Abstract
JOE CANGEMI: Who benefits the most from today’s markets, is it investors or broker dealers? I’ll start with Gary Stone.
*Alasdair Haynes is founder and, as of writing, CEO of Aquis Exchange.
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Notes
- 1.
NASDAQ subsequently scaled back this initiative in early 2013 at the Philadelphia Stock Exchange, formally known as NASDAQ OMX PSX, focusing instead on ETFs. The NASDAQ OMX PSX exchange was launched in September 2010 as Nasdaq’s third stock-trading platform.
“The ETF focus marks a retreat from NASDAQ’s earlier plans for the exchange. The PSX is the only US stock exchange that offers a so-called price/size priority model, which was intended to lure market participants through the use of rebates. That model ranks its orders first on price and then on size. In the filing, the exchange operator says that model has been only marginally successful in garnering market share.”
Source: Nasdaq Plans to Focus on EFTs With PSX Exchange. Kaitlyn Kiernan, The Wall Street Journal, March 12, 2013. http://online.wsj.com/article/BT-CO-20130312-710196.html .
- 2.
Many other US exchanges have similar pricing models. Traders are either “makers” or “takers" of liquidity. Makers provide bids and offers, earning a rebate, their orders already are at the exchange; takers pay a fee, executing against those orders.
In November 2008, BATS converted its ECN to a national securities exchange, BZX, which allowed BATS to participate in and earn market data fees from the US consolidated tape plan, reduce its clearing costs and operate a primary listings business. In February 2010, BATS expanded into a new asset class by offering trading of listed equity options on BZX. In October 2010, BATS launched BYX, a second national securities exchange for trading listed cash equity securities. BATS launched a primary listings business in the US on its BZX Exchange in December 2010 and launched its first listings of seven ETFs in January 2012. With BYX, BATS offered a different pricing model than its larger market, BZX.
- 3.
Reg NMS (Regulation National Market System) was adopted by the Securities and Exchange Commission in 2005 and introduced 2 years later to further advance the ideals of a national market system. The regulation includes the order protection, or trade-through rule; access rule (fair access) to market data including quotations; rules on sub-penny trading and on market data.
- 4.
National Best Bid and Offer. SEC requirement that brokers must guarantee customers the best available ask and the best available bid prices when they buy and sell securities.
- 5.
Flash Crash, May 6, 2010. The Dow Jones Industrial Average sensationally declined about 1,000 points, or about 9% only to recover those losses within minutes.
- 6.
Markets in Financial Instruments Directive, or MiFID, was officially enacted on November 1, 2007. The goal is to integrate the European Union's financial markets and to increase the amount of cross border investment orders.
- 7.
Referring to transactions and other costs.
- 8.
See, Global Regulatory Reform. The world of financial instruments just got more complex. Time to take note. Capital markets reform: MiFID II., Ernst & Young, http://www.ey.com/Publication/vwLUAssets/MiFID_II_adds_complexity_to_financial_instruments/$FILE/MiFID_II_adds_complexity_to_financial_instruments.pdf.
Financial Regulatory Reform: the Primary Driver Fueling Overhaul of Banking Operations. Ernst & Young LP, (PRWEB) January 14, 2013. http://www.prweb.com/releases/2013/1/prweb10315648.htm.
- 9.
The practice by a bank or brokerage of facilitating direct market access for a client to an exchange without any pre-trade risk management. In this way, for example, a high-frequency trading firm would have access to low-latency markets without pre-execution controls.
Sponsored access has many different meanings and nuances for market participants. Its origin can be traced back to the practice of direct market access (DMA), a practice in which a broker member of an exchange provides its market participant identification (MPID) and exchange connectivity infrastructure to a customer in order to send trades directly to the exchange.
- 10.
Fat finger risk is the risk of clumsy human errors in the trading process caused by misplaced keystrokes and the like. Systematic errors are associated with erroneous data entry.
- 11.
For example, the client might have an order to buy 50,000 shares of ZYZ via this sponsored access arrangement directly at the NYSE. At the same time, the broker sponsoring this sponsored access might have been willing to sell the client 50,000 shares of ZYZ had it known about the order but yet would have been effectively “disintermediated” because of the arrangement.
- 12.
Steve Wunsch is a well-recognized industry expert on market structure and the former CEO and pioneer of the now defunct electronic Arizona Stock Exchange (AZX).
- 13.
Press Release: SIX Swiss Exchange and Liquidnet Launch New Block Equities Trading Service. SIX Swiss Exchange first to deliver global institutional liquidity to its members through unique trading model. Liquidnet brings previously untapped block liquidity from five European markets to its global institutional trading network. (Business Wire, July 08, 2011) See http://www.businesswire.com/news/home/20110708005161/en/Swiss-Exchange-Liquidnet-Launch-Block-Equities-Trading.
- 14.
The service was expanded in 2012 and now includes Belgian, Danish, Finnish, Austrian, Portuguese and Swedish equities.
- 15.
“The cornerstone of the NYSE market model is the Designated Market Maker or DMM. Formerly known as “Specialists,” DMMs are the only participant to have true obligations for maintaining fair and orderly markets for their assigned securities. They operate both manually and electronically to facilitate price discovery during market openings, closings, and during periods of substantial trading imbalances or instability. This “high-touch” approach is crucial for improving prices, dampening volatility, adding liquidity and enhancing value.” Source: NYSE.
- 16.
“The number of transistors incorporated in a chip will approximately double every 24 months,” according to Gordon Moore, Intel co-founder.
- 17.
The project to turn Chi-X into the “fastest exchange” as described in the speaker’s comment was ultimately discontinued, according to a spokesperson for Haynes in a follow-up after this conference.
- 18.
See, Thoughts on Trade-At Rule, Themis Trading. April 19, 2010. (http://blog.themistrading.com/thoughts-on-trade-at-rule/.
- 19.
For example, when a portfolio manager makes a decision to say buy 300,000 shares of IBM the order gets loaded onto firm’s buyside “blotter.” Orders then get disseminated into the market from the blotter.
- 20.
Sullivan was referring to platforms such as Liquidnet that added innovative services to improve block crossing rates.
- 21.
ITG, Liquidnet and BlockCross.
- 22.
Ships passing in the night is a popular trading metaphor describing block trading opportunities missed because of a market structure that can result in both sides of a block cross missing each other like ships passing on the ocean in the dark of night. In the world of electronic trading today, this has a particular resonance.
“In many instances, for a dark pool trade to take place, a buyer has to be present before a seller can initiate a sale. This is called iceberg trading. The “iceberg” being the buyer. Sometimes, however, a seller doesn’t emerge to consummate the transaction at the same time a buyer is floating by. This is called ‘ships passing in the night,’” notes Jeremy Butler, author of Dark Pools Rising, Trading in the Dark, Valueline, April 25, 2013.
- 23.
“HFT [high-frequency trading] accounts for about 50–70% of US trades, 40% in Canada, 35% in London and about 15–20% of ASX [Australia Stock Exchange] equities trading,” according to a business article in Business Insider Australia that cited a study. See, STUDY: High Frequency Trading Makes Markets More Fair, Business Insider Australia, Liz Tay, December 09, 2013, http://www.businessinsider.com.au/high-frequency-trading-makes-markets-more-fair-by-mitigating-the-effects-of-manipulation-researchers-say-2013-12 .
- 24.
On November 07, 2013, the New York Stock Exchange proposed “A One Year Pilot Program That Would Add New Rule 107D To Establish An Institutional Liquidity Program.” See, http://www.nyse.com/nysenotices/nyse/rule-filings/pdf;jsessionid=07B5DBBA5CC5AB310C99B1FE9DC0B4F3?file_no=SR-NYSE-2013-72&seqnum=1.
- 25.
In a subsequent interview for this book in October 2013, Sullivan explained that this trend had accelerated in the wake of the conference. “It was starting to take hold and already happening back then at the time of the conference,” Sullivan said. “But nobody had really recognized it at that time.”
- 26.
By the spring of 2013, exchange executives, worried about the volume of trading moving off exchanges and onto platforms like dark pools, were pushing for enactment of a “Trade-At” rule, which would allow a trade to occur away from an exchange only if the customer was getting a significantly better price than was available on an exchange.
- 27.
“I wouldn’t say it is dead but it was a long shot from the beginning as was noted earlier in this discussion,” commented Joe Cangemi, the moderator, in a follow-up in October 2013 for this chapter, referring to the Trade-At Rule. “The exchanges have been trying to force the SEC and Congress to get involved and mandate such a rule but the resistance is high based on the arguments. No one has proven that the client is adversely impacted by the competitive model currently in place.”
- 28.
Joe (Joseph) Cangemi was Chairman of the Security Traders Association, January 2011–December 2011. He was visiting Washington in his capacity as an industry leader and professional.
- 29.
Reg NMS, adopted by the Securities and Exchange Commission in 2005, laid out guidelines on “best execution” and order protection to thwart the execution of trades at prices that are lower than the protected quotations displayed on other markets.
- 30.
Upstairs trading, or off exchange trading, today includes the panoply of off-exchange platforms such as ATSs and dark pools.
- 31.
Spread books and complex order books are regarded as the same thing depending on the exchange. For a more detailed explanation, See, ISE Options Exchange document, http://www.ise.com/assets/files/market_data/Spreads_Feed/ISE_Spreads_Book_Feed_Specification.pdf.
See, also, CBOE on Complex Order Books, http://www.cboe.com/COB/COB.aspx.
- 32.
In a subsequent explanation for this chapter, the speaker explained that, “if you get legged, you still need to complete the other side or you are not hedged. When you complete it, you may have slippage—that’s the difference between the intended spread and where you got done.”
The speaker offered this example. A spread of 10: buy at 10, sell at 20. Let’s say you get lifted at 20. And you go to hit the bid, but the market goes 10 offer. If you sell at 9, your spread isn’t 10 but 11, so you have “slippage” of 1. See, Legging Risk definition, Automated Trader.
http://www.automatedtrader.net/glossary/Legging+risk
- 33.
Stone explained in a follow-up interview that he was talking in broad terms about the risks associated mostly with market systems such as circuit breakers that are triggered when trading occurs within certain parameters. That in turn helps to reduce systemic risk.
- 34.
Reto Francioni, CEO, Deutsche Börse AG.
- 35.
The moderator was visiting Washington and speaking as an industry leader and on a professional basis. Cangemi explained in a follow-up how the exchanges are required to provide data to the so-called Securities Industry Processor, or SIP. SIP in turn consolidates and disseminates all prices for the industry. The cost of the consolidated data is reasonable, he contended, and the proceeds of those sales are redistributed back to the exchanges equal to the ratio of their contribution to it.
“The problem is that using the consolidated data from an institutional perspective is not effective because of the latency experienced when compared to the speed of the data you can buy from the exchanges directly and consolidate yourself,” Cangemi added. “The cost of which is what we are hostage to—and is unregulated by the SEC. The exchanges are not incented to provide a better consolidated product as that would adversely impact the sale of their other non-regulated data packages they sell directly.”
- 36.
Dodd-Frank Wall Street Reform and Consumer Protection Act, known as Dodd-Frank, was signed into law by President Barack Obama on July 21, 2010. The sweeping consumer protection and regulatory reform law also includes the controversial Volcker Rule that prohibits proprietary trading by depository banks. The rule was passed by regulators on December 10, 2013. See, Financial regulators approve long-awaited Volcker Rule. James O’Toole, CNNMoney. http://money.cnn.com/2013/12/10/news/economy/volcker-rule/index.html.
- 37.
As Stone noted in a follow-up interview, the implications of this change would be extraordinary. Today, for example, a 10-year note future can only clear via the CME. Under this scenario, if this could then be cleared through the ICS clearing facilities, the implications would be far-reaching.
- 38.
Markets in Financial Instruments Directive, or MiFID, was officially enacted on November 1, 2007. The goal is to integrate the European Union's financial markets and to increase the amount of cross border investment orders.
- 39.
MTF, or multilateral trading facility, originally identified in MiFID, are pan-European electronic trading platforms unique to Europe.
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Cangemi, J. et al. (2015). Competitive Challenges in the Marketplace. In: Schwartz, R., Byrne, J., Wheatley, L. (eds) The Economic Function of a Stock Exchange. Zicklin School of Business Financial Markets Series. Springer, Cham. https://doi.org/10.1007/978-3-319-10350-1_4
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