Abstract
ROBERT SCHWARTZ: Jim Ross is a big guy with a lot of really interesting ideas. He is also my close personal friend. Over the years, we’ve discussed and debated market structure ad finitum. We’ve agreed and disagreed on many topics. I’m very much looking forward to this panel with Jim as the moderator.
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Notes
- 1.
Enhancing Our Equity Market Structure. Chair Mary Jo White, Securities and Exchange Commission. Sandler O’Neill & Partners, L.P., Global Exchange and Brokerage Conference. New York, NY. June 5, 2014 https://www.sec.gov/news/speech/2014-spch060514mjw
- 2.
See, A CLOSER LOOK AT HOW TO IMPROVE AND REPAIR MARKET STRUCTURE. Chapter 6. Seth Merrin, CEO, Liquidnet.
- 3.
Ibid.
- 4.
Referring to data gathered by regulators for studies and research.
- 5.
Referring to a proposed pilot program for trading small-cap stocks in wider minimum increments. The pilot eventually was approved by the Securities and Exchange Commission. See, SEC Approves Pilot Program to Assess Tick Size Impact for Smaller Companies. Center for Financial Stability, May 7, 2015. http://centerforfinancialstability.org/wp/?p=5987
- 6.
See, NASDAQ Frequently Asked Questions: https://www.nasdaqtrader.com/content/MarketRegulation/LULD_FAQ.pdf
- 7.
“Market makers may not enter quotes that would lock or cross the market. A locked market is one where the bid and offer are equal in price. For example, if another market maker came into the above listed market for XYAD, known as market maker 6, and entered a bid of 15.05 or an offer of 15.00, the bid or offer entered would lock the market. A crossed market is one where a bid is entered that is higher than the offer or, one where an offer is entered that is lower than the bid. If market maker 6 entered a bid of 15.10 or an offer of 14.95, the bid or offer would cross the market. A market maker who has an order that would cause them to enter a bid or offer that would lock or cross the market must make an effort to trade with all the market makers whose bid or offer they would lock or cross. The NASDAQ’s Market Center Execution System helps alleviate most locked or crossed markets” Source: Investopedia.
Regarding the ban on locked and crossed markets, see, To Lock or Not to Lock. Terry Flanagan. MarketsMedia. July 07, 2014. http://marketsmedia.com/to-lock-or-not-to-lock/
- 8.
See, footnote 2.
- 9.
Ibid.
- 10.
Referring to the idea that the industry and regulators are making changes in market structure, by regulation and structural design, in piecemeal fashion.
- 11.
In a follow-up interview, the moderator cited unintended consequences among one of these impacts.
- 12.
See, footnote 2.
- 13.
- 14.
In a follow-up note, Weisberger explained: “Every transaction cost estimation model I have seen uses the percentage of average daily traded volume that the order being evaluated represents, as a major input to the model. Put simply, if a stock trades 1 million shares per day, an order to buy 100,000 shares (10%) will cost more than if the stock trades 10 million shares per day (1%).”
- 15.
Referring, metaphorically and colorfully, to the oath, formerly taken by those beginning medical practice, for the proper professional conduct of doctors.
- 16.
In a follow-up interview, John Ramsay elaborated by saying that in the case of Reg NMS, this was a reference to “questionable” speed advantages available to some market participants because of this regulation. This point clearly is related to “latency” advantages offered to high-speed trading firms, when they co-locate their computer boxes near stock exchanges, so that they can rapidly receive sensitive market-moving data.
Reg NMS (Regulation National Market System) was adopted by the Securities and Exchange Commission in 2005 and introduced two 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.
- 17.
In a follow-up interview, the speaker noted that by the time of the conference, the chair of the Securities and Exchange Commission, Mary Jo White, had already delivered an important speech on the topic in regard to scrutinizing exchange filings more carefully, and in how order types are designed, and on exchanges being more transparent about order types.
See, footnote 1, Mary Jo White speech.
- 18.
In a follow-up interview, the speaker noted that at the time of the conference, there were private initiatives by the Investment Company Institute and others, to come up with a “template” for the disclosure of order routing by broker dealers which in a sense had been overtaken by SEC’s subsequent proposal about this.
- 19.
Readers should note that investor conference was still at a low ebb at the time of the conference, some six years after the financial crisis of 2007 and 2008.
- 20.
Referring to how brokers are making decisions about where to route orders.
- 21.
See, IEX, the Investors Exchange. https://iextrading.com/about/
- 22.
SROs is short for Self-Regulatory Organizations.
- 23.
Reg NMS (Regulation National Market System) was adopted by the Securities and Exchange Commission in 2005 and introduced two 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.
- 24.
FX is short for foreign exchange.
- 25.
Citigroup to acquire Lava Trading. Finextra. July 02, 2004. https://www.finextra.com/news/fullstory.aspx?newsitemid=12111
Two Sigma. https://www.twosigma.com/about/approach
- 26.
For more on FINRA ATS weekly volume data, see, http://www.finra.org/industry/otc-transparency
- 27.
IP refers to intellectual property.
- 28.
The idea Ross is expressing is the concern about protecting proprietary data and intellectual property of ATSs in the operation of their business, the moderator explained in a follow-up interview.
- 29.
See, footnote 1.
- 30.
Ibid.
- 31.
Weisberger describes Stock Fact Pro as a software-based product that offered a model that analyzed the trade lists of clients, reporting both the characteristics of their trades and the estimated costs.
- 32.
In other words, they feel it does not require their close attention to detail, and the matter is practically an afterthought.
- 33.
It was originally Rule 11ac1-5 requiring market centers to report monthly data and statistical information related to stock trading, such as effective and quoted spreads.
See, Securities and Trading Commission, Division of Trading and Markets: Responses to Frequently Asked Questions Concerning Rule 605 of Regulation NMS. February 22, 2013. https://www.sec.gov/divisions/marketreg/nmsfaq605.htm
- 34.
In a follow-up note, Weisberger elaborated by offering this example: “If one tries to buy 1,000 shares at $50, but then only receives 100 shares, and the stock moves to $51 before you buy more, it is absurd to call that a good execution, because the 100 shares were bought at a good price. Compare that to a trade where you bought 1,000 shares at 50.25. The execution was 25 cents more expensive, but it is better since the 900 shares NOT executed would cost 51, making it worse, but ONLY when the unexecuted trade is included.”
- 35.
See, Securities and Exchange Commission, Market Structure, Research and Analysis, for more on MIDAS. https://www.sec.gov/marketstructure/research.html#.Wl0E7TdOmUk
- 36.
This refers to how FINRA conducts their own survey and examinations, which vary between standard exams and “sweeps.”
- 37.
See, Division of Trading Markets Disclosure of Order Execution and Order Routing Information (Rules 605 and 606 Reg NMS) [formerly Rules Ac1-5 and Ac1-6].
- 38.
“Near” and “far” are common terms in the trading markets, another way to say “bid” and “offer.”
- 39.
In a follow-up interview, the speaker was referring to the idea that if there is more fulsome transparency about how order types work and are designed, some of them would go away because they would be hard to “justify” in terms of market fairness and structure.
- 40.
Prior to joining IEX in 2014, John Ramsay was the acting director at the Securities and Exchange Commission’s trading and market division. His comment here was a reference to his former career as a regulator.
- 41.
See, footnote 1.
- 42.
In a follow-up interview, the speaker elaborated, by saying that his point was that exchanges should be doing an ongoing retrospective review of their order types, based on how they are actually performing in the marketplace. So, by this approach, when an order type is introduced by a market player, for example, this player should be more transparent about the objective of the order type.
- 43.
At the time of writing in early 2018, that kind of broad review has not occurred.
- 44.
Reg NMS (Regulation National Market System) was adopted by the Securities and Exchange Commission in 2005, and introduced two 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.
- 45.
Refers to the once dominant market share of the New York Stock Exchange and NASDAQ in stock trading. This was prior to the regulatory and trading changes that ultimately saw then upstarts like BATS and Direct Edge lure away much of the business of the “duopoly.”
- 46.
Let’s Talk Locked and Crossed – Lock Stock and Two Smoking Barrels. Themis Trading. December 09, 2013.
Intermarket Trading System (ITS):
Electronic communications network linking the trading floors of registered exchanges to permit trading among them in stocks listed on either the New York Stock Exchange, or the American Stock Exchange [now defunct at time of writing], and one or more regional exchanges. Through ITS, any broker or market maker on the floor of any participating exchange can reach other participants for an execution whenever the nationwide quote shows a better price available. A floor broker on the exchange can enter an ITS order to assure excecution of all of an offering or bid, instead of splitting it with competing brokers. Source: NASDAQ definition.
- 47.
Ibid.
- 48.
See, ‘Hide Not Slide’ Orders Were Slippery and Hidden. It’s good when the victim of a market-structure abuse is called Trading Machines. Lets you know the stakes. Matt Levine. Bloomberg. January 12, 2015
https://www.bloomberg.com/view/articles/2015-01-13/hide-not-slide-orders-were-slippery-and-hidden
- 49.
See, footnote 23.
- 50.
“Most US exchanges collect a “taker” fee for each incoming trade that immediately executes against a standing buy or sell order posted on the exchange, removing it from the exchange’s order book. Meanwhile, the exchange pays a “maker” rebate to the firms that posted those orders in the first place. The idea of the model, called “maker-taker,” is to encourage firms to quote more competitive prices for the securities traded on the exchange.
“In contrast, an inverted exchange pays rebates for incoming trades that execute against standing orders, while charging the firms that posted those orders— the opposite of maker-taker.” Source: Wall Street Journal, February 28, 2017.
For complete article see, ‘Inverted’ Model Said to Be Considered for NYSE’s Newest Exchange. Such exchanges flip the standard fee model of U.S. equities trading. Alexander Osipovich. https://www.wsj.com/articles/inverted-model-said-to-be-considered-for-nyses-newest-exchange-1488277981
- 51.
In a 2009 filing, NASDAQ said that the “the Post-Only Order is designed to encourage displayed liquidity, and to offer NASDAQ users greater discretion and flexibility to post liquidity on NASDAQ.” NASDAQ also noted that a similar order types already existed on NYSE Arca and BATS.
Themis Trading was sharply critical of this order types. In a blog posting, the trading firm stated: “What Nasdaq failed to highlight in this original filing was that in addition to displayed orders, post-only orders would also not interact with non-displayed liquidity. In other words, if a post-only order was entered at a price which would lock or cross an existing non-displayed order, then that post-only order would not trade, and instead the price would be slid either one tick below for buys, or one tick above for sells.”
See, Seven Years of Order Information Leakage. http://blog.themistrading.com/2016/09/seven-years-of-order-information-leakage/
For more, and broader insight on these order types see, Decimus Capital Markets letter to the Securities and Exchange Commission, September 15, 2014. https://www.sec.gov/comments/s7-02-10/s70210-420.pdf
Rosenblatt: No Order Type Conspiracy. Peter Chapman. Traders Magazine. August 23, 2013. http://connection.ebscohost.com/c/articles/89688633/rosenblatt-no-order-type-conspiracy
- 52.
In a follow-up note, the speaker explained: “The sliding orders make the book less predictable, since they can’t be seen on data feeds.”
- 53.
Intermarket sweep orders, or ISO orders, sweep several market centers. ISO orders have attracted criticism from some sides of the market.
No Day ISO: Tradebook Calls for SEC Review of Proposed Day ISO Order Types. September 24, 2014. Bloomberg Professional Services.
- 54.
Jim Ross as the founder of NYSE MatchPoint, served as its CEO and vice president at the New York Stock Exchange.
- 55.
IEX became a fully fledged stock exchange in 2016.
- 56.
Ross was also referring to the idea of making the process of ATS filings with regulators more transparent to the public, he explained in a follow-up interview.
- 57.
Self-Regulatory Organization.
- 58.
See, Reg ATS. https://www.sec.gov/rules/final/34-40760.txt.
- 59.
“A form that is filed with the SEC as an initial operation report or an amendment to initial operation report, or a cessation of operations report for alternative trading systems. SEC Form ATS must be filed 20 days prior to the initial operation or before a material change to an alternative trading system.”
Source: Investopedia.
- 60.
See, Automated equity trading: The evolution of market structure and its effect on volatility and liquidity. David Weisberger and Paul Rosa. Two Sigma Securities. June 2013. https://www.twosigmasecurities.com/uploads/TSS.White%20Paper.Volatility.June%202013.pdf
- 61.
VWAP is calculated by adding up the dollars traded for every transaction (price multiplied by number of shares traded), and then dividing by the total shares traded for the day. Source: Investopedia.
- 62.
Ibid.
- 63.
The “parent” order is regarded as the original starting order the trader is aiming to execute. For example, it could be a one million block share order but with only 100,000 shares put to work. The parent order is for one million shares.
- 64.
Cost-plus, Weisberger explained in a follow-up, is an arrangement where the broker passes on fees or rebates to their clients.
- 65.
See, footnote 23.
- 66.
See, footnote 53.
- 67.
“A system in which the price of a security is quoted using a decimal format rather than fractions. For example, a decimal trading quote would be $56.25; using fractions, the same quote would appear as $56¼. The US Securities and Exchange Commission ordered all stock markets within the US to convert to decimals by April 9, 2001. Prior to 2001, markets in the United States utilized fractions in price quotes. Since decimalization, all quotes appear in the decimal trading format.”
Source: Investopedia.
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Ross, J., Colby, R., Kellner, J., Ramsay, J., Weisberger, D. (2021). Regulatory Initiatives. In: Schwartz, R.A., Byrne, J.A., Stempel, E. (eds) Equity Trading Round-Up. Zicklin School of Business Financial Markets Series. Springer, Cham. https://doi.org/10.1007/978-3-030-51015-2_7
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