As regulators start to press their agendas for the coming year, Traders Magazine asked some industry experts what they expect to be the biggest regulatory and market-structure issues of 2012.
Politicization of the Regulatory Debate
Market structure has become the stuff of headlines, and that will continue over the next year, according to Alison Crosthwait, managing director for global market structure research at Instinet. With media outlets competing for attention and politicians concerned with earning points in an election year, there is little incentive for thoughtful debate, she said.
Robert Hegarty, global head of market structure at Thomson Reuters, said both the presidential and congressional elections in November will have a strong impact on regulation in the future. Agencies that are already dealing with a backlog will be reluctant to take on new initiatives.
“There’s clearly a feeling in D.C. that whatever we do this year could get unwound next year by the new Administration, the new Congress,” Hegarty said. “Do we really want to push forward with all these regulations only to have them go through a repeal process in 2013?”
New Threshold Proposals
Politicization of the market-structure debate could encourage proposals that would have dire impacts on capital markets, such as speed limits on orders, rules on minimum order duration or regulatory charges on message traffic, according to Crosthwait.
“We cannot hold ourselves back as an industry, as technological advancement will continue regardless,” Crosthwait said. “In addition, the enforcement of many of these proposals is just not feasible.”
A prime example of unwise regulation is the financial transaction tax, which has been proposed in Europe and has even been suggested by some in the United States. Jamie Selway, head of liquidity management at ITG, said while a transaction tax will generate election-year buzz, it won’t be seriously considered.
Better Definitions for High-Frequency Trading
In recent years the debates surrounding high-frequency trading have been hindered by the fact that people in the industry have been unable to agree on what HFT actually is. Hegarty predicts that the next year will bring some clarity to the definition of HFT.
“We may not come down with any rulings or judgments on high-frequency trading, but I’m optimistic that we’ll actually be able to define it as an industry much better than we have been able to do in the past,” Hegarty said.
Selway said the public could get its first real look at a definition for HFT when a high-frequency firm goes public and has to file an S-1 form for its initial public offering.
Bull Market for Paperwork
Regulators are increasingly asking traders to provide more information, as is made evident by the Large Trader Identification Program and the proposed Consolidated Audit Trail.
Crosthwait worries, however, that some of these efforts could increase paperwork while doing little to address core market issues. Some recent suggestions, like requiring HFTs to provide their algorithmic code, seem like good ideas on the surface, but there comes a point at which regulators cannot process this information and the cost of obtaining it cannot be justified.
“The same is true of testing requirements,” Crosthwait said. “Trading firms have tremendous economic incentive to fully vet their strategies, but even with the testing they perform, problems occasionally arise. Adding a bureaucratic layer of proving that testing has been done only increases paperwork.”
CAT Settles For Less Than Real Time
Though the SEC has been pushing for real-time reporting of the CAT, many in the industry feel providing transparency in real-time just isn’t worth it for most data.
“While we are supportive of more transparency, you can’t underestimate the significant cost of a real-time trade data facility for regulators,” said Tim Reilly head of North American electronic execution at Citi.
Hegarty said that while real-time transactional data isn’t necessary for what the SEC needs to do, waiting to get the information over night isn’t a good idea, either. Something in between is needed, he said.
End of Prop Trading
Though the Volcker Rule has yet to be finalized, it already is having a profound effect on banks, which are spinning off their proprietary trading desks in anticipation of the new regulation, according to Richard Chmiel, vice president of global sales and marketing for data delivery and analytics firm OneMarketData
“I think almost all the big banks are either out of prop trading now or very close to it,” Chmiel said.
The majority of these orphaned prop desks are becoming stand-alone shops, sometimes on their own and sometimes joining up with others, he added. He predicts these newly independent desks will place a great emphasis on black-box trading as powerful machines are making it possible to run complex mathematical programs more cheaply and easily than ever before.
Consolidation of Dark Pools
In the wake of last year’s controversy surrounding Pipeline Trading Systems, dark pools could see their numbers dwindle as consolidation comes to the industry, according to Chmiel.
“Dark pools just haven’t delivered on what they promised to do,” Chmiel said. Many of them don’t have a high cost to operate, but I just wonder, do you need so many?”
Chmiel points out that there has already been consolidation among broker-dealers, and with liquidity spread out all over the place, dark pools could be the next portion of the industry to face consolidation.
Merger Failures Lead to Global Alliances
Though the proposed NYSE Euronext/Deutsche Boerse merger could still happen in 2012, many of the much heralded exchange mergers of 2011 never came to pass: ASX/SGX, TMX/LSE and NASDAQ/ICE/NYSE all fizzled out.
This year might not see a slew of mergers, but a number of innovative alliances are in the works, according to Crosthwait. These alliances could allow for the further globalization of equity trading and take advantage of particular synergies without the complications that come with a full-on combination.
For example, the Korea Stock Exchange and Tokyo Stock Exchange have agreed to work together on data, listings and technology cost management. BRIC + South African exchanges have established an alliance to list each others’ stock index futures and index options contracts in local currencies. ASEAN Trading Link brings together exchanges in Singapore, Malaysia, Philippines, Vietnam and Indonesia. Similarly, the Andean Exchange Link/Mercado Integrado Latino Americano (MILA) brings together Chile, Colombia, Peru and Mexico.
