Is the proliferation of trading venues at an end? Industry professionals cant agree.
There are now 13 stock exchanges and more than 40 alternative trading systems. While some industry observers say the explosion of trading centers in recent years reflects a healthy and competitive marketplace, others bemoan the cost of connecting to the platforms and the complexity they bring to trading.
Some contend that new regulations could kill off some of the weaker exchanges and alternative trading systems. On the other hand, others say existing rules and strong operators will lead to more markets in the future.
I actually think were going to see more venues, Sapna Patel, head of market structure and liquidity strategy at Morgan Stanley, said at a recent industry conference. We wont see much consolidation.
Patel maintains that the Securities and Exchange Commissions Order Protection Rule, which requires brokers to trade against the marketplaces best quote no matter where it is posted, keeps small bourses in business. It also encourages the start-up of new exchanges, she said at the Security Industry and Financial Markets Associations annual market structure conference this month.
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Five stock exchanges each trade no more than 1 percent of total industry volume, on average, according to data from BATS Global Markets. They are the Chicago Stock Exchange, Nasdaq PSX, the National Stock Exchange, the CBOE Stock Exchange, and NYSE MKT.
As for ATSs, Sapna notes, as long as the operator has other businesses from which it derives revenue, it is not a burden to keep a tiny dark pool running. You can keep an ATS running that executes less than one million shares per day, she said, and theres not an additional overhead. So, those arent going to disappear either.
Some pros arent so sure. New rules proposed by the Financial Industry Regulatory Authority that require dark pools to publish their volume information could push out those ATSs with minimal liquidity.
I think some of them will decide to shut down, Nanette Buziak, head of equity trading at ING Investment Management, told SIFMA conference-goers. The trading executive explained that her desk is very selective about which dark pools it connects to. Once the volumes are disclosed, it will be interesting to see which ones really have volume and which ones just have good marketing spin, she said.
FINRA sent a rule proposal to the SEC this month that would require operators of dark pools to submit weekly volume data for every security traded in their systems. FINRA would then publish that data on its website after a two-week or four-week lag. The impetus behind the rule proposal is to gain a better understanding of the extent of off-board trading.
At least one trading official says the problem lies with the network of exchanges, not the dark pools. Jamil Nazarali, a senior managing director at Citadel Securities, speaking at the SIFMA conference, noted no one has to use a dark pool, but exchanges are different. Echoing Morgan Stanleys Patel, he blamed the Order Protection Rule for propping up tiny exchanges.
They trade less than 1 percent of the daily volume, Nazarali said. That imposes a cost on the rest of the industry because you have to connect to them and take in a price feed. Maybe thats not justified. Maybe we need to revisit the idea of a protected quote.
That could be in the cards. There may be a couple of potential proposals floating around out there that may actually reduce the incentive for more exchanges, Brett Redfearn, head of market structure strategy for the Americas at J.P. Morgan Securities, said at the SIFMA confab.
New regulations requiring exchanges to distribute their quotes within a minimum time frame-say five milliseconds-could become part of the Order Protection Rule, Redfearn indicated. If an exchange cant distribute a quote fast enough, then it wouldnt be protected.
If it lagged too long, should it be protected? Redfearn asked. Driving any such rule change is a desire to ensure the integrity of the industrys consolidated quote, Redfearn explained. Only those quotes that meet the minimum would be counted in the official bid or offer. So, if you want to be a protected quote, you have to earn it, he said.
