Keith Ross is the chief executive of PDQ ATS, a Chicago-based alternative trading system, who recently sat down with Traders Magazine to discuss the state of the equities market. Ross talked about his predictions for second half volume, advocated for dark pool transparency and how to manage the speed of trading.
TM: How do you see volume shaping up in the second half?
Ross: If we see the broad market index like the Dow get back to 16,000, and stocks like Facebook find their footing and get above their IPO price, things could improve from there. These events could give the market momentum and bring back retail investors which will drive volumes higher in the second half. But when this move to higher volume happens is anyone’s guess.
TM: So is the return of the retail investor the key to a rebound in volume?
Ross: Retail is important when it comes to volume. But it might be the return of everyone to the market that really pushes us higher. There are reports of $1 trillion in cash out there waiting to be put to work. If we get some market momentum to the upside and the equity train leaves the station, then this $1 trillion will have to put to work somewhere. It’ll likely be in equities.
TM: Are you in favor of more transparency in dark pools?
Ross: Yes. It’s a good thing.
TM: What will increased transparency entail?
Ross: Finra has proposed each of the ATS’ report by issue the amount of stock they trade in a given week. ATS’ will have a week to report their data and then Finra needs another week to collate this data and then publish a report. There will be a public record of how much volume of stock is trading in a particular venue. We’re not going to look like Hercules here when compared to our larger peers, but our name will be out there as a destination venue. And any data out there, even if it lags the market, will give people an opportunity to see what is going on.
TM: As a dark pool operator, is it difficult to comply with Finra’s data request?
Ross: No, not really. While I haven’t seen all the details of the Finra proposal, we should be able to comply easily. We already have to report trade data to OATS already, so a lot of things are already in place. Parsing a subset of this data and giving it to Finra shouldn’t be hard.
TM: Is anyone against this type of data reporting?
Ross: There has been some concern from a few large institutional buyside firms that worry their trading or strategy intentions can be discerned by the data. However given the two week lag, I do not think that will be much of an issue and I don’t think that outweighs the benefit of people getting the feel for where the marketplace is.
TM: So despite the Finra data being two weeks old, is it still useful?
Ross: Yes. By allowing people to understand what is happening in the market and where it is happening helps improve the market – even if the information isn’t viewed regularly. Just by being available, the information will give people confidence in the market. And even though I don’t think there is a confidence problem in the equities market, this type of reporting can only help its perception.
TM: If confidence isn’t a problem for the stock market, then what is?
Ross: Dodd-Frank and Sarbanes Oxley. Both of these regulations have put, in my mind, a huge dent in the IPO market and allowing companies to go public cheaply. The cost to go public under these rules is very expensive and this hurts liquidity and to a degree, capital formation. Other players will step in such as private equity or venture capital to pick up the slack in capital formation, but this now occurs off the books and in private.
TM: What about high-frequency trading?
Ross: At PDQ we actually court HFT flow. We manage the needs of the HFTs and our less latency sensitive clients by using our call auction process. For example, we get an institution looking for a symbol and he allows us to hold his order for 20 milliseconds. In that time, we tap our HFTs and tell them we have a marketable order in a symbol. Then the HFTs provide us a market for that stock – just like a specialist used to do. It can be either one or two sided market, have price improvement, etc. Then, depending on the customers’ choice and needs, we can either execute the order immediately or create an auction book and get the trade done. The choice is the customers.
TM: So is slowing trading speed the future of the equities market?
Ross: In the trading world you’ll never make everyone happy. Some want to go fast and others slow. Could we have a more reasonable market that has a slower speed? Yes. But I want to put the power of choice to trade fast or slow in the customers’ hands – not mandated by an authority. Slowing the market down isn’t a bad thing – it has benefitted us and our clients. But my clients get to choose how fast or slow they want to trade. It’s their choice and I want them to have a voluntary choice.
