TRADETECH WEST: Stock Exchanges at Bottom of Value Chain
September 12, 2012
SAN FRANCISCO -- U.S. stock markets are at the ‘bottom’ of the exchange value chain, according to Matthew Andresen, Co-CEO of Headlands Technologies and former president of the Island electronic communications network.
The reasons: The New York Stock Exchange, the Nasdaq Stock Market and their national exchange brethren control neither order flows nor the clearing of transactions.
If you visit the equity trading floors of either Morgan Stanley or Goldman Sachs, you will find “hundreds of supersharp people” selling access, research and risk management.
That’s because they control the order flow of large institutions and other customers and can match their orders against other orders they control, Andresen said at TradeTech West here.
Institutions can also make private trades on block trading venues, such as Liquidnet, without going onto public exchanges.
“Everything has been prefiltered,’’ by banks and brokerages, before orders get to exchanges for public trading, he said. There is “unlimited internalization.”
Clearing, also, is handling by a separate, not-for-profit industry utility, the Depository Trust and Clearing Corporation.
By contrast, futures exchanges such as those run by CME Group do not allow internalization, control all order flow and control their own clearing operations.
Options exchanges, he said, have the Options Clearing Corporation, similar to DTCC. But brokers and banks can’t do private trades. “By and large, price discovery is controlled by the exchange,’’ he said.
Which leaves stock exchanges as the only set of national exchanges left holding the bag on both order flow and clearing.
So if you look at the Morgan Stanley and Goldman Sachs trading floors, futures trading is handled by “two dudes managing connectivity” in a closet. That’s because the firms can’t match orders on their own trading floors.