TRADETECH WEST: New Regs Require Huge Tech Spend
September 11, 2012
SAN FRANCISCO -- New rules on how brokers can let their clients access markets electronically, how risks must be managed before orders are sent in and such changes in exchange operations as “limit up, limit down” trading breaks will represent significant costs to brokers and, indirectly, the institutions they serve, according to market participants appearing Tuesday morning at TradeTech West.
Such rule changes require a "huge technology spend" and a "significant resource allocation," said Adam Inzirillo, Director, Global Execution Services, Bank of America Merrill Lynch, at the outset of a “venue update” at the meeting of institutional traders and technologiest.
That spend will take budget away from spending on expanding the capabilities of algorithms that execute trading strategies epxanding algos or improving the functions of smart order routers, for instance, Inzirillo said.
This “definitely impacts” not just brokers, but the institutional traders that rely on the improvements made in trading systems by the brokers that serve them.
For instance, said Jason Vedder, head trader at Driehaus Capital Management, his shop over the last five years has evolved from an institution that primarily invests long-term in stocks for its clients, to one that uses “option overlays” to mitigate risks for those cleints. That means Driehaus must “aapt to being a multiasset firm, as opposed to just an equity shop.’’ And adopt technology that helps it meet the new client demands.
Institutions “rely heavilyg on algo providers’’ to keep them up to date with changes in market rules and market structure, said Mark D. Herman, head trader at Tamro Capital Partners.
Small shops, in particular, need to “piggyback” on broker resources, said Herman. “We don’t have the technology infrastructure,’’ said Vedder.
"We really rely on the broker dealers to be the first responders in terms of any market structure changes," said Vedder.
Bank of America Merrill Lynch already has begun planning for the introduction of limits in how far up and down a given stock can move in a trading day, as mandated by the Securities and Exchange Commission. Those rules are expected to take effect in February, Inzirillo said.
This means working through, some times, a rulemaking that runs 500 pages, then has another 20 pages of explanation that seem "to contradict he actual rules themselves." And then, Inzirillo said, figure out how that all will affect the placement of orders.
But the changes can also come from the exchanges themselves. The panelists pointed to the introduction of a Retail Liquidity Program by the New York Stock Exchange, that allows orders from retail investors to be matched against institutional orders off-exchange at high-speed and in subpenny increments for the first time.
This may be "creating just a bigger fragmented market" and taking that flow away from the public marketplace itself is a concern, Herman said.
This "could kind of make Reg NMS null and void" because “almost every broker becomes an exchange to some degree,’’ Herman said.
Institutions, though, can elect not to interact with that flow. Retail investors have moved toward exchange-traded funds, for instance, or dropped out of stock investing, Vedder noted.