TRADETECH WEST: 68% Favor Overhaul of Market Structure
September 11, 2012
SAN FRANCISCO -- Two-thirds of institutional traders and tehcnologists favor overhauling the structure of stock markets, in an informal poll taken at TradeTech West Tuesday morning.
The vote was taken of roughly 150 institutional traders and technologist gathered here and comes after a series of market disruptions since the credit crisis of 2008.
These included the credit crisis itself, the Flash Crash in May 2010, the marred Facebook IPO in May 2012 and “"my own firm's debacle, " said Troy Draizen, a director at Knight Capital. Knight lost $440 million and 73% of its shareholders’ equity in the wake of a flood of erroneous orders sent onto stock markets on August 1.
The vote reflects findings of a Tabb Group survey of market professionals taken after the Knight debacle, said Adam Sussman, a principal with the industry consulting and research firm.
That survey showed that 34% of professionals now have “weak or very weak” confidence in the structure of stock markets. This compares to 20% after the Flash Crash two years ago, according to Sussman.
In a survey of market participants between August 6 and 13, the industry consultant found that only 2 percent of broker-dealers, asset managers, hedge funds, execution venues and their arms suppliers rate their confidence in markets as very high.
By way of comparison, that compares to 12 percent of professional market participants who had a very high opinion of markets after the Flash Crash.
The survey also found:
• The Knight trading snafu had a medium impact on market structure confidence
• More than 50% of participants have not changed their investments
• Reducing the number of venues is the most popular avenue to pursue to improve market structure
More professionals would have voted in favor of the state of market structure as it is – if they knew with certainty what reforms were coming, said David Margulies, Head of Electronic Products Group, Weeden & Company.
But “the genie is out of the bottle” on market structure reform, said Jay Fraser, Managing Director, Head of Autobahn Equity Americas, Deutsche Bank.
Overhauling for overhauling’s sake would produce unintended consequences, he said. But it’s still not clear, even with the great increase in competing venues and dark pools, whether trading costs now are cheaper or more expensive than in past years.
There is room for improvement, Fraser said. But neither he nor other panelists on the subject of order transparency provided specific recommendations.
The idea of reforming market structure is theoretically to bring back higher order volumes to stock markets, said Knight’s Draizen.
But what’s driven down volumes is the credit crisis and events such as the technical disruptions of the past two years.
In the meantime, traders need to get smarter about their orders. Institutions, for instance, are taking greater control of how their orders are getting routed by their brokers, said Sussman.
Weeden, for its part, is looking at how long the order queue is at different venues, the fill rate on orders at particular venues and the timing of its orders, given the kind of strategy being pursued. That can change if the company on a particular order is pursuing a sequential order placement strategy versus a strategy that is trying to match the volume-weighted average price in a given stock during a given period,