Global Market Structure
Harris: A Microscope on Microstructure | UBS's Leibowitz: On the ATS Front Lines | Asia's Alternatives | Exchanges' Crossing |
Harris: A Microscope on Microstructure
May 14, 2007
Following up on
an extensive interview in last year’s Securities Industry
News special report on market structure (May 22, 2006), we
asked Harris to reflect on changes that have occurred since in
terms of exchange consolidation, emergence of multiple new
liquidity pools, product diversification and regulatory oversight.
Over the past 12 months, the pace of these changes only seems to
have speeded up, and their global implications--and perhaps
uncertainties--have only gotten more widespread. The resulting
interview was conducted in recent days by SIN markets
reporter Dawn Kissi.
Harris received a PhD in economics from the University of Chicago in 1982. He currently serves as a director of the Clipper Fund and as research coordinator of the Institute for Quantitative Research in Finance. He was chief economist of the Securities and Exchange Commission for two years through June 2004, where he contributed to the implementation of such measures as the Sarbanes-Oxley Act and Regulation NMS, and the resolution of the mutual fund market-timing issue. Harris also directed the SEC’s office of economic analysis, and at other points in his career did specific assignments for the SEC and New York Stock Exchange and worked at agency brokerage UNX and proprietary trading firm Madison Tyler.
What do you see as the biggest recent developments in
market structure? We are certainly living in a very
interesting time. The changes continue to accelerate and what
we’ve seen is remarkable. The near-universal conversion from
floorbased trading systems to screen trading is perhaps the major
change. Another is the New York Stock Exchange switching to hybrid.
And the New York Mercantile Exchange losing substantial market
share to IntercontinentalExchange’s ICE Futures. This forced
them to make their products electronic, which they did very
quickly.
Are there new and emerging hot issues? First, NYSE Euronext. It now runs three electronic trading systems--NYSE Hybrid, NYSE Arca and Euronext. They clearly cannot continue to run all three--it’s just too expensive and does not make much sense at this point. So the main issue is, which platform will be the winner? I highly doubt it will be the hybrid. I actually think that will be the first to go. As a past example, we can look to the Toronto Stock Exchange. They had a hybrid floorelectronic system and it eventually just withered away. The NYSE has been losing market share and there really isn’t much happening on the floor anymore. It is quite possible they will abandon the system-- maybe not this year, but at some point soon--in favor of either the Euronext system or Arca.
And on the securities front? The big regulatory issues. They are international. Once again, look to the NYSE. They now own Euronext, so what are the incentives to list in the U.S. now? And will they be able to put a screen in front of U.S. traders? This can be done with Interactive Brokers, where one can trade a European security. The quotes appear as if they are coming from Europe, but it is really coming from the intermediation of a European broker. There is still a relationship, where there is some regulatory oversight, with access to the European exchanges. There are some difficult issues involved in trading practices that need to be worked out, which the Securities and Exchange Commission is working on. For instance, if I trade IBM, which is listed in the U.S. and probably in Paris, the question is who is in charge of regulating any insider-trading issues across the two continents?
