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December 1, 2004

The Conflicts of Regulators: Equity Markets In Action The Fundamentals of Liquidity, Market Structu

By Gregory Bresiger

Also in this article

  • The Conflicts of Regulators: Equity Markets In Action The Fundamentals of Liquidity, Market Structu

by Robert A. Schwartz and Reto Francioni

(John Wiley & Sons, New York, $129.99) 468 pages

Here is an excellent, detailed book that authoritatively covers the mechanics and controversies of trading from A to Z. It is also a book chock full of the ironies and problems of market structure; arguments that have plagued the trading world for decades.

Yet one of the strong points of this work is that it doesn't contain any comprehensive proposals. That is interesting because the trading industry and regulators are trying to come to grips with a new century, as technology seems to be making many trading practices obsolete. Instead, "Equity Markets in Action" is a thorough analysis of current trading trends rather than a brief for any one kind of market structure.

The work is a good text for those who spend their lives on the trading firing lines and who also want to know why, despite many regulatory initiatives, problems persist. However, the most interesting parts of the book for me are when the authors note some of the ironies of markets, their structures and regulations.

For example, there is the issue of speed. The authors rightly note the controversies surrounding this much-debated part of trading. "Speed represents an important element for the market," they write, "but it is not one that comes for free, especially for less liquid securities." (Page 6). Fast trading, they note, generally means higher trading costs.

So speed has become a difficult issue. That's because markets compete, but often serve different interests. And the needs of constituencies often change as markets change. Some clients want speed above all. Others prefer the best price. Another client is more concerned about market impact. One size, or one set of uniform regulations, doesn't fit all the divergent needs of a changing client base, a client base that can change in myriad ways. That is, in part, because the number and kinds of trading venues have been revolutionized in the last decade.

Indeed, the authors make this point when they remind the reader that: "A securities market is a complex institution. Because customer needs are continually changing, an exchange is under never-ending pressure to adapt, to modify, and to enhance its operations. But the quality of a market is neither easily defined nor readily measured." (Page 29).

And, the quality of markets remains a problem in an era in which market structure is feverishly debated and officials of competing exchanges have verbal jousts almost every day. With all this rancor, common standards are difficult, maybe even impossible to impose by even the most enlightened regulators. Compounding this quixotic search for optimum market structure is the need to match the sometimes competing requirements of retail and institutional clients.

Indeed, like the weather, regulators often talk about best execution, but they rarely seem to do something about it or something that most participants can agree is the right thing. Here is one more seemingly impossible hurdle. The best execution standard is a concept that is difficult to define. For the institutional clients, the authors note, the idea of finding a common best execution standard is a daunting task.