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Tim Quast
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We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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November 29, 2005

The Coming Storm: Get ready for a regulatory hurricane

By Rob Shapiro

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  • The Coming Storm: Get ready for a regulatory hurricane

If Reg NMS were a hurricane, it would undoubtedly be a Category 5 monster. Though Hurricane NMS is still well offshore, its powerful winds of change have already begun to howl down the canyons of Wall Street. Traders are tracking this regulatory perfect storm with a wary eye, trying to predict where it will make landfall. There is little doubt that Reg NMS promises to dramatically reshape the terrain of the U.S. equity markets and how traders must approach their jobs.

Rumor has it that the SEC is not even sure what the most sweeping piece of securities regulation since 1975's May Day will bring. Though more than eight months away from implementation, Reg NMS has already triggered a liquidity consolidation turf war.

Indeed, soon after the NYSE/Archipelago and Nasdaq/Inet formed their respective alliances, the nearly dead "regionals" struck back by inking their own series of strategic deals with everyone from Merrill Lynch to hedge fund monolith, Citadel. Who would have ever thought the SEC-through Reg NMS-would have been such a godsend to these once struggling entities?

A Seismic Shift

Similarly, we learned from the Order Handling Rules and shift to decimalization that, in addition to getting what we want, regulators could inadvertently cause a string of secular push-outs, which market players never quite anticipated. The collapse of the OTC principal model, the worst of the NYSE's specialist system and a seismic shift to a slice-em and dice-em approach to order implementation immediately spring to mind.The spectacular rise of ECNs and consequential splintering of liquidity can also be traced back to these rules. In fact, the tidal surge from these prior, less catastrophic, "Category 3" regulatory storms still continue to shape many aspects of today's equity trading dynamic. It is no secret that the majority of buyside and sellside traders still openly question, or have failed to adopt, the latest suite of advanced trading tools technologies such as DMA aggregation systems, algorithms and pre- and post-trade analytics.

And it is upon this unstable foundation that a post-Reg NMS world will be built. This might suggest why so many traders feel out of joint. Our trader's sixth sense has detected the figurative drop in barometric pressure that will precede this monster storm that promises to alter our professional landscape in fundamental and unfathomed ways. Most of us already feel the winds of change beginning to pick up.

Painful Questions

Think for a moment: Does it seem like there are so many trends in motion you can hardly keep track? Are new trading technology vendors popping up like prairie dogs from the desert floor? Is your vision of the future state of trading dominated by questions rather than clarity? Do you secretly fear you might need a dramatic retooling of your skill-set?

If you answered, "Yes, Yes, Yes and Yes," you are not alone. A sense of foreboding and uncertainty has enveloped Wall Street like late summer humidity. And somewhere out there swirls Hurricane NMS, gaining strength, slowly working its way toward us.

Which leads to the question of how to survive in such an environment?