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April 12, 2007

A Roadmap for the Future

By Editorial Staff

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New trading rules, evolving market structure, better technology, more asset classes. All of these developments are conspiring to make the lives of traders more complex and difficult. A trader, like never before, needs to be on his or her toes and aware of what lies ahead. Toward that effort, Traders Magazine asked a handful of consultants to offer our readership a roadmap of the future. What can equity traders expect their marketplace, and maybe more importantly, their jobs, to look like, say, a year from now? Read on and hopefully some of your questions will be answered.

Q: What do you expect to be the impact of Regulation National Market System (Reg NMS)?

Gavin Little-Gill

Research Group Director, Securities & Investments


Reg NMS in the United States and the Markets in Financial Instruments Directive (MiFID) in Europe are regulatory initiatives that are pushing best execution. The direct impact of these regulations is felt in the exchanges/execution venues and at the institutional brokers; the trickle-down effect to the asset management industry is on measuring brokers' effectiveness relative to their compliance with those regulations.

The direct impact moves best execution from a client relationship and client-facing regulatory requirement (remember that BestEx has its roots in Employee Retirement Income Security Act of 1974, or ERISA, laws) to the trading floor. The more significant impact of these regulations is in the brokers' subsequent strategic responses.

The sudden increase in broker crossing networks, the movement of brokers into the market data business, and the creation of broker consortiums creates new venues and new trading paradigms, and it promises an explosion in market data. Smart orders have to become even smarter, and the subsequent movement of trades across liquidity venues promises an explosion in volumes and volatility. Brokers are responding largely by building out low-latency platform solutions.

The question asset management firms need to be asking is not whether Reg NMS will impact the buyside but rather what asset management firms need to do to manage their broker relationships and leverage the infrastructures and solutions those brokers are building.

James T. Leman

Principal, Head of Capital Markets

Westwater Corp.

As Regulation NMS (RegNMS) goes live in stages in 2007, the primary impact will fall upon the exchanges and ECNs as they must observe the trade-through rule among others and the implications for regulatory oversight and examination that come with new securities regulation adoption. They as well as brokers will live in a much more transparent world where alternative routing actions by order originators will gauge performance in milliseconds and where exchange and ECN costs are a telling component of trade distribution decisions.

Block trading will undergo a dramatic transformation where the various liquidity pools, ATS entities, combined with exchanges and ECNs will provide price and liquidity discovery. Brokers, acting as market makers, besides acting at speeds achievable only with sophisticated auto execution software will strive to deliver price improvement and liquidity to match the fastest exchange or ECNs. ATSs will focus on periodic or negotiated crossing to achieve the Holy Grail of minimal market impact, minimal information leakage and cost savings in an extremely timely way for institutions.