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April 3, 2008

Merrill Lynch's Mike Stewart Discusses...

By Editorial Staff

Mike Stewart, Merrill Lynch's global head of cash equities trading, offered his views on the changes taking place in the world's trading markets and the adaptability of U.S. equities trading technologies to those markets. Here are some excerpts.


Competition in Europe will do a couple of things. It will lower overall unit costs for firms. So our cost of doing business will change. And to the extent that those costs come down, we'll make tighter markets and benefit from increased volume. These lower costs will increase liquidity and bring in market participants that may have been priced out of that market. So, I think you will see the same type of dynamic that has arisen here because of a competitive market structure. That means different types of fee structures such as make-or-take models.

Right now they don't exist in Europe. It's just straight paying. You will see professional traders, stat-arb players and what are effectively liquidity providers and market makers come into that market in a bigger way.


On the portability of Merrill's U.S. technology across borders:

Our infrastructure algorithms, crossing, routing products is 100 percent portable to the environment in Europe. To date, there hasn't been a broad ability to use that routing technology, but as Chi-X, Turquoise, NYFIX Millennium start to bite....

On the migration of equities trading infrastructure to other asset classes:

With equities infrastructure, it's easy to see how the same basic principles of market connectivity, routing and data-driven order placement, ie, algorithms, would migrate. I think you are already seeing evidence of that in futures and foreign exchange. My guess is that over time you will see this in interest rate, credit, and mortgage-back products.

On the possibilities in fixed income:

As an example, a group of nine broker-dealers, including Merrill, bought the fixed income trading platform TradeWeb. Included is an equity component in the Thompson AutEx and order routing businesses. The bond guys are now understanding IOIs, network effects, algorithms, dark pools. This marriage of equity functionality and fixed-income e-trading will be new for TradeWeb and the market in general. The brokers are going to be pushing that platform to offer functionality that looks like functionality that exists in other parts of their buildings.

On the organizational implications:

There are a lot of things that fall out of that. Such as: How do firms like ours get organized across asset classes? How does electronic trading and market making get organized across asset classes? We are starting to understand that now as some of the thinking in equities electronic trading moved to foreign exchange, and visa-versa, the same is happening with fixed income." We see that happening globally.

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