Seven Signs for 2010
Market Structure Predictions
Traders Magazine, January 2010
The market closed the books on 2009 in early November, but predictions for the new year trade on a calendar basis. Below are ours for the market structure landscape, followed by settlement (T+365) on last year's list.
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1. Dark Pools Get Guardrails. Last May, the SEC announced an end to the "Sirri Doctrine"--a laissez-faire approach to dark pools--and said it planned to address some concerns. Initially expected to take the form of a concept release, but hurried by politics and the press, the SEC proposed three rule changes in October. Two of these--equating an "actionable IOI" with quotations and reducing the Reg ATS display threshold from 5% to 0.25%--are approved. The third, real-time tape illumination of dark trades, is shelved in favor of end-of-day, stock-specific, volume disclosure. Also proposals to make public Form ATSes, and amendments thereto, are considered and accepted. Fair access prompts a fight, but no changes are made. NYSE proves a better partner than Nasdaq as a real-time source of aggregate volume information for individual dark pools. The upshot: less mystery, more rule of law, and no unreasonable new burdens.
2. Internalization: Once More Unto the Breach. Related to the dark pool efforts, the SEC raises the issue of a "trade-at" prohibition for off-exchange venues. Positioned as a policy question--do "dark" executions harm market quality by reducing the incentive to display?--the deeper issue is a Grasso-era commercial chestnut: exchanges versus internalizers. As it has multiple times in the past 35 years, the SEC rejects requirement that off-board venues provide price improvement. When the SEC bans "flash" orders-which are really just an extension of internalization--DirectEdge asks to change its ELP "jump ball" into a 30-millisecond price-based auction, raising the question of subpenny orders anew.
Jamie Selway
3. How High's the Frequency, Kenneth? The ever-inflating buzz around high-frequency trading--66%, no 70%, no 120% of volume! Twenty one billion dollars in annual profits!--cools as regulatory attention heats up. Exchange co-location is rightly left alone; "naked" sponsored access goes away via exchange and FINRA rules, as well as the continued migration of high-frequency firms to broker-dealer status. Market surveillance tools and techniques play catch-up. This means few actions against high-frequency types. The current binary view of the world--high-frequency is either the second coming or the cause of cancer--is resolved with a realization: while clearly good for liquidity in the aggregate, even high-frequency firms succumb to human frailty on occasion. Better information, understanding, and surveillance--as opposed to blunt policy change--is the chosen remedy.
4. Equities Exchange Landscape Drab, Options Interesting. Coming off a sugar-high of cheap-stocks and the final leg of a 10-year technology-driven growth spurt, equities volume remains listless. Aside from second- and third-license launches to differentiate pricing and tweak market structure, little happens. But options provides some fireworks. The forward march of the penny pilot and the end of "step-up" auctions via the flash ban puts additional wind at the back of maker-taker markets. The BATS launch is a success, reaching 5% market share by year-end; CBOE's C2 never happens. An options TRF is offered as a way to resolve exchange-organized payment-for-order-flow.
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