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September 1, 2011

Living Large

By Michael Scotti

The first two weeks of August delivered volatile markets, the likes of which we haven't seen since the financial crisis. Despite the downward pressure on stocks, traders report that liquidity was ample as volume skyrocketed. Bad economic news and a lack of faith in government, along with mutual fund redemptions, triggered the mayhem. In this issue, you can read about what traders had to say in our feature "Roller Coaster."

Michael Scotti

In one conversation I had with a buyside trading executive, he gave credit to the industry and the SEC for coming up with responses to the "flash crash." In his mind, the various new rules on circuit breakers and naked access, as well as the earlier rules on short selling, allowed the markets to operate efficiently. As this month's story points out, there was no panic among traders this time, despite the wild swings.

On the rules front, the SEC has passed its large trader rule, which requires any firm doing significant volume to register. Then there is the normal record-keeping requirement, too. The rule allows the SEC to get a view into the market, to see what firms are doing. This is the first step toward a consolidated audit trail, which is still a distance off, according to staffer John D'Antona Jr.'s story. But if you want to be a player in this trading business, it might be wise to first read columnist Dan Mathisson's piece on large trader. Mr. Mathisson believes a firm would be stigmatized by not qualifying for large trader. In his view, firms will vie for the designation as a status symbol. It's certainly worth the read, and there's even a Telly Savalas reference to his short-lived "Players Club."

Once referred to as a club, today's exchanges are anything but. Reg NMS has put them all on equal footing, forcing each to fight for market share. Enter the market volume slowdown over the last year, and today exchanges are clawing and fighting for every order in a maker-taker world.

This month's cover story digs into how exchanges are adjusting their pricing to attract liquidity providers. They're spending more to attract firms and traders to post on their exchanges. Consequently, spreads are under stress: the difference between what an exchange receives from takers of liquidity and the amount it pays to attract posted liquidity. Rules limit what an exchange can charge takers to 30 cents per 100 shares. Price wars are always good for the consumer. This is one story worth keeping an eye on. Enjoy the issue.


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