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If It Ain’t Broke, Don’t Fix It

Traders Magazine Online News, March 6, 2018

Mark Davies

The phrase “The more things change, they more they stay the same” continues to apply to U.S. market structure and regulatory initiatives as we enter the midway point of 2018’s first quarter.  In contrast to recent, extreme volatility in the markets, many underlying issues remain steady across asset classes.

Questions such as, “What truly represents best execution?” and, “Are the markets really more transparent than they were five years ago?” continue to rear their heads.  As a result, FINRA’s 2018 Regulatory and Examination Priorities Letter once again focuses on these and related issues.  While our friends across the pond are bracing for massive regulatory changes in the form of MiFID II, little appears set to change from a regulatory perspective in the U.S. this year.

In my opinion, there is nothing wrong with this steady approach.  Enhancing transparency across asset classes and for all market participants, which inherently involves seeking to stamp out abusive trading practices, remains critical.  As financial markets continue to increase in complexity, oversight of order routing, execution quality and related matters grows ever more important.  FINRA’s 2018 priorities, and those of other U.S. regulatory entities, may not be groundbreaking, but they showcase the fact that market structure remains convoluted and often difficult to decipher.

Analyzing a multiplicity of market scenarios across available execution venues is not only required by regulatory entities, but also is integral in determining when – and on which venue – best execution occurs.  This can be difficult to manage effectively without the right technology solutions in place, but any firm executing trades is required to follow these procedures.  These processes are a legal mandate, but can also lead to critical insights that enable market participants to adjust their trading strategies in order to achieve optimal results.

Firms must be prepared to attain deep insights into their order flow and the execution quality of their transactions, in order to facilitate regulatory compliance and streamline operations.  Technology is decreasing the time and effort required to source and analyze this information, and remaining compliant is therefore less difficult than it was just a few years ago.  With this in mind, regulatory requirements from FINRA and other entities should seem less daunting than they may have previously.

I hope that ongoing regulatory efforts to increase financial market transparency will improve trust throughout the industry.  While something as abstract as “trust” is intangible and impossible to quantify, it is nevertheless crucial for the health of the market.  More open markets will increase competition, hopefully leading to greater liquidity and price improvement.  This should in turn positively impact investor confidence, which benefits everyone from financial institutions to broker-dealers, exchanges, market makers, banks, and more.

Another colloquialism that applies to 2018 financial market regulation: “If it ain’t broke, don’t fix it.”  While FINRA and other entities have not implemented any revolutionary priorities in 2018, we hope their ongoing efforts remain instrumental in improving transparency and trust throughout the industry.  Continued focus on market structure, execution quality, price improvement and related issues should only serve to benefit all market participants go-forward.


Mark Davies is Chief Executive Officer at S3

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