So, what can the markets expect going forward?
In an interview with Traders Magazines editor John DAntona Jr, OTC Markets Groups CFO Bea Ordonez gives her views on whats in store for global execution, clearing and the exchanges in the coming year.
Ordonez joined OTC Markets Group in 2015 as Chief Financial Officer. She has more than 20 years of experience in the financial services industry. Prior to joining OTC Markets Group, Ordonez served for 13 years as Chief Operations Officer and Managing Director at Convergex Group, a global brokerage and trading-related services provider. Prior to this she served as Chief Financial Officer at G-Trade Services, a broker-dealer then owned by Credit Lyonnais Securities Asia, providing global execution and clearing services. Earlier in her career, Bea worked at Marsh & McLennan and held tax consultant roles at both Price Waterhouse (now PWC) and Arthur Andersen. Lastly, she was Traders Magazines 2014 Wall Street Women Trailblazer award winner in 2014.
Traders Magazine: What trends do you see in global execution in 2019?
Bea Ordonez: We are seeing and will likely continue to see a continuation of the post 2008 financial crisis trends, including an increasing regulatory burden for institutional firms coupled with rising costs, compressing margins all contributing to further consolidation in the industry.
Both domestically and overseas, expect to see continuation of longer running trends — increasing fragmentation with staggering proliferation of new venues especially in Europe (e.g. 175 markets registered at the end of 2007 and almost 300 a decade later) leading to broker dealers facing increasing complexity in accessing global markets and delivering best execution. This, in turn, will continue to drive increased automation and the need for ever increasing complexity and sophistication around OMS and EMS systems requirements etc.
TM: Can you elaborate?
Ordonez: In general, expect to see continued trend towards further electronification of the execution industry with more and more order flow stemming from low touch channels and the provision of algorithmic strategies becoming more commoditized.
Increased emphasis will continue to be placed on transparency. MiFID, and now MiFID II, and notably, the requirement that execution and research services be unbundled in Europe will place an ever-increasing spotlight on best execution — with the analytics component (be it pre-trade, real-time, post-trade etc.) becoming even more important.
TM: How are the U.S. public markets/exchanges going to fare moving ahead? Fee increases, market data, consolidation, etc?
Ordonez: The larger U.S. exchanges have, over time, developed and maintained a business model that serves the large cap, blue-chip companies well, while serving the needs of early and venture stage companies less effectively.
For many years, IPOs were considered the hallmark of success for startups and entrepreneurs. More recently, the high costs associated with completing an IPO on an exchange, and the significant ongoing regulatory and disclosure burdens of being public, coupled with the ready availability of capital in the private markets has certainly impacted many companies thinking in this area.
There has been considerable discussion by the financial press and by regulators around the dearth of IPOs and the drop in the number of public companies on the exchanges (e.g. in 1997 there were ~9k companies on US exchanges— that number has since been cut roughly in half). I believe that while relevant, this dialogue partially misses the point. While the number of companies on the major exchanges has dropped, the overall size of those companies by market cap has grown exponentially. Meanwhile, we are seeing that for now at least, there is a thriving venture market with many companies raising money in the private markets and choosing to stay private longer or to go public on OTC Markets.
So, to me this seems less like a problem to be addressed necessarily and more a result of the markets evolving to provide alternative avenues for capital raising and alternative venues for price discovery and for companies to engage with investors.
TM: Can you give an example?
Ordonez: Spotify was a great example of a less conventional path to becoming a public company. There are others, with multiple options such as SPACs, Regulation A+ offerings and Direct-to-Market offerings via Slow-PO. Depending upon the needs, scale and size of the company, there are many alternatives available. A one size fit all approach does not work in the same way that it did 10, 20, 30 years ago.
The deregulation of private markets, the Jobs Act and legislative frameworks such as Reg A+ continue to provide alternatives to the traditional IPO model of capital raising. We should expect or our financial markets to continue to evolve to meet todays needs as they have always done. The capital markets ecosystem will never be static.
TM: What about ICOs?
Ordonez: Disruptive technologies and new asset classes, ICOs are just one example, will only accelerate this evolution, as traditional financial markets and digital assets/crypto continue to converge. Here at OTCM, we feel we are well-positioned to work within this evolving system, to better serve our subscriber base, the needs of international companies looking to access the US capital markets, the needs of venture stage companies as well as the needs of investors who benefit from data-driven solutions that help them price risk.
In this regard, OTCM has always taken a creative, solutions-based approach, that is not tethered to how the market is supposed to work, but rather is rooted in the notion of providing a data-driven, efficient market structure that can serve the needs of diverse constituents. In recent months, this has included supporting and advocating for alternative capital raising methods such as crowdfunding, Slow POs and Regulation A+ — all more efficient, less expensive and less burdensome paths for companies looking to raise capital in the public markets.
We benefit from a unique business model that continues to disrupt the exchange model: Unlike the listing standards of the traditional exchanges, OTCM creates standards that are practical, cost-effective, create efficiency, are adaptive and can be fast-tracked; our standards evolve and innovate to correlate with the changes we see in trading, technology and market structure.
TM: Lets talk about the state of clearing. What are the latest developments? What are some trends you see in 2019 and beyond?
Ordonez: I would anticipate continued consolidation and contraction in the US clearing space – driven by increasing regulatory burdens (AML/KYC requirements, FINRAs focus on gatekeeper liability, etc.) as well as increased capital requirements following changes in margin requirements with respect to customer transactions.
The transition to T+2 settlement will have alleviated some of the capital requirement/counterparty risk constraints, but the challenges in further shortening the settlement cycle are evidenced by the just how long the implementation process was to get us to T+2. I think we are seeing increased investment in back office and compliance-related systems as firms realize that legacy systems are not inherently adaptive to new regulatory and other demands of the market. In many instances, we will see firms transitioning to a more outsourced model in this area. Whether that involves widespread adoption of blockchain technologies in the near-term remains to be seen, although candidly, I am skeptical.
Clearing firms are continuing to take a much more proactive, critical look at the risk profile of the sectors they operate within, as well as the firms for whom they clear for and provide custody. In the OTC Markets Group space, we are seeing increasing scrutiny in line with this approach – with clearing firms constantly assessing the risk profile of OTC trading generally and of participants in the space. We work closely with many of the major clearing firms to educate them about the OTC space and to provide the tools and analytics they need to properly assess and respond to risk. Our data-driven initiatives continue to bring transparency to the OTC equities space, evidenced by the growth in the number of clearing firms utilizing our compliance suite of products.
TM: Can you give an example?
Ordonez: Some examples include initiatives around share issuance and dilution – a significant concern for market participants. Our Transfer Agent Verified Shares program reached new milestones this past quarter with 30 SEC registered transfer agents now participating, providing investors with current share information on over 96% of domestic OTCQX and OTCQB companies.
Also, we have launched a number of enhancements to our Market Data products over the past 12 months including our stock promotion and shell risk flags, and these continue to gain acceptance across the industry. These flags, which are applied to a small subset of companies, provide valuable real-time transparency into area of risk that can impact market pricing and investment decisions. Our OTC Compliance Analytics product provides broker-dealers and investment managers with a comprehensive, quantitative tool for evaluating and automating risk processes and questionable affiliates.
Lastly, given our leadership role to establish market standards and educate issuers in the small cap space, in September, OTCM launched a Small Cap Listed Compliance Product helping to standardize and improve analysis of 1800+ small cap securities listed on U.S. Stock Exchanges.
