Whew – it’s been a week for the books.
More volatility. More whipsaw market price movements. More trading activity at the market’s exchanges. And they were able to handle it. Despite 1000 point swings, circuit breakers tripping and the President, Congress, Federal Reserve Chairman Jay Clayton and myriad pundits talking the market – everything functioned. And the markets absorbed everything. Even ending the week suffering its worst losses in over 10 years.
All of it.
And the market still functions and remains open for business. Despite the NYSE closing its physical trading floor in New York, Nasdaq shuttering its Philadelphia Stock Exchange trading floor and the CME closing its floor the markets are still functioning and open.
And just today, SIFMA joined the Managed Funds Association, U.S. Chamber of Commerce, American Cotton Shippers Association, International Swaps and Derivatives Association and Investment Company Institute today in issuing the following statement on the importance of keeping U.S. financial markets open:
“The U.S. financial markets are critical infrastructure to our nation, and they continue to function as designed despite the volatility caused by the coronavirus. Keeping all U.S. financial markets open is essential to the well-being of the general economy and vital to maintaining and bolstering investor confidence, particularly once the economy recovers from effects of this pandemic.”
Spencer Mindlin, capital markets analyst at Aite Group, said that watching the markets and trying and navigate the volatility can be gut-wrenching. But everything is working and holding fast.
“Daily volumes are breaking new records and have tripled since last month from about 6 billion shares traded to 18 billion per day. I wouldn’t want to tempt fate but the US markets, from an infrastructure and technology standpoint, are functioning without major issue,” he told Traders Magazine. “Market makers have, in most cases, stepped up to provide the additional liquidity. Most systems have proven reliable in terms of redundancy and resiliency, and market fragmentation has not contributed to issues in any meaningful way. Some hold the view that computer-driven models have contributed to the size and speed of the moves we are seeing, but given the simultaneous corporate credit issues and collateral crunch, it’s unlikely that one factor alone is the cause. Fortunately, by all accounts, there have not been any so-called ‘flash crashes’ or market .infrastructure outages.”
He added that additionally, the SEC isn’t tinkering with the circuit breakers or attempting emergency orders as it did in September 2008.
“And as for the circuit breakers and their efficacy, they will be an everlasting source of debate – their configurations will always be imprecise,” Mindlin began. “But you would be hard put to find someone in the last few weeks that says they did not achieve their objective. To not have them would mean even greater volatility, and might prompt discussions of fully closing the market, which could have much greater negative consequences. The additional risk and uncertainty by such a move would only add to the anxiety, not just to the corporates and financial institutions that manage risk and capital on behalf of millions of others in real-time, but also to the average investor.”
He added that everyone in the capital markets should acknowledge the contributions of the financial industry professionals and stewards of our country’s capital markets system.
“Both the short and long term health of our country depends in a very real way on properly functioning financial and capital markets,” he said. “In the immediate aftermath of 911 there was a strong sense amongst financial professionals at all levels that restarting the markets was not so much about returning to ‘normal’ but about fighting back. When the markets reopened it proved that our country will always persevere. So, there’s enormous responsibilities riding on the shoulders of all the people involved in keeping the economy moving, from Wall Street to Main Street. And, from what I’m seeing today, even though employees are working from home, the markets haven’t skipped a beat.”
At Exchanges, Consolidation + Fragmentation
By Editorial Staff
When it comes to public price discovery, there is no better place than the exchanges.
NYSE.Cboe. Nasdaq. Doesn’t matter which one assists in the execution, the exchanges are the nexus of public trading. And the more paces to execute a trade, the better the execution, the thinking goes. And as time has gone by, from a single exchange formed in the 1800s under a Buttonwood tree to the most recent, IEX, exchanges have been an essential part of the market structure.
But that growth and innovation among the exchanges and their myriad incarnations has subsided from the stratospheric growth seen in the late 90s and early part of the 21stcentury. As much as Regulation NMS allowed for growth, the quest for profits and market share has forced consolidation in the markets. Smaller more intimate venue such as the American Stock Exchange, Philadelphia Stock Exchange and others have disappeared from the landscape while others, such as Direct Edge, have been absorbed.
But can we call that real consolidation in an equities marketplace still has approximately 40 trading venues?
Yes, says Richard Repetto, Principal at Sandler O’Neill + Partners.
There has been plenty of consolidation in the exchange space over the past 10 years, he began, noting the mega mergers between ICE and the NYSE and Cboe and BATs. The reason that there continues to be 40venues is due to two factors. First, there’s the cycle of entrepreneurship whereas consolidation leaves room for the small players to find a niche. Secondly, there is regulation and market structure. There’s still a place where dark pools and other ATSs can serve a purpose for select clientele or select segments of the markets.
While some say the multitude of trading venues – fragmentation–has helped the market as Repetto noted, some still maintain the marketplace might be better served by fewer venues. So, which is it?
Idont think it (multiple venues) has hurt the marketplace, especially in equities as theres still a very competitive marketplace, Repetto said. Furthermore, he doesnt expect much more consolidation going forward as there simply arent that many players left in the U.S. to merge.
But has this consolidation helped the market structure? There are still hundreds of different order types that differ by only a line of code at the exchanges and minor variations in pricing schema.
Consolidation has helped the exchanges as it provides economies of scale and cost savings, Repetto said. Idont have any strong feeling either way as to whether it (consolidation) helpedor hurt the marketplace overall because its just so competitive either way.”
James Angel, professor at the McDonough School of Business, Georgetown University, said that given the interconnected nature of today’s marketplace, consolidation still provides many diverse trading opportunities that satisfy traders and investors.
We now live in one virtually consolidated market network that provides numerous diverse trading opportunities, Angel began. We now have far better transparency and even uniformity than many ofus thought possible many years ago. Indeed, just as Sun Microsystems went around years ago saying ”The network IS the computer,” I like to point out that “The network IS the market.”
As Angel sees it, the various exchanges and trading platforms are just nodes in the network.Different investors have different trading needs, and the different nodes in the network have evolved to serve these needs in ways that are far better, faster, and cheaper than ever before.
However, that doesn’t stop us from advocating for still more improvements in the operation of the market network, Angel said. Even though are markets are far better than before, we still haven’t solved all of the problems. There is plenty to think about regarding market network governance, market data issues, rebates, tick size, venture exchanges, volatility dampers, and more.