For every point there is a counterpoint.
Debate has been endless on fragmented markets and the sheer number of trading venues in the U.S. market structure. Many argue too many venue hurt the market quality. Some traders it stunts block liquidity. Others complain of the difficulty in order tracking. They question how an order reaches a venue and is executed. Then some say too many venues makes the market ripe for information leakage. That exposes the buyside to high-frequency traders who use hyper-fast computers to predict and jump in front of their orders.
Yet there is a counterpoint to all these complaints.
Cromwell Coulson, chief executive of OTC Markets Group, said that fragmentation is good for the market. It signifies a healthy market that provides plenty of choice, he says. In a recent note to clients and chat with Traders Magazine, he talks about how fragmentation is not unique to the equities marts and how his venue sees benefits.
“The fragmentation of trading in our financial markets mirrors a change taking place in every industry: the shift from a three-tier model of producer, distributor, retailer, to a networked community where consumers and producers connect directly through public and private networks,” Coulson said.
He pointed to Apple as a model. It is where consumers can purchase products from a retailer that is a supplied by a distributor of Apple products, a retailer that deals directly with Apple, or direct from Apple via its website or standalone stores. The same, he said, is happening in the equities markets.
“Using the Apple example, investors in Apple stock can purchase shares from brokers who place buy orders with an exchange to match them with sellers. Alternatively, brokers may use a public or private network to connect directly to other brokers who are sellers, or they can internalize the order and provide the liquidity directly to the investor without another intermediary,” Coulson said.
“This networked model of trading is creating efficiencies for investors by providing buyers and sellers with a choice of trading partners and forcing intermediaries to add value or potentially be left out of the trade,” he added.
As a result, with more choices of different types of execution and liquidity providers, investors and brokers can select the destination that offers them the best liquidity and lowest total execution cost.
“Market fragmentation has improved the overall efficiency of trading and pricing of securities in the market,” Coulson said. “By helping broker-dealers better connect with their trading partners and providing tools for companies to inform their investors wherever they analyze, value and trade securities, we can leverage the power of networks to create better informed and more efficient financial markets.”
OTC Markets Group operates the OTCQX, OTCQB and OTC Pink marketplaces.
