Equities trading focus | Market structure | James Hilton
automated, it has introduced further competition into the execution space. Automated crossing networks are now operated by brokers, MTFs, and the exchanges themselves, allowing traders to cross stock without displaying their size. Our studies indicate that
trading in this manner has a clear, positive impact for the end investor. For orders using time- and volume-based tactics, those that were exposed to the dark performed a full 3.3bps better when measured against IS and 0.8bps better versus VWAP. Some detractors have argued this practice is damaging to market quality and should at least be restricted to the largest orders only; but, in our studies we have found that there is no evidence that higher levels of crossing activity adversely affect the market. In fact, we found evidence of a positive impact on several measures of market quality, including spreads and autocorrelation. We also showed that posting visible quotes
2.5 2.0 1.5 1.0 0.5
for even small orders causes market impact, undermining any argument for a minimum size restriction.
Clear and measurable benefits With the knock-on effects of changes to the market’s structure coming into focus, it stands to reason that the regulatory framework will need to adapt. Many common-sense reforms have been put forward or are underway. However, other proposals seem designed to roll back new forms of execution in order to reduce the competitive pressure on established business interests. The lobbying efforts of the exchanges clearly reflect this anti-competitive sentiment. They have strongly pushed for minimum trade sizes and caps for crossing networks. The research papers they fund to bolster their position employ questionable methodology, such as declaring that on-exchange crossing networks are “lit”, while off-exchange crossing networks are “dark”, or conflating macro
Fig 1: Credit Suisse transaction cost index B
A C D A
B C D
2007 2008 2009 2010 2011 2012 2013 Source: Credit Suisse Trading Strategy, Jan 2007 – May 2013
Best Execution | Summer 2013
Composite cost index Transaction cost index
J.P. Morgan acquires Bear Stearns
Global financial crisis Greece debt crisis Euro crisis
trends in volatility with market structure changes when it proves convenient. They argue that the above-mentioned restrictions would improve market quality, but the only obvious effects would be to force volume back to the old regimes, restore market concentration and transfer money directly from pension funds to the bottom line of exchange profits through increased investor costs. The market by and large knows this. For example, Pensions Europe – an association of funds representing the workplace pensions of 83 million Europeans – put it succinctly when they noted that these and other proposals: “offer trading venues the opportunity to take undue commercial advantage from pension funds’ investment activities…affecting the returns on investments and, ultimately, the contributions paid to workplace pension beneficiaries.” The European markets
have undergone an enormous transition since 2007. MTFs have driven down exchange fees and crossing networks have enabled investors to trade without distorting the market. While entrenched interests have painted these developments negatively – warning of deteriorating market quality with subjective or questionable claims – the net result of increasing competition is clear and measurable: a significant reduction in costs, with the benefits going to the end investor. It would be a shame to roll that back. n
43
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92