Click to add a heading (20pt Arial Bold, one line only) 1 Rise of Off-Exchange Trading MODERN US EQUITY MARKET STRUCTURE Very fragmented and highly automated A product of regulatory changes and rapid advances in technology
Click to add a heading (20pt Arial Bold, one line only) 0 Rise of Off-Exchange Trading MODERN US EQUITY MARKET STRUCTURE Very fragmented and highly automated.
Jan 21, 2016
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1
Rise of Off-Exchange Trading
MODERN US EQUITY MARKET STRUCTURE
Very fragmented and highly automated
A product of regulatory changes and rapid advances in technology
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2
Rise of Off-Exchange Trading
MODERN US EQUITY MARKET STRUCTURE
11 Exchanges
Nearly 50 “Dark Pools”
Variety of Fee Structures and Business Models
19
95
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00
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0%
20%
40%
60%
80%
100% 85% of KO traded on NYSE before…
…but only 25% after Reg ATS, Decimalization, and Reg NMS
2007: Regulation NMS required exchanges to route marketable orders to venue with best quote, ensuring price priority across venues and opening the door to increase competition
1998: Regulation ATSopened the door to the creation of ECNs, ATSs, and off exchange trading venues (“Dark Pools”)
2000: Decimalization increased competition to quote spawning the creation of Electronic Market Makers and other types of HFT
Source: Bernstein
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3
The Rise of HFT
MODERN US EQUITY MARKET STRUCTURE
HFT grew aggressively, became less profitable, and is now cashing out
Getco bought Knight Capital (KCG)
Virtu IPO
Flow Traders IPO
Source: TABB Group
Regulatory changes and technological advancements allowed HFT to flourish
Though the space has become less
profitable
More in dark, tighter spreads, smaller
trade sizes
Source: Fidessa
Source: TABB Group
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4
Michael Lewis’ “Flash Boys”released on March 31, preceded by 60 Minutes feature on Sunday prior
Market Response - IEX & Flash Boys
MODERN US EQUITY MARKET STRUCTURE
Au
gu
st 20
15
July 2
01
5
Jun
e 2
01
5
Ma
y 20
15
Ap
ril 20
15
Ma
rch 2
01
5
Fe
bru
ary 2
01
5
Jan
ua
ry 20
15
De
cem
be
r 20
14
No
vem
be
r 20
14
Octo
be
r 20
14
Se
pt 2
01
4
Au
gu
st 20
14
July 2
01
4
Jun
e 2
01
4
Ma
y 20
14
Ap
ril 20
14
Ma
y 20
14
0.0%
0.5%
1.0%
1.5%
IEX steadily gaining market share
IEX expected to launch exchange in Q1 2016
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Diverse Locations for Trading Centers
MODERN US EQUITY MARKET STRUCTURE
Source: datacenterknowledge.com
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Latency Arbitrage
MODERN US EQUITY MARKET STRUCTURE
Source: qz.com
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MODERN US EQUITY MARKET STRUCTURE
Securities Information Processor (SIP) Arbitrage
Source: qz.com
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High Frequency Trading In Action – 500 milliseconds
MODERN US EQUITY MARKET STRUCTURE
Source: Nanex
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AUTOMATED DECISION MAKING – BROKER ALGORITHMS
Automated Decision Making plays a vital role in today’s equity markets and is the core underpinning of broker algorithms.
Broker algorithms provide mutual funds, hedge funds and other types of funds the ability to execute their large orders intelligently in a complex environment.
These algorithms could be described as a “search engine” – find the best and most relevant results based on limited information and a broad spectrum of choices.
The decisions made by these algorithms are based on a multiple of factors: How many shares are you trying to execute? What is the objective of the algorithm in terms of trading style? What trading venues are available to chose from and where are they
located? What is the current supply and demand? What estimations can be applied? How do we deal with gaming factors (High Frequency Trading)?
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Brief Overview of Automated Trading Process
AUTOMATED DECISION MAKING – BROKER ALGORITHMS
Source: maroonanalytics.com
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Supply and Demand – A View of Buyers and Sellers at Various Prices
AUTOMATED DECISION MAKING – BROKER ALGORITHMS
Source: Bloomberg
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