Blurred Definitions; Broken Models

With Clive Williams, Global Head of Equity Trading, T Rowe Price

Clive WilliamsPeople are very much aware of dark liquidity and what it means. But what I think people are probably unaware of is that if you add up all the volume in the fragmented dark then the true volume number is closer to 55%, and not the 40% that is commonly quoted. So it’s the minority of trading that actually is used to develop price formation; price discovery is being impinged by dark flow, which is a challenging situation.

Brokers are increasingly indistinguishable from exchanges, and vice versa, both want to be each other. For example, NASDAQ tried to launch algorithms to try and compete with the sell-side. It becomes accepted behaviour.

The arguments that we hear from the sell-side, namely that exchanges are too expensive; the simple way to solve this is to reduce the exchange fees, and that’s the access fees, which is all part of the maker/taker model. Ban maker/taker and a lot of issues would be solved.

The exchanges are also increasingly becoming more like technology companies, they’re not trading companies; data is where they make their money which is counterintuitive.

It’s been tried before, but maybe now is the time for the buy-side to get together and have their own exchange. We haven’t seen that yet, but anything is possible.

Everyone comes up with a more complex answer to solve the same issue but not so long ago that market structure was relatively simple. Why do we need 50 dark pools and 13 different exchanges? They say its competition. I struggle to see that. It’s just about a different pricing model? Again, that all pertains to the maker/taker model where the biggest clients are the high frequency traders. They’re not looking after the investors and are not interested in fundamentals or even risk taking. They are just sand in the machine.

An exchange is supposed to be a facilitator for companies that want to raise money, help the economy and grow jobs. We seem to have lost sight of that; companies no longer want to come and list in the market. They’re happy to stay private longer as financing of private companies is much easier today. Increased regulation may have possibly played a part in the reduction of listed companies but it’s nowhere near the full answer.

We suffer as an institution as these small, growth companies are no longer serviced by research analysts; approximately 40% of all listed stocks globally don’t have any research coverage.

This lack of research and promotion is because there are no incentives for brokers to pick these things up. They’re busy spending their money on technology and trying to interconnect with the dark pools and venues; they’re forgetting what they were about, namely helping companies raise capital and grow.

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