By Sara Brady
The FPL Americas Electronic Trading Conference, for those in electronic trading, is always a year-end highlight and this year was no exception. Sara Brady, Program Manager, FPL Americas Conference, Jordan & Jordan thanks all the sponsors, exhibitors and speakers who made this year’s conference a huge success.
The 6th Annual FPL Americas Electronic Trading Conference took place at the New York Marriott Marquis in Times Square on November 4th and 5th, 2009. John Goeller, Co-Chair of the FPL Americas Regional Committee, aptly set the tone for the event in his opening remarks: “We’ve lived through a number of challenging times… and we still have quite a bit of change in front of us.” After a difficult year marked by economic turmoil, the remarkable turnout at the event was proof that the industry is back on its feet and ready to move forward with the changes to the electronic trading space set forth in 2009.
Market Structure and Liquidity
Two topics clearly stood out as key issues that colored many of the discussions at the conference – regulatory impact on the industry and market structure as influenced by liquidity, and high frequency trading. An overview of industry trends demonstrated that the current challenges facing the marketplace are dominated by these two elements. Market players are still trying to digest the events of 2008 and early 2009, adjusting to the new landscape and assessing the changing pockets of liquidity amidst constrained resources and regulatory scrutiny. The consistent prescription for dealing with this confluence of events is to take things slow and understand any proposed changes holistically before acting on these changes and encountering unintended consequences.
The need for a prudent approach towards change and reform was expressed by many panelists, including Owain Self of UBS. According to Self, “Everyone talks about reform. I think ‘reform’ may be the wrong word. Reform would imply that everything is now bad, but I think that we’re looking at a marketplace which has worked extremely efficiently over this period.”
What the industry needs is not an overhaul but perhaps more of a fine-tuning. Liquidity is one such area that needs carefully considered finetuning. Any impulsive regulatory changes to a pool of liquidity could negatively impact the industry. The problem is not necessarily with how liquidity is accessed, but the lack of liquidity that results in the downward price movements that marked a nightmarish 2008. Regulations against dark liquidity and the threshold for display sizes are important issues requiring serious discussion.
Rather than moving forward with regulatory measures that may sound politically correct, there needs be a better understanding of why this liquidity is trading dark. While there is encouraging dialogue occurring between industry players and regulatory bodies, two things are for sure. We can be certain that the evolution of new liquidity venues is evidence that the old market was not working and that participants are actively seeking new venues. We can also be assured that the market as a messaging mechanism will continue to be as compelling a force as it has been over the last two decades.
One of the messages that the market seems to be sending is that sponsored access, particularly naked access, is an undesirable practice. Presenting the broker dealer perspective on the issue, Rishi Nangalia of Goldman Sachs noted that while many agree that naked sponsored access is not a desirable practice, it still occurs within the industry. A panel on systemic risk and sponsored access identified four types of the latter: naked access, exchange sponsored access, sponsored access of brokermanaged risk systems (also referred to as SDMA or enhanced DMA) and broker-to-broker sponsored access.
According to the U.S. and Securities Exchange Commission (SEC), the commission’s agenda includes a look specifically into the practice of naked access. David Shillman of the SEC weighed in on the commission’s concern over naked access by noting, “The concern is, are there appropriate controls being imposed by the broker or anyone else with respect to the customer’s activity, both to protect against financial risk to the sponsored broker and regulatory risk, compliance with various rules?” Panelists agreed that the “appropriate” controls will necessarily adapt existing rules to catch up with the progress made by technology.
On October 23, NASDAQ filed what they believe to be the final amendment to the sponsored access proposal they submitted last year. The proposal addresses the unacceptable risks of naked access, and the questions of obligations with respect to DMA and sponsored access. The common element of both of these approaches is that both systems have to meet the same standards of providing financial and regulatory controls. . . Jeffrey Davis of NASDAQ commented on his suggested approach: “There are rules on the books now; we think that they leave the firms free to make a risk assessment. The NEW rules are designed to impose minimum standards to substitute for these risk assessments. This is a very good start for addressing the systemic risk identified.”
These steps may be headed in the right direction, but are they moving fast enough? Shillman added that since sponsored access has grown in usage there are increasing concerns and a growing sense of urgency to ensure a commission level rule for the future, hopefully by early next year. This commission proposal would address two key issues – should controls be pre-trade (as opposed to post-trade) and an answer to the very important question, “Who controls the controls?”