Alternative Venues:Going from Strength to Strength
Bryan Harkins from Direct Edge talks about the benefits of innovation and the need for good customer service.
FIXGlobal: What has enabled the new breed of exchanges to succeed in an illiquid environment?
Bryan Harkins, Direct Edge: This is certainly a challenging time in the marketplace with respect to trading volumes. We are addressing this through a range of products, services and revenues that are non-transactional based and by moving towards more subscription-based products such as market data and connectivity services – basically a suite of technology and connection-based products. The role of an exchange is not just to put buyers and sellers together but also to help move their members’ businesses forward with new data and connectivity products. Innovation is especially important when trading volumes are low.
FG: What advantages do alternative venues, such as dark pools and ATS, in the US enjoy that the incumbent exchanges do not?
BH: Dark pools and alternative trading systems (ATS) are two different business models and there are advantages for each that an exchange may not have, and vice versa. Dark pools and ATS are allowed to restrict access to their platforms, offering different types of incentives for different types of flow.
Exchanges are at times hamstrung, however, because of the current application of the principles of ‘fair access’ under federal securities regulation. Exchange efforts to provide a better experience for retail and institutional orders are often reviewed under the principle: “if it isn’t made available to everyone, it can’t be made available to anyone”. As a result, exchanges can be constrained in their efforts to provide a better environment for retail and institutional investors. This can lead the firms who manage this order flow to seek off-exchange executions. There is nothing nefarious about this; in fact it is consistent with the duty of best execution. If exchanges don’t offer the best trading experience, trading volume should and will go elsewhere.
In the US, we are working with regulators to empower exchanges to offer a better product and experience to long-term investors. Not only would this help restore investor confidence, it would prospectively improve trading outcomes.
On the other hand, exchanges have advantages that dark pools and ATS do not. For example, we have a protected quote. Under regulation NMS, any quote inside the market is protected. It is a very powerful advantage to have a quote in the public market place. Exchanges also have significant brand advantages. It is very prestigious to be an exchange, and with that prestige comes a great deal of regulatory responsibility, which itself produces stronger confidence in our platform for our members.
FG: What will it take for alternative venues to experience further growth in the US?
BH: Alternative venues need to not only provide a place to trade with quality liquidity, but they also need to provide much needed competition against some of the larger exchanges, with lower fees and a variety of trading strategies that help members fill their orders efficiently.
Alternative venues should be a source of innovation, continually thinking of new ways to help members meet their trading goals. In these days of high-speed technology and very sophisticated trading platforms, it really does all come down to aligning yourself in a customer-friendly way and providing good customer service.