Driving The Debate


Dave Lauer, Co-founder of Healthy Markets and President of KOR Group examines changes to market structure, and how firms need to involve themselves in the debate.
It seems that not a week can pass without mention of market structure, especially in US equity markets. While the debate has raged for decades, the years up to and following Regulation NMS have proven particularly dramatic. We’re now a year past the publication of Flash Boys, although many of us were focused on market structure well before that book, and most likely will be long after the paperback gathers dust in a used book store.
Over the past few years, many firms from across the industry have recognised the need to get further involved in the market structure debate. Generally this is a self-interested motivation – market structure has a dramatic (though not necessarily well-understood) impact on firms throughout the world. Certainly it is simple to understand why exchanges and broker-dealers are actively lobbying Congress and the SEC for / against new regulations, such as maker-taker reform to address broker routing conflicts, or a trade-at rule to bring more volume on to lit exchanges. What may be less obvious is why asset managers, and the buy-side in general, should be taking a much more active role.
When it comes down to it, the buy-side is the ultimate “consumer” of the market – it’s the buy-side firms whose orders are being executed in the market, and these are the firms that must ultimately answer to their clients. Reliance on the sell-side and their analysis of execution quality is no longer sufficient for the buy-side.
While several buy-side firms have recognised the importance of being represented in the ongoing debate, appearing on Congressional and SEC panels, or meeting with lawmakers and the SEC privately, these efforts have generally been loosely organised. There is no doubt that broader organisations such as ICI and MFA have been a part of this movement as well, but only as a small piece of their much larger and broader organisational focus.
These limitations have had significant consequences for the discussion around market structure reform. Buy-side organisations have struggled to find a common set of beliefs or ideas that their entire membership can coalesce behind, and so have found themselves mostly reacting to issues or ideas from others, rather than leading the debate. There have not been any strategic attempts to mobilise the buy-side to drive the market structure debate, to lead with ideas and a concrete platform of changes.
We believe there is a better way. My colleagues and I formed the Healthy Markets Association almost a year ago to lead the way. We formed this non-profit to be a small group of buy-side firms to drive reforms, both within the industry and from a regulatory / legislative perspective. We believe that the buy-side should be the leading voice in the market structure debate, while constructively engaging the rest of the industry.
The Healthy Markets Association is a US non-profit coalition of buy-side firms led by independent experts in market structure analysis and research. Our mission is to reduce complexity, increase transparency, improve understanding, and enhance efficiency and quality in US markets. Healthy Markets coalesces around a clear set of principles for which we believe industry-wide support is achievable:
· Transparency
· Accurate Metrics
· Data Freedom
· Displayed Liquidity
· Heightened Competition
To accomplish this, we believe we can drive changes within the industry. Our focus is on ATS transparency, data-driven research and better market structure metrics. Within each of these areas of focus, we are facilitating cooperation between the buy-side work and the rest of the industry, including ATSs, exchanges, market makers and broker/dealers. We work with leading ATSs to enhance voluntary disclosure in the industry, so that regulatory intervention is not needed. We work with market makers and SROs to build the Healthy Markets Research Institute, so academics can study markets with unprecedented data sets.
One of the more important initiatives worth highlighting is our work around Best Execution. As markets grow in complexity, the buy-side can no longer solely rely on brokers to reliably demonstrate execution quality. Third-party accreditation of both buy-side firms and brokers is needed, and Healthy Markets is leading the way by bringing firms together to agree on an accreditation methodology, a set of metrics and how those metrics should be measured. We seek to transform how the buy-side and brokers look at execution quality, order routing and meeting Best Execution obligations.
There is a tremendous amount of regulatory attention on Best Execution. Regulators often base regulations on industry best practices, which is why we believe that the buy-side must lead the industry forward to ensure those regulations are sensible and in the best interests of investors.
Some of our members have joined because they want to be leading voices and thought leaders as market structure changes happen. Others want to be publicly seen as contributing to this leading effort to promote sensible industry changes. And some want to join because they believe market structure is taking up too much of their time, and would like Healthy Markets and the work we are doing to relieve them of that burden.
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