Innovation Accelerated in US Equities in 2021
Joe Wald, managing director of electronic trading at BMO Capital Markets, said the acceleration of a systematic approach to trading and performance-driven execution have been huge themes which will continue next year.
Wald told Markets Media: “Venues, including exchanges and alternative trading systems, have really started to focus on a different segment of client base, versus the high-speed, high-frequency trade, in earnest for the first time.”
He continued that there has been a proliferation of new venues and order types that are geared towards performance, minimizing information leakage and optimizing execution quality. For example, Cboe Global Markets is introducing periodic auctions from Europe into the US equities market.
“The adoption of IEX Exchange’s D-Limit order type and the IntelligentCross Aspen ATS have been standouts,” Wald added.
IEX Exchange fully launched its D-Limit discretionary limit order type in October 2020, which protects investors from adverse selection, after receiving long-awaited approval from the SEC.
The IntelligentCross Aspen ATS is an equity trading venue powered by artificial intelligence. Imperative Execution, the owner of IntelligentCross, said in a report in May that the ATS was ranked second in the frequency of setting the best price in the US equities market when compared to most US equities exchanges, according to market data firm Exegy.
“There has been accelerated adoption of liquidity sourcing strategies and techniques to maximize how they work with all these different order types and venues,” Wald added.
He continued that the industry has been focussed on taking advantage of this huge outpouring of innovation. For example, BMO has been able to be nimble and roll out five or six new versions of its Algorithmic Management System (AMS) platform this year to add new functionality.
“Clients are looking for a data-driven approach,” said Wald. “They are looking for an iterative, collaborative process around incorporating new innovation and building out their workflows in a more process-oriented way.”
Jack Miller, head of trading, institutional equities at Robert W. Baird & Co, also welcomed innovation from venues which offer a differentiated way of trading.
Miller also highlighted the aggregation of liquidity at the close. Analysis by Baird of the last 10 minutes of the trading day through the entire “close process” found that this short window accounts for more than 10% of total volume traded.
“Finding liquidity at the close has become the most important part of the trading day and led to a recalibration of strategies,” he added.
In addition to new ATSs launching, there were a number of acquisitions this year. Nasdaq announced in August it was buying a significant minority stake in LeveL ATS. In addition, Cboe completed its purchase of BIDS Trading, the largest independent block trading ATS in the US, at the start of this year and TP ICAP completed its acquisition of dark pool Liquidnet in March this year.
“I would love to see more venues and order types focused on execution quality,” added Wald. “Adoption and integration into workflows can take some time and that is a big part of what we will see in 2022.”
Shane Swanson. equities and financial technology expert in Coalition Greenwich’s market structure and technology practice, said there is room for new venues that offer differentiated trading such as Blue Ocean Technologies which has launched BOATS, Blue Ocean Alternative Trading System, to offer after-hours trading of US stocks from 8:00 pm to 4:00 am ET from Sunday through Thursday. However, at the same time he also expects acquisitions to continue.
Swanson told Markets Media: “2022 will be a year of consolidation across financial services – not just of venues but also asset managers, banks and fintechs.”
Swanson highlighted that the move to a shorter settlement cycle in the US will be a big focus in 2022.
In December industry bodies published a report targeting the first half of 2024 to shorten the U.S. securities settlement cycle from trade date plus 2 days (T+2) to trade date plus one day (T+1).
As next steps, the Industry Steering Committee recommended that firms begin to work with their counterparties, custodians, vendors, regulators, and clients to better understand internal impacts related to timing requirements and deadlines, system requirements and improvements, and process changes.
The US Securities and Exchange Commission has said it is reviewing equity market structure, including payment for order flow. In the US retail trades are not executed on exchanges but most are sold to market makers under payment for order flow agreements. The market makers internalize the flow and capture the majority of the spread, in return for offering retail investors a slight improvement on the exchange price.
The SEC in October published a Staff Report on Equity and Options Market Structure Conditions in Early 2021, which focuses on the January 2021 trading activity of “meme stock” GameStop.
Wald said: “I definitely expect to see some movement around greater transparency of fees and rebates, some simplification of complexity and the terrible opacity that has snowballed into where we are today.”
The SEC has also proposed governance changes to the public SIP market data feeds, which have been temporarily put on hold due to a pending court challenge and the issue should be resolved in 2022.
In November the SIP operating committees filed a series of NMS Plan amendments as required by the SEC’s market data infrastructure rule. Adrian Griffiths, head of market structure at member-owned exchange MEMX, said in a blog that the SEC should reject these proposals.
Griffiths wrote: “As detailed in a comment letter that we are publishing, the proposed fees are generally more expensive than fees charged for comparable market data already available on proprietary data feeds. As such, the proposed fees will serve only one purpose – continuing to protect those proprietary data products from needed competition and impeding the viability of competing consolidators.”