MarketsMuse senior editors have quickly canvassed a broad assortment of “market structure experts” and industry talking heads who have been at the forefront of debating the pros and cons of market electronification, multiple market centers and the underlying issue: “Is Market Fragmentation Good, Bad or Ugly?”
For those who might have just landed on Planet Earth, the debate (which is ongoing via industry outlets such as TabbForum, MarketsMedia, and most others) boils down to whether multiple, competing electronic exchange systems enhance overall market liquidity and make it ‘easier and better’ for institutions and retail investors to execute ‘anywhere/anytime’ via the now nearly two dozen “ECNs”, “Dark Pools” that offer a Chinese menu of rebates, kickbacks and assorted maker-taker fee schemes (e.g. ARCA, BATS etc), or whether someone should try to shove the Genie back into the bottle and revert to the days of yore when the NYSE was the dominant listing and trading center for top company shares, and complemented by a select, handful of regional stock exchanges, most notably, The MidWest Stock Exchange, The American Stock Exchange, The Philadelphia Stock and the Cincinnati Stock Exchange.
Despite the fact that CNBC talking heads dedicated the entire day’s coverage to the NYSE snafu with rampant speculation as to whether the day’s outage was due to a cyber attack by the Chinese in their effort to distract the world from the dramatic drop in China-listed shares, whether it was a Russia-based malware attack, or perhaps even an ISIS-born cyber-terrorist attack that also impacted United Airlines)–the fact of the matter (one that CNBC seemed oblivious to) is that those who wanted to execute stock trades through their brokers were able to do so without disruption, simply because those brokers routed orders to a drop down menu of exchanges that compete with the NYSE..
Yes, the NYSE lost a day’s worth of fees attached to every order they typically execute on a normal day (not a good day for exchange President Tom Farley)–but more than half of the market structure experts who have continued to campaign against market fragmentation have [temporarily] flip-flopped today and have acknowledged that were it not for multiple competing exchanges, today would have been a real headache for US stock market investors and brokers. No doubt CNBC and others who were fixated on this outage will be able to turn their attention back to what is taking place in Greece, China and other topics that actually do impact the price of global equities.
They say you should always shoot for the moon and that is exactly what BATs exchange is doing. MarketMuse update profiles BATS exchange looks to hit it out of Nasdaq’s and the New York Stock Exchange’s parks. The ETF-only exchange out of Kansas City, BATS, is planning on becoming the number one ETF trading venue by 2020 which means passing both the Nasdaq and the NYSE. BATS. This MarketMuse update is courtesy of Tom Lydon’s article “BATS Looks to be Dominant ETF Exchange” on ETFTrends.com. An excerpt from the article is below.
Most exchange traded products in the U.S. trade on the New York Stock Exchange or the or the Nasdaq Global Market. That is not stopping Kansas City-based BATS Global Markets from the ambitious goal of being the largest U.S. ETF listing venue in three to five years.
“There was a total of 1,411 U.S.-domiciled ETFs at the end of 2014, according to the Investment Company Institute, with more than 1,000 listed by Intercontinental Exchange’s NYSE unit and the balance by Nasdaq OMX Group,” report John McCrank and Jessica Toonkel for Reuters.
To read the entire article from ETFTrends, click here
MarketsMuse Editor Note: Finally, the topic of payment for order flow, the questionable practice in which large brokerage firms literally sell their customers’ orders to “preferenced liquidity providers”, who in turn execute those orders by trading against those customers orders ( using arbitrage strategies that effectively guarantee a trading profit with no risk) will now be scrutinized by the U.S. Senate Permanent Subcommittee on Investigations in hearings scheduled for this morning.
The first paragraph of this morning’s NY Times story by William Alden regarding today’s Senate hearings frames the issue nicely: “..To the average investor with a brokerage account, the process of buying and selling shares of stock seems straightforward. But the back end of these systems, governing how billions of shares are traded, remains opaque to many customers…Behind the sleek trading interfaces of brokerage firms like TD Ameritrade, Charles Schwab and Merrill Lynch lie a web of business relationships with relatively obscure firms that make trades happen..”
MarketsMuse has spotlighted this issue repeatedly over the past several years, including citing long-time trading industry veterans who have lamented (albeit anonymously) that the notion of selling customer orders is a practice that not only reeks of conflict of interest, it is an anathema to those who embrace the concept of best execution. Their request for anonymity has been driven less by “not authorized to speak on behalf of the firm” and more by a common fear of “being put in the penalty box” by large retail brokerage firms who embrace the practice of double-dipping (charging a commission to a customer while also receiving a kickback from designated liquidity providers) simply because these firm deliver the bulk of orders to Wall Street trading desks for execution.
Throughout the same period that this publication has profiled the topic, we have repeatedly encouraged leading business news journalists from major outlets to bring this story to the forefront. In every instance other than one, journalists and editors have suggested the topic is “too complex for our readers” and many have indicated that its a story that their “major advertisers (the industry’s largest retail brokerage firms and ‘custodians’) would be offended by.”
NY Times reporter William Alden described the issue in a manner that is perfectly clear and simple to comprehend; whether the issue of “conflict of interest” is clear enough or simple enough for U.S. Senators to grasp is a completely different story.
The following extracts from Alden’s reporting summarize the issue brilliantly; link to the full article is below: Continue reading
Good op-ed courtesy of TabbForum re: debate about whether having yet more options exchanges makes sense, or is just plain silly.
The Pros and Cons of Options Exchange Proliferation :: TabbFORUM – Where Capital Markets Speak.