Market Structure 2019, a look back

Though we are well into 2020, this is a short note on what I think were significant events in the equity market structure space from both sides of the Atlantic during last year. I believe the market structure space will continue to evolve in the coming years as advances happen in the space of electronic communication, data management and analytics, computational power, etc. and hope to track the changes as they happen during this year as well.

I have mentioned twelve areas, though not in any specific order. Please feel free to add to it, if you think, something deserves a mention.

1.      Shorter Trading Day – There is some discussion about reducing the market hours in London and in the markets of Continental Europe. Today, Europe has longer stock trading hours in the world (8-10 hours), compared to US and Asia (6-8 hours). The benefits expected are (a) an increased concentrating liquidity during the shorter hours, (b) help in encouraging diversity of staff, and (c) a better work-life balance for the staff. However, this is not as easy step to achieve, as it would require co-ordination by execution venues from across the geography. PS: Given that come of my team has to stay hours after the end of the market to do technology housekeeping, this is a very welcome thought.

Here is a consultation on the same from LSE https://www.londonstockexchange.com/traders-and-brokers/rules-regulations/change-and-updates/stock-exchange-notices/2019/n1819.pdf

2.      Periodic Auction – It has been over 2 years since MiFID II regulation (3 Jan, 2018) came into effect, with one of the main objectives being the need to enhance transparency in the European equities markets. The rise of Periodic Auctions, has raised some flags with ESMA and they issued a call for evidence on periodic auctions in November last year as there are concerns that frequent batch auctions may be undermining pre-trade transparency and also used to circumvent the double volume caps (DVC). ESMA has confirmed in a final report that it would not take action to discontinue it.

Here is a view from the regulator https://www.thetradenews.com/mifid-ii-periodic-auctions-survive-intense-regulatory-scrutiny/

3.      Increasing volume in Closing auction – from the report on market activity during 2019, shows a marked increase in closing auctions. The 5 minutes window is becoming one of the most heavily traded period of the entire day, accounting for almost 25% of the daily traded volume. One reason cited for high activity during this period is the need for passive investments to trade at closing prices. Regulators are watching this space closely to see how it develops and if there any unintended consequences to this heightened activity during closing auctions

4.      Consolidated Tape in Europe – ESMA last year, published a first review report on the development of prices for market data and on the consolidated tape for equity for the markets in the EU. Given the fragmentation of liquidity across multiple market venues, governed by common set of regulations, it is high time EU had its own tape like the SIP in US equity markets. Given the discussions around limitations of SIP itself in the US equity markets, EU has a chance to study those, and design and implement something that overcomes those limitations.

5.      Enhancements to SIP – Securities Information Processor (SIP) is a widely relied upon market data feed, that provides investors and traders with a unified view of U.S. stock market prices and volumes. As the world has moved on to more advanced technologies, and since microseconds matter in the new world of High Frequency Trading and Algorithmic Trading, industry has realized the need to upgrade SIP in terms of both content and latency. SEC has made a proposal for modernization, and invited comments

6.      Cost of Data – Related to the modernization of markets and the need for low latency market data is the discussion about the proprietary data feeds offered by exchanges to the market at a premium. The concern was primarily, about how the data rich, low latency proprietary feed has created two tiers (vs. the SIP data) in terms of market data, and how the high cost of feed is acting as a barrier for entry to new participants. The regulators are thinking to introduce competition in acquiring, consolidation and dissemination of market data

7.      Market Access differences – There has been a lot of discussion last year, on the asymmetric access to the execution venues by HFTs and regular investors through the implementation of speed breakers. A few help buyside firms get to a level playing field against market participants with advanced infrastrucre (like HFTs), while others favor the sell side for reacting to a changing market

8.      Strength of our Market Infrastructure: A very recent topic of discussion was the technical outages at some brokerages caused by the spike in trade volume. Though the brokerage platforms may not quality as Systemically important market infrastructure, I think the need to discuss protection of these critical systems from challenges, including cyber security attacks, volume spikes, runway algorithms, malicious code, etc. is important

9.      Introduction of new exchanges – This was one of the most discussed topics of last year, about the addition of 3 new exchanges (Members Exchange (MEMX), Long Term Stock Exchange (LTSE), and Miami International Holdings, operator of the MIAX Exchange Group) to the US Equity space which already has about 13 exchanges. There is fear that this could further fragment the liquidity in the equities market. However, some of the buy-side and sell-side firms look at it as a measure to counter-balance the powerful trio of ICE, Nasdaq and CBOE

10.  Transaction Fee Pilot: The ability of the agencies to run pilots to see impact of regulations on market structure is something that US regulatory agencies use very effectively, and I haven’t seen this level of proactive intervention in other markets. However, the Transaction fee pilot to assess the impact of maker-taker incentives on the routing behavior in the market has hit some road blocks, with exchanges raising court challenges

11.  Consolidated Audit Trail – After a brief pause, the development of this solution is in progress and first milestones are just around the corner. Hope to see the many 2020 milestones being achieved by the banks together with FINRA

12.  Increased Electronic Trading of FI and FX: While the focus of most market structure discussion are about Equity Markets, last year saw increased adoption of electronic trading in Fixed Income and FX markets. I believe, it won’t be long before we would be talking about the issues and challenges in those markets in the same vein as equity.

When I read the above list now, I think there are some overlaps between points, but keeping it as it is, since I think there is merit in having a separate discussion on each one of them.

Would love to know your views on what you think should make the list for 2019, and what could be waiting for us in 2020 and beyond.

Thanks, Rumman