Abstract
I want to underline a special fact about our moderator, Ian Domowitz: We are friends from way back. Our friendship started when Ian was an academician. And Ian hasn’t changed that much. He may look spiffier, but he really hasn’t changed that much. Please welcome Ian.
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Notes
- 1.
Preface: Opening Remarks. The Low Down on High Intraday Volatility: Robert Schwartz, Speiser Professor of Finance, Zicklin School of Business, Baruch College, CUNY.
- 2.
In his varied and distinguished career as an academic and on Wall Street, the moderator was also a consultant to the US Commodity Futures Trading Commission (CFTC), the regulator for the US derivatives markets, with its central regional office in Chicago.
- 3.
See Chap. 1: Integrity of Price Discovery: Perspectives of Exchanges.
- 4.
See The Intelligent Investor. Back to the Future: Lessons From the Forgotten ‘Flash Crash’ of 1962. Jason Zweig, Wall Street Journal, May 29, 2010. http://www.wsj.com/articles/SB10001424052748703957604575272791511469272. The story quoted the opening of a story from the Wall Street Journal of May 29, 1962: “The stock market careened downward yesterday, leaving traders shaken and exhausted. The Dow Jones Industrial Average fell 5.7% that day, down 34.95, the second-largest point decline then on record.”
- 5.
This refers to the ability of market participants to gain advantages in the speed of their trade executions and price-quote data through advanced technology, specifically the “co-location” of their computer servers near stock exchanges’ computers. That lowers so-called latency, a critical factor in high-speed trade executions. The practice is regarded as legal though it has many critics.
- 6.
Referring to off-exchange trading in the USA.
- 7.
Focusing on Fundamentals: The Path to Address Equity Market Structure. SEC Chairwoman, Mary Jo White. Security Traders Association 80th Annual Market Structure Conference, Washington, D.C. Oct. 2, 2013 https://www.sec.gov/News/Speech/Detail/Speech/1370539857459
- 8.
Hua, Peng, Schwartz and Alan (2016). “Are Stocks Priced to Yield a Non-Resiliency Premium?”
- 9.
As the speaker explained in a follow-up interview: “In a single central limit order book, like you once had and still have in some European markets, if I am a seller of say, a million shares, I can ask myself how far do I have to take the price out from the current spread? You could certainly look at it [the order] from a pre-trade perspective, because there is an incentive here in the single book on the European market to show your order. In contrast, in a multi-market [fragmented] structure like in the US, there is no benefit in exposing your hand, because other trading participants could front run you on a different exchange, or trade ahead of you. So the idea of liquidity doesn’t become something you can look at in the US on a pre-trade basis. You can make assumptions based on [trading] history, but you can’t make too many assumptions based on what you see in the market [pre-trade].”
- 10.
National Best Bid and Offer (NBBO). “National best bid and national best offer means, with respect to quotations for an NMS Security, the best bid and best offer for such security that are calculated and disseminated on a current and continuing basis by a plan processor pursuant to an effective national market system plan.” Source: Code of Federal Regulations/C.F.R. § 600(b)(42).
- 11.
For a comprehensive account of dark pools and their opposite in lit markets, see Dark Pools: Fear of the Dark. Third Way. Lauren Oppenheimer, John Vahey. August 28, 2013. http://www.thirdway.org/report/dark-pools-fear-of-the-dark
As the authors explain: “Dark pools are private, electronic stock trading venues that allow buyers and sellers of a stock to be matched anonymously. In a dark pool, prices are not displayed to investors – stock prices are dark. Dark trading is an alternative to trading on a “lit” exchange, like the New York Stock Exchange (NYSE), where traders benefit from visible prices.”
- 12.
This refers to allowing access to a trader’s order management system, or OMS, to effectively read the trader’s position he or she is aiming to execute. Liquidnet is regarded as the first system of this kind.
- 13.
Referring in particular to how brokers were providing more support tools on the desktops of the buy-side.
- 14.
For more on this ATS, see the BIDS’company website http://www.bidstrading.com/about/company/
- 15.
A trade is internalized when it is handled and executed for an investor by the investor’s “internalizing” brokerage firm, using securities held by this investor’s brokerage. As a side note, brokerage firms that internalize orders can sometimes benefit from the spread, the difference between what they pay for the shares and what they sell them for.
- 16.
“The consolidated tape is a high-speed, electronic system that reports the latest price and volume data on sales of exchange-listed stocks. The data reflected on the consolidated tape are generated by various market centers, including all securities exchanges, electronic communications networks (ECNs), and third-market broker-dealers. Internet sites that provide updated market information and financial news programs on television often include trade reports from the consolidated tape.” Source: Securities and Exchange Commission.
- 17.
Think of the “tip of the iceberg” to further grasp this trading concept.
- 18.
The analysis was subsequently expanded to include the years through 2014.
- 19.
See Chap. 2: A Global Perspective. Huseyin Erkan, CEO, World Federation of Exchanges.
- 20.
“The Security Information Processor (SIP) links the US markets by processing and consolidating all protected bid/ask quotes and trades from every trading venue into a single, easily consumed data feed.” Source: Consolidated Tape Association.
More broadly, NASDAQ and NYSE, at time of writing, each operated a SIP for US stock exchanges. These data processors consolidate quote and trade data for stocks listed on their exchanges. The data is then disseminated for a fee to investors, market data providers, and others. NYSE also operated a SIP for options exchanges.
- 21.
See Trading Patterns, Liquidity, and the Citigroup Split. Milan Borkovec, Ian Domowitz, and Konstantin Tyurin. The Journal of Trading. 19. Fall 2011 http://www.iijournals.com/doi/pdfplus/10.3905/jot.2011.6.4.018
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Domowitz, I., Donahue, J., Lishman, W., Mahoney, T.J., Peng, L., Sussman, A. (2019). Integrity of Price Discovery: Perspective of Customers. In: Schwartz, R., Byrne, J., Stempel, E. (eds) Market Integrity. Zicklin School of Business Financial Markets Series. Springer, Cham. https://doi.org/10.1007/978-3-030-02871-8_3
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