Abstract
ROBERT SCHWARTZ: It is my great honor to introduce Rick Ketchum. As you all know, Rick is an outstanding highlight for this conference. His many admirers say Rick has a fantastic and extraordinary way of thinking about market structure. I agree. Rick, you really don’t need any introduction with this kind of reputation. Welcome. (Applause)
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Notes
- 1.
Ketchum is referring to a study released by the Commodity and Futures Trading Commission and the US Securities and Exchange Commission. Findings Regarding The Market Events of May 6th, 2010, September 30, 2010. See, http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
- 2.
For a more expansive viewpoint on this topic, read Ketchum’s subsequent keynote at the Annual Conference of the Security Traders Association, Palm Beach. FL., October 13, 2011. http://www.finra.org/Newsroom/Speeches/Ketchum/P124661
- 3.
Findings Regarding The Market Events of May 6th, 2010, September 30, 2010. See, http://www.sec.gov/news/studies/2010/marketevents-report.pdf
- 4.
At the time of writing, US stock trading occurred on 10 public exchanges, 30-plus dark pools, and over 200 internalizing broker dealers. Many of the dark pools accommodated internalization by their owners. In excess of three quarters of the order flow executed through dark pools was thought to be internalized. Some 33% of NYSE volume and 25% of NASDAQ volume was reported off-exchange and it was mostly internalized order flow, according to industry calculations.
- 5.
The US equity markets are governed and regulated today by various regulations including Reg NMS. The “top of the book” refers to how the best electronically delivered price quotes, the so-called top-of-book orders, must be posted across all exchanges under the mandate of Reg NMS.
- 6.
See, Findings Regarding The Market Events of May 6th, 2010, September 30, 2010. http://www.sec.gov/news/studies/2010/marketevents-report.pdf
- 7.
See, SEC Questions Trading Crusade as Market Makers Disappear, Nina Mehta, Bloomberg, September 13, 2010 http://www.bloomberg.com/news/2010-09-13/sec-second-guesses-its-stock-trading-crusade-as-u-s-market-makers-vanish.html
- 8.
See, Securities watchdog probes high-frequency trading firms: report, Reuters, March 23, 2012 http://news.yahoo.com/securities-watchdog-probes-high-frequency-trading-firms-report-063227979.html
- 9.
See, Concept Release on Equity Market Structure, January 14, 2010, http://www.sec.gov/rules/concept/2010/34-61358.pdf
- 10.
See, for example, FINRA Regulatory Notice 10–43, http://www.finra.org/Industry/Regulation/Notices/2010/P121634
- 11.
See FINRA Regulatory Notice 10–30 http://www.finra.org/Industry/Regulation/Notices/2010/P122122
Two years after the Flash Crash, some commentators were critical of the regulatory measures taken to help prevent a similar occurrence again. For one thing, these pauses or circuit breakers to halt trading in stocks were seen as counterproductive in some instance. See, US ‘flash crash’ measures suffer delays. Telis Demos, Financial Times, May 6, 2012. http://www.ft.com/intl/cms/s/0/ee439fe6-96af-11e1-847c-00144feabdc0.html#axzz1vF32UV4n
Also, see, Overview, SIFMA http://www.sifma.org/issues/capital-markets/equity-markets/flash-crash/overview/
- 12.
Ketchum is referring to price limits on some stocks that would temporarily stop trading if they traded outside pre-defined limits. For a summary of SEC regulatory action in this matter, see, Two Years After Flash Crash, SEC Still Pursuing New Safeguards, Michael Peltz, http://www.institutionalinvestor.com/Article/3023836/Two-Years-After-Flash-Crash-SEC-Still-Pursuing-New-Safeguards.html
- 13.
“At 2:45:28 p.m., trading on the E-Mini was paused for five seconds when the CME Stop Logic Functionality was triggered in order to prevent a cascade of further price declines. In that short period of time, sell-side pressure in the E-Mini was partly alleviated and buy-side interest increased. When trading resumed at 2:45:33 p.m., prices stabilized and shortly thereafter, the E-Mini began to recover.” Page 16, Findings Regarding The Market Events of May 6th, 2010, September 30, 2010. See, http://www.sec.gov/news/studies/2010/marketevents-report.pdf
- 14.
As defined by SEC in Findings Regarding The Market Events of May 6th, 2010, Sept. 30, 2010: “Cross-market strategies primarily focus on the contemporaneous trading of securities-related products in the futures and securities markets. The objective of these strategies is to capture temporary price differences between any two related products, but with limited or no exposure to subsequent price moves in those products.”
- 15.
Ketchum is the former president of NASDAQ and was later the chief regulatory officer of the New York Stock Exchange, before serving as chief executive officer of NYSE Regulation. https://www.finra.org/AboutFINRA/Leadership/p019335
- 16.
“Notable in the trading activity of May 6 was the redirection of order flow by internalizing and preferencing firms to Exchange markets during the most volatile periods of trading. While these firms provide significant liquidity during normal trading periods, they provided little to none at the peak of volatility.” P.12, Recommendations Regarding Regulatory Responses To The Market Events of May 6, 2010. Summary Report of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues. See, http://www.sec.gov/spotlight/sec-cftcjointcommittee/021811-report.pdf
- 17.
This so-called naked access permitted high-frequency traders and other market participants to buy and sell stocks on exchanges via a broker’s computer code without any pre-trade checks or reviews. In November 2010, the Securities and Exchange Commission banned the practice.
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Ketchum, R. (2013). Closing Remarks. In: Schwartz, R., Byrne, J., Schnee, G. (eds) The Quality of Our Financial Markets. Zicklin School of Business Financial Markets Series. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-5592-9_6
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