Abstract
This panel fits well with the splendid presentation earlier this morning by Richard Lindsey. It will take us back to the groundbreaking Order Handling Rules introduced in 1997. Which reminds me of a famous meeting Rich helmed on Wall Street in lower Manhattan in 1996. It was in the auditorium of a big hotel, and it occurred right before the Order Handling Rules were enacted. I didn’t see any armed guards in the hotel lobby, despite the outrage among some market practitioners present about the proposed rules! In fact, I was the only one to defend Rich in a room full of a couple hundred angry NASDAQ market makers!
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Notes
- 1.
See Chapter 2: Opening Address – Equity Market Structure and Regulation: The Last 25 Years. Richard Lindsey, Chief Investment Strategist, Janus Liquid Alternatives.
- 2.
The Order Handling Rules included the Limit Order Display and the Quote Rules that paved the way for today’s “modern” high-speed electronic markets, starting with the early wave of upstart Electronic Communications Networks, or ECNs. See Securities and Exchange Commission, Order Execution Obligation, http://www.sec.gov/rules/final/37619a.txt
- 3.
Hide Not Slide was an order type invented by Direct Edge, before it became part of BATS Global Markets. And it was at the center of controversy when BATS settled, for a reported $14 million, charges with federal regulators in early 2015 on allegations it did not properly describe this order type and other types to customers of its two exchanges, EDGA and EDGX. The name Hide Not Slide refers to the idea of “hiding” a stock from display, rather than “sliding” it to a lower price, often by a penny, as occurs for other, albeit visible orders.
- 4.
Difference between the current price or value when a decision is made to buy or sell a security and the final execution price or value, factoring in commissions, fees, and taxes. In sum, implementation shortfall is the total of the execution costs and the opportunity cost in the case of adverse market movements between the time of the trading decision and order execution.
- 5.
Price of the stock (NASDAQ: KRFT) surged 25% within 1 min soon after the market opened. The glitch was blamed on a broker error by NASDAQ that affected multiple exchanges. “Investors were hit with another stock-trading glitch Wednesday, this one in a household name – Kraft Foods – which saw dozens of trades canceled when a broker error caused shares to soar shortly after the opening bell,” according to The Wall Street Journal. See WSJ story, Kraft Hit by Trading Glitch, October 3, 2012, Alexandra Scaggs and Matt Jarzemsky.
- 6.
The Flash Crash occurred on Thursday, May 6, 2010, when the Dow Jones Industrial Average declined by about 9% and then quickly recouped those losses within minutes. At the time, it was the second largest point swing, 1010.14 points, and the biggest 1-day point decline, 998.5 points, on an intraday basis, in the history of Dow Jones Industrial Average.
- 7.
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 the so-called latency, a critical factor in high-speed trade executions. The practice is regarded as legal though it has many critics.
- 8.
This electronic turmoil violently impacted the accuracy of prices in 140 stocks listed on the New York Stock Exchange on August 01, 2012, further hurting already fragile investor confidence in the soundness of US stock markets.
“Knight Capital’s CEO Tom Joyce confirmed that ‘a very large software bug’ was the source of yesterday’s market fiasco,” according to an exclusive interview with Bloomberg TV on its Market Masters program this morning. See Knight’s CEO Admits Software Bug Was Cause of Market Mayhem, Ivy Schmerken, Wall Street & Technology, August 2, 2012.
- 9.
Appropriately, here is one book that was published in 2012 and released prior to the Kraft incident: Broken Markets. How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio. Sal Arnuk & Joseph Saluzzi (FT Press).
- 10.
In 1995, Pasternak co-founded Knight Trading Group in 1995 along with Walter Raquet. Pasternak served as the company’s CEO from 1995 until he retired on January 21, 2002. It was the predecessor organization of the same Knight Capital Group Inc. discussed on the panel. At the time of writing, Pasternak was the founder and executive chairman of The KABR Group and also the managing principal of Chestnut Ridge Capital.
- 11.
The Dow Jones Industrial Average scaled its pre-recession, all-time high on October 9, 2007, closing at 14,164.43. Less than 18 months later, through 2008, it had declined more than 50% to 6594.44 on March 5, 2009.
- 12.
Black Monday, October 19, 1987. The crash spread from Hong Kong to Europe, hitting the USA after other markets had already declined. The Dow Jones Industrial Average declined by 508 points to 1738.74, or 22.61%.
- 13.
At the time of writing, International Securities Exchange Holdings, part of Eurex Group, operated two US options exchange, International Securities Exchange (ISE) and ISE Gemini.
- 14.
See Chapter 2: Opening Address – Equity Market Structure and Regulation: The Last 25 Years. Richard Lindsey, Chief Investment Strategist, Janus Liquid Alternatives.
- 15.
This presumably refers to Knight Trading Group of which Pasternak is the former CEO. See footnote 8.
- 16.
See Don’t blink: TMX’s new system trades in microseconds. Boyd Erman, The Globe and Mail. May 09, 2014.
- 17.
“One criticism relates to its generation of so-called phantom liquidity, in which market liquidity that appears to be provided by HFT may be fleeting and transient due to the posting of and then the almost immediate cancellation of trading orders,” according to a summary of concerns of high-frequency trading, referring to “ghost” quotes, popularly known as “phantom” quotes. Source: High-Frequency Trading: Background, Concerns, and Regulatory Developments, Gary Shorter, Rena S. Miller Specialist in Financial Economics, June 19, 2014, Congressional Research Service. http://fas.org/sgp/crs/misc/R43608.pdf
- 18.
Ibid. FINRA, the frontline broker dealer regulator, has observed that “although many HFT strategies are legitimate, some are not and may be used for manipulative purposes [and] given the scale of the potential impact these practices may have, the surveillance of abusive algorithms remains a high priority for FINRA…. [A]reas of concern [include] … the use of so-called ‘momentum ignition strategies’ where a market participant attempts to induce others to trade at artificially high or low prices. Examples of this activity reportedly include layering and spoofing strategies.”
- 19.
Fairfield University.
- 20.
This is a reference to the “price manipulation” charges against NASDAQ market markers which regulators set out to address with the introduction of the Order Handling Rules in 1997. Prior to the Order Handling Rules, NASDAQ was a less automated marketplace where order execution speeds were slower overall than today.
- 21.
The Investment Industry Regulatory Organization of Canada (IIROC) introduced the Integrated Fee Model on April 1, 2012, encompassing a fee structure to recover market regulatory costs. The structure is based on the message traffic and trading activity of participants in a way that allocates IIROC’s annual operating cost to two pools, comprising distinct costs for dealer regulation and market regulation.
- 22.
This French Financial Transaction Tax on the purchase of certain French equities was adopted by the French parliament and was enacted August 1, 2012.
- 23.
See 21.
- 24.
Regulation National Market System (NMS) was enacted by the Securities and Exchange Commission in 2007 to foster competition among US exchanges and individual orders and to promote fairness in price executions across all exchanges and platforms.
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Schwartz, R., Clark, D., Krell, D., Pasternak, K., Sussman, A. (2017). Fifteen Years After the Order Handling Rules, How Do the Markets Look Today?. In: Schwartz, R., Byrne, J., Stempel, E. (eds) Rapidly Changing Securities Markets. Zicklin School of Business Financial Markets Series. Springer, Cham. https://doi.org/10.1007/978-3-319-54588-2_2
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