Abstract
Our next moderator, Michael Pagano, a fellow academician, is my very special colleague. Mike has clearly enhanced the practices and universe of academia. He is one of the few people who endured me as we worked together on five papers [laughter]. In my introduction earlier of Frank Hatheway, I cited a paper about empirical findings on NASDAQ calls – NASDAQ refers to them as “crossings” – and how these calls have made a positive contribution to markets. I produced this work with Mike, and also with one of my colleagues, Lin Peng, who is with us today. Let me also introduce Mike as a long-time friend. Please welcome him.
At time of writing, December 2014, Robert Shapiro had assumed a new role, Global Head of Trading and Execution Consulting at Bloomberg Tradebook.
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Notes
- 1.
One of the most recent and most memorable: The May 6, 2010 Flash Crash when the Dow Jones Industrial Average dropped about 1000 points, or 9%, only to recover those losses within minutes. See, Findings Regarding The Market Events of May 6th, 2010, September 30, 2010. See, http://www.sec.gov/news/studies/2010/marketevents-report.pdf
- 2.
The Order Handling Rules were introduced by the Securities and Exchange Commission in 1997. The rules included the Limit Order Display Rule and the Quote Rule and paved the way for today’s “modern” high-speed electronic markets, starting with the early wave of upstart Electronic Communications Networks, or ECNs.
- 3.
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.
- 4.
Reg SHO, or Regulation SHO, enacted in January 2005, created “locate” and “close-out” standards mainly designed to prevent naked short-selling abuses. For the subsequent “emergency rules” in 2008, see, Securities Exchange Act of 1934 Release No. 58190/July 18, 2008 Amendment to Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments. http://edgar.sec.gov/rules/other/2008/34–58,190.pdf
- 5.
US markets were legally required and then switched from trading in fractional increments to decimal pricing in 2001.
- 6.
Reg ATS, or Regulation ATS, enacted by the SEC in 1998, regulates the various Alternative Trading Systems in the US markets, including Electronic Communications Networks, or ECNs.
- 7.
Reg NMS, or Regulation NMS, enacted in 2007 by the Securities and Exchange Commission, aims to improve the quality of US market structure through significant enhancements in price executions and quoting processes, increment size, and market data. Specifically, there are four distinct rules in Reg NMS: order protection for investors so they can get the best price anywhere with the elimination of trade-throughs; improved access to quotations in the National Markets System via enhanced linkages and lower access fees; sub-penny trading on securities; and finally, market data reform that allocates formula-based revenues to market centers that offer improved access to market data.
- 8.
Markets in Financial Instruments Directive I, or MiFID I, introduced in October 2010, was followed by the second MiFID proposals, or MiFID II, in September 2012, aiming for the reform and harmonization of European area markets. MiFID II shifts the European regulatory regime from a principles-based to a more US-style, rules-based regulatory model.
- 9.
At the time of writing, there were some 45 ATSs and 13 public securities exchanges.
- 10.
Kraft Hit by Trading Glitch, Alexandra Scaggs and Matt Jarzemsky, Wall Street Journal, October 3, 2012. According to the opening paragraph: “Investors were hit with another stock-trading glitch Wednesday, this one in a house name – Kraft Foods – which saw dozens of trades canceled when a broker errors caused shares to soar shortly after the opening bell.” http://www.wsj.com/articles/SB10000872396390443768804578034354197596528
- 11.
August 1 stock trading fiasco costs Knight $604M, USA Today, October 17, 2012. According to the opening paragraph in this AP story: “The Knight Capital Group trading firm said it lost $764.3 million in the third quarter because of a software glitch that flooded the stock market with trades one day in August, causing dozens of stocks to fluctuate wildly.” http://www.usatoday.com/story/money/markets/2012/10/17/knight-capital-earnings/1638817/
- 12.
“Electronic communications network linking the trading floors of seven registered exchanges to permit trading among them in stocks listed on either the NYSE or AMEX and one or more regional exchanges. Through ITS, any broker or market maker on the floor of any participating exchange can reach other participants for an execution whenever the nationwide quote shows a better price available. A floor broker on the exchange can enter an ITS order to assure excecution of all of an offering or bid, instead of splitting it with competing brokers.”
Source: NASDAQ. See, http://www.nasdaq.com/investing/glossary/i/intermarket-trading-system#ixzz3S78pIeH9
General reference on “commitments” in this Federal Register notice, 15 August, 2001: Intermarket Trading System; Notice of Filing of the Seventeenth Amendment to the ITS Plan Relating to Regional Computer Interface, 30-Second Commitment Expiration, and the Principal Place of Business of the Boston Stock Exchange, Inc. https://www.federalregister.gov/articles/2001/08/15/01-20500/intermarket-trading-system-notice-of-filing-of-the-seventeenth-amendment-to-the-its-plan-relating-to
- 13.
See SEC Press Release, July 11, 2012: Approves New Rule Requiring Consolidated Audit Trail to Monitor and Analyze Trading Activity. http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171483188
For a discussion on kill switches at 2012 Securities and Exchange Commission Round Table: http://www.marketwatch.com/story/panel-at-sec-backs-high-speed-trading-kill-switch-2012-10-02
- 14.
The Financial Industry Regulatory Authority, or FINRA, is the US securities industry’s largest independent regulator. http://www.finra.org/AboutFINRA/WhatWeDo/
- 15.
To Regulate Rapid Traders, SEC. Turns to One of Them, Nathaniel Popper and Ben Protess, New York Times, October 2, 2012. http://www.nytimes.com/2012/10/08/business/sec-regulators-turn-to-high-speed-trading-firm.html?pagew
- 16.
Self-regulatory organizations.
- 17.
At the time of writing, Greg Berman is Associate Director, Office of Analytics and Research at the SEC and was at the agency’s Trading and Markets Division at the time of this conference.
- 18.
OATS, or the Order Audit Trail System, was created by the NASD to accurately record time sensitive information pertaining to the events in the order execution process.
- 19.
See, SEC Approves New Rule Requiring Consolidated Audit Trail to Monitor and Analyze Trading Activity. (footnote 13). http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171483188
- 20.
See, SEC proposes Consolidated Audit Trail System to Better Track Market Trades, SEC Press Release, May 26, 2010.
- 21.
See, NYSE Pressure Valve Highlighted in Plunge, Steven D. Jones, Wall Street Journal, May 07, 2010,
http://www.wsj.com/articles/SB10001424052748704370704575229092263818572
- 22.
See explanatory related story related, NYSE proposes “kill switch” to help catch trading errors, John McCrank, December 23, 2013, Reuters. “IntercontinentalExchange Group’s NYSE Euronext unit has filed a plan with regulators to offer firms that trade on the New York Stock Exchange a ‘kill switch’ that could cut off trading if preset levels were breached,” according to this story.
http://finance.yahoo.com/news/nyse-proposes-kill-switch-help-193900601.html
- 23.
The proposal moved forward and was implemented. See, SEC Press Release, April 5, 2011: SEC Announces Filing of Limit Up-Limit Down Proposal to Address Extraordinary Market Volatility. http://www.sec.gov/news/press/2011/2011–84.htm
- 24.
See, SEC ROUNDTABLE: Kill switches and Best Practices Are Coming. John D’Antona Jr., Traders Magazine, October 2, 2012. “The implementation of so-called ‘kill switches’ and a uniform best practices guide to electronic trading stand as the two high points of Tuesday’s Securities and Exchange Commission roundtable meeting,” according to the story.
- 25.
As Ross elaborated in a follow-up interview, exchanges will not know the funding of an account of an investor sending orders. The exchange will not know if the investor has billions or thousands of dollars, or just a nominal amount in the account.
- 26.
Shapiro, in a follow-up interview, noted how there are new models starting to address price formation for certain segments of the marketplace. In this instance, that means “exclusively” for ETFs, according to Shapiro. One example close to home for Shapiro is Bloomberg Tradebook’s own ETF RFQ platform, which was officially launched in 2014. See, Press Release (October 15, 2014), Bloomberg Tradebook First to Aggregate Buy-side Liquidity in ETF. http://www.bloomberg.com/now/press-releases/bloomberg-tradebook-first-aggregate-buy-side-liquidity-etfs/
- 27.
Colocate refers here to the much debated practice of “colocation” by high-frequency trading, or HFT firms, of their computerized boxes next to an exchange server, placed there for the advantage of split second price trading data feeds. Most investors, by contrast, get their price data feeds slightly later through consolidated prices, via the market. The New York Stock Exchange, indeed, has made substantial revenue from colocation services.
- 28.
In a follow-up interview, Ross elaborated that the classic buy-and-hold investor does not buy or sell in a rapid-fire fashion similar to a HFT firm. By the same token, the legendary Warren Buffett is typically not concerned about the performance of his new investment over, say, the next 5 min, rather he is likely weighing up his investment and its fundamental value on a much longer time horizon measured in years, buying at 20, for example, patiently waiting for it to rise to 30 and above, or to gain substantially in value.
- 29.
In a follow-up interview Ross noted that the “value proposition” of PDQ ATS is that the decision of how the trade takes place should be “client driven.” Among its services, PDQ introduced a one-second auction so that if clients are willing to wait for the platform to aggregate liquidity, then that elapsed time can be used to source liquidity from other venues, and from other asset players.
- 30.
Designated Market Makers, or DMMs, are NYSE “market makers” obliged to maintain fair and orderly markets in a specific group of listed stocks.
- 31.
Dynamic Density Estimation of Market Microstructure Variables via Auxiliary Particle Filtering. Daniel Nehren, David Fellah, Jesus Ruiz-Mata, Yichen Qin. Journal of Trading. Vol 7, No 4 (2012).
- 32.
See footnote 1.
- 33.
“The Alternative Display Facility (ADF) is an SRO display only facility that is operated by FINRA. The ADF provides members with a facility for the display of quotations, the reporting of trades, and the comparison of trades. ADF best bid and offer and trade reports are included in the consolidated data stream for NASDAQ and CQS listed securities. As an SRO display only facility, ADF does not provide automated order routing functionality, execution facilities, or linkages between ADF trading centers. ADF trading centers are required by FINRA rule to provide direct electronic access to all other ADF trading centers and provide such access to all FINRA members that request it. All FINRA members in good standing are eligible to participate in ADF, pending execution of appropriate contracts and meeting specific requirements as set forth by FINRA.” Source: FINRA. See, http://www.finra.org/Industry/Compliance/MarketTransparency/ADF/index.htm
- 34.
As of writing, in terms of percentage movements in stock prices, a trading halt was triggered if a price rose or fell more than 5% over a 5-min period in the most heavily traded shares. The price band was widened to 10% to generate a halt in the second stage of the roll-out.
- 35.
The order books are publicly available to subscribers.
- 36.
Volume weighted average price.
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Pagano, M., Angstadt, J., Gira, T., Harts, B., Ross, K., Shapiro, R. (2017). Regulators and Innovators as Initiators. 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_4
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