Thomas W. Farley, SVP, Financial Markets, ICE
According the Economist, “Trading equities is barely profitable these days” (May 11, 2013). With falling share volumes, reduced appetite for takeovers and mergers, and the rise of electronic trading, we focus on the impact of the ‘new normal’ on the equities landscape.
- The impact of economic uncertainty, including the shift from active fund management to passive investments, such as ETFs.
- The accelerating pace of change as new technologies combine with deregulation to reshape the trading environment.
- The rise of dark, off-exchange trading and its impact on the overall market.
- The impact of algorithms and electronic trading on the distribution of risk and profits.
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U.S. Equities Market Observations
1. U.S. Equities Market Observations
Thomas Farley, IntercontinentalExchange
October 2013
2. Intro to ICE: Derivatives Market Leadership
›Global derivatives markets
leadership
›Broad distribution, network effect
›Organic growth, M&A leader
›Positioned ahead of financial
regulatory reform
›Innovation to serve customer
needs
›Consistent growth and strong
returns
* Energy volume includes cleared OTC energy contracts transitioned to futures contracts on October 15, 2012 and all periods have been
adjusted to reflect these contracts as futures
3. Futures Markets Structure
›
›
No interconnectedness
›
Posted prices always respected /
prioritized
›
All customers interact in same venue
›
All customers treated the same
›
3
Lit, regulated markets with very few
order types
Principles-based regulation
5. Cash Equity Markets Structure
›
›
Mandatory interconnectedness
›
Posted prices not prioritized
›
Different customer segments transact in
different places
›
5
Combination of:
Lit, regulated markets with dozens of
order types
Dark pools
Internalization of retail orders
Customers given different treatment
6. Cash Equity Markets Performance
›
›
Highly complex, less transparent
›
Costly for most stakeholder groups
›
Most liquidity resides at NBBO and is
concentrated in top names
›
6
Highly fragmented
Customer dissatisfaction with status quo
7. Catalysts for Improving Market Structure
›
›
7
Regulators may choose to act
New regulations
Review reforms
Rescind prior regulations
Market practitioners may choose to act
Innovations
New business practices
8. Regulators as a Catalyst
Many of Chair White’s Key Priorities are Encouraging
›
›
Improve the operational integrity of markets
›
8
Focus on the needs of:
Issuers/public companies
Investors that participate in the market
directly
Investors that participate through
institutional investors
Preserve transparent trading models that
inspire confidence
9. Market Practitioners as a Catalyst
The Current Environment of Concern Makes Evolution Possible
›
›
9
Discontent is shared across
customer segments:
Sell-side
Buy-side
Retail
HFT
This environment of discontent may
create the best opportunity to effect
change for the better
10. NYSE: A History of Leadership
›
›
Markets have undergone repeating
cycles of fragmentation and
consolidation
›
10
Concern about the equities markets
(or futures markets for that matter)
is not new:
for 200+ years the efficiency
and fairness of equities
markets has been alternately
praised and questioned
Through this period, one entity has
stood consistently for free and fair
markets that support capital
formation: NYSE
11. ICE Track Record
Developing Customer-Focused Markets
›
ICE builds markets to serve the needs
of the core users of the market
›
ICE markets are characterized by
operational and risk management
integrity
›
Industry-wide initiatives involving ICE to
improve and/or evolve our markets have
been a key to our success
11
12. Potential Areas of Focus
Post-Closing of ICE/NYSE Transaction
›
›
Reduce complexity & fragmentation of cash equities markets
›
Identify the root of fragmentation and re-aggregate liquidity
›
Increase transparency and fairness of practices among exchanges,
ATS/ECNs and broker-dealers
›
12
Increase respect for displayed prices and price discovery throughout
industry
Improve operational & risk controls at each venue and market-wide
›
Evolve towards fairer and simpler pricing models throughout industry
13. Summary
›
›
Opportunity exists to improve market dynamics for multiple stakeholder groups
›
Such improvement will rely on leadership from both market practitioners and
regulators
›
13
Equities markets have become more fragmented and complex over the past
two decades
ICE/NYSE combination brings together cash equities market leader with
customer-focused market operator
16. Example
Futures Market Liquidity v. Equity Market Liquidity
ICE Russell 2000
Futures TF
Index Value1
1,100.80
109.44
Contract Size1
$100 x index
index value
Notional Value1
$110,080
$109.44
ADV ($)2
Value of Open
Positions
16
iShares Russell 2000
IWM
$12.86 bill
4.08 bill
$36.44 bill
$0.656 bill
Notas del editor
Lit regulated markets with very few order types
No interconnectedness
Posted prices always respected / prioritized
All customers interact in same venue (i.e. one venue not more toxic than the next)
All customers treated the same
Principles-based regulation
No fragmentation
Low complexity
Low cost
Deep liquidity
Significant competition
Rapid innovation
High customer satisfaction
Combination of:
-Lit, regulated markets with dozens of order types
-Dark pools
-Dark retail pre-arranged trading
Mandatory interconnectedness
Posted prices not prioritized
Different customer segments transact in different places
Customers given different treatment
Rules-based regulation
That’s the bad news
The good news is that new SEC Chair Mary Jo White has the right two goals
Quote from her speech: The success or failure of capital formation in the equity markets depends on two key constituencies – investors and public companies.
Without investors willing to accept the long-term risks and rewards of ownership in public companies, the equity markets cannot exist. This is equally true whether they participate in the markets directly or indirectly through institutional investors, like mutual or pension funds.
Surprising lesson learned for me: everyone agrees and nobody is happy!
Sell-side – commission compression and execution costs have reduced profitability
Buy-side – complexity of markets has increased difficulty in executing large trades
Retail – perception that markets are “rigged” has lead to reduced participation
HFT – decreasing quality of flow on public markets has impacted profitability and willingness to participate
The New York Stock Exchange will be a leader in achieving these two goals
[insert points on history of NYSE and specific examples of commitment to MJ White’s 2 goals]
ICE also has strong track record in developing market solutions and creating innovative tools to address market problems
Examples:
-Policing bad behavior - effective order / trade ratio policy; rigorous enforcement (WVR)
-Circuit breakers that allow market to catch breath without shutting down trading (IPL)
-Requiring appropriate risk controls: first exchange to require pre-trade credit checks
Let me talk now about some specific areas where ICE and the New York Stock Exchange, as a combined company, can improve markets:
Increase transparency market-wide
-From order type descriptions to the routing history of orders to the various rebates and incentives of an order, market particpants deserve transparency
Strengthen the operational & risk controls of markets
Reduce the cost of complexity and fragmentation of markets for the key constituencies identified by Mary Jo White
-speed…but at what cost?
Develop the liquidity of the bottom 90% securities – not just differing tick sizes, but apply other solutions to aggregate liquidity
Evolve to a pricing model industry-wide that is transparent and free of both conflicts of interest and negative incentives
Increase respect for displayed prices – because solving the problem of decaying respect is core to improving markets
Let me talk now about some specific areas where ICE and the New York Stock Exchange, as a combined company, can improve markets:
Increase transparency market-wide
-From order type descriptions to the routing history of orders to the various rebates and incentives of an order, market particpants deserve transparency
Strengthen the operational & risk controls of markets
Reduce the cost of complexity and fragmentation of markets for the key constituencies identified by Mary Jo White
-speed…but at what cost?
Develop the liquidity of the bottom 90% securities – not just differing tick sizes, but apply other solutions to aggregate liquidity
Evolve to a pricing model industry-wide that is transparent and free of both conflicts of interest and negative incentives
Increase respect for displayed prices – because solving the problem of decaying respect is core to improving markets
ICE also has strong track record in developing market solutions and creating innovative tools to address market problems
Examples:
-Policing bad behavior - effective order / trade ratio policy; rigorous enforcement (WVR)
-Circuit breakers that allow market to catch breath without shutting down trading (IPL)
-Requiring appropriate risk controls: first exchange to require pre-trade credit checks
Highlight that this is the 6th largest ETF contract.