Instructor: Prof. Bernard S. Donefer
Hours: 9:00 am - 4:30 pm each day; Registration/Breakfast begins at 8:30 am

We imagine stocks trade by our orders being sent to the listing exchange and executed by human specialists or market makers on noisy floors or via phone networks.  While the exchange floor has always been an iconic image, it has rapidly become as archaic as an 8-track tape.  Today trading is electronic, low cost and very fast.   Where we once had a few markets, today equity trading can be done at 60+ venues, some with unique trading models, some dark, without a public quote and all at speeds measured in millionths of a second.  In 1975 the SEC and Congress mandated a national market system and from the mid 1990’s we’ve seen accelerating advances in technology, communications and regulatory changes in order handling, trading models and market structure.  Currently the SEC is undertaking a complete review on the structure of the US equity markets.  Their goal is to understand our fragmented markets and competing trading methods to ensure no constituency is being disadvantaged.

This seminar will describe the equity trading markets and the issues faced by the pension and mutual funds and other institutional asset managers, as well as sell side firms.  It will start with an historical perspective and continue to describe the current issues facing market participants. 

     COURSE AGENDA

US EQUITY MARKET STRUCTURE

      --US markets before 1997 -- How did they work?

             NYSE – the specialist system

             NASDAQ – competing market makers

             Bulletin Board and Pink Sheets

             Instinet – the 1^st electronic market

      --Regulatory Revolution – the enablers of change

             Manning rule

             Order handling rules

             Decimalization

             Reg ATS (Alternative Trading System)

             Reg NMS (National Market System)

             Reg SHO (Short Sale)
     --New Markets Structure -- Driven by Regulation, Technology & Competition

             ECN’s

                  Visible limit order books and order matching

                  New order types, sweep, reserve, ISO

             NYSE Reaction

                  Merger with Arca – Going public 2006

             Mergers -- Euronext 2007, American Stock Exchange 2008

                  Designated Market Makers and SLP’s – the current model

                  NYSE multi-asset trading -- bonds, options, futures

                  The new floor and pods

             NASDAQ Reaction

                  Price time priority issue

                  Becoming an exchange – acquiring BRUT, INET

                  What happened to the market makers

                  Trade reporting facilities

                  Mergers OMX, Boston, Philadelphia and new asset classes

             Market Fragmentation – how many places are there to trade equities in the US?

INSTITUTIONAL TRADING

      --The search for liquidity

             Fragmented markets

             Maker taker models – payment for order flow

             Aggregation services

             Smart order routers

             Direct market access (DMA)

                  Naked access – its benefits and risks

      --Pre-trade analytics – Transaction Cost Analysis –TCA

             Trading costs  -  commissions/fees, market impact, opportunity costs

             What is market impact?  -- How to measure?

                  VWAP, arrival price, open/close, implementation shortfall

                  Measuring execution quality

      --Algorithmic Trading

             What is it and what are its goals?

             How and who uses it?

             Trading strategies, VWAP, TWAP, implementation shortfall

     --Alternative trading systems for institutional size – Dark Pools

             What is dark liquidity?

             What are dark pools and their benefits and risks?

                  Largest dark pools and their liquidity characteristics

             Major institutional dark pools & their market models -- Liquidnet, Pipeline Posit

     --Other ATS’s -- Dark and light pools

             Multilateral trading platforms

             Internalized trading

             Use of IOI’s in dark pools

     --High Frequency Trading (HFT)

             Estimate of market size and revenues

             Strategies

                  Automated market makers

                  Quant strategies – stat arb, pairs trading, etc.

                  Rebate capture strategies

                  Gamers

      --High speed infrastructure

             Complex event processing and high speed data bases

             Co-location

             Flash trading

      --Discussion –

             Does HFT benefit or hurt the investor? 

             Does it add liquidity or is it front running?

RISKS IN ELECTRONIC TRADING

      --Algos Gone Wild scenarios

      --The May 6^th “Flash Crash”

             Causes

             Suggested ways to avoid similar events

THE REGULATORS

      --FINRA

      --SEC

      --SEC Market Structure Concept Release

             What issues concerned the SEC?

             The audit trail and large trader reporting proposals

             What may we expect to happen?

WRAP UP

      --Books, articles and websites, sources for further information