The NEW US Equity Markets
June 5, 2012, NYC (Location)
Registration Fee: US$895.00 Register Instructor
Many classes sell out; we suggest registering at least two weeks in advance to ensure your seat.
Beginner/Intermediate Level, 7 CPE Credits
Instructor: Prof. Bernard Donefer
Hours: 9:00 am - 5:00 pm; Registration/Breakfast begins at 8:30 am
Locations: New York City, Bayards, One Hanover Square (Financial District)
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 1st 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 6th “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