Slideshow 9 Ways Market Structure Will Change

Published
  • January 12 2012, 10:12pm EST
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9 Ways Market Structure Will Change

Here’s what Investment Technology Group thinks will happen in the coming year, with modest re-interpretation.

1. Tobin Tax Terminated.<br><br>

Named after Nobel Laureate economist James Tobin, the “Tobin tax” on financial transactions that resurfaced in both the European Union and the United States dies. In the EU, the proposed Financial Transactions Tax comes close to passage, but is ultimately rejected. In the United States, the efforts of Oregon Congressman Peter DeFazio and Iowa Senator Tom Harkin generate election year buzz, but aren’t seriously considered.

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2. CAT Gets Life.<br><br>

As the SEC completes its docket of post-Flash Crash rulemaking – placing limits on the up and down movement of stocks in a given day, for instance – its imposing list of ‘to-do’s’ from the Dodd-Frank Wall Street Reform Act of 2010 don’t get done. The presidential campaigns guarantee it. All that gets breathing by year’s end is the Consolidated Audit Trail: Chairman Mary Schapiro’s plan for real-time reporting of all stock market transactions.

3. DirectEdge Gets Traded.<br><br>

The European Union leans on NYSE Euronext and Deutsche Boerse to spin off either NYSE Liffe or Eurex, to keep derivatives trading competitive on the continent. But the U.S. Department of Justice’s required remedy – divestiture of DirectEdge – happens regardless of the final outcome. DirectEdge management successfully argues for a sale of Eurex’s 31.5% stake. The buyer is a foreign exchange in search of a U.S. beachhead.

4. Maple-TMX: All Sap, No Syrup.<br><br>

The Maple Acquisition Group – a consortium of thirteen large financial institutions, including four of the “big six” banks – doesn’t complete its hostile takeover of TMX Group, operators of the Toronto and Montreal exchanges. The Canadian Competition Bureau intervenes, based on its discomfort with a near-monopoly in equity listings, equity trading, equity clearing, fixed income clearing, derivative clearing, derivative trading, and equity trading data distribution (whew!). This would be created by the combination of TMX and Maple’s members stakes in Alpha (an alternative marketplace) and CDS (an equities and fixed income clearinghouse).

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5. An Exchange Launches Spot FX.<br><br>

An increasing number of electronic trading hands view currency trading as the “next big thing.” The clearing issues aren’t straightforward. There’s no Depository Trust & Clearing Corporation for currency exchanges. But an enterprising and intrepid exchange changes the landscape by launching a spot trading initiative.

6. A High-Frequency Trader Goes Public.<br><br>

A large, mature HFT prepares for an initial public offering by filing an S-1 – the “holiest of holies” of business descriptors. Interested readers find what discerning market participants have known for a while: HFTs trade for tiny edge, deploy modest capital, and do not warehouse risk. The additional insight ends up easing fears about what HFTs do.

7. Alternative Venues Accelerate in Asia-Pacific.<br><br>

By year-end, three important milestones are reached: Proprietary trading systems account for 12% market share in Japan. Chi-X reaches 5% market share in Australia, and South Korea provides a regulatory framework for a competitor—either exchange or broker-sponsored dark pool—to the Korea Exchange. Further, a third player gets in the fray down under, competing with the Australian Securities Exchange and Chi-X Australia. More lunch-hour breaks go the way of the teletype machine.

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8. Brazil to Competition: “Boa Vinda.”<br><br>

Institutional investor interest in Brazil continued to grow in 2011. Alas, Brazil remains an expensive place to trade, particularly in size. In December, Brazil’s Finance Ministry ended its 2% tax on financial operations charged against equities. This year, Brazil’s securities regulator, CVM, allows competition to Bovespa, the monopoly homegrown market. DirectEdge doesn’t get its Brazil exchange launched in 2012. But, by end of 2013, both DirectEdge and BATS get their Brazil markets up and running.

9. ETFs Get Guardrails.<br><br>

Globally, regulators formally define the term “exchange-traded fund,’’’ with the consequence that complex, derivatives-based products need to find a new acronym. In the European Union, regulators push for hard and fast standards for swap-based products, such as a minimum number of counterparties and guidance around ac- ceptable collateral. In the U.S., regulators explore the effect of the ETF boom on market movements and pursue mechanisms to limit effects of funds geared to move twice or three times the daily direction of the market and similar approaches that play largely on -- and perhaps contribute to -- volatility.