Market Structure Update and Outlook for 2013

By Colin Serling, Business Analyst on the RM Sales team. Help cover buy side, sell side, retail, and electronic marking making/prop accounts.

A recent webinar hosted at the New York Stock Exchange by Joe Mecane, Executive Vice President and Co-Head of the U.S. Listing and Cash Execution businesses at NYSE Euronext, focused on upcoming regulatory issues related to market structure. Here is a brief review of topics covered:

Limit Up/Limit Down

Mecane highlighted two main changes coming in February. One of these is a limit up/limit down market wide policy that evolves single stock circuit breakers. He said limit up/limit down is a way of handling circuit breakers on a market wide basis—essentially preventing trades from happening more than 5-10% away from where they are trading. The benefits of limit up/limit down as opposed to circuit breakers are that trading continues within a band that eliminates excessive volatility but allows the market to continue operating/trading.

The second policy change coming early next year is market wide circuit breakers. These are similar to circuit breakers published quarterly in newspapers (the 10-20-30% circuit breakers came out of the 1987 crash). The forthcoming changes make tweaks to how levels are calculated and more importantly will automate the circuit breakers.

“Right now the circuit breakers we have in place are a manual process so I think it will be positive to have an automated response,” Mecane said. Both policies have been created to help prevent a market wide crash created from a technical glitch, as experienced in the May 6th 2010 Flash Crash.

The Consolidated Audit Trail

Mecane also touched on the Consolidated Audit Trail. He said that as part of the multi-year initiative, one proposal would provide aggregated trading info across all venues. This would create a database that tags every execution from the final print down to the individual investor. In addition the general view is a Consolidated Audit Trail would help with surveillance on manipulative activity, enforcement on mistakes, and insider trading.

Kill Switch idea

Lastly, Mecane discussed the idea of a “kill switch.” He said NYSE Euronext took the lead coming out of the Knight Capital event this summer and coming into a roundtable that the SEC held about system controls. One key question raised and discussed at the roundtable: should there be a larger backstop to prevent significant unintended market activity that could arise from technology issues? That question and the group’s recommendations are explored in greater details here.

Overall Market Structure

The talk amongst many exchanges and market participants continues to be the issue of off exchange trading. Trading on dark exchanges has created an ever increasing fragmented market, which has further deceased market transparency and price discovery. Some policies implemented in the past few years such as Reg NMS, may need to be readdressed as the market has evolved in ways not anticipated when it was put in place. It is time for a holistic review and consideration of change to the current structure of the equity market.

To view the Market Structure Update and Outlook for 2013 webinar, please register here.