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By Peter Cocuzza
Special to the TradeTech Blog
As it’s now the end of the year, it’s natural to reflect on what made 2010’s financial markets distinct. But how, exactly, do you determine what the biggest issues were? Think back on what was buzzed about at nearly every industry conference, cocktail party or benefit: what topics kept coming up? There’s a good chance this simple exercise will bring you to the same conclusions I’ve arrived at. If not, I’m happy to hear yours. Here’s my thoughts on the biggest impact stories of 2010 (read on for the top stories of 2011):
1. The May 6th 2010 Flash Crash. The single most important story of 2010. The SEC has been thorough in its investigation and its studies on the cause. They need to continue their work as a regulatory body, to govern and make sure they implement the necessary changes needed to minimize the chances of this happening again…although we all know that it may and probably will.
2. High Frequency Trading. The debate continues on whether this phenomenon was actually good or bad for the markets. Many believe that HFT was good for the markets in the way that it provided huge sources of liquidity in trading. Many debate the need for rules to be in place and enforced to police for fraud and to protect investors.
3. Dark Pools. As the dark pool arena continues to grow, so do the regulatory bodies’ interests, as I talked about in the previous article here. It was a year of continued expansion of Dark Pools and the constant debate that continues on whether or not there is a need for regulations. Many reports have been written on this topic, and changes are probably on the horizon.
4. Algorithms. Algorithms continue to grow and expand. Where it used to be just a couple of broker-neutral Algo’s, this arena has grown to become a big necessity for brokers who need a venue for buy side traders’ order flow. The investment in this area is has been huge and the area will continue to evolve for years to come as it becomes more customized and tailored to the buy side traders’ needs and styles.
5. Trading Volumes Down in 2010. According to agency brokerage Instinet, overall U.S. equity trading volume is down 13.6 percent for the first three quarters of the year. Average daily share volume fell to 9.05 billion shares a day in 2010 through October. For the same period in 2009, the number was 10.5 billion. There was a tremendous shift in sentiment through 2010, especially after May 6. What will it take for volumes to start to increase again?
This past year was extremely volatile to say the least, as a re-cap of these stories surely reminds you. An array of “major” events occurred in the US equities markets over the year, all of which have set the scene for a sure-to-be interesting next year. And it’s time to move on to next year. Enough re-capping – these are my picks for the top four stories of next year that we’ll all be buzzing about into 2011 and beyond:
1. Dark Pool Transparency. Buy side traders are demanding that their brokers provide them with more detailed reports of where orders are being executed. Also, traders need to quickly determine which dark pool venues are providing them with the most liquidity for their trades and react to that information. The need to know where their orders are finding that liquidity plays a big part in the unfolding story of dark pool growth for this year, as I spoke about here. With so many different dark pools in play these days, we as traders are looking for liquidity (lots of it) and at a fair price. When trading, I always found that the best dark pool providers did a good job at allowing me to pick and choose where to send my trades. But nowadays, that is not enough. Many of the buy side traders are requiring more data on their traders. In fact, one major electronic technology firm is providing a venue for their customers to send orders into the dark pools through algos and find this information and how it’s performing. Differentiating dark pools to determine which venues access the greatest liquidity will be a common topic. “Transparency” will be the key issue in this area for the year. Let’s see how it all unfolds. I have to believe that it is a good thing for the buy side customers who use and depend on the dark pools for their trade executions.
2. Algorithms Customization. Algorithms continue to grow and expand in terms of complexity. As traders use the many different algo strategies, they are asking for customization. Many firms are building different strategies based on the individual traders’ and firms’ requirements and trading patterns. This will be the trend for the future. Algorithms have become a very sophisticated and extremely necessary trading tool for traders today. When trading for a major investment advisor, I relied on the ability of the algorithm strategies to achieve “best execution” for my trades. To be able to “customize” based on my individual trading style was a huge benefit for me.
3. Flash crash regulations. At several industry events this year, the hot topic was this huge event and the resulting conversation was a debate over the need for and implementation of regulations. The May 6th 2010 event that is commonly referred to as “The Flash Crash” was a tumultuous culmination of many factors in our equity markets; a sort of “perfect storm” of different moving parts. It was bound to happen. Whether it actually was triggered by a single error or not doesn’t matter, it happened! Many debated that the equities market actually stood up well during this 30 minutes where all “hell broke loose.” But the fear in many investors that stocks retreated so far so quickly has many people up in arms, demanding immediate rules and regulation changes. The SEC, CFTC, IOSCO, as well as many other regulatory bodies, have and continue to study the reasons for this event. Based on all of the findings, I’d say regulatory changes are on the way!
4. Transaction Coat Analysis (TCA): Where it’s going and the need for improvements. The latest “Greenwich Market Pulse” reports that institutions are fairly satisfied with their TCA systems and providers. However, the survey results suggest their satisfaction is related mainly to the use of TCA as a tool for basic blocking-and-tackling issues, like compliance and trading desk performance. According to the study, institutions are not content with the “action-ability” of their TCA vendors’ analysis – that is TCA’s ability to find new efficiencies in the trading process to raise performance. Approximately 30 percent of institutions describe the analysis they receive from their TCA systems as actionable; 20 percent say it is not actionable, according to the report. The balance of the survey respondents said they were not sure. TCA is designed to measure how well an asset manager’s order was executed whether done so ultimately by the buy side trader, the sell side trader or a combination of both. As a trader using TCA, I have always felt that if gauged correctly, TCA could be used as a tool to better the trader’s performance, as long as the parameters where set for the trader’s ability to understand how the results are achieved…sort of a report card of the trade execution. Although there were many flaws in the early years of development, the TCA providers have listened to the trading community’s demands and have instituted new and improved measures. It continues to evolve into a better platform.
I’m excited to approach 2011 and see where these issues take us as an industry, and myself as an active member of it.
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