The FIA Principal Traders Group participated in a wide-ranging discussion on equity market structure issues yesterday with members of the House Financial Services Committee and other market participants at a roundtable hosted by Rep. Scott Garrett (R-N.J.). FIA PTG’s representative, Patrick Hickey, head of market structure at Optiver US, emphasized the value of automated trading as a tool for market making and the importance of avoiding “one size fits all” solutions to market structure issues.
“FIA PTG represents firms engaging in manual, automated, and hybrid methods of trading, and they are active in a wide variety of asset classes, including equities, fixed income, foreign exchange and commodities,” Hickey said in his opening statement. “Because our members are trading their own capital in financial markets, we are able to present a unique perspective on markets relative to other financial intermediaries or participants.”
The roundtable, which was held in Washington, D.C., included participants from exchanges, brokers, asset managers, principal trading firms, and industry associations. The discussion was divided into three panels. The first panel focused on leveling the playing field between exchanges and alternative trading venues. The second panel discussed resiliency and how to eliminate single points of failure. Hickey took part in the third panel, which considered how technological advances and automated trading affect market making.
“Automated trading has lowered trading costs, increased liquidity, and improved price discovery across related markets. Narrower spreads and lower execution costs are direct evidence of this,” Hickey said. “These improvements in market quality benefit all market participants, including individual and institutional investors.”
Hickey discussed the role of the public data feed known as the Securities Information Processor (SIP) and its value relative to market data feeds disseminated directly by exchanges. “About 95 percent of trades today rely on information from direct feeds,” Hickey said. “Today’s roundtable brought up an interesting question: what is the role of a SIP in our current market structure? This is an issue that FIA PTG is following closely.”
When asked about Security and Exchange Commission’s recently announced pilot programs for testing certain aspects of equity market structure, Hickey emphasized the importance of conducting rigorous, single-variable pilots that allow regulators to draw clear conclusions about the potential effects of market structure changes.
Hickey warned of the pitfalls of arbitrarily defining and regulating certain firms as high frequency traders. “All different kinds of market participants engage in HFT. High frequency trading, or HFT, is just one tool among the many that are required to create a market strategy. Effective regulations must be based on risk analysis of market behavior—not on subjective labels.”