Since its inception, FIA's Principal Traders Group ("FIA PTG") has worked diligently to improve markets. Although there are different opinions regarding what it means to improve a market, we believe that all market participants can agree that stability, transparency, and fairness are the cornerstones of any well-functioning marketplace. That belief is the primary driving force behind FIA PTG's efforts to educate the industry on best practices for market participants. It is also why, whenever a critique of today's markets is voiced or a potential improvement is proposed, we come together as a group to give what has been said the attention it deserves.
In recent months, the dialogue on market structure, technology, and regulation has reached a fever pitch, and there are quite a few opinions circulating. Unfortunately, there is also a good deal of exaggeration and misinformation being spread about market structure in general and automated trading in particular. These are complicated subjects, and they deserve thoughtful consideration. Our economy relies on strong, well-functioning markets, and so any discussion of market structure must be based on facts, and not sensationalism.
So what are the facts about our markets today? Chair Mary Jo White of the SEC, the regulator in charge of overseeing our equity markets put it best: far from being rigged, our markets are, in fact, the "strongest and most reliable in the world." Similarly, public statements by some of the world's largest fund managers have confirmed that today's markets are as good, if not better, for capital formation, investing, and risk management than they have ever been. As Clifford Asness, the CEO of a major asset management firm, explains, "[Retail investors'] orders are a perfect match for today's narrow bid-offer spread, small average-trade-size market." In other words, aspects of today's market structure including automated trading and increased market access have helped to lower the cost of trading. This improvement ripples across markets, benefiting everyone who participates.
These statements, based on rigorous economic analysis, have helped bring the debate back to reality.
That reality includes the following:
- Markets have evolved significantly in the past 10 years. Some aspects of this evolution, including transparency and automation, have benefited the markets. Conversely, some aspects of this evolution, including increased complexity, have been to the detriment of the market.
- Markets are more transparent and democratized than they have ever been as a result of innovations in technology and market access rules. This has enabled new market participants to access the markets using an increasingly diverse set of trading methodologies.
- Empirical evidence has shown that the cost of execution for retail and institutional investors has dropped as market intermediaries have turned to automated market making tools. The efficiency afforded by these tools is ultimately passed onto investors in the form of tighter bid/ask spreads and increased liquidity.
- No two markets are the same. Equities and derivatives markets are fundamentally different from one another. Most of the concerns being voiced about equities market structure are not applicable to derivatives.
- National regulators and self-regulatory organizations are protecting the integrity of markets by constantly monitoring for nefarious behavior and taking action where necessary. Through their actions we have seen that bad actors may use any trading technique and operate on any timeline. We have also seen that these bad actors account for only a tiny fraction of all market activity.
So that's where we stand today. But while separating fact from fiction about our markets is important, it isn't enough. We must now leverage that understanding to help identify opportunities to improve markets. The problem is that today's markets are complex and it is possible that any change we make may do more harm than good. So, where do we start? Check back soon for more on that.