NO 235 – SEPTEMBER 2012
52nd WFE Annual Meeting

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WFE Focus September 2012
THE READING LIST
Peter Clifford
Deputy Secretary General, WFE

For fellow frequent flyers in the market for in-flight entertainment or for conference delegates remedying jet-lag sleeplessness, there is plenty of choice of reading at the moment on the subject of market structure.

The current system of exchanges determining how to structure market maker obligations and pay for them seems to be working well oN most markets.

1 From the UK Government we have the latest market structure insights of their Foresight Programme. Considering the source, it will come as a surprise to many to see terms such as “unhealthy competition”, or the “socially detrimental” market quotes.

What Foresight likes: circuit breakers and tick size coherency -

Foresight finds general support for circuit breakers across markets, as well as support for coherent tick size policies. Tick size coordination can “limit excessive competition and incentivize limit order provision.” Foresight points to an agreement among FESE members as preferable to the current approach in Europe which can result in “unhealthy competition between venues and a race to the bottom.”

What Foresight is wary of: imposing market –maker obligations on HFT firms, notification of algorithms, minimum resting times for orders and order-to execution ratios to reduce data traffic. Academic evidence that such restrictions would improve market quality is not yet sufficient.

When it comes to market structure and technology exchanges seem to do doing a good job: “Voluntary programs whereby liquidity supply is incentivized by exchanges and/or the issuers can improve market quality”. “The current system of exchanges determining how to structure market maker obligations and pay for them seems to be working well or most markets.”

Spoiler alert: WFE Chairman Arculli is a member of the High Level Stakeholder Group of one of the Foresight projects – the Future of Computer Trading in Financial Markets which published its findings recently.

“fragmentation of trading in such markets increases the overall cost of trading and destroys liquidity”.

2 Alex Frino, CEO of Capital Markets CRC Ltd. and Professor of Finance at the University of Sydney, published an article in Focus recently. His new analysis of market fragmentation in Australia comes to a clear conclusion: “fragmentation of trading in such markets increases the overall cost of trading and destroys liquidity”. Professor Frino places in context the original need for competition between market participants in the US market and positive impact that made, with the competition between trading venues that ensued.

3 Just in case you think that markets exist for regulation alone, we are pleased to publish a report from the host of the 2012 WFE Annual Meeting. It turns out that at least here new IPOs, listing for foreign companies, and growing liquidity still are the focus of the market.

4 In what we expect to be the first part several articles to be published by WFE on ETFs, Deborah Fuhr, an internationally recognized expert on the subject, provides a textbook overview of ETFs. The name ‘ETFs’ may be misleading, as much of the trading now takes place off-exchange, or OTC. An important decrease in trading on-exchange for ETFs was reported earlier this year in WFE statistics reports. However, they still “might well be considered the leading financial innovation of the past two decades”.

5 Last but not least is a man who knows something about financial innovation. Richard Sandor is this year’s recipient for the WFE Award for Excellence. His contributions to financial markets are known globally, and he has recently published “Good Derivatives: A Story of Financial and Environmental Innovation”. In this edition, he proposes a solution to the most recent scandal in derivative markets, the LIBOR fixing which in his view “is giving derivatives a bad name”. He notes “a growing consensus to move towards a transaction-based system”.