NO 243 – MAY 2013

WFE Focus May 2013
Peter Clifford
Chief Operating Officer,

Market regulation is taking up more and more resources of many institutions in capital markets.  The issues are so fundamental to the business, that the rules being decided in the coming months may shape the industry for decades, and could determine which markets and which parts of the markets succeed and fail.

As these problems are global, so the work of global groups becomes primordial in order to avoid conflicting regulations, and to ensure that the inevitable overlaps are understandable and not prohibitively expensive.  Increasingly the industry looks to standard setters such as International Organizations for securities Commissions (IOSCO) to push national regulators in finding ways of working together.  In the banking sector the FSB, the Financial Stability Board, the Basel Committee on Banking Supervision (BCBS) are keys to implementing the goals set out by the G20 to shrink systemic risks in the financial world. 

The WFE is very pleased to be engaged in the search for a better global standards on the important topic of margins for exchange traded derivatives, and looks forward to more collaboration with leading derivative exchanges and clearing houses, and regulators in coming up with a cost-effective and data centric solution that will better meet the needs of the industry.

IOSCO should be congratulated for taking a holistic approach to concerns about market quality that include dark liquidity (OTC equity trading), best execution rules, price improvement standards and the use of high frequency trading.  There are interlocking economic interests at stake to fragment markets, and it is only when considering how these issues are interrelated that we might separate the best of the new – increased competition and efficiency – from the considerable weaknesses of fragmented markets, engineered complexity, systemic risk and the resulting drop in investor confidence.  The WFE response to the IOSCO consultation that was crafted by the WFE Policy Committee begins.

The WFE response is centered on the premise that ‘meaningful price improvement’ should be a prerequisite for diverting orders from retail clients from public markets onto dark venues.  Security commissions in Canada and Australia are at the vanguard of smarter regulations based on data and research that are proving to carry a welcome impact in improving market quality.  No one would deny that there is a place for OTC trading of equities, especially for block trades, but we must also admit that there is damage to price discovery and liquidity when investors are systematically directed away from the lit public markets and concerns for market surveillance in fragmented trading environment erode investor confidence.

In Dark Liquidity and High Frequency Trading in Australia, ASIC explains the analysis they did on these interrelated issues.  The conclusions they came to should be required reading for regulators of fragmented markets in the North America and Europe. As more data from these markets becomes available from these markets following the updated and upgraded regulations, the benefits of smarter regulation seem sure to be more compelling to investors. 

Understanding High-Frequency Trading, is the first step in a series of papers to de-mystify the aspects of trading technology, and other WFE initiatives to help market operators and investors cope with the new demands of technology.  What seems certain is that high frequency trading is a tool with the potential to be adopted eventually in all liquid electronic markets.  However, the ways that are used can be controlled to make sure that investors have full confidence that the structure of the market exists for the benefit of everyone.  It is with this goal in mind that exchanges will be cooperating to create a reference tool at WFE that will look at the different safeguards that exist to measure the different kinds of risk that arise in highly automated markets.  Look for more insight on this technology at WFE /MIT Exchange Technology Briefing which will be held on the campus of MIT in Boston on 4-6 December 2013.

Just in case Focus readers think there is nothing new in capital markets besides rules and more rules, we continue the series of interviews with exchange CEO’s this month featuring the Stock Exchange of Mauritius and Tadawul. Both Sunil Benimadhu and Abdullah Al-Suweilmy have earned the respect and appreciation of their peers through insight and active participation that they and the exchanges they run generously provide in the deliberations of WFE including the WFE Working Committee and the WFE Governance Committee.  In very different markets and circumstances, they are driving institutions forward that are of critical importance to their local economies and beyond their borders.