Off Exchange Trading and Market Quality in a Fragmented Market

A recent article in Traders Magazine states that the amount of "internalization" in US markets has increased from 20% to 30% in the past year. As pointed out in the Traders Magazine article, the definition of internalization has expanded to include dark pool and upstairs trades and is also known as off-exchange reporting. In addition, a recent Wall Street Journal article reports that markets are becoming increasingly fragmented, with NYSE market share declining to 37% from 70% two years earlier. The question then is, given the increased fragmentation in US markets, what impact has the increase in off-exchange reporting had on market quality - if any? This study seeks to provide answers to that question.

The Creation of Exchanges in Countries with Communist Histories

This chapter considers the stock markets that have emerged during the transition from centrally planned to market economies. The transition occurred over the last 20 years and covered a wide geographical area spreading from Central and Eastern Europe (CEE) through Central Asia to China and Vietnam. A complete description of the different paths of transition in each individual country would be too voluminous for this forum. Instead, this chapter concentrates on the common features and most important differences in the development of stock markets in the more than 30 countries that underwent transition. 

Proposed Foreign Board of Trade Registration Changes in the US

Given that the WFE promotes high standards for markets, growth of the regulated exchange model, and international coordination among regulators, CME Group would like to draw your attention to a recent proposal by the U.S. Commodity Futures Trading Commission (CFTC) that could limit competition by “Foreign Boards of Trade” (FBOTs) in U.S. derivatives markets and undermine global coordination among regulators.

Letter from WFE Chairman Ronald Arculli

I currently have the honour and privilege of serving as chairman of the World Federation of Exchanges (WFE), as from the Federation’s 50th General Assembly in October 2010. I also would like to take this opportunity to thank our former chairman, William J. Brodsky for the leadership he provided us for the last two hectic years.

Lighting the Lamp, or how Regulators Can Help Themselves Monitor Global OTC Derivatives Markets

As US and European policymakers push ahead to complete drafting new rules to govern global securities market, the need for transparency and risk mitigation in global over-the-counter derivatives markets remains a critical focus. Although much of their initial focus was on requiring OTC derivative trades to be cleared through a central counterparty (CCP), policymakers and regulators are now examining other steps that are equally critical to helping mitigate risk, enhance transparency and ensure that regulators have access to crucial market data. One of the most effective proposals under consideration is to require the reporting of all OTC derivatives trades to a central repository where all underlying position data (and possibly transaction data) can be held, with unfettered access provided to all regulators globally. This paper explores the value of such a premise—particularly in terms of the powerful tool that a global repository provides for regulators—as well as the severe data fragmentation problems that are likely to hinder effective regulation if the result of policy decisions on both sides of the Atlantic is a reporting system that is not unified.

OTC Solutions in an Exchange Environment

The 2008 financial crisis post mortems agree that growth of the OTC markets and the increased complexity of new instruments outstripped the industry’s capacity to manage them. Weaknesses in the OTC markets became evident all too rapidly during the crisis as the value of assets traded became difficult to assess, banks lost confidence in each other, and illiquidity spread.

OTC Derivatives, Systemic Risk and Market Structure

With the passage of legislation in the United States to transform Over-the-Counter (OTC) derivatives market, and similar measures in the works in Europe, the leaders of exchange industry sought the most up-to-date information on one of largest and most opaque parts of modern finance. Reform of these non-regulated markets and products has been a priority for the G20 governments and regulators. They have been seen as a central cause and accelerator of the crisis that brought down financial institutions.

Central Counter Party Clearing - The Future of Processing OTC Transactions

The global derivatives market is a main pillar of the international financial system and economy. As an indispensable tool for risk management and investment purposes, derivatives are used by more than 94 percent of the world’s largest companies.1) They contribute to improving operational, information, price, valuation and allocation efficiency, thus substantially increasing the efficiency of financial and commodity markets.2) Derivatives help lower the cost of capital and enable firms to effectively invest and channel their resources. These factors are an important driver of economic growth.3) Europe – as the most important region in the global derivatives market – stands to benefit immensely from the positive impact of derivatives.4) Derivatives are traded in one of two ways: either over-the-counter or on regulated markets, i.e. on exchanges. Exchange-traded derivatives are fully standardized whereas most OTC derivatives are customized contracts between two trading parties. The OTC segment accounts for 90 percent of the market in terms of notional amount outstanding. Here, the market volume is split equally between bilateral trading among market participants and multilateral trading, i.e. trading across a number of different market participants on organized marketplaces) such as interdealer-brokers or electronic crossing networks.

Spillover Effect of Counter Cyclical Market Regulation

On 18 September 2008 the SEC surprised the US financial markets by issuing an emergency order prohibiting the short selling of about 1,000 stocks of financial institutions from the NYSE, the AMEX, and the NASDAQ. Market authorities in the UK, France, Germany, and elsewhere took similar steps. The preamble to the SEC press release stated.

Short-Selling isn't That Bad

Short sellers still have a bad reputation. Pity, because they're better at exposing scams than the regulators In the inglorious history of the financial markets, Napoleon stands out-not for his retreat from Russia, not for the Napoleonic Code, but for his hatred of a species of speculator known as the short seller. The emperor had no use for cynics who felt that his regime and its bonds faced a dim future, and who bet against him. Shorts were "enemies of the state," he reputedly said.