Buy Side Remains Skeptical on Market Structure


The more things change, the more they stay the same. And when it comes to U.S. equity market structure issues and fixes, the buy side wants to see some answers.

And much to their collective chagrin, so far nothing of any substance.

That’s according to a recent report from market consultancy Greenwich Associates, which recently found that despite myriad market structure issues – many of which have recently made headlines – little, if anything, has been done to address and/or fix them. In the new report, buysiders give their two cents on such issues as maker/taker pricing, co-location, trade-at rule, the Tick Size Pilot Program, impact of MiFID II in the U.S., and dark pool caps.

The report, “Investors’ Take on Market Structure Issues,” presents the results of interviews with 55 institutional buy-side equity traders at pension funds, defined contribution type plans and other managers.

From June through September 2016, Greenwich Associates interviewed 55 buy-side equity traders in the U.S. to learn more about trading desk budget allocations, trader staffing levels, OMS/EMS/TCA platform usage, and the impact of market structure changes on the sector.

One of the standout findings, Greenwich reports, is that traders have a highly pessimistic view of the recently launched Tick-Size pilot, with only 9% of buy-side traders believing it will improve liquidity in small cap securities. In addition, these traders by a wide margin thought it more likely that the pilot program will increase, rather than decrease, execution costs.

And according to late October research from Phil Mackintosh, Head of Trading Strategy and Analysis at KCG Holdings, this increase in costs could be happening. He wrote that when trading costs are reduced, volumes go up. “This makes sense, if trading is cheaper, investors with marginal alpha become more likely to trade,” he noted. “So, what would you expect to happen if you instead forced spreads wider?”

Phil Mackintosh, KCG

Phil Mackintosh, KCG

Data from the tick pilot available at that time shows that volumes are on the decline. ADV, he said, is down for all pilot buckets where spreads were artificially (as a result of the pilot) widened.

ITG also added that it too was seeing a shift in trading behaviors. In its latest research note the firm said that  inverted markets (those with a taker-maker pricing scheme) are gaining share in Group 1-3 stocks, rising from ~7% of total trading volume to ~12% since the advent of the tick pilot. Also, traders are increasingly favoring midpoint or aggressive (spread-crossing) algos over passive algos for Group 1-3 stocks.

“An early read on Tick Pilot trading shows that the $0.05 trading increment may be encouraging traders to seek midpoint executions in dark pools given the added price improvement opportunities,” ITG said. “During the first three weeks of the pilot, dark trading volume was down 13% month-over-month in the control group (in line with broader market change) while Group 1 stocks saw dark volume increase 1%

And while the Tick Pilot was the most recent market structure topic mentioned, it was not the only one traders felt wasn’t getting its due. Greenwich noted that while this report canvassed the buy-side, there are others in the market who have an opinion on market structure.

“Given the significant implications of proposed changes to market structure, it is important that the views of all market participants are taken into consideration,” cautioned Richard Johnson, Vice President of Market Structure and Technology at Greenwich Associates and author of the new report. “For example, the SEC’s Equity Market Structure Advisory Committee is considering an Access Fee Pilot – however, our research indicates that institutional investors would prefer the regulators take an entirely different direction.”


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