Exchange Technology in Focus

Terry Flanagan

While some market participants and observers believe automation and speed are over-emphasized in exchange trading, there is broad agreement that on balance, technology has massively increased efficiency, and there is no turning back.

“Technology has been a major driver of what’s happening in the exchange space,” said Steven Hughes, vice president of sales at Exegy, a provider of market-data hardware. “It’s like toothpaste — once it is out of the tube you cannot put it back in.”

Regulatory pilot programs that aim to boost liquidity by widening ‘tick sizes’ in trading of certain small-capitalization stocks are in effect rolling back technology, but only at the margin, and it’s unclear whether such programs will stick.

Technology has been a boon for financial markets in the developed world, and there’s that same potential elsewhere. “Emerging markets are at a nascent stage in terms of use of technology,” said Manjusha Tipre, vice president of strategic relations at MillenniumIT. “Technology is a great equalizer — if used effectively, it can increase volumes, give fair market access, and make an enterprise more profitable. But the technology has to be distributed equally.”

Hughes and Tipre spoke on the Exchanges, Technology and Market Structure panel at Markets Media’s Sept. 23 Chicago Trading and Investing summit. They were joined by Dr. Jock Percy, chief executive of connectivity provider Perseus, and Drew Shields, director of product management and marketing at Trading Technologies. Ravi Manchi, vice president at Sapient Global Markets, moderated the panel.

While technology has pushed markets forward, it also has its downside, for example fragmentation and sometimes-impaired transparency in equity markets. Hughes, who spent almost a decade at the New York Stock Exchange and NYSE Euronext in the 2000s, said exchanges should focus their technological efforts on recapturing business from dark pools and other alternative trading systems.

“Exchange innovation needs to find a way to get order flow back to the lit markets and add to the price discovery process,” he said.

Fragmentation hasn’t been an issue in the futures space, which is dominated by giant exchange operators CME Group and IntercontinentalExchange and has been characterized by mergers and acquisitions rather than disruptive technologies. But the status quo is showing at least some signs of giving way.

“We’re starting to see people who have ideas on ways to compete in a market that has been pretty much a monopoly up until now, with certain products traded only on certain exchanges and no fragmentation,” said Shields of Trading Technologies. “There will be innovation on the product and technology side…It will be interesting to see if new entrants can force any additional innovation beyond ‘buy the next guy’.”

Manchi of Sapient noted that more smaller and different players are competing in the business of equity trading automation, and he said perhaps in the future, a tech stalwart such as Google or Apple may develop a mobile app that functions as an exchange.

Regarding regulation, Percy of Perseus opined that Regulation National Market Structure needs an overhaul, and the Financial Industry Regulatory Authority is well-intentioned yet budget-constrained. “Technology has helped exchanges and it has helped enable fair market access to exchanges,” he said. “That needs to continue regardless of any regulatory changes.”

Regulatory and compliance burdens have been a cause for hand-wringing on Wall Street for several years now, but Percy noted the redrawn landscape also presents an opportunity

“When you have low volume and relatively low volatility, you can become an operator rather than a grower, so if you’re an operator you have to look to a compliance advantage,” he said. “Companies are looking for a compliance advantage because every dollar in that space goes to the bottom line.”

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