At Exchanges, Consolidation + Fragmentation
The past decade has seen mergers of exchange groups, but the number of trading venues remains high.
When it comes to public price discovery, there is no better place than the exchanges.
NYSE. Cboe. Nasdaq. Doesn’t matter which one assists in the execution, the exchanges are the nexus of public trading. And the more paces to execute a trade, the better the execution, the thinking goes. And as time has gone by, from a single exchange formed in the 1800s under a Buttonwood tree to the most recent, IEX, exchanges have been an essential part of the market structure.
But that growth and innovation among the exchanges and their myriad incarnations has subsided from the stratospheric growth seen in the late 90s and early part of the 21st century. As much as Regulation NMS allowed for growth, the quest for profits and market share has forced consolidation in the markets. Smaller more intimate venue such as the American Stock Exchange, Philadelphia Stock Exchange and others have disappeared from the landscape while others, such as Direct Edge, have been absorbed.
But can we call that real consolidation in an equities marketplace still has approximately 40 trading venues?
Yes, says Richard Repetto, Principal at Sandler O’Neill + Partners.
“There has been plenty of consolidation in the exchange space over the past 10 years,” he began, noting the mega mergers between ICE and the NYSE and Cboe and BATs. “The reason that there continues to be 40 venues is due to two factors. First, there’s the cycle of entrepreneurship whereas consolidation leaves room for the small players to find a niche. Secondly, there is regulation and market structure. There’s still a place where dark pools and other ATSs can serve a purpose for select clientele or select segments of the markets.”
While some say the multitude of trading venues – fragmentation – has helped the market as Repetto noted, some still maintain the marketplace might be better served by fewer venues. So, which is it?
“I don’t think it (multiple venues) has hurt the marketplace, especially in equities as there’s still a very competitive marketplace,” Repetto said. Furthermore, he doesn’t expect much more consolidation going forward as there simply aren’t that many players left in the U.S. to merge.
But has this consolidation helped the market structure? There are still hundreds of different order types that differ by only a line of code at the exchanges and minor variations in pricing schema.
“Consolidation has helped the exchanges as it provides economies of scale and cost savings,” Repetto said. “I don’t have any strong feeling either way as to whether it (consolidation) helped or hurt the marketplace overall because its just so competitive either way.”
James Angel, professor at the McDonough School of Business, Georgetown University, said that given the interconnected nature of today’s marketplace, consolidation still provides many diverse trading opportunities that satisfy traders and investors.
“We now live in one virtually consolidated market network that provides numerous diverse trading opportunities,” Angel began. “We now have far better transparency and even uniformity than many of us thought possible many years ago. Indeed, just as Sun Microsystems went around years ago saying “The network IS the computer,” I like to point out that “The network IS the market.”
As Angel sees it, the various exchanges and trading platforms are just nodes in the network. Different investors have different trading needs, and the different nodes in the network have evolved to serve these needs in ways that are far better, faster, and cheaper than ever before.
“However, that doesn’t stop us from advocating for still more improvements in the operation of the market network,” Angel said. “Even though are markets are far better than before, we still haven’t solved all of the problems. There is plenty to think about regarding market network governance, market data issues, rebates, tick size, venture exchanges, volatility dampers, and more.”
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