Market Structure: Perception Versus Reality

Terry Flanagan

Technology is reshaping financial markets, but the perception that markets have become distorted by automated trading has no basis in fact, according to Rishi Nangalia, CEO of REDI Global Technologies, a trading platform that was spun off from Goldman Sachs.

“The perception that the markets are broken, and the hubris that the participants are pillaging and stealing from the common man, is completely exaggerated,” Nangalia told Markets Media. “The biggest issue is that the market is failing to parse reality from perception. Unfortunately, things have been completely muddled, and the characterization has been negative over the last couple of years towards market structure.”

The market structure “map” has been largely unchanged over the last few years, despite the advent of dark pools and high-frequency trading. “There might be a few more lines (connectivity/interaction), there might be a few more boxes (market centers), but the overall topology of the map has not actually changed,” Nangalia said.

Those who fail to read the map correctly are unable to understand how they’re interacting with the market, which results in the perception that the market’s being unfair, too complex and not transparent.

“Market spectators aren’t spending the time to figure out the reality, because they’re caught up in perception,” said Nangalia. “The perception has gone in a negative direction; and it’s not a true representation of the reality.”

He continued, “But participants who are in the market, who have taken the time and effort to understand how to interact with the market, how to benefit from the changes in the market, they are doing just fine. You don’t hear the sophisticated brokers crying and complaining.”

The members of these markets are the brokers — bulge-bracket firms, agency shops, “the big brokers, the Morgan Stanleys, the JP Morgans, the Credit Suisses, the Goldman Sachs.They’re doing everything they can to work within the market, and to work in the market structure where they can provide the best services to their customers,” said Nangalia.

These members have been able to parse out data from the brokers and exchanges–available from any sophisticated market participant via standardized FIX tags. “These members haven’t complained that the other members have an advantage,” Nangalia said.”They have been able to use that data and market structure effectively.”

REDI itself typifies the shifts that have taken place in recent years. When it launched under the Goldman Sachs umbrella 15 years ago, most clients would interact under their own member ID with the New York Stock Exchange, Nasdaq or ECNs, which was referred to as DMA [direct market access] trading. Today, most clients have switched to algorithmic trading.

“Ninety percent of the flow now consists of clients picking algos of the member firms who in turn interact with the market,” said Nangalia. “They have abstracted themselves from choosing the order type of the New York Stock Exchange or Nasdaq, instead relying on their broker to do that for them, and in turn will measure the performance of these brokers and send their flow to the broker that is the providing them with the best service.”

Clients can now trade with any broker on the REDI platform, whereas years ago they could only trade with the trading entities of Goldman Sachs.

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