More Venues Please?

Terry Flanagan

Buy-side traders have benefited from more options but there may come a point when excess options become ineffective.

Economic theories such as the Laffer Curve suggest that harder workers don’t necessarily gain the rewards they deserve. While not precisely correlated, Arthur Laffer’s theory might be analogous to what trading venues may soon experience in an increasingly competitive landscape.

Traditional trading venues, such as exchanges, and alternative, such as dark pools and ECNs (electronic communication networks) have been launching “Starbucks-like coffee flavors—dark roast, medium dark roast, blonde roast,” according to one market participant. There are currently 40 to 50 venues in the U.S. across all asset classes.

“More trading venues are generally good and I think we will continue to see a rise of venues by maybe 20 to 30% before we see them plateau because too many venues may lead to inefficacy,” said a buy-side source.

Others feel that the rise in number of trading venues has really helped make trading easier for the buy-side. “Market fragmentation has been a good thing; spreads are tighter,” said Mark Palchak, head trader at Infinium Capital Management, a global proprietary trading firm based in Chicago.

For those looking to taste something different in their coffee, having options is a plus. However, ultimately, buy-side traders care most about the quality of execution of their orders, which does not necessarily coincide with the fastest venues.

“All the focus is on the speed of execution, and people forget about the price, when it’s all about the price,” said Chris Bartlett, director at Nobilis Capital, a firm focused on automated and quantitative trading.

For most institutions that buy and hold securities for price appreciation, quality of execution is key. An institution might buy 50,000 shares of a stock at $150 a share and hold it until it goes to $200, not $150 and a penny.

“It’s better to understand what the stock is doing and you can tell by executing at the best price. You can’t keep up with the speed all the time because sometimes (buy-side firms) can’t,” Bartlett said.

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