Outlook 2019: Spencer Mindlin, Aite Group


Spencer Mindlin is an analyst at the Aite Group.

Spencer Mindlin,
Aite Group

Which hot topics should the industry put to rest at the end of this year?

We should retire MiFID II preparedness by the end of 2018. However, it will bleed over to 2019 since the industry is still waiting for long-term guidance from the Securities and Exchange Commission on Section 28(e)-MiFID II compliance conundrum and how firms will deal with payment for research in the US.

Which market structure changes should take place in the coming year?

I would have liked to have seen a pilot in 2019 that tests tweaks to Rule 611 Order Protection Rule and/or modifies the one-size-fits-all market structure. However, instead, we’ll be preparing for the access fee pilot.

A series of well-intended regulations to modernize US market structure and to invite venue competition has introduced all sorts of unintended consequences.

The SEC is in a tight spot and has the challenge of trying to decipher what’s best for end investors and corporations that utilize the public markets while trekking through a dense forest of self-serving opinions.

There’s the risk that by effectively eliminating rebates along with a shrinking commission wallet, the market may offer no incentives for market makers and liquidity providers. Still, the SEC likely felt it had to act on the Equities Market Structure Advisory Committee’s recommended access fee pilot

Which market structure changes do you expect to take place in 2019?

Exchanges and market makers will be dealing with preparation for the upcoming access fee pilot program. Routing tables and smart order routers will need to be tweaked, alternative trading systems will prepare for windfall gains in market share, and the buy side and corporates may discover how essential it is to incentive liquidity.

Although the ink is not yet dry on the details of the access fee pilot, and with the Consolidated Audit Trail yet to go into full production, the industry and regulators shifted their focus in 2018 and set their sights on the topic of market-data fee reform. What was already a hot-button topic for years, market-data costs was thrust to the front and center of the capital markets industry. This year also may have primed the pump for 2019 to be the year of market-data fee reform.

How should the new year be known?

The new year will be known as “The Year of New Norms.” Rising costs, smaller wallets, lower volumes, increased regulation, and technological disruptions have affected almost every part of the investment lifecycle over the past decade.

Competitive forces have been at work, and significant consolidation has happened across the entire supply chain. We’ve seen re-organization across exchanges, technology vendors, financial intermediaries, speculators, and asset managers. Political uncertainty also has created a resurgence in volatility and volumes in 2018, which are expected to continue into the new year.

On the one hand, all this is likely to buoy the earnings of capital markets firms. However, on the other hand, it remains to be seen how the supply chain will function and whether the industry will awaken in 2019 to new canaries flying out of the market-structure coal mines.

Although I have confidence in the market’s infrastructure, I’m concerned about the growing concentration among a shrinking number of market makers and liquidity providers as well as whether there remains enough redundancy and diversity among this group. So while assets continue to flow into ETFs, the number of corporate issues that are their constituents are not increasing commensurately to absorb the slow and steady increase in assets under management and intraday ETF trading volumes.

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