Martin Wheatley, chief executive of the Hong Kong Securities and Futures Commission, has acknowledged that alternative trading venues are a global trend with which individual regulators need to engage. At the same time, he warned that the increase in electronic trading would not necessarily benefit the trading community as a whole, citing a prediction that, by 2015, there will be a 90% reduction in the number of humans involved in securities trading.
Addressing FIX Protocol’s 6th Asia Pacific Trading Summit in Hong Kong on 3 June, Wheatley declared himself intrigued by the view expressed in a digi-vote preceding his address that regulation has improved the environment for electronic trading. Regulators, he said, are more often regarded as late to the game and are frequently compared to army generals, “good at fighting the last war.”
Among traditional exchanges, he acknowledged a push to global exchange networks, demutualisation and investment in technology. The days of the floor trader are coming to an end, he said, but exchanges are left with the challenge of how to recreate the sense of anticipation and excitement that is associated in the public imagination with floor trading. “The challenge for regulators is to deliver on their role of ensuring that investors are protected without holding back the pace of change,” he commented.
Among the key developments faced by regulators, Wheatley identified the emergence of alternative trading venues as the foremost. Typically the dominant trading mechanism in their home markets, stock exchanges themselves have not been blind to new challenges, he observed. Some have, for example, been looking at mergers as a way to achieve cost synergies.
Wheatley drew attention to the potential impact of competition at the exchange level on price formation and best execution. Where there is one exchange, he noted, establishing best execution is relatively simple. Where there are multiple price points, it becomes more complex.
He did not identify dark pools in themselves as a particularly new concern. Twenty years ago, he pointed out, each market maker was effectively a dark pool. “Today it is the technology that supports these pools that is new,” he commented. “We are dealing with new applications, not new concepts.” As these pools attract increasing volumes, said Wheatley, the challenge for regulators is to ensure that exchanges are still able to play a monitoring role for the market as a whole, which involves a certain cost on their part, unhindered by ‘free-riders’. The regulator, he insisted, needs to facilitate fair competition.
A related issue is fragmentation of post-trade transparency and liquidity. The tipping point would be when the effectiveness of the central system as a price source is undermined. In US and Europe, he noted, Reg NMS and MiFID serve to address that risk; Asian markets do not have equivalent legislation.
In Hong Kong, suggested Wheatley, it is relatively easy to create an alternative trading system (ATS), but it is not easy to create an alternative exchange. A new ATS would, for example, be required to be a member of the exchange and to operate under its umbrella. He admitted, however, that other regulators in the region were facing more immediate challenges to their existing market structures. Australia, for example, is going through a review of its regulatory structure as it faces three separate applications from businesses wishing to operate as an alternative to the Australian Stock Exchange.