Unintended consequences of new equity market regulations is the number-one market structure concern of US buy-side traders, according to a new study from research and consulting firm TABB Group.
The study, “Institutional Equity Trading 2009-2010: Dark Pools, Transparency and Consequences”, which interviewed 66 buy-side traders at US institutional equity management firms, found that traders harbour “grave” concerns that inappropriate action on a number of pending issues could severely impair their ability to trade effectively.
The US Securities and Exchange Commission (SEC) is currently reviewing several areas of the US equity market structure, including short selling, dark pool trading, high-frequency trading, sponsored access and use of immediate-or-cancel (IOC) orders and indications of interest (IOI).
The commission has recently proposed banning so-called flash orders, where unfilled orders are displayed momentarily to select participants of a venue before they are routed elsewhere, and new rules governing the transparency of dark pools.
While acknowledging that regulators have the market’s best interests at heart, TABB principal Laurie Berke, co-author of the report, said traders fear that liquidity will be impeded or withdrawn from the market when it is needed most as a result of new rules.
“There is a lack of confidence that the requisite data has been captured and the requisite analysis completed to determine cause and effect or even the need for additional regulation beyond what is already on the books,” said Berke. “Further, [traders] would like to have a voice in these matters, to provide input into these possible regulatory decisions, before any incremental regulation is enacted.”
While there has been much negative press recently about the impact of high-frequency trading on the US equity markets, the TABB study found that buy-side traders are largely unconcerned by the practice. Nearly 84% of the head traders interviewed for the study recommended no action be taken to restrict high-frequency traders’ activity. Over half of respondents said they were indifferent to high-frequency trading, while 28% said it benefited their trading style.
Nevertheless, US buy-side traders would like to see more transparency from brokers, the study found. “Buy-side traders want greater clarity covering the behavior of algorithms, dark pools and smart order routers, from preferencing and rebate deals, to the use of IOIs, IOCs and interactions with electronic liquidity providers,” said Berke.
Traders also told TABB they want a direct say in how trading technologies are configured and the flexibility to customise configuration on a trader-by-trader basis.