Electronic order books and market makers will continue to benefit from the changes to US market structure wrought by new pricing models, technology and regulation, while use of floor traders will continue to decline, according to a new study from research firm Celent.
The study, ‘The New Liquidity Shift: US Equities Markets 2.0’, predicts that US electronic order books, such as Nasdaq, NYSE Arca, BATS Trading and Direct Edge, will account for 65% of total US share volume by 2012, up 12 percentage points from their current market share of 53%.
In addition, the study asserts that a new breed of electronic market makers, including Citadel Derivatives and Getco, is filling the gaps left by failed or weakened
Wall Street investment banks.
These new market makers currently accounting for 4-5% of average daily share volume, but Celent expects their market share to grow to 10% by 2012, as their operations thrive and expand.
“The financial crisis affecting many large and formerly competitive dealers makes the evolutionary path of these new market makers that much more accelerated,” said David Easthope, senior analyst with Celent’s Securities and Investments Group and author of the report, in a statement.
The success of electronic order books and market makers will come at the expense of specialists – floor traders on the New York Stock Exchange (NYSE) who hold inventories of specific stocks. Specialist firms include Spear Leeds and Kellogg, Bank of America Specialists and Van der Moolen. The study attributed specialists’ waning appeal to weaker price improvement and increased competition from electronic order books.
Despite a dramatic restructuring of NYSE’s operations, including increasing rebates for high frequency traders and execution algorithms, the market share of NYSE floor specialists is expected to shrink to just 10% of total US share volume in 2012 from 27% in 2008. The study considered the greater price improvement that can be found on electronic order books – which has nearly tripled since Reg NMS – to be a significant reason for this decrease.