US market participants believe new regulation to reduce the fragmentation of equity markets would minimise the types of technology glitches that have occurred this year.
The call for action was part of a survey by consultancy TABB Group, titled ‘The sky is falling’, which polled 260 market participants on the level of confidence they had in US market structure.
Almost half (47%) of the buy-side thought new regulation was necessary to revive investor interest in US equities, compared to 21% for exchanges and 29% for brokers. Trading venues and sell-side firms saw the performance of US equities relative to other markets as a more substantial factor that would reignite confidence.
Looking at the type of action regulators should consider, the largest proportion of sell-side firms (30%), buy-side firms (36%) and trading venues (38%) all claimed a reduced number of equity trading venues would restore conviction in US stocks. A further 31% of buy-side called for policy makers to slow the market down to minimise market structure dangers.
Two-thirds of buy-side traders urged regulators to implement new rules with six months.
So far this year, the US equity markets have been beset by a spate of technology errors that have eroded investor confidence. Most recently, Knight Capital came close to extinction after its market-making system sent duplicative orders to the New York Stock Exchange, leading to US$440 million worth of losses for the firm. Around 58% of the asset managers and hedge funds questioned by TABB considered the Knight incident to have a medium or significant impact on market structure confidence.
The hotly anticipated IPO of Facebook was delayed for around 20 minutes after Nasdaq OMX had trouble setting an opening price for the stock, while BATS Global Markets was forced the cancel its own IPO, the first stock to have been issued on its own new listings service, after a software issue.
According to the TABB study, one-fifth of buy- and sell-side firms questioned considered the Facebook IPO to have the same impact on long-term investor confidence as the Madoff scandal from December 2008.