The downside of technology and regulation in trading

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Larry Tabb
Likely changes in trading and execution on major financial markets due to technological disruption combined with the impact of regulations will not all be good for the ultimate investor. Opportunities will be forgone in the demand for more transparent, simpler and liquid products.
Speaking at last week’s annual FIX Trading Community conference in Sydney, Larry Tabb, the US trading consultant and researcher, said the major issues prompting change included:

> More risk shifting to the marketplace ‘buy side’, such as big fiduciary funds, and away from the banks whose capital is going up and leverage going down. The opportunity is for smaller firms to take risk and provide capital.

> Size, as in marketable parcels of securities, works against speed, such as in high frequency trading. The market has already moved to very small parcels in equities and will do so in other markets such as FX.

> Complexity versus simplicity – the trend is to simpler financial products “but complex products actually benefit the end users”.

> Opaqueness versus transparency – while the trend for more transparency will continue, it gets more difficult to look at all the available information and put it into context.

The overall trend, Tabb said, was that these issues would play out in the more liquid markets of equities and listed derivatives and migrate to FX, sovereign debt, active issue corporates and standardized swaps. There would be a further shift away from complex unlisted products.
The founder of TABB Group said that disruptive technologies could take years to have an impact and that sometimes technology did not provide the answer, such as with corporate bond trading.
However, several disruptive technologies could result in significant change. These included:

> Blockchain (the digital platform that verifies and records continually updated data), which opens up trust between counterparties: “This is a big deal and could threaten the banks’ value proposition,” Tabb said.

> Payments infrastructure is very expensive and “creaky’, he said, especially in FX, and technology represented a tremendous opportunity for the payments system.

> Robo-advice has not yet reached the end investor in a material fashion but was allowing advisors to be more scalable.

> Market data is very expensive and is “tightly controlled” by the exchanges, which are “jacking up” their feed prices on data. “Can the industry afford this?” Tabb said.

> Consortia are being developed, such as SPReD and Symphony, and more will follow to try to take out some of the cost structures in the industry, but not all will be successful.

Tabb said that dark pools were in regulators’ sights around the world over transparency and fairness. In Australia, ASIC’s report on dark pools will be released in late October or early November.
Meanwhile, Liquidnet last week launched in New York its global fixed income dark pool to centralise trading in corporate bonds, initially focused on North America and Europe.
The institutional trading network has signed 120 asset managers in the US and Europe, including two-thirds of the top 50 holders of corporate bond assets in the US.
Seth Merrin, founder and chief executive of Liquidnet, said: “The fixed income market has been woefully underserved by technology and, as concerns about a liquidity crunch continue to rise, it needs a transformation.”
Liquidnet’s fixed income network was designed with significant input from the buy side to create “the first true dark pool for corporate bonds”, the company said.

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