Changes brought on by the SEC’s Reg ATS more than 20 years ago looked to foster competition and innovation in the capital markets. That has never stopped, as the fruits of Reg ATS continue to flourish in today’s market, with the intended consequence of greater competition and investor choice. In this Forecast 2021, four ATSs — CODA Markets, Imperative Execution, Luminex and OneChronos — give their perspective on the current equity trading marketplace and offer a look ahead, compiled by Sam Belden & Co. at Forefront Communications.
In our Forecast 2021 series, we bring you reflections and predictions from prominent firms and thought leaders from the industry. Today, we’re highlighting perspectives from the ATS space, with thought leaders providing their perspectives on the spikes in volumes and volatility, increasing fragmentation and the surge in retail trading activity.
The operator of an on-demand auction-based alternative trading system
Don Ross, CEO of PDQ Enterprises, Parent Company of CODA Markets
Three new equity exchanges launched in 2020. Is there too much fragmentation? Why or why not?
We at CODA run on-demand auctions, so we naturally hate fragmentation – it is anathema to the concept of an auction. But we also think the exchanges are themselves fragmenting the markets by executing trades bilaterally and sequentially, rather than multilaterally and simultaneously. So we also believe in competition to their model. The problem with the 16 exchanges is that they are all operating the same flawed market structure. The only product differentiation going on is in the order types, and most of that differentiation is itself a byproduct of regulatory arbitrage – that is, exploiting the SEC’s Order Protection Rule to attract order flow that would otherwise consolidate elsewhere. So, yes, there is too much fragmentation, yet there needs to be a continuous flow of competition. We believe that the right way to eliminate the former and encourage the latter is simply to repeal the Order Protection Rule.
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A financial technology company that builds trading venues
Roman Ginis, CEO
2020 saw record volumes and volatility, in addition to necessitating widespread shutdowns of physical trading floors. What was your experience during that period? What, if anything, might the long-term impact be?
Higher volatility in 2020 certainly increased everyone’s execution costs, which led to many firms focusing more intently on their trading performance. We built IntelligentCross for that precise goal – performance optimization, regardless of market conditions – so we’ve been pleased to see the venue more than triple in volume in 2020, becoming a top 10 ATS by volume in the second half of the year. Our displayed book – ASPEN – that lowers adverse selection, presented displayed liquidity with an average price improvement of 30% of the publicly available spread. We believe that higher volatility will be with us for at least another year, and since a basis point of alpha is the same as a basis point of execution slippage, implementation efficiency will remain at the center of attention. As such, performance optimization will continue to be an imperative.
Three new equity exchanges launched in 2020. Is there too much fragmentation? Why or why not?
We’ve been debating fragmentation versus innovation for the last three decades. The NYSE/NASDAQ exchange duopoly of the ‘90s protested the advent of Island, Arca, Bats, Direct Edge and other new entrants who ultimately transformed the market for the betterment of end investors, both retail and institutional. We believe that now’s no different – a vigorous competition between the new and incumbent firms is poised to make the market even better for investors. We created our AI-based platform to address a problem in the venue space, and in the two years since launch we see our approach bringing a lot of value to all market participants. We owe some of our success to the ATS regulations enacted by the SEC in the ‘90s to increase innovation in the exchange space, and we believe that our experience proves that ATS’s are a vital component of the market ecosystem and as needed as ever.
Retail became a much more significant part of the market in 2020. What’s the impact been, and what will it be moving forward?
While it’s always good to see retail investors be engaged and develop an understanding of the way modern markets function, we believe institutional investors will continue to be the main driver of growth in our industry.
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A large-block trading venue
Jonathan Clark, CEO
2020 saw record volumes and volatility, in addition to necessitating widespread shutdowns of physical trading floors. What was your experience during that period? What, if anything, might the long-term impact be?
“Things everyone knows” were tested this year in a big way. It has been conventional Wall Street wisdom that a rise in volatility signals a reluctance to trade blocks. True, when the VIX moves up modestly, traders are comfortable waiting, picking their spots to trade throughout the day. But this year we learned that during a tremendous spike in volatility (like March and April), there is a “tipping point” for block trading. When the VIX starts to push through 50, the urgency to move picks up dramatically and block trading is once again essential. We see this as validation of a long-term need for venues like ours.
Three new equity exchanges launched in 2020. Is there too much fragmentation? Why or why not?
Traders on both sides of the aisle have long complained about fragmentation in the equity markets. But if you asked them if one exchange is too few, they would say, “absolutely!” “How about 2 or 3?” “No, that’s not enough either.” The truth is that there is no perfect number, and as with most things with traders, everyone is going to have their opinion. We prefer to look at new venues through the lens of innovation – solving for specific issues, which we believe each one of these exchanges is trying to do. The marketplace will determine the demand for each; we shouldn’t stifle innovation in search of an optimal number of venues.
Retail became a much more significant part of the market in 2020. What’s the impact been, and what will it be moving forward?
Luminex doesn’t directly interact with retail investors or their order flow, but it was not hard for market watchers to spot them this year. Our sense is that early stay-at-home orders, combined with no sports on TV, created a series of “couch potato” day traders looking for action. We all saw the daily headlines about Robinhood trade volumes, and business at the ATS’s that support retail order flow was off the charts. While the resurgence of the virus has led to renewed restrictions, there’s nothing like the spring lockdown, and sports have been back since the summer. It’s not a coincidence that retail has stepped back since Q1-Q2, though the numbers do remain somewhat elevated.
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A technology company providing execution venues
Jesse Greif, COO
2020 saw record volumes and volatility, in addition to necessitating widespread shutdowns of physical trading floors. What was your experience during that period? What, if anything, might the long-term impact be?
A few things. The banks who were best at executing their BCP (Business Continuity Planning) strategies this year had real alpha in performance, operational risk management and client service. Despite the vantage point from many of us, the buy side (ranging from fundamental to stat arb) was chiefly focused on managing the regime shift and performance, less so on execution. That said, what stood out to those we talk to regularly was the challenge to interact with truly unique liquidity and limited diversification in execution channels. In addition, the market framework that had been in place for over a decade (circuit breakers, Limit Up-Limit Down, etc.) proved that it is generally resilient today. The market also operated well in the absence of in-person consultation, meetings, dinners, etc. We think this is, in part, here to stay. A big focus of ours in 2020 was to build more self-service tools to offer a more self-contained customer user experience, making it simple for users to onboard and get the most of our low code platform.
Three new equity exchanges launched in 2020. Is there too much fragmentation? Why or why not?
In addition to three new exchanges there have been at least five new complex order types introduced by existing venues. Our buy-side and sell-side counterparts find these new offerings generally “more of the same” with slight tweaks in pricing or incentives. None seem to address “root cause” issues in today’s market structure. The old saying stands: “If there are 40 solutions for one challenge, it’s clear none of them individually are great.” At this point, the bar for innovation must address root cause challenges and amplify the liquidity available, not just shift from one venue or venue type to another. In our view, the root cause challenge is specifically around price-time priority winner determination.
Retail became a much more significant part of the market in 2020. What’s the impact been, and what will it be moving forward?
A lot of our buy-side colleagues express strong interest in getting access to interact with retail. We find it important to look at both the volume of retail trades and the notional of turnover. Nonetheless, we expect that a) more brokers will offer segments to interact with retail or retail-esque flows and b) more broker algorithms will look for differentiation in offering odd lot solutions.
This article includes firms that are both clients and nonclients of Forefront Communications.
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