Oct 28, 2014, 3:15 PM ETPanel

2014 London Summit - The Future of Trading

The securities industry has transitioned over the last decade from a manual, floor-driven model to an entirely electronic, computer-dominated ecosystem.
Contrary to the view that market structure is "broken," Nasdaq's Edina Friedman argues that companies now have more options for capital access, utilizing private markets (e.g., JOBS Act allowing private status up to 2,000 shareholders) before eventual public listings.
Carlyle Group has taken approximately 23 companies public in a 1.5-year period, indicating active institutional engagement in bringing companies back to public markets after private equity lifecycles.
Barb McKenzie of Principal Global Investors identifies a generational loss of confidence, noting that many retail investors withdrew equity holdings post-2008 financial crisis and have not re-entered due to fear of volatility.
The shift from defined benefit to defined contribution plans has contributed to institutional de-risking, reducing equity interest among large asset managers.
Seth Marin of LiquidNet observes a "massive loss of wealth creation" as investors avoid equities, resulting in capital flowing into passive funds, ETFs, or alternative geographies like Europe and Asia.

US regulators generally accept the secondary liquid capital market as beneficial for corporate cost of capital, whereas European regulators (Brussels/UK) are perceived to view public equities more like private equities, discouraging short-term trading behavior.
Europe's MiFID I and MiFID II regulations are described as highly politicized, with some elements viewed as political soundbites that may have diluted market design compared to the US's more rule-bound structure.
The US has adopted a "free market" approach allowing dark pools to compete with exchanges (40% of volume off-exchange), while Europe is more restrictive, utilizing minimum trade sizes and price improvement requirements.
Phil Allison (KCG Europe) warns that applying equity market designs directly to fixed income and swaps markets is inappropriate due to the distinct nature of those asset classes.
European regulators are introducing progressive transparency measures, including the potential for full disclosure of management fees, which panelists note exceeds current US SEC proposals regarding end-investor protection.

Panelists agree that dark pools are designed for institutional block trading to prevent market impact, whereas retail orders (small size) do not significantly move markets and should generally trade on lit exchanges.
Seth Marin argues that off-exchange venues must provide value beyond price discovery (e.g., block execution, price improvement); otherwise, volume should return to exchanges to ensure sequenced price discovery.
Barb McKenzie notes that while institutions use dark pools to avoid moving the market on large blocks, retail investors also receive price improvements on off-exchange venues, often better than lit exchange execution.
The US Tick Test Pilot excludes retail orders from requirements to trade on exchanges, recognizing that retail investors receive better execution (0.3–0.4 cents/share improvement vs. 0.1 cent payment for order flow) via market makers.
European dark pools were partially spawned by MiFID I's prohibition on hidden orders in lit books, creating a "hybrid" environment that regulators are now attempting to unwind through "LIS" (Large in Scale) waivers.
Mark Hemsley (BATS) highlights that US tick sizes for low-priced stocks are proportionately wider, offering more room for price improvement compared to Europe's proportionate tick sizes.

The fixed income market is described as a "disaster waiting to happen" due to the end of quantitative easing, rising interest rates, and a 75% reduction in dealer capital required to facilitate bond trading.
Panelists anticipate a massive migration of assets from fixed income to equities or cash as bond yields normalize, potentially creating a liquidity cliff for over 7,000 equity issuances and 40,000 bond issuances.
The SEC has flagged fixed income as a priority for increasing transparency, with potential moves toward pre-trade price discovery on electronic venues and end-of-day quote transparency.
Proposals for bond standardization (e.g., specific tenors like 3, 5, 7, 10, 30 years) are suggested for small-cap issuers to improve liquidity, though customization remains the norm for large corporates.
Post-trade processing is identified as a key area for technological improvement, with current T+3 settlement times viewed as outdated and inefficient.
Nasdaq's Edina Friedman notes the critical need for a trade reporting facility for OTC transactions in Europe to link to central clearing, offering collateral efficiencies and capital reduction benefits.
The "nuclear arms race" in high-frequency trading (HFT) and latency is criticized for potentially reducing transparency and not necessarily improving price discovery, necessitating regulatory intervention.

A prevalent misconception is that HFT firms can "see" incoming retail orders and trade ahead of them; panelists clarify that while firms can react to market events, predicting specific order flow is not possible.
Edina Friedman refutes the idea that payment for order flow disadvantages retail investors, citing data showing retail customers receive significantly better price improvement than they would on lit exchanges.
Barb McKenzie warns that low-commission brokers often monetize clients through hidden fees or payment for order flow, contributing to a lack of transparency and investor sentiment.
The panel concludes that the market is not inherently unfair but requires better education on "best execution," which includes certainty of fill and counterparty risk, not just best price.
Regulators are encouraged to adopt a proactive model similar to tax authorities, where industry practitioners work alongside regulators to predict risks like algorithmic "fat fingers" before they cause market crashes.