Speed to Market: The Evolution of Trading

Market Evolution and Speed

• High-frequency trading (HFT) and algorithmic execution now account for over 50% of all trades in US markets.
• Transaction speed has evolved from hours and days (telegraph era) to milliseconds, where execution is measured in thousandths of a second.
• The average trade execution time has dropped from approximately 10 seconds in 2005 to under one second in the current era.
• Market fragmentation has increased, with 13 displayed exchanges currently operated by 5 providers, including a consolidation where Direct Edge was acquired by BATS.
• Since 2005, the market has seen a dramatic rise in off-exchange trading venues driven by Regulation NMS.

Benefits for Retail Investors

• Average commission costs have fallen by approximately 80%, dropping from $52 to roughly $12 per trade over the last decade.
• Bid-ask spreads for active stocks have narrowed from historical ranges of 1/16th or 1/8th of a dollar to approximately 1 cent or less.
• TD Ameritrade reports that despite public discourse surrounding HFT, only 70 phone calls and 120 emails were received regarding negative sentiment after the publication of Michael Lewis's book.
• LiquidNet CEO Seth Marin estimates retail investors are on a "Main Street" trajectory where they have never been better off, citing lower costs and faster execution.

Challenges for Institutional Investors

• The average execution size on public exchanges has fallen to 200–250 shares, creating a mismatch with the institutional average order size of 1 million shares or more.
• Seth Marin identifies a fundamental supply-demand imbalance where institutions "buying $200 million worth of stock" in slices of 250 shares creates inefficiencies and market impact.
• Information leakage remains a concern, as institutional intent can be inferred by other market participants even in electronic environments.
• Vanguard estimates that automation has reduced the cost of executing large block trades by 50 basis points.
• Vanguard calculates that a 50 basis point reduction in transaction costs could result in an additional $32,000 per year in retirement account value for a $10,000 investment over 30 years.
• A recent survey indicates that 70% of buy-side firms remain wary of high-frequency trading strategies.
• Greg Toussart characterizes the current environment as an "arms race" where buy-side institutions struggle to compete against predatory algorithms without incurring significant costs.

Market Structure and Regulation

• Limit Up/Limit Down (LULD): Exchanges have implemented circuit breakers that halt trading if a stock price moves more than 8% intraday to prevent continuous crashes.
• Market Maker Obligations: New rules require market makers to maintain a two-sided market within 8% of the inside price to ensure liquidity during stress.
• Regulatory Critique: Panelists argue that the SEC has been reactive rather than proactive, citing the delayed implementation of LULD following the 2010 Flash Crash.
• MIDAS System: The SEC has introduced Market Information Data Analysis System (MIDAS) to facilitate a more data-driven approach to regulation.
• Co-location: 97% of volume on BATS is executed by participants with direct data feeds and co-located servers, which Joe Ratterman argues is a fair, competitive marketplace available to all who can afford the infrastructure.
• Order Routing: Fred Tomczyk denies "selling order flow," stating that revenue-sharing agreements are a byproduct of seeking the lowest transaction costs after fulfilling "best execution" obligations to clients.
• Cross-Market Risk: Panelists highlight the need to address systemic risks from global market interconnectivity, where disruptions in foreign markets (e.g., Abu Dhabi) could impact US indices.

Panelist Disagreements and Perspectives

• Speed vs. Efficiency: While some panelists view speed as a byproduct of competition that lowers costs, others (including Seth Marin and Fred Tomczyk) argue that extreme speed creates an arms race that benefits few at the expense of many.
• Fairness: Joe Ratterman argues the US market is unique in that retail investors often receive better pricing than institutions due to competition, whereas Seth Marin argues this is an "inverse market" where bulk buyers (institutions) should logically pay less than retail buyers.
• Role of Intermediaries: There is debate over whether the specialist/market maker role is obsolete or if new structural obligations are needed to ensure liquidity during times of fear rather than just greed.
• Regulatory Philosophy: Jamil Nazarali advocates for the industry to stop blaming each other and for regulators to engage in proactive risk mitigation, while Fred Tomczyk emphasizes that market participants must innovate solutions rather than waiting for regulation.