Panel, Conference Presentation
The Future of Trading
- The market environment is expected to undergo continued institutional and microstructural changes, characterized by a shift from swaps to futures-based trading and an evolving impact from high-speed traders and social media on equity markets.
- A significant volume of business is projected to migrate from unregulated bilateral products to listed markets driven by increased transparency, acceptance, and mainstream adoption of exchanges.
- Regulatory implementation of Swaps Execution Facilities (SEFs) is anticipated to be completed following current delays, creating competitive trading platforms for swaps that may produce winners and losers depending on the speed of rule establishment.
- The Dodd-Frank legislation is expected to mandate greater capital and margin requirements for swaps to better back financial risks and reduce the probability of a meltdown similar to Lehman Brothers.
- Government mandates for clearing transactions are viewed as suboptimal by some perspectives, which favor economic incentives such as higher capital charges on bilateral transactions instead of forced clearing.
- High-frequency trading is predicted to continue delivering greater liquidity, transparency, and lower trading costs, with trading expenses projected to fall to an order of magnitude less than levels seen a decade ago.
- Retail investors are expected to benefit from co-location technology provided by market-making firms, allowing access to significant technological investments at low costs to level the playing field.
- Future trading models are likely to integrate big data, social network signals, and alternative data sources such as satellite imagery, fundamentally altering forecasting and market analysis capabilities.
- Cross-asset class arbitrage is anticipated to increase as electronic price dissemination improves, compensating for market fragmentation by sending price discovery signals faster.
- High-frequency trading volume in the futures market is expected to decline as the equity space becomes more efficient and fragmented, reducing the ability to arbitrage across different trading pools.
- Regulators are projected to face challenges in developing a proactive view of market impacts from massive passives and high-frequency traders rather than reacting only to visible current issues.
- Regulatory agencies are expected to require registration for proprietary traders and mandate program testing to identify unregistered bad actors.
- New registrations and rulemakings will likely progress slowly due to lobbying pressure, litigation concerns, funding shortfalls, and overanalysis paralysis.
- International harmonization of regulations is expected to be a significant challenge as different countries experiment with electronic trading models, with the US and EU potentially leading the way while others follow.
- Unless global rules are harmonized, regulatory arbitrage is likely to occur, with foreign firms potentially relocating operations to jurisdictions with fewer regulations if US requirements become too burdensome.
- Market quality metrics, including bid-ask spreads and commissions, are projected to continue improving, while regulatory changes over the last decade are viewed as beneficial for competition following the shift away from a NYSE-NASDAQ duopoly.
- Exchanges will likely serve as vital gatekeepers by developing risk protocols and kill switches to manage the systemic risk posed by individual computer failures or glitches.
- Technology glitches and computer problems are expected to persist in exchanges and among high-frequency traders, indicating that market stability remains unguaranteed.
- Off-exchange trading, particularly in dark pools, is likely to remain a concern regarding fair and open access, as broker-dealers controlling these venues lack the same requirements as public exchanges.
- Dark pools may continue to face negative public perception regarding their name, which could hinder retail investor participation despite their functional utility.
- Tension between market competition and integrity is expected to persist in the regulatory environment, even as the Dodd-Frank Act permits current integration levels in futures markets.
- The regulatory implementation pace may need recalibration to ensure economic recovery objectives are met rather than retreating to previous pre-legislation conditions.