2018 Viewpoints on Market Microstructure from Clearpool's Founders

Posted by The Founders on Feb 22, 2018 12:00:00 PM

The views of many broker-dealers are often underrepresented in the ongoing debate over market structure reform, but not understanding the impact that trading regulations may have on those broker-dealers can cause many unintended consequences. 

As a technology and execution services provider who also accounts for nearly 2% of average daily trading volume in the U.S., we feel we are in a unique position to engage in meaningful dialogue with regulators to ensure fair, equitable and competitive markets. Below, we summarize our recommendations made to FINRA, the SEC and other regulators in our recent viewpoints letter.

Control costs surrounding trading.

It has become increasingly difficult for these broker-dealers to compete with bulge bracket firms in the current market environment, due in part to issues related to the costs associated with trading. Our current market structure has created an environment where some broker-dealers end up subsidizing larger firms, whose costs associated with exchange membership, market data and connectivity are more than offset by the favorable tiered pricing structure and volume discounts they receive. This structure oftentimes forces these broker-dealers to utilize bulge bracket firms for market access to take advantage of their pricing structures.

We do not see any slowing to this trend where more flow is concentrated into fewer entities, increasing the overall risk for the markets and making it more difficult for new firms to enter the market. The time is ripe for exchanges to price their offerings more competitively and equitably for all market participants. In our viewpoints letter, we discuss the impact of market data and exchange fees, NMS plan governance and proposed rule changes relating to fees.

Increase transparency of market information.

As our market structure has evolved, it has become a complex ecosystem that has bred conflicts of interests, bias and information leakage. We believe the market needs increased transparency around broker-dealers’ order routing practices in order to facilitate open conversations around execution quality. Market participants need tools that transparently display routing protocols, give them control over making changes to their routing and provide analytics to validate those decisions. Read more about our view of market transparency and support of Rules 605 and 606 in our viewpoints letter.

Create sensible rules around technological advancements in trading tools.

As new firms and new technologies, like artificial intelligence and data management systems, enter the market, we believe it will become increasingly important for regulators to understand how these new technologies operate and evaluate the risks they inject into the market. This is particularly true for tools provided by firms that remain unregulated. At the same time, we recognize that overregulation may stifle innovation in technology by those very firms who know the trading business best. Our viewpoints letter provides recommendations for balancing regulation with continued technological innovations.

Improve oversight of broker-dealers by SROs.

We believe there are several issues that need to be addressed around the structure and operation of SROs which affect many broker-dealers. Our recommendations include increased guidance around new rules and regulations, and tighter coordination between regulatory organizations and within departments at regulatory organizations. Learn more about these recommendations in our viewpoints letter.

We are committed to issues we believe need to be examined to ensure that broker-dealers and other market participants can operate as effectively as possible under the current structure of the U.S. equities market. Our viewpoints letter outlines recommendations that will help us continue to deliver transparency, trust and control in algorithmic trading.

To learn how Clearpool’s Algorithms adapt to market structure request a demo.

To read the full viewpoints letter click here

Topics: Market Microstructure

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