NEW YORK & LONDON -- (BUSINESS WIRE) -- Different investors and firms view the US equity markets differently, says market structure expert Larry Tabb, CEO of the research and consulting firm TABB Group – but how to fix the market depends upon their trading perspective. According to Tabb in a new research report, “Regulation NMS (Part II), Plugging the Gaps: Where You Stand Depends upon Where You Sit,” the key question is, what do they deem broken and in need of repair?
Retail investors are interested in quick execution and low commissions; institutional investors want to trade efficiently in aggregated liquidity pools. Retail brokers focus on providing an efficient investment platform; institutional brokers want to provide institutional liquidity and trading infrastructure. Exchanges are interested in price discovery. With the SEC working to provide a fair marketplace, especially for individuals, the challenge of finding a communal solution to solve all of these problems together is next to impossible, Tabb says. “Where you sit really does dictate the answer to many of these issues.”
In Tabb’s first report, Regulation NMS (Part I): Loved or Loathed and Why Many Want it to Die,” published in May 2013, he addressed the need to rethink how markets should operate and tweak, or even scrap, the SEC’s Regulation National Market System (Reg NMS), implemented in 2006, that many institutions have come to loath, with its unintended – and sometimes intended – consequences.
In his new report, he examines the issue of fragmentation in financial markets, increasingly thought of as a pejorative. While fragmentation makes it more difficult to see the complete picture – one equity order can be executed now at over 100 different places – fragmentation can also be thought of as competition. As Tabb points out, markets fragment in many ways, not only in terms of trading venues but across venue, time and price.
Fixing Reg NMS, however, will not be simple, he warns. While few markets have significant challenges with the realignment of market-data fees, nearly all of the other tenets of Reg NMS are controversial to one or many market demographics. Depending upon your role in the market, he says, these rules can swing from significantly beneficial to very detrimental. “The SEC’s mandate is not to protect brokers, exchanges, or intermediaries, but to protect individuals, market quality and capital formation. If it could be proven beyond a reasonable doubt that one of these key pillars were clearly impaired, the SEC would have more ammunition to make a radical market structure change.”
“However, until the SEC’s views can be shown quantitatively to be wrong,” Tabb cautions, “my best advice would be to invest in the technology, understand the structures and use your influence to advocate to your service providers as vociferously as possible. And if your service providers, internal or external, just aren’t cutting it, vote with your feet – and change providers.”
The 38-page report with 16 exhibits and 32 summary “takeaway” points includes 8 detailed score cards outlining competitive advantages and disadvantages for different constituents covering speed, spreads, order protection, order types, access fees, order routing, off-exchange trading and a Trade-At rule.
The report is available now for download by TABB Group Research Alliance Equities clients and pre-qualified media. For the Executive Summary or to purchase the report, see TABB’s research catalog or write to firstname.lastname@example.org.
About TABB Group
With offices in New York and London, TABB is the research and consulting firm focused solely on capital markets, based on the proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb. For more information, visit www.tabbgroup.com. In January 2010, TABB launched TabbFORUM, the online global capital markets community covering peer-to-peer opinions and analyses on current industry issues, tracked daily by 18,000-plus professionals.