US financial markets undergoing radical change, says Tabb Group study

Not only have the national exchanges become fully electronic, the report says, but there are now more than 55 different venues vying to match buyers and sellers and trade US equities electronically.

‘With these 55-plus millisecond-matching US equity trading platforms competing against each other and new electronic strategies enabling brokers, investors and markets themselves to connect and trade, the way traders now access the financial markets has changed radically,’ says Larry Tabb, the firm’s chief executive and founder and author of the study.

He argues that the proliferation of equity execution venues, in conjunction with significant capital investment in scheduling and smart order-routing logic as well as the market data infrastructure and millisecond speeds necessary to read and analyse trading opportunities, ‘has made the old-school method of phoning a stock exchange floor broker for a trade execution as ludicrous as a horse and buggy competing in the Daytona 500. Not only can’t they win, but they have a greater chance of harming everyone around them.’

Who cares? ‘Not the millions of individual investors trading 100-share orders three or four times a year who are generally happy as long as they’re guaranteed by the SEC’s Regulation NMS rules of getting the best price at the time of execution,’ Tabb says.

But for brokers, proprietary traders, exchanges, electronic communication networks and other trading facilities inside and outside the US dealing with this daily radical change, ‘it means life or death’.

According to Tabb, it is absolutely critical for hedge funds and money managers to understand market structure nuances as professionally managed equity assets continue to expand and buy-side traders increasingly need to know how to negotiate the rapidly-changing market structure. ‘It often means the difference between beating their benchmarks – or merely matching them,’ he says.

The study analyses the US equity market structure, examines who, why and how institutions trade and looks at how market centres, ECNs, crossing networks and dark pools, or non-displayed liquidity, are changing the current trading environment and impacting the global equity execution business.

While the study focuses primarily on the US market, Tabb says that it should be read by exchanges, brokers and institutional and serious private investors worldwide. ‘What started as a way to disintermediate recalcitrant US market centres has effectively spurred the development of new trading tools to support better a wide-ranging selection of execution needs,’ he says. ‘While this trend started in the US, Tabb Group believes it won’t end there. Once the genie’s out of the bottle, it’s impossible to re-cork.’

Founded in 2003 and based in New York and London, Tabb Group uses the interview-based ‘first-person knowledge’ research methodology developed by Larry Tabb to analyse and quantify the investing value chain linking the fiduciary, investment manager, broker, exchange and custodian.