Alternative Trading Systems and liquidity (original) (raw)
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Financial Markets, Institutions and Instruments, 1998
Research on market microstructure has contributed to our understanding of unique features of auction markets, over-the-counter markets, and alternative trading systems (ATS). Each trading system has both its defenders and critics and the debate over comparative operational and allocational efficiencies continues. This fragmented market continues to operate in a tightly structured regulatory environment sanctioned by Congress and is overseen by a powerful administrative agency, the Securities and Exchange Commission (SEC). In this environment, each system has carved a niche that enables it to coexist with other competing systems. In recent years, the share of trading volume on ATS has grown significantly, accounting for 20% of the trades in NASDAQ stocks and 4% of the trades in the NYSE stocks. As trading volume on ATS increases, smaller exchanges such as the American Stock Exchange and the regional exchanges come under tremendous competitive pressure. This in turn leads to consolidation in the securities markets in the form of the proposed merger of NASDAQ, American Stock Exchange, and the Philadelphia Stock Exchange. The increased activity on ATS has raised concerns for the SEC. For example, trading on ATS is not fully disclosed to public investors and adequate surveillance is lacking. Fair access is not currently required of ATS. On May 23, 1997, the SEC issued a Concept Release designed to reduce market fragmentation by regulating ATS activities. 1 On April 17, 1998, after reviewing comments received, the SEC proposed to allow ATS to choose whether to register as national securities exchanges or register as broker-dealers and comply with additional requirements. 2 In light of these developments, this paper compares market structures in NYSE, NASDAQ, and ATS to demonstrate how fragmented markets serve different trading groups and how the proposed changes affect the unique services provided by each market. In addition, this paper examines obstacles in establishing a national market system, which are not addressed by the SEC, including governance issues and incentive problems in the surveillance function in self-regulatory organizations.
Liquidity and the Simple Industrial Organization of Stock Exchanges
2002
It is usually thought that network externalities, which are inherent to liquidity, make it desirable to concentrate transactions in one stock exchange. This paper shows that when the value of liquidity stems from the ability of potentially reach as many traders as possible, the market is integrated when every broker meets every other broker in at least one exchange. Thus, fragmentation is not about trades being executed in di¤erent exchanges but of connectedness among brokers.
The Role of Market Makers in Electronic Markets: Liquidity Providers on Euronext Paris
Market makers affect various measures of the spread and price impact in complex and potentially conflicting ways. Euronext Paris affords a natural experiment to discern these tradeoffs because a third of the stocks are prohibited from using an apporteur de liquidite whereas two-thirds are not. We match pairs of stocks with and without such a Liquidity Provider and then separately control for firm-specific differences in share price, traded value, market capitalization, price volatility, and tick size. This dual procedure effectively controls for selectivity bias. Our findings indicate that Liquidity Providers (a) increase quoted spreads for thickly-traded firms from the first three traded value deciles, but reduce quoted spreads for the lower deciles; (b) consistently reduce effective spreads; and (c), consistently reduce realized spreads except for firms with low price midpoint volatility. The Euronext Liquidity Provider has no significant effect on price impact. These results suggest that the prohibition of market makers in the most liquid stocks is sound public policy. 6
Electronic trading and its implications for financial systems
The adoption of electronic trading systems has transformed the economic landscape of trading venues and is proving a force for change in market architecture and consequential trading possibilities. 2 The term "electronic trading" is used in many ways. In this paper, it refers mainly to trading in wholesale financial markets (as opposed to e-commerce more generally -see, for example, Long (2000) for a survey of the latter) and focuses on the central feature of electronic trading systems, automation of trade execution. Such systems usually also feature electronic order routing and dissemination of trade information and may link through to clearing and settlement. Electronic trading both removes geographical restraints and allows continuous multilateral interaction (whereas telephone trading allows only the former and floor trading only the latter). It allows much higher volumes of trades to be handled, and in customised ways that until recently would have been technically impossible or prohibitively expensive. This paper considers areas where these enabling effects have been particularly important in wholesale financial markets and how they raise wider, policy implications.
Liquidity and the Simple IO of Stock Exchanges
SSRN Electronic Journal, 2002
It is usually thought that network externalities, which are inherent to liquidity, make it desirable to concentrate transactions in one stock exchange. This paper shows that when the value of liquidity stems from the ability of potentially reach as many traders as possible, the market is integrated when every broker meets every other broker in at least one exchange. Thus, fragmentation is not about trades being executed in di¤erent exchanges but of connectedness among brokers.
The Changing Microstructure of European Equity Markets
SSRN Electronic Journal, 2000
In the last decade, the increased competition between European stock exchanges has reduced the cost of trading and increased the variety of trading mechanisms. The London Stock Exchange, which initiated the competition in 1986 by setting up the SEAQ-I market, attracted considerable trading volume in Continental equities in the late 1980s. Later, however, Continental exchanges recovered most of the trading volume from London upon restructuring their auction systems so as to offer very low trading costs, greater transparency and continuous trading via an automated order book. At the same time, the spreads quoted by SEAQ-I dealers increased considerably. Lately, potential competition by continuous auction systems is threatening even the market for British equities, and prompting the London Stock Exchange to replace its former SEAQ system with an automated order book. As in Continental Bourses, this automated auction system is expected to run in parallel with a dealership market for large trades. So trading systems appear to be converging towards a dualistic structure all over Europe. The paper documents these developments, and considers how the competition between European exchanges is likely to evolve and which opportunities and dangers the future may hold for them.
Regulating Exchanges and Alternative Trading Systems: A Law and Economics Perspective
Journal of Legal Studies, 1999
New trading technologies are transforming securities markets, and with their rise have come important questions regarding the regulation of new and traditional trading mechanisms. This article provides a law and economics perspective on the regulation of alternative trading systems. We argue that alternative trading systems play a distinct role in the market and in particular solve the conflict-of-interest problem that exists between brokers and dealers. We propose a general strategy for their regulation that incorporates this economic role. We suggest a regulatory framework that permits providers of services to opt into particular regulatory frameworks as a way of fostering innovation and competition. The functional approach we outline is consistent with the Securities and Exchange Commission's regulatory objectives of fairness, efficiency, and transparency of market transactions.