This book is a comprehensive account of Competition in a Consolidating Environment, a conference hosted on May 2, 2006 in the annual series of the Zicklin School of Business at Baruch College. Doing so may give us greater confidence in the strength of our markets to continue moving forward. The session, led by Mike Murphy, was titled "The Counterforce of the Buying Side." After coming up with this title, I found out that some people didn't know the concept of countervailing power.
List of Participants
Chapter 2
We are on the border between the Middle East and the southern part of the Gulf. I don't think any of the national regulators in Europe - the FSA certainly - would be very keen on having a UK. But many of the ownership issues surrounding LCH Clearnet and Eurex Clearing stand in the way of that.
Chapter 3
At the same time, it is important for the listing company to have a dominant market share of the products that are listed on your stock exchange. If you don't have the three components – speed, price and liquidity – you're not even in the game. CORMACK: The most significant changes, outside of the floor community, will be in the August-September period.
Chapter 4
In the IPO market today and over the past 5 years, we have been able to target about 30% of companies going public. We have a very strong business here, although we are only approaching a third of the market. We believe that we provide the best market in the world in terms of maximum liquidity, reduced volatility and low transaction costs.
Our publicly traded companies tell us that this is one of the most crucial things we offer. And then there are the market quality issues associated with the specialist trade, including lowering transaction costs. That's a real hallmark of the business you have when you're on the NASDAQ with these companies (not that there aren't many good companies on the NYSE that we'd love to have too!).
We've seen a lot of people get into it and then get out of it because of the economy. Will the CME want to become something of a JV of one of the stock exchanges. I even wonder about the sophistication of the listed companies on the market structure issues we are talking about here.
At the end of the day, our issuers do a very rigorous exercise in terms of looking at the markets.
Chapter 5
Emergence of New Competition
Chapter 6
This scenario has changed with electronic trading and the reduction of the size of the usual commission payment. We're losing a lot of customization and special management that we've had all along. All that matters is how good your performance is at the end of the day.
Focusing on small pieces of it is part of the process of overall investment performance. At the end of the day you know if it worked. In England, the FSA is light years ahead of the SEC in the unbundling process.
The role of the expert will be similar to that of the above prop counter. I have said over the years that the real strength of the NYSE is that it is a hybrid. And under stock exchanges will be an extremely lively part of market development.
It should enable you to get your business done on the trading floor. But in the end, the hybrid system will continue until 3:59 p.m. KINNEY: We are very much opposed to the trade reporting facility in terms of the direction it is going.
Price Discovery, Quantity Discovery, and Network Effects
To address some of the broader issues involved, we discuss the operations of the NYSE's current floor-based system that provides both price discovery and quantity discovery, albeit less than perfectly. We also raise several key questions: How will the electronic and rapid market component affect the NYSE's current network operations? 4 The prices we actually see in a market reflect the orders that participants submit, the market structure that determines how orders are handled and translated into trades, and the size of the market (eg, number of participants and/or market cap).
4 For further discussion of price discovery dynamics, see Paroush et al., Schwartz and Wolf (2006). To date, the Big Board still receives just over 70% of the order stream for its listed stocks. That is, matching a large buy and sell order in one transaction can speed up the execution of the whole package.
8 And so mediation will maintain its importance regardless of the existence of an electronic platform. At this time, how the introduction of the NYSE flash market will change the balance between order book trading, floor trading and the upper floor market is not very predictable. 7 In a fast market-only environment, the role of the floor broker shifts to brokers who process orders electronically.
8 See Boehmer (2005) for further discussion and analysis of the trade-off between the differences in speed and cost of trading in an electronic system compared to market trading.
Off-Exchange Trading
It is possible that the division between order book-assumed price discovery and off-book delivered quantity discovery will be sharpened. On the other hand, if the NYSE's new market structure facilitates the handling of large orders more easily, the two processes may be brought into closer harmony. Before we try to look into the future, let's first take a broad look at OTC trading and then get a perspective on the current importance of rapid order book market trading on one exchange, Germany's Deutsche Börse, where the primary focus is on electronic trade.
Evidence on the Prevalence of Order Book Trading in a Fast Market Environment
The value-weighted average reflects the split between on-book and off-book trading for the representative euro value of trading. We see in Exhibit 8.1 that the value-weighted averages for adjusted on-book activity are uniformly higher than the value-weighted averages for the unadjusted data—the percentage point differences range from 3 to 10 (43% vs. 40% for SDAX stocks and 49% for 39% for DAX shares). Appendix 8.1. January 2006 German On-Book market share by trading volume in euros (value-weighted, both adjusted and unadjusted).
All of the equally weighted on-book trading averages are higher than the comparable value-weighted averages. The on-book market share averages for both the adjusted and unadjusted data and for both the equal weighted and volume weighted averages range from 38%. Overall, our four different ways of assessing the percentage of on-book trading show a fairly consistent picture.
Exhibit 8.2 January 2006 Unadjusted Share of the German Book Market by Trading Volume in Euros (both value-weighted and equal-weighted), in terms of cascade settlement volume. Across all four indices, Exhibit 8.3 reveals a clear size-based difference between the percentages of on-book and off-book trading, which is implicit in the relationship between the simple and value-weighted averages shown in Figures 8.1 and 8.2. Exhibit 8.3 July 2003–June 2005 Unadjusted German market share, equally weighted by euro trading volume, in terms of cascade settlement volume.
For the 2-year sample period, the monthly on-book market share had a standard deviation of 4% around its mean of 56%.
Our Foggy Crystal Ball
If the components of the hybrid work effectively together, they will provide valuable choices for participants. Will order flow in the NYSE and other flash market components seriously erode the profitability of floor traders. The new trading rule through the SEC, which prohibits transactions that "trade" the best posted quotes (highest bids and lowest bids), will significantly level the playing field for quick market competitors.
We have seen the extensive network of the NYSE as the producer of two services of extraordinary importance: price and quantity discovery; Without question, the introduction of the Hybrid Market will affect the operation of this network. We have estimated the size of book trading in Germany, where an electronic platform is dominant. The reassuring news for the Hybrid Market is that trading in Germany is roughly split 50–50 between book and off-book, despite the fact that this national market offers a more modern electronic trading platform.
This is consistent with an opinion expressed by William Donaldson in 2004: "Leadership in our market depends on taking advantage of technology while maintaining the benefits of the floor auction model for all investors." 17. A word of caution: If the fast market component of the Big Board's new Hybrid Market reduces floor activity or ultimately results in the floor shutting down, many large orders will migrate elsewhere. The role of floor broker will transition to agents who "slice and dice" and trade electronically, as they do now for NASDAQ-listed names.
17 Donaldson was formerly CEO of the NYSE and Chairman of the Securities and Exchange Commission.
Al holds degrees from the University of Pennsylvania's Wharton School of Finance (MBA) and the University of Virginia (BA). At the time of the conference, Mike Cormack was Executive Vice President of the NYSE Group, Inc. Culhane serves on the board of the NYSE and is a member of the Economic Club of New York.
He is also a member of the Statistical Advisory Group of the World Federation of Stock Exchanges. He is currently a board member of the Australian Securities Exchange and holds a CFA charter. He is a professor of applied theory of capital markets at the University of Basel and a member of the international advisory board of the Instituto de Empresa in Madrid.
Prior to this position, she was executive vice president of the New York Stock Exchange group since June 1995. At the time of the conference call, he was Director of Equity Trading at Merrill Lynch Investment Management. At the time of the conference call, John McGonegal was Senior Vice President, Equities at the American Stock Exchange.
He co-authored the 1997 book Technology Trends in the Securities Industry: Spending, Strategies, Challenges and Changes.
