Market Structure Map

Helping IROs understand short-term market structure to maintain long-term peace of mind.

May 14-18 – The New 1-2: Research and Trading

NOTE: We’ll be lounging around booth 110 at NIRI National June 3-6 in Orlando. Come see us! If you’d like extra time to yack about this whole market structure thing, grab a block of time with us.

The big Prime brokers, which also top the program-trading and equity research charts, again controlled liquidity, leading all trading forces in our sample set on four of five trading days and peaking at 45% of order flow on May 17. Why care?

For one, consider the “best execution” rule requiring broker dealers to provide clients with good price, liquidity, and speed. ECNs made hay, speaking colloquially, by automating pricing mechanisms, access and execution, thus cornering the market-order business. Market orders, you’ll recall, trade at the best prevailing price rather than at specified prices like limit orders.

Speaking of limit orders, next came the machine-driven limit-order specialists like ITG, Interactive Brokers, Lime Brokerage and so on, which garnered the professional trading market and forced other broker dealers to focus on speed, execution mathematics (like baskets, pairs and other trading models) and even logistical differentiators such as how close your servers were to the market center. At the same time, crossing platforms sprang up to serve big investors frustrated by order fragmentation (difficulty in getting blocks of shares – which is even worse under Reg NMS).

Now, big broker dealers have mastered these technological feats themselves. Increasingly, we see multiple desks at a given Prime running what we’re able to infer are different trading strategies that perhaps formerly were farmed out (or let’s say, routed away). Have you, for instance, seen multiple desks from Merrill or JP Morgan or CIBC trading your stock? Wonder why? It’s likely a division of labor – derivatives, programs, leveraged portfolios, agency brokerage, professional trading, etc.

Correspondingly, we’ve seen the Big Three – electronic platforms, speculative trading systems and the major Prime brokers – competing much more closely for order flow. And also at the same time, have you noticed that equity research notes from your analysts now often have contact information for the equity trader, the specialty equity trader and the derivatives trader, along with the research analyst and his or her associates?

Where research and banking were the old one-two punch (knocked out by then political aspirant and now NY governor Elliot Spitzer), research and trading today go hand-in-hand, and correctly so. It's a good idea to learn which of your market participants are adept at both.

One more reason to understand your market structure, IROs.

 

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Market Structure Map

Our weekly Market Structure Map provides unique insights — free — on trading markets, with an exclusive focus on helping investor-relations professionals keep cool in the IR chair.

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