2014 will go down in history as an inflection point for market structure. The year’s headlines signal the approach of momentous changes in the months ahead. Before we leap headlong into 2015, let’s take a look back, in no particular order, at the 10 biggest market structure events of the past year:
1. Flash Boys – Ask any industry veteran and they’ll tell you that the single most pivotal moment of 2014 came on March 31, the day Michael Lewis published Flash Boys: A Wall Street Revolt. Initially, industry insiders perceived the book as a flash in the pan (pun intended) and believed that it would be summarily dismissed by the public. To the contrary, the book served as a constant catalyst in 2014 for public discourse and a growing quorum for change.
2. Lewis/Katsuyama/O’Brien CNBC Interview – Undoubtedly one of the most watched and most heated segments on CNBC in years, this television encounter ultimately forced O’Brien to correct his own misstatements and make an abrupt departure from Direct Edge.
3. FINRA ATS disclosure – What began when Credit Suisse announced that they would cease publishing their Dark Pool volumes (a move that rankled both FINRA and the SEC), ultimately climaxed with FINRA’s ATS disclosure of ATS volumes.
4. Mary Jo White Speech – One of the most pivotal speeches by any SEC Chair in recent history, White’s June 5th speech at the Sandler O’Neill Brokerage Conference was a landmark address. White broke new ground for the Commission by calling for the creation of a market structure advisory committee and a comprehensive, data-driven review of equity market structure.
5. Levin Hearing – On June 17th, the Permanent Subcommittee on Investigations, chaired by Senator Carl Levin (D-MI) and Senator John McCain (R-AZ) as ranking member, grilled firms on inherent conflicts of interest, payment for order-flow and Best Execution in the market. The hearing also considered the impact such conflicts have on consumer confidence.
6. Schneiderman Attacks Dark Pools – Hopping on the Flash Boys bandwagon in 2014 was New York State Attorney General Eric Schneiderman, who filed a lawsuit against Barclays on June 25th for falsely marketing the extent of HFT activity in its Dark Pool, LX. And while the suit lives on into 2015, the fallout thus far has been consolidation and closure, with Wells Fargo shuttering its dark pool and Citi announcing plans to close its ECN LavaFlow.
7. Tick Size Pilot – Congressional pressure from the JOBS Act spawned the SEC sponsored experiment to draw more investors into trading smaller companies. The program seeks to expand the minimum tick size for certain small-company stocks to 5 cents and contains controversial subjects such as a “Trade-at” provision (See: KOR Comments on Tick Pilot).
8. Adoption of Reg SCI – Regulation Systems Compliance and Integrity, or Reg SCI, was borne out of the aftermath of the Aug. 2, 2013 KCG trading fiasco. Designed to better insulate the market against technical failures, Reg SCI received unanimous approval in November. While the rule seeks to deter market infractions, it is interesting to note that KCG, which sparked the genesis of the rule, will be exempt from most aspects of it.
9. SEC fines NYSE for data distribution – On Sep 14th, the SEC announced the first ever fine against an exchange operator for Improper Distribution of Market Data. NYSE agreed to a $5 million dollar penalty and to undertake significant reforms to settle the SEC’s charges that it provided improper early access to market data.
10. ALS Ice Bucket Challenges – One part challenge, one part charity, the ALS Ice Bucket campaign swept the industry, clogging Twitter and Facebook feeds over the summer of 2014 and boasting the participation of notable industry veterans such as Joe Ratterman (Bats Global Markets), Gary Katz (ISE), Terry Duffy (CME), Mike Cahill (OCC), Remco Lenterman (IMC), Rich Repetto (Sandler O’Neill), Daniel Coleman (KCG) and many more.
Volume Recap – Equities
2014 saw modest growth in equity volume, which rose 3% by year’s end. Internalized volumes averaged 36% in 2014.
Volume Recap – Options
OCC cleared contract volume reached 4,333,019,384 contracts in 2014, representing a 4% increase from the 2013 volume of 4,170,855,768 contracts. 2014 marks the second highest year for OCC cleared contract volume to date behind 2011's record volume of 4.6 billion contracts.
Predictions for 2015
While 2014 served to spark debate, 2015 will signify change and rollback. Here are a few of our predictions:
1. Rolling back Dodd-Frank – With Republicans taking over the Senate and retaining control of the House, Dodd-Frank rollback is likely and already underway. While we don’t see a full rollback, we do expect regulators to peel back some of the Swap rules and continue their push to water down certain aspects of the rule.
2. Tick Pilot – The SEC is under tremendous pressure from Congress to roll out the Tick Pilot and with the comment period for the published rule having ended in December of 2014, we’ll see a finalized version of the rule in 2015, albeit a scaled back version.
3. Continued ATS demise – Given increased scrutiny, the ATS consolidation and closure trend will likely continue into 2015.
4. Best Execution – With FINRA and SEC investigations into Best Execution, we will see fines and censures on Best Execution for the first time in 6 years.
5. Reduced Access Fees and scaling back Maker Taker – The announcement of ICE’s Grand Bargain and a BATS reform calling for lower access fees (see "A Grand Bargin, Not so fast") will both very likely come into play in 2015.
6. IEX Exchange Application – 2015 could well be the year the Upstart ATS files to become an exchange operator.
7. Sale of the NYSE – This is a very real possibility and could happen as early as this year.
8. Proposed Trade-At in Active securities – In conjunction with a reduction in Maker Taker fees, there is high probability that the SEC may propose a “Trade-at” test in a handful of actively traded stocks.
9. 605/606 reform – Low hanging fruit for the SEC, we expect that reform of order disclosure rules 605 and 606 will be proposed in 2015 (See KOR 605/606 reform comments).
10. HFT – HFT will be further defined in 2015. Likewise, definitions of what liquidity provisioning is will become clearer this year. We also anticipate increased disclosure from ATS operators.