Thoughts from the STA Market Structure conference 2021

October 1, 2021

We were among the many in-person participants at the Securities Traders Association’s Annual Market Structure Conference in Washington DC October 6-8. The complexity of our markets and the innovation around them was on full display. Several interesting panels centered on questions around the future of Payment for order flow (PFOF) and what Chairman Gensler’s review of the practice would yield. My opinion is pretty simple, which should not be considered my firm’s position on the topic. Think about it like air in a balloon. As you squeeze one side, the air moves to the other. Squeeze too much, and the balloon pops. PFOF is no different. Wall Street needs to be compensated for taking on the risk and operational complexity of executing trades on behalf of millions of disparate customers. That compensation can either come in as a commission or as a percentage of the spread. There is no free lunch. If we eliminate PFOF, you could reasonably argue that we should also eliminate rebate structures on exchanges. Commissions would then return, transaction fees from exchanges too; they would have to.

Another interesting topic was the emergence of Crypto trading. The notion that retail investors like Crypto, and want to trade it 24/7, settle instantaneously on the blockchain, etc. The assumption is that equity trading will naturally move in that direction as well. Before we can snap our fingers and make that happen, consider how perhaps a mutual fund could strike a NAV when there is continuous trading without a closing price. Or given concerns about the fragmentation of liquidity due to the large numbers of trading venues out there, what happens when you then fragment time? Concentrating liquidity can tend to improve execution outcomes because increased competition leads to tighter spreads. Again, circling back to the revenue question- how does one get compensated for doing this business with compressed rates and such thin margins, how does a brokerage firm support and staff for continuous trading? While this may be part of our future, there is much work to be done get from here to there. At Fidessa, this means more automation and more sophistication around our low touch offerings. Our algorithms must continually get more competent, and we are leveraging AI and machine learning to adjust to different volume profiles and improve performance from one day to the next. Our Algo wheel product ADSA allows clients to create their strategies, directing and moving their flow between internal and third-party algorithms in their quest for best execution. All these automation enhancements speed up the processing time for client orders, and allow for a more 24/7 world in the future.

The last topic I want to highlight is centered around sports betting. A spokesman from NASDAQ was talking about creating products around sports betting. Again, my opinion does not reflect my firm’s opinion, but to me, this went too far. I think it is quite different to make an investment based on the fundamentals of a company, its cash flows and historical performance than it is to bet on whether Carmelo Anthony will hit three pointers in the last 30 seconds of a game. People will argue with me, saying there are as many and as deep stats on every movement of every player in professional sports. Still, I worry about the integrity of our profession when we mix it with games of chance.

Regardless, it is fascinating to see the direction of travel and who the influencers of that direction are. Do we see a pivot from institutions driving these decisions to retail? What are the ramifications of regulations? Are the lines between investing and betting getting too blurry?

In all, it was great to see so many friends, colleagues, competitors, and clients in person. Many thanks to the STA for pulling off such a high-quality event.

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