{"title":"What has Changed in Four Years?","authors":"Robert H. Battalio","doi":"10.1093/OSO/9780198829461.003.0006","DOIUrl":"https://doi.org/10.1093/OSO/9780198829461.003.0006","url":null,"abstract":"This chapter revisits the findings of Battalio, Corwin, and Jennings (2016), who used public order routing data to examine the order routing of several large retail brokerages in 4Q2012. They found that brokerages generally employed one of two order routing strategies: they appeared either to route all customer orders in a given stock to a market maker (wholesaler), or to route marketable orders to wholesalers and nonmarketable orders to exchanges that offer relatively large liquidity rebates. Importantly, the researchers also provided empirical evidence suggesting that routing orders in a manner that maximizes order flow payments can result in diminished execution quality. This chapter examines the extent to which retail broker order routing decisions and patterns have changed since 2012. It finds that despite increased public and regulatory scrutiny, the practice of routing retail orders to maximize order flow payments remains pervasive.","PeriodicalId":199330,"journal":{"name":"Global Algorithmic Capital Markets","volume":"47 2","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133719867","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"A Case Study in Regulatory Arbitrage and Information Asymmetry","authors":"Haim Bodek","doi":"10.1093/OSO/9780198829461.003.0003","DOIUrl":"https://doi.org/10.1093/OSO/9780198829461.003.0003","url":null,"abstract":"While much of the public debate surrounding high frequency trading (HFT) and algorithmic trading has centred on speed, less has been said about the circumvention of regulation via special order types—complex and often non-transparent ways for high frequency traders to interact with exchange markets and other trading venues, allowing them to achieve a favourable execution position at the expense of other market participants. This chapter documents the special order types used by high frequency traders, the absence of adequate disclosure by exchanges, and the problematic interaction between order types designed to accommodate HFT strategies and the order types typically employed by public investors and agency brokers.","PeriodicalId":199330,"journal":{"name":"Global Algorithmic Capital Markets","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131216926","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Timothy Baikie, T. Stern, Susan Greenglass, M. Jensen
{"title":"A Framework for Responsive Market Regulation","authors":"Timothy Baikie, T. Stern, Susan Greenglass, M. Jensen","doi":"10.1093/oso/9780198829461.003.0013","DOIUrl":"https://doi.org/10.1093/oso/9780198829461.003.0013","url":null,"abstract":"This chapter submits that a regulator’s raison d’être is not simply to react to market issues but to be proactive and to follow and to understand the changes and the business decisions in the market. Regulators must be able to change and foster a responsive regulatory climate that allows innovation to occur, while ensuring that core principles such as investor protection are preserved and that the impact of any change is monitored. To that end, the chapter highlights the role of the Ontario Securities Commission in the Canadian regulatory landscape, and details how it has addressed the multitude of challenges posed by recent developments in Canadian capital markets, including the growth in dark liquidity and the emergence of high frequency trading.","PeriodicalId":199330,"journal":{"name":"Global Algorithmic Capital Markets","volume":"32 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126108671","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Algorithmic Trading and Market Regulation","authors":"Yesha Yadav","doi":"10.1093/OSO/9780198829461.003.0009","DOIUrl":"https://doi.org/10.1093/OSO/9780198829461.003.0009","url":null,"abstract":"This chapter examines the interaction between automated, algorithmic markets and fundamental legal concepts in securities regulation, an area to which policy-makers have devoted little attention. Recent advances in communication technology have facilitated the rapid rise of algorithmic trading and automated market mechanics. This chapter surveys eight framework notions critical to regulation and discusses how these might apply in an automated marketplace. Specifically, it examines reasonableness; strict liability; foreseeability; contribution; scienter; damage and harm; evidence and proof; and disclosure and information dissemination. This analysis reveals how deeply-held assumptions guiding regulatory law sit uneasily in today’s complicated and fast-paced markets.","PeriodicalId":199330,"journal":{"name":"Global Algorithmic Capital Markets","volume":"106 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125464419","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Naked Open-Market Manipulation and Its Effects","authors":"M. Fox, L. Glosten, G. Rauterberg","doi":"10.1093/oso/9780198829461.003.0008","DOIUrl":"https://doi.org/10.1093/oso/9780198829461.003.0008","url":null,"abstract":"More than 80 years after US federal law first addressed stock market manipulation, there is still dispute about manipulation law’s foundational principles; this chapter aims to provide clarity by offering an analytical framework for understanding a specific manipulation. There has been a sharp split among the federal circuits concerning manipulation law’s central question: Can trading activity alone ever be considered illegal manipulation? Economists and legal scholars do not agree on whether manipulation is possible in principle, let alone on how to address it properly in practice. The framework offered by this chapter aims to help clarify federal law and may guide regulators in successfully prosecuting financial law’s most intractable wrong. We draw on the tools of microstructure economics and the theory of the firm to provide an analysis of a particular form of manipulation, identify who is harmed by it, and evaluate the social welfare effects.","PeriodicalId":199330,"journal":{"name":"Global Algorithmic Capital Markets","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132533142","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Introduction and Overview","authors":"W. Mattli","doi":"10.1093/OSO/9780198829461.003.0001","DOIUrl":"https://doi.org/10.1093/OSO/9780198829461.003.0001","url":null,"abstract":"A key component of the infrastructure of global capital markets—exchanges—has undergone dramatic transformations since the start of the twenty-first century. Two are particularly notable. First, traditional floor trading and ‘market-making’ by humans have been replaced by supercomputer interactions and algorithmic high-speed trading. And, second, previously centralized domestic exchange structures have become decentralized or fragmented, with many exchanges and alternative trading platforms competing for business. This chapter introduces a unique set of chapters by leading scholars, industry insiders, and regulators shedding light on how these changes have impacted on core public policy objectives such as investor protection, reduction of systemic risk, fairness, efficiency, and transparency in markets for the benefit of society at large.","PeriodicalId":199330,"journal":{"name":"Global Algorithmic Capital Markets","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133829913","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The FX Race to Zero","authors":"D. Marcus, Miles Kellerman","doi":"10.1093/OSO/9780198829461.003.0004","DOIUrl":"https://doi.org/10.1093/OSO/9780198829461.003.0004","url":null,"abstract":"This chapter traces how technological changes have affected the structure and operation of currency markets, and examines the issues associated with these developments. These changes have caused significant concern within the industry and raise complicated questions about whether additional regulation is necessary. Nevertheless, they have received relatively little theoretical or empirical attention in comparison to similar developments in equities markets. To address this gap, the chapter outlines the primary market structural issues in foreign exchange markets, including potentially abusive trading techniques, last look, and perverse incentives to monetize access to speed and information. Further, the chapter provides an example of a high frequency latency arbitrage opportunity and discusses the potential mitigating impact of a randomized delay mechanism. This is followed by an analysis of recent regulatory efforts to address these issues in the UK, the EU, and the US, in addition to a review of industry-led initiatives to establish best practices for algorithmic traders and venue operators. The chapter concludes by discussing key questions and constraints for future research.","PeriodicalId":199330,"journal":{"name":"Global Algorithmic Capital Markets","volume":"56 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131305472","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Regulating High Frequency Trading and Dark Liquidity in Australia","authors":"Greg Medcraft","doi":"10.1093/OSO/9780198829461.003.0011","DOIUrl":"https://doi.org/10.1093/OSO/9780198829461.003.0011","url":null,"abstract":"This chapter focuses on how the Australian Securities and Investment Commission’s general regulatory approach has informed its response to the challenges facing investor trust and confidence as a result of high frequency trading and the growth in dark liquidity. Technological change, increasing competition, and globalization mean that financial markets are changing more rapidly than ever before, posing a number of challenges from a regulatory perspective. This is particularly true for exchange markets: innovation and advances in information technology are delivering lower costs for investors, yet alongside these positive developments is a need for continued testing, monitoring, and accountability. In this context, the chapter discusses ASIC’s responses to both real and perceived problems in the market, as well as the changes stimulated by ASIC’s actions.","PeriodicalId":199330,"journal":{"name":"Global Algorithmic Capital Markets","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114478376","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"High Frequency Trading and Circuit Breakers in the EU","authors":"Steffen Kern, G. Loiacono","doi":"10.1093/OSO/9780198829461.003.0012","DOIUrl":"https://doi.org/10.1093/OSO/9780198829461.003.0012","url":null,"abstract":"This chapter reviews the fundamental workings of the EU regulatory framework and its implications for high frequency trading (HFT) and the latest findings on the market realities in the EU. Over the last decade, securities trading landscapes have undergone significant change, with the emergence of HFT being one of the most important developments in this context. At the same time, the EU has made landmark legislative advances with the aim of increasing investor protection, market order, and financial stability, and of containing risks in those areas. As the new MiFID2 legal framework takes effect, a wealth of new data and evidence will become available in coming years that will improve understanding of HFT patterns, the effectiveness of circuit breakers, and their optimal calibration.","PeriodicalId":199330,"journal":{"name":"Global Algorithmic Capital Markets","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125700156","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Better ‘Best Execution’","authors":"Christopher Nagy, Tyler Gellasch","doi":"10.1093/OSO/9780198829461.003.0007","DOIUrl":"https://doi.org/10.1093/OSO/9780198829461.003.0007","url":null,"abstract":"This chapter reviews best execution and new disclosure obligations in relation to investment advisers as well as brokers; it also provides an overview of the strategies they use to meet their rapidly changing obligations. Investment advisers and brokers are confronted with increasingly stringent regulatory and client expectations to fulfil their duty of best execution. Regulators in Europe have become active in developing formal best execution obligations, but the US Securities and Exchange Commission (SEC) is lagging behind in providing a clear framework for best execution. This chapter first outlines the analogous best execution obligation for broker-dealers and explores the contours of the SEC’s expectations for investment advisers. It then assesses the impact of new European best execution obligations and the role of public disclosures in aiding the fulfilment of best execution duties. It concludes by examining various strategies used by investment advisers to fulfil their evolving duties.","PeriodicalId":199330,"journal":{"name":"Global Algorithmic Capital Markets","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128627631","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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