E-trading main driver behind Reg NMS

Rise of machines led to contentious regulation, says Andresen

The rapid evolution of electronic trading in the equities market in the last decade has not only forced new regulation upon equities traders, but is also driving a return to levels of block trading not seen since the late 1990s.

That was the prediction of Matthew Andresen, president of Citadel Execution Services, speaking at the Securities Industry and Financial Markets Association Technology Management in New York.

“I predict that in the coming years we are going to see substantial consolidation between asset groups to such an extent that in a few years we will look back and think it was strange that equities and equity derivatives were traded separately,” Andresen said.

“I think we will also see a return to large scale block trading. The level really dropped after the dot-com bubble burst, but people are still in need of large volumes of liquidity,” he added.

Andresen’s speech focused on how electronic trading has transformed the look of the equities market in the space of a single decade. “E-trading on equities really began back in 1997 and it worked in harmony with the old-fashioned means until about 2002. This success came at a price however, since the regulatory framework governing equities never contemplated that the rise of computers could force human beings out.”

“Even though side-to-side trading between electronics and people worked it was a short-term solution and of course, as we all know, the final answer to the challenge of e-trading was Reg NMS,” he added.

Andresen concluded by touching on the futures market and a key difference between the futures market and other types of trade.

“Crucially, some futures exchanges, like the operation in place at the Chicago Mercantile Exchange, have their own clearing houses and this effectively eliminates settlement risk in different markets. This is something that other instruments, such as equities options market, do not have since they have to share clearing houses. This is a big difference for the equities sector to think about,” Andresen concluded.