High Frequency Regulation: a New Model for Market Monitoring
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Equity Trading in the 21St Century
Equity Trading in the 21st Century February 23, 2010 James J. Angel Associate Professor McDonough School of Business Georgetown University Lawrence E. Harris Fred V. Keenan Chair in Finance Professor of Finance and Business Economics Marshall School of Business University of Southern California Chester S. Spatt Pamela R. and Kenneth B. Dunn Professor of Finance Director, Center for Financial Markets Tepper School of Business Carnegie Mellon University 1. Introduction1 Trading in financial markets changed substantially with the growth of new information processing and communications technologies over the last 25 years. Electronic technologies profoundly altered how exchanges, brokers, and dealers arrange most trades. In some cases, innovative trading systems are so different from traditional ones that many political leaders and regulators do not fully appreciate how they work and the many benefits that they offer to investors and to the economy as a whole. In the face of incomplete knowledge about this evolving environment, some policymakers now question whether these innovations are in the public interest. Technical jargon such as “dark liquidity pools,” “hidden orders,” “flickering quotes,” and “flash orders” appear ominous to those not familiar with the objects being described. While professional traders measure system performance in milliseconds, others wonder what possible difference seconds—much less milliseconds—could have on capital formation within our economy. The ubiquitous role of computers in trading systems makes many people nervous, and especially those who remember the 1987 Stock Market Crash and how the failure of exchange trading systems exacerbated problems caused by traders following computer-generated trading strategies. Strikingly, the mechanics of the equity markets functioned very well during the financial crisis, despite the widespread use of computerized trading. -
Impact on Financial Markets of Dark Pools, Large Investor, and HFT
Impact on Financial Markets of Dark Pools, Large Investor, and HFT Shin Nishioka1, Kiyoshi Izumi1, Wataru Matsumoto2, Takashi Shimada1, Hiroki Sakaji1, and Hiroyasu Matushima1 1 Graduate School of Engineering, The University of Tokyo, 7-3-1 Hongo, Bunkyo, Tokyo, Japan 2 Nomura Securities Co., Ltd.? [email protected] Abstract. In this research, we expanded an artificial market model in- cluding the lit market, the dark pools, the large investor, and the market maker (HFT). Using the model, we investigated their influences on the market efficiency and liquidity. We found that dark pools may improve the market efficiency if their usage rate were under some threshold. Es- pecially, It is desirable that the main users of the dark pool are large investors. A certain kind of HFT such as the market making strategy may provide the market liquidity if their usage rate were under some threshold. Keywords: Artificial Market · Dark pool · Large investor. 1 Introduction Dark pools, private financial forums for trading securities, are becoming widely used in finance especially by institutional investors [15]. Dark pools allow in- vestors to trade without showing their orders to anyone else. One of the main advantages of dark pools is their function to significantly reduce the market impact of large orders. Large investors have to constantly struggle with the problem that the market price moves adversely when they buy or sell large blocks of securities. Such market impacts are considered as trading costs for large investors. Hiding the information of large orders in dark pools may decrease market impacts. Moreover, from the viewpoint of a whole market, dark pools may stabilize financial markets by reducing market impacts[7]. -
The Future of Computer Trading in Financial Markets an International Perspective
The Future of Computer Trading in Financial Markets An International Perspective FINAL PROJECT REPORT This Report should be cited as: Foresight: The Future of Computer Trading in Financial Markets (2012) Final Project Report The Government Office for Science, London The Future of Computer Trading in Financial Markets An International Perspective This Report is intended for: Policy makers, legislators, regulators and a wide range of professionals and researchers whose interest relate to computer trading within financial markets. This Report focuses on computer trading from an international perspective, and is not limited to one particular market. Foreword Well functioning financial markets are vital for everyone. They support businesses and growth across the world. They provide important services for investors, from large pension funds to the smallest investors. And they can even affect the long-term security of entire countries. Financial markets are evolving ever faster through interacting forces such as globalisation, changes in geopolitics, competition, evolving regulation and demographic shifts. However, the development of new technology is arguably driving the fastest changes. Technological developments are undoubtedly fuelling many new products and services, and are contributing to the dynamism of financial markets. In particular, high frequency computer-based trading (HFT) has grown in recent years to represent about 30% of equity trading in the UK and possible over 60% in the USA. HFT has many proponents. Its roll-out is contributing to fundamental shifts in market structures being seen across the world and, in turn, these are significantly affecting the fortunes of many market participants. But the relentless rise of HFT and algorithmic trading (AT) has also attracted considerable controversy and opposition. -
Gibson, Christopher M
~-1;'· / r :r-- - UNITED STATES OF AMERICA RECEIVED Before the JUN 1 9 2017 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 OFFICE OF THE SECRE Administrative Proceeding File No. 3-17184 In the Matter of CHRISTOPHER M. GIBSON, Respondent. DIVISION OF ENFORCEMENT'S OPPOSITION BRIEF June 19, 2017 H. Michael Semler Gregory R. Boclcin Paul J. Bohr George J. Bagnall U.S. Securities and Exchange Commission Division of Enforcement 100 F Street, N .E. Washington, D.C. 20549 Counsel for Division of Enforcement r > Table of Contents INTRODUCTION ................................................................................................................. 1 THE EVIDENTIARY RECORD .......................................................................................... 1 THE INITIAL DECISION................................................................................................... 11 ARGUMENT ........................................................................................................................ 13 I. GIBSON VIOLATED SECTIONS 206(1) AND (2) OF THE ADVISORS ACT......... 13 A. Gibson Was An Investment Adviser Subject To Section 206 ............................ 13 1. Investors Were Told That Gibson Would Manage The Fund's Investments And Gibson Did So ................................................................... 14 2. Gibson Was An Investment Adviser Even If He Acted In The Name Of Geier Capital................................................................................. 15 3. Gibson Was an Investment -
Pre-Arranged Trading in the Securities Market 17 3.3
Page 1 of 1 23 May 2018 Circular No. DC/AM - 29 of 2018 SGX LAUNCHES SERIES 2 OF TRADE SURVEILLANCE HANDBOOK The inaugural Trade Surveillance Handbook was published in September 2016 as part of SGX’s collaborative efforts with Members to combat potential irregular trading activities, and enhance surveillance tools of Members. To build on these efforts, SGX has developed a second series of the Trade Surveillance Handbook (“Handbook 2”) with the aim to promulgate fair trading practices and uphold market integrity in our marketplace. Trade Surveillance Handbook – Series Two Handbook 2, featuring Wash trades, Order Management during Opening Routine and Momentum Ignition, seeks to provide Members with a better understanding of SGX’s expectations in relation to these trading practices in our derivatives markets. The Handbook also includes a set of surveillance guidelines and markers which Members may incorporate in detecting and examining these trading malpractices. This Handbook further provides as illustration, two cases heard before the independent Disciplinary Committee so that Members can appreciate the assessments and considerations of SGX and the Disciplinary Committee. The third case study sets out guidelines for Members and Trading Representative to consider in accepting and executing customers’ orders in the securities market. The Trade Surveillance Handbook 2 is attached in the Appendix. SGX to Continue Collaboration with Members and Stakeholders SGX will continue to work closely with Members and stakeholders to uphold robust compliance and surveillance standards, and encourage early disruption of potential irregular trading activities. All these are crucial to promoting greater investor confidence in our marketplace. Your feedback and questions on the Handbook are most welcome. -
A Pecking Order of Trading Venues
Journal of Financial Economics 124 (2017) 503–534 Contents lists available at ScienceDirect Journal of Financial Economics journal homepage: www.elsevier.com/locate/jfec R Shades of darkness: A pecking order of trading venues ∗ Albert J. Menkveld a, Bart Zhou Yueshen b, Haoxiang Zhu c, a Vrije Universiteit Amsterdam and Tinbergen Institute, De Boelelaan 1105, Amsterdam 1081 HV, Netherlands b INSEAD, Boulevard de Constance, 77300 Fontainebleau, France c MIT Sloan School of Management and NBER, 100 Main Street E62-623, Cambridge, MA 02142, USA a r t i c l e i n f o a b s t r a c t Article history: We characterize the dynamic fragmentation of U.S. equity markets using a unique data Received 16 September 2015 set that disaggregates dark transactions by venue types. The “pecking order” hypothesis Revised 13 June 2016 of trading venues states that investors “sort” various venue types, putting low-cost-low- Accepted 22 June 2016 immediacy venues on top and high-cost-high-immediacy venues at the bottom. Hence, Available online 8 March 2017 midpoint dark pools on top, non-midpoint dark pools in the middle, and lit markets at the JEL classification: bottom. As predicted, following VIX shocks, macroeconomic news, and firms’ earnings sur- G12 prises, changes in venue market shares become progressively more positive (or less nega- G14 tive) down the pecking order. We further document heterogeneity across dark venue types G18 and stock size groups. D47 Published by Elsevier B.V. Keywords: Dark pool Pecking order Fragmentation 1. Introduction R For helpful comments and suggestions, we thank Bill Schwert (ed- A salient trend in global equity markets over the last itor), an anonymous referee, Mark van Achter, Jim Angel, Matthijs decade is the rapid expansion of off-exchange, or “dark” Breugem, Adrian Buss, Sabrina Buti, Hui Chen, Jean-Edourd Colliard, Ca- role Comerton-Forde, John Core, Bernard Dumas, Thierry Foucault, Frank trading venues. -
Dark Pools and High Frequency Trading for Dummies
Dark Pools & High Frequency Trading by Jay Vaananen Dark Pools & High Frequency Trading For Dummies® Published by: John Wiley & Sons, Ltd., The Atrium, Southern Gate, Chichester, www.wiley.com This edition first published 2015 © 2015 John Wiley & Sons, Ltd, Chichester, West Sussex. Registered office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or trans- mitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com. Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor men- tioned in this book. -
Informational Inequality: How High Frequency Traders Use Premier Access to Information to Prey on Institutional Investors
INFORMATIONAL INEQUALITY: HOW HIGH FREQUENCY TRADERS USE PREMIER ACCESS TO INFORMATION TO PREY ON INSTITUTIONAL INVESTORS † JACOB ADRIAN ABSTRACT In recent months, Wall Street has been whipped into a frenzy following the March 31st release of Michael Lewis’ book “Flash Boys.” In the book, Lewis characterizes the stock market as being rigged, which has institutional investors and outside observers alike demanding some sort of SEC action. The vast majority of this criticism is aimed at high-frequency traders, who use complex computer algorithms to execute trades several times faster than the blink of an eye. One of the many complaints against high-frequency traders is over parasitic trading practices, such as front-running. Front-running, in the era of high-frequency trading, is best defined as using the knowledge of a large impending trade to take a favorable position in the market before that trade is executed. Put simply, these traders are able to jump in front of a trade before it can be completed. This Note explains how high-frequency traders are able to front- run trades using superior access to information, and examines several proposed SEC responses. INTRODUCTION If asked to envision what trading looks like on the New York Stock Exchange, most people who do not follow the U.S. securities market would likely picture a bunch of brokers standing around on the trading floor, yelling and waving pieces of paper in the air. Ten years ago they would have been absolutely right, but the stock market has undergone radical changes in the last decade. It has shifted from one dominated by manual trading at a physical location to a vast network of interconnected and automated trading systems.1 Technological advances that simplified how orders are generated, routed, and executed have fostered the changes in market † J.D. -
The Bright Sides of Dark Liquidity
The Bright sides of Dark Liquidity YUXIN SUN1, GBENGA IBIKUNLE*2, DAVIDE MARE3 This Version: June 2018 Abstract Modern financial markets have experienced fragmentation in lit (displayed) order books as well as an increase in the use of dark (non-displayed) liquidity. Recent dark pool proliferation has raised regulatory and academic concerns about market quality implication. We empirically study the liquidity commonalities in lit and dark venues. We find that compared with lit venues, dark venues proportionally contribute more liquidity to the aggregate market. This is because dark pools facilitate trades that otherwise might not easily have occurred in lit venues when the limit order queue builds up. We also find that the spread of the trades subsquent to dark trades tends to be narrow. This is consistent with the order flow competition between venues in that dark trade might give market makers a signal of uninformed liquidity demand to narrow the spread. Based on the recent dark volume cap regulation under MiFID II, we provide causal evidence that dark trading cap brings a negative impact on transaction cost. JEL classification: G10, G14, G15 Keywords: Dark pools, dark trading, MiFID, Multilateral Trading Facilities (MTFs), Liquidity commonality, trading liquidity, Double Volume Cap (DVC), regulation We thank Carol Alexander, Carlo Gresse, Thomas Martha, Sean Foley, Petko Kalev, Tom Steffen, Khaladdin Rzayev, Satchit Sagade, Monika Trepp, Elvira Sojli, Micheal Brolley and Lars Norden for helpful comments and discussions. We are also grateful to the participants at the 2nd Dauphine Microstructure Workshop, the 1st SAFE Market Microstructure Conference, the 1st European Capital Markets Workshop and the 2018 EFMA conference. -
2012 4Th Quarter Stock Market Commentary ALGOS GONE WILD
2012 4th Quarter Stock Market Commentary ALGOS GONE WILD "Why join the navy if you can be a pirate?" - Steve Jobs The Sixties were a decade of counterculture and social revolution – antiwar protests, the rise of feminism, sexual emancipation, and experimentation with illegal drugs. No rock group captured the ethos of that period better than the Beatles, with songs like Revolution on the White Album inspired by the protest movement. The biggest-selling album of the decade was Sgt. Peppers Lonely Heart Club Band. One song on the album, credited to Lennon-McCartney, but primarily written by John Lennon, was Lucy in the Sky with Diamonds, considered the greatest example of psychedelic rock. The lyrics describe a phantasmagorical world filled with “tangerine trees” and “marmalade skies.” Lennon claimed that the song was inspired by a nursery school drawing by his son, Julian, but speculation quickly arose that the song was really a hidden tribute to an LSD-induced trip, especially since the first letters of the nouns in the song’s title spelled LSD. Lennon denied the hidden meaning, although Paul McCartney confirmed it an interview thirty five years later. Other Beatles’ songs also contained hidden drug references. Got to Get You Into My Life, for example, was an allusion to marijuana. My own musical tastes run more to the Eagles, where the hidden messages seem to have presaged many of the problems plaguing the financial system that have caused many individual investors to abandon the stock market. After all, the enigmatic Hotel California, an inn where “you can check in, but you can never leave,” may be referring to the illiquidity imposed on investors by hedge fund operators that restrict the ability of investors to withdraw their funds during periods of market volatility. -
Staff Report on Algorithmic Trading in U.S. Capital Markets
Staff Report on Algorithmic Trading in U.S. Capital Markets As Required by Section 502 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 This is a report by the Staff of the U.S. Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, findings, or conclusions contained herein. August 5, 2020 1 Table of Contents I. Introduction ................................................................................................................................................... 3 A. Congressional Mandate ......................................................................................................................... 3 B. Overview ..................................................................................................................................................... 4 C. Algorithmic Trading and Markets ..................................................................................................... 5 II. Overview of Equity Market Structure .................................................................................................. 7 A. Trading Centers ........................................................................................................................................ 9 B. Market Data ............................................................................................................................................. 19 III. Overview of Debt Market Structure ................................................................................................. -
ESMA's Technical Advice on Possible Delegated Acts Concerning the Market Abuse Regulation
Final Report ESMA’s technical advice on possible delegated acts concerning the Market Abuse Regulation 3 February 2015 | ESMA/2015/224 Table of Contents 1 Executive Summary ....................................................................................................... 5 2 Specification of the indicators of market manipulation .................................................... 7 2.1 Mandate (extract) ..................................................................................................... 7 2.2 Analysis.................................................................................................................... 7 2.2.1 Scope of the analysis ....................................................................................... 7 2.2.2 General approach taken ................................................................................... 8 2.2.3 Approach regarding the extended scope of MAR ............................................10 2.2.4 Manipulation of benchmark calculation ............................................................10 2.2.5 Trading facilities services ................................................................................11 2.2.6 Orders to trade ................................................................................................11 2.2.7 Approach regarding cross-venue and cross-product market manipulation .......11 2.2.8 Approach regarding the specificities in an automated trading environment .....13 2.2.9 Approach regarding some examples of practices of market manipulation