Market Structure: What we Know, and What we Need to Know

Transcription

1 Market Structure: What we Know, and What we Need to Know Presented by Gregg E. Berman, Senior Advisor to Direct of SEC Division of Trading and Markets, 12th Annual SIFMA Market Structure Conference September 21, 2011, New York [A] much more complex form of fragmentation comes from the ability of market participants to trade the same stock via multiple products. For instance, an investor who wants exposure to stocks composing the S&P 500 index can do so by:

2 Purchasing those individual stocks; Purchasing call options or selling put options on those stocks (both on exchanges and over-thecounter); Purchasing call options or selling put options on the index itself (also both on exchanges and over-thecounter); Purchasing futures contracts on the index, or on individual stocks; Investing in shares of a mutual fund that holds individual S&P 500 stocks, or otherwise tracks the index;

3 Buying a structured note that is linked to the performance of the S&P 500 index or some complex formula involving a combination of one or more individual stocks; Engaging in equity swaps, volatility swaps, or dividend swaps, on individual stocks or the index as a whole; Purchasing shares of an ETF that tracks the S&P 500 or some subset of S&P 500 stocks; and even Selling shares of an ETF that inversely tracks the S&P 500 index. In this case though two wrongs may not make a right, two shorts do make a long.

4 4,500.0 Number of Options and Futures Contracts in Millions in United States , , , , ,000.0 Options Contract Volume Futures Contract Volume 1, , Source: for options volume and 2010 SIFMA Fact Book for futures volume.

5 8, Stock Market Daily Average Volume in Millions of Shares (Source: SIFMA Key Statistics) 7, , , , , NYSE AMEX/ARCA* NASDAQ BATS DirectEdge Pink OTC Markets 2, ,

6 $ Stock Market Daily Average Value in $ Billions (Source: SIFMA Key Statistics) $90.00 $80.00 $70.00 $60.00 $50.00 $40.00 NYSE NASDAQ BATS Pink OTC Markets $30.00 $20.00 $10.00 $0.00

7 $800,000 OTC and Exchange-Traded Derivatives Global Notional Amounts in $ Billions in December and S&P 500 Stock Index (2011 data for June; S&P off right axis) $700, $600,000 $500,000 $400,000 $300,000 $200, Exchange Traded Derivatives OTC Derivatives S&P 500 $100, $ Source: data since 1998 not strictly comparable to prior years.

8 100% 90% % Shares of Volume of Trading in Stocks ( and Data Not Comparable) NYSE % of NYSE-Listed % 70% 60% 50% 40% 30% 20% NASD % of NYSE-Listed Other Exchange % Of NYSE-Listed NYSE % of Total Exchange Volume AMEX % of Total Exchange Volume % 0% "Other" Exchange % of Total Volume

9 90.0 NYSE-Euronext Percent Share of Matched Share Volume in NYSE-Listed Issues January 2004-October 2011 ( Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

10 3,500,000 Figure 1: NYSE and NYSE Group Number of Trades (in thousands) and Average Share Size of Trades, (Average Size reads off right axis; computing differently than prior years) ,000, ,500,000 2,000,000 1,500,000 1,000, Number of Trades Average Share Size of Trades 500,

11 450,000 Number of Trades (thousands) and Average Share Trade Size, NYSE Group, January 2004-October 2011 (Size reads off right axis). Not comparable to NYSE data in Figure , , , , , , Number of Trades Average Trade Size 100, , Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Source:

12

13 Equity Trading in the 21 st Century NASDAQ-Iisted NYSE-Iisted RusseII 2000 S&P /05/ /09/ /01/ /05/ /09/ /01/ /05/ /09/ /01/ /05/ /09/ /01/ /05/ /09/ /01/ /05/ /09/ /01/ /05/ /09/2009 Source : Knight Capital Group. Fig. 16. Average quotes per minute.

14 Faster Executions 30 Market Order Execution Speed (ms) NVSE-Iisted - Nasdaq-listed 13

15 Equity Trading in the 21 st Century 9 Source : Chordia, Tarun, Richard Roll and Avanidhar Subrahmanyam, 2008, Liquidity and Market Efficiency, Journal of Financial Economics 87(2), 256. Fig. 2. Value-weighted daily average effective spread, NYSE, Source : Hasbrouck, Joel, 2009, Trading Costs and Returns for US Equities: Estimating Effective Costs from Daily Data, Journal of Finance 64(3), Fig. 3. TAQ and CRSP/Gibbs estimates of effective cost in the comparison sample.

16 16 J. J. Angel, L. E. Harris & C. S. Spatt Source : AAII Journal, Discount Broker Guide, February 2007 at http: / journal/200702/guide.pdf, as published. Fig. 14. US retail brokerage commission trends

17 100.0 Mutual Fund Net New Cash Flow (Billions) January 2009-September 2011 (Source: SIFMA US Key Stats, Equity Fund Hybrid Fund Bond Fund Money Market Fund Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept

18 90.00 Closing Value CBOE Volatility Index (VIX) January Through December /31/91 and 11/27/03 Not Available converted by CBOE to current methods and reported in different series.

19 FIGURE 1.1: E-Mini Volume and Price 90,000 E-Mini Volume and Price , ,000 Volume 1140 Volume (contracts per minute) 60,000 50,000 40,000 30,000 Price Price 20, , :30 9:45 10:00 10:15 10:30 10:45 11:00 11:15 11:30 11:45 12:00 12:15 12:30 12:45 13:00 13:15 13:30 13:45 14:00 14:15 14:30 14:45 15:00 15:15 15:30 15: M a y 6, M a r k e t E v e n t F i n d i n g s

20 FIGURE 1.2: SPY Volume and Price 10,000,000 SPY Volume and Price 118 9,000, ,000,000 7,000,000 Volume Bid Price 114 Volume (shares per minute) 112 6,000,000 5,000, ,000, ,000, ,000,000 Price 1,000, :30 9:45 10:00 10:15 10:30 10:45 11:00 11:15 11:30 11:45 12:00 12:15 12:30 12:45 13:00 13:15 13:30 13:45 14:00 14:15 14:30 14:45 15:00 15:15 15:30 15: M a y 6, M a r k e t E v e n t F i n d i n g s

21 FIGURE 1.3: E-Mini Buy-Side and Sell-Side Market Depth (all quotes) 200,000 E-Mini Market Depth All Quotes 180,000 Buy Depth Sell Depth 160,000 Resting Contracts (beginning-of-minute) 140, , ,000 80,000 60,000 40,000 20, :30 9:45 10:00 10:15 10:30 10:45 11:00 11:15 11:30 11:45 12:00 12:15 12:30 12:45 13:00 13:15 13:30 13:45 14:00 14:15 14:30 14:45 15:00 15:15 15:30 15: M a y 6, M a r k e t E v e n t F i n d i n g s

22 FIGURE 1.4: SPY Buy-Side and Sell-side Market Depth within 500 basis points of mid-quote 5,000,000 SPY Market Depth Within 500 basis points of mid-quote 4,500,000 Restnig shares (beinning-of-minute) 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 Buy Depth Sell Depth 1,000, , :30 9:45 10:00 10:15 10:30 10:45 11:00 11:15 11:30 11:45 12:00 12:15 12:30 12:45 13:00 13:15 13:30 13:45 14:00 14:15 14:30 14:45 15:00 15:15 15:30 15: M a y 6, M a r k e t E v e n t F i n d i n g s

23 FIGURE 1.5: Buy-Side Market Depth for E-Mini (all quotes) and SPY (within 500 basis points of mid-quote) 1.20 E-Mini vs. SPY Buy-Side Market Depth Fraction of Buy-Side Market Depth Relative to 9:30-10:00 Average E-Mini Buy Depth SPY Buy Depth - 14:00 14:02 14:04 14:06 14:08 14:10 14:12 14:14 14:16 14:18 14:20 14:22 14:24 14:26 14:28 14:30 14:32 14:34 14:36 14:38 14:40 14:42 14:44 14:46 14:48 14:50 14:52 14:54 14: M a y 6, M a r k e t E v e n t F i n d i n g s

24 70.0% NYSE Member Income % By Selected Categories (Source: px) 60.0% Securities commissions 50.0% 40.0% Trading & investments 30.0% 20.0% Other income related to securities business Underwriting 10.0% 0.0%

25 250,000 NYSE Member Firms' Revenue From Major Revenue Source, in $ Millions, (Source: NYSE Member Firms' Income Statements, SIFMA 2009 Electronic Factbook) 200,000 Commissions 150, ,000 Trading Gains 50,000 0 Other Securities Related Other Unrelated to Securities -50, ,

26 80% % of NYSE Member Firms' Revenue From Major Revenue Source, (Source: NYSE Member Firms' Income Statements, SIFMA 2010 Electronic Fact Book) 60% Commissions 40% 20% Trading Trading Gains 0% -20% -40% Other Securities Related Other Unrelated to Securities -60%