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:
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;
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.
4,500.0 Number of Options and Futures Contracts in Millions in United States 1973-2011 4,000.0 3,500.0 3,000.0 2,500.0 2,000.0 Options Contract Volume Futures Contract Volume 1,500.0 1,000.0 500.0 0.0 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: www.optionsclearing.com/market-data/volume/ for options volume and 2010 SIFMA Fact Book for futures volume.
8,000.00 Stock Market Daily Average Volume in Millions of Shares 1990-2010 (Source: SIFMA Key Statistics) 7,000.00 6,000.00 5,000.00 4,000.00 3,000.00 NYSE AMEX/ARCA* NASDAQ BATS DirectEdge Pink OTC Markets 2,000.00 1,000.00 0.00
$100.00 Stock Market Daily Average Value in $ Billions 1990-2010 (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
$800,000 OTC and Exchange-Traded Derivatives Global Notional Amounts in $ Billions in December 1988-2011 and S&P 500 Stock Index (2011 data for June; S&P off right axis) 1600.00 $700,000 1400.00 $600,000 $500,000 $400,000 $300,000 $200,000 1200.00 1000.00 800.00 600.00 400.00 Exchange Traded Derivatives OTC Derivatives S&P 500 $100,000 200.00 $0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 0.00 Source: www.bis.org/statistics/index.htm; data since 1998 not strictly comparable to prior years.
100% 90% % Shares of Volume of Trading in Stocks 1960-2007 (1960-1975 and 1976-2007 Data Not Comparable) NYSE % of NYSE-Listed 1976-2007 80% 70% 60% 50% 40% 30% 20% NASD % of NYSE-Listed 1976-2004 Other Exchange % Of NYSE-Listed 1976-2004 NYSE % of Total Exchange Volume 1960-1975 AMEX % of Total Exchange Volume 1960-1975 10% 0% 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1989 1991 1993 1995 1997 1999 2001 2003 2004 2006 "Other" Exchange % of Total Volume 1960-1975
90.0 NYSE-Euronext Percent Share of Matched Share Volume in NYSE-Listed Issues January 2004-October 2011 (http://www.nyse.com/financials/1143717022567.html) 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 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
3,500,000 Figure 1: NYSE and NYSE Group Number of Trades (in thousands) and Average Share Size of Trades, 1968-2010 (Average Size reads off right axis; 2004-2010 computing differently than prior years) 2500 3,000,000 2000 2,500,000 2,000,000 1,500,000 1,000,000 1500 1000 Number of Trades Average Share Size of Trades 500,000 500 0 0 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
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 1 900 400,000 800 350,000 300,000 250,000 200,000 150,000 700 600 500 400 300 Number of Trades Average Trade Size 100,000 200 50,000 100 0 0 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: www.nyxdata.com/nysedata/nyse/factsfigures/tabid/115/default.aspx
Equity Trading in the 21 st Century 17 600.0 500.0 400.0 300.0 NASDAQ-Iisted NYSE-Iisted 200.0 RusseII 2000 S&P500 100.0-01/05/2003 01/09/2003 01/01/2004 01/05/2004 01/09/2004 01/01/2005 01/05/2005 01/09/2005 01/01/2006 01/05/2006 01/09/2006 01/01/2007 01/05/2007 01/09/2007 01/01/2008 01/05/2008 01/09/2008 01/01/2009 01/05/2009 01/09/2009 Source : Knight Capital Group. Fig. 16. Average quotes per minute.
Faster Executions 30 Market Order Execution Speed (ms) 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 - NVSE-Iisted - Nasdaq-listed 13
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, 1993 2002. Source : Hasbrouck, Joel, 2009, Trading Costs and Returns for US Equities: Estimating Effective Costs from Daily Data, Journal of Finance 64(3), 1457. Fig. 3. TAQ and CRSP/Gibbs estimates of effective cost in the comparison sample.
16 J. J. Angel, L. E. Harris & C. S. Spatt Source : AAII Journal, Discount Broker Guide, February 2007 at http: /www.aaii.com/ journal/200702/guide.pdf, as published. Fig. 14. US retail brokerage commission trends 1991 2007.
100.0 Mutual Fund Net New Cash Flow (Billions) January 2009-September 2011 (Source: SIFMA US Key Stats, http://www.sifma.org/research/statistics.aspx) 50.0 0.0-50.0-100.0-150.0 Equity Fund Hybrid Fund Bond Fund Money Market Fund -200.0 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
90.00 Closing Value CBOE Volatility Index (VIX) January 2 1990 Through December 2 2011 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 http://www.cboe.com/micro/vix/historical.aspx. 3/31/91 and 11/27/03 Not Available. 1990-2003 converted by CBOE to current methods and reported in different series.
FIGURE 1.1: E-Mini Volume and Price 90,000 E-Mini Volume and Price 1180 80,000 1160 70,000 Volume 1140 Volume (contracts per minute) 60,000 50,000 40,000 30,000 Price 1120 1100 1080 Price 20,000 1060 10,000 1040 9:30 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 15:45 0 1020 1 9 M a y 6, 2 0 1 0 M a r k e t E v e n t F i n d i n g s
FIGURE 1.2: SPY Volume and Price 10,000,000 SPY Volume and Price 118 9,000,000 116 8,000,000 7,000,000 Volume Bid Price 114 Volume (shares per minute) 112 6,000,000 5,000,000 110 4,000,000 108 3,000,000 106 2,000,000 Price 1,000,000 104 9:30 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 15:45 0 102 2 0 M a y 6, 2 0 1 0 M a r k e t E v e n t F i n d i n g s
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) 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 9:30 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 15:45 2 1 M a y 6, 2 0 1 0 M a r k e t E v e n t F i n d i n g s
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 1,000,000 500,000 0 9:30 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 15:45 2 2 M a y 6, 2 0 1 0 M a r k e t E v e n t F i n d i n g s
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 1.00 0.80 0.60 0.40 0.20 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 14:56 14 58 2 3 M a y 6, 2 0 1 0 M a r k e t E v e n t F i n d i n g s
70.0% NYSE Member Income % By Selected Categories 1961-2004 (Source: http://www.nyxdata.com/nysedata/nyse/factsfigures/tabid/115/default.as 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%
250,000 NYSE Member Firms' Revenue From Major Revenue Source, in $ Millions, 1976-2009 (Source: NYSE Member Firms' Income Statements, SIFMA 2009 Electronic Factbook) 200,000 Commissions 150,000 100,000 Trading Gains 50,000 0 Other Securities Related Other Unrelated to Securities -50,000-100,000 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
80% % of NYSE Member Firms' Revenue From Major Revenue Source, 1976-2009 (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% 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009