Growing Up: Speed Bumps, Crypto-Currencies & Other Behavior

What a grown-up speed bump looks like…

Yesterday, the newly branded NYSE American exchange opened for business, complete with a speed bump designed to ensure that dark orders placed on the exchange are not priced at stale prices.   That is where the comparison with IEX ends, however.   The NYSE does not engage in the type of extreme and damaging rhetoric as their juvenile competitor, nor do they expect to achieve profit margins as high as them for their dark order book.   History shows, however, that NYSE American focuses on DISPLAYED orders (as it has throughout its history); they have simply added a well-designed dark pool to the exchange.   Data backs up this premise, as the formerly branded NYSE Mkt demonstrated excellent quote quality on the issues for which it is the primary listing venue.  In June, according to data provided by MayStreet & analyzed by ViableMkts, the NYSE Mkt achieved a symbol weighted NBBO participation percentage of 15.71% on its listings compared to 0.33% for IEX, and 15.77%, 15.3% & 12.48% for EDGX, ARCA, & Nasdaq respectively.   This metric is derived for each exchange by multiplying the percentage of time spent at the NBBO for each exchange by each exchange’s displayed volume when at the NBBO, and dividing that by the aggregate average displayed volume at the NBBO.   In addition, on those same issues, NYSE Mkt SET the NBBO 26.99% of the time, compared to 1.49% for IEX (and 14.86%, 25.87%, and 11.23% for EDGX, ARCA, & Nasdaq respectively.

(Editor’s Note:  Both of these metrics are part of a new data offering in development by MayStreet (designed by ViableMkts) that provides these metrics per symbol per day per exchange on the key metrics of displayed quote and trade quality).  

Thus, according to the aggregate of both metrics, NYSE American’s predecessor had the best overall quote quality for issues where it was the listing exchange.  The reason that other commentators have not focused on this, is that these issues are generally small.  Thus, when evaluating market share or other metrics on a trade or market cap weighted basis, the exchange does not compare well to its larger competitors.  That, however, is the wrong way to evaluate an exchange, since decisions about listing and routing should be made based on data for individual stocks that are relevant to the particular decision.

In addition to starting from a far superior displayed quote platform, NYSE American’s dark pool offering is materially similar, but at a lower marginal cost to investors than IEX’s offering.  As a result, it does pose a serious threat to IEX’s margins.  It remains to be seen if investor loyalty to the IEX platform, and IEX’s enhanced algorithms for extremely price sensitive clients, is enough to prevent defections and continued market share growth.   I suppose that we can all expect more marketing as a result.

Crypto-Currencies must grow up too…

Yesterday, the SEC released a press release on Initial Coin Offerings (ICOs) that indicates that they consider such instruments as securities.   This could well turn out to be a watershed event for the exchanges that trade Bitcoin, Ethereum, Litecoin and others.  Most likely, this means that the SEC plans to apply principles of “just and equitable trading” to the markets that trade these instruments.  While official rulemaking may take a fair amount of time, the SEC could leverage general enforcement processes to force these entities to implement an array of protective features, including surveillance for manipulation as well as protections against flash crashes and outlier prices.  Bloomberg wrote an article yesterday making many of these points; focusing on the legal evolution of the crypto-currency markets that the SEC will likely advance.

Both the SEC and the Bloomberg article focused on some of the extreme valuations of recent Initial Coin Offerings (ICOs), but the inclusion of language pertaining to exchanges in the SEC press release is indicative of a more holistic approach.  Events such as the recent “Flash Crash” of ethereum where the price briefly dropped from $300 to $0.10 in an instant have not likely been missed by the SEC.  When one considers the advances made in equity market structure with regard to such problems, as well as advances in harmonizing rules on erroneous trades, market access, best execution and surveillance of manipulation, it is pretty clear that the crypto-exchanges are going to need to “up their game.”  While I am normally skeptical of regulation, in this authors opinion, this is a welcome step in the evolution of this important new market.

Sometimes we never grow up…

Every time my children make excuses for bad behavior, I try to distinguish between mistakes made for the first time, and ones which repeat.  Repeating mistakes, I tell them is far worse, since we should learn from past mistakes.   Maybe that’s why any time I hear “this time it’s different” or “the crisis is over” my “Spidey Senses” tingle.   Yesterday, the FT reported that Citigroup declared that their post crisis restructuring is “over” and from an asset valuation perspective, that may well be true.  From a process perspective, however, I sincerely doubt that they have changed that much.   While history rarely repeats, it often rhymes, so I can’t predict what asset bubble explosion or major problem will surface next.  The root of the problem, however, was risk taking decisions being made or approved by upper management when they have a poor grasp of the details of the individual decisions being made by product teams.  This disconnect became accentuated by a hiring pattern that I learned to call the “traders option”.  It manifests when a senior trading hire is paid a lot of money up front based on his or her being considered “experienced.” Subsequently, to keep earning a sizeable amount of money beyond their guarantee period, they often bet big.   If they “win” their bet, they get paid again, but if they “lose” they don’t return the money lost or what they earned, but may be forced to leave the firm.   The firm usually doesn’t publicize the failure so the individual gets to do so again at another firm, based on their “experience.”   Until firms change this method of hiring, consider me a cynic about all the large banks being safe from massive losses…

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