2005 was the year of regulation. From NMS and the hybrid market to Spitzer and Cox; from MiFID and the formalization of the FSA's CP176 to the new hedge fund registration requirements - regulation, legislation and litigation have pushed the industry like never before. Regulatory and compliance issues more than any other factor drove the 2005 agenda as buy-side firms ranked compliance as the greatest single difference in their work over the past year. But what about 2006?
The most significant issues facing our industry are: exchange regulation, low-touch services, market data infrastructure redevelopment, research unbundling, derivatives, infrastructure rationalization and consolidation. I would love to say that the dawning of a new year will bring a more open and less regulated environment, but I doubt it. While I do believe that we have seen a high-water mark for regulatory proposals, the impact of last year's proposals will be with us for the next few years.
So, the first - and most significant - '06 trend is exchange and market infrastructure redesign. The formalization of NMS, the hybrid market, the NYSE acquisition of Archipelago, Instinet's acquisition by NASDAQ and the initial implementation phase of MiFID will make 2006 the year of exchange change. While this will go wholly unnoticed by the investing public, it will have a major impact on the equity markets globally.
These changes will make markets more transparent and more accelerated - hence Trend 2: the move toward low-touch services. As both the buy and sell sides continue to leverage the automated execution infrastructure to lower cost and provide a more effective execution platform for their clients, not only will U.S. Equity adoption increase, there also will be significant expansion into global equity markets as well as adoption across other asset classes.
As model-based trading continues to fragment larger orders and increase data velocity, we have seen peak market data speeds increasing almost five fold this year (from 25,000 ticks per second to 120,000 tps). This is overwhelming to all but the most technically sophisticated and will force lagging firms to rebuild their market data infrastructure - which is Trend 3.
Research unbundling, Trend 4, also will be a key '06 driver as London begins to implement PS 05/9 (the formalization of CP176) and the ramifications of the Fidelity/Lehman deal unfold (see Larry Tabb's December 2005 column, "The Sins of the Few"). This will increase the burden on both buy- and sell-side firms to develop a new research value proposition.
Trends 5 and 6 will see derivatives play a greater role as hedge funds, investment managers and broker-dealers look to redefine risk, gain or limit exposure to various asset classes, and migrate into other asset classes with increased financial leverage and limited technology investment. This move will push firms to develop consolidated delivery and processing platforms to better and more efficiently serve their clients.
Finally, consolidation will continue to drive the industry. We have not seen the last of brokers looking to gain scale and money managers looking to more effectively amortize expenses. Wells Fargo's elimination of its equities trading desk, and Legg Mason's and Citigroup's swap of their brokerage and investment management businesses last year were only the beginning. Increasing scale will grow in importance as we head into 2006, and the vortex of change we currently are experiencing will not, unfortunately, slow down until the pace of regulatory-driven change has blown way out of town.
Larry Tabb is founder and CEO of Westborough, Mass.-based TABB Group, a financial markets strategic advisory firm. firstname.lastname@example.orgLarry Tabb is the founder and CEO of TABB Group, the financial markets' research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the interview-based research methodology of "first-person knowledge" he developed, TABB Group ... View Full Bio