Exchanges

12:08 PM
Justin Grant
Justin Grant
Commentary
Connect Directly
Google+
Twitter
RSS
E-Mail
50%
50%

Are the Capital Markets Serving Up Pink Slime?

Tabb Group analyst Adam Sussman says with prime cuts of U.S. equity being served to dark pools and internalization engines, investors are left with the pink slime.

U.S. consumers were sickened by reports earlier this year that nearly 70 percent of the ground beef consumed in this country contains pink slime - mechanically processed meat that's used as filler to reduce its overall fat content.

So what does that have to do with the U.S. capital markets? On the heels of the New York Stock Exchange receiving SEC approval to start a Retail Liquidity Program, which is a type of dark pool for individual investors, Tabb Group analyst Adam Sussman says the challenge the beef industry is now facing with the American public is comparable to the problems with market structure in the U.S. He points out that the prime cuts of U.S. equity liquidity are often stripped away and routed to, or executed within, dark pools and internalization engines, leaving pink slime - or liquidity exhaust for the public markets.

In both cases - be it the production of beef or the trading of securities - the public is left in the dark about how the product is put together, repackaged and sold to consumers.

From Tabb Forum:

The upcoming Securities and Exchange Commission vote on the proposed RLP program (it passed .) is symptomatic of the challenges facing the industry participants. The level playing field that the exchanges provide has unfortunately become the lowest common denominator as competing venues strip away the more desirable cuts of liquidity. RLP is a natural response to try and recapture some of the more valuable liquidity.

Whether it delivers slightly better execution quality or not, the average investor will not be in any better position to understand what happens to his or her order and why that matters. What would make a difference is more labeling and disclosure about order handling and brokerage revenues. Rules 605 and 606 were a good start but are insufficient given the subsequent complexity of U.S. equity market structure.

Many industries break a product down, repackage certain cuts and distribute those cuts to the client segments willing to pay. Liquidity is an admittedly different beast from a cow but the economics of supply and demand are largely universal. Whoever can figure out how to cleverly package less desirable components and generate demand stands a good chance of making money. A quick search reveals a handful of truly awful ideas along these lines.

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio
Comment  | 
Print  | 
More Insights
More Commentary
Shared Reporting Services on the Horizon, Genpact Predicts
The financial services industry is starting to adopt shared services, resulting in reasonable impacts to the bottom line. Genpact expects a push for reporting efficiency will come next.
Don't Let the Cloud Rain on Your Operations Strategy Parade
Avoid migrating large applications all at once to minimize risk during a cloud project.
Could Intel Lose Data Center Market Share to ARM Chips?
ARM chips could be an alternative for certain purposes in the datacenter, but many questions have to be answered before they pose a threat to Intel's market dominance.
Cost to Trade: Hey, Banks, Itís Time to Face the Music
Why is calculating the cost to trade so difficult for banks? The answer is as complex as the calculations themselves.
M&A Activity Will Continue to Grow in 2015
Data shows that the M&A market continues to improve, and forecasts indicate deal making will be healthy in 2015.
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - Elite 8, October 2014
The in-depth profiles of this year's Elite 8 honorees focus on leadership, talent recruitment, big data, analytics, mobile, and more.
Video
Exclusive: Inside the GETCO Execution Services Trading Floor
Exclusive: Inside the GETCO Execution Services Trading Floor
Advanced Trading takes you on an exclusive tour of the New York trading floor of GETCO Execution Services, the solutions arm of GETCO.