The risk of unintended regulatory consequences is the top market structure concern facing U.S. equity markets, according to buy side traders in Tabb Group’s annual study, “Institutional Equity Trading 2009-2010: Dark Pools, Transparency and Consequences.”
Laurie Berke, principal at Tabb Group and author of the study, said in a statement that buy side traders are gravely concerned that “inappropriate action could be taken on multiple pending issues that would have a dramatic negative impact on their ability to trade effectively.”
She added, “There is a lack of confidence that the requisite data has been captured and the requisite analysis completed to determine cause and effect or even the need for additional regulation beyond what is already on the books. Further, they would like to have a voice in these matters, to provide input into these possible regulatory decisions, before any incremental regulation is enacted.”
According to the study results traders are not as concerned with the effects of high frequency trading, with nearly 84 percent recommending no action be taken to restrict HFT activity.
“Over half say they’re indifferent to HFT’s presence, while another 28 percent say that HFT is actually good for their trading style,” said Berke.
The study also found that buy side traders are calling for more transparency from their broker counterparts. “Buy-side traders want greater clarity covering the behavior of algorithms, dark pools and smart order routers, from preferencing and rebate deals, to the use of IOIs, IOCs and interactions with electronic liquidity providers (ELPs),” said Berke.
While electronic trading is on the rise and algorithms will continue to capture more share of the trading flow, the study found that block crossing is not experiencing the same rise. The results show only a slight increase in market share from 11 percent in 2008 to 12 percent in 2009, still not up to its 2007 level of 15 percent.
Said Berke, “Volatility continues to impact the way traders manage their order flow. There are fewer resting orders and less of a willingness to be patient.”
This year’s study, which was co-authored by Tabb research analyst Cheyenne Morgan, included 66 buy-side traders at U.S. institutional equity management firm managing an aggregate $12.1 trillion in assets.