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Thomas W. Farley, SVP, Financial Markets, ICE According the Economist, “Trading equities is barely profitable these days” (May 11, 2013). With falling share volumes, reduced appetite for takeovers and mergers, and the rise of electronic trading, we focus on the impact of the ‘new normal’ on the equities landscape. - The impact of economic uncertainty, including the shift from active fund management to passive investments, such as ETFs. - The accelerating pace of change as new technologies combine with deregulation to reshape the trading environment. - The rise of dark, off-exchange trading and its impact on the overall market. - The impact of algorithms and electronic trading on the distribution of risk and profits.
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U.S. Equities Market ObservationsThomas Farley, IntercontinentalExchange
October 2013
›Global derivatives markets leadership
›Broad distribution, network effect
›Organic growth, M&A leader
›Positioned ahead of financial regulatory reform
›Innovation to serve customer needs
›Consistent growth and strong returns
* Energy volume includes cleared OTC energy contracts transitioned to futures contracts on October 15, 2012 and all periods have been adjusted to reflect these contracts as futures
Intro to ICE: Derivatives Market Leadership
Futures Markets Structure
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› Lit, regulated markets with very few order types
› No interconnectedness
› Posted prices always respected / prioritized
› All customers interact in same venue
› All customers treated the same
› Principles-based regulation
Futures Markets Performance
4
› No fragmentation
› Low complexity
› Low cost
› Deep liquidity
› Significant competition
› Rapid innovation
Cash Equity Markets Structure
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› Combination of: Lit, regulated markets with dozens of
order types Dark pools Internalization of retail orders
› Mandatory interconnectedness
› Posted prices not prioritized
› Different customer segments transact in different places
› Customers given different treatment
› Rules-based regulation
Cash Equity Markets Performance
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› Highly fragmented
› Highly complex, less transparent
› Costly for most stakeholder groups
› Most liquidity resides at NBBO and is concentrated in top names
› Customer dissatisfaction with status quo
Catalysts for Improving Market Structure
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› Regulators may choose to act New regulations Review reforms Rescind prior regulations
› Market practitioners may choose to act Innovations New business practices
Regulators as a Catalyst Many of Chair White’s Key Priorities are Encouraging
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› Focus on the needs of: Issuers/public companies Investors that participate in the market
directly Investors that participate through
institutional investors
› Improve the operational integrity of markets
› Preserve transparent trading models that inspire confidence
Market Practitioners as a CatalystThe Current Environment of Concern Makes Evolution Possible
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› Discontent is shared across customer segments: Sell-side Buy-side Retail HFT
› This environment of discontent may create the best opportunity to effect change for the better
NYSE: A History of Leadership
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› Concern about the equities markets (or futures markets for that matter) is not new: for 200+ years the efficiency
and fairness of equities markets has been alternately praised and questioned
› Markets have undergone repeating cycles of fragmentation and consolidation
› Through this period, one entity has stood consistently for free and fair markets that support capital formation: NYSE
ICE Track RecordDeveloping Customer-Focused Markets
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› ICE builds markets to serve the needs of the core users of the market
› ICE markets are characterized by operational and risk management integrity
› Industry-wide initiatives involving ICE to improve and/or evolve our markets have been a key to our success
Potential Areas of Focus Post-Closing of ICE/NYSE Transaction
› Increase respect for displayed prices and price discovery throughout industry
› Reduce complexity & fragmentation of cash equities markets
› Identify the root of fragmentation and re-aggregate liquidity
› Increase transparency and fairness of practices among exchanges, ATS/ECNs and broker-dealers
› Improve operational & risk controls at each venue and market-wide
› Evolve towards fairer and simpler pricing models throughout industry
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Summary
› Equities markets have become more fragmented and complex over the past two decades
› Opportunity exists to improve market dynamics for multiple stakeholder groups
› Such improvement will rely on leadership from both market practitioners and regulators
› ICE/NYSE combination brings together cash equities market leader with customer-focused market operator
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Questions
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Extra Slides
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Example Futures Market Liquidity v. Equity Market Liquidity
ICE Russell 2000 Futures TF
iShares Russell 2000 IWM
Index Value1 1,100.80 109.44
Contract Size1 $100 x index index value
Notional Value1 $110,080 $109.44
ADV ($)2 $12.86 bill 4.08 billValue of Open
Positions $36.44 bill $0.656 bill
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