If TABB CEO Larry Tabb’s projections for 2013 hold true, we will see industry attrition in the coming year. Smaller balance sheets will result in less available risk capital, and a stringent Volcker Rule will change the participation and availability of short-term liquidity. In addition, the percentage of volume traded in the dark will continue to rise and, in my view, only the foolish or brave will short it at 36%. Meanwhile, the SEC has a plateful of Dodd-Frank and Volcker, and any propulsion in equities will be stymied by Mary Shapiro’s departure. A larger discussion about computerized trading was reignited by the Senate banking committee near the end of 2012, but as we have noted before, there’s no guarantee this stone will roll down the Hill to the SEC, let alone gather moss. And on the market side, ICE’s takeover of the NYSE will take up much of the energy and focus of this exchange, diluting a voice in the market.
When it comes to market structure, radical changes prompt polarized reactions, and we get a collective but disunited pushback against new proposals. These days it is pretty hard to contain any reform conversation, since it inevitably wends along connected paths to a clash of opinion. And as well they should, most market participants and -- perhaps especially -- the regulators fear the unintended consequences of regulation, let alone the effort and time that are consumed.
The opposite of radical or structural change is laissez-faire policy: Leave alone the complexity and paradoxes in the marketplace that come from diverse and entrenched interests, and let the market evolve naturally. Fragmentation will be at the mercy of natural attrition.
While we may see some participants or products falter in 2013, we will also see new entrants and innovation. As a result, the amount of net attrition is uncertain; so even if the equities markets outperform other markets, this may not be sufficient to take the sting out of the costs of fragmentation and compliance, which are rising faster than commission wallets can recover. It also does not add robustness to the environment. Favoring the market taking care of itself through natural evolution is all well and good, but Regulation NMS was not a natural phenomenon, and even nature needs a hand.
I have said before that I think capital markets citizenship means that those who profit from the market have a responsibility to improve, or at least safeguard, its quality. Responsibility in the broken window theory falls equally to the community to invest in keeping the environment in good standing as well as to the regulators (the “police”). Getting the market to act as a community is no mean feat, however, as profitability skews the lens for everyone.
[Related: “It’s Time to Take the Circle Out of the Round”]
And we won’t see anyone subject to curfew for causing havoc in the market, although it’s an interesting thought. Yet a willingness to aggressively address issues as they occur, within far shorter timeframes, would provide a more constant eye on the quality of the market and intolerance for disorder. Investigations take time, but the time to act on issues that affect everyday trading needs to be accelerated; Limit-Up, Limit-Down will be implemented in February only just ahead of the third anniversary of the Flash Crash.
Fixing problems more quickly, even as they occur, in the equities markets would undoubtedly incur direct costs. If this thereby also indirectly raises the price of participation too high for some so that it leads to a reshuffle of players and attrition, is that such a bad thing?
Effectively, any changes in market participants’ behavior (and, consequently, fragmentation) would become by-products of better enforcing rules and raising market quality. Maybe that’s wishful thinking, too, but as many people who tell me that we won’t have a market structure debate also acknowledge, the next Big Problem to hit the equity market will have a 2013 dateline. Yes, continually replacing broken windows and using reinforced glass is expensive; but new, fortified windows are considerably harder to break.