The Quality of Our Financial Markets

post in cooperation with Rashika Pandey, MBA Finance 2010.

Baruch has done it again!  Prof. Robert Schwartz and his team put together another fantastic conference on our Financial Markets.  The 14th floor of the Newman Vertical Campus hosted players who are in it for the long run.  These were survivors and those who know (and care about) the industry.  Marie Konstance, from Nomura, told this correspondent, “you have to love change to last in this industry.   And that rate of change is increasing. Nonetheless it’s fascinating for those who embrace it.”

There were several themes that ran through the day.  The first on everyone’s mind was high-frequency trading and the relationship to the flash crash on May 6th.  There was also much  talk about liquidity and importantly the dark pools and their relevance.  Of course, the perennial question regarding regulation peppered every discussion.

Mitchell Wallerstein, Baruch’s new President started the sessions.  Opening remarks from Dan Mathisson of Credit Suisse continued to 4 panels through the day which gave attendees insights and opinions from committed practitioners in the industry.  The audience reciprocated with lively questions and commentary.  Richard Ketchum from FINRA brought the day to close with a perspective from a regulator. The inimitable Prof. Schwartz leavened the dense, serious and depth of the discussions with the humor, intellect and his own special sauce.

High-Frequency Trading served as the topic for the first panel and was moderated by Baruch’s own Prof. Jim Gatheral.  Ari Burstein, of Investment Company Institute, Kevin Callahan, from  X41 Trading, Charles-Albert Lehalle, from Cheuvreux Credit Agricole, Doreen Mogavero, from Mogavero, Lee & Company, Lawrence Ryan from Hewlett-Packard and Cameron Smith, from Quantlab Financial, gave their perspectives on a topic that drew the interest of everyone.  The following is what stuck with us:

  • Is there a need to increase friction in the market?
  • Will the metrics correspond? Volumes are still high and volatility at all-time lows.

The Flash Crash of May 6 was the lively topic of the second panel.  The audience heard anecdotes and opinions from Robert Gasser, from ITG, Susan Greenglass, from Ontario Securities Commission, Gary Katz, from International Securities Exchange, Tim Mahoney, from BIDS Trading, Joe Mecane from NYSE Euronext  and William O’Brien, from Direct Edge — all of which were moderated by Andrew Brooks, of T. Rowe Price.  The seed of the crash seems to stem from one trade for 75,000 options. Was this a deliberate trade to destabilize the system?  You will have to come to the next conference to learn more.  Your correspondents took away the following:

  • What role did fragmentation play in the flash crash?
  • What is the relevance of the Flash Dash that immediately followed the precipitous dive?

After much needed nourishment and discussion at lunch, the day’s third panel discussed The Needs of the Buyside: How Well are They Being Met?  Rob Shapiro, from Bloomberg Tradebook, artfully moderated questions to Alfred Eskandar, of Liquidnet, Alan Hill, from Jones Trading, Marie Konstance, from Nomura, Matt Lyons, of Capital Research and Management Company and Mary McDermott-Holland, from NASDAQ OMX. Another theme emerged from this panel that most players are good guys.  There are nefarious actors and those on the buy side must be aware of that.

The discussion turned to the situation of ‘dark’ and ‘lit’ pools.  The ‘dark’ system is using prices from the ‘lit’ system.  Is this true price discovery and what skew is that causing?  Will more transparency help solve the problem? Or is it more of an issue of inconsistent reporting from the ‘dark’ pools? As with many other discussions, there were a lot of questions without answers.  That seems to be a sign of times.  Throw in a few observations about the SEC and their forthcoming “real-time” reporting system and a lot of heads shake.

New Technology: What Does it Bring to the Table? served as the topic for the last panel moderated by Marcus Hooper, from Pipeline.  Paul Britton, from Capstone Holdings Group, Joseph Cangemi, from ConvergEx, Jim Ross, from Financial Markets Horizons, Justin Schack, from Rosenblatt Securities and Joseph Wald,  from  Knight Direct kept the audience with the last panel.

The conversation revolved around speed and high-frequency trades.  Joe Wald opined that there is a limit to how fast the trades can happen.  The real disruptive change will occur when a new wave of innovation takes hold.  Innovation that meets the needs of the market aside from just speed.  A challenge was issued to the audience with regard to fragmentation — there is  huge opportunity here.  Some bright entrepreneur will figure out how to synthesize and make trades across many markets appear seamless.

Until then, Prof Schwartz advised that group fragment to the bar to analyze the liquidity there.  With one small delay, the CEO and chairman of FINRA Richard Ketchum brought the day to close with a perspective from the regulator’s side.

With good wine and food the conversation continued among the participants as they mingled among old friends and new acquaintances.  Many thanks to Prof Schwartz and his team and we are look forward to your forthcoming book.

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