Specialists Sliding Into Obscurity, Says Celent
February 18, 2009
By Alexa Jaworski
Electronic order books could represent 65 percent of U.S. equities volumes by 2012, as long-established specialist firms continue to lose ground, says research firm Celent.
Regulation National Market System and innovative technologies and pricing models have helped venues such as Nasdaq Stock Market, BATS Exchange and Direct Edge gain more than 53 percent of overall market share, notes Celent in a Feb. 17 study, “The New Liquidity Shift: U.S. Equities Markets 2.0.” While specialists--now designated market makers (DMMs)--accounted for 27 percent of volumes last year, they will see their share fall to 10 percent in 2012, predicts analyst David Easthope, author of the report.
“Electronic order books have successfully penetrated the market to such an extent that they [now handle the] majority of liquidity,” said Easthope, adding that the venues have done this “very well and in a rapid fashion.” He attributes the fading fortunes of the DMMs not only to increased competition for liquidity from the newer trading platforms, but also their weakening price improvement.
Despite efforts to change the situation, including a restructuring of its floor, the New York Stock Exchange “will not be able to stop the slow slide into obscurity of the specialists,” said Easthope. Specialists lost the ability to take a first look at orders for stocks they represent when they became DMMs last year, but they can now use options and futures to hedge risk and are treated as equal participants with other brokers when shares are allocated for orders at the same bid or offer.
“As much as NYSE attempts to change the model, with this new floor system and not calling them specialists but designated market makers, we don’t think this is enough to reverse this trend,” continued Easthope. “If you look at the market structure, it is a highly interconnected, electronic, technology-driven landscape with innovative pricing techniques and rebates, and that’s not really what the specialists offer.”
An NYSE spokesperson noted that the enhancements to the exchange’s market model, increased participation by designated market makers and floor brokers, the addition of secondary liquidity providers, and upcoming pricing changes and reduction of latency are creating “a very compelling combination of value for our customers. We are targeting a share of 50 percent by year-end.”
On a Feb. 9 earnings call, NYSE Euronext CEO Duncan Niederauer said the new model “levels the playing field and eliminates the information advantage for the specialist. … With this model in place, we begin 2009 able to focus on enhancing functionality, further improving the speed of our systems and developing a more comprehensive approach for adding value for our listed issuers and trading customers on the NYSE.”
In the report, Easthope noted that “a new breed of liquidity providers,” undeterred by the market turmoil, is filling the gaps created by Wall Street firms that are struggling or have collapsed. Market makers such as Citadel Derivatives Group and Getco, which both account for about 4 percent to 5 percent of average daily volume, are seeing their presence grow, he added. “In a highly electronic and interlinked marketplace with high rebate incentives, these firms will comprise a staggering 10 percent of volume by 2012 as market-making operations thrive and expand,” said Easthope.
US equity market structure favours electronic trading – Celent
Tue, 2009-02-17 18:46
Electronic order books and market makers will continue to benefit from the changes to US market structure wrought by new pricing models, technology and regulation, while use of floor traders will continue to decline, according to a new study from research firm Celent.
The study, ‘The New Liquidity Shift: US Equities Markets 2.0’, predicts that US electronic order books, such as Nasdaq, NYSE Arca, BATS Trading and Direct Edge, will account for 65% of total US share volume by 2012, up 12 percentage points from their current market share of 53%.
In addition, the study asserts that a new breed of electronic market makers, including Citadel Derivatives and Getco, is filling the gaps left by failed or weakened Wall Street investment banks.
These new market makers currently accounting for 4-5% of average daily share volume, but Celent expects their market share to grow to 10% by 2012, as their operations thrive and expand.
“The financial crisis affecting many large and formerly competitive dealers makes the evolutionary path of these new market makers that much more accelerated,” said David Easthope, senior analyst with Celent’s Securities and Investments Group and author of the report, in a statement.
The success of electronic order books and market makers will come at the expense of specialists – floor traders on the New York Stock Exchange (NYSE) who hold inventories of specific stocks. Specialist firms include Spear Leeds and Kellogg, Bank of America Specialists and Van der Moolen. The study attributed specialists’ waning appeal to weaker price improvement and increased competition from electronic order books.
Despite a dramatic restructuring of NYSE’s operations, including increasing rebates for high frequency traders and execution algorithms, the market share of NYSE floor specialists is expected to shrink to just 10% of total US share volume in 2012 from 27% in 2008. The study considered the greater price improvement that can be found on electronic order books – which has nearly tripled since Reg NMS – to be a significant reason for this decrease. |
