Regulation NMS: Preparing for Impact
Market Impact
The number of market trades is growing quickly, while the rate of increase for messages is climbing even more. This phenomenon, which we have been witnessing for years, will be compounded by the growth of intermarket participants to which orders must be routed with each intermarket sweep. Regardless of whether regionals are all compliant on Day 1, the messaging numbers will grow throughout the rollout of Regulation NMS and in the period immediately following its phase-in. TABB Group projects that the increasing number of protected participants, combined with the typical message-per-trade growth, will lead to an explosion of intermarket messages that will become well over 2 billion messages per day by 2009, a growth rate of 225 percent (see Exhibit 2, at right).
How are market participants going to manage this widespread and unprecedented growth? They will be forced to expand their already large investments in both routing power and bandwidth. Years ago, a market center's response time was measured in seconds, while today it is most commonly tracked in milliseconds. However, there has been an emergence of critical market center benchmarks on a nanosecond scale. As the manual markets become automated, and as more trades are driven by computer programs rather than human intervention, latency will become intolerable. Trading centers that wish to compete for this most-demanding flow not only must automate, deal with a consistent doubling of messages, and be smarter about where and how they route, they also will be forced to do it faster than ever before.
Looking farther into the future, there are even more side effects of this market shift. The amplified message volumes, combined with the increased pace of market movement driven by automated and algorithmic trading, will create an environment in which firms will struggle to keep their heads above water and comply. Participants not only will need to be compliant, they also will need to prove compliance, which will be a considerable challenge. The data and processes that are required to provide that necessary audit very well may be things that these firms are not prepared to offer, which will lead them to seek additional solutions. If a firm truly desires to be a player in the new game, then it will need to have the technology in place to support this audit.
The full extent of the impact of Regulation NMS will be considerable, as wide-reaching changes to the market infrastructures already are being put into motion. These new SEC mandates already require a significant investment in routing, capacity, and storage and compliance capabilities, and hundreds of millions of dollars of industry spending over the next several years on technology and services. In the resulting landscape, there will be clear definition between winners and losers across market centers and broker-dealers - those that made the investment and those that didn't.
About the Author:
Jeromee Johnson brings proven electronic trading experience to his role as senior analyst at TABB Group. As director of product development and professional services at agency broker-dealer UNX from 2003 to 2005, he helped traders create trading strategies and algorithmic execution mechanisms. As an independent financial services technical consultant from 2002 to 2003, Johnson developed the technology architecture for a start-up ECN, among other projects. And from 2000 to 2002, he was the senior technical engineer for Javelin Technologies, where he designed automated and algorithmic trading solutions.
Tweet This