The Many Arms Races
Competition in terms of an arms race was prevalent in the exchange business, with mergers and acquisitions making headlines, and competitors evolving from ECNs, and crossing networks. Underlying the milestone transactions was intense competition for trading flow, which was waged through pricing schedules and rule changes.
Funds competed for assets to manage, and brokers to provide their products. They grew distribution to attract clients to their primary business, and invested in execution as a means of monetising the flow. Research and execution were tightly coupled, at least until the end of 2002.
Unbundling research from execution came to the world in a neatly packaged consultation paper CP154, “Best Execution”, which many believe contributed significantly to the demand for electronic equity execution products. Brokers invested into their execution capabilities, including expanding vertically into the exchange functionality with dark pools.
Trading firms then benefited from exchange competition and rising volumes. Their early experiments with trading engines had become mainstream, and significant progress had been made into research capabilities and the performance of their strategies. Some also had built out their low latency environments, including market data, execution, and co-location. Trading firms were now very visible through the volume that they were trading. Their volumes were attractive to brokers, and many invested in faster market access to attract these firms.
Therefore the changes in environment and the changes in technology became coupled, which led to the rapid evolution into high frequency trading for many exchanges.
All in the Rules
The world from 2007 onwards has seen a marked de-leveraging and consequently a decline in transaction volumes in many markets. Proportionately, automated trading made up more than half the volume of exchanges, attracting examination from the wider public.
Winning Isn’t Just About Being Faster, It’s About Being Better
