New Greenwich Report Examines How Technologic Innovation Drives Evolution of Market Structure
Warnings that market fragmentation is undermining the efficiency and even the stability of U.S. equity markets are more myth than reality—but they are also important.
A new report by Greenwich Associates, From Crowd to Cloud: The Myth and Magnitude of Fragmentation in U.S. Equities, traces the evolution of the U.S. equity market from its open outcry roots to its current-day iteration. It reviews the history of the U.S. equity market through five distinct stages starting with the foundation of the modern market structure in 1969 and covers seminal events ranging from the establishment of NASDAQ, 1987’s Black Monday and the implementation of Reg ATS, Decimalization and Reg NMS to the 2010 Flash Crash and today’s debates about the role of high-frequency traders.
The report concludes that dire predictions about the negative impact of technologic innovations on institutional investors and overall market stability have almost always been overstated, but also have played a critical role in the market’s evolution by driving regulatory actions that helped define today’s market structure.
The picture that emerges is one of continuous cycle: while technology spurs innovation in execution, unexpected market events and concerns about investor protection prompting regulatory intervention, the market adapts to the new rules just in time for the next technological disruption. The repetition of this cycle has kept the market on a trajectory toward increased speed, complexity and regulation.
“A close examination of the history of the U.S. market shows that its evolution has been driven by this race of market participants and regulators struggling to adjust to technologies that alter the structure of the marketplace,” says John Colon, Greenwich Associates Managing Director. “At its essence, market fragmentation in the equities market is the emergence of new segments in a previously homogeneous market—which is precisely what we are seeing today.”
Technology Creates New Challenges and Offers New Solutions
This history places current warnings about market fragmentation in new context. Today’s market is assimilating a wave of technological innovations and disruptions. Brokers, investors and regulators will all play a role in that assimilation—as will technology providers.
Institutional traders are looking to a new wave of technologies to provide protection and flush out bad venues, rather than just blindly routing trades based on economic incentives. The buy-side trader today is looking for the vendors and brokers focused on building tools that inform and empower.
“Institutional traders today don’t see fragmentation as the problem, but they see lack of transparency and control into all the disparate trading venues as a severe disadvantage and rely on their best brokers and vendors to close the gap,” says John Colon.