MMing to improve with Reg NMS reform?

F

ferrycorsten

Haim Bodek ("Dark Pools") has aggressively been leading the charge for overhauling Reg NMS. His proposal is based around eliminating the special order types (or, making them available to non-HFTs), but he also discusses the need to revitalize the MM industry. Specifically, "To the degree that advantages and asymmetries exist in the market for certain classes of participants, such advantages must be made completely transparent and for the most part should be associated with adequate performance in meeting market maker obligations. The movement away from official market maker roles at many venues has resulted in an overall market environment where the “new market makers” (i.e. HFTs) share no responsibility in serving the investing public, maintaining fair and orderly markets, or developing concentrated order flow sources into the venue. The re-establishment of market making roles with incentives will assist in enhancing the integrity and liquidity of the marketplace."

I have been looking for catalysts to the MM game for a while now (I want to be a MM). Does anyone think Haim is onto something and a rebound could be in play?
 
The problem right now is there's huge barriers to entry and little to no transparency into the "new" market making. I dont mind HFT getting subpenny advantages, special order types etc. as long as everyone has access to it. New regulations should force this out into the open so everyone can play.
 
There is a reason why MM/Specialist model was not viable: money.

Stock market cap is about 15 trillion not counting derivatives. This money has not been printed yet.

No one could maintain orderly markets in given security with limited capital. NYSE specialists invoke LRP (liquidity replenishment ) quite often even in orderly markets. Knight could only trade on the wrong side of market for half an hour before going bankrupt.

So here comes HFT and market fragmentation; It replaces deep book with very thin one using speed - meaning that unwanted shares are held for very short period of time creating pseudo-liquidity and perception of orderly markets. At this market levels it is absolutely essential service (or pseudo-service?).

As many remember old MM system did not work very well and had many problems with primary role of maintaining orderly markets not mentioning cost and quality of execution.

Reviving "old" model is a pipe dream at this market levels because of money needed to support prices for number of shares issued and traded (and growing).
 
vicirek said:
There is a reason why MM/Specialist model was not viable: money.

Stock market cap is about 15 trillion not counting derivatives. This money has not been printed yet.

No one could maintain orderly markets in given security with limited capital. NYSE specialists invoke LRP (liquidity replenishment ) quite often even in orderly markets. Knight could only trade on the wrong side of market for half an hour before going bankrupt.

So here comes HFT and market fragmentation; It replaces deep book with very thin one using speed - meaning that unwanted shares are held for very short period of time creating pseudo-liquidity and perception of orderly markets. At this market levels it is absolutely essential service (or pseudo-service?).

As many remember old MM system did not work very well and had many problems with primary role of maintaining orderly markets not mentioning cost and quality of execution.

Reviving "old" model is a pipe dream at this market levels because of money needed to support prices for number of shares issued and traded (and growing).
More...

Interesting. Do you have any more insights into what the cause of the 1987 crash was? Is it related to your opening comment?

I pay for my stocks with my cash in Canada, so how does your 15 trillion unprinted money square with that? Where did my money go? Granted there is margin lending over and under depending on feast or famine in the markets.
 
TskTsk said:
I dont mind HFT getting subpenny advantages, special order types etc. as long as everyone has access to it. New regulations should force this out into the open so everyone can play.
More...

Everyone has access to these things already. It is just that your broker may not allow it.
 
StarDust9182 said:
Interesting. Do you have any more insights into what the cause of the 1987 crash was? Is it related to your opening comment?

I pay for my stocks with my cash in Canada, so how does your 15 trillion unprinted money square with that? Where did my money go? Granted there is margin lending over and under depending on feast or famine in the markets.
More...

First of all float (shares available for trading) is much less, then fraction of it actually hits the markets. The 15 trillion is just a number to put things into proper perspective. Most importantly issuers are very creative in diluting stocks with options, convertibles, acquisitions etc. being able to print the money. Your Canadian Dollar goes to the guy who took the other side of the trade. If he is HFT/ MM/Speculator etc it stays in the pool of available market liquidity otherwise it is withdrawn from market and become Capital to fund new ventures or grow companies or becomes Money to spend on goods and services.

Crash of 1987 was caused by multiple factors like increased popularity of stock market investing by general public, proliferation of funds with access to option markets for portfolio insurance, emergence of quantitative methods and computerized portfolio management by funds to enter or exit position. Bottom line was that there were too many people on one side of the trade and fast drop in price triggered too many sell orders that accelerated market decline because MM did not have enough liquidity to maintain orderly markets and step in and stop selling. One story to remember is that some exchanges (I think it was one of the Chicago one) could not open the next day unless they received financial support which finally came during overnight hours so they could open and total market panic was averted.

I think that events of 1987 were clearly showing that MM model is not suited for modern markets (with exploding inflationary pressure and shares dilution). It has been decided to let markets loose to have broader base of liquidity for decades to come. This new model is not perfect but allowed to absorb those tons of paper being printed every day by our bright financial engineers be it at the Fed and indirectly Government down to banks, corporations and the like.
 
how much influence does morgan style and peers have in tilting things in their favor, that's the elephant in the room
 
vicirek said:
First of all float (shares available for trading) is much less, then fraction of it actually hits the markets. The 15 trillion is just a number to put things into proper perspective. Most importantly issuers are very creative in diluting stocks with options, convertibles, acquisitions etc. being able to print the money. Your Canadian Dollar goes to the guy who took the other side of the trade. If he is HFT/ MM/Speculator etc it stays in the pool of available market liquidity otherwise it is withdrawn from market and become Capital to fund new ventures or grow companies or becomes Money to spend on goods and services.

Crash of 1987 was caused by multiple factors like increased popularity of stock market investing by general public, proliferation of funds with access to option markets for portfolio insurance, emergence of quantitative methods and computerized portfolio management by funds to enter or exit position. Bottom line was that there were too many people on one side of the trade and fast drop in price triggered too many sell orders that accelerated market decline because MM did not have enough liquidity to maintain orderly markets and step in and stop selling. One story to remember is that some exchanges (I think it was one of the Chicago one) could not open the next day unless they received financial support which finally came during overnight hours so they could open and total market panic was averted.

I think that events of 1987 were clearly showing that MM model is not suited for modern markets (with exploding inflationary pressure and shares dilution). It has been decided to let markets loose to have broader base of liquidity for decades to come. This new model is not perfect but allowed to absorb those tons of paper being printed every day by our bright financial engineers be it at the Fed and indirectly Government down to banks, corporations and the like.
More...

The explanation of the 1987 crash has always bothered me. I was new to markets then and didn't understand the world as deeply as I (think I LOL!) do now. Officially, the cause was portfolio insurance, but that never sat well with me since it made no sense to me. Perhaps it was a contributing factor, but I have always wondered about that explanation.

In modern times, we had a flash crash. The explanation was too many shares dumped too fast by an unnamed mutual fund group using a rogue algorithm. That explanation bothers me for the same reason as the 1987 explanation. It makes no sense to me.

IMO I think the root cause of the 1987 crash is related to the April 23 1973 (CBOT opening bell) and August 15 1971 (gold standard change). I think it is related to what changed in 1980 (http://www.elitetrader.com/vb/showthread.php?t=260513&highlight=changed+1980) It was in 1972 that SEC began the NMS pursuit.

Here is my question: Can a market or a world financial system or a world insurance system exist long term (200 years) without a buyer of last resort? And if not, then why not?
 
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