Recently, Molly McLaughlin Schilling interviewed Colin Clark of the New York Stock Exchange and gained insight of what is happening now, and in the future, at the Exchange.
Molly Schilling: Hi Colin. Can you tell us what you do here at the New York Stock Exchange?
Colin Clark: I am the head of Strategic Market Analysis and our group is responsible for analyzing various aspects of our business providing strategic and insightful information to senior management – we identify strategic small and large transactions for potential revenue synergies. We develop new products and leverage existing products across the two enterprises – NYSE and Euronext – we identify opportunities to leverage our trading platforms, distribution and sales forces to drive greater cash trade in revenues and greater derivative trading revenues.
For example, we’re rolling out a new crossing service called Match Point that allows us to facilitate block trading and trade portfolio throughout the day. It’s very good technology that can be extended into the Euronext markets, as well as other potential strategic partners offering the ability to trade global listings. Euronext has a product called Be Clear that allows you to trade over-the-counter derivatives, a sizable block of trades in over-the-counter derivatives.
ETF products will combine lists of companies on both NYSE and Euronext. We’re exploring opportunities to create new global indices. I believe our two markets account for 80 of the largest 100 companies by market cap throughout the world. With our market and one of the largest European exchanges, and also our new strategic alliance with the Tokyo Stock Exchange, we’ve got a presence in three major regions and the three major currencies. And there’s opportunity to develop new products, ETF products, given those relationships and that geographic extension.
MS: How do you allow for radical time-zone shifts in creating intercontinental ETFs?
CC: We can do a listing on both of our markets, so that it’s trading throughout the majority of the day. ETFs get dual listed, especially if it’s developed by us. ETFs are a very fast growing segment of our market as well as the European market… and only developing in the Asian markets.
MS: Is this stimulating global liquidity?
CC: I think the stats are something like 20% of US investor assets are invested in non US equities, and that’s up from 12%, I believe, since 2001. The capital market has been looking more globally. US investment banks have been setting up operations and establishing very strong collaborations in Europe and Asia. They are seeing faster growth in their investment banking business in the European and Asian regions than they are in the US region. And they anticipate that in the next ten years or so, there will be more significant growth in these areas.
Again, these investment banks and broker dealers are big customers of exchanges. NYSE/ Euronext is the first real sizable cross-border merger and I think we can expect to see more in the future. And with that will come with technology sharing, technology integration, better linkages of the various markets – which will make it easier, more efficient and less costly for traders and customers to access the markets. Another important development in the exchange space is electronic migration – technology innovation is allowing for the exchanges to reach out to a broad customer base. The Chicago exchanges opened up some of those products on their electronic platforms and they were able to reach a broader audience – extending their offerings globally, as opposed to having it congregated within the confines of the trading pit.
MS: Interesting word ‘migration,’ is that a metaphor, or is it used by the techie guys? Do they use the word migration?
CC: I don’t know if the techie guys use it, I think the analyst community uses it as a way to discuss the transition of some of the exchanges from traditional floor-based trading to more electronic trading, and they describe it in the context of electronic migration.
MS: On a broader note, is there an Iraq stock market? Would it move if it got established?
CC: For starters we’ve got our hands full integrating Euronext. We took a 5% stake in the National Stock Exchange of India. There’s no ability as to invest in China at this point – they’re restricted to foreign investments, so there’s no opportunities there. I wouldn’t put Iraq on the list as an area of focus right now for us. But there might be other areas in the Middle East that would interest us, eventually. We have, in effect, a working alliance with the Tokyo Stock Market, where we’re actually meeting with each other on a regular basis and exploring new development opportunities. Tokyo plans to go public by the end of 2009. We’ve been through that process, so we can be helpful in terms of lessons learned relating to next generation technology – significant volume, new functionality, bandwidth requirements, order type requirements, as well as trading synergies and market data synergies. NYSE initiated ARCA in March 2006. Our previous system was very restricted, so ARCA eliminated restrictions on size of trade and frequency of trade – it used to be 30 seconds – it’s now much faster. Specialists on the floor are now equipped to do both auction and electronic transactions. With the roll-out of hybrid we’ve seen 80% of our volume moving to AutoX trading, or electronic trading, up from a previous 15%.
MS: Basically, you’re speeding the whole thing up?
CC: I would say that our customers are interested in faster executions – and a big component of hybrid is to create a faster market; and we want to do that in conjunction with maintaining the traditional high quality market standards of the NYSE. But there is definitely a certain customer base whose trading strategies involve high velocity and high volume.
MS: The hedge funds…
CC: No, not necessarily the hedge fund – I’m talking about statistical arbitrage and pair traders – who are “black box” traders. Hedge funds place trades to invest in a company. I mean, they may do it for a day, or a week or a month, but when they’re putting their money to work it’s because they’re investing in a company based on their view on that particular company. Whereas, black box traders may be playing a kind of an anomaly in the market – maybe playing different movements and volumes and prices on two stocks. They have a different type of approach.
MS: Is it a technical approach?
CC: I would just say it’s a more quantitative approach to trading, utilizing algorithms that are reading specific HEP data.
MS: Does this represent a large percentage of the daily volume for NYSE?
CC: It’s a sizable percentage. It’s not easy to quantify. A given company may be implementing black box trading in one part of their business and not in another – so you’re not necessarily going to get the whole picture. But it has been a growing and sizable part of the overall trading business.
MS: And you’re saying that this is different from typical hedge fund trading – this is not the same thing?
CC: Right. Hedge fund investors – I wouldn’t say they’re black box traders. They’re investing assets for their customers. These black box traders are using algorithms to analyze movements in stock prices and volumes and balances, and price variations on different markets – and trying to make money on that, as opposed to really having a view on a particular company’s fundamentals.
MS: Are the black box folks part of the large brokerage firms, or are they offbeat little companies? – Where do they fit into the community?
CC: They’re both. You can have a big brokerage firm that has a small group in their organization that focuses on black box trading – and smaller boutique shops that are in that business. So I think it’s kind of pervasive throughout the trading community – in various pockets.
MS: Does this require another whole set of electronic equipment?
CC: Black box traders’ demands are different – they require faster executions in order to get a set price that they need in order to be able to provide on that trade. So they really demand low latency lines and they need a lot of bandwidth. They need to be able to cancel out of trades very quickly. And some of them require co-location, to be as close as possible to the trading infrastructure because every millisecond counts.
MS: Is the NYSE cultivating this client base?
CC: All customers are demanding more speed, and our hybrid system caters to faster executions and greater transparency of price on the platform. The black box traders – on the one hand – there’s a view that they could be predatorial. But, generally, everyone is concerned about any type of leakage of information. I mean, anyone could be a predator. But black box traders could be viewed as predators. On the other hand, they provide value in terms of providing liquidity in the marketplace. Some exchanges like ARCA offer rebates, where if you post visible liquidity on the platform you’ll get paid for that liquidity. So there’s value for black box traders to put liquidity on the books for others to trade on. So, overall, there are some negative, but also some positive benefits to this type of trading.
MS: Is this global – black box trading – or is it more in our neck of the woods?
CC: I think it’s certainly more pervasive in the US. Black box trading is really a statistical arbitrage and a real quantitative strategy. For us, it’s about looking to help, for example, a large institutional customer execute a big block trade. And the algorithms help to determine how to place that order into the market when and where there is liquidity with the purpose of minimizing market impact costs. Algorithm trading continues to grow as our markets get more electronic. In Europe – which is not as electronic – it’s not as sizable, but it’s starting to grow more significantly. So I think this is certainly the way the markets are moving.
MS: Is this what electronic migration is about?
CC: Yes, I think this type of trading is certainly going to migrate into other markets. As those markets become more liquid I think that the ability to trade algorithmically is partly a by-product of technology and innovation, but it’s also a by-product of a more liquid market – it’s a more effective technique and provides for more liquid stocks where there is a lot of activity. So, as markets develop, there’s more potential for that type of trading to emerge.
MS: When do you think NYSE/Euronext ETFs will be available?
CC: We haven’t mentioned any specific time frame, but I think there are going to be some significant developments as we do integrate Euronext over the next couple of years.
MS: So, maybe in two years?
CC: It depends – system integration is going to take some time. Rolling out a new ETF may not take as long, but it depends on the initiative.
MS: Thank you, Colin, very much for your time.
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