1. Evolution of U.S. Financial Markets Q
Developed by: Tellefsen and Company, LLC

2. How Do You Navigate Today’s Markets?
Confused about how the U.S. markets work?
If you did not have a solid grasp of the U.S. market structure back in 2000 (prior to Reg. NMS), you will probably have a tough time navigating the various players and their value proposition today
The markets have evolved - what does the landscape look like today?
Evolution of U.S. Financial Markets

3. Today’s Market Landscape
Evolution of U.S. Financial Markets

4. Global Trends / Background
Growth of electronic trading / contraction of open outcry: equities, options and futures; spread compression
Growing sophistication of the buy side
The Internet has matured, so has trading technology
Evolution of financial technologies (FinTech)
Demutualization evolution of exchange business and revenue models, market makers, payment for order flow (maker-taker, taker-maker)
Exchange mergers and acquisitions, globalization of markets.
Evolution of U.S. Financial Markets

5. Global Trends / Background (Cont’d) …
Maturity of prime brokerage business model
Direct market access (DMA)
Impacts from de-leveraging and residual effects of the global financial crisis, post-Lehman Bros.
Continued market fragmentation – equities and options
Regulatory evolution:
Commodity Futures Modernization Act (2000)
SEC Reg. NMS, demise of the InterMarket Trading System for equities (2005)
Dodd-Frank Act regulations
MiFID, MiFIR.
Evolution of U.S. Financial Markets

6. Global Trends / Background (Cont’d) …
Evolution of market making from bank-dominated MMs to proprietary trading firms
Inter-relationship of asset classes, markets
Portfolio margining
Growth of algorithmic and high-frequency trading
Proximity hosting (co-location)
Demise of Lehman Bros., MF Global
The market is evolutionary, not (necessarily) revolutionary!
Evolution of U.S. Financial Markets

7. Evolution of U.S. Financial Markets
U.S. Equities Markets
2000
2017
Evolution of U.S. Financial Markets

8. Evolution of U.S. Financial Markets
What Happened ?
Implementation of SEC Reg. NMS, demise of the Inter-market Trading System
Exchanges demutualized, went public
Exchange consolidation, continued globalization
Evolution of NYSE, Nasdaq duopoly
Internalization of order flow, rise of new, more nimble ATS/dark pools
Growth of direct market access users, algorithmic trading, new order types, high frequency trading and proximity hosting as differentiators
Banks exited market making, prop trading firms moved in.
Evolution of U.S. Financial Markets

9. Evolution of U.S. Financial Markets
U.S. Options Markets
2000
2017
Evolution of U.S. Financial Markets

10. Evolution of U.S. Financial Markets
What Happened ?
Growth of electronic trading / elimination of open outcry
Decimalization, penny quoting, spread compression
Preferencing of orders, payment for order flow
Exchange acquisitions
Algorithmic and high frequency trading, new order types
Banks exited market making, prop trading firms moved in
Market fragmentation and evolution of new players - 5 markets are now 14!
Evolution of U.S. Financial Markets

11. Evolution of U.S. Financial Markets
U.S. Futures Markets
2000
2017
Evolution of U.S. Financial Markets

12. Evolution of U.S. Financial Markets
What Happened ?
Growth of electronic trading / elimination of open outcry trading
Exchanges demutualized, went public; exchange consolidation and globalization
Demise of Enron, Lehman, MF Global, Peregrine
Introduction of new players - some came, some went
Direct market access and co-location
New products that align risk to users needs
Convergence of OTC and ETD products - rise of OTC clearing, futures look-alikes
Portfolio margining.
Evolution of U.S. Financial Markets

13. Evolution of U.S. Financial Markets
U.S. Clearing Houses
2000
2017
Evolution of U.S. Financial Markets

14. Evolution of U.S. Financial Markets
What Happened ?
Global clearing member consolidation (Bear Stearns, Jefferies Bache, Lehman Bros., MF Global)
Exchange-owned vs member-controlled clearing houses
Clearing house “silos” versus non-profit, industry utilities
Introduction of new products: futures look-alikes, portfolio margining and cleared OTC products as new revenue streams
Convergence of OTC and ETD products
Cross-margining of cleared futures vs OTC swaps.
Evolution of U.S. Financial Markets

15. Evolution of U.S. Financial Markets
Conclusions
US market structure is evolutionary
Players need to be faster, cheaper, better providers of services
Potential opportunities/inroads/threats from distributed ledger technologies (block chain)
Greatest regulatory changes in over 75 years
Continued need for technology investments – capacity, compliance, productivity, competitive edge.
Evolution of U.S. Financial Markets