0. Modern US Equity Market Structure
Rise of Off-Exchange Trading
Very fragmented and highly automated
A product of regulatory changes and rapid advances in technology

1. Modern US Equity Market Structure
Rise of Off-Exchange Trading
11 Exchanges
Nearly 50 “Dark Pools”
Variety of Fee Structures and Business Models
1998: Regulation ATS
opened the door to the creation of ECNs, ATSs, and off exchange trading venues (“Dark Pools”)
2000: Decimalization increased competition to quote spawning the creation of Electronic Market Makers and other types of HFT
85% of KO traded on NYSE before…
2007: Regulation NMS
required exchanges to route marketable orders to venue with best quote, ensuring price priority across venues and opening the door to increase competition
…but only 25% after Reg ATS, Decimalization, and Reg NMS
Source: Bernstein

2. Modern US Equity Market Structure
The Rise of HFT
HFT grew aggressively, became less profitable, and is now cashing out
Getco bought Knight Capital (KCG)
Virtu IPO
Flow Traders IPO
Regulatory changes and technological advancements
allowed HFT
to flourish
Source: TABB Group
Though the space has become less profitable
More in dark, tighter spreads, smaller trade sizes
Source: TABB Group
Source: Fidessa

3. Modern US Equity Market Structure
Market Response - IEX & Flash Boys
Michael Lewis’ “Flash Boys”
released on March 31,
preceded by 60 Minutes
feature on Sunday prior
IEX expected to launch exchange in Q1 2016
IEX steadily gaining market share

4. Modern US Equity Market Structure
Diverse Locations for Trading Centers
Source: datacenterknowledge.com

5. Modern US Equity Market Structure
Latency Arbitrage
Source: qz.com

6. Modern US Equity Market Structure
Securities Information Processor (SIP) Arbitrage
Source: qz.com

7. Modern US Equity Market Structure
High Frequency Trading In Action – 500 milliseconds
Source: Nanex

8. AUTOMATED DECISION MAKING – BROKER ALGORITHMS
Automated Decision Making plays a vital role in today’s equity markets and is the core underpinning of broker algorithms.
Broker algorithms provide mutual funds, hedge funds and other types of funds the ability to execute their large orders intelligently in a complex environment.
These algorithms could be described as a “search engine” – find the best and most relevant results based on limited information and a broad spectrum of choices.
The decisions made by these algorithms are based on a multiple of factors:
How many shares are you trying to execute?
What is the objective of the algorithm in terms of trading style?
What trading venues are available to chose from and where are they located?
What is the current supply and demand?
What estimations can be applied?
How do we deal with gaming factors (High Frequency Trading)?

9. AUTOMATED DECISION MAKING – BROKER ALGORITHMS
Brief Overview of Automated Trading Process
Source: maroonanalytics.com

10. AUTOMATED DECISION MAKING – BROKER ALGORITHMS
Supply and Demand – A View of Buyers and Sellers at Various Prices
Source: Bloomberg