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The unintended consequences of financial sector reform can be predicted and curtailed by closer attention to their impact on market fairness and efficiency, says Australian entrepreneur and academic Professor Michael Aitken.
Currently on a global tour of financial centres, Aitken has developed a Market Quality Dashboard (MQD) to help work out the potential effect of a market design change, using academically accepted measures of market efficiency and fairness. The idea is that the pros and cons of a new rule or design change – anything from a change in tick sizes, trading hours or auction processes to the imposition of charges for high order-to-trade ratios – can be measured in terms of its contribution to achieving the overall mandate of the financial regulator, which is typically to ensure markets are fair and efficient. “No one has yet come up with the data to back up market design changes. The current pace of reforms will lead to changes being implemented without a retrospective look at their effects. We’re in danger of implementing changes that should not be introduced,” he argues. As an example Aitken cites the introduction of a levy to penalise high order-to-trade ratios, which has had the side effect of raising transaction costs. The application will be ready for use in roughly six weeks and part of the reason for Aitken’s tour is to persuade market information providers to supply data on a pro bono basis for 12 months to allow regulators to fully interrogate the MQD as part of their efforts to monitor and, where necessary, reform financial markets. He also hopes the MQD will be used not only by other established stakeholders in the financial markets, such as exchanges and brokers, but also by institutional investors, pension funds, and corporates. “End-investors and their representatives do not typically have an adequate share of voice in the market reform process, despite the fact that they are often the ones hardest hit,” asserts Aitken. “We want to empower the buy-side to get more involved with the debate.” The aims are ambitious, but Aitken has a strong track record. He is founder, chief scientist and CEO at the Capital Markets Cooperative Research Centre (CMCRC), a 40-strong, Sydney based research group which is funded both by the industry and the Australian government and has done pioneering evidence-based research into the impact of high-frequency trading. He is chair of capital market technologies at the University of New South Wales, where he is also professor of finance at the university’s Australian School of Business. Aitken also founded SMARTS Group, the market surveillance technology specialist acquired by Nasdaq OMX in 2010. Bearing in mind the current pace of change to market structure in most jurisdictions – exchange competition and technology upgrades are changing financial markets processes almost as much as post-crisis reforms – Aitken is under no illusions about the difficulty of isolating the impacts of individual design changes. But if we can define and measure market fairness and efficiency, he says, we should at least use the available information to better understand – and avoid – the consequences of ill-conceived rule changes. Users of the MQD can select from a number of metrics – for example transaction cost and price discovery representing efficiency and insider trading and market manipulation representing fairness – and compare their values before and after the introduction of a change to the market. If any metrics suggest a deterioration in market quality without an offsetting appreciation elsewhere, this might suggest a need to reconsider, says Aitken. The first version of the dashboard, which covers 25 markets and 30 pre-loaded metrics, will be made available on a software-as-a-service basis. CMCRC expects to be able to allow users to create their own metrics and import proprietary data to augment market data. On launch, users will be able to study sub-markets, sectors and groups of stocks with a specific market, but stock groupings will be entirely user-driven in future iterations.
Source: The Trade News
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