“New rules to prompt surge in trading”, said a recent headline in the Financial Times. The article tells us that, “Controversial rules coming into force on Monday are set to spur a fundamental shake-up in US equity markets, with a widely predicted surge in trading volume expected to put technology and systems under pressure and benefit smaller, faster markets.”
The new rules go under the moniker, “Regulation National Market System (Reg NMS) and essentially unite the New York Stock Exchange with the NASDAQ into a giant order system, automatically routing a trade to the exchange that offers the best price.
We don’t really know what to think of this. There’s nothing more frustrating than having to pay more to exit or enter a position than you should simply because a market maker refuses to match your order with another order on a different market. More transparent trading should make for tighter bid-ask spreads, quicker execution, and less profit for market makers. Good for the little guy, less good for the big guys.
But what will a huge increase in trading mean? First thought: higher volatility. With buyers and sellers matched automatically rather than through open-outcry or through human managed order books, you’ll probably see an increase in both trading volume and volatility. Beyond that? Who knows? But Reg NMS could be a key ingredient in already spicy broth of inter-connected-and unstable-global markets.
The Daily Reckoning Australia