Soaring cost of US share dealing risks ‘investor harm’

October 17, 2013 8:14 pm

Soaring cost of US share dealing risks ‘investor harm’

By Arash Massoudi in New York

The costs of keeping up with the complexity of the US equity market may be harming individual savers, says an executive from one of the world’s largest institutional investing firms. William Baxter, head of global programme trading and market structure at Fidelity, said the costs incurred by buyside firms to stay competitive with technological advances in stock trading on the US market continue to soar, even as trading volumes have fallen sharply in recent years.“The big question is whether the market is incurring more costs as a net benefit, and is that net benefit translating down to net investors,” he said in remarks at a securities industry conference in New York on Thursday.

Mr Baxter said that might add credence to concerns that the US equity market, where firms trade across 13 exchanges and 50 alternate trading venues, has become “exceedingly complex”.

Mr Baxter said trading for the average buyside institutional firms has become much faster, requiring significant investments to remain competitive in a market where sophisticated traders are constantly creating new high-speed trading strategies.

Larger firms such as Fidelity are able to invest in technology, but the concern is that the costs for the broader institutional industry are rising quickly, he added.

The comments come as US regulators and the securities industry debate the merits of a wide-ranging review of the country’s equity markets, where trading patterns have changed rapidly with the rise of electronic dealing and regulatory reforms. Dan Gallagher, Securities and Exchange Commission commissioner, spoke at the conference and said a holistic review was needed because reforms under the SEC’s Reg NMS, implemented in 2007, have increased the complexity of the US market and the number of malfunctions.

“The complexity of the markets today is in large part due to rational responses by market participants to the requirements, incentives and disincentives – both intended and unintended – arising from laws and regulations,” said Mr Gallagher.

Since the introduction of Reg NMS, the percentage of share trading that has dispersed from the main US exchanges to private venues and internal platforms run by brokers has risen to about 40 per cent.

“There’s natural complexity and the complexity we’ve brought on ourselves,” said Joseph Mecane, executive vice-president of NYSE Euronext. “It’s becoming difficult to incentivise firms to make markets publicly.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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