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The Real Value of Venue Transparency

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One of the greatest concerns of the most current recession was the lack of jobs. Pundits have commented on the jobless nature of the recent recovery. Republicans have decried democrats over taxing the job creators. And until recently, the unemployment rate has remained stubbornly above 9 percent. What if Tag 30 could put the unemployed back to work?

Tag 30 (also known as the Last Market field) refers to the FIX message field that contains data about the venue at which an equity trade is executed. One may wonder how this ties in to the current employment situation. Tag 30 is (or can be) populated on every fill that is received on every trade of a U.S. equity in the market. According to Bloomberg data, the average daily volume in the U.S. is about 7 billion shares and the average fill size is 230 shares; this implies there are approximately 30 million fill messages per day that can or should contain Tag 30 venue information. That is a wealth of information demanding interpretation and understanding that can lead to better trading. Out-of-work traders and quantitative analysts could to be put to work filling that demand. Without it, this unprecedented level of transparency now afforded to the market will be wasted.

The trend we have seen from our customers is for greater demand for this information. However, we have also seen a rise in requests for help in interpreting this data. So, when is transparency really not transparent? When no one is able to attach meaning to it.

The information has value because of the current microstructure of the U.S. equity market. With venues competing for executions and quote traffic, the competitive landscape has never been more difficult for exchanges. As a result, exchanges now have competing business models designed to attract the most volume possible to their respective exchanges. This has resulted in the current maker/taker, rebate/fee structure prevalent in the market. And some venues have chosen to tailor their business models to HFTs creating the potential for toxic behavior.

Tag 30 presents the need for talented individuals to be put to work making sense of this valuable data. But, I believe the need is even greater than that. I believe every money manager would benefit from a greater understanding of all parts of their trading business. Some may choose to write their own trading algos as a result, while others will seek to gain a more detailed understanding of how their brokers’ algos perform and why they do what they do when they do it. This can, in turn, lead to a closer alignment of the algo chosen with the reason for the trade and the nature of the trade. And that will lead to better trade outcomes. For example, if I know that Algo A performs best in a high volatility environment while Algo B performs best in a low liquidity environment, I can route my trades accordingly.

With the greater emphasis on electronic trading and powerful execution management tools the data is available for greater self knowledge as long as we are willing to make the investment in tools and talent to create value from the mountain of zeroes and ones. What is likely is that those who understand the least will be taken advantage of by those who understand the most.

The views of Paul Daley are not necessarily those of SunGard Brokerage and Securities Services LLC.

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