On November 20th, the Center for Financial Policy and the Mutual Funds Directors Forum hosted a conference on best execution for mutual funds. This day-long conference fostered a lively discussion among mutual fund directors, academics and regulators on the impact of high frequency traders and rebate programs in the equity market, and the complexities of the fixed income market have on mutual funds.
Gregg E. Berman Ph.D, Associate Director, Office of Analytics and Research, Division of Trading and Markets at the United States Securities and Exchange Commission, kicked off the event. Dr. Berman provided insights on market structures and more specifically dark pools – venues where orders come in, but aren’t broadcast as they are on an exchange. He explained that full transparency is the goal, but dark pools, alternative trading systems and the exchanges still do not account for all of the trades executed. Many transactions happen within the broker-dealers trading room where brokers internally cross customer orders. Dr. Berman urged the mutual fund directors to participate in the dialogue between their trading managers and broker-dealers on best execution. He also highlighted the information advantage large mutual fund managers have over smaller firms, noting this discrepancy may be more important than issues with dark pools when it comes to best execution.
James Angel, Associate Professor at Georgetown University and author of “Equity Trading in the 21st Century,” was the keynote speaker. His talk posed the question — are markets “rigged?” He highlighted the populous’ ongoing and general distrust of financial markets. In the 1980s, people blamed the specialists on the exchanges for manipulating the markets and now it is the high frequency traders (HFTs). He outlined the positive aspects of high frequency trading, such as competitiveness, keeping transactions costs low, keeping the exchange traded fund (ETF) market competitive, and providing liquidity. On the downside, some high frequency traders can (and do) abuse the system through manipulation, putting in orders intended to trigger further orders, or by executing large short sales. Dr. Angel also provided multiple examples of improper and manipulative practices in the markets such as spoofing, which he defined as putting in an order with no desire to trade in an attempt to persuade other parties to alter their trades. Finally, Dr. Angel pointed out that markets are better than before, but also much more complex. Institutional trading costs have fallen dramatically, a benefit conferred directly to investors and the pension funds asset managers trade on behalf of, but there are still improvements to be made in order to truly achieve best execution.
Professor Angel’s presentation