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To celebrate the University of British Columbia’s centennial, we asked UBC Sauder professors to tell us about imminent changes in business that will transform our daily lives. From the green economy to internet security we asked them, “What’s next?”

 

Who:

Markus Baldauf, assistant professor of finance at the UBC Sauder School of Business, and specialist on trading in modern financial markets.

What's Now:

Over the past decade, there have been three profound changes to public equity markets, explains Baldauf.

Speed has always been a factor in markets — in early days, traders used carrier pigeons and later telegraphs to edge out competitors  — but computers and algorithmic trading have accelerated transactions to a level that’s beyond human comprehension.

“Fifteen years ago, if I asked you to hold on for a second you would have thought there was no risk, because what can happen in a second?” says Baldauf. “Today a second is an eternity.”

Markus Baldauf

Markets have also become increasingly fragmented. Fifteen years ago, the vast majority of trading of blue-chip companies took place on the New York Stock Exchange; now that number has dropped to just 20 percent. According to Baldauf, in the U.S. alone there are 11 formal exchanges and approximately 45 alternative trading systems, many of which are “dark markets” — private exchanges or forums for trading securities that often come with lower transaction costs, but are inaccessible to much of the investing public. (Despite their ominous name, they are legal.)

There have also been key regulatory changes including new rules by the United States Securities and Exchange Commission which allow for more competing exchanges.

“You don’t have to be a formal exchange to facilitate stock trading,” explains Baldauf. “So this has essentially paved the way for the increase of dark pools and electronic crossing networks.”

What's Next:

Baldauf predicts there will be more and more activity in dark markets, which already account for over 35 per cent of shares being traded. The problem is, those markets rely on pricing from the traditional exchanges such as the NASDAQ and NYSE — but if fewer trades are happening in those arenas, the pricing may not be as reliable.

“If you take this to the logical extreme, and more and more trades occur in the dark, where do the prices come from? If they come from exchanges where fewer trades happen, they might be less representative prices,” he says. “So I think eventually there will be a limit on how many trades happen in the dark.”

Politics will also play a role, says Baldauf. Politicians including Hillary Clinton are voicing concerns over electronic trading, pointing to particular transaction patterns as indications that things are no longer functioning as they should. Many are calling for reform — things like introducing virtual speed bumps, or creating batch auctions, to slow the sizzling speed of automated transactions.

“The concern is there are a few market participants who benefit, and the vast majority lose out,” says Baldauf, explaining that billions of dollars can move in the blink of an eye. “But, there is a lot of disagreement about who are the winners and who are the losers with this development.”

So what does Baldauf see for the more distant future of automated trading? “I deal with nanosecond data,” he says with a laugh. “If I make a five-year prediction that’s already way out of my comfort zone.”