60 seconds with… Andreas Park
Andreas Park, Associate Professor of Finance, University of Toronto
As an independent observer, what are your thoughts on the Plato Partnership project and their aims more generally?
It is terrific that the buy-side and the sell-side have come together in the Plato Partnership initiative to enable academic research. Ultimately, the buy-side and the sell-side have a common goal: they want well-functioning financial markets. Yet industry players often disagree on how to get there and whether a particular innovation (e.g., dark trading, speed bumps, high frequency trading), benefits or harms markets. Ideally, a discussion is evidence-based – but buy-side firms often don’t have the resources to provide the necessary analysis, and, let’s be honest, how often do we see firms produce research that runs counter to their commercial interests? Academics can bring –and have brought!– much-needed clarity to the debate because they are independent, and the Plato Partnership initiative provides an exciting opportunity by pro-actively seeking academic contributions.
What role do you think academia can play in the development of global market structure?
Even though the ultimate goal of the market structure debate is to create a market that fosters the interests of investors and issuers, the discussion sometimes gets sidetracked and circles around granular details and technological issues. My approach, for instance, in my role as a member of the Ontario Security Commission’s Market Structure Advisory Board, is to identify the overarching questions that we need to answer to address a concern. The same applies to good academic research: one asks questions to identify the key practical aspects that drive unexplained market phenomena. In the best case, the answers help everyone involved understand the root causes for disagreements so that, going forward all sides of the debate can find resolutions based on the new common body of knowledge.
A good example is the debate on high-frequency trading: when these fast, hyperactive robo-traders first appeared, there was an strong concern that there was wrong-doing, that markets were harmed. Yet academics soon developed a large body of academic work, both theoretical and empirical (enabled by industry-provided, high quality data). This work shaped our understanding of the role of HFTs in markets, and therefore brought much clarity to the debate. We are now in a better position to identify and assess areas of concern, and we have a higher quality debates on the impact of innovations.
Your co-author presented a paper at the Plato Conference in June. Can you describe how your work contributes to the market structure debate?
In my view, at its core, much of the current debate on trading venues, order types, dark trading and fees is about order flow segmentation, which is the attempt to segment orders into desirable (usually non-directional or balanced) and toxic (single-directional) flow. In 2012, Canada adopted a rule that made liquidity provision in the dark much more expensive. The immediate consequence of the rule was the demise of a “dark” trading venue that had previously managed to syphon off a large chunk of retail order flow from the main market. After the rule change, the bulk of this retail flow moved to a single lit market, a shift that we argue in the paper was predictable. To me, the most interesting finding in the paper is what happened to this lit market when the retail flow was re-introduced: liquidity there improved quite noticeably. So how does this help in the market structure debate? You have to think about in reverse: if market participants develop venues, fees, or trading mechanisms that ultimately aim at drawing retail flow away from the main market, then chances are, market quality is harmed.
Which topics do you believe to be important for the regulatory debate going forward?
Over a time span of less than a year, a parallel universe to the world of mainstream finance has emerged, and this development will likely become highly disruptive to the traditional world of securities issuance and trading. Hundreds of small tech firms have circumvented traditional means of finance (banks, VCs) and have issued and are preparing to issue digital “tokens” to finance their operations; for all practical purposes, these tokens are financial securities, created on the Bitcoin or Ethereum blockchains, and they now account for billions of dollars in value. The “crypto exchanges” where these tokens trade are entirely unregulated and use minimal market infrastructure: no security depositories, no brokers, and no accounts; settlement is almost instantaneous and the security issuance process, procedurally at least, is dirt-cheap and takes mere minutes to set up. Dealing with the many challenges that this development brings, will require some serious out-of-the box thinking. I don’t believe that the mainstream financial industry is prepared for this disruption, nor do I believe that regulators know how to handle it. And we academics have barely started thinking about the impact of these developments.