A majority of Wall Street traders believe that the introduction of a Central Limit Order Book (Clob) for US stocks will reduce market fragmentation and protect investors by helping to ensure best price execution. Support for a central order book was expressed by more than 60 percent of respondents to a poll of Securities Trader Association members.
"With orders listed on exchanges, the Nasdaq Stock Market and ECNs, the frustration level among traders trying to find the best price for their clients is increasing," says STA president John King. "It's no surprise most members believe a Clob will help them to do their jobs more effectively and also help protect investors' interests. Whether it's called a Clob or 'SuperMontage,' as the Nasdaq calls its proposal, traders prefer that limit orders all be listed in one place."
When asked who should own and operate a Clob, if adopted, nearly 59 percent of respondents chose a major market centre such as an exchange or Nasdaq. About one in ten believe an independent third party or an ECN should run a Clob, and only about 17 percent favoured a consortium of market maker firms
Members strongly favoured one independent regulatory body in the new market structure. Nearly half the respondents expressed this preference while about 22 percent favour keeping the regulatory structure the same as it is now. About 23 percent of respondents believe the regulatory body should be part of the SEC.
"People prefer to be audited by only one organisation. With ECNs registering as exchanges, the number of audits will increase, stretching the capabilities of many firms, especially smaller ones. With one regulatory body, duplication is eliminated and regulation becomes much more efficient and much less onerous," notes King.
Finally, traders again expressed concern over the SEC's plan for the conversion of price quotes from fractions to decimals. Nearly half of the respondents (47 percent) say that nickels should be the smallest increment used for price quotes. Two in ten respondents believe nickels should be used initially, moving to pennies after a reasonable period of time. Only 17 percent think penny increments should be used right from the start and about 15 percent would rather continue trading in fractions. Only 0.2 percent expressed a desire to trade in increments less than a penny.
"For months, our members have expressed serious concerns about the inability of the data infrastructure to effectively handle price quote message traffic with the increment initially as low as a penny," notes King. "They believe a more prudent approach is to stick with nickel increments, which will generate a maximum of 20 price quotes per dollar, before rushing into pennies, which will result in up to 100 price changes per dollar. It's no secret that Nasdaq couldn't be ready for decimals this year. Our members believe moving to pennies too fast will jeopardise the stability of the markets."