Systemic Liquidity Risk and Bipolar Markets: Wealth Management in Today's Macro Risk On/Risk Off Financial Environment

3

The Changing Character of Financial Markets

In this chapter, and in preparation for future discussions of critical events such as the Flash Crash, it will be helpful to outline some of the more significant changes which have occurred in the topology of markets, newer execution platforms and the changing micro-structure of markets which has resulted from the development of new technologies on new platforms as well as a result of high frequency trading algorithms (HFT).

In the US and Europe, but to a lesser extent in Asia, at least in mid-2012, there has been a fragmentation of what used to be more centralized platforms of trading activity. The public securities exchanges such as the New York Stock Exchange (NYSE) in the US, and the London Stock Exchange (LSE) and Deutsche Boerse, for example, in Europe were until around the turn of the millennium the dominant “locations” where most trading in equities and often fixed income instruments took place. By 2012 this has been completely transformed and, as will be seen, a variety of alternative trading venues and platforms have largely usurped the dominant position previously enjoyed by the traditional exchanges. There were some key developments in this fragmentation and these can be outlined in a brief historical sketch.

In 1998 the Securities and Exchange Commission (SEC), the regulator of the US securities markets, authorized the introduction of electronic communication networks (ECNs), which are also often referred to as Alternative ...