As lines blur between exchanges and alternative trading systems in U.S. equities, market operators are diversifying and innovating how they provide liquidity.

That was a high-level takeaway from the Innovation in Liquidity Provision panel, which took place Nov 2 at the SIFMA Market Structure Conference in New York.

“There’s a lot of talk about liquidity provision, but it’s not about any one particular thing, whether price, size, or ease of accessing liquidity or counterparties,” said Ari Burstein, General Counsel and Chief Policy Officer at Imperative Execution. “At the end of the day, it comes down to market performance. If you provide good execution quality, they will come.”

Imperative Execution operates IntelligentCross, which offers a traditional non-displayed midpoint order book as well as a displayed, or lit, order book.

Innovation is Critical

Panelists noted that innovation is critical to keep pace with evolving markets.

Jane Street Capital aims to provide liquidity to a broad range of market participants, through mechanisms such as a single dealer platform, a request for quote (RFQ) platform, and voice trading.

“We want to provide liquidity and be a market maker everywhere,” said Raz Tirosh, Trader at Jane Street.

The proprietary trading firm is now building an algorithmic trading business. “As a relatively recent entrant on the client-facing side, we are forced. Forced to innovate all the time,” Tirosh said.

The New York Stock Exchange continues to innovate, 231 years after its founding in 1792.

“In the recent past we have been upgrading our technology and putting ourselves in a spot to innovate,” with the aim of providing fast, reliable and deterministic execution, said Kevin Tyrell, Head of Equities at NYSE.

“We have also brought more capital opportunities to investors,” Tyrell added, highlighting direct listings as a way for companies to go public, rather than traditional IPOs.

MIAX Exchange Group launched its first options exchange in 2012, and the firm has since expanded to four options exchanges and one stock exchange. “We have brought innovation in the way of competition,” said Joe Bracco, Senior Vice President and Head of Sales at MIAX. “We feel we have raised the bar around technology and customer service.”

Panelists noted that liquidity provisioning is situational, and institutional trading and investing firms can often find good liquidity around the market close, but not good at midday.

The proportion of U.S. equity trading that happens off-exchange has increased to as much as 45 percent currently, from 35 percent in 2015, according to industry data. Panelists were asked whether the amount traded off-exchange is a problem.

“If more and more moves off-exchange, I can see things breaking down,” Jane Street’s Tirosh said. “There’s value to a structure that’s simplistic, where people can come in and compete. The worry is that with fragmentation, it’s harder for new participants to compete.”

“The trend isn’t going the right way,” said Tyrell of NYSE. Given fragmentation plus new regulations, “it seems daunting for either an agency or a principal business to get to scale.”

Regulatory Challenges

New or pending regulatory regimes, such as Regulation Systems Compliance and Integrity (Reg SCI) and the Consolidated Audit Trail, are constraining the industry’s capacity to innovate, panelists said.

“We have to invest so much money and time in technology and risk infrastructure” to comply with regulation, Tirosh said. “As things get more complex, it will be harder to compete.”

To the question of how a technology “arms race” is impacting liquidity provision, Tirosh said.

Technological advances on the venue side are enabling newer protocols and connections, and also enabling different liquidity providers to do different things, like focusing on speed for example.

Closer partnerships is another way forward. “We are very transparent with all our trading firms, regarding how our technology works and how to be most efficient,” said Bracco of MIAX.

Regarding the pros and cons of operating multiple market models, panelists said operators need to determine whether they are filling a void, innovating, and adding value. There’s value to having multiple market centers, but it must be balanced with market participants’ need to manage complexity.

The panel touched on artificial intelligence, but it wasn’t framed as a major factor in liquidity provision, at least not yet.

Burstein said Imperative Execution uses machine learning to recalibrate its matching model; Tyrell said AI is more significant on the operational side for NYSE; Tirosh said Jane Street uses machine learning primarily to make better use of data.

The panel closed with final thoughts on regulation, most notably the Securities and Exchange Commission’s pending equity market structure proposals.

“It will be interesting to see how regulation plays into” liquidity provision, Burstein said. “The SEC should be aware of how this affects small entrants and competition.”

“Think about the unintended consequences of regulation, and let’s use data to make these decisions,” Bracco said. “We’ve done well as an industry in building resilience and protections, all based on data.”

“Markets are resilient and robust, broadly speaking, especially since 2020. Technology has held up and markets feel very efficient,” Tirosh said. “Margins are low, so you have to innovate to be profitable.”