2000 – 2014

July 2014

EVOLUTION OF

U.S. FINANCIAL MARKETS

Evolution of U.S. Financial Markets 2

How Do You Navigate Today’s Markets?

• Confused about how the U.S. markets work? • If you did not have a solid grasp of the U.S. market

structure in 2000 (prior to Reg. NMS), you will probably have a tough time navigating the various players and their value proposition today

• The markets have evolved:– Exchanges’ M&A– Continued market fragmentation– Introduction of new players

• What does it look like today?

Today’s Market Landscape

Evolution of U.S. Financial Markets 3

• Growth of electronic trading / contraction of open outcry: equities, options and futures; spread compression

• Growth and sophistication of the buy side• The Internet has matured, so has trading technology• Demutualization and for-profit business models• Evolution of exchange revenue models, market makers,

payment for order flow (maker-taker, taker-maker)• Exchange mergers and acquisitions, continued

globalization.

Evolution of U.S. Financial Markets 4

Global Trends / Background

• Maturity of prime brokerage business model• De-leveraging and impact of global financial crisis post

Lehman Bros.• Introduction of new broker-sponsored exchanges,

clearing houses• Continued market fragmentation – equities and options• Regulatory evolution:

– Commodity Futures Modernization Act (2000)– SEC Reg. NMS, demise of the InterMarket Trading

System for equities (2005)– Dodd-Frank Act regulations– EMIR - EU

Evolution of U.S. Financial Markets 5

Global Trends / Background (Cont’d) …

• Inter-relationship of asset classes, markets; portfolio margining

• Growth of algorithmic and high-frequency trading• Madoff• MF Global

• The market is evolutionary, not (necessarily) revolutionary!

Evolution of U.S. Financial Markets 6

Global Trends / Background (Cont’d) …

U.S. Equities Markets

2000 2014

Evolution of U.S. Financial Markets 7

NYSE

Nasdaq

BSE

PHLX

CHX

NSX

PSX

Arca

Brut

Redi

Instinet

Island

Attain

Nextrade

Strike

Bloomberg Tradebook

ITG Posit

Latice Trading

Inter-market Trading System [ITS]

EXCHANGES REGIONALS ECNs ATS

AMEX

NYSE

NASDAQ

NASDAQ PSX

CHX

SIGMA X

Instinet – VWAP Cross

Barclays LX

CSFB - Crossfinder

EXCHANGES ATS / DARK POOLS

Direct Edge

Convergex

Knight Link

UBS - PIN

CitiMatch

LavaFlow ECN

MS Pool

BIDS

Level

Liquidnet

BATS

NYSE Arca

Citadel Connect

IEX

Deutsche Bank SuperX

• Implementation of SEC Reg. NMS, demise of the Inter-market Trading System

• Exchanges demutualized, went for-profit and public• Exchange consolidation, continued globalization• Evolution of NYSE, NASDAQ duopoly• Internalization of order flow, rise of new, more nimble

ATS/Dark Pools• Growth of algorithmic trading, new order types, high

frequency trading and proximity hosting as differentiators.

Evolution of U.S. Financial Markets 8

What Happened ?

U.S. Options Markets

2000 2014

Evolution of U.S. Financial Markets 9

AMEX

EXCHANGES

CBOE

ISE

PHLX

PSE

Options Linkage

NYSE- AMEX

EXCHANGES

CBOE

ISE

NASDAQ PHLX

NYSE – ARCA Options

BATS

BOX

C2

ISE Gemini

Miax

NASDAQ BX

• Growth of electronic trading / consolidation of open outcry trading

• Decimalization, penny quoting, spread compression• Payment for order flow, growth of electronic market

makers• Continued market fragmentation• Exchange acquisitions• Algorithmic and high frequency trading• New order types• Evolution of new players - 5 markets are now 11!

Evolution of U.S. Financial Markets 10

What Happened ?

U.S. Futures Markets

2000 2014

Evolution of U.S. Financial Markets 11

CME

EXCHANGES

CBOT

NYMEX

NYBOT

MGEX

KCBOT

BTEX

NASDAQ LIFFE

OneChicago

CME Group CME CBOT NYMEX KCBOT

EXCHANGES

ICE NYBOT

ICE OTC WCE

Eris

MGEX

NADEX

OneChicago

CBOE Futures Exchange

trueEX

• Growth of electronic trading / consolidation of open outcry trading

• Exchanges demutualized, went for-profit and public• Exchange consolidation and globalization• Demise of Enron• Introduction of new players - some came, some went,

some stayed• New products that align risk to users needs• Convergence of OTC and ETD products - rise of OTC

clearing, futures look-alikes• Collapses of MF Global, Peregrine Financial

Evolution of U.S. Financial Markets 12

What Happened ?

U.S. Clearing Houses

2000 2014

Evolution of U.S. Financial Markets 13

EQUITIES OPTIONS FUTURES FIXED INCOME

NSCCOptions Clearing

Corp

New York Clearing Corp DTCC

NYMEXClearing

CME Clearing

BOTCC

KCBTCC

EQUITIES OPTIONS FUTURES FIXED INCOME

DTCC OCCDTCC / FICC

OCC

CME Clearing

ICE Clear US

LCH ClearNet

• Exchange consolidation, clearing member consolidation (Bear Stearns, Lehman Bros., Refco, MF Global)

• Exchanges demutualized, went for-profit and public• Member-controlled versus exchange-owned clearing

houses• Clearing house “silos” versus non-profit, industry utilities• New products / convergence of OTC and ETD products• Futures look-alikes, cleared OTC products as new

revenue streams• Introduction of new clearing houses.

Evolution of U.S. Financial Markets 14

What Happened ?

Conclusions

• US market structure is evolutionary• Players need to be faster, cheaper, better…• Greatest regulatory changes in 75 years• Continued need for technology investments – capacity,

compliance, productivity, competitive edge

Evolution of U.S. Financial Markets 15