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Market Structure: Key Themes in the New Year

Insight by

Jennifer Hadiaris, Cowen Head of Global Market Structure, discusses key market structure themes for 2022, including predictions, information that should be on your radar, and introductions to new resources available to Cowen’s clients. 


  • Get ready for trading around the clock:  24 Exchange submitted an application to the SEC to launch the first U.S. stock exchange to operate 24/7.  With increased demand, particularly from retail investors, we expect to see offerings for extended trading hours expand, despite the lack of after-hours liquidity.
  • PFOF will continue to come up:  While we still do not expect a ban on Payment for Order Flow (PFOF), we do expect the SEC to take some action on retail order handling.  Enforcement could be an easier route than rulemaking.  Industry-based solutions, like retail order types on exchanges, will also continue to gain traction. 
  • Periodic auctions make their way to the U.S.:  With CBOE Periodic Auctions and OneChronos set to launch in 2022, we expect to see periodic auctions pick up market share among institutional investors in the U.S., largely based on the positive experience clients have had with them in the EU.
  • The great retail migration to options may lead to single stock volatility:  With options volumes at record levels, and retail making up an estimated 25% of 2021 volumes, we expect regulators to take a closer look at options approval processes.  In the interim, look out for options-driven volatility, as discussions on Reddit and other “meme stock” havens increasingly shift to options trading.
  • Europe:  Regulatory divergence will take center stage.  With the UK loosening restrictions on dark trading, London may become a more attractive and cost-effective destination for trading European shares on behalf of institutional investors.  Without any further regulatory intervention from Europe, this could lead to a migration of flow back to the UK.

Get ready for trading around the clock

Is the Stock Market Open at 3 a.m.? This Startup Says It Should Be

Wall Street Journal, October 5, 2021  |  Click here for article


  • 24 Exchange, a startup trading platform is seeking approval from the SEC to launch the first U.S. stock exchange that would operate around the clock, including on weekends and holidays.
  • The exchange filed key parts of its application for a national stock-exchange license with the SEC in October, including a rulebook and user manual detailing its proposed approach to trading hours.
  • The three-year-old startup already offers trading in FX and crypto.  It is led by Dmitri Galinov, a two-decade veteran of electronic trading.

The demand for around-the-clock trading has been picking up steam among a few different subsets of market participants, and it seems uniquely positioned right now to capitalize on some of the key trends we expect to continue into 2022.

The Rise in Retail Trading

First, the rise in retail trading has led to increased focus on extended trading hours. The 24-hour availability of market data and executions in cryptocurrencies and digital assets, which have been increasing in popularity among retail and institutional investors, have led to expectations of a similar experience in other assets, including equities.  As more individual investors trade, and as more of those investors become involved in crypto, their demand for 24-hour access to equity markets have increased as well.  Since we don’t see the trends in retail or crypto activity declining considerably anytime soon – we would expect to see support for extended trading hours in the U.S. to continue into 2022, even outside the proposed 24 Exchange.

Why do individual investors trading odd lots of meme stocks need 24-hour access to the markets? In some ways it further democratizes the markets and makes them more accessible to non-professional traders, many of whom enter orders before or after work, outside of live trading hours. Beyond that, 24-hour trading would put markets more in line with the round-the-clock news cycle, which would allow investors to execute orders based on news as that news occurs. 

International Retail Trading Is a Factor

However, we think the most important factor to remember here when we think about demand is that a huge subset of retail traders executing orders in U.S. stocks are not actually based in the U.S. If you look at the securities that trade on retail-focused ATSs (like Interactive Brokers) – you can see heavy concentration in Asian and South American ADRs, indicating a vast international client base. If you think about an investor in Singapore, for example, entering an order in a U.S. stock on Monday morning before they go to work, they will likely have to wait over 12 hours for markets to open in the U.S. and for that order to execute or to even see any reliable market data. So, we can understand the call from not only U.S. retail investors, but also from international retail investors, for expanded market hours.

Institutional Support

That is not to say that these frustrations are exclusive to retail investors or that the 24-hour demand is being solely driven by non-professional traders. There is institutional backing for both 24 Exchange and other platforms offering extended hours in U.S. securities. 24 Exchange just completed a $14 million funding round in December, which was led by Point72 Ventures. Blue Ocean ATS also fills an institutional gap, offering overnight trading, with capabilities institutional clients would require – including electronic access and live data. BOATS specifically serves U.S. broker dealer subscribers, and their session runs from 8:00 pm to 4:00 am, Sunday through Thursday.

At the request of some institutional investors, Nasdaq will also likely introduce an Extended Trading Close (ETC) in 2022. The continuous crossing session, which is currently pending SEC approval, will match orders at the Nasdaq closing price between 4:00 and 4:05 pm. While this isn’t a vast extension of trading hours, it has the potential for significant usage among some large investors. Of the current post-market offerings being floated, we think Nasdaq’s ETC could be responsible for the largest chunk of volume migrating to post-market hours in the near term.

International Institutional Support

Looking beyond U.S. institutions, James Baugh, Cowen Head of European Market Structure, wrote a note on Turquoise’s plans to offer trading in U.S. securities during UK trading hours. Turquoise’s offering began on October 5th, 2021, and over 200 US companies are available to trade starting at the London open at 8am – six and half hours before the U.S. open. It’s a little too soon to comment on the uptake, but it is interesting James noted that this was one of the few recent innovations he has seen come out of European venues, and it was focused on extending trading hours – so there is clearly demand for these sorts of facilities beyond U.S retail investors.

The concept of 24-hour equity trading has largely been met with groans from many institutional investors. For years, we’ve been talking about the concentration of liquidity around the close. We’ve had more than a few clients jokingly say that we should shorten the trading day to a half hour around the open and the close, since there seems to be less and less institutional activity intraday as time passes. While these are jokes, they’re founded in the reality that fragmentation is a real problem for investors trying to “find” one another in continuous markets. If approved, 24 Exchange would be the 17th registered stock exchange in the U.S., and we have a few new ATSs in the hopper as well. Adding more hours of trading to the day, and another protected exchange, could further fragment a U.S. market that already feels as though it’s spread pretty thin.

Success Will Hinge on Overnight Market Making

At the end of the day, however, the success of these ventures isn’t really hinged on either retail or institutional investors. They’re dependent on market makers, and their willingness to provide liquidity at all hours of the day. To date, we haven’t seen extensive interest in overnight market making – beyond some of the extended hours that brokers offer for pre/post market trading in the U.S. It really doesn’t matter how many venues are open overnight, if there isn’t any market making liquidity available, there won’t be any displayed prices and orders won’t execute.

Regulatory Approval Pending

Beyond liquidity issues, 24 Exchange still needs to receive regulatory approval. The SEC has historically alerted individual investors regarding the risks of after-hours trading– including the lack of liquidity, wider spreads, volatility, and uncertain prices. The hours aren’t the only unique element to 24 Exchange either. They also have stated that they are looking to enable trades in U.S. equities with a minimum increment of one one-thousandth of a share. This may raise further regulatory scrutiny, delaying their launch.

As 24 Exchange submits their Form 1 Application, and we see commentary from the industry, we expect to see this topic continue to make headlines into the next year. In some ways, however, this genie is already out of the bottle. With European venues and ATSs are already working to fill this void, the expansion of other 24-hour markets like cryptocurrencies, and increased demand for greater access to U.S. equity markets from the global retail community, we think round-the-clock trading offerings will only continue to grow in 2022 and beyond.

PFOF will continue to come up

Gensler Poised for Clash with Citadel Securities, Robinhood

Bloomberg, October 26, 2021  |  Click here for article


  • SEC Chair Gary Gensler, elaborating on an October 18th “meme stock” report, said brokers may be using algorithms to encourage trading in a way that hurts investors.
  • The SEC concluded that because brokers make money by selling customers’ orders, the firms could have an incentive to find “novel ways” to increase trading.
  • The SEC has signaled that it may propose a plan to revamp trading rules by April. The agency’s GameStop report, released Oct. 18, recommended additional study on the effects of payment for order flow and brokers’ so-called digital engagement practices.

The SEC May Focus on a Few Key Areas

Ok, I get it. You’re sick of hearing me talk about retail trading and inaccessible liquidity. I’ve been harping on it for 5+ years now, and it seemed to be the only thing anyone talked about in market structure in 2021. Unfortunately, I have some bad news for you – we’re likely still going to be talking about retail, wholesalers, meme stocks and payment for order flow in 2022. But, since we’ve covered this topic ad nauseum, I will make every effort to keep this brief(ish). We think the SEC will remain focused on a few key areas within this theme – concentration of order flow among a small number of wholesalers, conflicts of interest between dealers and end retail clients, and shortening the settlement cycle to avoid the issues a few brokers experienced with regards to limiting trading activity in meme stocks.

Payment for Order Flow

The first thing to discuss is Payment for Order Flow (PFOF). We still strongly believe that there will not be a ban on PFOF anytime soon, despite 2021 headlines. Banning PFOF doesn’t change the retail / wholesale model. Market makers would still compete to execute retail orders without having to pay for them, so you haven’t really changed the existing execution model by banning PFOF. Beyond that, efforts to ban PFOF would likely get caught up in courts for an extended period. Brokerage businesses have built their revenue models on PFOF, clients have become accustomed to free trading (which is largely subsidized by PFOF), and the market has become accessible to a more diverse investor base as brokers moved to free trading. In short, there are a lot of people – from brokers, to retail investors, to policy-makers – who have a vested interest in the PFOF model continuing and would likely resist a ban.

SEC May Act to Enhance Competition

While it may not be a direct ban on PFOF, we do expect the SEC to try to do something. It feels as though one of their recurring concerns regarding PFOF is the sheer concentration of retail liquidity among few participants. In speeches, Chair Gensler has questioned whether there is information asymmetry when so few participants have access to so much flow. He has even gone so far as to ask whether the NBBO is robust enough to be an effective “yardstick” against which we measure execution quality for retail orders. 

It feels as though the SEC is inching towards enhancing competition for retail orders and opening executions up to a broader base of market participants. We don’t know exactly how that would look, however. There are retail order types on exchanges, which have been moderately successful. EDGX’s program, which provides retail orders with execution priority and a hearty rebate, makes that exchange one of the leading destinations for non-marketable limit retail orders. IEX’s retail order type, which launched last year, also shows promise because it provides retail orders with midpoint price improvement and it displays a retail liquidity identifier (symbol and side) when at least one round lot is available in a symbol. This means that there is an identifier available on the SIP that demonstrates there is substantial price improvement available for retail orders on IEX.

Perhaps, in instances where these sorts of identifiers are displayed, the benchmark for retail executions should be tighter than the NBBO?  We’re not entirely sure that would vastly change the retail experience, but retail programs on exchange are a way to open fair access to retail orders and directly increase competition. We could see the SEC encouraging more of this sort of activity in the coming year. We have also heard rumblings about enhancing identifiers on the tape to differentiate between ATS and non-ATS off-exchange executions, so the industry can even begin to estimate how much wholesaling concentration impacts a given security in real time. Right now, we’re forced to somewhat guess at “inaccessible liquidity” metrics using historical ATS data. Increased transparency intraday would at least shed more light on how much of an issue retail, PFOF and wholesaling may be in a given stock in real time.

While some of these changes may feel small relative to what has been a very large topic of discussion for the past year, the challenge is that anything other than the most moderate changes feel fraught with legal challenges. On the other hand, it feels as though the SEC really doesn’t have the option to just do nothing here. Beyond the fact that they have raised the issue of PFOF and wholesaling several times publicly, the SEC also put out a public questionnaire that specifically targeted retail traders. While the questionnaire focused on “broker dealer digital engagement practices” – like the gamification of some of these trading apps, the Commission has received over 2,000 comments (primarily from individual investors), many of which complain about dark pools, systemic failures, corruption at large market participants, and complacency among regulators.

If there is a general theme to the responses, I would say it is that people don’t trust that they have a fair shot in the existing system. This may come as somewhat of a surprise to institutional investors, as the long-standing perception in market structure is that the retail investor experience is preserved in U.S. markets above all else. Even though the bulk of retail money is represented by institutions such as mutual funds and pension funds, we have long given individual orders from retail investors “top billing” in order handling in U.S. equities – even sometimes to the detriment of other market participants. So, to read all these comments and to see the sheer level of distrust in the markets came as a surprise to us. At a time when we have made the markets more accessible to more people via free trading, apps, and other practices, it feels as though investors have never felt more disenfranchised. That is why we feel that the SEC will need to do something to publicly address these investor concerns.

Potential SEC Action

So, what is the easiest route to go? Prior SEC’s have favored enforcement actions over rulemaking as a way to button up certain activities that may be a gray area under existing rules. Where new rules can take years to propose, amend and approve (never mind face litigation), enforcement actions tend to occur on a slightly shorter timeline. They also have the benefit of making splashy headlines, especially if they are accompanied by hefty fines. Enforcement actions (and the press releases that accompany them) allow the Commission to point to retail investors’ complaints and say that they are directly addressing some of the issues. In late 2020, we saw an enforcement action against Robinhood for misstatements and omissions in communications between 2015 and 2018. We would expect that the SEC is looking in more depth at post-2018 retail activities across broker dealers, since the onslaught of free trading offerings and the uptick in individual investor activity really began in earnest in late 2019. The SEC also alerted the industry recently that they are looking at enforcement actions under Regulation Best Interest (Reg BI).

Shortening the settlement cycle is a given, but may take longer than expected

Push for T+1 Settlement Cycle Gaining Momentum

Pensions & Investments, December 27, 2021  |  Click here for article


  • A report published Dec. 1 from SIFMA, the ICI and the DTCC said shortening the settlement cycle to T+1 from T+2 will enhance efficiency and reduce risks and costs for the industry.
  • The settlement cycle in the U.S. was shortened to T+2 from T+3 in 2017, a process sources said went smoothly. As a result, the report recommends a similar timeline (about 30 months) to shift to T+1 with heavy testing.
  • Before firms can allocate resources to prepare for the T+1 shift, the SEC needs to update its rules greenlighting the process. SEC Chair Gensler has directed staff to put together a draft proposal for the commission’s review on shortening the settlement cycle.

Meme Stock Craze Leads to Push to Shorten U.S. Equities Settlement Cycles

An ancillary issue to come out of the meme stock craze in 2021 was the push for shortening settlement cycles in U.S. equities from T+2 to T+1 (and potentially even T0 in the future). When a subset of retail brokers had to suspend buying in GME and other securities, it was in large part due to intraday margin calls at the DTCC. In volatile markets, there is chance that buyers will not pay for a stock that has dropped or sellers will not deliver a stock that has rallied. Clearing agencies require margin to protect against the risk of such defaults. The amount of time between trade date and settlement date can compound this risk. Theoretically, with more time between trade and settlement date, there is more opportunity for stocks to move significantly, leading to margin calls.

On January 27th, 2021, for example, individual stocks were moving so quickly that 36 clearing members received margin calls from the DTCC totaling $6.9 billion. This led some brokers to restrict trading activity in the most volatile names, like GME and AMC. While many retail investors were frustrated that they were being denied full access to markets and there was a narrative that this was being done to assist larger investors who were short some of these names, the reality was that it was a much more mundane explanation – a combination of volatility, margin requirements, and settlement cycles. As a result, one of the first suggestions to come out of the SEC’s meme stock report was reducing the period between when a trade is executed and when it settles, which could reduce the risk of repeating Gamestop-like halts in the future. In a December report, SIFMA, ICI and the DTCC also publicly supported the move to a shortened settlement cycle with a target timeline of Q1 or Q2 2024.

Settlement Timing Recently Shortened, But Further Shortening Would Be Different

The U.S. equities market did change our settlement timing relatively recently. In 2017, we made the switch from T+3 to T+2. However, the key with that move was that, at the time, the U.S. was largely lagging the rest of the world. Many global markets were already on T+2 settlement cycles, and the U.S.’s move simply brought it in-line with other global markets. T+2 had already been “tested” globally, and institutions that execute global baskets or other cross-border trading were already accustomed to settling securities in 2 days.

Should the U.S. go to T+1 on the timeline suggested by SIFMA, ICI and DTCC, we would likely be among the first countries to go to T+1. As the SIFMA, ICI and DTCC report states, that would create, “a significant misalignment scenario for the U.S., as many international markets will remain at T+2 with no current announced plans to accelerate the settlement cycle.” This is a particular challenge when it comes to executing global programs, since the settlement dates would be different across different geographies. It also presents challenges for interlisted securities, where there is a variation in settlement timelines between the US-listed security and the international market. The hope is that other markets would also follow and move to T+1.

Canada, for example, has the largest overlap with the U.S. in terms of interlisted names, and they have announced plans to move to T+1 in tandem with the U.S. Another large consideration that has been raised is the disparity that will exist between securities markets and FX markets, which largely still operate on a T+2 settlement cycle. For international executions with an FX component, there will be a one-day disconnect between a securities trade and its FX component, which could increase operational complexity and costs for these transactions.

Operational Factors Play a Role

Our point in raising these complexities is not to discourage the move. T+1 is one of those rare issues that seems to have nearly universal support across the industry and feels like a given in the coming years. However, it’s important to remember there are still significant operational factors to consider. Sometimes even seemingly simple regulatory changes are approved, but the teams that handle the technical aspects or the mechanics of these changes raise unforeseen red flags as the industry approaches implementation deadlines. We could absolutely see this happening with the move to T+1, which is why we say it is coming, but perhaps not exactly on the timeline the industry is currently pushing for.

Periodic auctions make their way to the U.S.

OneChronos ATS Readies for Launch

Markets Media, September 3, 2021  |  Click here for article


  • OneChronos ATS, a periodic auction dark pool, has received regulatory approval and is aiming to launch in 2022.
  • OneChronos’ matching engine initiates auctions throughout the trading day, every tenth of a second. The priority is based on aggregate notional price improvement contributed.
  • OneChronos will also offer expressive bidding, which allows users or algos to customize constraints for executions. For example, users can choose to only trade when an imbalance is above a certain magnitude or only buy a certain stock if they can sell some other shares.
  • The SEC also approved periodic auctions in the US on CBOE’s BYX exchange in 2021. CBOE has yet to launch the U.S. program, but has been using periodic auctions in Europe since 2015, prioritizing size and price.

Periodic Auctions Trend Reaches the U.S. Post-MiFID II

As with the increased appetite for systematic internalizers and ELP feeds, periodic auctions are another market structure trend to make its way to the U.S. from Europe following MiFID II dark trading restrictions. In 2022, we expect to see CBOE and OneChronos launch periodic auctions. CBOE’s auctions were previously approved by the SEC and will operate exclusively on their BYX exchange to start. They are currently allowing brokers to certify and test the functionality, so we wouldn’t expect a launch to be too far off.

CBOE Auction

CBOE has somewhat touted their auctions as an on-exchange response to the rise in conditional orders in dark pools – a way to attract and aggregate block liquidity at a registered exchange. While the auctions aren’t exclusive to larger orders, the execution price will be determined based on where the greatest number of shares would execute, and orders specifically designated for the periodic auction will follow a size/time priority. With a “size” component to the design of the auctions, CBOE’s auctions have been built to allow the aggregation of liquidity. If a buy and sell periodic auction order are entered and are eligible to trade, that will initiate an auction message that goes out over BYX’s proprietary depth of book data feed. The auction will run for 100 milliseconds, with auction update messages going out every 5 milliseconds.

In some ways, this is similar to the match/firm up process with conditional orders. However, the periodic auction notification will go out to anyone taking in BYX’s proprietary feed, so it somewhat “opens up” the trade to a broader group of participants in an effort to bring together buyers and sellers. CBOE has seen success with this type of model in Europe. They operate the largest European periodic auction, accounting for ~3% of notional value traded on EU equities exchanges. We are excited to see some innovation, particularly in block trading, at the exchange level. Many global firms are already equipped to interact with CBOE’s periodic auctions in Europe, so, assuming the logic is portable to the U.S., it doesn’t seem like a terribly heavy lift to incorporate the BYX auction into U.S. algos. As a result, we would expect to hear more about this and see decent volumes for a new exchange program when it launches.


OneChronos, on the other hand, is a newcomer to the market and will offer periodic auctions via an ATS. They have come up with a slightly different spin on their auction offering with “expressive bidding”. Expressive bidding allows a participant (or an automated strategy) to specify the conditions under which they’d be willing to trade. These inputs could be an imbalance at OneChronos, current market spread, price dislocation, or quote fade metrics (among other variables).

We’ve seen a large client focus recently on constraining conditional or block fills to optimal times or prices. Some clients are looking to only get conditional fills when prices are moving in their favor, or at certain points in their order. OneChronos will allow for some of that flexibility at the venue level (versus the algo), which gives users a customized experience. We have seen in the past, with ATSs over-engineering segmentation, that offering too much optionality can occasionally get in the way of actually matching orders. As a result, we think the expressive bidding option may take some time to ramp up. But we would expect to see decent institutional interest in connecting to OneChronos’s periodic auctions, even if people aren’t taking full advantage of all the bells and whistles the ATS has to offer out of the gate.

The Impact of Periodic Auctions on Electronic Trading Execution

We’re genuinely excited to see these facilities make their way to the U.S., largely based on the positive experience we have had with them in Europe. We closely monitor mark-outs across all global venues we trade with, and, when we look at the data in Europe pre- and post-execution, we see a vast difference between executions in periodic auctions versus multilateral trading facilities (MTFs), another type of dark trading venue.

The chart below shows this comparison across all Cowen electronic executions in H2 2021. You can see that, in periodic auctions, the line pre/post execution is relatively flat, particularly when compared to dark MTFs. This means that stocks do not tend to move much after an execution, which is generally preferred for institutional clients looking to minimize dark impact. If you have specific questions about the mechanics of the venues in Europe or how we access them, particularly for different algo aggressions, Tom Campbell, who runs Cowen’s European electronic team, is an excellent resource.

Dark MTF vs Periodic Auction Fill Quality
Midpoint Price Move Around Execution as a % of Spread
Source: Cowen Execution Data, H2 2021

Uptick in Independent ATS in the U.S.

Lastly, one important thing to note with regards to the launch of OneChronos is that it is part of an uptick in independent ATSs in the U.S. After some consolidation in 2021 – with CBOE completing its acquisition of BIDS and Nasdaq purchasing a minority stake in LeveL – we have seen a few independent ATSs launching, adding to their numbers once again. Beating OneChronos to launch date, Purestream opened in 2021, and we expect to see them continue to expand in 2022 with a fair amount of institutional broker and client support. While new ATSs mean there will be a bit more fragmentation in the dark going forward, we think that’s offset by the opportunity to test out new innovations, as each of these ATSs takes a novel approach to matching buyers and sellers. As we connect and begin to execute orders at these new venues or exchange programs, we will provide updates on progress and will share execution analytics with our clients. Look for more in the coming months.

The great retail migration to options may lead to single stock volatility

Investors Are Using Robinhood, Other Platforms to Jump into Options Trades, Worrying U.S. Regulators

Wall Street Journal, December 7, 2021  |  Click here for article


  • Around 39 million options contracts traded on an average day in 2021, up 35% from 2020 and the highest level ever, according to Options Clearing Corp. Retail traders recently made up ~25% of 2021 activity.
  • At some retail-focused brokerages, it is significantly faster or easier to gain approval to trade options than at other brokerages. These discrepancies, along with uptick in activity, have led regulators to question whether the rules governing individual investors’ access to the options market (written in 1980) need to be revised.
  • Finra plans to publish a request for comment in coming weeks to solicit feedback from market participants about trading in options and other complex products, a spokesman for the body said. Such requests are often the first step regulators take when considering potential rule changes.

Our Take

The subreddit Wallstreetbets was infamous in 2021 for launching some of the meme stock investments that drove the January and February craze. However, if you look at wsb now, you’ll probably notice something – talk of options trades seems to far outweigh plain old vanilla equity trading. YOLOs (wsb jargon for “betting it all” on a single company) are often trades involving straight out-of-the-money calls.

The uptick in basic options strategies among redditors corresponds with the data from retail brokers and from exchanges. CNBC reported that “11% of Robinhood’s monthly active users made an options trade in the first three quarters of 2021.”  That number was likely higher across retail brokers as we continued into the fourth quarter, based on data from CBOE. The exchange recently analyzed both stock and options trading activity in the top 15 meme stocks (measured by mentions each day on r/wallstreetbets). In a December report titled “How Meme Stocks Impact Options Trading,” CBOE looked at all customer volume on its four options exchanges, broken down by the original order size. In January 2021, options trades with an order size between 1 and 10 contracts reached more than 1 million trades per day in the top 15 meme stocks, and that count continued to climb into the end of 2021. This indicates an uptick in retail options activity, which continued far beyond the GME/AMC volatility of early 2021 – well into Q4. Where we saw retail activity slow down a bit in stocks at the end of 2021, that does not seem hold true for options.

Top 15 Meme Names: Options Average Daily Trade Count by Order Size
Source: CBOE, December 2021

I will be the first to say that I’m the furthest thing from an options expert, but I have found myself reaching out to our options strategist, Ling Zhou, more and more often these days when a client asks about volume or volatility in a stock that seems to defy explanation. During Q4 last year, when retail options activity was on a steady rise, Ling wrote about “a significant ‘stocks up vol up’ dynamic – driven by single names.”  Ling explained that one-month options on October 15th were cheaper than 1-month options on November 15th. That was unusual, because on October 15th, basically every 1-month option would include earnings (when we tend to see higher volatility). On the other hand, by November 15th, most earnings are complete, and the 1-month contracts would include Thanksgiving week, which tends to be relatively quiet in the U.S. So, to see options rising in price, despite lower expected volatility, Ling noted this was a “bizarre” event that could point to increased trading activity or some form of supply / demand phenomenon. This seemed to be driving some aberrant moves in single stocks as well, particularly around expiry days, as we saw some evidence of gamma squeezes. And it makes sense really – if retail investors could have such an outsized impact on the market when they traded single stocks in Q1, it stands to reason that they would also be able to have an outsized impact trading options, which provide access to leverage. An investor who may not have the capital to buy 100 shares of a high-priced stock may very well be able to cheaply trade some short-dated options contracts that provide them with similar exposure.

While the SEC or FINRA may be planning some regulatory action to curb retail options activity – or at least standardize or “beef up” the options trading approval process, this will likely take some time. In the interim, we will continue to watch for outsized volumes in options and Ling’s commentary, since we expect we will continue to see retail options trading have an impact on single stock moves in 2022.

People are still complaining about market data costs

MEMX Asks SEC to Reject ‘Deeply Flawed’ Proposed Changes to US Equities Data Fees

The Trade News, November 12, 2021  |  Click here for article


  • The SEC approved plans in 2020 to amend the SIPs – real-time consolidated data feeds for the US equities market – to include depth of book data, in an effort to bring more competition to the space and decrease rising data costs.
  • Incumbent exchanges Nasdaq, CBOE and NYSE filed court petitions against the SEC’s decision, claiming that the new rules were arbitrary. These legal efforts are ongoing.
  • In November, the SIP operating committees (of which the incumbent exchanges are majority members) submitted amendments to existing plans that outlined proposed charges for the new SIP depth of book data.
  • MEMX submitted a comment letter to the SEC asking them to deny the amendments, because the proposed depth of book data fees were more expensive than the fees currently charged for comparable proprietary data.

Fight Over Market Data Fees Continues

There is not a lot to add here other than to say that market data fees are going to continue to be a battleground issue between the incumbent exchanges, broker dealers, and the SEC. If you thought that the change in administration and the resulting change in leadership at the SEC (particularly in the Division of Trading and Markets) was going to put a halt to this fight, you were mistaken. While big banks and market makers paying excessive market data fees may not be Chair Gensler’s top concern, the fact remains that some of these changes and battles are already in motion and will continue to make headlines into 2022.

In 2020, the SEC approved plans to amend both the governance and the infrastructure of the SIP. Within the infrastructure plan, the SEC expanded the SIP content to include odd lots, depth of book data, and auction data. The incumbent exchanges – NYSE, Nasdaq and CBOE – are going to continue to fight these plans. At the same time, the exchanges, as members of the SIP committees, are facing deadlines to submit proposals to upgrade the SIPs to meet the SEC’s new requirements. In other words, despite litigation, the SIP overhaul train keeps chugging along. While the incumbent exchanges may fight the changes with one hand, they still need to be writing amendments to the SIP with the other hand. So, we will continue to see squabbles such as the one highlighted in the article above until the SIP is updated or until a court overturns the SEC’s infrastructure plan. What is more, it doesn’t seem like anyone has been shielded from the hot button issue of market data costs. IEX, who had historically not charged anything for market data, submitted a proposal in November to begin charging what they described as a “fair and reasonable” amount for real-time access to their TOPS and DEEP feeds. In their proposal, the exchange demonstrated the costs they have incurred to build out their market data infrastructure and explained that the proposed fees were meant primarily as a form of cost recovery. On December 30th, the SEC suspended the proposed changes, questioning the cost models IEX used, some of their other methodologies and explanations, and whether the filing was consistent with the exchange act. We found the SEC’s response interesting, because – even under a new administration and Chair – the commission still seems to be intensely focused on market data fees, even from exchanges that made it their mission to keep fee models fair and reasonable.

Consolidated Audit Trail Battle Continues

We have one final tangential note here. While it isn’t exactly market data, we would expect to see the battle over Consolidated Audit Trail (CAT) continue as well in the new year. From how CAT will be funded to who will face liability for issues such as data breaches, there are ongoing arguments between the broker dealer community and the exchanges being tasked with building CAT. Like the SIP overhaul, the regulatory train has already left the station with regards to CAT. What remains for 2022 and beyond are disagreements over the details – like who will fund it and who will be held liable for problems.

Questions about sustainability make their way to trading desks

Markets Veteran Duncan Higgins to Launch Industry’s First Trading Focused Sustainability Initiative

The Trade News, November 9, 2021  |  Click here for article


  • Former ITG and UBS executive Duncan Higgins is set to launch a new environmental initiative focused specifically on the ESG needs and shortcomings of trading firms.
  • Named Sustainable Trading, the membership network will act as a forum for trading firms to discuss trading-specific environmental issues and create potential practical solutions.
  • The group will look to establish sustainability best practices for both organizations and their supply chains, which could include brokers, counterparties and technology providers.

Our Take

We added this story because the topic of sustainability in trading came up a few times in 2021, and this isn’t only our experience or observation. We have heard from clients that questions about sustainability, renewable energy sources, and other environmental issues have come up on questionnaires from their clients. There haven’t been a lot, but a few have been spotted here and there.

Several years ago, clients noted that diversity and inclusion questions began appearing on questionnaires, which has ultimately led to efforts to quantifiably demonstrate trading with minority or women-owned brokerages. Although this sustainability trend seems nascent, with the organization mentioned in the article above being the first of its kind that we’ve heard of, we think it’s a trend to watch. It feels like other ESG-related efforts began with a couple questions from pensions, foundations and insurers to money managers, and have since evolved into minimum trading goals and other requirements for institutional investors. We would not be surprised to see questions about sustainability and environmental impact follow suit, especially given the intense focus on environmental issues in other aspects of investing. We would expect this to manifest in an increased focus on how institutional investors, and their vendors (including broker dealers, exchanges, and others) are mitigating their carbon footprint. In an industry that has long thrown computing power at the challenge of best execution, it will be a real change of course to have to take into account the impact of that computing power or the sources of energy that power the data centers on which we have all become so reliant. This may remain in its early stages through 2022, but with the intense focus on climate change across geographies and industries, it would be naïve to think that trading will remain immune.


The TRADE Predictions Series 2022: Regulatory Divergence in the UK and Europe Post-Brexit

The Trade News, December 23, 2021  |  Click here for article


  • Following Brussel’s proposed changes to MiFID II in November and with the results of the UK’s Wholesale Markets Review due to come into play early next year, EU participants expect regulatory divergence to take center stage in 2022.

European Market Structure Expert’s Take

James Baugh joined us in 2021 as Cowen Head of European Market Structure, bringing over 20 years of industry expertise with him. He produces excellent content on a frequent basis and is a leading voice on the market structure issues impacting institutional investors in Europe. His predictions on regulatory divergence are as follows:

“Continued divergence in regulation between Europe and the UK may see London wrestle back some of that European share trading business from Amsterdam and Paris during 2022. With a significant amount of business executed in European names done on behalf of international investors, further curbs on dark trading and on business consumed by Systematic internalisers (SIs) may lead to an increase in the cost of getting business done in Europe next year, particularly for larger sized institutional business that today looks to those alternatives to mitigate the impact of trading on lit order books.

With the UK seemingly abandoning the share trading obligation (STO) and the double volume cap (DVC) regime, allowing for systematic internalisers (SI) and frequent batched auctions (FBAs) to trade at fair value at the mid-price and in the short term at least – applying lower Large-in-Scale thresholds for European shares – from a best execution perspective London may become a more attractive and cost-effective destination when trading European shares on behalf of institutional investors. Quite how that plays out for Europeans unable to access that liquidity under the European STO and or whether the European regulator might react to any shift in liquidity back to London remains to be seen.”

European Trading Perspective

Carl Dooley, Cowen Head of European Trading, publishes a note most mornings, or when a major event in the region has occurred. It’s a great way to frame global moves going into the U.S. open. Carl recently provided his outlook for 2022, which, with its positive spin, feels like something many of us could use right now. I’ve included part of his 2022 note below. 

“With markets delivering a textbook finish to 2021, setting new highs (and not one correction) on record buying ahead of a period of tightening, it is totally understandable that investors have become more cautious. There are lots of valid reasons to be, but we will end the last note of 2021 by pointing to some big picture positives for Europe (and keeping a bullish stance) as we enter 2022:

  • Unlike most of the world, money has been coming out of Europe (not crowded)
  • Investor sentiment is not at an extreme
  • Unlike other regions Europe has a historical positive correlation to US rates
  • Valuation is low relative to global stocks, i.e. it is more exposed to the value factor
  • Earnings are growing, but growth expectations relative to history are not high
  • Every part of the balance sheet (government, corporate, household) is still buying
  • Record M&A, private equity bid, company buybacks, and still some pent-up consumer demand
  • Consensus GDP estimates have already been slightly lowered, while eps remain in an upward cycle
  • And while they have spiked, real rates are still negative”