Money managers were able to trade normally during the July 8 shutdown of the New York Stock Exchange, as volume shifted to the 50 other U.S. equity trading venues until the NYSE was back online.
So, on that day, fragmentation — the abundance of equity venues on which to trade — was a blessing and not the curse many make it out to be, right?
Not so, sources said, citing the difference between having a diverse market and a fragmented one.
The NYSE shutdown “was a helpful reminder that, though there are traders who long for the good old days of just a few exchanges, there is a benign benefit to having multiple venues,” said Craig Viani, vice president, market structure and technology, at Greenwich Associates, Stamford, Conn. “It did strengthen market stability in this case ... But fragmentation, having too many venues, is a different issue altogether.”
Mr. Viani said trade orders have two characteristics — portable and transient. The NYSE outage showed the benefits of portability, or diversity, in catastrophic situations, but orders' transient, or fragmented, nature — constantly moving from one venue to another to find a match — is what makes institutional trading difficult, given the volume of trades institutions conduct.
“If you're executing a block order, exposure to a lot of venues puts that order at risk,” Mr. Viani said. “That has nothing to do with technology; it's an issue with certainty of execution and information leakage. Those are big issues for institutional investors.”
While some market observers might think fragmentation came to the rescue on July 8 by allowing for orderly trading, the liquidity issues stemming from that fragmentation remain the same. “There absolutely is still a problem with liquidity, and remember, liquidity and volume are two very different things,” said Ryan D. Larson, head of equity trading, U.S., at RBC Global Asset Management (U.S.), Chicago.
“Did fragmentation save the day, in the sense that participants were able to still execute while the NYSE had to halt trading? Then yes,” Mr. Larson said. “But I continue to believe that 11 exchanges and over 40 dark pools are simply too many. I'm not arguing we need to go back to yesteryear — that is a very naive argument ... 11 exchanges are too many, but one or two are too few.”