The Norges Bank Investment Management (NBIM) company which runs the Norway SWF has written a provocative piece on the role of exchanges in current capital markets which asks for a significant change in focus. Provocative may seem like a strong word, but on most finance issues SWF's try to keep a low profile. There are two key points that I believe NBIM want to make in the their piece "The Role of Exchanges in Well Functioning Markets: An Asset Manager Perspective".
One, the equity markets are more fragmented than what many may think. There are fewer exchanges, but more mechanisms for accessing liquidity which makes for a less well-functioing markets. Asset managers have to search for liquidity and develop and access multiple systems to find this liquidity. This search for liquidity comes at a cost.
Second, the limits to speed have been reached and this technological drive may not meet the needs of large institutional investors. High frequency and support for this smaller size trading is not consistent with the structural changes in the asset management area over the decade. Pension funds have gotten larger. SWF are larger and generally the size of asset managers around the global have increased significantly over the last two decades. Money management has become a game of scale. Asset managers need liquidity to trade size not speed. The exchanges have to come to grips with the size needs of institutional money managers who actually represent many small investors.
Continual markets that focus on speed do not help the manager who wants to trade blocks at fair prices. This is a fair comment from one of the big guys. The questions is how to find the right mix between size, speed, and price discovery. It is not clear that exchanges or regulators will be able to handle these issues.
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