BEFORE THE 2010 GENERAL ASSEMBLY OF THE
WORLD FEDERATION OF EXCHANGES
Comments of Thomas Peterffy Chairman and C.E.O., Interactive Brokers Group[1]11 October, 2010
INTRODUCTION: WHAT IS AN EXCHANGE?
An exchange used to be a place – yes, a physical place – where people would come together to buy or sell, hoping to achieve the best price for themselves. The more the exchange was able to attract all of the buy and sell interests in a product, the more the prices on the exchange would reflect the true state of supply and demand.
Along with the exchanges the role of brokers emerged. They would represent their customers' buy or sell interests. With brokers came the crucial question of trust. Can you trust your broker? Regrettably, many chapters of the history of financial markets must be devoted to recounting the myriad innovative and ingenious ways brokers have devised to steal from their clients.
The first great online trading revolution involved the telegraph and telephone lines, and with them more and more people were able to trade securities in smaller lots. As the number of trades increased, the relationship between brokers and clients became more impersonal and distant. Even so, as long as all the transactions had to take place on centralized exchanges with basic rules, rules of fair trade, our markets had order and transparency. Customers could be reasonably sure that there was a limit to the amount for which their brokers could fleece them.
Fast forward to today and we cannot make the same claim. In the last 20 years came computers, electronic communications, electronic exchanges, dark pools, flash orders, multiple exchanges, alternative trading venues, direct access brokers, OTC derivatives, High Frequency Traders, MiFID in Europe, Reg. NMS in the U.S. --- and what we have today is a complete mess.
CRISIS OF TRUST
It is not so much anymore that the public does not trust their brokers. They do not trust the markets, the exchanges, or the regulators either. And why should they, given our showing in the past few years?
To the public the financial markets may increasingly seem like a casino, except that the casino is more transparent and simpler to understand. Just as the emerging markets led by the BRICS are doing a wonderful job establishing their market economies with their exchanges as their centerpieces, we have a crisis of trust in the developed world.
I must confess to you that I was an ardent proponent of bringing technology to trading and brokerage. Unfortunately, I only saw the good sides. I saw how electronic trading and recordkeeping could be used to force people to be more honest, to make the process more efficient, to lower transaction costs and to bring liquidity to the markets.
I did not see the forces of fragmentation and the opportunity for people to use technology to keep to the letter but avoid the spirit of the rules -- creating the current crisis. It is vitally important that we bring an end to this crisis of trust before it spreads any further; that we bring back order, fair dealing and trust in the marketplace. And it is the regulated exchange community that has the opportunity and the wherewithal to do it.