Market Structure: Equity market structure will remain quiet.
4. High-frequency trading, by and large, will fall completely off the horizontal media radar screen.
DC: Disagree. While HFT should diminish because it is mainly based on arbitrage and once inefficiencies are reduced to near zero there is no way to profit; once a boogey man always a boogey man and we will still need villains.
5. We still will not see major market structure regulation in either the US or Europe. Much of the transaction tax, order resting periods, and anti-HFT discussions will fade without major regulation or legislation; however, we will see discussions around queue priorities and order types that hide or slide in front of an active queue position (queue jumping). While equity market structure will be quiet, however, fixed income market structure will begin to move.
DC: We may still be going through regulatory withdrawal but with Bart Chilton gone can we still use the phrase “Cheetah traders?”
6. We won’t see a major threat to the fixed income status quo arrive.
DC: Woohoo! Treasury bull market forever.
7. However, there are a number of players that will be developing technology for release in late 2014 that will have a greater impact in 2015, at which time there will be one or two more serious challenges to the current phone-based trading modes. Meanwhile, SEF market structure will continue to be built out.
DC: A lot of regulatory roadblocks lead to innovative work-arounds.
8. The newer bespoke players will find it very difficult to be successful, as there will be a few high-profile SEF causalities in 2014.
DC: Markets will be market.
Regulation: Global regulation will begin to settle down. As mentioned above, many countries will model their regulatory environments after the CFTC’s vision.
9. While firms will continue to invest heavily in regulatory compliance, the pace of investment will decline and firms will begin to invest in opportunities.
DC: Perhaps firms will make the bet that regulators have no resources to watch them and put money elsewhere.
10. Banks will remain Public Enemy No. 1, and regulators will continue to mete out fines, as claims around the standards created through “fixes” such as Libor, FX, gold and other rate standardization mechanisms will continue to be picked over and used to beat the banks over the head.
DC: But will any bankers go to jail? It is hard for me to work up much sympathy for the major banks that were bailed out and then used their money to lobby for lighter regs. Without criminal prosecutions regulatory fines are nothing but teh price of doing business.
11. There will be a cycle rotation out of bonds and into stocks; however, it will be harder for banks to take advantage of this shift, as taking capital positions will be harder under both Basel and Volcker.
DC: Perhaps they can start making loans. You know banking.
12. The equity banking and origination business will remain strong. But as interest rates rise, the fixed income origination business will suffer.
DC: No more borrowing at zero and buying risk free Treasuries instead of lending?
13. U.S. Equity share volumes will increase for the first time since 2009.
DC: For that to happen investors must believe the markets are free to move without intervention. Are we there yet?
14. US Equity performance will be good, but not nearly as good as in 2013 (+30%). We will, however, see gains north of 10%. But while the U.S. will experience strong Equity performance, it will underperform compared with Europe and Asia.
DC: Well, you can’t maintain a weak economy supported by the Fed forever. However, if the market can have its greatest bull run during a massive recession and tepid recovery, perhpas it can falter with more positive economic conditions.
15. With the breakdown in correlations comes a cyclical movement away from passive funds toward active management.
DC: Is that what is behind recent attack on alternatives?
16. Private equity will come under greater scrutiny. Increasing regulation combined with higher-cost debt, as well as a robust equity market, will act as a double or triple whammy to make operating private equity harder, more expensive, and less profitable than it has been in the past five years.
DC: So they were the ones making money the past five years.