Securities and commodities industry participants strive to innovate and compete within an environment of constant regulatory and technological changes and ever-evolving market structures.
These dynamics have led to conflicts over the interpretation of rules, often manifesting in the form of regulatory investigations, disciplinary proceedings, and private litigation. Such actions have involved nationally registered exchanges, clearing agencies, alternative trading systems, broker-dealers, investment advisors, institutional investors, and both professional and retail traders.
Cornerstone Research has worked on a variety of matters involving market microstructure issues. Our work in this area has included numerous issues related to order handling, rules involving price quoting, clearing and settlement, uncovered short sales, best execution, markups, and trade reporting.
Our experience includes:
- Conducting market quality studies for regulators, including a report for the SEC on the effect of short-selling regulations and for the Financial Industry Regulatory Authority (FINRA) on the impact of OTC quote rules.
- Analyzing trading records and failed delivery data for a group of large clearing firms faced with allegations of improper clearing and settlement procedures in connection with short selling in equity markets.
- Evaluating whether customer orders were properly executed by analyzing trades in actively traded NASDAQ securities.
- Analyzing the dissemination of market data by the New York Stock Exchange and its potential impact on market liquidity and market quality.
Select Experience
Market Quality Study
The SEC’s Division of Economic and Risk Analysis (DERA) retained Cornerstone Research in a matter related to a pilot program that allows certain exchange-traded options to be quoted in reduced price increments. Our analysis used quoted and effective spreads as measures of market quality. This research sought to assist DERA staff in evaluating whether the program should be expanded (or contracted) by examining the spreads of pilot option classes vis-à-vis matched controls.
Exchange Competition
In an antitrust lawsuit between two exchanges in the futures market, Cornerstone Research evaluated allegations that one exchange illegally blocked the entry of the other exchange by lowering transaction fees to predatory levels. We supported an expert in evaluating whether plaintiff and plaintiff’s experts articulated a methodology for calculating the impact of the defendants’ alleged anticompetitive actions on the probability of success of the entrant. Using hundreds of gigabytes of audit trail and order book data, we analyzed the likelihood of competition in a highly centralized, order-driven market. Our analysis also involved assessing how electronic trading changed the market at issue at the time of the entry attempt and how liquidity network effects can impact competition.