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30 December 2013

2013 Predictions & Prognostications – a Scorecard

After nailing 80 percent of his market predictions for 2012, TABB Group founder Larry Tabb crept out a little further on a limb for his 2013 predictions. And he proved even more prescient.

Not to toot my own horn, but I had another strong year in the predictions business in 2013. Out of 20 major predictions (44 in total, including subparts), I nailed 89%, while another two of the 44 straddle the fence.

To be fair, some of my macro predictions weren’t that hard, including the prediction that the political stalemate would continue. Little did I know that the mess would get so large that the government would actually shut down. I also predicted a return to positive growth, a good US equity climate (but not as good as we got) and continued low interest rates. None of these were rocket science.

[Related: “20 Predictions for 2013: Markets Up, and Volumes Follow”]

On the market structure side, however, I did step out a little further on a limb. Stressing that market structure issues would not fade away, I predicted that high-frequency trading issues would decline though another market structure glitch would strike – which was spot on, given the Goldman options market making issue and the problems with the Tape C SIP.

I also predicted that the topics of transparency and dark pools would be top of hat, but that, at the end of the day, no regulatory actions would be taken in 2013. All of this came true, as dark matching rates reached 37.5% and ended the year (at least November) at 37% (I predicted it would reach 36%); exchanges made the trip to Washington to lobby for Trade-At protection; FINRA introduced an initiative to mandate greater dark pool reporting; and brokers are working to give the buy side more consistent and complete execution reporting.

On the Regulation front, I made the huge leap to predict that swaps clearing would be implemented. But I also thought that buy-side clearing would reach 35%, a level that wasn’t breached, according to TABB Group’s recent buy-side swaps research (“US Swaps 2013: The Future is Emerging”). And while it was touch and go right up to the end, I also was right about Volcker reemerging in 2013 and the final version coming out a bit harsher than the initial 2011 proposal.

As for the industry as a whole, I was right about the economics being challenged, bank balance sheets coming under additional pressure, and further consolidation, as we saw the mergers of Knight and Getco, BATS and DirectEdge, and ICE and the NYSE, while some of the larger players reduced their size. I further predicted that equity volumes would start to rebound and that fragmentation was going to improve; I marked each of these half right, as year-over-year volumes were down, but we started seeing some year-on-year/month-on-month increases, without macro shocks such as the Flash Crash to chase investors for the hills. We also saw a bit of market consolidation, though that was more at the entity level rather than at the liquidity pool level. But that said, I did predict that the IPO market would heat up, which it has.

On the fixed income side, I printed that swap futures would gain steam but not set the world on fire, and that banks would begin to support electronic FI trading. Unfortunately, I also said that electronic FI volumes would double, which clearly was not the case.

In terms of exchange traded derivatives, I was wrong about an end to the dividend trade and aggressive growth in mini options. But I was right about low volatility, muted listed options volumes, the approval of ICE/NYX and their targeting of the IRS market, and the growth of futures volumes (by at least 10%).

So all in all, it was a pretty good year for my predictions. I only wish my investing success had a win rate of 89%. Of course, if that had been the case, there may not be a 2014 set of prognostications. But be heartened – I can’t retire yet. So stay tuned for my even more aggressive list of predictions for 2014.

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