Following a six-year hiatus, the 2024 Conference on Financial Markets reconvened under the leadership of Owen Graduate School of Management Professor and Financial Markets Research Center Director Robert “Bob” Whaley. Operating under the theme “Past, Present, and Future,” this year’s conference featured presentations and panels exploring the ongoing intersection of research, industry, and regulation of financial markets.

Past: The Birth of Modern-Day Financial Markets

Following opening remarks by Tom Steenburgh, Ralph Owen Dean and Professor of Marketing at the Owen School, the conference kicked off with Owen Professor of Management Bill Christie leading a free-flowing panel discussion on the birth of modern-day financial markets.

Richard Roll, Professor of Finance at the California Institute of Technology and past president of the American Finance Association, shared anecdotes about his early 1960s move from aeronautics with the Boeing Company to financial market research.

While earning his Ph.D. at the University of Chicago, Roll studied under Milton Friedman, befriended former FMRC Director Hans Stoll, and penned a doctoral thesis about the behavior of interest rates that won the Irving Fisher Prize in 1968.

Roll recalled the work that led to his co-authoring “The Adjustment to Stock Prices to New Information,” the first event study analyzing the ways in which stock prices respond to events.

“I started processing the [CRSP database] tapes, and I calculated what became known as the cumulative abnormal return around a stock split,” Roll recalled. “It was the first time I ever thought about a residual being something other than a random number.”

Maureen O’Hara, Professor of Finance at Cornell University and author of the groundbreaking 1995 book, Market Microstructure Theory, spoke on how she came to research microstructure while working as an assistant professor at Cornell in the 1980s.

“Microstructure in those days was sort of nascent,” O’Hara said. “And when you’re in a new field, nobody has to publish your paper, so it was hard. What keeps you going are the things you find interesting.”

Jeff Harris, formerly a Chief Economist at the U.S. Commodity Futures Trading Commission and current Finance Chair at American University’s Kogod School of Business, recalled his work with William Christie and Paul H. Schulz for “Why Nasdaq Market Makers Avoid Odd-Eighth Quotes,” a 1994 paper focusing on the role that preference trading plays in determining quoted spreads.

Later, Harris observed that “the connections we have between the academic world and the real world still exist, and I think we’re rebuilding them through conferences like this.”

Present: Markets, Retail Investors, and Regulation

Following an introduction from BOX Exchange CEO Tony McCormick, MIT Professor of Accounting and Finance S.P. Kothari presented “Commission Savings and Execution Quality for Retail Trades.”

The study found that Payment for Order Flow (PFOF) has saved retail investors billions in fees by allowing broker-dealers like Robinhood Markets, Inc. to eliminate trading commissions in late 2019. What’s more, so-called “uninformed” retail traders see better execution quality and significant price improvements on trades made off-exchange compared to similarly sized trades made on public exchanges.

Chester Spatt, a former Chief Economist of the U.S. Securities and Exchange Commission and current Professor of Finance at Carnegie Mellon University, helped contextualize Kothari’s findings. Spatt said the SEC’s current attitude toward zero commission trades reflects “a limited appreciation of how market segmentation benefits retail.”

Ed Boyle, a member of the Board of Directors of the BOX Exchange, said he was not surprised by the paper’s findings, even with its debunking of commonly held views about PFOF contributing to potentially unfair conditions at the expense of investors.

Later in the morning, Pradeep Yadav, Professor of Finance at the University of Oklahoma, presided over a panel that addressed the explosive growth of trading in zero days-to-expiry options, or 0DTEs.

Mandy Xu, Vice President and Head of Derivatives Market Intelligence at Cboe Global Markets, reported that 0DTEs have seen remarkable growth in recent years, accounting for roughly 45 percent of SPX options volume in 2023. With this growth, Xu said, has come a rash of industry concerns over whether 0DTE trades are the new “meme stocks,” contributing to higher market volatility and having an outsized influence on the S&P market.

Xu argued that higher trade volumes matter less to market volatility than the balance between 0DTEs that buy and those that sell. Besides, Xu said, 0DTE trades account for less than 1 percent of S&P daily liquidity, making their influence limited.

Michael O’Neill, an Adjunct Associate Professor with Bond University in Queensland, Australia, expressed fascination at “the level of multilayered trading here,” saying one should not assume that retail traders are unsophisticated.

Sean Feeney, Head of U.S. Options at Nasdaq, declared that he sees zero correlation between the rise of 0DTEs and “Volmageddon,” referring to the unprecedented U.S. stock market activity of February 5, 2018, that resulted in losses of $2 billion in investor assets.

Present: Frictions in Employee Benefits

Babara Ostdiek, Professor of Finance at the Jones Graduate School of Business at Rice University, presided the first half of Session Three, titled, “Frictions in Employee Benefits.” Ostdiek brought up Umit Gurun, Professor of Finance and Accounting at the University of Texas at Dallas, to go over findings from his 2023 research paper, “Too Many Managers: The Strategic Use of Titles to Avoid Overtime Payments.”

Gurun’s research saw a 485 percent increase in the awarding of managerial titles for salaried employees making slightly more than the Fair Labor Standards Act (FLSA) salary threshold of $455 per week. Under the FLSA, firms are exempt from paying employees overtime if they hold a managerial title and receive a salary—it is this loophole, Gurun said, that has led to the rise of job titles like “Front Desk Manager” for receptionist and “Grooming Manager” for barber.

Gurun said the spike in managerial positions appears especially prevalent within retail organizations like Walmart, Staples, and Publix, and in states with right-to-work laws. “This is not a problem for high-wage people,” he said.

Peter Haslag, Assistant Professor at the Owen School, suggested that employees may not be harmed—and firms may not be benefiting as greatly—as much as one might assume.

“Salaried positions are afforded additional benefits—paid time off, access to healthcare, and so on,” he said. “As these are subsidized by the employer, the benefit to these firms might actually be reduced.”

Nick Bollen, Professor of Finance at Owen, introduced fellow Owen Professor of Finance Veronika Pool, who detailed findings in her December 2020 research paper, “Mutual Fund Sharing in 401(k) Plans.”

Pool’s paper suggests that certain share classes of mutual funds include revenue-sharing expenses in addition to regular investment management fees. These expenses are often, though not always, passed on to the plan’s service providers—or recordkeepers, as the paper calls them—to help pay for a plan’s administrative costs. Pool said recordkeepers have a financial incentive to feature revenue-sharing mutual funds among their offerings, as these arrangements allow them additional compensation.

Andy Puckett, Professor of Investments at the University of Tennessee’s Haslam College of Business, offered an enthusiastic review of the paper, characterizing the passing on of these revenue-sharing expenses as “kickbacks” that point to “potential agency problems.”

Future: AI and the Future of Finance

The final panel discussion of the day was dedicated to the future of finance markets, specifically what impact Artificial Intelligence (AI) might have on financial markets. Josh White, Assistant Professor of Finance at Owen, presided over a three-member panel.

Campbell Harvey, Professor of Finance at Duke University, appeared sanguine at the humanity’s growing reliance on AI, discussing opportunities in productivity improvement.

“I think AI will cause a disruption in terms of employment, but it will be an interesting disruption because it means people will work less hours,” Harvey said. “There will be significant productivity gains and this, obviously, is very helpful.”

Mike Piwowar, EVP of Finance at the Milken Institute, said that while he appreciated Harvey’s point about productivity gains, AI introduces the danger of markets becoming less efficient, since the abundance of data could lead to overconfidence in predictive analysis and contribute to herd behavior.

Hermine Wong, a Lecturer at the Berkley School of Law who built and led the Policy team at Coinbase, the first publicly listed U.S. crypto exchange, said that while employment disruptions may prove disastrous to low-wage workers, AI’s biggest potential for financial markets lies in the speedy interpretation of unstructured data.

“No longer will we see some line-staff attorney combing through hundreds of pages of SEC documents, using their mojo to figure out whether or not there’s a discrepancy,” she said. “AI can quickly get signal from noise.”

Closing remarks were deferred until the end of evening, following a cocktail hour and dinner. FMRC Director Robert Whaley treated the audience to a thumbnail history of the FMRC and former Director Hans Stoll, who passed away in 2020 but whose presence was felt throughout the day. Finally, Richard Roll was given the FMRC Award for Lifetime Contributions to Financial Markets Research, and Bill Christie was honored for his contributions to the Owen, and greater Vanderbilt, community.

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