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August 14, 2007

Late-Summer Reading

By Michael Scotti

Each Traders Magazine issue should reflect the happenings and controversies of the trading business. Consequently, it's logical that this month we have stories on commission-sharing arrangements (CSAs), crossing networks and the options penny pilot.

In our "Rules & Regs" section, you'll find a story about the SEC rejecting the request of a group of bulge bracket firms for a no-action letter, which would have given them an exemption from the Investment Advisers Act. The bulge bracket firms claim their relationship with institutional clients would change to an advisory one if they got paid with a check through a CSA. The problem with CSAs, they say, is that they would not be able to commit capital to facilitate trading. Regardless of the brokers' claim, it would be difficult for many money managers if they lost access to broker capital.

Recently, low-cost algorithmic executions have risen dramatically. As our cover story notes, algorithms are becoming more successful in the small-cap space. Brokers' capital commitment, of course, remains important for these less-liquid stocks. The story shows how dark books play a significant role in finding the other side in small caps.

Discussion of crossing networks is also prominent in our "Inside Trading" section. The utility-like crossing systems, like LeveL, BIDS and the International Securities Exchange's MidPoint Match, report bigger volumes. In LeveL and BIDS's case, the percentage jump is dramatic, although the actual shares traded remain relatively low. But they are new. Who knows how much volume they'll record in a year? Goldman Sachs' Sigma ATS is another beneficiary of the crossing boom. There is a separate story on Goldman's system, which crossed an eye-popping average of 86 million shares per day through most of July. And that's just volume crossed internally.

For our options readers, Traders Magazine has two stories relating to penny quoting and trading in options. One reports on the penny pilot being extended and expanded. The story was originally sent out as an email news blast. As a bonus, this publication gives readers breaking news to complement our monthly format. The other options story covers a controversial issue. Two exchanges have come up with an innovative plan to trade options in penny increments-whether or not the issue is quoted in pennies. Established options players are fuming. Thomas Jefferson said a little revolution, from time to time, is a good thing. At Traders Magazine, we believe the same thing about controversy.

Michael Scotti

Editorial Director