Commentary

Momtchil Pojarliev
Traders Magazine Online News

Some Like It Hedged

BNP Asset Management's Pojarliev discusses a variety of options to address foreign currency exposures. Although there is no single best-practice solution for addressing foreign currency exposures, institutional investors have three main choices, he says.

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May 3, 2010

Will a Naked Access Ban Raise Costs?

By James Ramage

The firm, however, is one of several in the bulge bracket expanding its filtered sponsored-access business. It, as well as other broker-dealers, could benefit from any measures that would take away from clearing broker-dealers' models.

But the clearing firms say they also provide valuable aggregation services. For these, the clearing firms bundle orders together and send them to an exchange to surpass volume thresholds and benefit from better pricing--which gets passed onto clients.

The SEC proposal would make it more difficult for these firms to reach the various volume breakpoints and would eliminate these savings. Forcing, say, Penson to add pre-trade risk checks--on top of the checks its broker-dealer customers already perform--would discourage the customer from using the clearing firm's MPID to access the exchange, because it would take too long to trade, Weingarten said.

"We have a broker-dealer who can access the market directly as a regulated entity, who chooses to go and leverage off the clearing firm give-up for efficiencies," Weingarten told Traders Magazine. "And if you remove the ability to do so, you've just removed the efficiencies without any added benefit."

In the Penson comment letter the firm said that, besides increased costs, the rule would also hurt smaller firms and their ability to compete with larger ones.

If a firm doesn't reach the top pricing tier of a market center and chooses instead to access the markets under its own MPID, it will still have to perform the pre-trade risk checks. But that firm would also realize a 32 percent decrease in rebate income, wrote Edward Wedbush and Jeff Bell, Wedbush's president and executive vice president, respectively, in the firm's March 31 comment letter.

So, in the best of circumstances, brokers who normally use clearing firms for the tiering benefits have a difficult choice to make, Wedbush wrote. Broker-dealers who don't achieve the best economics from the market centers must choose either slower access to the markets--because of the second set of pre-trade risk checks--or losing the benefit of volume aggregation.

There are other costs, wrote Christopher Lee and Paul Willis, global head of market access and global compliance officer, respectively, at Fortis Bank Nederland, in their March 26 comment letter. If the SEC's proposal is passed as is, there would be a "significant loss of trading volume" among the market participants and proprietary trading firms. And this, subsequently, will have a negative effect on the retail investor volume by reducing overall market liquidity and increase bid-ask spreads, they wrote. Overall cost-of-trade to the end retail client would rise, they concluded.

 

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