Momtchil Pojarliev
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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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November 1, 2010

Cover Story: In Search of Market Makers

By Peter Chapman and James Ramage

Others also question the need for market maker support of stock prices. They point to the ready availability of liquidity during stable times. They also note that registered market makers are unlikely to support a rapidly crashing market anyway.

At least one SEC commissioner is in this camp. Speaking at this year's Security Traders Association conference, Troy Paredes said, "During periods of stability, the value of subjecting high-frequency traders to market maker obligations is not self-evident. In short, when liquidity already is forthcoming and equity markets are not stressed, one has to question what the benefit is of imposing obligations that are intended to bring forth liquidity."


Futures Markets

Others note that the world's futures markets function just fine without market makers. One is Cameron Smith, general counsel with HFT firm Quantlab Financial, who opposes a return to the days of the centrality of market makers. "Look around the world at other markets--whether the futures markets in Europe or the Chicago Mercantile Exchange--none of those markets have market makers," Smith noted at this year's Traders Magazine conference. "They might for some of the less-liquid names, but not for all the liquid securities. All of those markets have a particularly high percentage of professional traders; plus, they all have circuit breakers or something that stops the markets from dropping precipitously."

Marty Mannion, Citadel

Most trading houses Traders Magazine spoke with say that HFTs should not be forced to register. That includes Getco, which says it provides two-sided markets in about 3,000 stocks everyday. "The whole rule structure is designed to provide firms with a choice," said Getco general counsel John McCarthy. "If you want the obligations associated with being a market maker, you should also get any associated benefits. But it doesn't make sense to require market participants to adhere to a set of obligations if they don't want to do so, even if they trade in a manner that looks like market making."

It's not clear that it would even be possible for the SEC to impose market making obligations on HFTs. One senior bulge bracket trading executive told Traders Magazine that the SEC and the exchanges can only mandate registration if the firm in question is running a pure market-making strategy.

It's unlikely that anyone can provide a comprehensive enough definition of market making strategies to encapsulate what each HFT does, he said. "I don't know if the SEC or the exchanges are going to be able to mandate that people [register as] market makers," he said. "Someone can be a lot of the volume, but not be a market maker."