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October 3, 2011

Brokerage Matters

By Michael Scotti

As I perused this month's issue, I was struck by the contrast of two stories: the Buyside Snapshot and our cover story on ETFs. Head trader Dave DeVito of Madison Investments says in the Snapshot that he doesn't need brokers for their trading expertise like he once did, given all the electronic tools at his disposal. But he very much needs their market information and color. That makes him a better trader, and that is where the sellside's value resides for him.

Conversely, this month's cover looks at how valuable brokers are when it comes to trading ETFs. Some of these instruments are very complex and hard to trade, particularly the less liquid ones, so brokers are still very much in demand there. I was reminded when reading staffer James Armstrong's piece that ETFs are now 18 years old. They hold more than $1 trillion in assets, and that is expected to double in the coming years.

Today, these instruments contain commodities, fixed income, currencies, and yes, of course stocks. At 18 years old, the ETF is coming of age. The story also addresses how traders' skills will need to evolve to handle these more complex instruments. That's nothing new for traders, as they've been adapting to unprecedented change over the last decade. The piece also outlined the various types of niche players in brokerage that have evolved in the ETF business.

As it relates to ETFs, Europe is still catching up to the U.S. But in issues related to computerized trading, global regulators are on equal footing: Regulators need to better understand algorithmic and rapid-fire trading. This month, we feature an op-ed piece from attorneys Annette Nazareth, Robert Colby and Jai Massari. We're pleased-in fact, honored-that they chose Traders Magazine to publish their analysis of a working paper in the U.K. that could ultimately affect regulation in the U.S. Ms. Nazareth is a former SEC commissioner, and Mr. Colby is a former deputy director in the Division of Trading and Markets. Both are steeped in market structure issues, so I'm certain you'll find their thoughts of great interest.

Lastly, there's a bit of an industrywide brouhaha developing regarding automatically converting market orders to limit orders. It may never become the standard or a rule, but you can read about this in greater detail in our Rules and Regs section. Thank you for taking the time to read Traders Magazine. I hope you find this issue timely, interesting and well written. Enjoy.