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In this shared commentary, Aplomb Strategies writes that when considering a firm’s governance structure, a holistic approach makes the most sense.

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December 1, 2011

A Good Walk

A Good Walk

By By Michael Scotti

Since 2007, Traders Magazine's December issue has featured a review of the year's top stories. This year's issue marks our fifth annual such edition and delivers some interesting recaps. One story is how the bulge bracket is cutting back on the number of algos it provides to the buyside. Over the last year, firms began streamlining their offerings to save money. They've shifted to supporting their most widely used products. Call it algo consolidation. Another reason behind this move is a greater demand for customized algos.

Another story looks at how a bulge firm may wear two hats as it relates to high-frequency traders-it is both courting their business, and at the same time, looking to protect traditional clients from the more predatory rapid-fire strategies. These stories, as well as the others, are a good chance to look back on the year.

Looking back at 2007's top stories, there is little reference to high-frequency trading. That might come as a surprise, because it has been a nonstop topic of discussion for the last couple of years. In retrospect, however, the lack of HFT coverage then makes sense. Regulation NMS had only been implemented earlier that year. No one can argue that rapid-fire trading was helpful during the August 2007 meltdown, when volume set records, reaching between 9 and 10 billion shares each day for a week. High volumes returned again this August, when markets nose-dived after concerns were heightened about European debt problems.

One emerging story for the year remains how the industry will need to comply with the Volcker Rule, which was part of Dodd-Frank and designed to curtail proprietary trading. The rub for equity traders is how the final rule will be written by the Securities and Exchange Commission. A proposal has been written, and the SEC is awaiting industry comment. All eyes are on the SEC, as its final rule could impact liquidity. It has its work cut out for it to separate what constitutes prop trading and market making.

What happens in 2012 is anyone's guess. A year ago, who would have thought that for nearly two months, a group calling itself "Occupy Wall Street" would decry the financial system and take over a park in lower Manhattan that no one previously knew the name of? Twice a day I walk past Zuccotti Park. Over time, OWS's message became more muted and blended in with the rest of the city. I look forward to next year and wish you luck in all your endeavors. Buen camino.