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May 1, 2012

Designer Liquidity

By Michael Scotti

Who do you want to trade with today? It appears that choice is growing in today's electronic marketplace. This month's cover story details how a few bulge bracket firms offer clients peace of mind through greater transparency in their dark pools. Editor Peter Chapman's cover story examines how these brokers tell clients which contra parties offer good liquidity and which don't. In each case, market impact is key. Each participant in these dark pools is given a report card. Clients decide who they want to trade with. This recent development goes beyond allowing clients to shut off high-frequency traders, as all participants receive a grade. Theoretically, a long-only manager could be deemed a less desirable liquidity provider. 

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Deutsche Bank, BofA Merrill, Morgan Stanley and Barclays are firms that we know offer this service. Each has its own wrinkle. Why is this story important? It appears to be the first coverage of this topic anywhere.

Separately, two stories in this issue relate to spreads-one on ETFs and another on the stock of small companies. Spreads are usually a function of risk. In our feature on ETFs, staffer James Armstrong examines how wide spreads in some illiquid vehicles are artificial: Trade at your own risk against the quote. However, a number of brokers are creating competitive situations with arbs. This allows institutions to obtain better prices.

Our second story on spreads relates to the JOBS Act signed by President Obama in April. A component of the law requires the Securities and Exchange Commission to examine the trading tick size for emerging companies and small caps: Should they trade in increments of greater than a penny? The question is whether there would be greater liquidity if these companies traded with wider spreads, which would be a truer reflection of the risk associated with trading that name. Wider spreads, some say, would increase profitability and the number of block trades. This could also encourage more Street research to support these companies. What will be the SEC's response?

You might recall a catchy public service announcement during the 1970s that said, "Don't forget, hire the vet." Today Wall Street firms, along with the rest of corporate America, are pushing the same idea to new levels. You can read about one three-year-old firm in this issue-veteran-owned Academy Securities-that is looking to hire post-9/11 vets, as well as experienced Wall Street traders. This is one story worth following for years to come.


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