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December 1, 2012

Rebound Disrupted

Traders Magazine's Top 10 Stories in 2012

By Editorial Staff

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For the equity markets, it was a tough year to say the least. There was optimism among Wall Street trading firms and venue operators at the close of 2011, as many felt the worst of the Pipeline Trading scandal was over, Dodd-Frank reform was now a distant memory, slumping volumes would have to end, and falling commissions were going to be a thing of the past. 

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Not quite.

As the year began, brokers on the precipice of death due to 2011's anemic volumes began closing their doors, when volumes dropped by roughly 20 percent again.

WJB Capital, Ticonderoga Securities and smaller boutiques just couldn't hold out any more amid the commission slump as trading volumes failed to rebound, despite predictions they would. Even bigger shops such as Nomura Securities International, which undertook a massive buildup of its U.S. equity operations under Ciaran O'Kelly, finally ceded to financial pressures; in October, Nomura shifted most of its U.S. operations to its agency-only sister, Instinet, which pioneered the computerization of institutional trades.

Despite the fact that volume and commissions stayed low through the year, the equity markets didn't exactly help themselves either. A number of high-profile trading mishaps and glitches plagued the sector: The failed BATS Global Markets IPO in March, the botched Facebook IPO in May (and the corresponding compensation proposed by Nasdaq) and the near collapse of Knight Capital Markets in August combined to turn public sentiment against Wall Street.

Protests raged in lower Manhattan and other cities as Main Street publicly voiced disgust at all things Wall Street-from its arrogant image, compensation practices and greed to its overreliance on unchecked technology.

With Wall Street on the verge of being ostracized by retail investors who demanded answers, Congress and regulators had to respond. The complex market structure was put under a microscope to find out how to fix a system that had strayed from its capital formation roots to become an ATM for a select few. Regulators held a series of meetings and conferences on topics ranging from the basic-how to restore investor confidence-to complex subjects such as kill switches, algorithm testing and verification, tick sizes and disclosure as to where child orders were routed. Nothing was off limits this year.

Wall Street saw the writing on the proverbial wall: Fix yourself or government will fix you. Dark pools, either independently owned or broker-sponsored, began to police themselves. Several pools employed so-called high-frequency trading filters or technology designed to protect large buyside orders from predatory speedy trading strategies.

The exchanges, looking to regain some of their lost market share to alternative trading systems or electronic communication networks, began to court smaller investors through new retail-targeted programs. They also began to conduct thorough examinations of their technologies and how they functioned.