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MiFID II Reaches Across the Pond: Is This the Calm Before the Storm?

Despite the view that MiFID II is a European regulation, US investment managers are experiencing disruption as they align their research payment and execution practices with the influential standard.

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December 1, 2012

Rebound Disrupted

By Editorial Staff

In October, ThinkEquity, the San Francisco-based investment bank, shuttered its stock-trading business, while Rodman & Renshaw, owner of brokerage Hudson Holding, said it would stop trading because of lack of capital. Throughout the past year, other smaller brokerages, such as Auriga Holdings, Pritchard Capital Partners, Kaufman Bros. and Momentum Trading Partners have either closed down or shuttered some operations, idling brokers, traders and staff. And the pain isn't limited to the small fries. Big boys like Morgan Stanley, Citigroup, Bank of America and Goldman Sachs have been quietly trimming their brokerage units this past year, mostly in equities trading.

"It is definitely a challenge for some of the smaller brokerages, especially those without the scale to get them through the tougher times," said Packy Jones, chairman of JonesTrading Institutional Services LLC, a brokerage based in Westlake Village, Calif.

Jones said he expects to see continued difficulty and further consolidation in the smaller brokers through the first half of 2013, if not through the entire year. "It's very sad to see these small boutiques shut their doors," Jones noted. "These smaller players are what make our business great."

-Gregg Wirth

 

>>More Tranquil Markets Sought

The mandate for exchange operators and regulators in 2013 will be to find ways to calm markets and make sure they operate reliably, even under abnormal conditions. And little wonder: The failure of the BATS IPO, the flubbing of the Facebook IPO, Knight Capital's runaway algorithm and the two-day shutdown of markets forced by Mother Nature (see page 56) ensure that a repeat string of disruptions will not be healthy.

The effort to calm markets began in 2010, after the flash crash of May 6. New single-stock and marketwide circuit breakers were put in place after that. Stub quotes were eliminated. "Naked access" to exchanges was forbidden.

In the coming year, the single-stock circuit breakers are giving way to a "limit up/limit down" mechanism. Other antidotes being examined: kill switches, expanded use of drop copies and an auditable trail of all trades.

The "up and down" limits prevent trades in individual stocks from occurring outside a specified price band, above and below the average price of the security in a five-minute period.

For the most highly traded stocks, those in the Standard & Poor's 500, the Russell 1000 and certain exchange-traded products, the band will be 5 percent above and below the average price. For other listed securities the level will be 10 percent. The percentages will be doubled during the opening and closing periods, and broader price bands will apply to securities priced at $3 per share or less.

The first phase, involving the highly traded stocks, begins Feb. 4. The second phase, for all other stocks, begins on Aug. 5. In certain cases, five-minute trading pauses will be triggered.

Also likely to arrive in 2013 are "kill switches" designed to automatically shut off a firm's incoming orders, to prevent a market disruption or spate of erroneous orders, like the Knight Capital incident on Aug. 1, 2012.

The exchanges are considering a "layered" approach, whereby a brokerage receives alerts five or 10 minutes before trading is shut off.