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Erik Hoel
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Ketchum Prods Sellside Over New Trading Ahead Rule

Rick Ketchum, president and chief executive officer of the Financial Industry Regulatory Authority, advised broker-dealers on Thursday to ensure that their institutional customers understand the ins and outs of NYSE Euronext's new trading ahead rule.

Specifically, the senior regulatory official wants the brokers to make sure the money managers understand that brokers are no longer required to inform them every time they trade alongside, or ahead, of their orders.

Under new NYSE Rule 5320, brokers only need to send out a letter once a year informing their buyside customers that they might trade alongside their orders. Previously, brokers were required to ask for the buyside's permission each time they accepted an order.

Rick Ketchum

Now, under the new rule, the buyside trader can still bar the broker from trading alongside, but must raise the issue with the broker himself before each and every trade.

The compliance burden has shifted to the buyside.

"With the shift in Rule 92, the buyside is concerned and focused on the disclosure and the decisions they have to make," Ketchum told attendees at the annual conference of the Security Traders Association in Palm Beach on Thursday.

"It is time for those of you on the sellside to make sure there really is understanding of your expectations and how you will handle those orders," he said.

NYSE Euronext changed the trading ahead rules for its three exchanges last month to conform with FINRA's new Rule 5320, better known as "Manning."

Some on the buyside have complained they did not receive notice of the rule change and are worried their brokers may take advantage of the changes to the buyside's detriment.

Brokers that commit capital for portions of their customers' orders end up trading on their own behalf as well as for their clients.

That position of competition could potentially lead to a form of front running where the brokers trade at prices better than those they give their clients.

Under the new rules, it is up to the buyside to police the situation. This is something some buyside traders say they were unprepared for.

"From the standpoint of the customers, a surprise never works," Ketchum said. "They're never positives. They're never received well by the regulators or the media. This is a great time for the sellside to take a step back and work towards an environment where there is transparency and understanding of the alternatives."