After SEC Settlement, ATS Flies LeveL

Despite some bumpy air and turbulence, LeveL ATS says its business has stabilized and that it is wooing clients back.

This comes after the dark pool’s parent company agreed to pay a $800,000 fine in October in a case involving the protection of information about its customers’ unexecuted orders.

The company experienced a drop-off in order flow in the wake of the settlement between parent eBX LLC and the Securities and Exchange Commission on Oct. 3, LeveL chief executive Whit Conary told Traders Magazine. But the alternative trading system is seeing some lost order flow return as the dust settles.

“We’ve received tremendous customer support,” Conary said of his clients. “And we’re here for the long term.”

However, LeveL has its work cut out for it. One senior trading desk head said he’d heard the ATS’s volumes are down roughly 20 to 40 percent from presettlement levels. LeveL declined to provide trading volume figures.

In the five trading days preceding the settlement, LeveL reported on its Twitter feed that it executed trades involving anywhere from 76.2 million shares in a day to 92.1 million.

The firm stopped publishing statistics to its Twitter feed after Oct. 3.

But Conary told Traders Magazine that 75 percent of LeveL ATS customers are sending order flow, at this point. And the firm is working to get back 100 percent of the clients it had prior to the settlement’s announcement, he added.

The firm receives order flow from more than 100 broker-dealers. Not all are sending orders, as the settlement fallout remains.

To combat that, Conary has been pounding the pavement and talking to his clients daily to regain lost order flow. He knows getting all his clients’ orders back is paramount in today’s low-volume trading environment.

According to an industry executive familiar with the operations of the alternative trading system, only 4 percent of all LeveL’s executed trades were processed by the order router that came into question in the SEC’s case.

While some clients withdrew business from LeveL because the SEC had cited it for not protecting customer information adequately, LeveL’s situation is different from that of Pipeline Trading, which went out of business after the SEC said it failed to properly disclose where it was getting its order flow from, industry pros told Traders Magazine.

In the Pipeline case, one brokerage desk head said, the settlement was based on fraud and resulted in direct changes against individuals.

In that case, Pipeline failed to disclose that more than 97 percent of orders in its dark pool at times were filled by a trading operation affiliated with the firm.

The company agreed to pay a $1 million penalty. Two top Pipeline executives, founder Fred Federspiel and chairman Alfred Berkeley, each agreed to pay a $100,000 fine for their involvement, as well.

This is not the case with LeveL.

“This case is about information sharing, and to the best of my knowledge no one gained a price advantage on any trade,” the brokerage desk head said. “What happened with LeveL is not the same as Pipeline. But the question remains for us: When can we turn them back on? Some of our clients have asked us to turn them off and haven’t said anything about turning them back on.”

Dan Mathisson, head of U.S. equity trading at Credit Suisse, which holds a stake in the ATS, said even his firm had to temporarily shut down its connection to LeveL. He told Traders Magazine the broker had a team of people-lawyers, analysts, etc.-look at the situation to evaluate it.

“After looking at the situation, we saw this was not a Pipeline-esque situation at all,” he said. Credit Suisse has since restored its connection to LeveL; however, Mathisson said not all customers have requested their orders be routed again to the ATS.

In the LeveL case, the SEC said in its complaint that the smart order router of LeveL’s technology provider, the Lava Trading unit of Citigroup, kept information in its memory about LeveL subscribers’ unexecuted orders. The router then used that information to make routing decisions for the benefit of its own order-routing business.

That “memory feature,” the SEC said, enabled the Lava router to retain a record of any order submitted to various market centers, and to use that information to make automated routing decisions. The feature retains the symbol, side, source, quantity and received time for these orders; it can be turned on or off.

In an Oct. 3 letter to customers, Conary said Lava confirmed in April 2011 that it no longer was using the feature when it handled LeveL subscribers’ orders.

In that letter, Conary wrote that Lava, under its contract, is required to maintain confidentiality of subscriber information and “is not authorized to use the order information from LeveL for any purpose other than order routing.”

This is something the SEC noted in its findings. According to the settlement documents, the SEC wrote, “There is no evidence that information about LeveL’s unexecuted orders was displayed, or otherwise communicated to, clients of [Lava] or other third parties.”

In addition, the SEC found that “the record shows that the actual execution price received by the LeveL subscriber and [Lava] would be identical to the execution price that would have resulted had [Lava] sent the same orders to LeveL without the benefit of the router’s order memory feature.”

While the firm has settled, orders keep flowing in, signifying that clients are willing to send in orders. And that comforts Conary.

“We have significant customer support and we are committed to providing the unsurpassed execution quality they have come to expect on an ongoing basis,” Conary said. “We are committed to the business and here for the long haul.”

Tereck Fares, CFA and director of equity trading at Chicago Equity Partners LLC, declined to comment directly about LeveL ATS or the Pipeline trading incident. However, he did say that incidents like these point the bigger issue of order ownership. And that ownership, he said, resides exclusively with the originator and initiator of the order and not the engine used to route that order. Any use of order information by anyone other than the order sender is inappropriate, he added.

“This issue of ownership of an order is a fundamental property right that needs to be understood and respected throughout our market structure,” Fares said. “At no point in the life of the order should any one firm-whether it is a sellside firm, ATS or exchange-make that order their own and profit from the valuable information it carries.”


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