Buyside traders want the Securities and Exchange Commission to wrest information about the inner workings of exchanges and alternative trading systems from their operators.
That was the consensus of traders from 37 buyside desks that participated in a workshop put together by broker-dealer Bloomberg Tradebook. Based on the discussion, Bloomberg produced a list of 17 questions for exchange and ATS operators about their order handling practices.
In June, Bloomberg sent that list to the Securities and Exchange Commission, asking the regulator to require exchanges and ATSs to provide answers to the questions. Those answers should then be made available on the SEC’s website.
The list questions are grouped into three categories. First, the traders want to know if the exchange or ATS has any affiliates that might be trading in the venue. The concern harkens back to the Pipeline Trading episode in which an affiliate of the dark pool operator secretly traded against buyside orders.
Second, the traders want to know something about the order handling practices of the venue operator. Specifically, the traders want to know if the venue is sharing information with a third party. This concern harkens back to the Level ATS affair in which the dark pool operator shared sensitive information with its routing partner, Citi’s Lava Trading.
Finally, the traders seek some understanding of the venue’s order matching methodology. Pointedly, they want to know if the venue offers certain players special advantages in the venue. This concern echoes recent criticism from the buyside that some exchange order types may give professional traders unfair advantages.
At the workshop, the traders “expressed a real need for more transparency around how their equity orders are handled and how orders interact with the marketplace – on exchanges or ATSs and in dark pools,” Ray Tierney, Tradebook’s president and chief executive officer, told Traders Magazine. “And at Bloomberg Tradebook, we fundamentally believe that transparency drives trust in the marketplace.”
In his letter to the SEC, Tierney said the buyside believes “the Commission should strive to provide additional transparency and a more standardized disclosure process.”
At least one buyside trader with whom Traders Magazine spoke agreed. Cheryl Cargie, head trader at Ariel Investments, said: “We definitely want more clarity on these important market structure issues from both the exchanges and ATSs.”
Whether just one of the above questions gets adequately answered or all three, increased transparency in the marketplace can only help the buyside trade better, she said.
“I want to know how these venues price an order, who gets first dibs on it and who is in there looking at the order,” Cargie said. “These are questions that need to be answered. We, the buyside, want this.”
David DeVito, head trader at Madison Investments told Traders Magazine that he was especially interested in the exchanges and venues having a standardized disclosure process.
“When it comes to transparency we operate under the ‘trust but verify’ model,” DeVito said. “A standardized disclosure process would certainly help. Comparing and contrasting existing disclosures and then challenging any differences among providers is cumbersome and time consuming. There are a few providers who offer their own standardized ‘checklist’ for wider dissemination; but again, this lack of standardization becomes cumbersome for all parties.”
The exchanges are taking steps to provide more information to the trading community. Earlier this year, they gave Rosenblatt Securities access to their order type data to help the broker with its study of exchange order types.
At least one exchange operator tells Traders Magazine it is providing information about its systems to the public. “We believe in sharing information and being completely transparent,” Randy Williams, a spokesperson for BATS Holdings, said. “We spend a significant amount of time with the buyside and believe it is important that all market participants understand how the market works.”
The exec added that BATS provides detailed information about any changes or updates to its systems to its customers as well as to the industry through detailed rule filings and comment letters submitted to the SEC.
