The Financial Industry Regulatory Authority is likely to publish a draft of a rule proposal requiring dark pools and internalizers to report their trading volume later this month or in November.
Once a draft is put out and discussed, a formal rule proposal will be sent to the Securities and Exchange Commission, presumably late this year, with a comment period to follow, likely stretching into 2014. Full approval and implementation could happen during the first half of next year.
The chances for its approval next year are high, said Christopher Nagy, head of consultancy KOR Trading, and other industry execs. [IMGCAp(1)]
“This regulation will get passed,” Nagy said. “The feeling of some operators is this type of mandate to report is OK, but the frequency of said reports needs to be sorted out first.”
The regulator first announced its plans to promulgate a reporting rule in July.
Driving the idea for such a rule are complaints by exchanges that too much trading is taking place off-board in dark pools and brokers internalization engines. Such a disclosure rule is considered a positive first step in achieving an understanding of the extent of dark pool trading.
FINRA spokesman George Smaragdis told Traders Magazine in an email that the regulator expects to file the proposals with the SEC “in the near future.” He provided no further comment.
KOR’s Nagy, who has experience in such matters from his days as managing director for order routing and market data strategy and co-head of government relations at TD Ameritrade, said that Finra was currently working with the broker-dealers that run their own dark pools, other alternative trading system operators and the buyside to come up with a reporting system all could work with.
Dan Mathisson, head of equity trading at Credit Suisse, who said he had not seen any proposal yet, agreed with Nagy that a rule governing dark pool volume reporting would likely pass. He told that he supports the idea of a Finra proposal despite not seeing all the details just yet and that a date of early 2014 for a final rule was likely.
Credit Suisse was one of several dark pool operators that self-reported its volumes but subsequently stopped in April due to frustration concerning the lack of uniform reporting criteria among self-reporters, according to Mathisson.
(c) 2013 Traders Magazine and SourceMedia, Inc. All Rights Reserved. http://www.tradersmagazine.com http://www.sourcemedia.com/
More than three years after a scandal that gravely damaged its reputation and led to the loss of more than $50 billion in assets under management and almost all its U.S.-based investors, Orinda, Calif.-based money manager AXA Rosenberg believes it is on the upswing.
Outflows have stopped, assets have inched up to $23 billion, and the firm has beaten its performance benchmarks for the past three years.
Back in April 2010, the firm disclosed to clients that a computer error in its quantitative investment process had been covered up by senior managers. A year later, the Securities and Exchange Commission charged the firm with securities fraud for concealing the error, causing $217 million in investor losses.
AXA Rosenberg agreed to settle the SEC charges by paying $217 million to harmed clients, plus a $25 million penalty, and by hiring an independent consultant with expertise in quantitative investment techniques to review disclosures and enhance the role of compliance personnel.
AXA had already seen its assets under management halved to $70 billion in the 2007-2008 period when the whole quant section fell out of favor. With the scandal, it saw another outflow of more than $50 billion, and assets declined to $21 billion in 2011.
There can be opportunity in crisis. In 2010, Axa Rosenberg offered employees a buy-out package and the two co-heads of trading took it. The firm then tapped Scott Wright, who had started there as a consultant in 2005 and began trading in 2006, to head the desk.
Wright, now head of trading for the Americas, focused on managing relationships to make sure AXA didn’t lose credibility on the Street.
“I kept relationships current by making sure commission dollars, even though they naturally fell to all-time lows, seemed as though they were being funneled in the right direction,” he said. “Because the Street can easily hurt you if you appear to be a wounded dog.”
When Wright began consulting at AXA, he had a mandate to integrate FIX into their proprietary OMS and to convince traders it was smarter to send electronic orders than to give them over the phone.
He had a background in trade floor support at Barclays Global Investors and Schwab SoundView Capital Markets, where he supported the electronic trading desk for the program trading group. Among other things, he taught the traders at Schwab how to use algorithms, and that started his career as a trader.
That background has served him well. Will Geyer, now a managing director at ITG and global head of the firm’s platforms business, was at one time head of U.S. equity trading at Barclays Global Investors and worked with Wright then. Later, when Geyer was on the sellside, managing Citigroup’s global alternative execution business and serving as CEO and president of JonesTrading, Wright was one of his customers. Geyer says Wright “has a broad knowledge of not just trading but also the technology that surrounds it. He has an insightful view of how things work and why things work.”
Wright is one of those top traders who “appreciates the intersection of technology and execution,” Geyer said. He has “an understanding of where trade automation works and when it doesn’t, and when you need to provide a different course that adapts to the market environment.”
Said Wright: “I do understand how things are built. Since I know there are shortcomings in rule-based trading, I can step back and say it’s better to trade something with a larger set of rules-a human brain.”
UNIQUE TRADING STYLE
AXA is a quant shop, where the firm’s model chooses stocks based on fundamentals rather than what’s happening in the marketplace. The firm seeks to capture both short-term earnings growth and a long-term earnings advantage, through rigorous fundamental analysis. AXA selects stocks the model has identified as, on average, slightly misvalued relative to similar stocks.
The firm’s unique style of trading is intended to be a backstop for the model’s picks, because those selections are not made with regard to current market developments. That’s why traders there don’t have to complete the orders if something is happening that the model can’t know of.
For instance, the model might be saying to buy SanDisk, but Cisco may have just made an announcement that affected SanDisk’s price, Wright says. In that case, trading in the stock is stopped. The portfolio manager freezes the stock, reoptimizes the portfolio-and a new recommendation comes out. Optimization involves determining mathematically the best return-to-risk tradeoff, given the model’s forecast of return and risk.
“Because we deal in similars, we don’t deal in specifics, it’s easy for us to find another name to address it,” Wright said.
There’s another big difference between the AXA desk and most others. Contrary to do-it-yourselfers, 20 percent of the firm’s orders are done via algos and program trading and 80 percent via brokers’ cash desks.
Wright says that algos don’t normally beat the benchmarks. They typically come close but miss. “So I’m missing two to three basis points every day on my algorithmic trades, where my cash desk usually beats the benchmark,” he said.
AXA tells its brokers it expects them to trade as if it were their own money. If a trade isn’t making sense, they should go back to AXA, because the money manager can always come back to them with a different order, Wright says.
Most of the brokers the firm uses are an extension of the desk, Wright says. The brokers and traders the money manager does business with have been with it for quite a while. Even though a trader may move firms, AXA moves with the trader, rather than stay with the firm.
AXA has no preference about whether it uses full-service or agency brokerage firms, but it has found that bulge bracket firms don’t provide the level of attention AXA is looking for, because its commission dollars are lower than some other money managers’, Wright says. So AXA tends to stay with the smaller firms.
ALGO SURVEILLANCE
The drawback with algos, says Wright, is that “even though some algorithms have tried to incorporate factors outside of what the name is doing, they are still just machines. You still have to be able to recognize that the thing that you are doing is not smart because of things that are happening around it, rather than just focusing on the trade itself.”
So although AXA’s brokers may use algos for an order, they watch and stay on top of each order, Wright says. That enables them to take advantage of market movements, holding back a percentage of the order to take advantage of the intraday lull, for example, he says.
Of course, algos still offer important advantages. “We want to take advantage of uninformed flows, so I still want to participate in dark pools and every algo that I can, because it gets fed by retail flow which is uninformed,” Wright said.
The end result of this trading strategy? Over the last six months, AXA Rosenberg is four to six basis points over its interval volume-weighted average price benchmark, Wright said. When commissions and costs are factored in, the firm is still positive by 2.5 to 3.5 basis points, he says.
At the time of the SEC settlement, the firm’s three trading desks-in New York, London and Singapore-were silos, each with its own technology and tools, Wright says. As part of an effort to increase transparency across the firm, they now trade the same way and use the same tools. That allows them to share information, Wright says.For instance, the U.S. leads in algo production, so when a new algo comes online, the U.S. desk normally gets it first and offers its findings to the other offices, he said.
The arrangement makes AXA Rosenberg more competitive because “my relationships in the U.S. are seen by the European desk. So if we tend to trade a lot more with Barclays, we negotiate better rates on the trades that we do.”
In late 2010, AXA Rosenberg announced that Jeremy Baskin, previously head of the active equities division of the Northern Trust Company, had been named CEO. During his 22-year career at Northern Trust, Baskin was responsible for the global passive business, as well as building the research and investment infrastructure for risk-taking value-added quantitative equity strategies.
As head of the active equities division, Baskin was responsible for all global fundamental and quantitative portfolio management and research, managing around $24 billion in assets.
Said Geyer: “The organization is really positioned well to value trading’s contribution” because new CEO Baskin values trading and understands what trading can do. “That empowers Scott to be able to contribute in a really meaningful way.”
The organization is really moving in the right direction under Baskin’s leadership, Geyer added. “It’s been a tremendous turnaround of the company, and he’s very well respected in the industry.”
Wright agrees. Baskin “brings a unique depth and understanding because of his background in trading. He understands much deeper what’s entailed in trading,” Wright said.
(c) 2013 Traders Magazine and SourceMedia, Inc. All Rights Reserved. http://www.tradersmagazine.com http://www.sourcemedia.com/
Last month was the five-year anniversary of the near collapse of the global economy — and today’s traders have been pushing forward ever since. The past few years have given us a federal bailout, a grinding recession, Flash Crashes large and small and electronic trading speeds that would amaze Albert Einstein. The men and women who cut the deals in the major investment houses on Wall Street and beyond are deploying new technology like never before.
It’s been a turbulent time for the industry. When the banks grudgingly accepted the TARP bailouts, the CEOs made sure that they paid themselves and their top traders’ lavish bonuses. They believed that if they didn’t pay the bonuses, the traders would leave to start their own hedge funds. Many did – and many failed. Several start-up funds and prop trading firms started by star traders have crashed and burned. As the operator of one hedge fund that flamed out put it, it was closed for “lack of interest.” Further, new regulations such as The Dodd-Frank Act have pushed for greater transparency that now force firms and trading practices into the light of day.
In this month’s Traders we shed light on the firms and their trading practices. Our cover story reveals the efforts of head trader Scott Wright to restore the badly damaged AXA Rosenberg to its former glory. For a quant shop, this asset management firm is looking beyond algorithmic trading to restore its reputation that was nearly destroyed by a scandal. What are Wright’s secrets? He’s working with smaller brokers and executing more trades in a hands-on fashion.
Managing editor John D’Antona Jr. takes us inside the launch of IEX, a new ATS that is owned and operated by the buyside but is aimed at the sellside. In the past, the sellside offered everything from order management systems to trading venues in exchange for the buysides’ business. But as John reports, there’s a new wrinkle in the buyside/sellside relationship. Speaking of trading venues, John also looks at FINRA’s new rules that shine a light into dark pools. The regulator wants to set rules for these unlit trading venues that traders love, exchanges loathe and lawmakers do not quite understand.
As the new editor of Traders, I am pleased to be part of such an august publication. Traders has been around for decades and its coverage is respected throughout Wall Street. I invite you to check out our daily news on tradersmagazine.com and follow us on Twitter at @Traders_Tweets.
After all, news doesn’t happen every 30 days.
(c) 2013 Traders Magazine and SourceMedia, Inc. All Rights Reserved. http://www.tradersmagazine.com http://www.sourcemedia.com/
In 2009, the Securities and Exchange Commission proposed a package of three rules aimed at operators of alternative trading systems, including dark pools. As part of the “Regulation of Non-Public Trading Interest,” as the proposal was called, the SEC suggested that dark pool operators be required to attach their names to their trade reports.
This post-trade disclosure idea didn’t sit well with many industry participants, primarily because the SEC believed it should be done in real time. Buyside traders and their brokers were concerned that such frequent reporting would result in undue information leakage. The proposal never got beyond the comment period.
Now, four years later, the Financial Industry Regulatory Authority is trying again. Industry sources tell Traders Magazine that a similar proposal is being worked on that would require brokers to report their off-board “dark” trades to FINRA. The exact time a broker or other venue would have to report its trades is still open to discussion, as is just when the regulator would publish the data on its website after it gets it.
A rough draft of the proposal could come as early as this month, sources tell Traders Magazine. (See “Briefs” section for details.)
FINRA spokesman George Smaragdis told Traders Magazine in an email that the regulator expects to file the proposals with the SEC in the near future. He provided no further comment.
Driving the idea for such a rule are exchanges’ and regulators’ concerns that too much trading is taking place off-board in dark pools and brokers internalization engines. That hurts price formation on the public exchanges. FINRA’s disclosure rule is considered a positive first step in achieving an understanding of the extent of dark pool trading.
INTO THE LIGHT
Christopher Nagy, president at KOR Trading and former managing director for order routing and market data strategy and co-head of government relations at TD Ameritrade, told Traders Magazine that FINRA was working with the broker-dealers that run their own dark pools, other alternative trading system operators and the buyside to come up with a reporting system all could work with.
“This regulation will get passed,” Nagy said of the to-be-announced regulation. “The feeling of some operators is this type of mandate to report is OK, but the frequency of said reports needs to be sorted out first.”
Off-board trading accounts for around 35 percent of total volume. But for some stocks, it often runs higher, at 40 percent-or for some, as high as 100 percent. Off-board trading includes four categories: dark pools, internalization, electronic communication networks and broker block trades.
The proposed rule targets dark orders traded off-board. That include broker-dealer and private alternative trading systems, internalizers and wholesaling firms like KCG Holdings, Nagy added. The rule will not impact dark trades done on the exchanges.
WHAT’S THE FREQUENCY?
The main point of contention in the rule proposal, Nagy said, is the frequency and publication of trades. He said this was still being debated at press time.
On the one side are the regulators and the exchanges; both are concerned over the growth in off-board trading and how it hurts public price discovery. On the other side are the brokers and other dark pool operators and the buyside, who claim these less transparent venues allow anonymous trading and better price and size execution away from the unsavory traders found on the public or lit exchanges.
Timing of the reporting of dark pool data, Nagy said, seems to be centering at the once-per-month format. FINRA would be the aggregator of the data and publish it on their website. The dark pools or other ATSs would furnish volume data as most already monitor it and have the data readily available. With FINRA publishing this data, some firms that already provide a glimpse into dark pool activity, such as Rosenblatt Securities, could find themselves competing with the regulator, Nagy added.
“I think it is better to have a regulator publish this data,” Nagy said.
And dark pool operators, big and small, seem to be comfortable with FINRA publishing the data, as long as it doesn’t compromise their mission of providing liquidity and anonymity.
Dan Mathisson, head of U.S. equity trading at Credit Suisse and operator of the largest dark pool, Crossfinder, told Traders Magazine he supports the idea of the FINRA proposal despite not seeing a draft of any rule or the details just yet. Credit Suisse was one of several dark pool operators that self-reported volumes for a time; it stopped in April, due to frustration concerning the lack of uniform reporting criteria among self-reporters.
“Overall, we’re looking forward to it,” Mathisson said of the idea of upcoming FINRA regulation. “It would be healthy for the market for everyone to report volumes and have the same reporting methodology. Consistent reporting criteria are the key. The ad hoc way things were being reported frustrated us.”
Keith Ross, chief executive of PDQ ATS, a Chicago-based alternative trading system, recently told Traders Magazine he too was OK with proposed new rules governing dark pools and initiatives aimed at making them more transparent. Ross said he was in favor of more transparency, as it would bolster investor confidence in the equity markets, something he felt was needed to boost trading volume overall.
“FINRA has proposed each of the ATSs report by issue the amount of stock they trade in a given week,” Ross said, based his knowledge of the proposed rule. “ATSs will have a week to report their data, and then FINRA needs another week to collate this data and then publish any report. There will be a public record of how much volume of stock is trading in a particular venue.”
As a dark pool operator, Ross said it wouldn’t be difficult to respond to this new requirement from FINRA for more data.
WHY THE RUSH?
Robert Felvinci, head trader at Spinnaker Trust in Maine, said he didn’t have an issue with a dark reporting rule, as long it incorporated some type of reporting delay period.
“I don’t have an issue with the reporting of trading data, but there should definitely be a delay in the reporting of these trades to protect against high-frequency trade operations in the market that are looking for opportunities to profit from this trading information,” Felvinci said. “Whether that delay is two days or two weeks, I don’t think it matters that much, just as long as there is a delay.”
He added that those who are against any type of delay or who want the data immediately are individuals representing HFT businesses or those who claim to represent the retail investor.
“But what many forget is that the retail investor or ‘little guy’ is whose money an institution actually represents,” Felvinci said. “Whether it is a mutual fund, 401k or pension fund … that is whose money is typically being traded and invested by the institution.”
Those in favor of such as rule, such as Felvinci, are traders simply trying to do their fiduciary responsibility of getting best execution for their clients and avoid getting gamed.
As for the exchanges and internalizers, the early consensus looks to also be in favor of a dark trading proposal.
While spokesmen for Nasdaq OMX and NYSE Euronext both declined to comment, a spokesperson for BATS/Direct Edge did tell Traders Magazine that it supports FINRA’s efforts to provide more information.
“We have always believed in providing transparency wherever appropriate, and we support FINRA’s efforts to try to bring an appropriate level of transparency to trading that happens away from the lit exchanges,” the BATS spokesperson said.
And at least one of the internalizers is OK with a rule proposal. A spokesperson for KCG Holdings, the company formed by the union of Knight Capital and Getco, said the firm supports providing investors with increased transparency around where to source liquidity.
“We look forward to commenting on the proposal when we have the opportunity,” the spokesperson said.
However-despite not having yet seen the proposal-Credit Suisse’s Mathisson said that as he understands it, the proposal doesn’t go far enough in lighting up the dark. While the final rule will govern dark pools and non-public trading, he noted that it doesn’t appear to address the dark liquidity being transacted on the lit exchanges such as NYSE Euronext or Nasdaq OMX. He contends that the exchanges, such as NYSE, operate large dark pools themselves. Among the 150 or so order types offered by today’s exchanges are dozens of dark varieties, as well as order types that switch between lit and dark, such as “Hide and Slide.”
Furthermore, Mathisson argued that exchanges and off-exchange ATSs are more similar than different. They are both for-profit businesses, he said, they both offer dark and lit order types, and they both create pricing plans designed to maximize their profit. As a result, the line between exchange and off-exchange trading is blurrier than it’s ever been.
“While the FINRA rule is good and we’d like to see it, it gets the industry only halfway there in terms of disclosure,” Mathisson said. “I want more disclosure from the exchanges about their dark liquidity. While this proposal sheds light on ATSs, it doesn’t shed light on exchange dark trading. That remains in the shadows.”
(c) 2013 Traders Magazine and SourceMedia, Inc. All Rights Reserved. http://www.tradersmagazine.com http://www.sourcemedia.com/
Bank of New York Mellon Corp. last month appealed a decision by the New York State Supreme Court to allow a lawsuit brought by the New York State Attorney General against BNY Mellon over its foreign exchange trading.
In August, the state’s highest court ruled in favor of the attorney general’s office, allowing it to proceed with its lawsuit. New York’s top cop is accusing the giant custodian bank of defrauding various New York City pension funds over a 10-year period by overcharging them for currency trades.
The appeal is the latest volley in a nearly four-year legal tussle between BNY Mellon and various states, as well as the U.S. Justice Department, over its “standing instructions” foreign exchange transactions service. Other custodian banks, including J.P. Morgan and State Street, have also been the subjects of FX-related lawsuits.
Besides New York, BNY Mellon is facing lawsuits in California, Massachusetts, and Florida. It won a dismissal of a so-called whistleblower suit in Virginia. It also has had whistleblower suits thrown out in New York and California.
Custodian banks such as BNY Mellon take custody of the financial assets of institutional investors such as pension funds, including foreign securities. As part of that service, they may automatically enter into so-called standing instructions currency trades during the clearing and settlement process.
Standing instructions trades are typically smaller than negotiated trades, falling below the $1 million minimum necessary to qualify for trading in the inter-dealer wholesale market. The custodians’ customers often don’t learn of the actual prices of the trades until weeks after the fact.
BNY Mellon and State Street are the two largest custodian banks, as measured by assets in custody. Both do a significant amount of foreign exchange trading, typically acting as dealers in the trades.
PRICING
For the six months that ended June 30, BNY Mellon booked $328 million in FX trading revenues. Of that, $130 million, or 40 percent, was for standing instructions trades. The balance was for the larger negotiated trades.
In the same period, State Street booked $317 million in FX trading revenues. Of that, $150 million, or 47 percent, was for standing instructions trades. The balance was for the larger negotiated trades.
The New York State suit claims that BNY Mellon priced clients’ FX transactions “at the worst rate at which the currency had traded during the trading day rather than at the market rate at the time of the trade. The bank then pocketed for itself the difference between the worst price of the day it had given clients and the market price existing at the time it executed the transaction. Through this fraud, it earned $2 billion over a 10-year period.”
BNY Mellon “flagrantly misrepresented its practice,” writing to clients that in executing SI transactions, the bank would obtain the “best rate of the day,” “best execution” and “the interbank market rate at the time of execution,” according to the suit.
For its part, BNY Mellon contends the attorney general’s suit is without merit. In a statement following the court’s ruling in August, BNY Mellon head of corporate communications Kevin Heine praised the court for dismissing the whistleblower claims, but said, “We continue to believe the remaining claims are unwarranted, and we will vigorously defend against them.”
TWO SIDES
For some industry officials, the pension funds deserve some of the blame for the allegedly poor prices the received.
Jim Cochrane, foreign exchange transaction-cost analysis product manager at ITG and a former FX trader, says there are two sides to the story. The clients agreed to pay through transactions to cover the cost of custodial services, he said. “The banks are not innocent, but you let the fox guard the henhouse,” he said.
“The buyside knew where the markets were. They should have been doing a better job of policing their FX transactions,” Cochrane said.
As for the custodian banks, they have stepped up their game, according to Cochrane, because they know they are being watched.
Cochrane said that when he looks at the data-a custodial trade without a timestamp-and measures it against the high and low for the day, more often than not, the fills are falling inside the high and low and not outside.
That wasn’t the case when he first began examining the data. Two years ago, when he looked at 2009-2010 data, “I saw a lot more trading outside the daily range.”
Pension funds and buyside firms now want independent verification that the rates they are getting “are either within the daily range or at the time of execution it was close,” Cochrane said. That’s why ITG is getting requests for trials of its new FX TCA product, which debuted a year ago.
Firms are using the service for compliance and process improvement, but most commonly to help measure best execution, Cochrane said.
BNY Mellon was first hit with a lawsuit in December 2009. Since then, it has watched as its revenues from foreign exchange transactions dropped by nearly 40 percent. In 2009, the bank took in about $850 million in revenues from FX trades. In 2012, it grossed $520 million, a decline of 38.8 percent.
It is unclear how much of that decline is the result of fallout from the litigation. BNY Mellon does the bulk of its FX volume in negotiated trades-not standing instructions trades-according to its website. It only started disclosing the percentage of standing instructions trades in 2011.
As for State Street, it has seen its revenues from “indirect,” or standing instructions, FX trades drop from $369 million in 2009 to $248 million in 2012-a decline of 33 percent.
ITG’s Cochrane isn’t the only industry official to find the pensions remiss in their duties. Historically, according to Michael O’Brien, head of global trading at Eaton Vance, fixed income managers were more sensitive to FX execution levels than equity managers.
“If you are an equity manager and you’re worried about whether your stocks will go up or down by 30 percent, FX, on an individual trade basis, seems like such a small piece of the trade that it could have been overlooked,” he said.
BUYSIDE TRADING
On the fixed income side, however, firms are counting in basis points, so those managers were more sensitive to foreign exchange, O’Brien said. “If you had to generalize, you’d find it was more equity managers leaving their orders with custodians and fixed income managers maybe not.”
As a result of the FX custodian lawsuits, however, there is now far more sensitivity to foreign exchange, and one piece of evidence is the emergence of firms that do FX TCA, he said. “It’s not as precise as equity TCA, but you can get a general idea.”
The lawsuits are also one of the big reasons more buyside shops are trading FX more on their own now, O’Brien said. And the growth of electronic FX trading has made it more efficient for smaller shops to do their own FX. Eaton Vance, which has had a longtime policy of not using custodians for FX trades, does almost every trade in G10 currencies electronically, he said.
Still not everyone agrees that the litigation has pushed traditional buyside shops to do their own trading. According to David Mechner, chief executive of Pragma, an algorithm vendor with a line of FX trading tools, most are staying with the custodians for now.
“There’s a huge amount of inertia,” Mechner said. “A lot of ways that firms trade is entrenched. Over the next five years there will be a shift, but changing is a big undertaking that involves dealing with credit agreements.”
(c) 2013 Traders Magazine and SourceMedia, Inc. All Rights Reserved. http://www.tradersmagazine.com http://www.sourcemedia.com/
Long frustrated by the sellside and its order-handling practices, the buyside is set to open up its own alternative trading system-and asking brokers to do business there.
The buyside is not going to take it. Anymore.
But is the already crowded and highly fragmented U.S. equity trading market, replete with 13 exchanges and 40 other trading venues, ready for another marketplace? The braintrust behind IEX, chief executive Brad Katsuyama, chief strategy officer Ronan Ryan, chief technology officer Robert Park and chief operating officer John Schwall all think so.
Ryan and Katsuyama said IEX will address institutional traders’ biggest concern regarding trading in broker-dealer operated dark pools: the inherent conflict of interest in order routing. The buyside has long argued that dark pool operators often route their orders to their own pools or desk first for execution, rather than send the orders to other pools. Brokers, the buyside says, are incentivized to complete orders in-house, as they can collect both sides of the commission. Also, there is concern the sellside is taking undue advantage of exchange rebates, choosing to post orders rather than trade against quotes immediately and pay a fee.
Also, institutional investors have publicly and privately lamented that extant venues, mostly public but in some cases private, are highly populated by high-frequency traders that only want to game their orders. These speedy traders are not concerned with providing liquidity or helping facilitate the block trades the buyside wants, rather they want to make money flipping small amounts of stocks. And they get paid mostly by rebates from the exchanges for providing liquidity.
IEX looks to end these issues, the execs said, by giving the buyside ownership of the venue and utilizing some features they want -no rebates for order flow, offering a limited number of order types and not colocating client servers with its own matching engine. And IEX will do this soon, Ronan Ryan, chief strategy officer at IEX Group told Traders Magazine.
IEX will start off as a dark pool in its initial two months, and will then file to operate as an ECN, displaying its best-priced quotations on the National Stock Exchange. IEX plans to become an exchange in the future. While operating as dark pool, IEX will be a fair-access, broker-neutral venue. All registered broker-dealers are welcome to become subscribers, Ryan said.
The concept of a buyside-only trading venue is not new-Liquidnet has run an institutional equities trading network for years. But the idea of the buyside actually owning a venue is. Liquidnet is privately owned. IEX did not disclose a full list of investors or member firms, but it did confirm that Capital Group Co., which runs American Funds (with $1.2 trillion in assets under management), and Brandes Investment Partners (with $25 billion in assets under management) are among its backers, as is Netscape founder Jim Clark.
And unlike Liquidnet, IEX doesn’t tout itself as a block trading venue. However, Katsuyama and Ryan expect an average execution size “greater than the industry average.”
The sellside is IEX’s customer. Ryan told Traders Magazine most of the bulge firms are already signed on to send orders to IEX and discussions with other brokers are ongoing. All orders sent to IEX must come from a broker-dealer, else it risks losing a buyside client’s order flow. There is no minimum order size required to trade at IEX, and it offers clients the ability to set minimum quantity parameters on their orders.
“Through the algo integration, the brokers will rest portions of the order with IEX,” Ryan said. “The broker can also access IEX liquidity when active.”
The Long Road
IEX Group was founded in March 2012. It has raised $26 million in three separate phases-$1.5mm in June 2012, $9.4mm in December 2012, and $15mm in May 2013, according to IEX officials. The proceeds came from the issuance of convertible preferred stock. The fundraising is now complete, and the firm is ready to open its order book. IEX is not yet registered with the Securities and Exchange Commission as an ATS, but is in the process of doing so.
IEX’s new headquarters is 7 World Trade Center in New York City. Its execs all have a deep understanding of the trading world from their days at RBC Capital Markets, where Katsuyama was global head of electronic sales and trading; Ryan, global head of electronic trading strategy; Park, head of global algorithmic trading; and Schwall, global head of product management.
The firm has 30 employees, 20 of whom are technologists with backgrounds ranging from technology firms to the sellside, exchanges and even high-frequency trading firms. Ryan describes himself as a technology infrastructure network engineer at heart. As the firm grows, his goal is to recruit more market-structure-oriented people, generate more ideas on how to trade in the current market environment and develop their ideas into trading methodologies.
Armed with a trading pedigree and deep knowledge of the markets, Katsuyama, a lifelong trader, knows what the buyside wants. It wants fast, anonymous execution, preferably in block size. Institutions do not want to be gamed by high-frequency traders and their technology, he added, so he is employing his own technoplogy to combat predatory strategies.
“We’re not anti-HFT. We focus on being pro-investor and pro-technology,” Katsuyama said. “Our view is to embrace technology to help our clients avoid predatory trading practices. That’s a viable trading solution everyone wants.”
To that end, Katsuyama and Ryan have been meeting with HFT firms and listening to their ideas as well. “There’s always talk that HFTs are gaming the system and how there is a need to filter them out,” Katsuyama said. “But there are HFT strategies out there that are of benefit to the market. Some HFT firms have embraced us, while others have not.”
Selling the Sellside
And the sellside has been receptive to IEX’s philosophy, Ryan and Katsuyama said. Both execs have been meeting with and signing up firms to receive order flow when the wholly electronic continuous venue opens. They have been active in explaining to the sellside that IEX’s goal is empower the sellside, not disenfranchise it. The buyside, Ryan added, can only rest an order through the sellside.
“The more orders brokers send here, the better the chance they’ll get executed,” Katsuyama said. “We’re not like some venues where they take orders away from the full-service broker.”
Buyside firms must access IEX through their broker-dealers similar to the way they access exchanges today. If a buyside firm wishes to direct orders to IEX, it will have to work with its brokers to customize their algorithms and smart order routers to do so. Brokers, if they want order flow, will have to connect to IEX. Only orders from broker subscribers will be executed. Ryan said it is the buyside’s prerogative to direct flow to a particular venue, or request customization from brokers for order handling to use or avoid particular venues.
The buyside, Ryan said, is not telling brokers not to go to their own dark pools, but rather instructing them to rest a portion of an order in IEX, as well as in their dark pool. The brokers, he added, have been very cooperative in supporting their clients’ wishes in this regard.
“We are doing back-end algo integration with the brokers so that they are configured to interact with IEX both when passive and active,” he said.
All orders on IEX are firm, with no negotiation, and are not required to sit there for any minimum time period. Any trades that occur are printed to the trade reporting facility.
And that appeals to the sellside-staying in the order taking and execution business. So far, 50 brokers are in the process of subscribing to IEX, including Sanford C. Bernstein in New York. Jason Griffith, Sanford’s global head of trading, and Dave Liles, global head of electronic trading at the firm, said they’ve been involved with Katsuyama since his RBC tenure and have been active supporters of the IEX proposition since its inception.
“IEX’s philosophy works perfectly with our venue-agnostic order-routing strategy, not to mention a firm like ours that doesn’t have a dark pool,” Liles said. “Our mission isn’t to be a market center or liquidity aggregator-just to get best execution for our clients. The proposition of having a clean source of liquidity to tap got us, and our clients, excited. IEX fits perfectly into Bernstein’s liquidity aggregation strategy.”
Griffith added that upon hearing about IEX, Bernstein’s customers contacted the broker about using them. “Our buyside clients proactively reached out to us to hook up to IEX. Once we started getting the inbound calls saying they would be interested in IEX’s offering, that got everyone excited.”
Griffith added that Bernstein’s customers like the concept of a venue that provides additional natural liquidity and liked IEX team’s track record of work in market structure.
“We like Mr. Katsuyama’s story and what IEX is doing and why,” he said. “It fits in our agnostic order routing strategy to get our clients the best possible liquidity and price.”
IEX follows a price-priority model first, then by displayed order second. Then comes broker priority, which means a broker will always trade with itself first, which Katsuyama described as “free internalization.” He explained that brokers do not pay IEX to trade should an order be matched against another order from that same broker. This, he added, offers brokers incentive to trade in IEX.
IEX will charge 9 mils a share for every share that is traded on the platform, less than most other venues that trade upward of 30 mils. This is designed specifically to discourage those firms that trade simply for the rebate from trading on IEX.
Ryan said IEX will monitor activity on the ATS for compliance with its system guidelines, applicable industry rules, securities laws and subscriber behavior.
“We are not applying any type of subjective monitoring that we have seen on some venues,” he said. “We feel that this is better solved through objective and transparent measures such as our pricing, our order types and our architecture, which were designed to deter predatory behaviors in the market.”
Courting the Buyside
Another feature designed to help the buyside is that IEX won’t offer co-location with its matching engine server, in Weehawken, N.J. Brokers’ servers will be located in nearby Secaucus, N.J., roughly three miles or 350 microseconds away, introducing a buffer between when an order is sent to IEX and when IEX processes it. Clients that happen to have their servers at the facility will not be allowed to cross-connect. This is in contrast to many venues and exchanges that allow clients to co-locate their servers alongside the venue’s to reduce latency and help buyers and sellers get the absolute fastest execution.
Ryan explained that IEX’s belief is that the ability to physically co-locate your strategy next to a trading venue, whether lit or dark, offers that party a distinct advantage over other participants in the industry.
“A competitive market will naturally attract participants with diverse objectives, so our goal at IEX is to provide relative fairness for the greatest number of participants,” he said. “By architecting a physical separation of 350 microseconds between our subscriber access point and our matching engine (where the trade occurs), IEX can operate as a continuous market while providing all of our subscribers with equal utility, as opposed to providing a small subset of members with a unique advantage.”
Aside from the fairness the 350-microsecond delay creates, IEX also looks to simplify trading for both the buyside and sellside. It will offer only a handful of order types that will universally appeal to all, according to Donald Bollerman, IEX’s head of market operations and former managing director at Nasdaq OMX.
“Our approach at IEX is to offer a simple yet concise set of order types that have clear utility to the broadest set of market participants,” Bollerman said. “We keep complexity down by focusing on bringing together buyers and sellers, rather than managing economics, aiding information discovery or relief of processing burden for those who care about ultra-low-latency. At this point in time, you can count the number of order types we have on one hand.”
Both the timing buffer and fewer order types appeal to the buyside. Institutions have long said HFTs and other firms with deep pockets have an unfair speed advantage thanks to their ability to afford co-location and super-fast computers. Fewer and simpler order types, they’ve told Traders Magazine, can only increase institutions’ efficiency and speed up the order selection process. All in all, IEX meets their needs.
Dan Royal, co-head of global trading at Denver-based Janus Capital Group, which manages $160 billion in equities, has known about IEX since its inception two years ago. He told Traders Magazine that Janus has been in discussions with IEX about its trading needs and concerns, as well as what the ATS wanted to do and how it planned on doing it. Upon seeing the end result, Royal is impressed.
“These guys are on to something,” he said, referring to the IEX team. “They have thoroughly dissected market structure, provided a solid educational effort and established a fair amount of credibility among the buyside. They recognize there’s an opportunity here.”
And Royal is a fan of IEX and its business/trading model. He said the existing ownership structure of many ATSs and exchanges introduces the potential for economic conflict in a broker’s routing practices. IEX, he said, helps eliminates much of this conflict and has credibility as a new and unique trading venue-one he would strongly support as a destination for his broker’s routing tables.
“People, including us, recognize this is different from other exchanges or markets and helps to level the playing field among market participants,” Royal said. “I’m supportive of them.”
(c) 2013 Traders Magazine and SourceMedia, Inc. All Rights Reserved. http://www.tradersmagazine.com http://www.sourcemedia.com/
Until this past August, almost everyone outside of the financial services industry had neither a clue nor a care as to what the Securities Information Processor-a SIP-was and its purpose in the market. That all changed on Aug. 22, when the tape C portion of the Nasdaq OMX pricing feed suffered a massive failure and the market maker was forced to halt orders of all Nasdaq-listed securities for three hours.
Today there are 16 registered stock exchanges that fall under Section 6 with the U.S. Securities and Exchange Commission. Each of those exchanges also distribute private data feeds outside of the SIP, so why were they forced to close that day?
It comes down to age. While we commonly refer to today’s market structure as fragmented, the SIP dates back to nearly 40 years ago, when Congress passed the Securities Act Amendments of 1975. With an eye toward the future, Congress correctly recognized the emergence of technological advancements in the markets and ordered the SEC to create a national market system with market data at the center of the debate.
Thus, the Consolidated Tape Authority and SIP were born, and they continue to be run and funded by the exchanges through the collection of market data fees. The SIP is a central collection point whereby all exchanges must submit their best bids and offers, which are then redistributed to brokers and investors.
Another key piece of rule-making by the SEC made its debut in 1980. The Vendor Display Rule requires any vendor or broker of market data to provide the National Best Bid and Offer including top of book size. The rule was created so that investors wouldn’t receive misleading or narrow views of the best trading price of a security. Thus, the Vendor Display Rule required brokers to become consumers of the SIP. At the time it made sense. In 1975, Congress, the exchanges and the SEC were grappling with significant changes in market structure. The Dow Jones climbed to 852, up more than 38 percent from the prior year. Fixed commissions were abolished, trading was extended to 4 p.m., and a record 35 million shares were trading daily while market data rates were bolstered to handle more than 36,000 messages per minute.
FAILURE TO ACT
Could Congress have ever have imagined what a bottleneck those rules would create 40 years later? At the time, they surely could not have envisioned the exponential growth of exchanges, market data volumes and electronic trading speeds. Yet even with this unimaginable growth, it’s ironic that today’s issues are not that different from what they were back in 1975. In fact, those very rules designed to promote competition may actually hinder competition, harm market structure and increase costs today.
In 1999, then-SEC Chairman Arthur Levitt commissioned a committee chaired by Washington University Law School Dean Joel Seligman and made up of industry representatives and academics to provide recommendations on market data structure. Of the many recommendations issued by the committee in 2001, a narrow majority comprised of NYSE, AMEX, Nasdaq, institutional investors and academics favored retaining the Vendor Display Rule, thus maintaining the status quo and the SIP. On the dissenting side Island, two online brokers, market makers and market data vendors argued that market forces and the principal of best execution should pave the way for a new realm in high-speed market data vendor choice. The Seligman study also recommended expanding the SIP from the current NBBO structure to include a greater amount of depth. This recommendation was also reiterated in a TABB study about the SIP, titled “Circus of the Absurd,” from 2011.
While there were many notable and sound recommendations in the Seligman study, not a single recommendation was ever enacted by the SEC.
By all accounts, today’s SIP is extremely fast, considering that since 2006 average quote latency declined from 800 milliseconds to less than 0.6 milliseconds today-a significant increase. The SIP has also increased system capacity from 11,250 quotes per second in 2006 to more than 2.5 million by 2012 with plans of 3 million by October of this year. Overall latency is measured from when the participant sends the order to the SIP to the time the order is disseminated by the SIP, so what’s perplexing is that even though the Vendor Display Rule was designed to provide the investor with a complete view of the market, the rules surrounding the dissemination of consolidated data are vague under Rule 603(a) of Regulation NMS, which requires exchanges that distribute market data do so on terms that are “fair and reasonable” and “not unreasonably discriminatory.”
The SEC has been taking a harder look at latency, and in 2012 it fined the NYSE $5 million for failing to comply with Rule 603. It further cited that the NYSE had no formal compliance program for the rule. Compliance and oversight seem to be a common theme in even the latest Nasdaq SIP failure.
With that in mind, the Unlisted Trading Privileges Consolidated Tape Authority Committee (UTP/CTA) discussed several short-term actions to undertake. Some of these steps include:
Improve structural framework. The committee agreed to consider several proposals from Nasdaq OMX, as the operator, that would tighten the structural framework and provide additional clarity around roles and responsibilities.
Strengthen SIP technology architecture. The SIP implemented a solution that will automatically disconnect the front-end and back-end processors when a fail-over occurs.
Enhance operational integrity. The SIP will manually terminate connections if unusually high traffic is experienced on a single port. In addition, they will disable a single participant in such a situation to ensure the integrity of the SIP and stability of the market.
Increase frequency of stress and failover testing. The SIP will be available every weekend for testing. Market participants are encouraged to perform stress and failover tests after making code changes.
But don’t look for any quick fixes from the committee that oversees the SI, as the governance structure is as mysterious as the committee itself. The committee is comprised of each exchange that carries a vote, along with five advisors who came aboard after the passage of Reg NMS in 2005. Each exchange is a voting member, and any decision must be agreed upon by all voting members. Conversely, the advisors are not voting members.
The SIP is an old and antiquated system that has not kept pace with the rapid changes to our national market system, and because it operates in a market structure so drastically different from what was intended or ever envisioned, reform should be paramount. In today’s marketplace, data should be sold and purchased directly by the consumer; this increases price competition and negates issues and concerns with latency over private/public data feeds. The Vendor Display Rule is a relic from the past and should be abolished. The UTP/CTA committee itself should either be abolished or structurally changed from requiring unanimous approval to a majority.
While it is unfortunate that the failure of a key piece of industry infrastructure happened, perhaps the unintended benefit is SIP reform is finally on the front burner.
Christopher Nagy is president of consultancy KOR Trading and Managing Partner of PrairieSmarts LLC
The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine or its staff. Traders Magazine welcomes reader feedback on this column and on all issues relevant to the institutional trading community. Please send your comments to Traderseditorial@sourcemedia.com
(c) 2013 Traders Magazine and SourceMedia, Inc. All Rights Reserved. http://www.tradersmagazine.com http://www.sourcemedia.com/
In today’s volatile market, the smart thing might be to take advantage of volatility instead of waiting for calmer waters. Mariner Investments Group, a New York hedge fund, recently set up a multi-strategy incubation fund to be managed by leading investment talent. Its strategy is keeping an eye on volatility.
The firm has tapped Eric Pellicciaro, former head of global rates investments at BlackRock, and Richard Rumble, former head of global emerging market equity prop trading at Goldman Sachs. Pellicciaro is managing a global macro portfolio, while Rumble is managing a global emerging market equity portfolio.
The portfolios have initial investments ranging from $50 million to $100 million.
Most recently, the firm, which manages $10 billion with associated advisers, tapped Peter van Dooijeweert, the former head of equity relative value trading at Citigroup, to run a global equity volatility portfolio.
Mariner decided to invest in an equity volatility strategy because it sees benefits from increased volatility without the huge premiums of tail risk hedges. “About two years ago, tail hedging was all the rage, and what we’ve had since then is a very strong rally. And suddenly the tail hedges you thought were nice sure just look like excessive life insurance,” said Van Dooijeweert.
Both Mariner and Van Dooijeweert expect the markets to become more volatile as the U.S. Federal Reserve begins to remove the accommodations it had put in place following the credit crisis of 2008. That will means “no more quantitative easing, no outright stimulus support, no stimulus from the federal government,” Van Dooijeweert said. “There are a lot of forms of supports to the equity market that are going to be going away.”
Equity volatility trading is designed to take advantage of dislocations in the market among options, said Van Dooijeweert. The new fund will look for things that its traders think are either fundamentally mispriced or mispriced from a model. Once this discovery is made, Mariner will pounce. “The more erratic the market is, the more opportunity we see,” he said.
When making decisions about portfolio managers and strategies, Mariner is looking for talent that has left the investment banks and to allocate where the banks aren’t allocating capital any longer. “We have seen the investment banks step back from the options market, which means that the dislocations within the options markets should be increasing,” said Van Dooijeweert. “That is consistent with the goal of this platform, which is to look for opportunities not to just hire good teams but to put capital to work in places capital is no longer being put to work.”
The portfolio trades listed options or what the portfolio managers call “extremely liquid” products. There are 3,000 underlyings including stocks and indices, according to Van Dooijeweert. The Mariner portfolio tends to trade the more liquid ones, therefore it may only look at 1,500, he said, adding, “There’s a lot of stuff to look at.”
The new strategy is model-based, with such factors as companies that are more levered, with a bet that it might have trouble in the future. He also looks for earnings stream issues and other macro headwinds such as the possibility of European government bonds collapsing or the Fed tapers. Micro issues like earnings momentum and trends of the companies are other factors, as well as event-driven exposures.
The firm uses a proprietary model for picking single stocks. “It’s not a black box sitting in a corner where I can take six weeks off and let me see how it is when I come back,” Van Dooijeweert said. “We have a lot of fundamental and macro factors that we use to develop positions in addition to our models.” Typically, he trades electronically and will often be involved with six or seven stocks at a time.
Van Dooijeweert looks at trading positions in Vega terms when deciding how much to buy or sell, he said. Vega is the measurement of an option’s sensitivity to changes in the volatility of the underlying asset. “Vega is the most relevant metric for what we do,” he said.
(c) 2013 Traders Magazine and SourceMedia, Inc. All Rights Reserved. http://www.tradersmagazine.com http://www.sourcemedia.com/
Deutsche Asset & Wealth Management hired Matt Montana as a managing director and head of equity trading, Americas. The position is new. Montana joins from Bank of America Merrill Lynch, where he spent 25 years in the New York and London offices in senior trading roles, most recently as a managing director in charge of non-dollar sales and trading. He is based in New York and reports to Joshua Friedberg, head of trading, Americas.
If you’ve gotten a new job or promotion, let us know at onthemove@sourcemedia.com
Veteran market-making executive Ed Coughlin joined the execution services department of Nasdaq OMX Group, where he has responsibility for the exchange operator’s cash equities and options markets. Coughlin spent 17 years at wholesaler Bernard L. Madoff Investment Securities until that firm shut down in 2009. He then spent the next two years at Surge Trading as head of automated market making.
Michael Gray joined Macquarie Securities as a managing director and head of international sales trading. Gray spent the last 27 years with Morgan Stanley. There, he was a managing director responsible for international equity sales trading.
Macquarie Securities hired Liz Hunter as a senior vice president in cash trading. Hunter was most recently a director in cash equities at Bank of America Merrill Lynch. There, she focused on large-cap financials and held other senior trading roles in small-cap financials, technology, media and telecommunications, according to Macquarie.
Tom Fasulo joined the institutional brokerage International Correspondent Trading in Jersey City, N.J., as a sales trader. Fasulo previously spent about 14 years at the now defunct Knight Capital Group in Jersey City in a similar capacity.
Veteran options and futures trading executive Jay Knopf joined Maxim Group. Knopf spent about 20 years at Spear, Leeds & Kellogg and nine years at Goldman Sachs, including its predecessor Hull Trading. Recently, he has done stints at Cowen & Co. and Newedge.
Sean Maloney joined Alabama’s Sterne, Agee & Leach in the firm’s Boston office as a sales trader. Maloney held a similar position at Knight Capital Group for 10 years.
Electronic trading veteran Stephen Blatney joined bond brokers KGS Alpha in New York as an equity trading executive. Blatney was most recently with PE Source, a joint venture between private shares research shop Greencrest Capital Management and Knight Capital Group. Before that Blatney spent four years as head of electronic trading at now-defunct Thomas Weisel Partners.
Oppenheimer & Co reorganized its equity trading department. Doron Barness is now head of New York institutional equity sales trading. Barness joined Oppenheimer in May from Goldman Sachs as a managing director and senior sales trader.
Oppenheimer also promoted David Laufer and Anthony Mazzella to co-heads of cash equity trading. Laufer joined Oppenheimer last year as a senior technology, media and telecommunications trader after short stints at Merrill Lynch and Canaccord Genuity. Prior to that he spent nine years at BMO Capital Markets. Mazzella has been with Oppenheimer and its predecessor company CIBC World Markets for 19 years. He has spent much of that time as senior trader of life sciences and biotechnology stocks. All three executives continue to report to Peter Feinberg, Oppenheimer’s head of equity trading.
Rich Korhammer is now a senior advisor at private equity fund Lightyear Capital. Korhammer was the co-founder and former chairman and chief executive of Lava Trading, one of the first execution management systems. He recently assisted Lightyear in evaluating its investment in REDI Holdings, a technology spin-off from Goldman Sachs that markets an execution management system.
Mike Lloyd joined Janney Montgomery Scott’s equities group in New York as a sales trader. Previously, he was a trader at Knight Capital Group, where he spent seven years.
Craig Campestre joined SunGard’s Fox River Execution Solutions division in New York as a managing director and head of sales. A 10-year pro, Campestre comes from Elkins/McSherry where he evaluated manager, trader and broker trade cost performance. At SunGard, Craig oversees the day-to-day operations of the Fox River sales team. He reports to Vince Tolve, vice president, head of sales for SunGard’s brokerage business.
Greenwich Associates hired Kevin McPartland as a principal to lead a new market structure and technology advisory service. McPartland, a veteran with 15 years’ market experience, is an influential figure in market structure, having testified before the Senate Banking Committee and Commodity Futures Trading Commission. He comes from BlackRock, where he was a director in the electronic trading and market structure group. He has also done stints at J.P. Morgan, UBS and Deutsche Bank in various capacities.
Sean Foley joined Leerink Swann in Boston as a sales trader. Foley has spent much of his 21-year career as a sales trader, lastly with Fidelity Capital Markets in Boston.
Wall Street Access hired a slew of traders and technicians from Murphy & Durieu and Direct Access Partners. The mass hiring is the firm’s second since last fall when it brought on a dozen market makers from Rodman & Renshaw. The new crew reports to Wall Street Access senior sales and trading officials Sean Kelleher and Dana Pascucci.
The firm hired sales traders Mike Maiello, John Laresca, Bob Giglio in New York and Peter Hoey for its Boston office. Wall Street Access also brought on Peter Naso, Mike Cronin and Matt Devlin in its technical research group.
Maiello, a 23- year veteran, joined the firm’s institutional division as vice president, institutional trading. He came from Murphy & Durieu where he spent the last five years establishing its execution services desk and was a market maker in domestic and foreign equity markets. Prior to that, he worked at Hill Thompson Magid as a sales/DMA trader and at Goldman Sachs as senior trader on its program trading execution desk.
Laresca, a sales trader, was added to the firm’s institutional and sales trading team. He also came from Murphy & Durieu, as trader in both foreign and domestic equities. He also did stints at Domestic Securities, Sky Capital and Donald & Co. He started his career at Drexel Burnham in 1984 on their treasury desk. He reports to Pascucci.
Giglio, a 25-year pro, works on the institutional sales and trading team. He spent the last six years at Murphy & Durieu and was a member of the American Stock Exchange for 15 years. He reports to Pascucci. Hoey, a 15-year veteran, joined the firm in its Boston office as a managing director, institutional trading. Prior to this, he worked in Direct Access Partners’ Boston office for the last six years. Before that, he spent five years at LaBranche Financial. He reports to Sean Kelleher.
Naso, a 9 year pro, joined the institutional division as a vice president in technical research from Direct Access Partners.
Cronin, a veteran with more than 25 years experience, was hired in the technical research group as a vice president, institutional trading. He came from a brief stint at Direct Access Partners. He has also worked at DeMatteo Monness and LeBranche Financial. Devlin, with more than 17 years of industry experience, started in the institutional division as a director of technical research. Prior to joining Wall Street Access, he was senior vice president in charge of sales at Direct Access for almost seven years. Before that, he was with LaBranche.
Bill Bright joined CV Brokerage, a 100 percent woman-owned agency brokerage based in West Conshohocken, Pa., as a sales trader. Bright previously held a similar position at Instinet, where he spent 15 years.
(c) 2013 Traders Magazine and SourceMedia, Inc. All Rights Reserved. http://www.tradersmagazine.com http://www.sourcemedia.com/
In a bid to target institutional traders, Canada’s Cyborg Trading Systems has changed its name to Embium, installed a new chief executive officer and opened an office in New York.
The five-year old company started out building desktop automation software for retail traders, but believes its future is in technology deployed on corporate servers.
The vendor has created a new trading engine for low-latency executions. It includes an algorithm development environment; real-time simulation and back-testing; in-memory complex event processing; and real-time risk management, as well as a co-located trading infrastructure.
The company was formed in Montreal in 2008 by a pair of ex-Refco derivatives traders and recently brought on former SunGard executive Janice Robson as chief executive. Embium’s former chief executive James McInnes was appointed head of strategic development. He will continue to participate in new products and service offerings.
(c) 2013 Traders Magazine and SourceMedia, Inc. All Rights Reserved. http://www.tradersmagazine.com http://www.sourcemedia.com/
An Old SIP In a Modern Market
Until this past August, almost everyone outside of the financial services industry had neither a clue nor a care as to what the Securities Information Processor-a SIP-was and its purpose in the market. That all changed on Aug. 22, when the tape C portion of the Nasdaq OMX pricing feed suffered a massive failure and the market maker was forced to halt orders of all Nasdaq-listed securities for three hours.
Today there are 16 registered stock exchanges that fall under Section 6 with the U.S. Securities and Exchange Commission. Each of those exchanges also distribute private data feeds outside of the SIP, so why were they forced to close that day?
It comes down to age. While we commonly refer to today’s market structure as fragmented, the SIP dates back to nearly 40 years ago, when Congress passed the Securities Act Amendments of 1975. With an eye toward the future, Congress correctly recognized the emergence of technological advancements in the markets and ordered the SEC to create a national market system with market data at the center of the debate.
Thus, the Consolidated Tape Authority and SIP were born, and they continue to be run and funded by the exchanges through the collection of market data fees. The SIP is a central collection point whereby all exchanges must submit their best bids and offers, which are then redistributed to brokers and investors.
Another key piece of rule-making by the SEC made its debut in 1980. The Vendor Display Rule requires any vendor or broker of market data to provide the National Best Bid and Offer including top of book size. The rule was created so that investors wouldn’t receive misleading or narrow views of the best trading price of a security. Thus, the Vendor Display Rule required brokers to become consumers of the SIP. At the time it made sense. In 1975, Congress, the exchanges and the SEC were grappling with significant changes in market structure. The Dow Jones climbed to 852, up more than 38 percent from the prior year. Fixed commissions were abolished, trading was extended to 4 p.m., and a record 35 million shares were trading daily while market data rates were bolstered to handle more than 36,000 messages per minute.
FAILURE TO ACT
Could Congress have ever have imagined what a bottleneck those rules would create 40 years later? At the time, they surely could not have envisioned the exponential growth of exchanges, market data volumes and electronic trading speeds. Yet even with this unimaginable growth, it’s ironic that today’s issues are not that different from what they were back in 1975. In fact, those very rules designed to promote competition may actually hinder competition, harm market structure and increase costs today.
In 1999, then-SEC Chairman Arthur Levitt commissioned a committee chaired by Washington University Law School Dean Joel Seligman and made up of industry representatives and academics to provide recommendations on market data structure. Of the many recommendations issued by the committee in 2001, a narrow majority comprised of NYSE, AMEX, Nasdaq, institutional investors and academics favored retaining the Vendor Display Rule, thus maintaining the status quo and the SIP. On the dissenting side Island, two online brokers, market makers and market data vendors argued that market forces and the principal of best execution should pave the way for a new realm in high-speed market data vendor choice. The Seligman study also recommended expanding the SIP from the current NBBO structure to include a greater amount of depth. This recommendation was also reiterated in a TABB study about the SIP, titled “Circus of the Absurd,” from 2011.
While there were many notable and sound recommendations in the Seligman study, not a single recommendation was ever enacted by the SEC.
By all accounts, today’s SIP is extremely fast, considering that since 2006 average quote latency declined from 800 milliseconds to less than 0.6 milliseconds today-a significant increase. The SIP has also increased system capacity from 11,250 quotes per second in 2006 to more than 2.5 million by 2012 with plans of 3 million by October of this year. Overall latency is measured from when the participant sends the order to the SIP to the time the order is disseminated by the SIP, so what’s perplexing is that even though the Vendor Display Rule was designed to provide the investor with a complete view of the market, the rules surrounding the dissemination of consolidated data are vague under Rule 603(a) of Regulation NMS, which requires exchanges that distribute market data do so on terms that are “fair and reasonable” and “not unreasonably discriminatory.”
The SEC has been taking a harder look at latency, and in 2012 it fined the NYSE $5 million for failing to comply with Rule 603. It further cited that the NYSE had no formal compliance program for the rule. Compliance and oversight seem to be a common theme in even the latest Nasdaq SIP failure.
With that in mind, the Unlisted Trading Privileges Consolidated Tape Authority Committee (UTP/CTA) discussed several short-term actions to undertake. Some of these steps include:
Improve structural framework. The committee agreed to consider several proposals from Nasdaq OMX, as the operator, that would tighten the structural framework and provide additional clarity around roles and responsibilities.
Strengthen SIP technology architecture. The SIP implemented a solution that will automatically disconnect the front-end and back-end processors when a fail-over occurs.
Enhance operational integrity. The SIP will manually terminate connections if unusually high traffic is experienced on a single port. In addition, they will disable a single participant in such a situation to ensure the integrity of the SIP and stability of the market.
Increase frequency of stress and failover testing. The SIP will be available every weekend for testing. Market participants are encouraged to perform stress and failover tests after making code changes.
But don’t look for any quick fixes from the committee that oversees the SI, as the governance structure is as mysterious as the committee itself. The committee is comprised of each exchange that carries a vote, along with five advisors who came aboard after the passage of Reg NMS in 2005. Each exchange is a voting member, and any decision must be agreed upon by all voting members. Conversely, the advisors are not voting members.
The SIP is an old and antiquated system that has not kept pace with the rapid changes to our national market system, and because it operates in a market structure so drastically different from what was intended or ever envisioned, reform should be paramount. In today’s marketplace, data should be sold and purchased directly by the consumer; this increases price competition and negates issues and concerns with latency over private/public data feeds. The Vendor Display Rule is a relic from the past and should be abolished. The UTP/CTA committee itself should either be abolished or structurally changed from requiring unanimous approval to a majority.
While it is unfortunate that the failure of a key piece of industry infrastructure happened, perhaps the unintended benefit is SIP reform is finally on the front burner.
Christopher Nagy is president of consultancy KOR Trading and Managing Partner of PrairieSmarts LLC
The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine or its staff. Traders Magazine welcomes reader feedback on this column and on all issues relevant to the institutional trading community. Please send your comments to Traderseditorial@sourcemedia.com
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