FX Volume Slowing for First Time in Six Years

Editorial Staff
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Institutional interest in foreign exchange is tailing off around the world, except in the United States, according to research firm Celent.

Growth is slowing down for the first time in six years, according to a report prepared by analyst Sreekrishna Sankar.

Despite a widespread shift to electronic trading in the past decade and the emergence of technical platforms that cater to institutions, near-zero interest rates and fears of recession in many parts of world are causing banks and asset managers to pull back from foreign exchange trading. 

The result: Volume is at $4.3 trillion a day this year, down from peak of $4.7 trillion in October, Celent says.

This remains above 2010 levels. But the only country where volumes are up is the United States, which is showing what Celent calls a “minimal increase.” All other parts of the world are showing a drop in volume from 2011.

Economic crises in Eurpe and elsewhere are slowing FX growth. The biggest drop is in spot markets, Celex said. That is where investors had begun to treat foreign currencies as a new asset class, representative of the strength of different economies.

The biggest drops have been in what Celent calls the dealer-to-client (D2C) segment of the business, because of the pullback by banks and buyside institutions.

The interdealer market also is not growing, Celent said. And the boost that high-frequency trading that has been a “key driver” of FX volume growth is not driving new peaks in 2012.

The slowing growth comes, Celent says, as manual trading firms and those that use algorithms, but not in high-frequency fashion, struggle to compete in the high-speed trading that now characterizes the market.

Celent said it expects an increase in competition in the dealer-to-client spot market and new platforms to serve institutions to emerge.

It also expects growth in single-dealer platfroms, outside of the top three bank platforms. Technology costs are falling, it said, but sustained investment will be needed to continue growth.

Vanguard’s Sauter, Pt. III: How Brokers Can Win His Business

Editorial Staff
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Vanguard’s Sauter, Pt. III: How Brokers Can Win His Business

How does Vanguard Funds,’ famous for Fred Mertz like trading economy, go about finding the lowest possible costs? The process is detailed in Part Three of Traders Magazine’s Q&A with Vanguard chief investment officer Gus Sauter.

Traders Magazine: Who are your brokers?
Gus Sauter: We use all of the wirehouses and all the big trading firms.

Traders Magazine: How do you find these brokers who presumably give you low-cost executions?
Gus Sauter: We start with a broad universe and we trade with a wide variety of different firms. While we are certainly looking for the low possible commissions, we are looking for some other advantages a broker might offer.

Traders Magazine: Such as?
Gus Sauter: What opportunities will they give us to participate in IPOs. How willing will they be to commit capital if we need them to commit capital for our trade. So we weigh off all our different needs and it turns out that no one broker has all of what we want.

Traders Magazine: So you’re using 40 or 50 brokers
Gus Sauter: Yes, but the bulk of it is concentrated in five or six brokers, but there’s a long tail.

Traders Magazine: You said in an interview that “a large part of indexing is actually being a trader.”  Does mean that, as with most traders, you’re using algos and using agency traders like ITG or Instinet. How does it work out for Vanguard?
Gus Sauter: We do most of our trading through agency brokerage. We will use brokers’ algos as well if we think that is appropriate for trading. We monitor the transaction costs on a broker by broker basis.

Traders Magazine: So you’re playing one broker against another?
Gus Sauter: Yes, we determine which brokers are getting good executions with certain traders versus others.

Traders Magazine: Even index fund managers need the same trading skills as though who are actively managing funds?
Gus Sauter: Yes, it really is important that our portfolio managers understand how to trade, how to execute, how to find the right strategies and venues. Should it be an algo or something they are using a dark pool.

Traders Magazine: Does Vanguard develop its own trading software or does it use vendor or broker supplied technology?
Gus Sauter: We use broker supplied technology. So we have access to the exchanges through our brokers. We are not high frequency traders but we have the same tools.

Traders Magazine: Which means?
Gus Sauter: We have immediate access to the exchanges through our brokers, through their systems. And we use their algos. We haven’t designed our own.

Traders Magazine: Do you do internal crosses?
Gus Sauter: Yes, if one fund is a natural seller of a security and another is a natural buyer, we cross those trades.

Traders Magazine: A lot?
Gus Sauter: Not a lot. We are very fortunate because a significant portion of our trading is cash flow into the fund. So we aren’t doing much selling.

Traders Magazine: But what about when you’re rebalancing?
Gus Sauter: Typically we’re doing that once a quarter. And when that happens, when one index fund is buying and another is selling, then we do get a lot of good crossing.

Traders Magazine: Why have you and your company launched this campaign to change what you perceive as an overpriced market structure?
Gus Sauter: I think transaction costs are surprisingly high.

Traders Magazine: Higher than most investors think?
Gus Sauter: Yes, a lot of people don’t realize how much money you could spend on transactions if you’re not careful. In other words, we trade hundreds of billions of dollars a year. If you lose , just a half a percent, you’re losing a billion dollars.

Traders Magazine: The implication of what you’re saying is the industry, especially in good times, is incredibly sloppy. Is it because it is other people’s money?
Gus Sauter: Yea, hard for me to tell you. Historically, people have never had respect for the magnitude of transaction costs. They really felt they provided so much alpha in their actively managed funds that they really didn’t have to worry about transaction costs.

Traders Magazine: Not over the past decade…
Gus Sauter: Yes, in a lower return environment people really recognize how much costs are.  And they are devoting more time to how they trade.

Traders Magazine: How do you trade small caps when there is limited liquidity?
Gus Sauter: Use limit orders

Traders Magazine; Why?
Gus Sauter: When you have ill-liquid segments of the market, and you don’t use limit orders, it can really run on you just as we saw in the Flash Crash. You’ll add significant greater market impact if you’re not careful in that segment of the market.

Traders Magazine: Anything else?
Gus Sauter: Trying to remain anonymous is very important. If people see you coming, your trade will get a lot more expensive. And probably taking control of your trade as opposed to handing it off is a way to minimize costs.

Traders Magazine: Did the Flash Crash prove the need for circuit breakers?
Gus Sauter: Yes, that was the one thing missing in Reg NMS. In the old days, when the market was dominated by specialists and markets makers, if things got crazy, if there was an order imbalance, the market would just halt. The specialists would just say “time out. We’re halting trading.

Traders Magazine: And you’re saying there was no provision for that in Reg NMS…
Gus Sauter: Now you have stocks trading on multiple exchanges so there was nothing to halt the whole process. So when the order balance happened on that day (the day of the Flash Crash), there was no one there to stop it. I think the circuit breakers are effective in doing that. I think the proposal limit up, limit down, that the SEC is considering, would be even more effective than the circuit breakers.

Traders Magazine: So limit up, limit down would be an effective replacement for the circuit breakers?
Gus Sauter: Yes.

Average Salaries Up 17%. Bonuses Down.

Editorial Staff
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The average salary in the securities industry in the nation’s financial capital, New York City, is now $362,950, according to New York State Comptroller Thomas P. DiNapoli.

That is up 16.6 percent in the past two years and is higher than any year since the peak of nearly $400,000 was reached in 2007. That was the year before the financial crisis erupted across world markets.

The bonus pool, however, is likely to drop for the second year in a row, DiNapoli said in a report released Tuesday.

The bonus pool for work done in 2011 and paid in 2012 was $19.7 billion, down 13.5 percent from the prior year. This reflected “heavy losses in the second half of 2011 and changes in compensation practices,’’ the Comptroller’s report said.

The pool is “likely to decline for the second consecutive year,’’ DiNapoli said, even though profits appear to be rebounding.

The Office of the State Comptroller is projecting profits of $15 billion for all of 2012, for member firms of the New York Stock Exchange, the benchmark it usually uses for industry profitability.

That is double the $7.5 billion of 2011. But in 2011, members firms reported profits of $12.6 billion in the first half of the year and lost $4.9 billion in the second half.

The comptroller said the industry has lost 1,200 jobs so far this year, in New York City.

But the U.S. Bureau of Labor Statistics says New York City securities industry employment gre by 3,300 jobs in the second quarter of 2012, reaching 173,000.

And that is up 1,300 jobs against a year ago, despite two consecutive quarters of losses.

The Problem With Too Many Order Types

Editorial Staff
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The stock market is unnecessarily complex and the thousands of exchange order types are partly to blame.

That was a recurring frustration of industry professionals expressed during two weeks of conferences and hearings on the inner workings of markets, held in Washington and New York during September and October.

“We have way too many order types,” Chris Concannon, a partner at market maker Virtu Financial, and a former Nasdaq OMX transaction services executive, said at a Senate hearing in September.

The culprit, in the pros’ minds: Regulation National Market System, which requires traders to carry out transactions at the lowest available price across a proliferating number of exchanges and trading venues.

Before Reg NMS, which went into effect in 2007, there were no more than a dozen order types, including market orders, limit orders, time-in-force orders, stop-loss orders, all-or-none orders, and those associated with short selling.

That number has swelled into the thousands, practitioners say. BATS Global Markets alone lists over 2,000, Chris Isaacson, BATS’ chief operating officer told attendees at the Security Traders Association’s annual conference in Washington, D.C,., in September.

Despite the large numbers, all those order types are justified, trading officials say, because they help exchanges comply with federal regulations and route orders to other market centers.

“The vast majority of order types are related to routing strategies,” Isaacson also said at the Securities and Exchange Commission’s roundtable on market technology last month. “That’s exchanges routing to each other.”

Still, their necessity hasn’t stilled the complaints or the calls to limit their numbers. At a market structure conference sponsored by Georgetown University in September, there was a call for a moratorium on new order types.

The criticism surrounding the order type explosion is of two types. First, they add undue complexity to the marketplace. Second, they may give speculators and professional traders an advantage over institutions and their brokers. The criticism: more active traders get access to hidden orders and order types designed to specifically benefit high-speed systems.

 

“We wonder why someone is trying to make things more complex,” Andy Brooks, head of U.S. equity trading at T. Rowe Price, said at the Senate Banking Committee hearing. “Why do we need so many ways to express trading interest? Is there something else going on? It’s a question that is troubling and we’re not sure what the answers are.”

The myriad of order types don’t just bother traders, they also concern trading technologists. That became clear during a roundtable on market technology hosted by the Securities and Exchange Commission last month.

Held in the wake of this summer’s Knight Capital Group flood of erroneous orders, the regulator used the roundtable to probe operations and technology executives about the problems inherent in developing, testing and deploying the software that underpins the stock market.

“In isolation, most of these order types make sense,” Sudhanshu Arya, global head of liquidity management technology at the brokerage Investment Technology Group, told the SEC. “But the whole suite of order types actually presents a pretty huge challenge for us to actually test through.”

Arya recommended that the burgeoning variety of order types come under some sort of review. That review would examine the amount of volume each one handles and the actual utility of an individual order type.

Adoboli Discussed Slush Fund With Trader, Transcripts Show

Editorial Staff
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A colleague of Kweku Adoboli at UBS AG discussed a “slush account” with him in online chats after the former trader told him he was holding profits off the bank’s trading books.

Darren Bailey, a trader in the cash-equities group who has worked at the bank for 13 years, testified yesterday at a London criminal court that he didn’t remember the exchanges and was “genuinely shocked” by message transcripts that showed they discussed the so-called umbrella account. Bailey said last week he couldn’t recall discussing a slush fund with Adoboli.

Adoboli is on trial, charged with fraud and false accounting, for allegedly causing a $2.3 billion trading loss at Zurich-based UBS. Prosecutors say he created an internal account while working on the bank’s exchange-traded funds desk in London where he parked trading profits to cover future losses. Adoboli, 32, has pleaded not guilty and his lawyers have sought to show the jury that others knew about the account.

Paul Garlick, one of Adoboli’s attorneys, yesterday read out chats between the traders where Adoboli told Bailey he was holding back some proprietary trading profits “for a rainy day.” In another chat from March of last year, Bailey asked Adoboli if he’d used the “slush account.”

“You’ve been caught out, haven’t you?” Garlick asked Bailey. “If you’re doing something which is illegal, which is dishonest within the bank, then you’d want to keep it secret.” 

Trading Ban

Bailey, who still works for UBS, again said he didn’t recall the chats. He testified last week that he was once banned from trading futures for three months after he asked Adoboli to “warehouse” a trade for him, meaning that he’d book a trade for Bailey and keep it on his book overnight.

Another former colleague of Adoboli, John Ossell, testified on Oct. 5 that a reference in a chat to “Adoboli Fund Ltd.” wasn’t about the umbrella account. Ossell, a sales trader on the equity-traded derivatives desk, said he never knew about the umbrella and the reference was “work banter.”

“I suggest to you that you certainly knew about the umbrella fund and that you weren’t at all surprised,” Garlick said to him during the Oct. 5 hearing.

Adoboli was arrested in September 2011 after admitting that he had risked $5 billion on Standard & Poor’s 500 futures and a further $3.75 billion in the German futures market.

In messages to Bailey and Ossell in June 2011, Adoboli expressed concern about the direction of the market. Garlick said Adoboli was under pressure by others at UBS to change his position from bearish to bullish.

Niggling Feeling

In a message to Ossell, Adoboli said he “can’t escape the niggling feeling there is a shock on the horizon.”

Ossell advised him in one message to placate his bosses by changing his position.

“Yeah, but then we all lose,” Adoboli said. “I would rather take their wrath and make money they can share than follow the lemmings.”

Henry Chu, a former trade support analyst at UBS, was read a chat transcript by Garlick in which he told Adoboli to cancel and rebook a trade to change the settlement date. Garlick said Chu must have known it was a fake trade.

“If it were a genuine transaction, you couldn’t rebook and just move the settlement date, and you knew that,” Garlick said.

Chu denied the accusation and said he just wanted to remove discrepancies in the trading system.

“I thought it was just a messy desk,” Chu testified via video-link from Hong Kong. “We’re working 12, 13 hours a day, all we want is that our work is done, our e-mails replied to and the breaks resolved.”

Trading Official Says Fewer Order Types Will Help Simplify Marketplace

Editorial Staff
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Recent public criticism over the swelling number of exchange order types can be partly addressed by changing a key part of Regulation NMS, argues a top brokerage compliance official. Specifically, changing the locked and crossed markets rule will go a long way towards reducing the number of order types.

“We have a locked markets rule that was made for a different era,” Jerry O’Connell, the chief compliance officer at Susquehanna International Group, said last week at the annual market structure conference hosted by the Securities Industry and Financial Markets Association.

Exchange order types, which number in the thousands, have come under fire in recent weeks at a series of hearings and conferences held in New York and Washington. Most industry officials appear to agree that there are too many order types and that their numbers add undue complexity to the marketplace.

At the same time, trading executives note that most order types are justified because they help exchanges comply with federal regulations and route orders to other market centers.

“Before Reg NMS we had very few order types,” Chris Concannon, a partner at market makers Virtu Financial, and a former Nasdaq OMX official, told U.S. senators at a hearing in Washington two weeks ago. “It was because of the complexity of Reg NMS-that interconnected all of our markets and gave us 50 dark pools-that we ended up with all these order types.”

Complaints about a marketplace overrun with overly complex order types first surfaced at a market structure conference in Washington sponsored by Georgetown University on September 19. There, panelists questioned whether a moratorium on new order types was warranted.

Andy Brooks, head of U.S. equity trading at T. Rowe Price, attended the conference and later told the senators at the Senate Banking Committee hearing that the order types had added complexity to the marketplace. “We wonder why,” Brooks asked at the hearing. “Why are people trying to make things more complex?” He was echoed by Concannon. “I agree we have way too many order types,” Concannon told the senators.

O’Connell argues that the locked and crossed market rule, implemented in 2007, has led exchanges to create many of these order types. Because some of their customers want to quote at prices that would otherwise lock the market, exchanges have had to devise ways for them to do so without breaking any rules.

The result has been the deployment of order types with such names as “Price to Comply,” “Hide Not Slide,” “BATS Only Post Only,” and “Post-No-Preference Blind.” The common denominator is that all of the order types allow traders to “book” hidden quotes that would otherwise lock the National Best Bid or Offer if displayed. Professional traders such as market makers and arbitrageurs are the most common users of these order types.

A locked market occurs when the displayed bid equals the displayed offer. A crossed market occurs when the displayed bid is greater than the displayed offer. Most industry professionals maintain that locked and crossed markets are signs of inefficient markets. With Reg NMS, the SEC outlawed them, stating that a trader who locks the market unfairly elbows aside the original price-setter.

Still, during the Reg NMS debates, some professional traders opposed the locked and crossed market rules, including Tradebot, Tower Research and Hudson River Trading. At the time, the market for Nasdaq stocks had no such rule. During a one week period in March 2004, Nasdaq reported over a half million locked and crossed markets per day, on average.

Professional traders often prefer to quote at a price that would lock the market rather than simply execute against the original quote. The tactic increases their profits and ensures they maintain their standing in the exchange’s queue.

Because spreads in most stocks are only a penny wide and access fees can reach three-tenths of a cent, they can increase their profits by supplying liquidity. If their order is then traded against, they avoid paying an access fee and receive a rebate as well.

And, by hiding and waiting for their number to come up, they avoid having their order shipped to another exchange. That lets them hold their place in the queue.

O’Connell argues the locked and crossed market rule doesn’t take into account these practices. Before Reg NMS, it was understood that an order for a NYSE-listed stock that would otherwise lock the market would simply fill against the prevailing quote, he explained.

But “in this day and age, when people are getting rebates, it’s not so easy because you may not want to be matched up with everybody at a price,” he told the SIFMA crowd. “So we’re left with a quandary. We should probably figure out a better way to deal with the locked market rule than to continue the drumbeat of all these new order types.”

That may not be so easy, according to one exchange official. “It’s a really complicated problem,” Larry Leibowitz, chief operating officer at NYSE Euronext, said at SIFMA. “You can’t solve it in isolation. It’s the result of interaction between the rebate and the trading increment.”

Leibowitz points out that traders look to lock the market because relative to spreads, the access fees “are too high.” Any reform would have to tackle such issues as the appropriate trading increments and access fees for a given security, the exec said.

No data exists but actual locked quotes are minimal, according to O’Connell. Perhaps only 5 percent of all quotes are locked, he said. The problem is not one of locked markets, per se, but the use of complex order types and hidden liquidity in order to avoid locked markets, O’Connell explained.

 

DTCC Could Help Control Market Glitches

Editorial Staff
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The utility that provides clearing services for the equities trading industry could be asked to produce the “control mechanism” that keeps brokerages, market makers and other trading participants from imploding due to flawed technology.

An industry working group that includes all four major national stock exchange operators, broker-dealers, buyside firms and the Financial Industry Regulatory Authority suggested in its September 28 letter to the Securities and Exchange Commission that the Depository Trust and Clearing Corporation (DTCC) and its clearing agencies might provide a “consolidated control mechanism” that could help keep trading from running wild, as occurred in the August 1 flood of erroneous orders that nearly swamped market maker Knight Capital.

That’s because its clearing operations are in “a unique position” to limit risks, able to act “as the ultimate receiver of the potential risks resulting from technology-related and similar events,” according to the group.

In particular, the group pointed to two proposals by the DTCC’s National Securities Clearing Corporation (NSCC) agency that are already under review at the SEC.

The first is a rule filing that would require that amounts, prices and other details on trades be “locked-in” when buy and sell orders are matched and that the “locked-in-trade data” be submitted by market participants to the clearer on a real-time basis.

This proposal was designed to prevent the hazards of not having up-to-the-moment trade data. Late day trade data now limits NSCC’s ability to “effectively monitor counterparty credit risk and to risk manage those trades on an intra-day basis,” according to the letter.

The DTCC is also calling for accelerated trade guarantees. Currently, the NSCC guarantees trades at midnight the day after a trade takes place.

If the trade guarantee were moved up, the clearer could become the central counterparty earlier in the trading cycle. This also would reduce intra-day counterparty exposure.

These proposals, still to be fleshed out by the industry group and worked out with regulators, is designed to prevent the hazards of not having up-to-minute trade data.

Late-day trade data now limits NSCC’s ability to “effectively monitor counterparty credit risk and to risk manage those trades on an intra-day basis,” according to the letter.

DTCC confirmed that the utility is discussing faster, more effective trade guarantees.

“The group is discussing what actions the industry can take to improve the stability of the markets without inhibiting the ability for firms to conduct their normal business,” said Bari Trontz, a DTCC spokeswoman. “As these discussions are in their early stages, it is premature to determine the direction of the group’s views,” she added.

Trontz said it was too early to go beyond general comments, saying discussions with the working group are ongoing.

“The DTCC suggestions are meant to get the DTCC to a more real-time environment so they could perhaps function longer in some sort of centralized risk management capacity in real time,” one industry professional familiar with the talks said. He said the first step is to “get the DTCC systems more real time.”

However, the working group, according to the individual familiar with the discussions, is focusing on the idea of using a calculation called “Peak Net Notional Exposure’’ as the trigger for a shutdown of aberrant activity. That kill switch would be maintained by the exchanges.

The working group includes Bank of America Merrill Lynch, Citadel, Citigroup Global Markets, Deutsche Bank Securities, GETCO, Goldman, Sachs & Co., IMC Chicago, ITG, Jane Street, Morgan Securities, RBC Capital Markets, RGM Advisors, Two Sigma Securities, UBS Securities, Virtu Financial and Wells Fargo Securities.

The September 28 letter is signed by NYSE Euronext, Nasdaq OMX, BATS Global Markets, Direct Edge, the Chicago Stock Exchange, FINRA and the Depository Trust & Clearing Corporation, the industry’s post-trade utility.

The group was formed this summer after Knight Trading Group’s 45-minute technology trading glitch caused a $440 million loss. That loss that nearly pushed the giant liquidity provider into bankruptcy.

The working group says it is interested in both the DTCC’s accelerated trade guarantee and ensuring trade data is provided to the utility on a real time basis.

“If approved, both proposals would contribute to the goal of mitigating counterparty risk and would provide a means for the NSCC to identify cross market credit issues on a timelier basis,” according to the letter. It was signed by Joseph Mecane, executive vice president, head of equities, NYSE Euronext, executives of BATS Global Markets, Direct Edge, Nasdaq OMX Group, the Chicago Stock Exchange and Murray Pozmanter, general manager of clearing services for the DTCC.

The DTCC campaign to improve the clearing and settlement standards of U.S. markets has been going on for years. The nonprofit industry utility has contended that the United States is falling behind the clearing, settlement and trade guarantee standards of many other advanced markets. Indeed, three years ago, a DTCC official, in arguing for accelerated trade guarantees, said the current T+1 trade guarantee standard is insufficient.

In Traders Magazine’s sister publication CQ&D, Michael Bodson, executive managing director of business management strategy at DTCC at the time, warned that “recent market events, including firms like those of Lehman Brothers and Madoff Securities, underscore the importance of a real-time guarantee.” (See CQ&D, Summer 2009).

In the same 2009 story, Richard Closs, director of credit risk management at Pershing, contended that many healthy firms continue to fear that they could be hurt by a counterparty if and when the next brokerage or banking giant fails.

Today’s standard trade guarantee and settlement standards, critics say, are not fast enough. That’s because intra day and other kinds of problems can arise. As an example, let’s assume two parties trade on Monday, which is T. The NSCC applies its trade guarantees at midnight at midnight of T+1 (midnight Tuesday into Wednesday). The trade is settled, with the movement of money and securities, on Thursday (T+3).

Critics complain that, within the trade guarantee and settlement periods—-T+1 to T+3—many things can go wrong. These problems can hurt well-run firms that have done nothing wrong.

For instance, say the counterparty of healthy firm is under regulatory review, which can hurt a firm even though it has dome nothing wrong. Say a firm files for bankruptcy, then your business could be tied up. Pershing’s Closs cited the Lehman Brothers’ bankruptcy as an example.

“Euroclear,” he adds, “was refusing to honor transactions with Lehman Brothers International and many people were confused.”

Since the market meltdown of 2008, DTCC officials have noted the utility was able to weather the Lehman Brothers bankruptcy and other crises without any financial fallout to its members. Still, many industry players, including the Omgeo post-trade services joint venture between DTCC and Thomson Reuters, continue to argue for faster trade and settlement guarantees.

Hedge Funds Trim Trading Staff

Editorial Staff
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Here come the hedge funds.

Lousy trading volumes are hurting hedge funds’ bottom lines and they are looking to cut back staff on the trading desk. 

The cost cutting move is being viewed as aggressive as equity trading volumes have remained anemic throughout the year and trading desks simply are not generating enough revenue to support staff, according to the results of a new study on buyside staffing by Greenwich Associates.

Forty-four percent of hedge funds participating in the study said their 2012 trading desk budgets were reduced from 2011.  Almost half, 43 percent of trading desks, said they were shrinking budgets.  Another 40 percent said  budgets were unchanged versus their 2011. Only 17 percent of hedge fund respondents said they were increasing trading desk budgets.

Those results suggest that hedge funds are moving faster than other types of institutional investors to pare desk costs, the report said

Among all the institutions participating in the study, roughly 20 percent said their 2012 budget was reduced from last year. About half the institutions said their budgets were unchanged over the past 12 months. In many cases they maintained the status quo of reduced resources in place since financial crisis-era cutbacks.

Greenwich Associates conducted a study of 232 head traders and traders at numerous buyside institutions, including hedge funds and asset management firms, corporate treasuries, pensions, endowments, banks and insurance companies. Greenwich Associates asked participants about the organizational structure, staffing levels, budgets and operations of their trading desks.

Rodman Alumnus to Head New Equity Trading Group

Editorial Staff
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The PrinceRidge Group has hired a former Rodman & Renshaw manager as the head of a new equity trading and institutional sales trading group.

The broker dealer and investment banking subsidiary of Institutional Financial Markets said it hired James Dyer to head the business.

Dyer most recently served as senior manager director of institutional equity sales and trading with Rodman & Renshaw.

Rodman & Renshaw last month filed a request with the Financial Industry Regulatory Authority to withdraw from the brokerage business. But Dyer preceded that move, having left Rodman in 2010. He called his Rodman stint “a small blip in my career.”

Before joining Rodman & Renshaw, Dyer was general partner and head of equity trading at Maxim Group, a New York investment banking, securities and investment management firm. There, he helped growth the volume in its equity trading business from roughly 2 million shares a month in 2004 to 300 million in 2009.

He also, at one point in his 27-year career in equities trading, was head of trading and an executive committee member at BrokerageAmerica, also based in New York.

The breadth of PrinceRidge’s businesses, from bond trading to investment banking, attracted Dyer. But he could help fill that out.

“They needed an equity desk to round out their whole platform,’’ he said.

Dyer said the equity desk will concentrate on “secondary and tertiary names” and sectors such as chemicals and consumer products, in its trading operations.  He said he is in the process of hiring four or five institutional traders, with 10 or more years of experience each.

PrinceRidge also said it hired Ari Wald as Desk Analyst. Wald previously served as Assistant Vice President of Institutional Equity Research at Brown Brothers Harriman.

IFMI in 2011 recorded revenue of $100.3 million, according to an annual filing with the Securities and Exchange Commission. Of that, $73.2 million came from trading, $21.7 million from asset management and $3.6 million from advisory services.

Daniel Cohen, Chairman and Chief Executive Officer of PrinceRidge, said, “our clients will have access to an enhanced set of product offerings,’’ as the result of the formation of the equities group.

PrinceRidge has strong expertise in collective investment arrangements, such as special purpose acquisition corporations, and plans to expand into such fields as private investment in public equity plans, master limited partnerships and “regular equity offerings,’’ the company said in announcing Dyer’s hiring.

Rodman & Renshaw said it planned too explore options for selling the assets of its broker-dealer business. A representative of the firm was not immediately available to comment on the status of that exploration.

Time for Comprehensive Review of Market Regulation, Says SEC’s Gallagher

Editorial Staff
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Time for Comprehensive Review of Market Regulation, Says SEC’s Gallagher

Securities and Exchange Commission member Daniel Gallagher called on Thursday for a comprehensive study of how markets are set up – and how they regulate themselves.

The review, he said, should include examination of how the securities industries regulates itself – and whether self-regulation by stock exchanges works in a world where algorithms trade “decimalized securities at speeds measured in microseconds.”

“I believe it is time to undertake a comprehensive market and regulatory structure review, including a review of the self-regulation paradigm as a whole,’’ he said at the annual market structure conference of the Securities Industry and Financial Markets Association.

Re-examining how national exchanges operated by NYSE Euronext, Nasdaq OMX Group, Direct Edge and Global Markets regulate themselves – or outsourcing that work to the Financial Industry Regulatory Authority, a body that oversees brokers — is necessary, he said, because the commission is overloaded. And the exchanges themselves might not have the wherewithal to effectively analyze their own operations.

“I say this not despite the Commission’s unprecedented current workload, but in fact because of it,’’ he said. “To say that the Commission’s resources are stretched thin by the workload imposed by” the 2010 Dodd-Frank Wall Street Reform Act “is an understatement.”

But even the exchange operators, who are “self-regulatory organizations,” may be stretched thin. Rule-making, for instance, requires “meaningful economic analyses.”

“I’m under no illusion as to the onus this places on SROs – cost-benefit analysis isn’t easy, it isn’t quick, and it isn’t cheap. If self-regulation is to remain viable, however, it is necessary,’’ he said.

If “self-regulation is to continue to play a central role in securities regulation, SROs must be committed to ensuring that the rules they send to the Commission for approval are the result of the same degree of rigorous analysis as the Commission applies to its own rules,’’ he said. “There has been significant progress on this issue lately, but there is still a long way to go.’’

Gallagher questioned whether the exchange oeprators have the resources “and, just as importantly, the willingness” to perform sufficiently rigorous analyses to support proper rulemaking on how markets will operate.

The commission’s review of rule filings, he said, is “not meant to be a rubber stamp” for what exchange operators propose. The proposals have to be “fully vetted and pass legal muster.’’

The last time the commission, he noted, undertook a formal, thorough evaluation of the equity markets, the result was in a report released in January 1004 that tried to assess what markets would look like in 2000.

  • But that 450-page report made no mention, he said, of these technical developments that have radically reshaped markets:
  • “Internet”
  • “Web-site”
  • “www”
  • “dot com” [use “.com” in version to be posted online]
  • “High frequency trading”
  • “Dark pools”

That Market 2000 Report’s “basic finding” was, he said, that stock markets “are operating efficiently within the existing regulatory structure.’’

But, to show how much has changed he said, the “basic finding” on Apple Computer was “that it was a struggling has-been left behind by the personal computing industry.’’

He tried to engage the audience of market professionals at the New York Marriott Downtown. But not a single question was posed on his proposal for a comprehensive review of market structure and regulation.

But “you should be careful about what you wish for,” said Brandon Becker, executive vice president and chief legal officer of TIAA-CREF.

If self-regulatory organizations are held to the same standards as government agencies in maintaining “minimum rules of the road,” decisions won’t get made. Political jockeying, litigation and the like will slow down the process of adapting to changing market structures, he said.

There is “no upside for any SRO to be the weak link in our complex fragmented system,’’ said Eric W. Noll, executive vice president, Transaction Services U.S., for the NASDAQ OMX Group.

That’s because the markets themselves will enforce discipline on exchanges to be reliable and operate fairly and reliably.

“If people don’t like what we say or do, we lose order flow,’’ Noll said.

 

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