Trading in options on exchange-traded funds is soaring.
Based on data provided by the Options Clearing Corporation, volume in ETF options is ripping this year, leaving index options behind. The run-up continues a multi-year trend.
Market volatility and good liquidity play a large role.
"We’ve seen a huge influx recently into ETF products because of volatility," Kevin Fischer, head of block trading in the options department at Interactive Brokers/Timber Hill, said at a recent industry conference.
Volatility, as measured by the VIX index, spiked in mid-March due to the crises in Japan and Libya, sending options on the SPY ETF, for instance, soaring. But the recent cycle in volatility has been under way since June 2007, according to analysts at MKM Partners. That’s spawned interest in ETF options for hedging and speculating.
For the first three months of 2011, ETF option volume is up by 37 percent, compared to the same period last year, according to the OCC. At the same time, volume growth in index options, an older competitor product, has been considerably slower, coming in at about six percent.
ETF options and index options are similar-the underlying ETFs often track indices-and compete with each other to a certain extent. The largest index option is the SPX, based on the S&P 500 Index. The largest ETF option is the SPY, or the S&P 500 SPDR Trust. The two contracts are similar although the index changes price only once a day while the ETF fluctuates throughout the day.
Trading in options on ETFs long ago overtook trading in index options. Daily ETF contract volume now dominates index volume. ETF options trade, on average, six million contracts per day. Index options trade an average 1.2 million contracts a day.
During the first quarter of this year, an average of about 2.2 million SPY contracts traded every day. By contrast, the SPX traded an average of about 666,000 contracts every day. The SPX is traded only on the Chicago Board Options Exchange, which holds an exclusive license.
According to Fischer, the popularity of ETF options over index options has a lot to do with their tighter spreads. That becomes apparent especially during periods of high volatility, he explained.
"In tough times," the trader told the crowd at the annual conference of the New York chapter of the Security Traders Association, "you’ll see spreads on older products such as the SPX widen from 30 cents to five dollars. By contrast, spreads on options on the Spider ETF will move from one cent to three cents. Spreads on some products-single name indices especially-are sometimes five times or ten times wider than comparable ETFs."
Still, at least one index option shows no signs of slowing down during volatile times. The CBOE’s contract on the VIX index, the universal measure of market volatility, traded a record 1.15 million contracts on March 15, in the midst of the recent crises, according to the exchange.
David Mechner was made sole chief executive officer of Pragma Securities, following the departure of Doug Rivelli. Mechner retains his title of director of technology. He co-founded Pragma in 2002 and led the development of its flagship product, TradeEngine. Before founding Pragma, Mechner developed and implemented short-term trading strategies as director of research at the Pragma Hedge Fund.
JPMorgan has bulked up its electronic trading desk by adding four new hires with more than 40 years of collective experience. David Fellah joins as a director in quantitative analytics from LiquidNet. Peter Ward joins JPM as head of EMEA electronic trading solutions from Townsend Analytics. Brett Fischer, an Investment Technology Group alum, joins as head of Americas electronic sales. Marcus Consolini, comes onboard as head of Asian Electronic Sales and trading. He joins from Macquarie.
Also joining JPMorgan and rounding out the desk’s management team are: Michael Green, formerly of Merrill Lynch, as head of Asia electronic trading solutions. Daniel Nehren comes onboard as global head of ECS quant analytics, previously at Deutsche Bank. Peter Eliades joins as executive director of the Americas electronic client trading desk. Daniel Ciment, formerly of Barclays Capital, arrives as head of Americas electronic trading solutions.
Patrick DeGroat joins Pulse Trading’s BlockCross as vice president of electronic sales and trading in New York. Patrick, a 15-year veteran, arrives at the independent alternative block liquidity trading system after six years at Liquidnet. There, he also held roles in electronic sales and trading. DeGroat reports to Doug Gamble, head of Pulse Trading’s New York trading desk.
Charles Garcia joins execution management system provider TradingScreen as head of global marketing for traditional asset managers. Based in New York, Garcia leads TradingScreen’s expansion into the global asset management community. Garcia has more than 25 years of experience in financial services and sales. He was most recently head of North American sales at Sophis, a provider of portfolio and risk management software.
Two business days after Nasdaq OMX and Intercontinental Exchange (ICE) announced a rival bid to purchase NYSE Euronext, trading professionals are still trying to digest its impact. The one-time rivals could form the largest North American exchange now that Nasdaq’s trumps the previous offer made by Deutsche Boerse in February to purchase the Big Board.
The new bid, $42.50 cash and stock, or approximately $11.3 billion, was based on the respective Nasdaq OMX and ICE closing share prices as of March 31. The offer represents a 19 percent premium over the price proposed by Deutsche Boerse and is based on its closing share price as of March 31. The price is indicative of a 27 percent premium over NYSE Euronext’s unaffected stock price on Feb. 8.
Tim Mahoney, chief executive of dark pool operator BIDS Trading, said he was surprised at the price of Nasdaq’s bid. For one, Nasdaq would retain the equities portion of NYSE Euronext, and equities trading volume has shrunk in recent years. ICE would get the NYSE Euronext’s derivatives, which Mahoney called a "high-volume, high-margin" business.
"Derivatives are the future," he said, pointing out that the cash equities business is not growing and is much more competitive than derivatives.
For shareholders, he wondered if it was better to keep the diversity of equities and derivatives, as NYSE Euronext is currently configured, or to own one dominant equities exchange in the U.S. with a roughly 70 percent market share that a combined Nasdaq and NYSE Euronext would offer.
Under the terms of the proposed merger, NYSE Euronext stockholders would receive $14.24 in cash, plus 0.4069 shares of Nasdaq common stock and 0.1436 shares of ICE common stock for each NYSE Euronext share.
As part of the proposal, ICE would purchase NYSE Euronext’s futures businesses, and Nasdaq OMX would retain NYSE Euronext’s remaining businesses, including the NYSE Euronext stock exchanges in New York, Paris, Brussels, Amsterdam and Lisbon, as well as the U.S. options business. A combination of Nasdaq OMX and NYSE Euronext would merge the trading, listings, options and market technology businesses of the two exchanges and be headquartered in New York City.
"As announced today, Nasdaq OMX has placed a bid with the intent to purchase NYSE Euronext. We believe that a combination of these two iconic companies will bring many benefits to our U.S. trading members and investors," wrote Eric Noll, executive vice president Nasdaq OMX transaction services U.S. and Europe, in a letter to clients. "I want to share with you our vision of how the combined exchange company will create additional efficiencies, offer choice through multiple market structures, lower costs and bring innovations to the market with greater speed and frequency.
Noll said Nasdaq will continue operating all self regulating organizations within the NYSE Euronext family. "We will continue to offer the full breadth of market structure options available to you today, while continuing to bring new and innovative products to market."
Furthermore, the NYSE Euronext exchanges will be integrated onto the INET platform, resulting in greater efficiencies and lower costs for all participants.
"A single group of protocols and infrastructures will allow participants to reduce IT costs, eliminating the need to support multiple code bases. Similarly, we will consolidate all markets within a single data center, resulting in lower costs and faster access to liquidity. A single point of presence is all that will be needed to access six U.S. equity markets and four U.S. options markets, equaling the largest pools of liquidity in the country."
ICE and Nasdaq OMX will continue to operate as separate entities throughout the merger process and after its completion.
Equities traders were unfazed by the announcement, as speculation has been rampant for weeks about a potential Nasdaq OMX bid.
"Everybody speculated that someone, another bidder for NYSE was lying in the weeds," said Craig Jensen, head trader at Armstrong Shaw Associates. "Obviously, this was Nasdaq. The merger would be good for buyside firms like Jensen’s if costs associated with doing business come down. And with so many trading venues available to execute a trade, the loss of one doesn’t hurt the markets, he added.
Shares of Nasdaq rose following the announcement and closed Friday 9 percent higher at $28.23, prompting Jefferies to downgrade the stock to "hold" in a note this morning. Nasdaq traded slightly lower at $27.73 in morning trading. Shares of NYSE were also downgraded this morning by Wells Fargo to market perform from outperform.
"Nasdaq shares are within 3 percent of our price target and we believe the current valuation adequately reflects the prospects for the core business," the note said. "Following the recent stock move combined with the uncertainty of the joint proposal for NYX, we believe the risk/reward in the shares is fairly balanced."
The note said Jefferies risks to the valuation share price include any changes to the terms of proposed merger with NYSE and overall market conditions.
Alfred Berkeley, chairman of Pipeline Trading, and former vice chairman of Nasdaq from June 1996 to August 2003, told Traders Magazine in an interview one day before the bid was announced that should a consolidation among the exchanges were to happen, he preferred if the merger occurred between American companies and not a foreign entity. A wholly American company, he said, would be more sensitive to native corporate interests such as capital formation and job creation, as opposed to an international company.
"I would prefer to have competition between the Nasdaq and the NYSE, and for it to be intense," Berkeley said. "If there is going to be a merger, leaving a dominant, global player, then I’d like that dominant, global player to be an American company."
While competition and declining market share have often been cited as the reasons for the recent spate of exchange mergers, Berkeley said this union was rooted in simple economics. Exchanges like NYSE and Nasdaq are publicly traded companies and must produce profits for shareholders.
And given the recent decline in their trading volumes and increase in trading venues, profits have been scarcer. NYSE Euronext, for example, currently accounts for roughly 14 percent of daily trading volume, down from the heady 80-percent level seen in its own names just 10 years ago. And what revenues the two exchanges have been earning have come increasingly from business lines that fall outside of trading volumes.
"The reason they want to increase their market share and expand their operations is to grow their share price," Berkeley said.
The merger comes on the heels of two other cross-Atlantic exchange marriages. The first includes the one between the LSE Group, operator of the London Stock Exchange and Borsa Italiana, and TMX Group, operator of the Montreal and Toronto stock exchanges. Separately, BATS Global Markets and Chi-X Europe have tied the knot.
In words that were spoken with the conviction of a man with more than 30 years in the financial industry, Berkeley said the benefits of a merger between Nasdaq and the NYSE would lead to more uniform capital-raising rules as one large exchange would have one set of rules, not multiple exchanges with different sets of rules.
These rules are already attuned to needs of the local markets, which the NYSE has been serving for more than a century. And since capital formation is the basic function of the exchanges, more local growth would lead to cheaper capital costs and lower the risks associated with capital formation.
"I believe in globalization. And globalization brings many benefits. But if consolidation is going to take place, wouldn’t you rather have the consolidated giant be an American company," Berkeley asked. "It matters, as you intuitively know local decision making leads to local jobs, sensitivity to the capital formation process and philanthropy."
A potential merger between Nasdaq and the NYSE could draw scrutiny for violating anti-trust laws especially when securities listings are discussed. Fewer exchanges could mean fewer venues where shares can have a home listing, and companies want a choice where they can be listed, Berkeley noted. But other existing exchanges such as the International Securities Exchange could easily provide equities listing services and take up the slack, or other venues could fill the void, the market sage said.
Still not all were convinced. Pat Healy, chief executive at the Issuer Advisory Group, a consultancy, said that issuers want both an American-owned exchange and competition for the listings business. But in this case, they seem mutually exclusive.
"If you give someone 100 percent market share, then they should do away with the listings fees altogether," Healy said.
If listings fees go up as a result of the merger, which Healy thinks could well happen, then he said there was a "very good chance if we will petition the Securities and Exchange Commission to get rid of listings fee altogether."
However, he said issuers would have to weigh the reduction of competition in the listings space versus the benefits of the new mega-exchange being an American-owned firm. And that could be the deciding factor.
Traders were more resigned to the merger being a done deal and saw little trouble for the union of the two New York-based juggernauts. Dennis Dick, prop trader at Bright Trading in Detroit, said that if this merger was put on the table 10 years ago, it might have drawn tremendous anti-trust scrutiny. But not so much now, as investors can choose to trade on 14 different exchanges and other crossing networks and systems.
"I think our regulators would have had some major concerns as NYSE and Nasdaq essentially had monopolies in their respective markets," Dick said. "However, that environment no longer exists today. Considering 30 percent of equity orders never see an exchange, it is hard to argue that there are any serious anti-trust issues for the equity markets."
The buyside has a message for legislators in Europe: We like the anonymity of trading in dark pools, so don’t change the game with new rules that would force us onto public markets.
Dark pools remain a crucial option the buyside uses to trade large orders with minimal market impact, institutions have said. And the reforms to the Markets in Financial Instruments Directive–or MiFID II–would threaten that if they passed as they’re currently proposed. Legislators in Europe will address the proposals in May and could vote on them sometime in the fourth quarter.
Some institutions, such as Boston-based Wellington Management Co., voiced their opposition to new rules for dark pools in comment letters to the European Commission regarding the MiFID review.
"We oppose the unilateral imposition of regulatory burdens on the [broker crossing systems] segment of a firm’s trading operations without strong justification," Wellington wrote. "Such actions may serve to drive [broker crossing systems] out of the market landscape and cause more opaque, less regulated venues to gain share."
The comment period ran from Dec. 8 until Feb. 2. The proposals to reform MiFID drew a strong response from industry participants, as more than 4,200 letters poured in during the 56-day comment period.
The original MiFID directive took effect in November 2007 as a means to raise competition across the European Union at exchanges and other trading venues. It permitted new competition from ECN-like execution venues, called multilateral trading facilities–MTFs. Last year, the European Commission proposed a further review, MiFID II.
Among those measures that would affect crossing networks, whether dark pools or broker internalization engines, is a proposal to re-classify broker-dealer dark pools as organized trading facilities. Also, broker-dealer crossing networks that clear a certain volume threshold would be forced to register as MTFs. As a result, they would carry increased regulatory obligations. MiFID II also seeks to bring a degree of transparency to dark pools post-trade and to curb internalization, in general.
The Investment Company Institute, the national association of U.S. investment companies, isn’t taking the MiFID II plans for dark pools lightly. ICI felt strong enough on the matter to comment on this topic, given that it represents institutional investors of more than $12 trillion of assets from more than 90 million individual shareholders. ICI data show that, as of September 2010, U.S.-based long-term mutual funds held $2.1 trillion in non-U.S. securities, accounting for almost 25 percent of the assets of these funds.
Dark pools, ICI wrote in its letter to the EC, not only make it cheaper to implement trading ideas, but also lessen the risk of information leakage. And they let funds avoid interactions with market participants who want to profit from the public display of large orders to the detriment of funds and their shareholders.
"The importance of funds being able to trade efficiently in large size cannot be discounted," the ICI wrote to the EC. "The confidentiality of information regarding fund trades is of significant importance to ICI members. Any premature or improper disclosure of this information can lead to frontrunning of a fund’s trades, adversely impacting the price of the stock that the fund is buying or selling."
The proposals were made due to regulators’ concerns surrounding the effects dark pools have on price discovery in Europe. But gauging the impact dark pools have isn’t easy. That’s because transaction reporting across the heterogeneous continent is difficult, Investment Technology Group noted in a recent study on ATSs in Europe.
In February, ITG looked at numbers from the past two years in Europe to determine how much effect alternative trading systems have been having on price discovery and trading costs. It found in its study, "ATSs in Europe: Post-MiFID performance," that 2010 data showed that transaction costs in dark pools was 13 percent lower than those of regulated primary markets, and 18 percent lower relative to those of "lit" MTFs.
The study looked at order and execution data from ITG Europe, a liquidity aggregator. It analyzed nine dark pools, four displayed MTFs and the registered exchanges over the first 10 months of 2010. The numbers included more than 438,000 orders and 4.8 million trades.
"Dark pools continue to add value relative to MTFs and primary markets in 2010, as measured by trading transaction costs," The ITG study concluded. "Dark pools provide significant added value for all market capitalization groups, with the exception of the most liquid securities. Breakdowns by country of listing do not change the qualitative nature of the results."
Dark pools have carved out a significant, yet nowhere near dominant, segment of the European markets, Rob Boardman, ITG’s head of European operations, told Traders Magazine. He estimates that 10 percent of total volume in Europe is dark. Dark pools saw their largest growth in Europe in 2009 and the early part of last year, Boardman said. But dark volume stabilized a bit over the past six months, he added.
"Probably the long-term trend is up," Boardman said. "But it’d be totally wrong to say that dark trading dominates European equities."
Nevertheless, restricting the amount of trading in the dark is unhealthy for the markets, said Miranda Mizen, principal and head of European research for The Tabb Group. The buyside will probably hold onto more order flow if it cannot easily use dark pools to hide it. Brokers lacking the same options, on the other hand, will likely make capital more expensive, Mizen said.
"If you clamp down on dark pools," she said, "you get all sorts of consequences that go with this."
The Securities and Exchange Commission is likely to initiate a debate on a potential new rule that could drastically crimp the activities of broker-dealers that trade against their own orders.
Known as "trade-at," the rule would force brokers who match their orders internally–rather than send them to a public exchange–to make a choice. They could either fill the orders at significantly better prices than are available in the public market or route them away to the public market.
Such a rule could wreak havoc with the businesses of wholesalers and operators of dark pools. It could increase their costs significantly and/or force them out of the business altogether. Just about every major broker internalizes a portion of its orders. For the wholesalers, the practice is a considerable part of their overall business.
"The SEC has a political issue with the original ‘flash crash’ report," Janet Angstadt, a partner with law firm Katten Muchin Rosenmann," said yesterday at the annual conference of the New York chapter of the Security Traders Association. "It showed how the internalizers reacted that day. So we may see something from the Commission."
On May 6, 2010, within a 15-minute timeframe, the major market indexes dropped 6 percent and then rebounded. The ‘flash crash’ frightened American investors and led to cries of action from Congress. The SEC produced a study that, among other things, alleged the wholesalers dumped their sell orders on the public markets, thereby fueling the crash.
"I think the Commission has to do something about the internalizers," Angstadt said. "It may be a concept release. It will be interesting to see if it is a trade-at rule or something else."
The SEC first broached the idea of a trade-at rule in its January 2010 Concept Release covering market structure. At the time, the idea was derided as a non-starter by many in the industry. After the flash crash, however, the sentiment changed.
"The probability of a trade-at rule happening is much higher than it ever was," said Vlad Khandros, who heads market structure and government relations at Liquidnet, a block crossing network.
"There are some very senior Congressional staffers asking us how this would work," Khandros told the STANY crowd. "The fact that they are thinking about it and asking us tells us something."
Others contend that a recent report from an advisory committee convened by the SEC and the Commodity Futures Trading Commission makes it inevitable that a trade-at debate will be forthcoming. The committee presented the regulators with a list of 14 recommendations for preventing another flash crash. Among them was the implementation of a trade-at rule.
Khandros expects action by the SEC after it finishes up its work on Dodd-Frank–perhaps later in the year or next year.
The SEC broached the issue last January because it was concerned too much volume was being traded off-board. It worried internalization might be impairing the public market’s ability to discover price. Currently, about one in three shares is traded away from the public markets. That figure has grown sharply in recent years.
Exchanges would be the beneficiaries of any trade-at rule as they would likely receive more orders. However, publicly at least, they are not clamoring for one. While they are worried about the growth in off-exchange trading, they maintain a trade-at rule might be going too far.
"Trade-at is a sledgehammer," Chris Isaacson, chief operating officer at BATS Global Markets, said yesterday. "It would be the biggest change in U.S. equities market structure since Regulation NMS–maybe even bigger."
In any case, Isaacson says, the industry and the regulators need to first agree that there is a problem. "Do we believe there is too much off-board trading that is hurting price discovery?" he asked. "I think there is a big debate whether or not there is actually a problem."
Still, he noted that at least 40 percent of the share volume of three of the top four traded stocks was done off-board. That was true of five of the top 10 stocks as well. (Those figures include the shares of Citigroup which recently announced a 1-for-10 reverse split, a move which is expected to dramatically reduce trading volume.)
Isaacson and other exchange executives say some action may need to be taken, but any solution could involve something less drastic than a trade-at rule.
Among the alternative ideas floating around are a price improvement requirement; an exemption for block trades or child orders of block trades; or shrinking spread widths.
"I think what will evolve as the debate continues is perhaps not a full trade-at type rule, but other things that are more palatable or incremental," Joe Mecane, chief operating officer at NYSE Euronext, said at the STANY conference.
Credit Suisse will launch an electronic crossing system for large options trades. With the crossing of large blocks at exchanges on the upswing, the broker sees potential. "All the exchanges are jumping in," Eugene Kearns, an executive in Credit Suisse’s Advanced Execution Services group, said at the recent meeting of the Chicago chapter of the Security Traders Association.
"We’re releasing this matching product to compete with that. So you can actually bring your flow to Credit Suisse to cross."
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How has Sylvia Rocco, a sales trader at Bank of America Merrill Lynch, managed to cover accounts for 40 years, all at the same firm? She chalks up her longevity to her love of the business, the thrill of competition, loyalty, a willingness to keep learning and flexibility.
"I love what I do so much," Rocco said. "I’m having so much fun now, more than ever." Indeed, Rocco has witnessed the evolution of an industry-from the rise of institutional trading to the electronic trading revolution.
She recalls her first year as a sales trader in 1970 as a less complicated time to be a trader. That year the Dow Jones Industrials Average closed at 838.92 points, about the time when Watergate, the scandal that brought down President Richard Nixon, was just a building about to open.
Everything was done by hand when she started. Every order was teletyped or phoned to the floor of the exchange. There were listed-trading desks and over-the-counter trading desks. And company earnings releases were printed and mailed. An analyst’s report on a stock often took five days to arrive.
Learning Experience
For sales traders, the business was a phone call to the floor. And the job involved paper-lots of paper. "It was almost clerical, in a way, because you were dealing with so much paper," Rocco said.
In 1970, she started as an institutional sales trader in single stocks at Merrill Lynch. Today, 40 years later, she’s an institutional sales trader in single stocks at Bank of America Merrill Lynch. And during all those years on the cash desk, there are few days Rocco can recall when she has not loved her job.
"It’s been a lot of fun, and a constant learning experience," she said. "I like that I can come into the office early in the morning and when it looks like nothing’s going on and, unexpectedly, I can have a great day trading. I never know what’s going to happen; my job is never boring. It’s what I make it."
Her position as a sales trader has been a constant learning experience during her career, as the job has changed dramatically. It’s evolved to where Rocco said she must be a relationship manager, a student of the U.S. and global markets, and a fount of information on all of BofA Merrill’s products, as well as the capabilities and limits of the firm’s systems. In short, sales trading has undergone almost an industrial revolution, Rocco said.
"It’s harder today," she said. "Traders really need to think more. But it’s more intellectually stimulating."
Learning aside, nurturing relationships-with her clients, her position traders and her other colleagues-is her favorite part of the job. Her boss, Henry Mulholland, head of Americas cash equity trading, has been known to seat young sales traders next to Rocco so they can watch and learn from her skills at managing relationships.
The exercise has paid dividends, Mulholland said. "It’s a subtle, little trick that we have," he said. "Every once in a while, we move people next to Sylvia. And in 18 months, they’re better at their jobs."
Her customers appreciate her approach to relationship management. William Priest, the chief executive officer and portfolio manager at Epoch Holding Corp., said he’s been a client of Rocco’s for almost 40 years. To him, Rocco defines professionalism as a trader. "She’s the salt of the earth and thinks of her clients first, last and always," Priest said.
Another former buyside trader, Peter Cocuzza, has fond memories of working with Rocco, whom he called his mentor. She covered him while he traded for PaineWebber’s Mitchell Hutchins for more than 15 years. Cocuzza said he stayed in touch with Rocco after he moved to Oppenheimer Funds for eight years after that. She wasn’t Oppenheimer’s primary sales trading coverage, he said, but provided backup when needed. Cocuzza said Rocco adapted to electronic trading easily back in its early days and helped him to make trading decisions: electronic versus high touch.
Rocco began her days at Merrill Lynch as a trading assistant-a secretary, as she describes it. She worked in the sales department for several brokers who covered institutional clients. The position resembled a phone clerk’s, she said, relaying orders when the brokers were out at meetings.
Soon, the brokers concluded that Rocco would make a good sales trader, as she’d already built relationships with clients. After some hesitation, Rocco accepted the head trader’s offer and was promptly handed several dozen of the desk’s smaller or more difficult accounts. "Do something with them," she remembered them saying. And she did. "I loved it immediately," she said. "It’s constant action, constant competition."
Rocco remembered the learning process as one of trial and error. As she knew nothing about trading, she had to sit on the desk and learn by making mistakes. "Once you’ve shorted a stock on a downtick," she said, "you learn to never do that again."
But Rocco credits her earliest bosses, colleagues and clients as the source of her success. They were her mentors. As a result, she’s always enjoyed teaching younger sales traders. Rocco tries to mentor them, just as she was guided.
Ups and Downs
Rocco’s place in trading history is unmistakable, given the time frame of her career and the fact that she is a woman. She remembered how in 1975, she was one of only two women on the trading desk. In addition to seeing the ranks of women in trading grow over the years, Rocco also has noticed how their priorities have changed.
"I see more women who wouldn’t even think of leaving their careers," she said. "When they have children, they work around it. That’s what I did. I figured out a way to have my career and have my kids, too. And I really see that happening." Rocco has two grown sons.
Rocco married a commodities trader at Merrill, Ray Rocco, who retired 15 years ago. Being traders, each understood the other’s job. They could empathize and commiserate with each other on the ups and downs of the workday. And that’s helped them through Wall Street’s bigger trials over the years, such as the crash of 1987, the dotcom bust, Sept. 11 and the turmoil of 2008 and 2009.
And recent years have seen the contraction of the high-touch business. But Rocco insists that high-touch trading is far from dying. She still fields requests for capital and supplies color for both low-touch and high-touch trades. She has also noticed how even those wanting to trade electronically still want to talk to her on the desk.
"[The high-touch business] is definitely changing, and has definitely shrunk," Rocco said. "But I don’t think it’s dead. And I don’t see it going away."
During her four decades, Rocco has had opportunities to work at other firms, but she never felt compelled to take the jobs, even though they may have offered more money. She felt comfortable where she was and liked her colleagues.
Count her boss Mulholland as one of her fans. He praised her work ethic, focus and positive outlook during the dark days of 2008, when it appeared that the entire financial system was on the brink of collapse.
"She has a work ethic that would embarrass most people in the business," Mulholland said. "She absolutely comes with the same intensity and the same focus every day of the year. It’s really amazing. And she has a genuine love and passion for the business, for her clients and for the people she works with, and it just comes through in so many ways."
Wall Street Access added three sales traders from LaBranche Financial Services, the institutional trading arm of the longtime specialist firm that is merging with Cowen & Co. William Barker, a 12-year veteran who spent eight years at LaBranche, joins as a senior vice president. Louis Puglisi, a 10-year veteran who spent five years at LaBranche, joins as a vice president. Eugene Riggio, a 13-year veteran who spent six years at LaBranche, also joins as a vice president. The new sales traders report to Sean Kelleher, a managing director for equity sales and trading.
Michael Palamaro joins ThinkEquity as a sales trader and a director. Palamaro, a 24-year veteran, previously covered accounts for Abel/Noser Corp. for three years. Prior to that, he worked at Jefferies & Co. and Raymond James. Palamaro, whose focus will be accounts in New York and the Midwest, reports to Phil Johnston, who heads the equities effort at ThinkEquity.
Todd Rich joins NYSE Technologies as a director based in its Chicago office. An 18-year veteran, Rich will focus on offering clients flexible and scalable end-to-end electronic trading solutions. Prior to this, he was a former trader on the floor of the Chicago Board Options Exchange and has held business development positions with Eurex and Boston Options Exchange. He reports to managing director Josh Clifford.
Chris Jackson joins AGF Investments, a Canadian-based money manager, as chief information officer and senior vice president of IT and operations. Jackson, a five-year professional, comes from Belzberg Technologies, where he spent two years as president of Canadian operations. He reports to chief operating officer Judy Goldring.
Adena Friedman, the former chief financial officer at Nasdaq OMX, has taken a similar position at private equity firm Carlyle Group. Friedman, who joined Nasdaq in 1993, oversaw many of Nasdaq’s acquisitions in recent years, including the Island ECN, OMX and the Philadelphia Stock Exchange. Friedman becomes the eighth female partner at Carlyle, which has 94 partners.
U.S. Capital Advisors made two hires. It brought on Bradley Stammen as a managing director and head of institutional trading. It also hired Clint Turner as a director of institutional trading. Stammen was head trader and chief operating officer of business development at SteelPath Capital Management. Turner has been an equity sales trader for more than 15 years, working for Banc of America Securities, Southwest Securities and Pulse Trading. U.S. Capital, based in Houston, recently launched its institutional client business.
Borje Ekholm was added to Nasdaq OMX’s board of directors. Ekholm, a 23-year veteran, is president and chief executive of Investor AB, a Nordic-based industrial holding company he joined in 1992. Prior to this, he worked at McKinsey & Co., a management consulting firm that advises leading companies on issues of strategy, organization, technology and operations. Ekholm sits on the boards of directors for Chalmersinvest AB, EQT Partners AB, Husqvarna AB, Lindorff Group AB, Scania AB, Telefonaktiebolaget LM Ericsson and KTH Royal Institute of Technology.
Eze Castle Integration hired two senior technologists from hedge funds for its San Francisco office. Michael Hartig and Zachary Lehman join to expand its West Coast business. Hartig joins as regional service director. He most recently served as the chief technology officer at Seasons Capital Management. Lehman joins as technology director. He will guide technology initiatives at Eze Castle for West Coast clients. A 13-year veteran, Lehman most recently worked at alternative investment advisor Varde Partners, where he served as director of technology.
Bryan Christian joined Direct Edge as head of sales. In his new role at the exchange, Christian oversees new customer acquisition and the servicing of existing accounts. An industry veteran for 16 years, he arrives from Nasdaq, where he had worked since 2005. Christian works in the Jersey City, N.J. office and reports to Bryan Harkins, the exchange’s chief operating officer.
Walter Ferstand joins TAG, a longtime provider of trade-cost analysis, as a senior vice president of compliance and regulatory consulting services. Ferstand, a 25-year veteran, has held senior compliance positions at MF Global and Instinet. Ferstand, who worked at Nasdaq for 10 years in operations management, will work with brokerage and exchange clients on their regulatory reporting requirements.
Jenn Goldson joins RBC Capital Markets as a vice president in electronic trading sales and trading in Toronto. An eight-year veteran, Goldson joins from ITG, where she spent nearly three years. She reports to Tom Gajer, who heads electronic sales in Canada, and Brian Suth, who heads electronic sales in the U.S.
Robert Garrett joined brokerage Merlin Securities as senior partner and chief technology officer. Garrett previously served as global head of execution services technology at Deutsche Bank. There, he was responsible for order management and execution, algorithms and crossing engines across all asset classes. Prior to that, he was global head of equities electronic trading technology.
Brad Wilson was appointed chairman of a new membership committee for the Security Traders Association of New York. Wilson, a veteran sales trader currently at Dahlman Rose & Co., will be focused on building new memberships through a marketing campaign highlighting STANY’s voice to regulators, legislators and the media. Wilson said since STANY is the only professional organization focused on trading securities and related issues, greater industry participation is crucial to expand STANY’s influence in Washington, D.C. and with the media. Stephen Kay is STANY president for 2011.
James (Jim) Toes, a former BofA Merrill Lynch executive, was named the CEO and president of the Security Traders Association. After a five-month search, he succeeds John Giesea, who spent a decade at STA’s helm. STA chairman Joseph Cangemi said Toes’ 25 years experience with regulators, technology and market structure, as well as his overall trading know-how, made him the most qualified candidate. "We gain all this expertise with Jim at the helm," Cangemi said. The STA has about 27 affiliates and about 4,200 members.Toes is a past president of STA’s biggest chapter, the Security Traders Association of New York. He is also a past governor and secretary of STA. Besides that, he has served on various STA market structure committees, which have put him in front of Congress. His latest position was a senior relationship manager at Broadcort, a clearing division of BofA Merrill Lynch. He spent 17 years at BofA Merrill working with retail, broker-dealer, middle-market and institutional clients.
(c) 2011 Traders Magazine and SourceMedia, Inc. All Rights Reserved.
Market structure recommendations from regulators drew guarded praise from one group of affected parties and scorn from another.
The recommendations came from an advisory committee sponsored by the Commodity Futures Trading Commission and the Securities and Exchange Commission. The group’s February report is intended to serve as a road map for regulators searching for ways to prevent another market flip-flop like the flash crash of May 6, 2010. While many of the 14 recommendations are already in rule form or have been agreed to in principle, a few are likely to produce vigorous debate.
Those recommendations already in rule form include putting circuit breakers on individual stocks; making updates to clearly erroneous trade rules; banning so-called "stub" quotes; a ban on naked access; and a proposal for a consolidated audit trail. Those still in the idea stage, but considered likely to become rules, include limit up/limit down functionality and a revision of existing marketwide circuit-breaker rules.
Any fireworks are likely to come as a result of the report’s third section, which focuses on maintaining market liquidity. The committee targets both high-frequency traders and broker-dealers that internalize order flow.
For HFTs, the group suggests that the SEC consider encouraging firms engaged in market-making strategies to maintain bid and offer quotes that are "reasonably related to the market." Previous suggestions to mandate quoting have been criticized by some high-frequency traders as anticompetitive and bad for the market. In their report, the committee suggests that encouragement could come in the form of pricing incentives rather than by regulatory fiat. The committee suggests the exchanges institute "peak load" pricing schemes to draw liquidity at the times of greatest needs.
For one group of HFTs, such language is encouraging. "We agree with the committee’s conclusion that market-based incentives are more effective than mandatory obligations in promoting well-functioning markets," members of the Futures Industry Association’s Principal Traders Group said in a statement.
An idea unlikely to receive FIA PTG support, however, is cancellation fees. The joint committee also believes the SEC and the CFTC should explore the idea of implementing uniform cancellation fees across exchanges. Placing orders and immediately canceling them is standard operating procedure for many HFTs.
As for the internalizers, the committee recommended that the SEC consider adopting a trade-at rule. Because a lack of liquidity was at the heart of the flash crash, the committee reasons that forcing brokers to send more flow to the public markets would be helpful. A trade-at rule would require brokers to either offer significant "price improvement" to their incoming orders or route them to the exchanges.
Such a rule could make it significantly more expensive for brokers to internalize, or fill their customers’ orders in-house. Last year’s SEC concept release suggested that price improvement could be as much as 1 cent over the market’s best bid or 1 cent under the market’s best offer. That’s a considerable amount in an era where spreads on many stocks are a penny. Higher price-improvement costs could lead brokers to route out more of their flow.
That doesn’t sit well with some internalizers. "One of the advantages of matching up two client orders at the bid or offer is that I don’t have to send it to the public market and run the risk it will be gamed," said Owain Self, UBS’s head of algorithmic trading for the Americas and the EMEA region, at this year’s TradeTech USA conference.
The fear of gaming by high-frequency traders has become a major concern for money managers and their brokers these days, as the amount of fast-paced speculative trading has surged.
"If all of the orders wind up in the lit markets, who’s going to be first in the queue every single time?" Self asked. "It will be the HFT, because he’s faster than everybody else. So I will always be behind him. He knows what my clients are doing. Internalization is a way to limit that."
Dmitri Galinov, head of liquidity strategy for Credit Suisse’s Advanced Execution Services group, operator of the CrossFinder dark pool, also believes trade-at is a bad idea. He noted that it costs more to route an order to a stock exchange or ECN than it does to route to a dark pool. "Why should I be forced to pay 30 mils at an exchange when I can take a dark pool and pay five mils?" he asked at TradeTech. "It doesn’t make sense."
Despite their opposition to a trade-at rule, most of the dark pool operators are skeptical one will be written into the rulebook any time soon. For one thing, the SEC has too much on its plate to tackle such a controversial proposal.
"I don’t see it happening this year," Galinov said. "It’s probably unlikely next year, as well."
(c) 2011 Traders Magazine and SourceMedia, Inc. All Rights Reserved.
The mood at the TradeTech USA conference, from Feb. 28 to March 2 in New York, was cautiously optimistic, as attendees adjusted to the lower volumes and reduced commissions of the new environment.
Andrew Silverman, global co-head of electronic trading at Morgan Stanley, said that while trading volumes were up slightly in January versus his firm’s projections, the crisis of confidence shown by investors brought on by last May 6’s "flash crash" still remains. He cited internal trade volume data that showed actual trading flows were below projections for the last six months of 2010. The handwriting is on the wall: Until investor confidence is fully restored, volumes will remain low and commissions depressed, he said, adding that self-regulation by the Street was the way to restore that confidence.
"We can either regulate ourselves or we are going to be regulated," Silverman said. "One of five or one of eight of us here today will not be here next year if we don’t regulate ourselves." And the former was much more preferable than the latter, he added.
Despite this warning, the buysiders and sellsiders in attendance were content to eat, drink and almost be merry as they mingled along the Hudson River. This year’s three-day conference was held at Pier 60, Chelsea Piers.
Attendees discussed current topics such as anti-gaming strategies, high frequency trading’s impact on the market, commission management and future regulatory developments.
This year’s conference attendance saw a modest 8 percent bump in the number of institutional and buyside participants, while the overall number of people wasn’t much different from last year, according to organizers. A total of 257 buyside participants came to the event, compared with 235 in 2010.
On the vendor front, 45 different firms were represented at this year’s meet, unchanged from last year.
One technology vendor likened the mood and participation of the buyside at the conference to that of window-shoppers-the buyside was looking at the new products, but not making any firm commitment to purchase software or other products.
"I’m here to take a look at some of the new offerings, but I have no money to spend," said Carl Reynolds, global systems strategist at Pioneer Investments.
A sellside vendor who requested anonymity said this type of behavior was typical at this year’s event.
"It’s a buyer’s market," he said. "Everybody’s looking, but no one’s buying. Also, firms are extending their tryout periods as long as they can. It’s a bad environment for vendors."
Still, the buyside had plenty to say to the sellside at the conference. Several instant polls were taken, and here are the results:
Attendees were asked to forecast where commissions were headed this year; 43 percent said rates would be stable, 33 percent said they’d be slightly lower, and 15 percent simply said they’d be lower. On the other hand, 8 percent expect an increase-5 percent said commissions would move up slightly, and 3 percent said they’d move higher.
Regarding the number of algorithms they actually use, 89 percent of the attendees surveyed said they use fewer than 25 algorithmic providers, while 8 percent trade with between 25 and 50 providers.
Giri Cherukuri, head trader and portfolio manager at OakBrook Investments, said during one panel that he expects best execution from his brokers. He added that, despite having discretion in working his orders, brokers cannot be mind readers.
"In the end, the onus is on the buyside to communicate and be painfully clear on how we want brokers to execute our orders," Cherukuri said.
(c) 2011 Traders Magazine and SourceMedia, Inc. All Rights Reserved.
Trading Pros Still Digesting Nasdaq Bid For NYSE Euronext
Two business days after Nasdaq OMX and Intercontinental Exchange (ICE) announced a rival bid to purchase NYSE Euronext, trading professionals are still trying to digest its impact. The one-time rivals could form the largest North American exchange now that Nasdaq’s trumps the previous offer made by Deutsche Boerse in February to purchase the Big Board.
The new bid, $42.50 cash and stock, or approximately $11.3 billion, was based on the respective Nasdaq OMX and ICE closing share prices as of March 31. The offer represents a 19 percent premium over the price proposed by Deutsche Boerse and is based on its closing share price as of March 31. The price is indicative of a 27 percent premium over NYSE Euronext’s unaffected stock price on Feb. 8.
Tim Mahoney, chief executive of dark pool operator BIDS Trading, said he was surprised at the price of Nasdaq’s bid. For one, Nasdaq would retain the equities portion of NYSE Euronext, and equities trading volume has shrunk in recent years. ICE would get the NYSE Euronext’s derivatives, which Mahoney called a "high-volume, high-margin" business.
"Derivatives are the future," he said, pointing out that the cash equities business is not growing and is much more competitive than derivatives.
For shareholders, he wondered if it was better to keep the diversity of equities and derivatives, as NYSE Euronext is currently configured, or to own one dominant equities exchange in the U.S. with a roughly 70 percent market share that a combined Nasdaq and NYSE Euronext would offer.
Under the terms of the proposed merger, NYSE Euronext stockholders would receive $14.24 in cash, plus 0.4069 shares of Nasdaq common stock and 0.1436 shares of ICE common stock for each NYSE Euronext share.
As part of the proposal, ICE would purchase NYSE Euronext’s futures businesses, and Nasdaq OMX would retain NYSE Euronext’s remaining businesses, including the NYSE Euronext stock exchanges in New York, Paris, Brussels, Amsterdam and Lisbon, as well as the U.S. options business. A combination of Nasdaq OMX and NYSE Euronext would merge the trading, listings, options and market technology businesses of the two exchanges and be headquartered in New York City.
"As announced today, Nasdaq OMX has placed a bid with the intent to purchase NYSE Euronext. We believe that a combination of these two iconic companies will bring many benefits to our U.S. trading members and investors," wrote Eric Noll, executive vice president Nasdaq OMX transaction services U.S. and Europe, in a letter to clients. "I want to share with you our vision of how the combined exchange company will create additional efficiencies, offer choice through multiple market structures, lower costs and bring innovations to the market with greater speed and frequency.
Noll said Nasdaq will continue operating all self regulating organizations within the NYSE Euronext family. "We will continue to offer the full breadth of market structure options available to you today, while continuing to bring new and innovative products to market."
Furthermore, the NYSE Euronext exchanges will be integrated onto the INET platform, resulting in greater efficiencies and lower costs for all participants.
"A single group of protocols and infrastructures will allow participants to reduce IT costs, eliminating the need to support multiple code bases. Similarly, we will consolidate all markets within a single data center, resulting in lower costs and faster access to liquidity. A single point of presence is all that will be needed to access six U.S. equity markets and four U.S. options markets, equaling the largest pools of liquidity in the country."
ICE and Nasdaq OMX will continue to operate as separate entities throughout the merger process and after its completion.
Equities traders were unfazed by the announcement, as speculation has been rampant for weeks about a potential Nasdaq OMX bid.
"Everybody speculated that someone, another bidder for NYSE was lying in the weeds," said Craig Jensen, head trader at Armstrong Shaw Associates. "Obviously, this was Nasdaq.
The merger would be good for buyside firms like Jensen’s if costs associated with doing business come down. And with so many trading venues available to execute a trade, the loss of one doesn’t hurt the markets, he added.
Shares of Nasdaq rose following the announcement and closed Friday 9 percent higher at $28.23, prompting Jefferies to downgrade the stock to "hold" in a note this morning. Nasdaq traded slightly lower at $27.73 in morning trading. Shares of NYSE were also downgraded this morning by Wells Fargo to market perform from outperform.
"Nasdaq shares are within 3 percent of our price target and we believe the current valuation adequately reflects the prospects for the core business," the note said. "Following the recent stock move combined with the uncertainty of the joint proposal for NYX, we believe the risk/reward in the shares is fairly balanced."
The note said Jefferies risks to the valuation share price include any changes to the terms of proposed merger with NYSE and overall market conditions.
Alfred Berkeley, chairman of Pipeline Trading, and former vice chairman of Nasdaq from June 1996 to August 2003, told Traders Magazine in an interview one day before the bid was announced that should a consolidation among the exchanges were to happen, he preferred if the merger occurred between American companies and not a foreign entity. A wholly American company, he said, would be more sensitive to native corporate interests such as capital formation and job creation, as opposed to an international company.
"I would prefer to have competition between the Nasdaq and the NYSE, and for it to be intense," Berkeley said. "If there is going to be a merger, leaving a dominant, global player, then I’d like that dominant, global player to be an American company."
While competition and declining market share have often been cited as the reasons for the recent spate of exchange mergers, Berkeley said this union was rooted in simple economics. Exchanges like NYSE and Nasdaq are publicly traded companies and must produce profits for shareholders.
And given the recent decline in their trading volumes and increase in trading venues, profits have been scarcer. NYSE Euronext, for example, currently accounts for roughly 14 percent of daily trading volume, down from the heady 80-percent level seen in its own names just 10 years ago. And what revenues the two exchanges have been earning have come increasingly from business lines that fall outside of trading volumes.
"The reason they want to increase their market share and expand their operations is to grow their share price," Berkeley said.
The merger comes on the heels of two other cross-Atlantic exchange marriages. The first includes the one between the LSE Group, operator of the London Stock Exchange and Borsa Italiana, and TMX Group, operator of the Montreal and Toronto stock exchanges. Separately, BATS Global Markets and Chi-X Europe have tied the knot.
In words that were spoken with the conviction of a man with more than 30 years in the financial industry, Berkeley said the benefits of a merger between Nasdaq and the NYSE would lead to more uniform capital-raising rules as one large exchange would have one set of rules, not multiple exchanges with different sets of rules.
These rules are already attuned to needs of the local markets, which the NYSE has been serving for more than a century. And since capital formation is the basic function of the exchanges, more local growth would lead to cheaper capital costs and lower the risks associated with capital formation.
"I believe in globalization. And globalization brings many benefits. But if consolidation is going to take place, wouldn’t you rather have the consolidated giant be an American company," Berkeley asked. "It matters, as you intuitively know local decision making leads to local jobs, sensitivity to the capital formation process and philanthropy."
A potential merger between Nasdaq and the NYSE could draw scrutiny for violating anti-trust laws especially when securities listings are discussed. Fewer exchanges could mean fewer venues where shares can have a home listing, and companies want a choice where they can be listed, Berkeley noted. But other existing exchanges such as the International Securities Exchange could easily provide equities listing services and take up the slack, or other venues could fill the void, the market sage said.
Still not all were convinced. Pat Healy, chief executive at the Issuer Advisory Group, a consultancy, said that issuers want both an American-owned exchange and competition for the listings business. But in this case, they seem mutually exclusive.
"If you give someone 100 percent market share, then they should do away with the listings fees altogether," Healy said.
If listings fees go up as a result of the merger, which Healy thinks could well happen, then he said there was a "very good chance if we will petition the Securities and Exchange Commission to get rid of listings fee altogether."
However, he said issuers would have to weigh the reduction of competition in the listings space versus the benefits of the new mega-exchange being an American-owned firm. And that could be the deciding factor.
Traders were more resigned to the merger being a done deal and saw little trouble for the union of the two New York-based juggernauts. Dennis Dick, prop trader at Bright Trading in Detroit, said that if this merger was put on the table 10 years ago, it might have drawn tremendous anti-trust scrutiny. But not so much now, as investors can choose to trade on 14 different exchanges and other crossing networks and systems.
"I think our regulators would have had some major concerns as NYSE and Nasdaq essentially had monopolies in their respective markets," Dick said. "However, that environment no longer exists today. Considering 30 percent of equity orders never see an exchange, it is hard to argue that there are any serious anti-trust issues for the equity markets."