OTC dealers were able to make an effective case that their sub-penny trading was hurt by Manning rules. So the Financial Industry Regulatory Authority tailored its Manning rules on over-the-counter stocks.
Manning prohibits front-running, which is trading against incoming orders at prices equal to or less than any contra-side customer limit orders they may be holding. FINRA’s new take on Manning eases rules by dividing penny stocks into several tiers.
FINRA made changes because some dealers complained that the price-improvement rules were too stringent for OTC stocks that sell for less than a dollar or less than a penny.
OTC dealers also contend that their unique economics are very different from the listed business. Dealers selling listed stocks must price-improve by a penny on stocks selling for more than $1.
Under FINRA’s liberalization plan, orders for OTC stocks selling for less than a penny but more than one-10th of a cent need only be price-improved by one-10th of a cent or half the spread, whichever is less.
Dealers in these small issues of a dollar or less had been required to provide price improvement of 1 cent or half the spread, whichever was less. They grumbled that it was difficult to make money on many of these smaller issues, some of which sell for one-1,000th of a cent.
They also groused that FINRA’s original sub-dollar price-improvement standards would have been draconian. Paying half the current spread would have been too much, they said.
FINRA agreed. It also plans to offer new, easier rules for OTC stocks trading at over $1. Liberalization is also needed here, dealers say, because these stocks can be quoted and traded in sub-pennies. So dealers will only be required to price-improve the incoming order by half the spread if it equals less than 1 cent.
Securities and Exchange Commission Chairman Christopher Cox surprised many in the securities industry when he suddenly called for the abolition of soft dollars. In a speech in May, Cox said soft dollars “offer perverse incentives to investment advisers to use them in ways that aren’t beneficial to investors.”
Cox also suggested that soft dollars lead to higher brokerage costs and “may operate to impede the further development of efficient markets.” Cox called on Congress to pass a bill to kill Section 28(e) of the Securities Act, which justifies the use of soft dollars. The use of soft dollars results in investors paying more for trades in exchange for access to research.
Cox’s war cry against soft dollars was surprising on at least two counts. First, no other SEC commissioner had made such a comment. Secondly, in July 2006 the SEC had once again interpreted 28(e) and concluded that soft dollars were an acceptable use of client dollars. However, the SEC tightened up how soft dollars could be used and required more disclosure.
The SEC soft dollar reinterpretation in July had been unanimous. Therefore, lobbyists for the trading industry, who had feverishly lobbied the SEC and Congress to protect the practice, thought soft dollars were safe. In the short term, the industry lobbyists seemed victorious. Ultimately, Cox found little support for his soft dollar abolition call. Indeed, Sen. Charles Schumer, D-N.Y., defended soft dollars, contending they supported “a vibrant independent research industry.”
Schumer told Cox in a July hearing before the Senate Banking Committee: “I still don’t quite get why there is a need for legislation, when about six months or a year ago, everyone thought the disclosure rules would basically do the job.”
Soft dollars seemed safe at the end of the year. But there still were a few senators who thought Congress should take another look at the controversial practice. Possibly, they will again raise the issue in 2008.
A Securities and Exchange Commission bigwig said the commission wants to help block traders use client commission arrangements, or CCAs, without incurring the legal responsibilities of an adviser.
Bob Plaze, associate director in the SEC’s Division of Investment Management, told a fall conference that his group is working to make CCAs less daunting for block-trading officials.
Officials of some bulge bracket firms fear the use of the popular CCAs would subject them to the requirements of the Investment Advisers Act of 1940. They fear that they would be covered by the act if institutional clients, for whom they commit capital on trades, pay them in hard dollars for their research.
So how will the SEC ease these fears? Plaze, speaking at the Securities Industry and Financial Markets Association’s annual institutional brokerage conference, said a broker-dealer could structure its legal relationships so its institutional client is the investment management company and not the funds themselves. That’s the approach now used by Lehman Brothers in dealing with Fidelity Management Company. That agreement has the tacit approval of the SEC.
“If the client is the money manager, rather than the mutual fund,” Plaze told the conference last fall, “the broker providing the research is not restricted in its ability to do principal transactions with the mutual fund. I would expect sometime in the next couple of months that would be formalized.”
Broker-dealers that don’t want to structure their relationships with fund companies themselves, he added, might still be able to trade on a principal basis with their accounts. If the research were generic, the principal-transaction rules wouldn’t apply, Plaze said.
Traditionally, brokers have been paid for research with commission dollars. However, many managers are moving to unbundling arrangements. They separate execution from research. The managers are using CCAs to pay their execution providers with their commissions while assigning a portion of those payments to research providers.
But the Advisers Act, which deems these hard dollar payments as “special compensation,” prohibits firms from trading with customers on a principal basis. Again, though, Plaze said there was a possible solution for block traders.
“If you do unbundle now, there is an advisory relationship. But there are a couple of options or models you have to make that kind of unbundled arrangement work,” Plaze said.
The SEC may have already moved in the direction of removing CCA barriers. In September the commission proposed a rule permitting retail brokers offering non-discretionary fee-based accounts to trade with those accounts on a principal basis.
The rule requires brokers to verbally notify clients they are taking the opposite side of a trade. Plaze suggested that rule “may be available” for institutional brokers as well.
Trading pros knew plenty of changes were coming in 2007. Regulation NMS was one reason. Ever-improving technology was another. But the velocity of change caught many within trading departments off guard. They had to adapt like never before.
Indeed, greater fragmentation due to the increasing use of dark pools, as more orders went “dark,” only added to traders’ difficulties in getting fills this year. It was also a year in which Reg NMS made the New York Stock Exchange floor a shadow of itself. NYSE specialist firms were ready to throw in the towel and give up their pads, as the new hybrid market made profitability elusive in a more electronic trading environment.
One memorable event of the year that impacted traders–and investors–was the credit crunch in August, precipitated by non-performing subprime loans. Equities markets were roiled, volatility nearly doubled and trading volume skyrocketed to the 9-to-10-billion-share range for about a week.
The good news was that the technology withstood the heavy barrage of usage. It bent but didn’t break, observers say. Against this backdrop, Traders Magazine presents its year in review of the top trends in 2007.
What Regulation NMS didn’t kill, Nasdaq just might. The Securities and Exchange Commission’s new trade-through rule has largely neutered the specialists at the New York and American stock exchanges. However, it left their role in managing stock openings untouched. While most trading at these exchanges is now done automatically, openings are still handled by specialists the old-fashioned way.
Nasdaq hopes to change that. Taking advantage of complaints leveled against the New York and Amex over the slowness of their opening processes, Nasdaq has begun soliciting NYSE and Amex order flow from broker-dealers for its opening cross.
“At both NYSE and Amex, orders at 9:30 a.m. are still sitting there at the so-called primary market,” says Chris Concannon, executive vice president for transaction services at Nasdaq. “That’s frustrating for the retail investor. We have order flow that wants to open at 9:30 on the nose.”
Nasdaq last month expanded its automated opening and closing auctions to 5,000 NYSE and Amex names. Nasdaq began testing the waters in July when it added seven active Amex-listed exchange-traded funds to its crosses.
Human Negotiation
Specialists open their stocks by gathering buy and sell interest from floor brokers, institutions and orders in their book to “discover” the best price that will meet the supply and demand. They may commit capital and negotiate with brokers to facilitate this process. When a stock is going to open away from the previous night’s close, or has amassed a large imbalance in orders, they publish repeated indications of the likely opening price to solicit contra-side flow. That helps them try to dampen volatility at the open.
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Nasdaq’s opening and closing auctions, which launched for the market’s own securities in 2004, are single-price electronic auctions that also discover price, but without the involvement of specialists. The auction process uses electronic indications to attract contra-side flow when necessary.
Competition has now reached across from the trading day, during which multiple markets compete for orders, to the opening and closelong the bastion of the primary listing venue. “Expanding Nasdaq’s automated opening and closing crosses is a logical extension for Nasdaq,” says Michael Rosen, senior vice president for product development at institutional broker UNX Inc. “Nasdaq is responding to a market need by offering an alternative.”
Nasdaq’s foray into exchanges’ sacred habitat wasn’t taken lightly by the NYSE. On Oct. 31, the NYSE preemptively eliminated its fee for all trades at the opening. Orders that participate in specialists’ opening auctions now execute at no charge.
The NYSE and Amex both concede that market participants want stocks to open earlier and want more transparency around the pricing process at the open and close. But both markets stress the importance of hands-on, human-negotiated price discovery at these critical times, which Nasdaq’s automated auctions cannot provide. They question the ability of Nasdaq’s crosses to produce good, or efficient, prices since the bulk of liquidity is in their markets.
“Clearly the market is moving toward wanting an opening that’s faster,” says Larry Leibowitz, chief operating officer for U.S. markets at NYSE Euronext. The NYSE, he says, will reduce delays by giving specialists tools to open stocks faster and to disseminate pre-open indicative prices to brokers more efficiently. Since October, specialists have also been able to open stocks automatically on quotes when there is no opening trade.
Big Play
Nasdaq’s ambitions are big. “Our intention is to take the volume away from Amex,” Concannon says. Nasdaq set its sights on the NYSE’s and Amex’s openings because delays at 9:30 a.m. occur after a night or weekend when the markets are closed and therefore lack reliable price discoveryand because many retail customers trade in the opening. More trading also occurs at the open than at the close. Snatching volume at that time could thus add precious percentage points to Nasdaq’s market share. On most days, a little less than 5 percent of daily volume appears to trade at the open.
In comparison to the open, the close is dominated by institutions. Some institutions, such as index players, insist on trading at the primary market, particularly if they’re following indexes and want to eliminate tracking error. That makes closing volume more difficult for Nasdaq to siphon away from other markets.
Steve Swanson, chief executive of Automated Trading Desk, an electronic market-making firm owned by Citi, predicts Amex will lose the opening and close to Nasdaq in the coming months. At a Security Traders Association conference in October in Boca Raton, he said “problems” with Amex’s auction process “have begun to wear” on customers.
Oscar Onyema, chief administrative officer at Amex, doesn’t think his exchange’s grip on the open and close will loosen. “We have to open as promptly as possible,” he says. “But our opens are robust in terms of size and the market quality of the prices.” He adds that Amex is the “leader” in Amex-listed stocks at the open and close, although during the day that market share falls off.
Onyema stresses that Amex’s specialist system provides additional benefits to customers. “We guarantee the opening,” he says. When imbalances occur, specialists typically take the other side as part of their affirmative obligations. “If there’s an imbalance of 3,000 shares on Nasdaq, that 3,000 shares is out of luck in Nasdaq’s opening cross,” Onyema says.
NYSE’s Leibowitz agrees. “If there’s a specialist, they will make the market and a trade can happen,” he says. At Nasdaq, if the other side isn’t there, that trade can’t occur.
Amex’s Plans
Amex is considering additional modifications to its opening process such as allowing automated openings for illiquid stocks, along the lines of what the New York now does. “When there’s no on-open order, we may allow the specialist to do a shotgun open,” Onyema says. Amex also intends to reduce the waiting time once imbalances are published before stocks can be opened.
Still, many market participants believe Nasdaq could grab some of Amex’s business. Amex is “particularly vulnerable” because its market share in its own listed securities has declined dramatically in recent years, says Joe Gawronski, president and chief operating officer at institutional broker Rosenblatt Securities. However, he adds, while firms servicing retail customers may like the certainty of Nasdaq’s prompt openings, they wouldn’t want to execute “away from where most of the trading and price discovery occurs.”
Knight Pilot
Knight, a large market-making firm, launched a pilot in November to test Nasdaq’s opening cross. The pilot ETFs, all listed on the Amex, are DIA, SPY, MDY, OIH, SMH and XLE. Orders in those six names are sent to Nasdaq’s opening cross instead of to Amex.
The concern with Amex’s openings is speed and efficiency, says Frank Grampone, managing director of operations and client services at Knight. On the Nasdaq side, the concern is capacity and system performance, as well as the quality of its pricing. “If there’s not enough critical mass [at Nasdaq’s opening], there could be potential pricing gaps,” Grampone says.
So far, Grampone hasn’t seen gaps in pricing in the pilot ETFs relative to the primary market’s opening print. “In our experience, Nasdaq is faster than the specialist opening on Amex,” he says. The time saved ranges from seconds to a minute or two. However, Grampone points out that there’s less volume on Nasdaq than there is on Amex.
Leonard Amoruso, Knight’s general counsel and regulatory affairs officer, says his firm is “agnostic” about whether a manual or electronic opening is better. “We have no stake in the race and will monitor the openings carefully,” he says.
Chris Nagy, managing director in charge of order routing, sales and strategy at TD Ameritrade, one of the largest retail brokers in the U.S., isn’t agnostic when it comes to openings. “Nasdaq is fast, fair and transparent, and has the consistency of a 9:30:00 opening,” he says. “That’s unparalleled in the industry today.”
Ameritrade began using Nasdaq’s opening and closing auctions for all stocks on the Nov. 5 launch date. “Why should we have clients wait until 9:40 in the morning when valuable information has been disseminated and trading time is ticking away?” Nagy asks. He says he’s comfortable with the prices he’s been seeing on Nasdaq, although, like Knight, he says Nasdaq’s volume is currently thinner than it is on the primary market.
Broken Trades
Nasdaq knows its pricing at the open must be deemed reliable for customers to use its cross. Nasdaq initially launched the product with popular ETFs because their liquidity gave Nasdaq’s electronic auction a good chance of attracting enough flow to produce efficient opening prices. Since expanding its opening to all listed securities, Nasdaq has broken, or cancelled, many trades at the open that reflect dislocations in the price of the security. Knight’s Amoruso says they are the result of Nasdaq’s cross in those names not having sufficient liquidity.
Concannon says Nasdaq broke 20 opening trades on Nov. 5 and a “smaller number” on Nov. 6, and has had fewer “clearly erroneous trades” since then. He also points out that Nasdaq’s initial opening cross, for Nasdaq-listed securities, had many broken trades after it launched in 2004. As liquidity builds, he says, the pricing improves.
In the current competitive market structure, Nasdaq’s assault on the traditional specialist-run auction process has struck a nerve. “New York seems to be viewing it as a serious threat,” says Rosenblatt’s Gawronski. “New York’s value in the opens, closes and IPOs is particularly high, but the emphasis on automatic executions means it has less of the information flow and color needed to maintain that edge.”
Gawronski points out that running the opening is also part of NYSE’s brand. “The open is very important to listed companies” that want to understand how their stocks trade, he says. “Nasdaq’s cross, if successful, could threaten the core franchise.”
The NYSE’s reaction has been swift. “They’ve broken a lot of trades,” Leibowitz says of Nasdaq’s opening cross. “They’ve traded a lot of stocks outside our range for the entire day. They’ve had a lot of price dislocation, and they haven’t gotten a lot of volume. They can’t claim it’s a success.”
Fair Prices
Leibowitz says New York’s opening prices stay closer to where the stocks trade shortly after the open. He notes that there’s no objective measuring stick for what’s a fair price, “but if a stock opens at a price and rapidly trades at another price and stays there, it’s fair to infer that the price that opened wasn’t good.”
For its part, Nasdaq has little to lose by taking aim at NYSE and Amex. “Nasdaq sees the opening as a contestable market,” says James Angel, a finance professor at Georgetown University who focuses on securities market structure. “Nasdaq has the technology and connections to broker-dealers. It costs them nothing to do this.” Angel was part of a group that helped develop Nasdaq’s automated crosses half a dozen years ago.
A former specialist takes a different view. “Speed does not price assets,” says Anthony Corso, a managing director at Rosenblatt Securities. “In a bull market with low volatility, you may get away without high-touch service, but not in a volatile market like August.” Corso, who previously ran LaBranche’s NYSE floor operation, stresses that openings and closes can be risky times to trade and that specialists still have a level of accountability that gives their auctions more relevance than a computerized system.
Air Pockets
A pure auction, Angel concedes, could have “air pockets in demand” and a lot of volatility associated with the prices it produces. But he thinks Nasdaq’s auction is battle-tested on Nasdaq-listed stocks and addresses imbalances at the open by attracting imbalance-only orders.
Still, Angel acknowledges the powerful role humans can play at difficult trading times. The problem, he says, is that specialists can no longer earn a profit doing what they’ve been doing. And if they can’t earn a profit, they can’t fulfill their obligations. In addition, Angel points out, fewer bodies on the floor of the NYSE means that specialists have fewer people to negotiate with face to face as they seek out the right price for a stock.
UNX’s Rosen doesn’t expect Nasdaq to capture the open from New York or Amex in the near futureif at all. But he says Nasdaq has begun changing the game by questioning what the opening print means when an exchange’s market share dips below 50 percent in its own listed securities, or when its competitors trade more than it does. In his view, an opening print remains a “static concept,” but could ultimately be defined by the client. And if that happens, and the volume in particular securities on the primary market “isn’t the determinant of price, at some point that exchange could be vulnerable to a reasonable alternative in those names,” Rosen says.
In the U.S., electronically linked, competitive markets are seen as beneficial for investors intraday. But some view the opening as a different matter. “I’ve never been one to say fragmentation is a bad thing,” says NYSE Euronext’s Larry Leibowitz. “The open and close are the exception. It’s hard to make the argument that two auctions is the right answer.” Indeed, Leibowitz says it’s the wrong answer: “Customers can’t be in both, whereas in the market during the day, they can be represented in one spot and know the market can’t trade through them because [the exchanges] are electronically linked.” TD Ameritrade’s Chris Nagy emphasizes a different Reg NMS-related point. He says Reg NMS made the case that competitionrather than where a stock is listedshould dictate how a stock trades. “Previously there was no competition at the opening and now there is,” Nagy says. In his view, Ameritrade’s retail customers now have more opportunities to analyze pricing around the market open and can make better-informed decisions. The regulators are watching what happens. The Securities and Exchange Commission’s Erik Sirri, director of the Division of Trading and Markets (the renamed Division of Market Regulation), sees competition at the open as an opportunity to get names opened earlier, which is good for the market. “Exchanges have an incentive to improve,” he says of both specialist systems and automated auction markets. For the SEC, the key issue is the impact competition at the open may have on market quality. Sirri notes that each exchange could work out “where the price could be” for any given security at the opening. “If, as a result, there’s a problem with the quality of the market,” he says, “we’d have something to say about that. If the opening price is consistently biased, we might have a concern.” Sirri adds that brokers, with their duty of best execution, also wouldn’t want to route to a market that provided inefficient prices. UNX’s Michael Rosen adds that two opening prices probably couldn’t be sustained for long if the smaller market built liquidity. “Once that price is published, off goes trading and the market will move to an electronic mode where people can see the top of the book and make their trading decisions,” he says. N.M. * the U.S., electronically linked, competitive markets are seen as beneficial for investors intraday. But some view the opening as a different matter. “I’ve never been one to say fragmentation is a bad thing,” says NYSE Euronext’s Larry Leibowitz. “The open and close are the exception. It’s hard to make the argument that two auctions is the right answer.” Indeed, Leibowitz says it’s the wrong answer: “Customers can’t be in both, whereas in the market during the day, they can be represented in one spot and know the market can’t trade through them because [the exchanges] are electronically linked.” TD Ameritrade’s Chris Nagy emphasizes a different Reg NMS-related point. He says Reg NMS made the case that competition-rather than where a stock is listed-should dictate how a stock trades. “Previously there was no competition at the opening and now there is,” Nagy says. In his view, Ameritrade’s retail customers now have more opportunities to analyze pricing around the market open and can make better-informed decisions. The regulators are watching what happens. The Securities and Exchange Commission’s Erik Sirri, director of the Division of Trading and Markets (the renamed Division of Market Regulation), sees competition at the open as an opportunity to get names opened earlier, which is good for the market. “Exchanges have an incentive to improve,” he says of both specialist systems and automated auction markets. For the SEC, the key issue is the impact competition at the open may have on market quality. Sirri notes that each exchange could work out “where the price could be” for any given security at the opening. “If, as a result, there’s a problem with the quality of the market,” he says, “we’d have something to sayabout that. If the opening price is consistently biased, we might have a concern.” Sirri adds that brokers, with their duty of best execution, also wouldn’t want to route to a market that provided inefficient prices. UNX’s Michael Rosen adds that two opening prices probably couldn’t be sustained for long if the smaller market built liquidity. “Once that price is published, off goes trading and the market will move to an electronic mode where people can see the top of the book and make their trading decisions,” he says. (c) 2007 Traders Magazine and SourceMedia, Inc. All Rights Reserved. http://www.tradersmagazine.com http://www.sourcemedia.com
Pragma Financial Systems and Weeden & Co. are shining many lights into the fragmented marketplace with a new product they call “a liquidity management tool.” The two have partnered to develop a new “dynamic” aggregation product, called
OnePipe, to help institutional investors find liquidity faster in non-displayed markets. OnePipe distributes an order among 25-and soon, more than 30-liquidity sources from a central position on the user’s order management system. Those sources include “passive stream liquidity sources, dark pools and other internalization pools,” said Doug Rivelli, managing director at Weeden.
OnePipe looks at historic fill rates within each venue to determine where among the participating pools the order should be sent. Using historical data, it then sends order flow in real time to where it finds the best-quality fills. “We’re targeting crossing rates above 20 percent,” Rivelli said.
OnePipe doesn’t favor lower costs or internal liquidity pools, and instead exposes orders to all of the pools, so users maximize crossing opportunities. OnePipe also manages each venue’s rules, such as crossing times, minimum share quantities or minimum resting times. It also can block orders from accessing specific pools.
At the end of the day, the tool sends users a report to let them know where their crosses occurred. “The client sends one order into our system, and then we manage all the liquidity sources,” Rivelli said. “Weeden clears all the Street-sides, and the client only clears one ticket.” A beta version of OnePipe is available now. Pragma@Weeden will hold its soft rollout this month, and follow with a hard rollout on Jan. 1.
When Mark Schlarbaum became Global Capital Management’s sole trader in April, he knew some things about his job would be different. “You can get a cup of coffee,” he says. “And if you have to go out to lunch, you can.”
But he knew a lot of what he’d be doing for Global Capital would be familiar-and that’s trading small-cap stocks, his specialty. Schlarbaum had spent most of his career doing that at investment giant T. Rowe Price, sometimes handling 50 orders a day and constantly interacting with a platoon of portfolio managers and analysts. His days at Global Capital, in Conshohocken, Pa., aren’t as hectic-he could find as few as five orders on his desk on a given day. But he still has clients and analysts who demand his A-game.
Despite 16 years in the business, the past seven months have nevertheless been a learning experience. From the outset, Schlarbaum had to become familiar with Global Capital’s execution platforms, set up its trade-cost analysis and get a handle on communicating with portfolio managers about order flow.
“I’m just getting a handle on the characteristics and the styles of the stocks we hold and trade,” he says. “Even though you’ve traded all these stocks before, some portfolio managers want to be very aggressive, some want to be more passive.”
Schlarbaum has also spent his time looking for ways to get the firm’s trading technology up to speed. “When you’re new somewhere, you need to get an accurate survey of where you are, and then find areas where technology can make you more efficient,” he says. “I’m still in the phase of discovery.”
He already has some ideas. Schlarbaum wants Global Capital’s trade settlement and order management to be more automated. “We don’t run a huge amount of assets,” Schlarbaum says. “As small-cap investors, we run a concentrated portfolio of 40 or so names.” Still, Global Capital requires some trading expertise to move in and out of its concentrated positions. Global Capital executes about 95 percent of its orders itself, using ECNs or dark pools, or through ITG’s execution management system, Triton.
Global Capital hasn’t gotten into client commission arrangements much. Schlarbaum says the firm gets its ideas mostly from three in-house portfolio managers who also serve as analysts. “Since we don’t own a tremendous number of stocks,” he says, “people are able to follow stocks fairly in-depth.”
Relationships with sales traders have become noticeably more infrequent. But Schlarbaum has filled that space by cultivating relationships with programmers, so that he can offer his input on how they can design algos that work best with his trading approach.
Looking back, he measures success by the firm’s efficiency in setting up and executing trades, as well as by the fact that dispersion among its accounts and platforms is tight. “That,” he says, “is when I feel like I know we’re doing a good job.”
BNY ConvergEx wants to protect the value of investors’ assets better during a portfolio’s transition process. And the firm has developed an algorithm to do it called TOPx. Whenever one portfolio is sold and another is purchased, the algo will minimize the sum of the market impact and opportunity costs incurred in the transition. To do this, TOPx will reoptimize each individual stock’s trading schedule within the portfolio on a continual basis to minimize the overall transition cost as trading conditions change.
Furthermore, it looks at every stock both in isolation and then in a portfolio context, said Kal Bassily, global head of transition management for BNY Global Transition Management. TOPx identifies the marginal contribution to risk for every stock toward the overall risk in the portfolio and then gives users a trading strategy that takes that contribution to risk into account.
“You might have a stock in your transition portfolio that contributes a whole lot of risk to that whole portfolio,” Bassily said. “So the algorithm will trade that in a speedy manner to get rid of the risk. There may be another stock in the portfolio that diversifies overall portfolio risk, in which case you trade that at a very slow pace, because you want to hold onto that risk diversifier.”
During the day, TOPx reacts to movement in the marketplace and irregular volume patterns. And it reoptimizes at intervals throughout the day, so that at any point during the implementation period, users have a strategy that has been reoptimized no more than three minutes prior.
Brokerage firms now have a much better idea of how prepared they would be if a pandemic flu hit the U.S. The industry underwent a mock trial in September and October that tested firms’ ability to continue to function if high percentages of their staff were unavailable because of a pandemic flu.
About one-fourth of nearly 2,800 financial organizations that registered for the exercise were brokerage firms. One goal of the exercise was to enhance the industry’s understanding of the potential systemic risks of a pandemic. Another was to provide an opportunity for firms to test their pandemic plans, as well as the impact one would have on the industry.
Two organizations-the Financial Banking Information Infrastructure Committee and the Financial Services Sector Coordinating Council-were in charge of the exercise.
“Nearly 3,000 organizations from the banking, insurance and securities industries registered for this voluntary exercise, and the number of people participating in the three-week exercise likely was in the tens of thousands,” said George S. Hender, chairman of the Financial Services Sector Coordinating Council for Critical Infrastructure Protection and Homeland Security. “The full analysis of the exercise … has helped the financial services sector be better prepared to meet the challenges posed by pandemic flu.”
In a subsequent questionnaire about the exercise, 56 percent of the respondents rated their organization’s business continuity plans for a pandemic as “moderately effective,” while 28 percent said their plans were “minimally effective.”
About 55 percent of the firms said they plan to establish work-at-home capabilities, while 41 percent said they would divide up their business units and disperse them. Twenty-one percent said they would enter into agreements with other organizations. The questionnaire results will be available to the public next year.
