Nasdaq's complaints in a recent white paper about holes in the regulatory system are based on "material misstatements, mischaracterizations and suppositions." Nasdaq is attempting to "cloak its anti-competitive desires behind the claims that the CSE [Cincinnati Stock Exchange] and other markets lack sufficient rules…CSE is greatly troubled by these accusations, which the Nasdaq knows to be false."

That's what Jeffrey Brown, senior vice president and general counsel of the Cincinnati Stock Exchange, wrote in a blistering reply to the Nasdaq white paper, which was sent to the Securities and Exchange Commission. Brown contended that Nasdaq's paper is inconsistent.

"Nasdaq," Brown continued, "does not appear to be arguing that the same surveillance programs are inadequate as applied toward NYSE-listed securities, nor does Nasdaq appear to be arguing that NYSE assume regulatory jurisdiction over Nasdaq members trading NYSE stocks." Nasdaq, Brown contends, is less concerned about regulatory holes than its own competitive position and costs.

"Its motivation in proposing this change is to effect a bailout of its contract for regulation with NASD, a contract that failed to anticipate real competition in the trading of Nasdaq securities," according to Brown.

Cincinnati officials contend that, if the SEC accepts the proposals of the Nasdaq white paper, the system of self-regulation will end because Nasdaq will be able to police its competitors' marketplaces.

Payment for exchange sponsored option order flow should be eliminated, but the Securities and Exchange Commission must be clear in how it wants to do that.

There are times when internalization carried out by members can be in the best interests of the clients and the SEC should enact rules that will clarify these situations.

That's what Philadelphia Stock Exchange (PHLX) officials are telling the regulators.

Broker dealers' best execution guidelines aren't always clear for the exchange's members under the current rules, wrote Meyer Sandy' Frucher, chairman of the PHLX.

"Rules that promote internalization, facilitation, crossing and similar practices by exchange members clearly create opportunities for such members to benefit from order flow received from their customers (or purchased from others) through increased trading opportunities and commission revenues," Frucher wrote in a letter to the SEC.

Order Routing

"Whether a firm is likely to wantonly trade," Frucher continued, "against internal order flow to the detriment of customers, by not aggressively seeking the best price, depends primarily upon the integrity of the management of the order routing firm and, secondarily, upon the various safeguards built into the system."

Frucher noted that some of these safeguards are required by the rules of the exchanges.

The SEC started this debate back in January when it sent a letter to the heads of the five options exchanges warning that payment for order flow "encourages firms to consider their own economic interests over those of their customers."

The SEC says it is studying the issue.

*The Cincinnati Stock Exchange appointed Geoffrey Gradler as director of government affairs and Bonnie Greenberg as director of corporate communications. Gradler will represent the exchange on regulatory issues in Washington where he was previously a policy analyst for Tom DeLay, the recently elected House Majority Leader. A former journalist, Greenberg once headed the public relations department for the Chicago Board Options Exchange.

*Adams, Harkness & Hill is building an institutional listed market making desk in Boston. It named Kevin J. Ronayne managing director and head of the new business. Before he joined, Ronayne was head of listed trading at Investec in New York. He also worked in San Francisco for Robertson Stephens and Montgomery Securities.

*Credit Suisse First Boston made changes in the ranks of the institutional securities unit. Mike Clark, formerly global head of equity trading, and Jim Kreitman, the co-head of European equities, are the new co-heads of the equity division. The division was previously headed by Brady Dougan, who became co-president of Credit Suisse last year. Neil Moskowitz, chief operating officer of the equities division, was named COO of the unit. The firm is also forming an institutional securities operating committee.

*Reuters reorganized the management ranks. Devin Wenig, former president of the investment banking and brokerage unit (IBB), will oversee IBB, Treasury, asset management, corporates and media. Isaak Karaev will fill Wenig's role at IBB. Graham Albutt will be responsible for the Fast Forward project launched to revive Reuters' sluggish fortunes. Philip Green, COO, will take charge of development, operations and data.

*RBC Dain Rauscher promoted a top executive at Hill Thompson Magid, a dealer that is expanding in Nasdaq, OTC and Bulletin Board stock trading. Nicholas Ponzio (inset) was elevated from president to CEO, a post previously held by Anthony Broy who will remain as chairman.

*Tom Mulroe moved to TAG as senior vice president of operations. He comes from TD Waterhouse where he spent 13 years in various management positions, most recently as first vice president of trade quality management.

*Systems vendor OM hired two pros in its Americas division. Curt Brill joined as senior vice president, sales and marketing, covering financial markets. Wayne Arden joined as vice president of sales, exchange and clearing services. Brill was most recently with Reuters where he was in charge of transactions products management. Arden previously worked for IBM in a variety of sales, marketing and business development positions.

*Jamie Selway (inset), chief economist of Archipelago, left the company with four colleagues to start an institutional agency brokerage, White Cap Trading in New York. The other Arca pros are Bill D'Arbanville, Tim Love, Jamie Petraglia, and Quito Zuba.

*TowerGroup expanded its Securities and Investments practice, adding three executives. Ernest Brito, a managing director, will serve as a senior advisor, consultant and relationship manager for major clients. Brito's career included management positions at various firms, such as Deloitte Consulting. Stephanie Evanick as a manager will focus on developing and managing consulting engagements. Evanick was previously a strategy and business architecture executive at Accenture. Miranda Mizen as a senior analyst will be supported by her extensive experience in the global equity markets. She was formerly first vice president at Instinet.

Nasdaq, in a bid to wrest market share from ECNs, changed its rules to allow order entry firms to post certain limit orders on SuperMontage.

Non-market making NASD members can now post non-marketable limit orders, or those whose prices are inferior to the market's best, directly onto Nasdaq's new trading system. Previously, only dealers could do so.

Order entry firms could only post marketable limit orders, or those whose prices create or match the market's best prices, in SuperMontage.

Agency brokers that wished to post so-called "resting" orders on SuperMontage did so indirectly via ECNs.

However, one of the largest ECNs, Instinet, does not represent its quotes in SuperMontage. A second, Archipelago, is moving its quoting activity off Nasdaq to its new exchange, ArcaEx.

Nasdaq says its decision means that traders using defector-ECNs will still be able to post on SuperMontage. "Over the past few months, more and more orders, generated by non market-making broker dealers, are displayed in unlinked markets," said Rick Ketchum, Nasdaq president. "We believe it is critical to bring this liquidity back to SuperMontage."

At least one agency broker is pleased by Nasdaq's move. "If most of the liquidity in a particular security is on SuperMontage," said Randy Abernethy, president of UNX, "then giving people access to post there gives them an advantage."

Abernethy notes that a security may trade more shares in one market than another.

"Nasdaq is moving to compete toe-to-toe with the ECNs," he added. "They're taking down the boundaries that prevent people from adding liquidity."

Floor traders on the American Stock Exchange might soon be assessed a fee to finance payment for order flow.

This would come under a plan that members privately said the Amex is considering to lure more options orders. However, a spokeswoman for the exchange said action had not been taken.

"We have not done anything on any fee plan for order flow. Everything is status quo," she told Traders Magazine.

Traders privately said that the plan under review by the Amex would call for the exchange to collect 40 cents per option contract for each of the 100 most actively-traded option classes. The plan would also call for collecting $1 per contract for the popular options on the QQQ, or the Nasdaq 100 Tracking Stock.

The plan is controversial because regulators have been pressing exchanges to stop the practice of payment for order flow.

The dream of a pan-European trading platform appears to have been achieved, but will it turn out to be a nightmare?

The SWX Swiss Exchange's takeover of Virt-x – along with its bold announcement that it is going to promote the Virt-x European platform at least for another year – has sparked a debate.

Is SWX's move premature or is its step coming at just the right time to take business away from established exchanges? Even some of the advocates of the pan-European exchange agree that timing could be a problem.

Lee Hodgkinson, director of operations at Virt-x, said it could have been different had Virt-x launched three years earlier, rather than in the middle of a market downturn. But Hodgkinson still thinks the pan-European idea is on target. That's despite Virt-x not having reached its early goal of 10 percent in European blue-chip trading volume. Hodgkinson contends that the migration of a Swiss national market is a signal event. It had never previously been attempted.

Skeptics claim that the acquisition proves that the Virt-x model is in trouble.

Alasdair Haynes, CEO of ITG Europe, which operates the POSIT crossing network in Europe, said that a new Virt-x entity won't survive today unless value is added. He said drawing liquidity from a national exchange is difficult.

SWX took control of some 90 percent of Virt-x recently, which was originally launched as a joint venture between Tradepoint and the Swiss exchange. Shareholders, which include a consortium of leading investment banks and securities holders, agreed to an offer of 12.5 pence per share from the Swiss exchange. The latter is delisting Virt-x shares from the London Alternative Investment Market and will acquire the outstanding shares.

BrokerageAmerica will now impose liquidity fees on some Nasdaq orders submitted by its broker dealers. The fee will not be applied to Pink Sheets and Bulletin Board business. Broker dealers will not be charged for any not held orders of 2,500 shares or greater. Every held order, under the new schedule, and not held order of 2,500 or less, will be charged a penny per share.

BrokerageAmerica officials said they don't expect any substantial clients to be driven away by the liqudity fee.

"This move is in response to the market climate as well as the development of ECNs and decimalization," said Drew Sycoff, chief executive of BrokerageAmerica. "We're not afraid to do this because we believe our clients will understand."

He said other institutional players have been waiting for someone to impose this kind of fee and predicted that others would follow his firm's move.

One of the Street's most entrepreneurial trading firms is putting its research salesmen on a commission package.

The move will align the interests of the research, sales and trading teams at Jefferies & Co., the equity trading firm noted for compensating most other pros strictly on production.

The firm's some 40 research sales pros will no longer earn a salary plus a bonus. Instead, the sales pros will keep up to 30 percent of the commission on the business they generate.

The move is said to have been well received among the troops at Jefferies since it gives the sales team more control over their earning power. For management, it should act as a powerful tool in its efforts to motivate producers, according to outside observers. John Shaw, Jefferies' president, has cited his firm's variable compensation package as one reason why his operation was able to add traders in the midst of a market downturn.

He says salary and bonus don't work for firms in a bear market. "It can crush a business," he told Traders Magazine.

The news is getting worse for Instinet.

Once an untouchable king in Nasdaq agency transactions, the ECN is facing more tough times following a recent period of cutbacks and reorganization.

Reuters Group, which lost $630.4 million last year, may even consider an offer for its 62 percent stake in Instinet, according to some analysts.

That comes as Instinet deals with a reported loss of $111 million, or 34 cents a share, in the fourth quarter. The number accounts for Instinet's purchase of the Island ECN. It works out at $10 million, or three cents a share. That's excluding one-time charges.

Instinet and Island combined execute more Nasdaq trades than other individual ECNs. But some of the early economies of the business model have turned negative.

Island, for instance, had a market data revenue sharing program with the Cincinnati – which was an obvious plus for Instinet – stymied by the SEC. Instinet's next move is crucial. Previously, it responded in a slash and burn manner. It reduced fees, for example, to take back lost business. The next move will be brutal, because Reuters is likely to make big cuts in headcount at Instinet, analysts say. The British news conglomerate says it will eliminate about 3,000 of Reuters 16,000 employees around the globe this year.

The VWAP, the trading industry performance yardstick, has many critics. And rightfully so – it is used not because it is the best measuring rod, but simply because it is the easiest way to gauge a trader's performance.

Since the mid-1980s, VWAP, or volume-weighted average price, has been the most common benchmark to evaluate a trader's or broker's executions.

VWAP is calculated by dividing the total dollars traded in a stock by the total shares transacted over the same time horizon.

Gathering the transaction information is easy enough. The data on individual trades, the number of shares executed and the stock price are available from the consolidated tape. Many trading systems calculate VWAP as it evolves over the course of the day.

The comparisons provided by the VWAP serve at least one basic purpose: Keeping an eye on the trader's judgements, skills and market savvy. The VWAP shows a positive measure if a buyside trader's execution price is lower than the VWAP. The measure is mediocre – if not downright negative – if his execution price is higher than the VWAP.

Still, in recent years, daily VWAP's star has dimmed a little. That's because there are now hundreds of benchmarks that purport to measure what traders are trying to accomplish. Not to be outdone, there are several versions of VWAP, which vary based on the type of data used.

One version, for example, might exclude block trade data. Another might record the time the trade entered the market.

There are other measures, besides VWAP. For example, some are not based on average trade data through the day. They use time stamps, closing price, and decision price.

As the benchmark battle rages, best execution – and the importance of benchmarking performance – has gotten a boost from the bear market. If a portfolio manager becomes more efficient at running money, if he can save 100 basis points by executing orders more effectively, that's significant money saved in current market conditions.

Regulators have also been issuing guidelines and watching best execution practices. The final result could be increasing knowledge about what exactly best execution is for traders using different styles, and on large, multi-day, multi-portfolio orders.

But traders are not likely to dump the VWAP. "We all look at VWAP," said Madison Gulley, director of global trading at Franklin Templeton Investments, which has $260 billion in assets. "It happens to be the most prevalent and measurable indicator that exists."

But should VWAP be the sole measure of performance for how a trader handles a stock? Absolutely no, according to many pros.

Indeed, the industry view on VWAP is changing. Trading firms are demanding even more sophisticated approaches. Abel/Noser Corp., an agency broker, became one of the pioneers in trade cost analysis for plan sponsors, based on the VWAP.

"It's not the end-all measure," said Peter Weiler, senior vice president in Abel/Noser's investment management group. "It should be used in tandem with other measures."

VWAP was once criticized for comparing a trader's execution price to a snapshot of the day's trading. If a trader got an order on the desk at 1 p.m, for example, it wasn't fair, say experts, to compare his execution price to the average price across the day's volume – all of which wasn't available to him.

Abel/Noser, for example, now looks at VWAP over a daily period, order-length period, or investment performance period. But it also looks at strike-price measures and has a benchmark test based on volume considerations for large orders.

Effects of Delays

Wayne Wagner, chairman of Plexus Group, the Los Angeles-based consulting and investment analysis firm, has never placed much stock in VWAP. One reason the use of VWAP is at times misleading, Wagner contends, is that it "misses the effects of delays and the opportunity costs of not being able to trade."

Added Wagner: "If it's a trade that can be done instantly, it's not a bad measure. But if it involves a half-day's volume, which is typical of institutional trading, then you must consider the tactics the trader is using to secure that liquidity because that trade might be alive for two, three or five days."

Instead of relying on market data, Plexus compares a client's trade data to its universe of money managers. A value manager can expect to have low trading costs. A growth or momentum manager, who's buying on the news, faces more substantial costs.

"If you're thinking about this as a head trader or chief investment officer, you want to look at people like yourself and see how well you're doing relative to your competition," Wagner said.

Timothy Blastek, head of equity trading at Provident Investment Council, a Pasadena, Calif.-based institutional money manager, says his firm doesn't use VWAP as a benchmark. He says his firm doesn't want to settle for an average performance. Instead, Provident, which has about $5 billion in assets under management, uses Plexus Group's cost measurement service.

Plexus analyzes Provident's trade data on a quarterly basis and measures it against its own benchmark. In the past, Plexus has told the money manager that if traders had accelerated the rate at which they made sales on an order, they would have been better served.

Basis Points

Plexus also said that going more slowly cost the firm some basis points in performance. Plexus also offered color on the portfolio manager's decision point. "They've come back many times and chastised portfolio managers, saying that had they got orders in earlier in the day, giving the trading desk the opportunity to trade for a longer period of time, there would have been a benefit," Blastek said. "That changed the way portfolio managers got their orders to the desk."

To be sure, there are many ways to look at data and evaluate trades, but not everyone is prepared to discount VWAP, even though it's a measure of average performance. "It's a reasonable measure if you have to trade 20 percent of a stock's daily volume and you're going to trade it all day long," said Franklin Templeton's Gulley. "How you spread it out and the decisions you make matter."

For a small order, say 1,000-5,000 shares of Microsoft, many pros say it's better to get it executed quickly and efficiently, and forget about comparing performance to the VWAP.

For very large orders, which involve buying five or six days worth of volume, VWAP isn't adequate. In those cases, Gulley says, the solution is a benchmark relative to volume. "Volume is a liquidity measure," he said. "It's about what you are trying to accomplish versus what the market can handle."

Franklin Templeton has run its data through a number of systems, including Plexus Group, Elkins/McSherry Co. and ITG Inc. It now has an in-house system that looks at VWAP and a value-added measure that takes volume into account on large orders that must be executed over multiple days.

"So if the benchmark says a trader should be able to trade 20 percent of the stock's daily volume at VWAP, the question is: How much volume did the trader buy and, based on that, what happened the following day to that stock?" Gulley asked.

"If the trader bought 40 percent of the order and the stock went up the next day, that was positive," he added. "If he bought only five percent of the order and it went up one or two points, that's true opportunity cost that's lost."

VWAP is a useful benchmark for a "logical participation strategy," according to Ananth Madhavan, a managing director of research at ITG. That's a strategy in which a trader tries to take advantage of all the liquidity present in the market over the course of the trading day.

"If I don't have a big order and am not likely to move the market through my own trading, and I don't have information that's short-lived," Madhavan added, "then it's a reasonable strategy to try to achieve VWAP."

Cost Forecast

Another way to benchmark costs is to use a pre-trade model. The post-trade performance analysis – using VWAP, the snap price or the closing price – can then be handicapped relative to the pre-trade model. That forecasts what the trade should cost at the time the order is received, says Madhavan.

Meanwhile, the attention on best execution is increasing around the world, fuelled by changes in market structure and bear market conditions. Weiler at Abel/Noser notes how decimalization has expanded the number of price points in a stock but has reduced market depth. That's made it more important – and difficult – for traders to carefully work orders.

Non-U.S. data is still frequently not clean enough to analyze as closely as U.S. data, but the direction in which trade analysis and measurement is heading leaves no doubt. The objective, after all, is indisputable: figuring out whether a trader made the right decision on a stock.