Current Events

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The industry might have rung out 2014 discussing the “grand compromise” on the US equity market structure led by the Intercontinental Exchange that would lower access fees in exchange for a trade-at rule, but BATS Global Trading wasted no time in the new to offers its market-structure alternative.

In an open letter to the industry, exchange CEO Joe Ratterman and president Chris Concannon argue against the compromise as a bad deal for investors despite it being a win-win for exchange operators and broker-dealers.

“[I]nvestors will likely pay more both in the form of potentially wider spreads as well as fewer and inferior execution choices resulting from restrictions on competition,” they wrote.

The pair suggests that exchanges should determine their access fees, and associated rebates, using a tiered price model based on an issue’s liquidity. For example, the most liquid stocks could have a five cent per 100 share, or $0.0005 per share, and more illiquid a stock is, greater its access fee.

They also recommend that alternative trading system (ATS) operators be required to disclose the operation rules of their platforms, descriptions of available order types, transparent eligibility guidelines, participant pricing tiers, order routing logic, and eligible routing destinations as well as expanding Rule 605 and 606 reports to include execution quality on a dealer-by-dealer basis.

None of these ideas are a real departure from the industry’s ongoing market-transparency and market-structure conversations.

What is new, is their idea of stripping Regulation NMS trade-through protection and shares of the consolidated tape revenue from any self-regulator organization (SRO) or publicly displayed ATS that does not achieve more than one percent of the daily consolidated tape volume over a rolling three-month period.

The current Regulation NMS structure artificially subsidizes competition and encourages further market complexity since it costs existing exchange operators almost nothing to mint a new exchange while broker-dealers could face substantial cost connecting to the new venue, Ratterman and Concannon argue.

Which exchanges would be affected?

According to the latest Tabb Liquidity Matrix, November 2014, the immediate losers would be NYSE MKT, Chicago Stock Exchange (CHX), and Nasdaq PSX, which have a 0.3%, 0.4%, and 0.7% market share respectively.

The market shares for the four equities exchange that BATS operates are well above the proposed 1% threshold – BZX (7.7%), EDGX (6.1%) BYX (3.1%), and EDGA (2.1%).

If the Securities and Exchange Commission implements this regulation, it would liberate about 1.4% of current liquidity, which the remaining exchanges would divide. However, it would remove three protected quotes that help tighten the overall spreads.

Additionally, it would raise a significant barrier-to-entry for potential new exchange operators if they needed to capture 1% daily volume within the first quarter of their operation to receive trade-through protection.

Competition always breeds innovation and stripping away the trade-through rule for the smallest exchanges guarantees that the US equities markets will remain a triumvirate.

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The era of good feelings definitely is over for the over-the-counter (OTC) derivatives market judging by the tone of the conversations at yesterday’s SEFCON V.

“It’s to be expected,” said  a beaming Chris Ferreri, chairman of the Wholesale Brokers’ Association Americas (WBAA) and who hosted the event. “Last year, we all were trying to accomplish the same thing. But with ‘made available to trade’ in place, we are all competitors now. Isn’t great?”

The zingers flew wild and free during the conference’s first panel on what the industry has learned over the first year of swap execution facility (SEF) trading.

Representatives from Bloomberg, Credit Suisse, the DTCC’s Data Repository, Thomson Reuters,  tpSEF and UBS shared some rather candid thoughts and information during the verbal free for all.

Although the UBS offers a SEF aggregation service, it currently does not connect to Bloomberg SEF or tpSEF.

And when it comes to differentiating the SEFs that have sizable liquidity, it is all about the bells and whistles that they offer, according to Bloomberg’s Nathan Jenner and Thomson Reuters’ Jodi Burns.

However, the SEF operators might want to cool their technology pitch to swap dealers and institutional investors, suggested PIMCO’s Ric Okun, who spoke on a later SEF-technology panel.

The rest of the day’s discussions addressed the future of cleared foreign-exchange (FX) non-deliverable forwards (NDFs) and the benefits and shortcomings of central limit order book (CLOB) versus request for quote (RFQ) execution.

When an audience member asked Commodity Futures Trading Commission (CFTC) Chairman Timothy Massad whether the regulator developed a sense when NDFs would be available to trade, Massad stated that the CFTC “has not taken a view on it yet.”

Whether it will be before 2017, when the EU’s rules should go into effect, no one knows.

At least the one panel, which consisted of representatives from BGC Derivatives Markets, Bloomberg, Squire Patton Boggs and London-headquartered Wholesale Broker Market Association (WMBA), came to a consensus that NDFs probably will clear like US dollars and euros. They bandied about an 80-20 ratio, but could not agree on which currency represented which percentage.

The most heated conversations, unsurprisingly, related to CLOB and RFQ execution models. It definitely is the Mac versus PC and open-sourced software versus licensed software debate for the industry.

Supporters of RFQ won the day in terms of their loudness and liquidity, but consider the membership of the WBMAA.

CLOB supporters were optimistic that liquidity on their systems would pick up when interest rate volatility and its related volume returns to the market.

They also believed that as swaps dealers widen their RFQ spreads due to regulatory capital restraints, that it may drive investors to the CLOB platforms.

It is not clear if there will be a SEFCON VI, but the OTC industry still has a lot to do in terms of data consistency and quality, according to the DTCC.

A standardized instrument symbology across all SEFs would be a good place to start, suggested KCG’s Isaac Chang.



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This might be heresy for a financial technology blog, but is technology driving business growth in the capital markets?

I ask this because I had an organizational call for a panel discussion I’m moderating during Linedata Exchange New York on October 7 this morning.

The panel,  entitled “Truth or Myth? What Drivers Really Play a Role in Growing the Business Today?”, promises to be an interesting conversation with Jeff Scannell, vice president of trading technology at State Street Global Markets; Ryan Bateman, director of technology at Sands Capital Management; Jonathan Wang, head of business development at TPG-Axon Capital;  and Dushyant Shahrawat, research director at CEB TowerGroup.

It was relatively easy to cover the capital markets from a technological perspective before the 2008 financial crisis. Reporters only had to ask technologists how the specific investment would generate more money for the firm or how would it save the firm money, which could be used to make more money.

After 2008, Dodd-Frank, EMIR and Basel III, reporters started to add a third uncomfortable question: “How will this investment keep the company from being fined by regulators and appearing on the evening news?”

Over the past six years, I have not heard many technologists discuss how IT investments drive business growth. Instead, they have returned to the bearish mantra of doing more with less while throwing available resources at the middle and back offices.

It’s no longer a matter of capturing alpha, but controlling costs and improving internal efficiencies. Hence, why hosted-platforms, outsourcing, cloud computing and their management are the topics of the day.

Looking at my inbox, emails pitching trade reporting, margin management and risk analytics outnumber trade-execution pitches on  low-latency messaging, trading algorithms or smart order routing, at least six or seven to one.

Until some level of volatility comes back to the markets, most firms are left treading water and updating their middle and back offices and it will not change until the US Federal Reserve and the other central banks take their feet off the interest-rate brakes. Then we will see the pendulum swing back to greater investments in the front office.

Am I wrong?

Let me know.





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I know Wall Street’s grapevine is second to none when it comes to job changes and departures, but I’d like to update those who have not heard the news: After a few months at Asset International as the first joint US editor for The TRADE and Global Custodian, I’m back to freelancing.

The role always was an experimental one and not all experiments work out, hence the term.

There are some great people on both publications and I’ll miss working with them daily.

In the meantime, I finally can give this blog the attention that it deserves.



I apologize for not updating the blog as much as I should. It’s just been a crazy time for the past few months.

That should change in a few weeks when I exchange my freelancer’s lifestyle for a new job as the US editor for Global Custodian and The Trade.

More details to come.


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