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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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The global frontier markets are mature enough to give the emerging markets a run for their money, according to Aite Group’s Danielle Tierney and Gabriel Wang.

The industry analyst firm recently published a research note, Frontier Markets: Emerging World: Exploring the New Frontier,  in which the authors examine the macroeconomic and fundamentals of 65 frontier markets and found reasonable valuations, low volatility and low correlation between developed and emerging markets.

Usually I am not interested in the straight economic research, but the authors tossed in chart showing that roughly a third of the frontier markets had deployed Nasdaq OMX’s X-stream multi-asset trading platform since 2008.

I’m sure other exchange technology providers like Deutsche Bourse, London Stock Exchange and the New York Stock Exchange had similar wins over the same period, but since I’m not paid for writing this blog let us just take it as a given.

That is about time I started to notice that a rash of press release announcing the various contact wins. It came after assigning one of my favorite stories about the Iraq Stock Exchange’s paper-based trading and had a T+30 settlement cycle (circa 2006) and the post-Regulation NMS exchange consolidation.

As these markets continue to invest in electronic trading, the more efficient they should become.

However, I doubt that it will become much easier for foreign investors to trade directly in the markets due to the standard local market regulations and currency control issues.

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Sean Debotte has been named president and CEO of Canadian equities and fixed-income alternative trading system (ATS) operator Omega Securities, corporate officials announced today.

Debotte first joined Omega in 2011 as director of business development. He replaces Brian Crew, who departed in October 2012- the same month that Omega began opening its planned Lynx ATS to industry testing.

Officials expect that the new platform will go live on February 3, but are still waiting for the Ontario Securities Commission (OSC) to sign off on the market’s Dynamic Pricing Model that determines a maker/taker rebate for each security based on its previous month’s trading volume.

The new ATS will use the same order entry and market data protocols as the Omega ATS and will not charge market data, subscription or connectivity fees.

The only other difference, say officials, is that Lynx will use broker attribution as a default setting.

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It’s only a matter of time before more investors move away from foreign-exchange (FX) swaps to FX futures, according to the latest research from Kevin McPartland, head of market structure and technology advisory service at analyst firm Greenwich and friend of the blog.

He attributes the coming migration due FX swap’s higher regulatory and margin costs, even though regulators exempted them from many swap requirements, and the lack of need by financial users for custom FX swap products compared to their corporate counterparts.

Check out his blog for more opinions and analysis on the OTC derivatives marketplace.



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