Tag Archives: high frequency trading

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Bond Boy Rutter Adds Tackling UST HFT to List of Axes

Nobody can accuse veteran government bond market broker and fintech poster boy David Rutter of being single-minded. The former Prebon Yamane exec, who later migrated to inter-dealer broker ICAP where he became of head of electronic trading, then did a stint as CEO of fixed income and FX platform BrokerTec, and who more recently has positioned himself as a blockchain empressario via his role as co-founder and head of R3, the industry consortium dedicated to normalizing the use of distributed ledger technology across the financial ecosystem remains determined to set the standard for how UST’s and related futures contracts are electronically traded.  His latest axe is to cut down on the noise and disruption created by high-frequency trading (HFT) tools used by so-called predators that have ‘undermined’ how government bonds are traded in the OTC marketplace.

(Bloomberg) via reporting by Eliza Ronalds-Hannon : David Rutter, the former head of the biggest electronic venue for Treasuries, says his startup will launch a new trading platform called LiquidityEdge Select this week. According to Rutter, a big draw is that it will enable clients to shut off bids and offers from firms they suspect are using hair-trigger algorithms to trade against their orders. He’s enlisted Cantor Fitzgerald to backstop the transactions and signed up about 90 clients, including most of the Treasury market’s 23 primary dealers and several high-speed trading firms.

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David Rutter, Liquidity Edge LLC

“There’s a lot of pent-up demand to fix the inherent disadvantages” on some of the existing venues, Rutter said from his midtown Manhattan office. Going up against certain kinds of speed traders can be “a huge frustration.”

Success is far from guaranteed and there’s considerable debate over whether high-frequency traders, or HFTs, actually do more harm than good. But one thing is undeniable: technological advances and post-crisis bank regulations designed to limit risk-taking are transforming the inner workings of U.S. government debt trading. What’s resulted is a sense of disorder among the more traditional players in the world’s most important bond market.

“The game is changing every day,” said Tom di Galoma, the managing director of government trading and strategy at Seaport Global Holdings. On electronic platforms, the rise of HFTs “concerns anybody else who trades on them.”

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Liquidity Woes

Regardless of who or what is responsible, there are signs U.S. government bonds have gotten harder to trade, even as Treasury Department officials say the $13.7 trillion market is sound and the ability to transact remains robust.

An average of $491 billion of Treasuries have changed hands each day in the past year, down from $600 billion in 2011, according to JPMorgan Chase & Co. The ability to trade without moving prices has also deteriorated, with another measure indicating Treasuries are now 50 percent more sensitive to price fluctuations than they were five years ago.

At the same time, the market itself has become more prone to sudden shocks, with the Oct. 15, 2014, “flash crash” in Treasury yields the most prominent example. While regulators still haven’t figured out what triggered it, they concluded that automated trading firms made the wild ride that much worse.

All these changes have come as regulations imposed in the aftermath of the financial crisis prompted Wall Street banks to retreat from dealing. Computerized firms have swept in to fill the void.

Electronic platforms like ICAP Plc’s BrokerTec and Nasdaq Inc.’s eSpeed now account for almost half the volume in the Treasury market. Bloomberg LP, the parent of Bloomberg News, and its affiliates also provide trading in Treasuries.

‘Phantom Liquidity’

On the main venues that cater to dealers, eight of the 10 biggest firms by volume last year were non-bank proprietary trading firms, according to Greenwich Associates, a financial services consulting firm. Their influence has led HFT critics to blame computerized traders for providing “phantom liquidity.”

That occurs when those firms use their speed to suddenly change the amount they are willing to buy (or sell) once they detect incoming orders. And it can be costly for slower-footed investors who enter the market thinking there’s a certain amount they can trade, only to have it disappear. In some cases, predatory firms use sophisticated algorithms to decipher a counterparty’s intentions and race ahead of its orders.

The problem was underscored by the Bank for International Settlements, which concluded in a January paper that such strategies have the potential to depress bond-market liquidity. According to Greenwich, less than half the trading activity on inter-dealer platforms last year consisted of “true market making,” which the research firm defined as the willingness of firms to buy and sell a specific security on demand.

“A lot of the intermediaries that had balance sheets to absorb risk and trade, they’re gone,” said Ed Al-Hussainy, senior global interest-rate analyst at Columbia Threadneedle Investments, which oversees $460 billion.

Value Proposition

That’s where Rutter comes in. LiquidityEdge is the first of at least four companies that are planning to start trading platforms by year-end.

LiquidityEdge Select differs from traditional electronic platforms in a few distinct ways. First, clients can pre-select counterparties and trade with them using anonymous user IDs, rather than sending an order into a central market that everyone can see. That maintains confidentiality and enables clients to receive bids and offers only from parties they want. Second, the system allows customers to exclude any streams at any time.

Rutter says this kind of self-policing gives non-bank traders a greater incentive to provide firm orders, while weeding out predatory firms that try to game the system.

LiquidityEdge will also use Cantor Fitzgerald as a central clearing counterparty, settling trades via the Fixed Income Clearing Corp. That means trades are guaranteed even if one party fails to deliver on either payment or bonds. The lack of a such an arrangement precipitated the demise of Direct Match, a Treasuries trading startup that shut down in August.

Diminishing Returns

To be sure, a proliferation of trading platforms could potentially harm liquidity more than help it.

New venues may poach clients from the incumbents — BrokerTec, Rutter’s former employer, and eSpeed — but that may just lead to shallower liquidity across more venues and result in a Treasury market that’s more fractured than it is now. LiquidityEdge Select will be the firm’s second trading venue for Treasuries. It will sit alongside the firm’s one-year-old bilateral platform, LiquidityEdge Direct.

“Is it a case of, the more liquidity pools the merrier?” said Anthony Perrotta, global head of research and consulting at Tabb Group, which specializes in market-structure research. “Some would say yes. At the same time, people’s bandwidth is only so great.”

The Treasury market’s two incumbents, BrokerTec and eSpeed, already have plans to launch competing trading venues later this year.

To continue reading the Bloomberg story, click here

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UST Trading Invaded by HFT Firms

The high-frequency arms race, aka “Battle Between Wall Street-style Transformers” has extended to trading in USTs and HFT firms are invading the US Treasury market, according to latest from BusinessInsider..

(BusinessInsider)-High-frequency traders have taken over the market for US Treasuries, and a bunch of market participants say they’re alarmed by the change.  

The US Treasury recently asked for public comments on changes to the largest government bond market in the world. The responses have been flooding in.

The topic is a weighty one. The US government bond market makes up around 30% of the fixed income market, according to a letter from the Securities Industry and Financial Markets Association and American Bankers Association.

The Treasury market is “the most important global benchmark for pricing and hedging spread asset classes and is a key transmission mechanism for US monetary policy,” they wrote.

Several Wall Street players took the opportunity to get in a dig in over the growing role of principal trading firms and high-frequency specialists. 

The general consensus among this group is that regulation has discouraged Wall Street banks from making markets in US government bonds. While banks have pulled back, high-frequency trading firms have piled in and these firms are more flighty in times of stress.

Here is Mike Zolik from prop trading firm Ronin Capital pointing the finger at leverage ratios:

Why are primary dealers retreating from the US Treasury market? Participating in the US Treasury market no longer generates a profitable return on capital for those primary dealers that are subject to regulatory leverage ratios. Most primary dealers have been designated as G-SIBs (Global Systemically Important Banks). The lack of diversity in primary dealer membership means that regulation targeting the “too big to fail” problem has the unfortunate side effect of reducing liquidity in US Treasuries.

Shane O’Cuinn, a managing director at Credit Suisse, highlighted the impact of regulation on bank balance sheets for example, saying it had curtailed banks’ ability to participate in the market. He said: 

These traditional sources of liquidity have a reduced capacity to warehouse risk, and therefore banks have to become more dynamic in their provision of liquidity. This has, in turn, led not only to a definitive, structural reduction in market depth but also increased sensitivity of liquidity provision to price volatility. New sources of liquidity, such as HFTs, are a potentially unstable and unpredictable source of liquidity in times of volatility.

It’s worth remembering that Wall Street banks have an axe to grind here. They’ve seen revenues for the government bond trading business tank over the last five years.

But it’s certainly true that the high-frequency traders are now much more active in this market, and some investors say they’re making life difficult.

Here is fund manager Prudential Fixed Income: 

PTFs—or those conducting high-frequency trading tactics—have generally been an impediment within the Treasuries market. These firms generally impede dealers’ ability to provide liquidity to end users. In our opinion, suggestions that PTFs could eventually replace dealers are tenuous because most of these firms are less regulated than dealers, hold minimal amounts of capital, and the potential failure of one, or several, of these entities could contribute to widespread systemic risk.

In September, Risk.net published a confidential list ranking the top 10 firms by volume traded on BrokerTec, an ICAP-owned trading platform for US Treasurys that is believed to make up 65% to 70% of interdealer market volumes.

Eight of the top 10 firms on the platform were not banks, including KCG, Spire-X, XR Trading, DRW and Rigel Cove, according to the report. This research was highlighted by several of the respondents to the US Treasury report, who used it as evidence of the growing influence of principal trading firms. 

These firms trade in and out of markets at speed, usually in small sizes, and they don’t hold positions overnight. Some establishment players believe that these funds disappear when liquidity is needed most.

Here is The Securities Industry and Financial Markets Association and the American Bankers Association

With these changes in market structure has also emerged a class of market participants who largely remain outside of the current regulatory framework, and whose business models are fundamentally different than those of traditional, principal-based participants that used to be responsible for the majority of the volume in the market. The result can be higher volumes and lower trade sizes. However, while these participants are responsible for increases in volumes, this does not mean that such participants are establishing and holding positions or willing to meaningfully provide liquidity during stress events. These factors tend to exacerbate volatility in rapidly changing markets, even absent fundamental catalysts.

And here is Deirdre Dunn, head of North America G10 rates at Citigroup:

While the arms race for speed is in the best interest of any individual trading firm, Citi agrees that it is not in the best interest of the overall market. Arguably, it worsens liquidity and social welfare with no benefit to the investor or end user, while potentially advantaging firms with larger technology budgets.

Not everyone is so concerned. Some of the respondents were keen to point out, for example, that trading continued during the US Treasury Flash Crash in October 2014, and that the proliferation of high-speed traders in the US Treasury market was nothing to worry about. 

You can read what they all of the respondents had to say here. 

Trading Ahead: Dark Pool Operator ITG Gives Itself Best Ex and Gets $20mil Fine

According to the BrokerDealer.com blog, MarketsMuse reports that “dark pool” operator ITG and its agency-only, best-ex, ‘conflict free’ brokerdealer affiliate AlterNet Securities appear to have been providing themselves with best-ex by capturing order information from ITG institutional customers and for that, they will pay  a record SEC fine of $20.3 million to settle charges that they operated a secret trading desk, the U.S. Securities and Exchange commission announced this week.

As described the SEC — and, unusually, admitted to by ITG ( ITG, -4.29% ) — there were two main charges — that the company operated a proprietary trading desk when it claimed to be “agency only,” and that it then used the confidential trading information of its dark-pool subscribers without disclosing that.

The regulator “found that despite telling the public that it was an “agency-only” broker whose interests don’t conflict with its customers, ITG operated an undisclosed proprietary trading desk known as “Project Omega” for more than a year.”

On Monday, ITG CEO Bob Grasser stepped down to be replaced by E*trade veteran Jarrett Lilien in the wake of the scandal and news of the SEC’s proposed fine. ITG General Counsel Mats Goebels also resigned, according to news reports.

An SEC press statement added, “[while] ITG claimed to protect the confidentiality of its dark pool subscribers’ trading information, during an eight-month period Project Omega accessed live feeds of order and execution information of its subscribers and used it to implement high-frequency algorithmic trading strategies (aka “HFT”), including one in which it traded against subscribers in ITG’s dark pool called POSIT.”

BrokerDealer.com provides a global database of brokerdealers operating in more than three dozen countries throughout the free world. – See more at: http://brokerdealer.com/blog/#sthash.6VqFIQkG.dpuf

Unlike previous SEC settlements where the accused pays a fine and does not admit any guilt, ITG admitted wrongdoing. Further, it will “pay disgorgement of $2,081,034 (the total proprietary revenues generated by Project Omega) plus prejudgment interest of $256,532 and a penalty of $18 million that is the SEC’s largest to date against an alternative trading system,” according to the SEC. 

For the full story from BrokerDealer.com, please click here

 

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Fixed Income FinTech Chapter 14: More e-Trading Platforms for US Govt Bonds

The US Government Bond Market is set to explode…with more e-trading systems.. MarketsMuse Tech Talk continues its curating of fintech stories from the world of fixed income and today’s update is courtesy of WSJ’s Katy Burne, who does a superb job (as always) in summarizing the latest assortment of US Government bond “e-trading” initiatives. MarketsMuse editor note: The financial marketplace is now littered with electronic trading platforms ostensibly designed to enhance liquidity and address the needs of respective market participants.

The once-revered premise of electronifying old-fashioned, non-transparent OTC markets so as to make them fully transparent and in turn, enhance liquidity in a manner that would inspire institutional investors to increase use of those products has, according to many, morphed into a ethernet rat’s nest. There are now almost as many of flavors of institutional electronic trading platforms as there are ice cream flavors from by Ben & Jerry’s and Baskin Robbins combined. Most if not all are ‘accelerated’ thanks to the innovation of rebate schemes, payment for order flow menus, and of course, high-frequency trading (HFT) applications, which has made the market structure more akin to a continuous “Battle of the Transformers.”

Despite the rising concern  on the part of both institutional investors and regulators as to the impact of market fragmentation (the latter of whom are easily-cajoled by the phalanx of lobbyists and special interest groups),  the Genie is not only out of the bottle, it’s reach continues…and the US Govt bond market is, according to those leading the initiatives described below, ripe for ‘innovation,’  for two good reasons. The first is the widely-shared belief that the rates market, which has been mostly range bound for several years thanks to the assortment of QE programs and lackluster economic recovery. is now anticipating a major uptick in volatility, which is a trader’s favorite friend. Secondly, the role of major investment bank trading desks, once ‘controlled’ the market for government bonds, has become severely diminished consequent to Dodd-Frank and the regulatory regime governing those banks and the financial markets at large.

Here’s the opening excerpt from Katy Burne’s column “Antiquated Treasury Trade Draws Upstarts”..

A host of companies are vying to set up new electronic networks for trading U.S. Treasurys, the latest upheaval in a $12.5 trillion market already being reshaped by some large banks’ pullback and the growth of fast-trading firms.

The efforts highlight the shifting role of banks, and gyrations in the market as the Federal Reserve prepares to lift interest rates in the months ahead.

Traditional Treasury trading is now widely viewed as “antiquated and rigid,” said David Light, a former head of government-bond sales at Citigroup and co-founder of CrossRate Technologies LLC, which is launching one of the new venues. “It simply did not evolve with all the changes in technology and regulation.”

Currently, there are two main channels for trading Treasurys on screens. Banks trade opposite their asset manager and hedge fund clients, with identities disclosed, via either Bloomberg LP or Tradeweb Markets LLC.

The banks then trade with other banks and professional investors anonymously, in exchange-like systems on either BrokerTec, owned by broker ICAP PLC, or eSpeed, owned by Nasdaq OMX Group. The banks trade with other banks in a wholesale market on one set of prices; they trade with customers on another set of prices. Continue reading

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Interest in Buyside-Only Equity Trading Platforms Gains Traction..Again..

MarketsMuse update courtesy of extract from Pension & Investments Feb 23 edition, with story reported by Sophie Baker …MM Editor Note: The notion of buyside-only electronic trading venues for institutional equities (i.e. block trading) is not a new one. Graybeards who have been around for more than 15 minutes will say “First came Instinet, then there was Optimark….”both were spearheaded by trading pioneer Bill Lupien, and while Instinet quickly became the platform for all to trade NASDAQ stocks, Optimark was determined to be a black box for block trading available to buysiders only…and burned through nearly $100 million before it was sent to the wood chipper. Proving that history repeats itself and that innovation doesn’t need to be an original idea, as Yogi Berra would say “ Its Déjà vu All Over Again.”

The development of buy side-owned equity trading venues has attracted interest from long-term investors.

U.S.-based Luminex Analytics & Trading LLC, set to open for business this year, and Europe-based Plato Partnership Ltd. are being developed against a backdrop of increased pressure on costs, regulatory demand for best execution, recent regulatory investigations into the U.S. dark pools operated by banks, and concerns about some participants in existing dark pools.

“We manage our equity exposure largely internally, and we also do the trading internally,” said Thijs Aaten, managing director, treasury and trading, at APG Asset Management, Amsterdam, Netherlands. The firm has €400 billion ($453.3 billion) in assets under management, including the €344 billion pension fund ABP, Heerlen, Netherlands.

“I’m definitely willing to consider new venues that we can trade on. If there is an advantage to it, then it would be silly not to make use of it. It is our fiduciary duty, and if there is a new opportunity, we have to investigate.”

Luminex is a buy side-to-buy side trading venue owned by a consortium of nine money managers, representing a total of about $15 trillion under management: Fidelity Investments, BlackRock (BLK) Inc. (BLK), Bank of New York Mellon (BK) Corp. (BK), The Capital Group Cos. Inc., Invesco (IVZ) Ltd., J.P. Morgan Asset Management (JPM), MFS Investment Management, State Street Global Advisors and T. Rowe Price Group Inc.

Managers declined to disclose their financial commitments.

Plato’s consortium includes two money managers: Deutsche Asset & Wealth Management and Norges Bank Investment Management, manager of the 6.6 trillion Norwegian kroner ($870 billion) Government Pension Fund Global, Oslo. “We believe we will be naming more firms in coming months,” said Stephen McGoldrick, project director, Plato Partnership, in London.

Both venues were created to give long-only money managers and institutional investors back the power they need to fulfill their best execution requirements, and to ultimately save costs for their clients when trading large blocks of securities.

APG is keen to trade with long-term asset holders, Mr. Aaten said. “(That type of trader,) taking a fundamental but opposite view on the same company, is the cheapest to trade with. But finding that long-term trader is difficult. This is what those new, buy side-to-buy side platforms are about — helping to find those long-term asset owners, (which) will lower our trading costs.”

He said the traditional model, where the sell side acts as a go-between for buyer and seller, and high-frequency traders are admitted, is more expensive. High-frequency traders “don’t have a fundamental view on an equity, but trade on information from the order book. Because of technological advantages they have this information before I do … in our experience, they are the most expensive type of trader to trade against,” Mr. Aaten said.

Self-sustaining

“The consortium’s goal is that Luminex will become self-sustaining, offering its clients a low-cost, fully transparent trading venue for large peer-to-peer block orders, preserving as much alpha as possible for the trading partners’ clients,” said Jeff Estella, director, global equity trading at MFS in Boston.

A BlackRock (BLK) spokesman said company officials believe “alternative trading platforms are invaluable execution tools for investors seeking to avoid information leakage and reduce market impact,” and a spokesman for Fidelity said Luminex “will be focused on helping the investment management community more efficiently source block liquidity.”

Excess cash flow will be reinvested in Luminex, rather than making a profit for the consortium.

Being designed as non-profit-making entities for the members of the consortiums is a key point in the platforms’ favor, said sources.

Plato’s consortium members have goals similar to those for Luminex.

“The consortium’s key aims for this project are to reduce trading costs, simplify market structure and to act as a champion for end investors — a vision which we firmly back,” said Oyvind Schanke, Oslo-based chief investment officer, asset strategies, at NBIM.

Buy side and sell side Plato participants will have equal say on key decisions, and the model was developed with an eye on European regulation, said Mr. McGoldrick.

The intention is to open Luminex to other long-only managers, but there are requirements. This new platform will require a commitment from users of a minimum block size of 5,000 shares or a value of $100,000, whichever is smaller, said a spokesman for Luminex.

Execution guaranteed

Should an order be matched, it is guaranteed to execute. Users also can increase the size of their block trade. Hedge funds that abide by the same rules are permitted on the platform, but not high-frequency traders.

Still, liquidity and the likelihood of finding a match are two issues that hang over the success of Luminex and other buy side-to-buy side platforms.

To continue reading the full story from P&I, please click here.

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Market Manipulation or Rapid Fire Trading? Regulators Eye Spoofing

MarketsMuse update courtesy of Feb 21 WSJ story by Bradley Hope

One June morning in 2012, a college dropout whom securities traders call “The Russian” logged on to his computer and began trading Brent-crude futures on a London exchange from his skyscraper office in Chicago.

Over six hours, Igor Oystacher ’s computer sent roughly 23,000 commands, including thousands of buy and sell orders, according to correspondence from the exchange to his clearing firm reviewed by The Wall Street Journal. But he canceled many of those orders milliseconds after placing them, the documents show, in what the exchange alleges was part of a trading practice designed to trick other investors into buying and selling at artificially high or low prices.

Traders call the illegal bluffing tactic “spoofing,” and they say it has long been used to manipulate prices of anything from stocks to bonds to futures. Exchanges and regulators have only recently begun clamping down.

Spoofing is rapid-fire feinting, and employs the weapons of high-frequency trading, aka “HFT”. A spoofer might dupe other traders into thinking oil prices are falling, say, by offering to sell futures contracts at $45.03 a barrel when the market price is $45.05. After other sellers join in with offers at that lower price, the spoofer quickly pivots, canceling his sell order and instead buying at the $45.03 price he set with the fake bid.

The spoofer, who has now bought at two cents under the true market price, can later sell at a higher price—perhaps by spoofing again, pretending to place a buy order at $45.04 but selling instead after tricking rivals to follow. Repeated many times, spoofing can produce big profits. Make no mistake, spoofing is not limited to the fast-paced world of futures contracts; high-frequency traders are notorious for spoofing and anti-spoofing tactics across listed equities, options and other electronic markets.

The 2010 Dodd-Frank financial-overhaul law outlawed spoofing, but the tactic is still being used to manipulate markets, traders say. “Spoofing is extremely toxic for the markets,” says Benjamin Blander, a managing member of Radix Trading LLC in Chicago. “Anything that distorts the accuracy of prices is stealing money away from the correct allocation of resources.”

For the full story from the WSJ, please click here

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Dark Pool Tales Part 3: Fidelity Leads Buy Side-Only Initiative For Block Equities

In what has become an ongoing “trilogy-type” story straight out of Hollywood, the WSJ reports today that Fidelity Investments is set to launch yet the latest “dark pool” initiative via a consortium of and exclusively for buy-side investment managers. The announcement comes on the heels of a recently-profiled NYSE initiative [with a strategy to partner with leading investment banks that operate their own dark pools and otherwise bring back the block trade volume taking place away from the NYSE in consideration for lower fees] and a competing NASDAQ initiative that comes with a completely different pricing scheme in effort to capture market share.

MarketsMuse Senior Editor quips: “We’ve seen ‘buy-side only’ schemes before for both equities and fixed income. Bottom line: they’ve all wound up on the cutting room floor.”

Here’s the extract from WSJ reporting, courtesy of Kirsten Grind: Continue reading

Former Sell-Side Trader Blows Whistle on NYSE Order Routing Scheme; SEC Says Nothing..So Far

As recently reported by Automatedtrader.com, with below excerpt from Sept 21 New York Post, this is not the first we’ve heard about Wall Street whistle-blower Haim Bodek; its an update to claims of conflict he brought to the SEC and other regulators last year in connection with NYSE’s electronic order handling procedures that favor high-frequency trading (HFT) strategies wrapped within the NYSE payment-for-order flow schemes. Until now, Bodek’s allegations have gone unanswered, so he is apparently increasing the volume.

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Haim Bodek

Now managing principal of Decimus Capital Markets, Bodek is a former Goldman Sachs and UBS trader-turned-high-profile-mole last week launched a fusillade at the already battered New York Stock Exchange, saying the exchange’s latest gamble on high-speed reforms should be stopped.

Bodek last went this ballistic back in 2011, when he went directly to the Securities and Exchange Commission to accuse exchanges of giving turbo-charged electronic traders an unfair edge over the little guy.

Bodek, 43, of Stamford, Conn., had run a high-speed-trading firm after his Goldman and UBS gigs. The SEC is said to be quietly probing his charges, but declined to comment.

Continue reading

Is KCG Cracking Up? More Key Executives Quit ETF Trading Behemoth

As reported by various news outlets on Friday, KCG, the firm that was created last year via a “take-under” of former Knight Capital by HFT market-maker Getco Securities after Knight suffered a $460 million trading loss attributed to a technology snafu,  and whose business model somehow continues to pass the smell test by combining proprietary trading with “agency-only” execution of institutional orders that are directed to the firm courtesy of payment-for-order flow schemes, is suffering from more executive departures.

In a news release issued by the company, which was once considered to be a leading market-maker in ETFs, it was announced that Steven Bisgay, the firm’s CFO Richard Herr had left the firm. Two other senior executives have also apparently left during recent days, including Richard Herr, the firm’s head of corporate strategy and Andy Greenstein, the firm’s deputy general counsel. All three of these senior executives had come from Knight Capital when the 2 firms were combined in a $1.6 billion transaction.

According to one industry source, who is not authorized to speak on behalf of his firm stated, “The combination of the two cultures, one that is essentially an opportunistic trading shop and the other, which has been trying to justify its role as both a fiduciary broker and a prop trader is no doubt creating internal dysfunction.”

Hedge Fund Manager Blames HFT for Firm Closing

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A hedge-fund manager says an unusual culprit contributed to his firm’s demise: high-frequency traders.

Rinehart Capital Partners LLC, which had been backed by hedge-fund veteran Lee Ainslie and specialized in emerging-markets stock-picking, is closing, according to a letter viewed by The Wall Street Journal.

In the letter, Rinehart founder Andrew Cunagin aligned himself with those who have been critical of the rise of fast-moving traders.

“This is a circus market rigged by HFT and other algorithmic traders who prey on the rational behavior of warm-blooded investors,” Mr. Cunagin wrote, referring to the high-speed traders who have attracted wide attention this year for the alleged advantages they hold over more traditional investors.

For the full article from the WSJ, please click here.

HFT Chapter 3: U.S. Senate To Hear About Payment-For-Order-Flow, Conflicts of Interest and Best Execution

MarketsMuse Editor Note: Finally, the topic of payment for order flow, the questionable practice in which large brokerage firms literally sell their customers’ orders to “preferenced liquidity providers”, who in turn execute those orders by trading against those customers orders ( using arbitrage strategies that effectively guarantee a trading profit with no risk) will now be scrutinized by the U.S. Senate Permanent Subcommittee on Investigations in hearings scheduled for this morning.

The first paragraph of this morning’s NY Times story by William Alden regarding today’s Senate hearings frames the issue nicely: “..To the average investor with a brokerage account, the process of buying and selling shares of stock seems straightforward. But the back end of these systems, governing how billions of shares are traded, remains opaque to many customers…Behind the sleek trading interfaces of brokerage firms like TD Ameritrade, Charles Schwab and Merrill Lynch lie a web of business relationships with relatively obscure firms that make trades happen..”

MarketsMuse has spotlighted this issue repeatedly over the past several years, including citing long-time trading industry veterans who have lamented (albeit anonymously) that the notion of selling customer orders is a practice that not only reeks of conflict of interest, it is an anathema to those who embrace the concept of best execution. Their request for anonymity has been driven less by “not authorized to speak on behalf of the firm” and more by a common fear of “being put in the penalty box” by large retail brokerage firms who embrace the practice of double-dipping (charging a commission to a customer while also receiving a kickback from designated liquidity providers) simply because these firm deliver the bulk of orders to Wall Street trading desks for execution.

Throughout the same period that this publication has profiled the topic, we have repeatedly encouraged leading business news journalists from major outlets to bring this story to the forefront. In every instance other than one, journalists and editors have suggested the topic is “too complex for our readers” and many have indicated that its a story that their “major advertisers (the industry’s largest retail brokerage firms and ‘custodians’) would be offended by.”

NY Times reporter William Alden described the issue in a manner that is perfectly clear and simple to comprehend; whether the issue of “conflict of interest” is clear enough or simple enough for U.S. Senators to grasp is a completely different story.

The following extracts from Alden’s reporting summarize the issue brilliantly; link to the full article is below: Continue reading

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Dark Pool IEX Seeks To Transform to Major Exchange; Solicits Investors With $200 Million Valuation

Extract below courtesy of WSJ Weekend Edition (May24-25) and reporters Bradley Hope, Telis  Demos and Scott Patterson

IEX Group Inc., an upstart trading venue that aspires to be a haven from high-frequency trading, wants to become the only stock exchange that isn’t dominated by speedy dealers.

The firm is in talks with potential investors to raise millions of dollars to expand its operations and pay for the increased regulatory costs of becoming a full-fledged exchange, according to people familiar with the talks. At present, IEX is a “dark pool,” a lightly regulated, private trading venue.

IEX has previously gained the backing of a number of big investment firms, such as Los Angeles-based Capital Group Cos., which manages American Funds, and has shunned investments from Wall Street banks.

The latest fundraising talks, held at IEX’s New York headquarters, have involved hedge funds, private-equity groups and asset managers, according to people familiar with the talks.

An exchange owned solely by investment firms would be a “game changer,” said Albert Kyle, a professor of finance at the University of Maryland who has advised the government on market issues. “The motives of the exchange would be different than what we have now, and that could have benefits for investors,” he said.   For the full WSJ story, please click here

Finally: Debate re High-Frequency Trading Includes A Tangible Solution

tabb forum logo Excerpt courtesy of TABB Forums April 21 submission by Chris Sparrow, CEO of “Market Data Authority” a consultancy that provides guidance within the areas of equities market structure, transaction cost analysis and “best execution.”

MarketsMuse Editor note:  below snippet is a good preview to the most recent “short-form white paper” written by Mr. Sparrow in connection with the ongoing brouhaha re high-frequency trading aka HFT. The submission itself inspired a broad assortment of comments from industry experts..and, having been considered a “market structure expert” in a prior life, MarketsMuse editor says “overlook the ‘techno talk’, its worth hitting ‘read more.’

“Eliminating Unfairness: Creating a Protocol For Synchronized Period Trading”

The goal of this piece is to describe at a high level a protocol that could be introduced to allow for a multi-venue system operating synchronized batch auctions. The motivation for this protocol is to eliminate any advantage from the asymmetric distribution of order book information – i.e., trade and quote updates. No attempt is undertaken to control other types of information that may be relevant to trading.

The protocol should allow for competition of trading venues and not discriminate against any type of market participant. Further, the protocol is suggested only as an option that could be used by venues that want to participate.

A strong motivation for creating the protocol is the perceived “unfairness” that is present in the existing market structure, where some participants may be able to get faster access to trade and quote information than others. The result has been a perceived erosion of confidence in the equity markets. Other externalities that exist in the current system include the need to store vast amounts of data generated from continuous trading and a technological arms race.

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51% Of Pension Managers Say NO to High-Frequency Trading

pensioninvestmentlogo   Excerpt below courtesy of Pensions&Investment April 14 edition, story by Christine Williamson

Controversy over high-frequency trading, fomented by Michael Lewis’ new book, highlights the conflict many chief investment officers experience over the practice.

On the one hand, both pension fund executives and their external money managers are grateful that the development of electronic trading and the competitive exchanges established to serve the growing high-frequency trading segment has dramatically lowered trading costs.

On the other hand, it’s maddening for many CIOs to suspect their portfolios’ returns might be harmed from front-running by high-frequency trading algorithms.

A Pensions & Investments’ online reader poll conducted last week showed 51.5% of respondents believe high-frequency trading is bad for institutional portfolios, while 17.1% said it’s good. The remainder said it was neither good nor bad.

For the full story and who said what, please visit P&I

 

Regulators Take Aim at Maker-Taker Fees; High-Frequency Trading v. Brokers’ Fiduciary Obligations

wsjlogoExcerpt courtesy of April 15 edition of WSJ and reporters Scott Patterson and Andrew Ackerman.

A fee system that is a major source of revenue for exchanges and some high-frequency trading firms is coming under the heightened scrutiny of regulators concerned that market prices are being distorted, according to top Securities and Exchange Commission officials.

SEC officials, including some commissioners, are considering a trial program to curb fees and rebates they say can make trading overly complex and pose a conflict of interest for brokers handling trades on behalf of big investors such as mutual funds.

At issue are “maker-taker” fee plans, which pay firms that “make” orders happen—often high-frequency trading firms that specialize in trading strategies designed to capture payments. The plans charge firms that “take” trades—typically big investment firms looking to buy or sell a chunk of stock or hedge funds making bets on short-term price swings.

The trial program would eliminate maker-taker fees in a select number of stocks for a period to show how trading in those securities compares with similar stocks that keep the payment system.

For the full story from WSJ, please click here.

Flash Boys Fight Over High Frequency: Op-Ed

MarketsMuse Editor Note: Having close on 3 decades “habitating” within the financial industry’s sell-side, this greybeard former trader turned opinionator and postulator is certainly fascinated by the spirited debate over “high-frequency trading”, not only because most of those arguing for and/or against HFT can only selectively point to lop-sided studies to defend their respective arguments , but the escalating war of words (over the Battle of the Transformers) has more recently captured the attention of the always beloved experts of financial industry market structure and trading technology: the Federal Bureau of Investigation. If there were an agency less qualified than the FBI to ask the right questions and determine whether any laws have been broken, it might be the always-conflicted and lobbyist-influenced SEC; particularly when real industry experts have vehemently pointed to an industry practice that truly undermines the credibility of financial markets: retail brokerages and custodians selling their customers orders to “preferenced market-makers” in exchange for cash..  [Then again, given that FBI Director Jim Comey came to his new job after serving as General Counsel for the world’s biggest and most high tech hedge fund, the debate about who is most conflicted becomes more complex]…..Ironically, the biggest beneficiary of the practice of payment for order flow is Charles Schwab (only because they’re arguably the biggest of the major custodians, but all others who do the same benefit accordingly)..whose Chairman/CEO announced this week that “HFT is a cancer that is plaguing the industry..” Clearly someone who likes to have their cake and eat it too.

In trading market lingo, “Bid Repeats”; the largest of the industry’s retail brokerage platforms–ostensibly those who have a fiduciary obligation to secure best execution on behalf of its clients when routing orders to the marketplace, are selling those orders to favored proprietary traders, a group whose primary obligation is to their own P&L, NOT the interests of public investors who would like to presume they are receiving best execution on their orders. Adding insult to injury, customers of these brokerages who know better and request their orders be routed to agency-only execution firms (whose role is limited to fiduciary broker and to secure true best execution by canvassing all market participants for best bids and offers) are rebuffed and faced with egregious fees  on any orders in which customers ask the custodian to “step-out” or “trade-away” to specific agency-only firms.

While most objective financial industry experts (if not experts from any other industry) would liken the practice of payment for order flow as a kickback scheme that undermines the notion of ‘fairness’, this practice, which clearly is antithetical to the notion of “fiduciary obligation” has gone virtually unmentioned by the media, and those from within the industry who have tried to raise this flag have been futily dismissed by advertiser-influenced media platforms, if not regulators responsible for overseeing fair and orderly market practices.

All of that said, and for an assortment of reasons that has led to market fragmentation,  the existing landscape enables a quagmire of complexity when trying to distill what makes sense, especially when those who have the biggest role in market efficiency are those who are focused on making dollars for themselves, not sense.

Perhaps one of the week’s best observations can be found not by replaying clips from heated debates broadcast on CNBC, but in an op-ed in today’s New York Times courtesy of Philip Delves Broughton, who, in critiquing the impact of Michael Lewis’s new book “Flash Boys”, frames the issue of HFT in a very intelligent way. His opinion piece,  “Flash Boys for the People” can be found by clicking on this link.

 

Wealth Fund Cautions Against Costs Exacted by High-Speed Trading

dealbook  Courtesy of NY Times

Wall Street firms and exchanges have long said that the speed and competition in the markets has made trading cheaper for everyone. Mary Jo White, the chairwoman of the Securities and Exchange Commission, recently referred to the United States stock market as the “envy of the world.”

But the top trader at the Norwegian fund, Oyvind G. Schanke, said not enough was heard from long-term investors like the fund, which holds $110 billion in United States’ stocks, and the asset managers representing American retirement savers. For them, Mr. Schanke said, the benefits of the technological changes of the last few years are not nearly as clear, and the costs of the system are often left out of the discussion.

“The U.S. market has gone through a lot of changes and has become quite complicated — and this complexity of the market creates a lot of challenges for a large investor like us,” said Mr. Schanke, the global head of stock trading for the fund, Norges Bank Investment Management. The fund invests some of the country’s oil wealth for future public programs.

Compared with five years ago, he said, “We don’t see any evidence that it is cheaper for us to trade.”

Mr. Schanke said the debate had gone off track largely because most of the research had examined narrow metrics to determine whether things were improving.

For the full column from the NY Times, please click here

Fragmentation Harming Market Quality, Warn Traders

Courtesy of MarketsMedia

With new trading venues catering to institutional investors ready to enter the fray, market participants say that more fragmentation is not necessarily the solution to cure market imbalances.

‘Fragmentation of the markets is not a good thing for long-term investors,” Manoj Narang, chief executive and founder of Tradeworx, a hedge fund and technology firm, told Markets Media. “Regulators need to look at ways to defragment the market. The more different venues there are, the more traders who are technologically sophisticated are at an advantage.”

Narang asserts that market fragmentation hurts, rather than helps, longer term investors because the technology utilized by institutions is not as sophisticated and advanced as those used by high-frequency trading firms. They are less able to effectively wade through the plethora of lit and dark venues in the markets.

“Having more trading venues just complicates matters,” Dennis Dick, a proprietary trader with Bright Trading, a prop trading firm, told Markets Media. “We keep adding more and more layers, adding exchanges and adding dark pools, to try to find a solution, but really the solution is to break it down and start simplifying it all.”

Noted John Houlahan, Chief Operating Officer of OMEX  Systems, a broker-neutral order routing and risk management platform that provides direct market access to major equities and options exchanges as well as so-called “dark pools” for broker dealers and buyside firms, “We seem to spend as much time adding routes to new exchanges and ECNs as we do building order and risk management applications. I’ve been in this business for 20 years, and I find myself scratching my head when discovering yet another new “liquidity center”, but with a different ‘spin’ compared to already-existing exchanges.

There are currently 13 equities exchanges in the U.S., along with nine options exchanges. Many of the exchanges are operated under the same corporate umbrella, with NYSE Euronext and Nasdaq OMX each operating three equities markets and two options markets apiece. This is an addition to the 40-50 dark pools operated by independent firms and broker-dealers.

“Do we really need 13 exchanges and 50 dark pools and 200 internalizing broker-dealers,” said Dick. “I know the Securities and Exchange Commission had good intentions with Reg NMS but now we’ve gone too far the other way. We need to start simplifying. The solution is not to add more dark pools.” Continue reading