Tag Archives: sec

payment-for-order-flow-rebates

Yale University Wonks Blast Exchanges’ Payment-For-Order-Flow Schemes

In a July 18 NYT op-ed piece “Wall Street Profits by Putting Investors in the Slow Lane” submitted by Jonathan Macey, a professor at Yale Law School and David Swensen, the chief investment officer of Yale University, the spirit debate topic of payment-for-order-flow schemes, aka rebates paid by the various stock exchanges to retail brokers that route orders to those platforms is once again brought to a public forum. MarketsMuse curators and editors have profiled this issue more than once during the past years, and each of those posts have earned us lots of visitor traffic from Washington DC outlets, academics and a multitude of sell-side firms that are loathe to let it be known they are getting paid a kickback for routing orders to exchanges, but not feeling obliged to share those rebates with their retail customers.

Mssrs. Macey and Swensen frame the issue in what is arguably a clear, crisp and straight forward manner:

Institutional brokers are legally obliged to execute trades on the exchange that offers the most favorable terms for their clients, including the best price and likelihood of executing the trade. The 12 exchanges, most of which are owned by New York Stock Exchange, Nasdaq and Better Alternative Trade System (BATS), along with the Chicago Stock Exchange and the Investors Exchange (IEX), are supposed to compete to offer the best opportunities.

But that’s not what is happening. Instead, brokers routinely take kickbacks, euphemistically referred to as “rebates,” for routing orders to a particular exchange. As a result, the brokers produce worse outcomes for their institutional investor clients — and therefore, for individual pension beneficiaries, mutual fund investors and insurance policy holders — and ill-gotten gains for the brokers.

Although the harm suffered on each trade is minuscule — fractions of a cent per share — the aggregate kickbacks amount to billions of dollars a year. The diffuse harm to individuals and the concentrated benefit to Wall Street create yet another way in which the system is rigged, justifiably eroding public confidence in the fairness of the financial system.

That said, MarketsMuse takes this view: The regulation of “market structure” falls on the SEC. Well before anyone even envisioned the notion nightmare of a Trump-led US Government administration, it has always been the SEC’s mandate to ensure PUBLIC investors are treated fairly and properly. Somewhere along the line, the moral compass got lost by the boy scouts and girl scouts at the SEC, or maybe they never had one considering the legacy of that failed agency. After all, it was  Joe Kennedy, Sr. who was appointed to be the first person appointed to run that agency when it was established in 1934. But, whether or not Kennedy Sr.’s  DNA was stuck to the walls of that venerable institution and has permeated ever since, the fact is that the securities industry and its lobbyists have served as the Oz Behind the Curtain for decades.

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As technology evolved and ‘innovation’ came to the stock markets, brokerage firms found themselves suffering from having to offer increasingly lower commission schemes in a ‘race to zero’. Whenever industries evolve to point where services provided become nothing more than a commodity, it should be no wonder to anyone that creative folks will step in and figure out how to remake those business models and monetize new models. Hence, the existing payment-for-order-flow market structure that permeates throughout the US equities markets (and now emulated by players in other product areas) should be of no surprise to anyone. After all, few who work within the financial services sector could not survive if they don’t embrace Gordon Gekko’s decree that Greed is Good. Don’t believe that? Well, this ‘blog post’ would extend for tens of thousands of words and hundreds of links to news articles profiling the travails of financial industry gurus that got ‘busted’ for playing hide the banana with their customers. Tens of Billions of Dollars in Fine Payments have been made by the Industry for misleading, duping, defrauding and cheating customers–many of whom were innocent, unsuspecting and not completely stupid; they were simply cheated by folks who are too slick for their socks. (Editor note: To Donald Trump, Jr.–this article didn’t envision referencing you, but that last comment seemed applicable, if only as a metaphor.)

It boggles the mind of this industry veteran when observing that the topic profiled by Yale’s Macey and Swensen has yet to be addressed by regulators. In fact, those regulators have consistently enabled the ever-more-sophisticated schemes that its industry constituents have devised. (Can you spell M-a-d-o-f-f?)

In an informal survey of 100 retail investors conducted by MarketsMuse, 70% of those individuals had ‘no clue’ that their brokers were receiving kickbacks from industry platforms that pay those brokers to receive the respective customers’ order flow. The remaining 30%  were “somewhat aware” and when the issue was framed for them, they were unanimously vexed by the fact the brokers charged them a commission and also earned a kickback from someone else.  When asked to review statements, those same folks took out a magnifying lens and located the small print, but all asked rhetorically, “Why don’t I get a piece of that kickback? After all, its MY order!”

OK, those same individuals did acknowledge that commission rates for executing stock orders have come down sharply during the past 10 years. “Hoorah to that ‘progress'” say those who love Schwab, Fidelity, eTrade and TD for offering “Only $5.99 to trade 1000 shares!”,  but when pendulums swing so far, something is awry. Then again, when the likes of FB, LinkedIn and the thousands of other platforms that offer something for seemingly nothing are chastised for ‘selling customer data to advertisers’, perhaps the guiding principle should be- If its too good to be true, it isn’t.

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sec-audit-system-catch-me-if-you-can-marketsmuse

SEC Proposes System to Catch Market Manipulators

In effort to thwart the “Catch Me If You Can” crowd, the SEC has proposed a new audit system that will purportedly allow regulators to track every bid and offer submitted to stock and options exchanges in effort to catch market manipulators.

(WSJ)–U.S. market regulators on Wednesday proposed a massive data repository that will eventually allow them to sift through billions of daily trading records to detect market manipulation and probe bouts of extreme market disruption.

The Securities and Exchange Commission’s consolidated audit trail will,enable regulators to track 58 billion daily transactions submitted to stock and options exchanges, as well as private-trading venues maintained by brokerage firms. Plans for the CAT, as it is called, were spurred by the May 6, 2010, flash crash, when more than 20,000 trades were executed at clearly erroneous prices and nearly $1 trillion in equity-market value was wiped out before prices rebounded.

The project has taken years to get off the ground, as industry groups have disagreed over its scope, costs and governance. Regulators believe the system will become a powerful means of quickly investigating excessive volatility and could be harnessed for other purposes, such as detecting insider trading and whether brokers are getting the best price for their clients.

sec-kara-stein
Kara Stein

“This will help us to fully understand the trading that is occurring in our markets within a matter of days, instead of months,” SEC Commissioner Kara Stein said at a meeting where the agency unanimously approved the plan. “The need for the CAT has unfortunately been proven over and over again.”

According to one market structure expert who spoke with MarketsMuse, “Another intriguing idea brought forth by a bureaucracy that has proven it has no fluency in technology and no real ability to implement policy that might infringe on the interests of Wall Street. They’ll be talking about this pipe dream for another four years, then spend 3x the amount budgeted and then discover the system is flawed.”

The proposal also sets several deadlines to ensure the system is fully operational within four years. The SEC must take final action to approve the CAT within six months. Exchanges would have to begin reporting trading data to the system by late 2017. Large brokers would have to comply by 2018, and small brokers would have until 2019 to report their activity.

Regulators still have to choose who will build the system, a decision that could come late this year or early in 2017. A selection committee has narrowed the choice to three bidders—the Financial Industry Regulatory Authority, Fidelity National Information Services Inc. unit SunGard and Thesys Technologies LLC.

The project’s supporters say it would have been useful last August, when huge price swings triggered more than 1,000 trading halts in stocks and exchange-traded products. It took the SEC nearly six months to issue a paper explaining the factors that influenced the barrage of trading halts on Aug. 24.

For the full story from the WSJ, click here

BrokerDealer Exchange Rebates: BuySide Not Happy

On the heels of the recent NYSE ‘outage’, which actually had little impact on overall equities trading volume, but did lead to volume spikes away from the NYSE and at competing exchanges across the fragmented marketplace, the volume also increased with regard to spirited discussions about market structure. And, whenever talking about market structure, the “rebate debate” insofar as “maker-taker” rebate and fee schemes remain a front burner topic. It is no surprise that many (but not all) sell-side brokerdealers are characteristically in favor of these complex Chinese menus offered by the assortment of major exchange venues and dark pool operators. After all, brokers are ever more dependent on these ‘rebates’ as the race to zero in terms of commission rates paid by institutional customers continues to eat into executing broker income. To counteract the business model impact on BDs, savvy executing brokers have [for a number of years] been making up for lower rates via capturing offsetting revenue from routing customer orders to those bounty-paying trade execution platforms.

On the other hand, nobody should be surprised that an increasing number of institutional investment managers from the buy-side are beginning to “get the joke”, but they aren’t laughing as many realize that brokers are effectively double-dipping by charging their customers a commission and also pocketing kickbacks from competing execution venues that pay those brokers to help light up their screens and provide so-called actionable liquidity execution.

A comprehensive database of global brokerdealers in more than 30 countries, including the US is available at www.brokerdealer.com

To wit, and in our continuing coverage of this topic, MarketsMuse curators spotlighted this week’s story from buy-side publication Pensions & Investment Magazine, which profiles the heightened concern on the part of buysiders and the growing number who are expressing their angst with the SEC, the agency that is ostensibly supposed to ensure fair market practices and protect the interests of public investors. Below are select take-aways from the P&I story.

The Buy-Side Says: “Along with conflict-of-interest issues with rebates, other concerns like increased transaction costs and lack of transparency have added to the complexity of today’s market structure,” says Ryan Larson, RBC Global Asset Management. Added Larson, “Whether it’s SEC mandated, or better yet, driven from market participants themselves, I think it’s time to finally address the elephant in the room and start thinking about possible alternatives to the maker-taker model. … It’s not just the buy side that has been calling for a pilot on maker-taker. It’s the sell side, some of the exchanges, Congress, even members of the (SEC) as well. When you see that diverse of a group calling for change, I think it suggests something very important — whether maker-taker is the right approach. This could be one of the most impactful tests ever taken up in market structure.”

The Not-So-Subjective Market Data Vendor Says: “The whole point of maker-taker is to incentivize display of liquidity in lit markets,” said Henry Yegerman, director of trading analytics and research at financial data provider Markit Group Ltd., New York. “Market participants who place trades that rest passively in a venue, and so add liquidity, get a rebate. Investors who aggressively cross the spread to access that liquidity pay a fee to do so.” Institutional investors that are looking to buy or sell large blocks of stocks “are frequently takers of liquidity,” he said.

The Altruistic Sell-Side Perspective: Joseph Saluzzi, partner, co-founder and co-head of equity trading of Themis Trading LLC, a Chatham Township, N.J.-based agency broker for institutional investors said the link between liquidity and maker-taker doesn’t exist. What maker-taker does increase, Mr. Saluzzi said, is volume. “Liquidity and volume are two different things,” Mr. Saluzzi said. “Maker-taker creates volume, and a lot of that is artificial.”

Mr. Saluzzi said liquidity access is not helped through maker-taker, but by changes in a fragmented market structure that would reduce the number of trading venues. “Liquidity is not helped by rebates, but by less fragmentation,” Mr. Saluzzi said. “Maker-taker is the linchpin of the problems with the market. It’s a relic of a system that was around 15 years ago.”

The Exchange Perspective: Not Everyone Agrees: IEX, the dark-pool operator whose ATS platform is now awaiting SEC approval to operate as a regulated exchange is perhaps the most outspoken critic of maker-taker fee/rebate schemes; customers are charged a flat rate commission irrespective of how an order interacts with prevailing bid-quotes. The New York Stock Exchange came out against maker-taker rebates in testimony by exchange executives in 2014, while Nasdaq Global Markets is running a pricing test program that lowers rebate pricing for select stocks to gauge the effects on liquidity. In two reports this year on the test, Nasdaq has said the lower rebates have had a negative effect on liquidity.

At the other end of the spectrum, executives at BATS Global Markets Inc., which is perhaps the second largest equities exchange as measured by volume, don’t support an outright maker-taker ban and think the rebate paid to liquidity providers matters, “particularly with less liquid securities,” said Eric Swanson, general counsel at BATS, Kansas City, Mo.

[MarketsMuse editor note: Mr. Swanson is a former SEC senior executive who served as Asst. Director of Compliance Inspections and Examinations during the same period of time that his wife Shana Madoff-Swanson, the niece of convicted felon Bernie Madoff, received millions of dollars in compensation while she served as head of compliance for Bernard L. Madoff Investment Securities. According to Wikipedia, Swanson first met Shana Madoff when he was conducting an SEC examination of whether Bernie Madoff was running a Ponzi scheme. Ms. Madoff-Swanson’s father Peter is the brother of Bernie Madoff and is currently serving an extended sentence in a federal jail while Uncle Bernie is serving a 150-year sentence.]

The full story from P&I can be accessed by clicking this link.

 

Securities-and-Exchange-Commission

SEC Has Eye On ETFs

MarketsMuse ETF update profiles the inevitable: The U.S. Securities & Exchange Commission (SEC) now has their cross-hairs on the exchange-traded fund industry.

 As reported by Traders Magazine (among others), the Securities and Exchange Commission announced that it is seeking public comment to help inform its review of the listing and trading of new, novel, or complex exchange-traded products (ETPs).

 “Exchange-traded products have become an increasingly important investment vehicle to market participants ranging from individuals to large institutional investors,” said SEC Chair Mary Jo White. “As new products are developed and their complexity grows, it is critical that we have broad public input to inform our evaluation of how they should be listed, traded, and marketed to investors, especially retail investors.”

 The request, made via its website, looks to address key issues that arise when exemptions are sought by a market participant to trade a new ETP or when a securities exchange seeks to establish standards for listing new ETPs. Due to the expansion of ETP investment strategies in recent years that has led to a significant increase in the number and complexity of these requests, the Commission determined it would be beneficial to receive public input on these issues.

To read more, click here. 

ETF

NYSE Proposal Would Lower ETF Listing Standards, Save You Months

MarketsMuse ETF update profiles an amended proposal by NYSE Arca to adopt generic listing standards for actively managed ETFs.

NYSE Arca asked the Securities and Exchange Commission to amend existing rules and cut out a key, time-intensive step fund companies must undertake to launch active ETFs. Such generic listings standards, which generally don’t apply to index-tracking ETFs, could reduce the time it takes to launch an active ETFs to mere months, from one year or longer.

The Proposed Rule would require an actively managed ETF that relies on the generic listing standards to disclose on its website certain information relating to the ETF’s holdings that form the basis for determining the ETF’s net asset value at the end of the business day.

ETF would have to disclose identifying and other information, specifically

  • The ticker symbol;
  • CUSIP or other identifier;
  • A description of the holding;
  • For derivatives, the identity of the security, commodity, index, or other asset on which the derivative is based;
  • For options, the strike price;
  • The quantity of each security or other asset held as measured by (i) par value, (ii) notional value, (iii) number of shares, (iv) number of contracts, and (v) number of units;
  • The maturity date;
  • The coupon rate;
  • The effective date;
  • The market value; and
  • The percentage weighting of the holding in the ETF’s portfolio

To read the full article, click here. 

spoofing (2)

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

mutual funds

Mutual Funds Issuer Hoping to Enter the ETF Ring

MarketMuse update courtesy of ETF Trends’ Tom Lydon

American Funds, one of the largest mutual funds issuer, are waiting for the SEC to approve an application for the issuer to enter the ETF industry. 

Capital Group Cos., the parent company of American Funds, submitted an application for ETFs to the SEC a year ago. A notice from the SEC indicates approval of American Funds’ ETF foray appears likely though there is still time for opponents to request an SEC hearing, though such a hearing is unlikely, reports Trevor Hunnicutt for InvestmentNews.

California-based American Funds has $1.2 trillion in assets under management, or more than half the current AUM tally for the U.S. ETF industry. However, ETFs are the fastest-growing corner of the asset management industry, underscoring the desire of mutual fund companies to become involved with products that institutional investors and advisors are increasingly adopting.

While it took nearly two decades for the ETF industry to reach $2 trillion in assets, it will not need nearly as long to get to $5 trillion, according to a new report by PwC. The PwC repots says the global ETF industry will reach $5 trillion in combined AUM by 2020.

News of American Funds potentially entering the ETF business represents a reversal from the company’s previous stance on ETFs. The company has been a strident supporter of active management at a time when data indicate many active managers consistently fail to beat their benchmarks.

In September 2013, Capital Group published a study that “argued that its stock-picking mutual funds outperformed their benchmark indexes in the majority of almost 30,000 periods examined over the past 80 years. That included 57 percent of one-year stretches, 67 percent of 5-year periods and 83 percent of 20-year ranges. The Capital Group study examined 17 of the company’s mutual funds that invest in equities or both equities and bonds. It measured their performance over every one-, three-, five-, 10-, 20- and 30-year period, on a rolling monthly basis, from Dec. 31, 1933, through Dec. 31, 2012.”

Still, “only about 13% of actively managed, large-company stock funds posted returns above that of the S&P 500 for 2014,” the Wall Street Journal reports.

Although the SEC notice did not specify whether American Funds will issue active or passive ETFs, the firm’s reputation for active management implies the company would favor actively managed ETFs, a still small, but fast-growing segment of the ETF business. Some industry observers also see actively managed ETFs being a key driver of ETF industry growth in the coming years. For the week ending Jan. 16, U.S.-listed actively managed ETFs had a combined $17.24 billion in AUM with nearly half that total allocated to PIMCO and First Trust ETFs, according to AdvisorShares data.

While that is just a fraction of the overall U.S. ETF industry, increased demand for active ETFs and the potential for a more favorable regulatory environment could make actively managed ETFs a $500 billion asset class by 2020, according to a report by publishedSEI Investments last year.

 

F-Squared Investments Inc. CEO Howard Present

ETF Issuer Spanked by SEC; CEO Present No Longer Present

MarketsMuse update courtesy of extract from 22 December edition of  Bloomberg, with reporting by Dave Michaels. 

F-Squared Investments Inc. agreed to pay $35 million over U.S. regulatory claims that it misled investors about the performance of a trading strategy used by exchange-traded funds.

The firm admitted that performance data used to market the strategy to mutual funds and other clients was based on historical models for a seven-year period before the product existed, the Securities and Exchange Commission said in a statement today. Investors were told that the performance represented actual results from 2001 through 2008, the SEC said.

Investigators also found that the hypothetical data contained an error that further inflated the performance results by about 350 percent, the SEC said. F-Squared is the largest active-ETF strategist with about $28.5 billion invested under its index strategies, according to the agency.

“Investors must be able to trust that performance advertisements are accurate,” said Andrew Ceresney, director of the SEC’s enforcement division. “F-Squared has admitted that it misled its clients over a number of years about the existence and success of its core strategy.”

In a statement, F-Squared said the strategy, known as AlphaSector, has performed as expected since it was launched in 2008 and “clients have seen the results” in their returns. Following the strategy told investors when to buy or sell nine ETFs, the SEC said.

‘Downside Protection’

“We greatly appreciate the continued support of our clients who have maintained confidence in F-Squared’s ability to deliver downside protection in down markets and upside participation in rising markets,” Chief Executive Officer Laura Dagan said in the statement.

F-Squared explicitly advertised AlphaSector’s performance as “not back-tested,” the SEC said. An F-Squared analyst tried to inform former CEO Howard Present about a mistake in the performance model in 2008. The formula continued to be used for the next five years, according to the agency.

The SEC also sued Present, alleging that he made false statements when he claimed AlphaSector was based on a strategy that had been used to invest client assets since 2001. In a statement, Present’s attorneys said they would challenge the allegations, which they called “misdirected and meritless.”

For the entire article by Michaels from Bloomberg, click here

Copper ETF Approved Over Hedge Fund’s Objections | FINalternatives

Commodities hedge fund RK Capital Management has lost its bid to stop a copper exchange-traded fund that it warned could “wreak havoc on the U.S. and global economy.”

The Securities and Exchange Commission last week approved a rule change at NYSE Arca that will allow the launch of a physical copper ETF. That fund will be launched by JPMorgan Chase, but is expected to be followed by two others, from BlackRock and ETF Securities.

Read the full story at FinAlternatives

Copper ETF Approved Over Hedge Fund’s Objections | FINalternatives.

Industry Sounds Off On Paying ETF Market Makers

Courtesy of James Armstrong

If issuers of exchange-traded funds could pay to attract market makers to their products, would there be more liquidity in ETFs? Or would paying market-makers create a dangerous precedent and harm long-term investors? Or, is Tim Quast, MD of trading analytics firm “Modern Networks IR” correct when suggesting to the SEC in his comment letter “..paying market makers could constitute a racketeering felony and would increase speculative, short-term trading rather than focusing the markets on capital formation..”?

Both Nasdaq and NYSE Arca have proposed programs allowing ETF issuers to pay fees to the exchanges for market-maker support. The proposals are similar to a program already implemented on the BATS exchange, which has a handful of ETF listings. These proposals, according to comment letters to the Securities and Exchange Commission, are drawing strong reactions from key industry figures.

The Investment Company Institute has come out in favor of the measures, arguing they could result in narrower spreads and more liquid markets. In a letter to the SEC, ICI’s general counsel, Ari Burstein, said the organization has long advocated changes to increase the efficiency of markets. “As ETF sponsors, ICI members have a strong interest in ensuring that the securities markets are highly competitive, transparent and efficient,” Burstein said. “Liquid markets are critical for ETFs, particularly smaller and less frequently traded ETFs.”

Vanguard, the mutual fund giant which also offers a number of ETFs, said it neither supports nor opposes the Nasdaq proposal and certainly does not support the NYSE Arca proposal, at least as it is currently structured.

In a letter concerning Nasdaq’s ETF initiative, Vanguard’s chief investment officer, Gus Sauter, said payments to market makers have the potential to distort the markets and create conflicts of interest. Though Nasdaq proposed several safeguards to prevent that from happening, Sauter suggested a longer review and comment period would be a good idea.

BlackRock, the nation’s largest ETF issuer is opposed to the idea of paying market-makers.

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SEC Punts on Payments to ETF Market Makers

Courtesy of Rosalyn Retkwa

 

The Securities and Exchange Commission has decided not to decide yet whether to approve proposals by Nasdaq and the New York Stock Exchange to pay market makers to make better markets in thinly traded ETFs. The proposals would require an exemption from a current prohibition against such payments.

Rather than approving or rejecting the idea, the SEC decided last Wednesday, July 11, to seek another round of comments on pilot projects put forth by Nasdaq and NYSE Arca (the electronic exhange formerly known as Archipelago). In its 83-page order instituting proceedings to determine whether to approve or disapprove the proposed pilots — posted on the SEC’s web site last Thursday — the SEC listed 27 questions asking for more input on specific points. “They’re keying up the issues,” said a source who asked not to be named.

Under the law, the SEC has 45 days to respond to these kinds of regulatory filings by the exchanges, with an automatic right to extend the initial deadline by another 45 days.

July 11 was the 90-day mark for the Nasdaq’s proposal, and while the SEC had until August 14 to respond to NYSE Arca, it decided to consider both proposals with a joint order — a suggestion made by Vanguard, the mutual fund and ETF sponsor headquartered in Valley Forge, Pennsylvania, which filed separate comment letters on both proposals. Continue reading

2 More Studies Say: ETFs NOT to Blame for Market Volatility

Here’s a wake-up call to critics of the ETF world: two more unrelated and just-published research studies have acquitted the ETF industry of charges leveled by critics who have claimed ETFs are at the root of heightened market volatility.

In a newly-released report from the Investment Company Institute, which interrogated market volatility over the past 25 years, ICI’s experts (let’s presume their unbiased, OK?) concluded that ETFs have unfairly been cast as the dog wagging the tail, and accusations that “ETFs were the ‘match that ignited the Flash [Crash]’, or have in any other way been responsible for any unusual market volatility, are simply inaccurate and unjustified.

According to the report, “Heightened periods of volatility existed before ETFs (the most volatile during Black Monday ’87)”…more importantly,  “The market volatility that started before the financial crisis in mid-2007 and has continued through today has [simply] coincided with the rapid growth of the ETF market, as assets have grown from about $600 billion to more than $1 trillion.”  The report points out that “over the same time period, there was a prolonged global financial crisis that threatened to take down the international banking system and threw financial markets worldwide into turmoil.”

This report comes on the heels of a joint report issued by the SEC and the CFTC which determined that ETFs were not the cause of the May 2010 “Flash Crash”.  (Even if Editors here reserve comment on any potential conflicts these agencies might have), ICI’s report coincides with an earlier report study from Morningstar Inc., which investigated  and dismissed the notion that leveraged ETFs were causing increased turbulence late last year. The Morningstar report also pointed out that if leveraged ETFs were the cause of market volatility, the assets in the funds would rise and fall with volatility, but assets remained mostly steady from March 2009 to November 2011.

READ THE FULL STORY COURTESY OF INVESTMENT NEWS:

HFTs Hampering Trade in ETFs? SEC Wants to Know.

As reported by Reuters, U.S. securities regulators have widened their inquiry into the trillion-dollar market for exchange-traded funds, according to a person familiar with the matter.

Prompted by a delay in a big trade at a popular ETF, the U.S. Securities and Exchange Commission is taking a closer look at a possible connection between high-frequency traders and hedge funds jumping in and out of ETFs, and instances where ETF trades fail to settle on time, this person said.

The SEC’s inquiry is part of a wider probe that began last year and focused on complex ETFs that allow investors to magnify returns or bet against stock indexes.

U.S. and UK regulators are concerned that so-called settlement fails – when trades are not completed on time – could contribute to volatility and systemic risk in financial markets.

The probe’s main focus is on illiquid ETFs, but regulators are now also examining popular ETFs and failed trades, according to the person.

An SEC spokesman confirmed that the agency is looking into failed trades and ETFs, but declined to elaborate.

That said, the SEC might be barking up on the wrong tree, as many ETF experts discount criticism of the impact ETFs might have on trade settlement processes. In a recent report, State Street Corp, a Boston asset manager that created the first ETF in 1993, said that “short interest theoretically should have no impact on an ETF’s performance.”

ETF industry leaders say the data on ETF trade failures does not account for the fact that market-makers, the firms that do the bulk of ETF trading, have seven days to clear trades. The data assumes that all market participants must clear in four days, and any trade that settles later is counted as a failed trade by the National Securities Clearing Corp, a trade processing subsidiary of the Depository Trust & Clearing Corp.

READ THE ENTIRE STORY HERE