Tag Archives: market structure

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Stock Price Implosion Puts HFT Firms Under Attack, Again

Stock Price Implosion Leads Some to Challenge Current Market Structure; HFT Firms Are Under Attack, Again…

Heads Up to High-Frequency Firms: Time to Hire a PR Crisis Manager Again, Call Your Lobbyists, Book Your Plane Tickets to Washington DC.

Before “bidding on” to the anti-HFT and anti-ETF remarks circulated by the assortment of market pundits appearing on Bloomberg, Reuters or the financial media megaphone channel, CNBC, you should know that SecTres Mnunchin has already weighed in. So has the SEC’s favorite tech entrepreneur, Mark Cuban. So has icon stock investor Leon Cooperman, who has the ear of Mnuchin and others. There’s a whole ‘hang-em-high’ crowd assembling to lay blame on high-frequency trading for the latest market routs. According to CNBC, Trump favorite Mike Flynn was overheard shouting to Mnuchin and Trump: “Lock them up!”

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NYSE DMM Citadel Securities started as a HFT prop trading firm

But, unless you’ve been investing in or trading in the equities markets for at least 20 years, you probably have no conception of a simple premise: markets go up and markets go down. Blame games are easy to play, equities investing is not always easy.

Traditional drivers to stock price movements include simple, time-tested fundamentals: the interest rate environment, the economic cycle, the value of the US dollar vs. other currencies, corporate revenue and profit, corporate debt levels, consumer debt levels, trends in residential real estate prices and other consumer optimism metrics. Yes, you can throw in the degree of confidence in the current government administration and a bunch of other geopolitical stuff (including tariff wars, Brexit event, and total uncertainty in many countries’ leadership–including the US) into the mix. We’ve all grown accustomed to the minute-to-minute chaos caused by the current president. His impact on stock prices is powered by his Twitter comments about China, the Federal Reserve Chairman, and blaming the latest government shutdown on democrats. Beyond that, institutional investors can only make investment decisions based on reality within context of  company earnings reports and not easily-fudged economic data. Investors should NOT make decisions based on a reality TV show produced in Foggy Bottom.

But, we should agree on one thing: the combination of complacent investing, a belief that prices of company shares will go up year after year is a fool’s view. The topic of debate in this post is whether the evolution of high-frequency trading (aka HFT) weaponry has contributed (yet again) to the large (downward) percentage moves in stock prices during the recent weeks. The sell-off, which arguably began during the first week of October, has led to an approximate 20% decline in the leading stock indices from the record highs. Many individual share prices have suffered bigger mark-downs, most notably tech sector stocks. Before asserting that high-frequency trading algorithms are the culprit, one need to ponder whether those same HFT tools also contributed to the nearly 50% gains the stock market has enjoyed since the 2016 US presidential election (two years ago)?

Whatever black swans have been flying over head for the past 6 months, now that equity prices have suffered multiple-day declines of 1%-3% (and the interim 1%-2% “dead cat bounce”) we need to blame someone!! After all, our very own president has been unwavering in his leadership mantra: “When the shit hits the fan, blame someone else for the problem!”

Let’s say you want to blame HFT firms for the slide. Considering the fact that today, the 3 largest NYSE market-makers are better known

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Specialist traders work at a Virtu Financial booth on the floor of the New York Stock Exchange April 16, 2015. Shares of electronic trading firm Virtu Financial Inc rose as much as 24.6 percent during their IPO, valuing the company at about $3.23 billion. REUTERS/Brendan McDermid – RTR4XMJS

for their legacy as high-frequency trading outfits, its easy to be cynical. These are ‘not your father’s NYSE specialist firm’, these are young quant jocks who made a ton of money as HFT prop trading shops starting back in the early 2000’s, and more recently, used some of that cash to purchase the legacy NYSE market-maker firms; the firms responsible for maintaining fair and orderly markets in NYSE listed companies. Now known as NYSE “DMMs”, they (actually their computers) also have the “first look” at orders to trade shares in which they are now the designated market-maker for. Instead of old-fashioned auction markets, these folks utilize algorithmic trading tools to match buyers and sellers and also trade for themselves. As a consequence, there is circumstantial evidence these firms are, to some extent, culpable for the rapid reflex moves in share prices.

Keep in mind, the flip-side is that these ‘HFT black boxes’ are also providing instantaneous liquidity, price transparency, and facilitate exiting or entering a investment position in less time than it takes to hit a ‘send’ button (until someone unplugs the machine after realizing they’ve risked the entire firm’s capital). Further, because everything happens in nano-seconds, one can argue that bear market cycles –periods that typically reflect recessionary pressures and in turn, signals that lead to a negative impact on the value of a company’s equity shares—are now much shorter in duration when compared to cycles going back 60-70 years.

To the first question, who can forget the May 2010 ‘Flash Crash’—an event that was certainly connected to HFT computers plugged into the walls surrounding the NYSE and NASDAQ computer server farms–and then became unplugged by humans when markets cratered due to a “fat finger” episode. We’ll tell you who cannot remember that event (other than having read about it years later): upwards of 1/3 of current ‘senior’ Wall Street quant jock HFT programmers who code the HFT machinery. Many of them were mining bitcoins in their MIT dorm rooms back in 2010. How many of the current generation of ‘systematic traders’ who now oversee billions of dollars were beyond high school in 2004? How many current trading desk wonks were around during the dot com bubble? How many folks who worked on trading desks in 1987 are even still alive, no less working in the business? Have you gotten the point, yet?

Because our pundits have accurately predicted this latest market down draft, allow us to further predict that we want to be “long on” private jet services to Washington (NYSE: BRK.A) and we’d love to invest in engagement contracts issued by PR Crisis Management gurus who represent these folks; they are presumably getting calls already by the best-known HFT honchos, starting yesterday.

Let’s be clear, the fundamental economic underpinnings that power equity prices have been sending mixed (warning) signals for months. OK, employment figures have been good, but Trump told us while campaigning for president that “US Employment figures are fake and fraudulent.” Yes, corporate earnings have met expectations, but nobody has delivered out-sized reports, and many companies have been sweating to provide realistic expectations, not wild-ass projections. According to recent polls, nearly 50% of Fortune CFOs are anticipating a recession will hit the US economy in 2019. 80% of CFOs believe a recession will be upon us before the end of 2020. Many multi-nationals based in the US are lamenting “Tariff Man” tweets. He says ‘US companies with US employees that make/sell products to US consumers will benefit, and the big companies have plenty of money to cushion the blows..” Really?!

So, fundamentals have been weakening during the past 2 quarters (unemployment figures aside). Even for those who subscribe to technical analysis and historic charts, the writing has been on the wall for months: “Caution Mr. Robinson, Caution!”

High-flying tech company shares started cracking in the 2nd quarter of 2018. They’ve been under an assortment of pressures that range from severe government and shareholder scrutiny to simple supply/demand obstacles impacting their business models (e.g. FB down nearly 40%, GOOG down 30% from its high, AAPL down 40%, AMZN down etc etc.) Bank stocks have been pummeled for the most part, even if GS’s latest beating is connected to yet another multi-billion dollar scandal. Big ticket corporate acquisitions made in the past 2 years have resulted in transition management problems. Corporate balance sheets have become increasingly overly-bloated with debt, thanks to folks on Wall Street who came up with a new pitch to corporate treasurers starting back in 2011: “We’ll float your bond offering (and get a big fee), you use the proceeds to repurchase outstanding shares, and you’ll make your EPS numbers look fantastic; everyone wins!!” Until the music stops, of course.  Corporate share repurchases have been credited with keeping equity prices stable and moving higher for upwards of seven years; the brokers are making nice commission on executing those buybacks and all is good with the world, until its not.

Stock market chartists started raising red flags in October. Corporate debt issuance came to a crashing stop in the last 6-8 weeks. That was a big signal. Less than two dozen Fortune companies have actually been buying back debt in the past quarter in preparation for the next shoe to drop; the one with the word ‘recession’ stamped on the bottom of each shoe. The notion that corporations should unwind the ‘sell debt, buy shares’ trade –by issuing new shares and using the proceeds to balance the balance sheet and repurchase outstanding debt is an idea that no investment bank would even suggest in his sleep, no less in an office. It would be professional suicide for a corporate CFO to even suggest that idea makes sense. Geopolitical impact re Trump’s tariff war is hitting US companies and US workers, even if not the Trump Hotel enterprise. The corporate tax cut was a short shot of heroin that stimulated the stock market, but increased the Federal deficit by nearly $1trillion. (Let’s not forget that Trump campaigned on reducing debt, not increasing it–but so does every other candidate). Now people are coming off the sugar high and that’s how/why stock prices revert to the mean.

Tariff Wars, Brexit and the assortment of geopolitical catastrophes have all been thrown into the mixing bowl. Crude oil prices have been crushed–along with the share prices of companies that drill, process and sell oil-based products. Yes, we’ll repeat: employment figures have been great, but as Donald Trump said throughout his presidential campaign, “Nobody can believe government employment figures, they’re all fake news!”

When weighing the assortment of fundamental signals that have been brightly broadcast throughout the past 9-12 months—and certainly since October of this year, anyone who had not re-balanced or pared down exposure to equities has no business investing in stocks. Its easy to say “Ok, 20-20 hindsight is great..blah blah blah..” For those following @marketsmuse, there’s no 20-20 hindsight; our resident pundits (with trading market pedigrees that go back to the 1980’s) have been shouting “Caution Ahead!!” for at least 4 months. (see the pinned tweet).  But, who wants to listen to experienced (if not cynical) professionals who have lived through multiple market cycles, especially when prices keep going up? Who wants to risk taking a profit and paying taxes on those gains when the asset value keeps going up, with or without fundamental justification? The answer: people who are (i) naïve (ii) overly-optimistic (iii) financially irresponsible (iv) not old enough to appreciate that what goes up, must go down.

Whatever black swans have been flying over head for the past 6 months, now that equity prices have suffered multiple-day declines of 1%-3% (and the interim 1%-2% “dead cat bounce”) we need to blame someone!! After all, our very own president has been unwavering in his leadership mantra: “When the shit hits the fan, blame someone else for the problem!”

Before the ink was dry on the famous Michael Lewis book “Flash Boys,” which profiled the May 2010 stock market crash, everyone knew who to blame. Before the first 1000 copies of that book left Barnes & Noble, government officials and regulators were busy sending out outlook meeting invites to the primary suspects-the heads of HFT proprietary trading firms that had come to dominate the trading of shares in US companies listed on public exchanges (and ‘dark venues), as well as stock index futures traded on electronic venues in Chicago.

Rules were introduced. Market structure lobbying groups were formed. Exchange executives pilot tested uptick rule changes. Fintech firms that provided ‘better solutions’ now represent more than just a cottage industry as evidenced by the fact, three of the leading HFT firms have through acquisition, become the three largest NYSE DMMs. For old folks, DMM is the contemporary phrase for ‘floor specialist’-the folks who are responsible for maintaining fair and orderly markets in the companies the NYSE assigns to market-makers on the floor of the NYSE. Pay-to-play and maker-taker rebate schemes advanced by brokers and exchange venues have flourished. Blah Blah Blah. Along the way, the US equities market, spurred by improving economic circumstances, and the last 10 years have been pretty much one long wet dream for traders and stock investors. The evolution of high-frequency trading morphed even more.

Irrespective of bull vs. bear views on individual stocks and stock indices and the 1500+ Exchange-Traded Funds that provide thematic investing styles, more than a carload of institutional investment managers still agree on one simple fact:  share price movements in individual companies and ETFs are exacerbated by high-powered black boxes that spit out millions of orders per minute. Those orders are often based on what has transpired in the markets during the past few seconds. This algorithmic approach to trading causes educated investors to scratch their heads when observing the value of shares in public companies can gyrate so violently in the course of an hour or a day, despite the fact those companies haven’t made any earnings report nor announced any positive or negative news as to the health of their business or the industry they sit in.

How does a company’s enterprise value move 10% down one day, then 5% up the next? Are there so many investors with differing views who are expressing these views constantly via buying and selling millions of shares? No. Honest electronic trading industry experts will estimate that at least 80% of the time, transactions taking place at the NYSE or NASDAQ are between two ‘transformers’; computer bots that are set on auto-trade. These black box powered bots do not represent investors, they don’t smoke (unless the computer is overheated and not residing in a freezer), they don’t curse and they don’t sweat—they simply spit out–orders based on algorithms.

Put more simply, actual investors are not involved in upwards of 90% of the trades taking place. Bottom line: the exaggerated changes in publicly traded corporate enterprise values that take place from second to second are even more pronounced as prices move lower. That’s a real fact, not a Kelly Ann Conway or Sarah Huckabee-style “alternative fact.” More than a handful of objective market observers and participants have long argued that Wall Street has evolved into a Battle of the Transformers”; price moves and volatility are powered by computers, not by momentary sentiment changes on the part of real investors.

But, we live in a blame game world, as best evidenced by our so-called leaders (yes, we’re referring to the current occupant of the White House) who, when faced with obstacles or after making stupid decisions, automatically blame others for the disaster that occurred recently.  And those blames are applauded by the blind mice and sheep who go along with the stupid decisions made for them.

Because our pundits have accurately predicted this latest market down draft, allow us to further predict that we want to be “long on” private jet services to Washington (NYSE: BRK.A) and we’d love to invest in engagement contracts issued by Wall Street-friendly PR Crisis Management guru. Those folks will be on speed dial for the best-known HFT honchos, starting yesterday.  Caveat Emptor: PR crisis management should be advanced by smart folks, not those trained in the art of jibber jabber and deflection. If there is a fundamental flaw, acknowledge it and implement transparent steps that will appease the plaintiffs and provide real solutions to the ‘problem’ .

If you’ve got a hot insider tip, a bright idea, or if you’d like to get visibility for your brand through MarketsMuse via subliminal content marketing, advertorial, blatant shout-out, spotlight article, news release etc., please reach out to our Senior Editor via cmo@marketsmuse.com

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Buy-Side Says: Don’t Just Set It and Forget It

Cheryl Cargie, head trader at buy-side fund manager Ariel Investments in Chicago, said that while the buy side is looking for more from its sales trader coverage, it depends on whether a buy side trader is representing a passive or active strategy. For a veteran with over 20 years in trading and representing all of Ariel’s trading strategies, Cargie wants a sales trader who will partner with her and be proactive.

“For a traditional trader like me, I want my sales traders to pay attention to my order and not just ‘set it and forget it’,” Cargie said. “I need them to be an extension of me.”

Cheryl Cargie
Cheryl Cargie

High-Touch Sales Traders Go Electronic

(MarketsMedia) By , Senior Editor ·

Today’s high-touch or cash sales traders are looking to electronic trading tools and skill sets to stay relevant in today’s equity market structure.

Born out of a “if you can’t beat them, join them” mentality, sales traders are increasingly learning about electronic trading tools to cater to the buy side’s increasing appetite for technology along with human interaction. If not, more traders could find themselves out of work in a persistently difficult job market.

According to a recent report from Greenwich Associates, the human touch in trading is still as important as ever, even in a largely electronic marketplace. As the buy side looks to their brokers for an increasing array of services, simply acting as an order taker is no longer enough to ensure return business. The sell-side sales desk must provide proactive suggestions, understand market structure and offer clients advice on how to best leverage trading technology. And that is something an algorithm or smart order router simply cannot do.

Re-enter the human sales trader.

Kevin McPartland, head of market structure and technology research at Greenwich Associates, told Markets Media that new buy-side demands are being handled by a smaller sales force than 10 years ago. So in order to provide a high level of service to the buy side and keep its business, the remaining top-notch sales desks are leveraging technology “not only to help clients trade, but to better understand their customers’ portfolios, trading habits and profitability.” He added that technology does not replace human intuition in this case, but instead enhances the abilities already present on the desk.

To continue reading John D’Antona’s column at MarketsMedia, please click here

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Pay-to-Play Rebate Schemes Confuse Smartest Traders

Within the context of market structure, the ever-evolving rules of the road for those attempting to navigate how and where to secure best pricing when executing equities orders has become so convoluted thanks to pay-to-play rebate schemes, its not only the curators at MarketsMuse who are scratching their heads, even the most sophisticated traders from both the buy-side and sell-side are confused.

As noted in today’s NYT article “Stock Exchange Prices Grow So Convoluted Even Traders Are Confused” by  reporter Nathaniel Popper, one of the sharpest knives in the drawer when it comes to distilling both technology and regulatory policy issues that impact financial markets, “computer-driven American stock markets have become so complex that any moment in time more than 800 different pricing possibilities are being offered to trading firms across 12 official exchanges, according to a report prepared by Royal Bank of Canada (RBC).”

Here are some of the noteworthy extracts from Popper’s piece:

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Mehmet Kinak, T.Rowe

“The level of complexity has grown to such an extent that it is unknown to most market participants,” said Mehmet Kinak, the head of electronic trading at T. Rowe Price Group, and a client of RBC with which the research has already been shared. “Instead of finding natural buyers and sellers, we’re finding intermediaries who come in and are benefiting from the complexity.”

“When we trade we don’t even know what it will cost us,” said Rich Steiner, the head of electronic trading strategy at RBC.

The prices are far from the only factor introducing complexity into the markets. Twelve public exchanges are now in operation, compared to a time when the markets were largely ruled by one: the New York Stock Exchange.Then there are the dozens of so-called dark pools, where stocks can be traded privately away from the public exchanges.

All of these trading venues offer many different types of orders that determine how and when a stock can be traded. A 2014 research report identified 133 unique order types, including some for particular times of the day and others for trades of a particular size.

RBC and other critics of the stock market structure argue that the rebates given out by exchanges can skew the incentives of brokers and banks, encouraging them to trade where they can get the largest rebate, rather than where they can get the best price for their client.

The pricing structures that RBC details in its new report are a result of the efforts by exchanges to calibrate the rebates they offer to some customers and the fees they charge to others.

In one example given in the report, the BATS-Y stock exchange — one of four stock exchanges run by BATS Global Markets — sent out a fee notice at the end of March 2014 announcing that it would offer 15-thousandths of a cent to traders buying certain stocks, thus bettering the 14-thousandths of a cent that Nasdaq BX had been offering. Fifteen minutes after the BATS-Y filing, Nasdaq made its own filing matching the new BATS-Y price. The next morning, BATS-Y filed again, increasing its offer to 16-thousandths of a cent.

Between 2012 and 2015, RBC found 362 filings with regulators announcing changes to trading fees, with some of the filings including multiple fee changes. The number of pricing tiers proliferates quickly because each tier can apply to similar trades in different ways depending on how frequently a trader uses a particular exchange.

Vimal Patel, who oversaw the research at RBC, said that he had no idea how tangled it had become until he began trying to sketch it out last summer. “It snuck up on people that the world is this complicated,” he said.

According to Popper, the new research from RBC is likely to strengthen the hand of an upstart company, IEX, that is currently asking regulators for approval to become an official stock exchange. Although IEX Founder/CEO Brad Katsuyama is a alumni of RBC, the report issued by the bank and scheduled to be submitted this week to a Senate Committee investigating market structure issues makes no reference to IEX.

For Popper’s story published by the NY Times, 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.

 

The Man Who Is Transforming Equities Market Structure: Dark Pool Killer Targets Maker-Taker

For those who might have missed it, Jeffrey Sprecher (pictured above), the CEO of Intercontinental Exchange, which owns the NYSE, is determined to put the genie back in the bottle by turning back the market structure changes that have taken place over the past 10 years, including the surge of “dark pools” hosted by leading investment banks which internalized all institutional order flow and the dominant use of complex “maker-taker” fee models that exchanges have provided as a means of capturing order flow to their venues.

genie-bottle-blue-smokeAs reported by the WSJ  2 days ago, Sprecher has been negotiating with all of the major banks that operate dark pools and offering a %90 reduction on NYSE exchange fees if those banks will send the order flow back to the NYSE. According to the latest news, those banks are apparently on-board with the notion proposed by Sprecher, yet KCG, the group formed by Getco and the former Knight Capital, a major “market-maker” is opposed.

Here’s an excerpt from the story by WSJ’s Bradley Hope and Scott Patterson:

“..Under the proposal, the NYSE would drop the fee for trading stocks at its exchanges to five cents per 100 shares from 30 cents per 100 shares, the people say. Banks, in turn, would accept a rule known as “trade at” that would give more precedence to the stock exchanges for most orders. A trade-at rule would mandate that stock trades take place on exchanges unless private venues offered a better price. Advocates of the rule say it would force a significant chunk of the stock trades that occur away from exchanges back onto them.

Credit Suisse AG, which operates the largest dark pool in the world, has endorsed the proposal, according to a person familiar with the matter.

Goldman Sachs Group Inc., Morgan Stanley, Deutsche Bank AG, J.P. Morgan Chase & Co., and UBS AG—which are among firms expected to be affected by the proposal—declined to comment.

“We’re actively involved in discussions with ICE and we are optimistic about the proposal yielding positive results,” said Jamie Selway, a managing director at Investment Technology Group Inc., a brokerage that operates a dark pool.

Last month, Nasdaq announced it was drafting a pilot program that would test the effect of lowering trading fees on a group of stocks. The pilot is scheduled to begin in February.

The NYSE proposal would require approval by the Securities and Exchange Commission and is likely to face opposition. Among the critics is KCG Holdings Inc., a brokerage firm that operates dark pools and a business that matches up retail stock trades.

“Mandating trading on exchanges is an elephant-gun approach motivated by commercial interests of a handful of market participants,” KCG said in a statement Wednesday.

The ICE proposal has been in the works for more than a year, according to people familiar with the situation.

Mr. Sprecher and Thomas Farley , the ICE executive appointed as president of NYSE Group, began discussing a variety of changes to their markets, including a reduction in fees, with Wall Street firms about nine months ago, according to a person close to the discussions. The goal was to try to get long-term investors such as mutual funds, as well as banks and high-frequency traders, to unite behind a broad restructuring of the market that included lower fees, the person said. Credit Suisse became more deeply involved in the discussions several months ago, the person said.”

 

The full WSJ story is here

 

Finra Steps Up Investigation Of Broker-Dealer Order Routing Rebate Schemes; Conflict of Interest Endemic to Current Market Structure

NYSE CEO Says “Not Good” while appearing before Senate on the topic of equities market structure and Maker-Taker Rebate Schemes.

Bowing to increasing pressure from regulators, law makers and law enforcement officials, Finra, the securities industry “watchdog” has launched its own probe into how retail brokers route customer orders to exchanges, according to recent reporting by the Wall Street Journal’s Scott Patterson.  In particular, through the use of “sweep letters” targeting various broker-dealers, Finra is purportedly focused on whether rebates associated with schemes that brokers receive when directing their orders to specific venues is a violation of conflict of interest rules, given that customers presume they are receiving best price execution when in fact, they often do not.

MarketsMuse, the securities industry blog that has long reported about payment-for-order-flow and the unsavory practice in which customer orders are “sold” by custodians and prime brokers to “preferenced liquidity providers,” who then trade against those customers and profit from price aberrations between multiple exchange venues and dark pools, takes pride in pioneering the coverage of this topic.

Now that main stream media journalists are beginning to “get it”,  a growing number of those following this story hope that WSJ’s Patterson and other journalists will shine light on the even more unsavory practice in which these same brokers imposing egregious fees on customers who wish to “step out” aka “trade away” and direct their orders to agency-only execution firms, whose role as agent is to objectively canvass the assortment of marketplaces and market-makers in order to secure truly better price executions for their institutional and investment advisory clients. Continue reading

Wall St Execs Do The Flip-Flop While Being Grilled In Washington; Payment For Order Flow Exposed

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Conflict of Interest is Of Interest to Senate Panel Members “just learning about” industry-rampant Payment For Order Flow Schemes . Market Structure To Be Re-Structured?

Excerpts below courtesy of The Wall Street Letter’s on the spot coverage of the U.S. Senate investigation of Wall Street’s affection for high-frequency trading aka HFT, and with specific focus on order routing and execution practices, particularly with regard to kick-back inspired payment for order flow schemes, “maker-taker” rebate schemes and likely conflict-of-interest issues within the context of brokers such as Charles Schwab and TD Ameritrade (among others) failing to ensure so-called “best execution,” a role that necessarily precludes receiving payment for directing customer orders to any counter-party other than the one offering the best available price for that sized order at that point in time.

Here’s the WSL story as of 8 pm EST on the first day of testimony from members of the securities industry; no surprise to note certain executives take the ‘walk backwards’ and no longer defending the practices that have enriched their business models:

Market participants commenting in front of Senate’s Permanent Subcommittee on Investigations hearing into ‘Conflicts of Interest, Investor Loss of Confidence, and High Speed Trading in U.S. Stock Markets’ noted that the SEC needs to re-examine or dismiss the maker taker rule and subsequent rebates as they’ve harmed consumer confidence and efforts to provide best execution.

Tom Farley, president of NYSE, noted to Senators Carl Levin, John McCain, and Ron Johnson that the maker taker model has led to a proliferation of sell-side broker dealers executing orders on exchanges that are offering induced rebates to create liquidity, rather than sending orders that offer the best execution. Continue reading

Market Structure: The Great “Flash Boys” Debate and Putting the Genie Back in The Bottle

tumblr_m66pvmdFe61rog4ypo1_500  MarketsMuse Editor Note:  Though we typically focus on using a high-touch approach to aggregating the more topical  and poignant ETF, Options and Macro-Strategy news items, the  nearly never-ceasing diatribes re market structure and the impact of “high-frequency trading” which has either been incited or simply elevated by Michael Lewis’s book “Flash Boys” inspires us to distill the multitude of most recent opinion articles and punditry promoted by the ever-increasing universe of “content experts.”

In that spirit, we point our readers to 2 different pieces worth picking over:

1. For the ETF-focused audience, this week’s published comments from ETF.com’s Dave Nadig, “Great Flash Boys Idea IEX Doesn’t Matter” is a solid read for RIAs and the universe of investment managers who use exchange-traded funds. As always, Dave frames his observations and insight in a thoughtful, non-conflicted and erudite manner. Here’s the link to the ETF.com posting.

2. For institutional equity fund managers, institutional equity brokers and whomever else might be intrigued by the latest “survey of capital market professionals” conducted by ConvergEX, one of the major institutional order execution platforms. Their study finds that 70% of those canvassed believe the market structure is “unfair” to them. The study was published this week and since re-published by an assortment of industry media websites, including TABB Forums, and starts with the following: Continue reading