traders magazine dec 2011
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Traders mag-dec 2011TRANSCRIPT
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December 2011www.tradersmagazine.com
The Magazine for Securities Industry Professionals
STA Affiliate Coverage
Dallas • Seattle/Portland
>> A raging Debate On message Traffic Fees>> NYSe Floats Sub-Penny Pricing Again>> Low-Touch Trading Gets Personal
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“Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affi liates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affi liates of Bank of America Corporation (“Investment Banking Affi liates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated, which is a registered broker-dealer and member of FINRA and SIPC, and, in other jurisdictions, locally registered entities. Investment products offered by Investment Banking Affi liates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed. Instinct® is a trademark or registered trademark of Bank of America Corporation in the U.S. and other countries. ©2011 Bank of America Corporation
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View the Instinct® videos.*
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Ferris D’Angelo
Head of Vendor ConsultingGlobal Execution ServicesBank of America Merrill Lynch
TraderTrendsBrought toYou by Bankof America Merrill Lynch
Which Trading platform is right for you?
As trading technology evolves, innovation across
order and execution management systems is leading
head traders to reassess the technology required to run
their desks. By consolidating platforms, firms can drive
significant cost savings while streamlining trading
workflow. An investment in more robust technology
today will help to minimize the cost required to change
or add systems in the future.
Whether you are a start-up hedge fund or a sizable
asset manager, there are a variety of solutions that can
streamline your front office technology portfolio and reduce
the number of platforms needed to trade.
Ferris D'Angelo
Head of Vendor Consulting, Global Execution Services
$Cost vs. Time
New York 212.449.6090 | London +44.20.799.64521Asia +852.2161.7550
0
50,000
100,000
150,000
200,000
250,000
Year 1 Year 3 and Beyond
Robust Order Management System with Execution capabilities
Accounting Platform
Portfolio Management
Real-time Market Data
Order Management System
Risk Management
Source: Bank of America Merrill Lynch* Example of projected cost savings, individual results will vary.
Year 2
A good trader
spots all the right signals
at just the right time.
All on Instinct.
The new Instinct®Algo.
Combining the strengths of our widely used algorithms, the new Instinct ® Algo
recognizes and adapts to more signals and more conditions more quickly than ever.
Yet for all its innate sophistication, it’s incredibly easy to use. When you want to
perform at the highest levels, go with our Instinct.
Taking your opportunity further. That’s return on relationship.
*Standard data rates apply.
“Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affi liates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affi liates of Bank of America Corporation (“Investment Banking Affi liates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated, which is a registered broker-dealer and member of FINRA and SIPC, and, in other jurisdictions, locally registered entities. Investment products offered by Investment Banking Affi liates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed. Instinct® is a trademark or registered trademark of Bank of America Corporation in the U.S. and other countries. ©2011 Bank of America Corporation
New York +1.212.449.6090 | Chicago +1.866.202.5908 | Europe +44.20.799.64521 | Japan +813.6225.8398 | Asia +852.2161.7550
View the Instinct® videos.*
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Ferris D’Angelo
Head of Vendor ConsultingGlobal Execution ServicesBank of America Merrill Lynch
ad-OMS-Color_TradersMag.indd 1 22/03/11 21:08001_TMApr11 1 3/28/2011 9:42:42 AM
ContentsDECEMBER 2011 • VOLUME 24, NUMBER 331
26 Cover StoryTop 10 Stories of 2011
> Pipeline Fine Shocks TradingWorld > Regulators Look to Pacify the Market > Low Volume Sparks Exchange PriceWar > Brokers’ HFT Balancing Act > Canada Forges Ahead > Bulge Weathers Rough Year > ETFs Push Traders Toward Multi-Asset World > Algos: Better, Faster… Fewer > Buybacks Rebound From Financial Crisis Lows > Volume and Volatility: Th e Comeback Kids
� | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
002_TMDec11 1 11/22/2011 11:13:43 AM
4 | |
ContentsDECEMBER 2011 • VOLUME 24, NUMBER 331
Traders Magazine (ISSN 0894-7295) Vol. 24 No. 331, is published monthly with additionalissues in April and July by Source Media, One State Street Plaza, 27th Floor, New York, NY 10004. Subscription price: $120 (US) per year; $170 (US) per year in Canada and Mexico;$170 (US) per year in all other countries. Periodical postage paid at New York, NY and U.S.additional mailing offi ces. POSTMASTER: Send address changes to Traders Magazine, P.O. Box 530, Congers, NY 10920-1729. For subscriptions, renewals, address changes or delivery service issues, contact Customer Service at (800) 221-1809. Please direct editorial inquiries, manuscripts or correspondence to: Traders Magazine, One State Street Plaza, 26th Floor, New York, NY 10004. Back issues, when available, are $12 each, prepaid. Traders Magazine is a trademark used herein under license. Copying for other than personal use or internal use is prohibited without express written permission of the publisher.
© 2011 SourceMedia and Traders Magazine. All rights reserved. www.tradersmagazine.com
Member of BPA Worldwide
The opinions expressed by the authors are not necessarily the opinions of the editorial staff . The editors disclaim any intent to make recommendations about securities andsecurity markets. We are not responsible for unsolicited manuscripts. Manuscriptsbought/paid for by the corporation are its property.
STA and Other Industry Events
50 Dallas 55 Seattle
8 INSIDE TRADING > Dark pools’ integrity are questioned after recent settlement > Low touch trading is expected to more closely mirror high touch, according to a study > Two exchanges fl oat sub-penny pricing schema once again
16 ON THE MOVE
18 RULES & REGS > Message traffi c debate rages > Th e SEC considers rules limiting market makers > New parameters for market-wide circuit breakers proposed > Buysiders worried about new front-running rule > IOI proposal draws mixed reviews
42 OPTIONS > Volume surges with introduction of new weekly contract > Public pension plans look to invest in options
—Peter Chapman
48 TECH NOTES
62 BUYSIDE SNAPSHOT With every crisis comes opportunity. In the case of Drew Harbeck, a trader at Cortina Asset Management, his opportunity came when he joined the Milwaukee-based fi rm’s desk right before the market meltdown began, roughly three years ago.
—Michael Scotti
� | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
004_TMDec11 2 12/1/2011 10:48:58 AM
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005_TMMar11 3 2/16/2011 5:00:29 PM
Since 2007, T M’s December issue has featured a review of the year’s top stories. � is year’s issue marks our fi fth annual such edition and deliv-ers some interesting recaps. One story is how the bulge bracket is cutting back on the number of algos it provides to the buyside. Over the last year, fi rms be-
gan streamlining their off erings to save money. � ey’ve shifted to supporting their most widely used products. Call it algo consolidation. Another reason behind this move is a greater demand for customized algos.
Another story looks at how a bulge fi rm may wear two hats as it relates to high-frequency traders—it is both courting their business, and at the same time, looking to protect traditional clients from the more predatory rapid-fi re strategies. � ese stories, as well as the others, are a good chance to look back on the year.
Looking back at 2007’s top stories, there is little reference to high-frequency trading. � at might come as a surprise, because it has been a nonstop topic of discussion for the last couple of years. In retrospect, however, the lack of HFT coverage then makes sense. Regulation NMS had only been implemented earlier that year. No one can argue that rapid-fi re trading was helpful during the August 2007 meltdown, when volume set records, reaching between 9 and 10 billion shares each day for a week. High volumes returned again this August, when markets nose-dived after concerns were heightened about European debt problems.
One emerging story for the year remains how the industry will need to comply with the Volcker Rule, which was part of Dodd-Frank and designed to curtail proprietary trading. � e rub for equity traders is how the fi nal rule will be written by the Securities and Exchange Commission. A proposal has been written, and the SEC is awaiting indus-try comment. All eyes are on the SEC, as its fi nal rule could impact liquidity. It has its work cut out for it to separate what constitutes prop trading and market making.
What happens in 2012 is anyone’s guess. A year ago, who would have thought that for nearly two months, a group calling itself “Occupy Wall Street” would decry the fi nancial system and take over a park in lower Manhattan that no one previously knew the name of? Twice a day I walk past Zuccotti Park. Over time, OWS’s message became more muted and blended in with the rest of the city. I look forward to next year and wish you luck in all your endeavors. Buen camino.
Michael ScottiEditorial Director
A Good Walk
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� | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
006_TMDec11 1 11/21/2011 10:17:57 AM
In the wake of Pipeline Trading Systems’ settle-ment with the Securities and Exchange Commis-
sion, many people are won-dering if dark pools will be able to retain the trust of trad-ers given the mis-representations made by such a well-known venue.
According to the SEC, Pipeline failed to disclose that the vast ma-jority of orders in its dark pool were filled by an af-filiate of the firm. Though Pipeline billed itself as providing natural liquid-ity, it has now admitted that, over the course of its history, its affiliate took the other side of the trade about 80 percent of the time.
Pipeline did disclose in most of its subscriber agree-ments that unspecified af-filiates could be trading in the dark pool, but it did not dis-close the vital role its affiliate played in providing liquidity, the SEC said.
The revelations could have
repercussions beyond Pipe-line, as market participants take a closer look at alterna-tive trading systems in gener-al. Some dark pools have their own prop desks, which they do disclose, and in the wake
of the Pipeline scandal, those desks could draw greater scrutiny.
“It points up the general opaqueness of how ATSs dis-close how they handle orders,” said David Mechner, chief executive officer
of Pragma. “The lack of trans-parency about details raises questions.”
Mechner said he hopes the revelations about Pipeline don’t translate into a general backlash against dark pools, but added the case should be a wake-up call to the industry that transparency and disclo-sure are important.
Joe Gawronski, president and chief operating officer of Rosenblatt Securities, noted that many customers of Pipe-line used the company’s dark
pool because they thought it would help them avoid gam-ing by high-frequency traders. Yet the Pipeline affiliate alleg-edly employed many HFT strategies, such as placing a large number of orders and then canceling them immedi-ately afterward.
Rosenblatt built a name for itself by being the first firm to track dark-pool vol-ume, but Gawronski said he would happily cede that part of his firm’s business if it meant dark pools started be-ing more trans-parent without firms like his.
“The industry should demand transparency,” Gawronski said. “We live in a much more complex world than before.”
Dave Johnsen, head of U.S. liquidity strategy for Goldman Sachs Electronic Trading, said many customers have become paranoid in the wake of the Pipeline scandal, wondering if other dark pools might also be behaving in ways contrary to
what they have disclosed. Johnsen said that today’s
complex market structure will not go back to where it was decades ago, in spite of wish-ful thinking from some on the buyside. Instead, firms have to construct algorithmic trading strategies to protect them-selves, even in dark pools, he said.
Among other things, dark pool participants need to be
prepared to deal with HFT, said Dmitri Galinov, head of liquid-ity strategy for Credit Suisse Ad-vanced Execution Services.
“You need to understand what kind of strategies they’re using, and then you need to
design algos to prevent in-formation leakage,” Galinov said.
Meanwhile, the trading industry is abuzz with chat-ter about Pipeline’s long-term prospects. The settlement in October came as a shock, since few knew the affiliate
Traders Wary After Pipeline Case> Da r k P o o l s
David Mechner
Joe Gawronski
Continued on page 14
� | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
008_TMDec11 1 11/18/2011 8:30:27 PM
© September 2011 Knight Capital Group, Inc. All rights reserved. Offered by Knight Capital Americas, L.P. and Knight Execution & Clearing Services LLC, members of FINRA and SIPC and Knight Capital Europe, Ltd. a U.K. registered broker-dealer authorized and regulated by the Financial Services Authority. Each are wholly owned broker-dealer subsidiaries of Knight Capital Group, Inc. For additional information about Knight Capital Group, Inc. (NYSE Euronext: KCG), please visit www.knight.com.
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039_TMSep11 15 8/25/2011 6:14:51 PM
Proposals by two of the exchanges op-erated by NYSE Euronext mark the
second time in the past two years the exchange operator has looked to sub-penny pric-ing to gain an advantage over brokers in the trading of retail orders.
The New York Stock Ex-change and NYSE Amex have asked the Securities and Ex-change Commission for ap-proval to allow a special group of “Retail Liquidity Providers” to quote between a stock’s best bid and offer in increments of one-tenths of a cent. The quotes would be hidden from view and only accessible by providers of retail order flow.
The intent is to provide the retail customer with bet-ter pricing than is visible on exchange books, a service now provided by wholesalers and other brokers that internalize their orders.
Under the plan, the ex-changes would pay order senders and charge the liquid-ity providers. Only bona fide retail order senders would qualify for the service. The RLPs will come from the
ranks of the exchanges’ Des-ignated Market Makers and Supplemental Liquidity Pro-viders.
Still, under the SEC’s Reg-
ulation NMS, ex-changes are barred from quoting in sub-pennies. NYSE and NYSE Amex are seeking exemptions to the rule, which does not apply to broker-dealers.
Much retail flow is inter-nalized by broker-dealers. The proposal by NYSE marks its second attempt to win ap-proval from the SEC to quote in sub-pennies as a way to
compete with internalizers. Last year, NYSE and two oth-er exchanges wrote a joint let-ter to the SEC requesting the ability to trade in sub-pennies in certain low-priced stocks. The SEC did not approve the request.
There has been some de-bate over the use of sub-pen-nies in recent years as spreads in many stocks have narrowed to a penny. Some trading of-ficials contend that a penny increment may be too high for some securities.
“What is the natural tick increment at which stocks should trade?” Joe Mecane, an NYSE Euronext executive vice
president, asked rhetorically at October’s Security Traders As-sociation’s annual conference. “This has been subject to de-bate since the SEC released its Concept Release.”
The NYSE proposal calls for using hidden, not dis-
played, quotes. That contrasts with the proposal in the letter sent by NYSE, Nasdaq OMX, and BATS Global Markets last year to the SEC that called for using displayed quotes.
“Why not do this in dis-played fashion and put them on the SIP feeds?” Chris Isaac-son, BATS’ chief operating of-ficer, asked at the conference.
Besides the issue of trans-parency, the proposal is likely to impact the ongoing debate over a trade-at rule. The SEC is mulling a rule that would push wholesalers and other internalizers to offer more price improvement to their customers. The brokers have
complained such a rule would kill their business.
The SEC is worried that not
enough flow is making it out of brokerages’ trading
departments and to the public markets. Giving exchanges the right to trade in between the spread could take the pres-sure off of the wholesalers.
That would “certainly move the trade-at discussion
NYSE Floats Sub-Penny Again > T r a d e P r i c i n g
“This [natural tick increment] has been subject to debate since the SEC released its
Concept Release.”
Joe Mecane
continued on page 14
10 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
010_TMDec11 2 11/18/2011 8:30:47 PM
As high-touch trades continue to decline and trading algos get more and more
complicated, buyside firms are turning to the sellside for execution consulting that combines high-touch service with low-touch technology.
That’s according to a new report by Tabb Group, which found that by 2013 the way the sellside services clients will look radically different from today. Traders will seek out value-added insight from their electronic trading part-ners to help them traverse an ever-shifting maze of deci-sions, Tabb predicts.
The report, “Execution Consulting: The Next Gen-eration in Sales Trading,” en-visions a new model for sales trading that requires refined skill sets to help buyside trad-ers navigate market structure.
Tabb interviewed the heads of sellside algo desks as well as head traders at major asset management firms and found that there is an increasing demand for the high-touch equivalent of insight and ad-vice, but from the sellside’s low-touch algo coverage.
While today there is a dis-tinct difference between a sales trader who has an opinion on a stock and an algo desk cov-erage person who can explain a change in a liquidity-seek-ing strategy, the future will see more of a hybrid approach, the report found.
“You will find that there are folks that have been high-touch sales traders who are now on sellside algorithmic trading desks,” said Laurie Berke, a principal at Tabb Group and study author.
Sitting next to that former high-touch trader might be a quantitative analyst with very different skills, Berke said. To offer execution consulting ser-vices, firms need to blend their two different approaches.
Berke notes three skill sets the buyside is demanding. The first is the ability to know and understand customers’ needs, a page out of the traditional sales trader playbook. Second is expertise in a firm’s own al-gos and trading technology. Third is a deep knowledge of market structure.
“The bar is raised now for low-touch coverage,” Berke said. “They need this unique
blend of skill sets.”What really differentiates
one broker from another is an ability to apply trading tools
specifically to the needs of an individual customer, Berke said. The way to optimally use an algo is very different for a large-cap value manager than it is for a small-cap growth manager, she noted.
“You’ve got to understand what’s driving the buyside client’s transaction,” she said. “What’s the objective of the trade?”
Execution consultants will be able to demonstrate their value if they can help clients preserve and protect alpha,
something that will show up in TCA numbers, she said.
Execution advisors could largely replace traditional sales traders, but the report predicts there will be fewer of them in the trading room.
Berke said once execution consultants can prove they save money, they will be able to justify their fees.
“You’re going to be able to quantify it, and the buyside will pay for it,” she said.
Mark Kuzminskas, director of equity trading for Robeco Investment Management, told Traders Magazine he would be willing to pay for ex-ecution consulting if it could be shown to add value.
Kuzminskas said he has seen the sellside beef up their low-touch areas, adding more contact individuals to provide updates, performance metrics and trend spotting.
“As differentiation amongst algos and the various offerings becomes harder and harder to discern, I think that’s led to the sellside placing more emphasis on distinguishing the value add from one to the next,” Kuzminskas said.
—James Armstrong
Low-Touch Trading Gets Personal> Sa l e S t r a d i n g
laurie Berke
12 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
012_TMDec11 3 11/18/2011 8:40:25 PM
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even existed. Even sources sympathetic to Pipeline have called its past marketing de-ceptive and inappropriate.
The company’s block trad-ing activities in the U.S. only amount to about 30 percent of its total business, accord-ing to knowledgeable sources. Pipeline’s analytic tool Alpha
Pro actually accounts for a larger portion of its business, but with a shadow cast over the firm’s dark pool, other units could lose customers as well.
Several sources in the in-dustry expressed doubts that firms would be eager to work with Pipeline on any of its ven-tures, even those not touched by the dark pool scandal.
—By James Armstrong
Dark PoolsContinued from page �
in a different direction,” Me-cane said.
Chris Nagy, a managing director at TD Ameritrade, contends the proposal, if ap-proved, could diffuse the trade-at issue.
“It won’t be the demise of internalization,” Nagy told Traders Magazine. “But it’s
Trade PricingContinued from page 10
a very elegant solution for trade-at.”
Nagy contends the likely customers for the proposed service will come from the ranks of the wholesalers or internalizers, not firms like his. The exec is wary of the program as his mandate is to win price improvement for 80 percent of TD Ameritrade’s orders. “If I send in 100 or-ders, how many will get price improvement?”
Still, one wholesaler found the proposal objectionable. Jeff Martin, president of ATD/Citi, found fault with the idea of letting a market maker’s hidden order take precedence over a displayed quote.
“That means I no longer have to enforce Manning ei-ther,” Martin said at STA. “[NYSE] has a resting order and allows someone to step inside for less than a penny.”
Under the so-called Man-ning Rule, market makers like ATD can only trade ahead of their customers if the price they trade at is inferior to that a customer might receive by at least a penny.
The NYSE proposal would let the exchange dealers trade at sub-pennies. That’s why the proposal needs an exemption to Reg NMS Rule 612, Me-cane said.
—Peter Chapman
Busy DaysNumber of Days with Market Moves >4%
14 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
014_TMDec11 4 11/18/2011 8:30:51 PM
and a former board member of the BSTA Foundation, joins Williams from Avondale Partners, where he spent four years after spending much of his career at Banc of America Securities. Both report to Stephen Carl and Michael Ferry, co-heads of equity sales and trading.
>>Joseph Benantibeen promoted to di
rector of sales at Rosenblatt Securities in New York. Benanti, a 30-year veteran,
joined Rosenblatt as a salesman nearly five years ago after a long career as a trader on the floor of the New York Stock Exchange. He worked for several independent brokerages, including his own, and was also a floor governor. Benanti reports to Joe Gawronski, the firm’s president and chief operating officer.
>> Canaccord Genuity has named Gaasenbeekof the capital markets
>>Robert Veek has been promoted to man-aging director and head of institutional trading at Summer Street Research. He will con-tinue to cover accounts for the Boston-based health care boutique, which has three traders in Boston and three in New York. Prior to joining Summer Street last year, Veek spent five years at White Cap Trading. That came after 13 years at Fidelity Capital Markets as a trader and market maker in both Boston and New York. He reports to Al Sollami, the company’s chief executive.
>>Ryan Petersonjoins agency-only broker Cheevers & Co. as its new chief compliance officer. A seven-year veteran, Peterson was previously CCO for Fox River Execution Technology for just over a year. Prior to that, he spent four years as an at-torney and compliance consultant at Regula-tion Technologies. He was also an investigator
for the Chicago Board Options Exchange. He now leads a three-per-son compliance team at Cheevers. He reports to president Laura Yunger.
>> Buckman, Buckman & Reid, a full-service brokerage firm, added an institutional trading group to its Shrews-bury, N.J. office. The group was previously with Seton Securities.
Bob Mezey, a 35-year veteran, heads broker-dealer sales. Veterans Ron D’Angelo and Tony Pontecorvo run trading. Also join-ing the firm as sales traders are veterans Frank Passalaqua,previously with Sterne Agee; Peter Battaglia,previously with the Vertical Group; Chuck Esposito; and Tony Lopez. The firm clears
through RBC Capital Markets.
>>Glenn Koh joined Bank of America Merrill Lynch to lead equity derivatives trad-ing in the Americas. Koh spent 14 years at Morgan Stanley, most recently in charge of trading U.S. equity index derivatives. Koh reports to Henry Mulholland, head of Americas equities, and Fabrizio Gallo, global head of equities.
>>Jim Kelly joins Citigroup Global Mar-
kets’ capital introduction group as a di-rector in New York. A 30-year veteran,
Kelly was previously at Morgan Stanley, where he headed its transition management group in the Americas. Prior to moving upstairs, he spent 28 years on the floor of the New York Stock Exchange, where he ran his own firm. Kelly was also a floor official and board member of the Alliance of Floor Brokers. He
reports to Beth Neely, who heads capital introduction in prime finance for the Ameri-cas at Citi.
>>John Hickey joins the Buckingham Re-
search Group as a senior sales trader in New York. Hickey, a 22-year veteran, was
previously with Sanford C. Bernstein, where he spent 11 years. Prior to that, he worked at Cantor Fitzgerald. He reports to Tony Sutera, who runs Buckingham’s equity trading desk.
>> Minority brokerage firm Williams Capital Group opened a Boston office, hiring industry veterans Rick Gill and Ken Beaulieu as sales traders. Gill, a 27-year veteran, joins from Sterne Agee, where he spent four years. A past president of the Boston Securities Traders Association, Gill also worked at Oppenheimer & Co., Gruntal & Co. and Everen Securities. Beau-lieu, a 13-year veteran
>>Mike Stewart has become the sole head of UBS’s global equities division. He was formerly head of global equities
at Bank of America Merrill Lynch and joined UBS in July as co-head of that bank’s global equities division. He assumed the role of sole head following the resignations of the other global equities chiefs, Yassine Bouhara and Francois Gouws, in
the wake of the bank’s unauthorized trad-ing scandal. Stewart reports to Carsten Kengeter, chief executive officer of UBS’s investment bank.
16 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
016_TMDec11 1 11/18/2011 8:40:50 PM
and a former board member of the BSTA Foundation, joins Williams from Avon-dale Partners, where he spent four years after spending much of his career at Banc of America Securities. Both report to Stephen Carl and Michael Ferry, co-heads of equity sales and trading.
>>Joseph Benanti has been promoted to di-
rector of sales at Rosenblatt Securities in New York. Benanti, a 30-year veteran,
joined Rosenblatt as a salesman nearly five years ago after a long career as a trader on the floor of the New York Stock Exchange. He worked for several in-dependent brokerages, including his own, and was also a floor gov-ernor. Benanti reports to Joe Gawronski, the firm’s president and chief operating officer.
>> Canaccord Genuity has named Matthew Gaasenbeek president of the capital markets
division of Canaccord Genuity. Gaasenbeek, who joined the firm 18 years ago, has led the firm’s North Ameri-can equities group for the last four years. In his new role, he will manage all aspects of the Canadian capital markets business, including investment banking, research, institutional sales and trading, fixed income and international trading. Prior to this, he was head of equities at Canaccord Genu-ity. Before Canaccord, Gaasenbeek worked as a management consultant at PriceWaterhouse.
>>Allison Jacobsjoins Citi as a relation-ship manager covering
equities and options in its broker-dealer sales group. Jacobs, a 12-year veteran,
comes from Bank of America Merrill Lynch, where she worked in the Global Execution Services group. Before that, she worked at Credit Suisse in the Advanced Execution
Services group. She reports to Tom Fasano, who heads U.S. broker-dealer sales.
>>Robert Weinsteinjoins Tullett Prebon as head of institutional equity sales and trading. A 19-year veteran of the
industry, he was previously managing director for institutional sales and trad-
ing at Dahlman Rose
& Co. Prior to that, he oversaw a team of sales traders at Lighthouse Financial Group. Wein-stein spent four years at Bear Stearns, where he was senior managing director for institu-tional sales and trading. Weinstein reports to Tom Bovitz, a senior managing director at Tullett Prebon.
>>Miley Nakamurajoins electronic trading provider TORA as
a sales trader in Los Angeles. Nakamura, a 12-year veteran, was director of Japanese equities sales trading at UBS in Japan. Prior to joining the Asian-based TORA, she did stints at Citi and Goldman Sachs. She reports to managing directors Khahlil Kirtman and Rob Santos.
>> Capstone Invest-ments hires executives Alan Ebright, Douglas Livingston and Mark Sylvestri. Ebright, a 16-year veteran, joins as senior vice president institutional sales and comes from Miller Ta-bak & Co. Livingston,
a 10-year veteran, comes on board as chief compliance officer from IXE Securities. Sylvestri, a 12-year pro, joins as an equity analyst from SES Partners. All three report to president Steven Capozza.
reports to Beth Neely, who heads capital introduction in prime finance for the Ameri-cas at Citi.
John Hickey joins the Buckingham Re-
search Group as a senior sales trader in New York. Hickey, a 22-year veteran, was
previously with Sanford C. Bernstein, where he spent 11 years. Prior to that, he worked at Cantor Fitzgerald. He reports to Tony Sutera, who runs Buckingham’s equity trading desk.
Minority brokerage firm Williams Capital Group opened a Boston office, hiring industry
Rick Gill and Ken Beaulieu as sales traders. Gill, a 27-year veteran, joins from Sterne Agee, where he spent four years. A past president of the Boston Securities Traders Association, Gill also worked at Oppenheimer & Co., Gruntal & Co. and Everen Securities. Beau-lieu, a 13-year veteran
Got a new job? A promotion?Did a colleague? Send your
particulars—or a colleague’s—to [email protected]
>>Alan Rubenfeld joins Boston-based QuantShares as director of sales to pro-mote its market-neutral ETFs. Rubenfeld has spent more than 20 years in portfolio trad-ing and most recently worked at UBS, after a nearly two-year stint at BNP Paribas. He spent more than 10 years at Deutsche Bank. He will work out of New York. Rubenfeld reports to Richard Block, QuantShares’ chief administrative officer and director of marketing. Block is the former head trader at Putnam Investments.
www.tradersmagazine.com� TRADERS MAGAZINE | DEcEMbER 2011 | 17
017_TMDec11 2 11/18/2011 8:31:05 PM
Peter Driscoll, a senior trader with the Northern Trust Co. and a former chairman of the Security Traders Association, has asked the Securities and
Exchange Commission to reconsider its approval of a controversial New York Stock Exchange rule gov-erning trading ahead, or front-running.
Driscoll sent a letter to the SEC on Oct. 18, ques-tioning the legality of the changes made by the NYSE Euronext unit to its Rule 92. The executive wants the SEC to kick back the rule to the NYSE and reopen the comment period, which ended Sept. 14.
Driscoll made his request as a private citizen and not through his company. Northern Trust is one of the industry’s largest money man-agers.
The rule change “reduces the protections currently afforded client or-ders and makes the trading process much less transparent,” Driscoll told the SEC. “Buyside stakeholders were surprised by this rule change.”
As part of a “rule harmonization” pro-cess under way between NYSE Euronext and the Financial Industry Regulatory Authority, the three stock exchanges op-
erated by NYSE Euronext reworked their trading ahead rules to conform with FIN-RA’s Rule 5320, better known as “Man-ning.”
With the changes, brokers were re-lieved of their obligations to ask the buyside upon receipt of every order whether or not they could trade along-side, or ahead of, the order. Now, the buyside trader must raise the issue himself with every order.
The New York Stock Ex-change filed its changes for “immediate effectiveness” rather than go through the standard notice and com-ment process. The exchange
told the SEC it was eligible to file in expe-dited fashion partly because the rule does not “significantly affect the protection of investors or the public interest.”
Driscoll disagrees with that assess-ment, telling the SEC that “many clients (buysiders) viewed this protection as fun-damental.”
Although filed as immediately effec-
tive, the rule proposal did include a 30-day comment period. The NYSE received no comments. Driscoll blamed both bro-kers and the NYSE for the lack of input from the buyside, noting that “the har-monization of NYSE Rule 92 escaped the attention of much of the buyside com-munity.”
At a recent industry conference, Rick Ketchum, president and chief executive officer of FINRA, urged brokers to work closely with their customers on the new trading ahead rules.
“From the standpoint of the custom-ers, a surprise never works,” Ketchum said. “They’re never positives. They’re nev-er received well by the regulators or the media. This is a great time for the sellside to take a step back and work toward an
environment where there is transparency and understanding of the alternatives.”
It is not unheard of for the SEC to stay a rule it has approved. Typically, an aggrieved party must file a “Petition for Review” with the regulator. The Chicago Board Options Exchange filed one in 2009 after the SEC approved the Inter-
Trader Asks SEC to Look At Rule> F rO N T- rU N N I N G
Peter Driscoll
The rule change “reduces the protections currently afforded client orders and makes the trading process
much less transparent. Buyside stakeholders were surprised by this rule change.”
Continued on page 24
18 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
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Despite complaints from brokers over soaring levels of market data, officials from some of the leading exchanges indicated they
weren’t enthusiastic about slamming on the brakes.
“I don’t want to put on a fee that is onerous, or be forced to by the SEC,” Chris Isaacson, chief operating officer at BATS Global Markets, said during a session on October 14 at the Security Traders Association’s annual conference in Palm Beach, Fla. “Everyone’s market data technology costs would probably go down, but spreads would widen and in-vestors would be hurt.”
At issue are broker complaints over the tremendous increase in quotes being streamed into exchanges by high-frequen-cy trading firms and the cost of processing all those messages.
Some firms, including Goldman Sachs, are questioning whether the Secu-rities and Exchange Commission should step in and force exchanges to impose fees on those customers that send in a large number of quotes relative to the number of trades done.
That could lead to a reduction in the amount of quoting.
The SEC is considering taking action. David Shillman, a senior official in the SEC’s Division of Trading and Markets, noted at a recent industry conference that the SEC was mulling the idea of direct-
ing exchanges to implement some sort of quote-to-orders fee.
This doesn’t sit well with the exchanges.“We don’t think the regulators have
the authority to dictate order-to-trade ratios or cancellation levels,” Bryan Har-kins, chief operating officer at Direct Edge, told the STA crowd. “That’s a com-mercial decision.”
According to data supplied by the Fi-nancial Information Forum, Direct Edge’s EDGA exchange sends out about 109,000 quotes per second.
Some have criticized the exchanges for a lack of concern over the issue and an approach that favors the large quoters, which pro-vide much of their liquid-ity, over other members.
“The criticism is that the exchanges are HFT-friendly,” Harkins added. “But in fact not all traffic is good traffic. We have throttles. Not every cus-tomer likes throttles. We do that to protect the mar-ket. Every customer has a certain message limit per second.”
Throttling, done to some degree by most exchanges, involves slowing down the rate at which an exchange will accept incoming messages.
Nasdaq OMX is taking a look at the issue, according to Michel Finzi, Nasdaq’s
head of U.S. equities, but it is also wor-ried about overburdening those members who provide the exchange with most of its liquidity.
“If entities are sending a significant amount of quotes and never generating a trade, then it’s not a good idea for us to support that,” Finzi said at STA.
“But one must also be careful be-cause there are certain models and folks who provide value to the marketplace,” he added. “That includes market-maker
strategies with two-way prices in stocks. In volatile times, they have to address those and amend those quite regularly.”
Even if the exchanges don’t act, it is not impos-sible that regulators won’t unilaterally try to rein in message traffic with fees. They do so in Canada, ac-cording to Robert Fother-ingham, a senior vice pres-ident at the Toronto Stock Exchange.
Fotheringham told STA attendees that the In-
vestment Industry Regulatory Organiza-tion of Canada, the Canadian equivalent of the U.S.’s Financial Industry Regula-tory Authority, has begun “factoring in messaging when they allocate charges for surveillance.”
—Peter Chapman
Message Traffic Fee Debate Rages> M a r k e t data
Chris Isaacson
www.tradersmagazine.com� TRADERS MAGAZINE | DEcEMbER 2011 | 19
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Arule proposed by the Fi-nancial Industry Regulatory Authority that could limit broker-dealers’ usage of in-dications of interest drew
mixed reviews from those who submitted comment letters to the regulator.
Brokers and their advocates shot down the proposal, while one major buyside shop praised FINRA. While respondents differed on the rule’s impact on buyside-sellside relations, both sides managed to find some common ground.
“The STA is opposed to this amend-ment,” James Toes, president and chief executive of the Security Traders Association, told FINRA in its letter. “Rather than clearing up a perceived issue emanating from a small subset of the mar-ketplace, this amendment would build a wall between market participants.”
In favor of the change was Capital Research and Management Company, a large money manager based in Los Angeles. Saying he supported the “broad in-tent” of the rule, Matt Lyons, the firm’s global trading manager, urged FINRA to fine-tune it. Capital Research “applauds the ongoing work of FINRA to improving the quality and clarity between member firms and their customers,” Lyons said.
At issue is a proposed amendment to Rule 5210, published last month, that at-tempts to bar brokers from sending out IOIs labeled as “natural” if they aren’t backed by an actual customer order.
In its proposal, FINRA said it was con-cerned that brokers were disseminating misleading information regarding IOIs, including not accurately labeling them to reflect their origination.
The proposal addresses buyside com-plaints that some IOIs they receive are mislabeled. They’re called “naturals,” but, in fact, are not associated with an actual order. There may be no order, or the “or-
der” may, in fact, be a bro-ker’s proprietary position.
The proposal is the third time in the past five years that FINRA has addressed the problem. In both Sep-tember 2006 and May 2009, FINRA (or its pre-decessor NASD) sent out notices to its members re-minding them to be “truth-ful” when using IOIs.
The warnings apparently weren’t enough for some.
“While we believe the 2009 notice was helpful, we received a number of comments from our commit-tees and otherwise that without a clear definition of a natural IOI, there is still po-tential for misuse,” FINRA president and chief executive officer Rick Ketchum said
at a recent industry conference. “Namely, when the buyside trader attempts to reach out to a natural IOI, he finds there is no longer any trading interest behind it.”
Most IOIs are not labeled as “naturals,” according to a vendor who distributes the trade advertisements for brokers. “Many broker-dealer firms disseminate hundreds of thousands of IOIs daily while mark-ing only a few hundred or less as natural IOIs,” Raptor Trading Systems’ Nasser Sharara told FINRA.
Still, those that are labeled natural get the buyside’s attention. “Many buyside traders consider the non-natural IOIs as noise and ignore them,” Sharara explained. “They only view the natural IOIs.”
In their letters, the brokers called FINRA’s proposal a bad idea. They ar-gued they sometimes received verbal in-structions—but not actual orders— from their customers to send out IOIs on their behalf. They told FINRA that that com-muniqué should suffice.
Brokers also pointed out that some of the so-called natural IOIs they send out are based on previous conversations with their customers. They often label these IOIs as ITWs, or “In Touch Withs.”
Toes, citing concerns from STA’s buy-side members, said the requirement would impede money managers’ search for li-quidity and “compromise the relationship between a broker-dealer and a client.”
Whichever side they took, some of
IOI Proposal Draws Mixed Reviews> F I N R A
James Toes
Continued on page 24
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Despite the hue and cry over trades done in error, the single-stock circuit breakers introduced after the May 2010 flash crash
were triggered by news events more than half of the time, according to a report by Credit Suisse.
Titled “Pardon the Interruption—The Impact of Trading Halts,” the report found that 51 percent of trad-ing halts from June 2010 to September 2011 came after funda-mental news emerged about a stock. The report discovered 111 trading halts during that period—56 from news.
About 11 percent of circuit breakers were triggered by a “fat finger” trade, and bad prints only caused about 6 percent of trading halts, the report found. About 32 percent of trading halts were in cheap or illiquid stocks.
During 2010, many traders publicly grumbled about needless trading halts in large stocks such as Citi, but the data runs counter to the perception that most trad-ing halts were caused by errors.
“Certainly, some people will always view trading halts as a nuisance, but they may not be as negative as some people put them out to be,” said Ana Avramovic, an
analyst at Credit Suisse.According to the report, trading halts
attributable to news are potentially unde-sirable to some market participants who are looking to profit from a first-mover advantage.
Still, exchanges have always halted stocks when certain news is pending to allow investors time to digest all the relevant information.
The single-stock circuit break-ers can be seen as a continuation of that practice.
When important news is released during trading hours without advance
warning, circuit breakers can allow an orderly adjustment process in which mar-ket participants have time to correct for
imbalances before submitting their orders, the report found.
In the cases where news events triggered the cir-cuit breakers, no harm came to the market, and in other cases the cir-cuit breakers were clearly helpful, the report found.
Currently, the Securities and
Exchange Commission plans to replace the single-stock circuit breakers with a proposed limit up/limit down rule, which would introduce a pause for 15 seconds before enacting a full trading halt.
The limit up/limit down proposal could eliminate trading halts caused by bad prints, Avramovic said. That would be an improvement over the current sin-gle-stock circuit breaker rule, she added.
Limit up/limit down faces opposition from within the futures and options in-dustries, since derivative products could still continue trading during a pause in the underlying equity, which would make hedging problematic.
—James Armstrong
News Often Triggers Trading Halts> C i rC u i t b r e a k e rs
“Some people will always view trading halts as a nuisance, but they may not be as negative as
some people put them out to be.”ana avramovic
Causes of Trading Halts for SSCBs
News Event 51%
Cheap, Illiquid Stock 32%
“Fat Finger” Trade 11%
Bad Print 6%
source:Credit suisse
22 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
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national Securities Exchange’s clean cross order type. Nasdaq OMX filed one this month after the SEC prohibited it from making a fee change.
Steve Nelson, principal at Nelson Law
Firm, says the SEC has backtracked more frequently in recent years. That’s due to pressure on the regulator to speed up its approval process of exchange and FINRA rules.
“They can’t really speed up because they don’t have the staff,” Nelson said. “So the rule goes into effect and then the SEC real-
izes it was a bad idea and abrogates it.”Driscoll, who was chairman of the Se-
curity Traders Association from 2008 to 2009, did not respond to an email seek-ing comment on whether he or any or-ganization planned to file a “Petition for Review” with the SEC.
—Peter Chapman
Front RunningContinued from page 18
Jamie Brigagliano, a former co-acting director of the Di-vision of Trading and Markets at the Securities and Ex-change Commission, joined Sidley Austin as a partner in the firm’s securities and futures regulatory practice. Briga-gliano spent 25 years with the SEC, working in the Divi-
sion of Trading and Markets for 13 years. He became an as-sociate director for trading practices and processing in 2007 and a co-acting director in 2009.
Under his watch, the division tackled the issue of transparency in dark pools, including reporting and the use of indications of interest; sponsored access; and the fallout from the ‘“flash crash”
of May 2010.Earlier, Brigagliano led the draft-
ing and implementation of Regula-tion SHO, which updated the SEC’s oversight of short sales. More recently the attorney worked on new rules cov-ering derivatives mandated by Dodd-Frank.
Brigagliano won the division’s Jay Manning award in 2003, given to staffers for excellence in service.
Ex-SEC Official Joins Law Firm> E m p loy m E n t
Jamie Brigagliano
the respondents suggested that fine-tun-ing the labeling of IOIs was warranted. JMP Securities, for instance, recommends stratifying natural IOIs into three groups: those with associated orders; those based on verbal communications; and those
based on past conversations—the “In Touch Withs.”
Lyons, of Capital Research, suggests that FINRA add two more categories: “principal” IOIs, for those times when a broker is looking to unwind a position, and “In Touch With” IOIs. Some bro-kers already label their IOIs as “In Touch Withs,” but not all, Lyons noted.
Speaking at this year’s Security Trad-ers Association conference in Palm Beach, Fla., Ketchum said FINRA was divided over the need to regulate IOIs. “We really do want comments on [the proposal],” he said. “Even within FINRA, there is a de-bate as to the appropriateness of how to handle this issue,” he said.
—Peter Chapman
IOI ProposalContinued from page 20
24 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
024_TMDec11 5 11/18/2011 8:31:52 PM
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026_TMDec11 1 11/18/2011 8:38:25 PM
AAs 2011 nears its close, Europe, staying employed and
Pipeline Trading were the most discussed topics this year,
according to traders. For investors and equity traders, the
end of July marked a watershed moment. That’s when
volatility kicked up and volumes skyrocketed after fears of
a financial blowup emerged in Europe from the region’s
debt crisis. And stock markets took it on the chin, as a
correction briefly hit the 20-percent mark—a bear mar-
ket—before recovering to positive territory in October.
Top 10Storiesin 2011
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 27
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Traders were shocked this year when Pipeline Trading Systems agreed to pay $1 million to settle charges brought by the
Securities and Exchange Commission. Regulators alleged the company failed to disclose that, at times, more than 97 per-cent of the orders in its dark pool were filled by a trading operation affiliated with the firm.
The SEC also reached settlements
with Pipeline founder Fred Federspiel and company chairman Alfred Berkeley, who each agreed to pay a $100,000 fine for their involvement. Berkeley is also a former president of Nasdaq. Under the agreement, neither man admitted nor de-nied wrongdoing.
Pipeline launched its alternative trad-ing system in 2004, billing itself as a crossing network that matched orders to provide natural liquidity. But the SEC
claimed Pipeline’s liquidity was anything but natural.
The company owned a trading entity that has gone by multiple names, most recently Milstream Strategy Group. Mil-stream sought to predict the trading in-tentions of the dark pool’s customers, the SEC said. Milstream allegedly would then trade elsewhere in the same direction as those customers before filing their orders on Pipeline.
In the first four months after Pipeline launched, the affiliate, initially known as Exchange Advantage, was a party to 97.5 percent of all transactions in the dark pool, the SEC said. From the launch until the end of 2009, the affiliate allegedly participated in a total of about 80 percent of all trades.
Pipeline told users that they were being treated the same, but in reality provided its affiliate with advantages over other users, according to the SEC. Those advantages allegedly included special access to certain information and data connections that made it easier for the affiliate to track activity in the dark pool.
The company responded to the charges by reaching out to its customers, attempting to retain their business in spite of the
Up until then, the first half of the year—to put it bluntly—was slow on the trading front, as volumes stag-nated. Consequently, a number of firms laid off trading professionals and the fears of further layoffs continued through the fall—despite the uptick in trading volume in the last half of the summer. Brokerage firms, from the bulge to the independents, handed out pink slips, while the buyside had its own concerns.
As a result, it should not come as a surprise that to-tal compensation is expected to be down between 20 and 30 percent for equities trading pros this year. That comes after a similar decline in equities compensation last year. Some say the closing of proprietary trading desks, which will be required by Dodd-Frank, has also shrunk compen-sation.
Pipeline Trading provided its own lesson in prop trad-ing. As it turns out, the block crossing network had an af-filiate broker-dealer facilitating trades—not the natural li-
quidity that it claimed to offer. The Securities and Exchange Commission smacked the firm and its two top execs with a total of $1.2 million in fines. The action put a new focus on dark pools and forced the buyside to scramble to learn all it could about routing practices and how pools operate.
Meanwhile, lower Manhattan’s Zuccotti Park took on the look of an urban Woodstock in September, as hundreds of disenfranchised mostly recent college graduates decried corporate greed and the workings of the financial system. The group, “Occupy Wall Street,” became a lightning rod for a hodgepodge of points of view, from the Green Move-ment to redistributing wealth in America. As the weather grew colder, however, the OWS crowd dug in its heels and pitched tents. They built themselves a makeshift city, and by doing so, offered their own version of a popular saying during the protests of the 1960s: “Turn on, tune in, and camp out.” Amid this backdrop, Traders Magazine pres-ents the top stories of the year.
>>Pipeline Fine Shocks Trading World Tcreate a more stable trading environment and restore confidence rattled by last year’s “flash crash.”
Regulators introduced a myriad of rules this year and floated new proposals to fix market structure flaws that led to the May 6, 2010 event. They also want to get a better handle on the forces driving the market. Upon examining the “flash crash,” many pointed at high-frequency traders and their effect on the market—
>>Regulators
28 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
028_TMDec11 3 11/18/2011 8:32:10 PM
claimed Pipeline’s liquidity was anything
The company owned a trading entity that has gone by multiple names, most recently Milstream Strategy Group. Mil-stream sought to predict the trading in-tentions of the dark pool’s customers, the SEC said. Milstream allegedly would then trade elsewhere in the same direction as those customers before filing their orders
In the first four months after Pipeline launched, the affiliate, initially known as Exchange Advantage, was a party to 97.5 percent of all transactions in the dark pool, the SEC said. From the launch un-til the end of 2009, the affiliate allegedly participated in a total of about 80 percent of all trades.
Pipeline told users that they were be-ing treated the same, but in reality provid-ed its affiliate with advantages over other users, according to the SEC. Those advan-tages allegedly included special access to certain information and data connections that made it easier for the affiliate to track activity in the dark pool.
The company responded to the charges by reaching out to its customers, attempt-ing to retain their business in spite of the
revelations. Pipeline scheduled in-person meetings with customers to explain how the affiliate provides liquidity and to em-phasize the execution quality its dark pool provides.
“We recognize that we should have been more forthcoming about the criti-cal role of our affiliate and sincerely regret that we were not,” Pipeline said in a state-ment to customers. “We believe—and can show you in detail—that you have ben-efited in the past from our affiliate’s ability to provide liquidity in the Block Market, and you can benefit in the future.”
In its defense, Pipeline has claimed it has a patented mechanism to align the interests of Milstream’s traders with those of customers. Under the system, traders are supposed to be penalized if they make
trading profits at a customer’s expense. In fact, Milstream has shown a cu-
mulative net operating loss since it was launched along with Pipeline’s dark pool in 2004. Though in recent years Milstream has made trading profits, including $18.4 million in 2008, it was operating this year at close to breaking even.
Pipeline maintains the purpose of the affiliate was to provide liquidity, not to make a profit. Still, for many in the in-dustry, the issue comes down to a ques-tion of trust.
“People were using that pool with an expectation that it was natural liquidity,” said one veteran broker. “Maybe Pipeline thought what they were doing was fair, but it’s disappointing.”
— James Armstrong
quidity that it claimed to offer. The Securities and Exchange Commission smacked the firm and its two top execs with a total of $1.2 million in fines. The action put a new focus on dark pools and forced the buyside to scramble to learn all it could about routing practices and how pools operate.
Meanwhile, lower Manhattan’s Zuccotti Park took on the look of an urban Woodstock in September, as hundreds of disenfranchised mostly recent college graduates decried corporate greed and the workings of the financial system. The group, “Occupy Wall Street,” became a lightning rod for a hodgepodge of points of view, from the Green Move-ment to redistributing wealth in America. As the weather grew colder, however, the OWS crowd dug in its heels and pitched tents. They built themselves a makeshift city, and by doing so, offered their own version of a popular saying during the protests of the 1960s: “Turn on, tune in, and
Traders Magazine pres-
The Securities and Exchange Commission and other regula-tors had a busy year, addressing market concerns about how to
create a more stable trading environment and restore confidence rattled by last year’s “flash crash.”
Regulators introduced a myriad of rules this year and floated new proposals to fix market structure flaws that led to the May 6, 2010 event. They also want to get a better handle on the forces driving the market. Upon examining the “flash crash,” many pointed at high-frequency traders and their effect on the market—
exacerbating market volatility and con-tributing to the severity of price move-ments and liquidity issues. Also, the role of market makers in providing an orderly marketplace was questioned.
To recap, 2011 saw the implementa-tion of the sponsored-access rule; the approval of the “large trader” rule; and proposals for a limit up/limit down single-stock circuit-breaker rule and a revamped marketwide circuit-breaker rule. On top of that, a new consolidated audit trail gained traction, as did several ideas to curb the impact of HFTs. Busy, indeed.
The large-trader rule requires large-
volume traders to code their trade tickets with a unique identifier and time stamp for trades they execute. It targets both buyside and sellside shops doing signifi-cant volume.
If requested by regulators, trade infor-mation would have to be available one day after a trade is completed.
The market-access rule requires brokers to screen all orders before they are sent to the exchanges. The rule prohibits traders from sending orders directly to exchanges and allows brokers to check for clearly er-roneous “fat finger” errors or other obvi-ous discrepancies.
>>Regulators Look to Pacify the Market
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Despite their preoccupation with im-plementing more requirements mandated by the recently enacted Dodd-Frank Act, regulators continue to float new propos-als to fine-tune the market structure and keep trades flowing smoothly.
A limit up/limit down proposal was pitched as an improvement to the current circuit-breaker rule. Other ideas being dis-cussed include a minimum time require-ment for quotes, a message traffic tax and specific market-maker obligations.
However, next year’s most likely
change to market structure will be the implementation of a consolidated au-dit trail. An audit trail will help provide regulators with a detailed picture of what trading looks like, allowing them to pin-point causes of market stress and imple-ment fixes to prevent major strains from happening again.
“We have not seen the end of issues and concerns around the flash crash,” said An-nette L. Nazareth, partner at Davis Polk & Wardwell, and a former SEC Commis-sioner and director of the regulator’s Divi-
sion of Trading and Markets. “The SEC continues to work on responses such as the implementation of a consolidated au-dit trail. This clearly is a priority, since the SEC remains concerned about the time it took to aggregate all the market data and analyze it.”
Stephen Nelson, principal of the Nel-son Law Firm, agreed.
“Clearly, we are in the mode where there will be more regulation,” he said.
—John D’Antona Jr.
With volume slumping for the second year in a row, the industry’s major stock exchanges competed ag-
gressively for brokers’ business. That meant cutting prices.And, in the world of stock exchanges,
price cuts translate into higher rebates. This year, the exchanges introduced new rebate programs and sweetened the terms of existing programs.
They added new rebate tiers, reduced the volume thresholds necessary to qual-ify for higher rebates and, simply, in-creased rebates. The upshot was to make it easier for liquidity providers to qualify for higher rebates. And while most of the liquidity providers are market makers and other high-frequency trading types, the exchanges looked to broaden their source of supply by creating rebate programs that
appealed to nontraditional suppliers such as retail and institutional brokerages.
“They are looking to add more flow to their platforms that is not high-frequency in nature,” Pankil Patel, a managing direc-tor of trading at Credit Suisse, told Trad-ers Magazine earlier this year.
“It’s important for [the exchanges] to get a good mix of flow in the door,” Pankil added. To that end, Nasdaq expanded its “Investor Support Program,” while NYSE Arca created a similar program called “In-vestor Tiers.”
Perhaps the most dramatic move came from BATS Global Markets, which had previously kept its pricing simple. Eschew-ing its “flat” pricing model, BATS tiered the pricing on its flagship BZX exchange in July. More liquidity now garners higher rebates.
Much of the rebate activity occurred
in the first half of the year, when average daily volume was trending at 7 billion to 7.5 billion shares. That was down from a run rate of 8.4 billion shares in 2010 and 9.8 billion in 2009.
The business turned around in August as concern over Europe’s debt crisis roiled the stock market, producing a run rate of 8 billion shares through October.
Still, despite the recovery, the exchang-es did not reverse course and kept tinker-ing with their rebates.
In November, for instance, Nasdaq launched a new program for firms that do a lot of trading before the open. It added a new tier to a program targeting big tak-ers of liquidity, and it tweaked its Inves-tor Support Program. All the steps taken give more traders more opportunities to qualify for higher rebates.
—Peter Chapman
>>Low Volume Sparks Exchange Price War!
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Special thanks to our Members and partners for helping us become the #1 marketplace for institutional equities.
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High-frequency traders. Can’t live with ‘em. Can’t live without ‘em.
That was the message this year coming out of the bigger brokers as they took steps to both win HFT business and help their institutional clients thwart HFT trading.
Now that the Securities and Exchange Commission’s Rule 15c3-5, or mar-ket access rule, has gone into effect, the brokers are scrambling to put into place an infrastructure that would allow them to process orders from latency-sensitive high-frequency trading firms. At the same time, they are deploying technol-ogy to help their money manager clients combat what they contend are the HFTs’ predatory trading practices. Brokers have reworked their algorithms, built new trading devices, deployed special-purpose ECNs, and, in one extreme example, completely reshaped their dark pools.
But can they do both? Can the brokers serve two masters? Charles Susi, global co-head of direct execution at UBS, believes so.
“By providing execution capabilities to all segments, we can bring different kinds of liquidity together—and offer even more crossing opportunities,” the exec told Traders Magazine this summer.
Despite the reassuring words, the buyside is still concerned about brokers’ handling of their orders. This year they stepped up their pressure on the sellside to both provide them with more informa-tion regarding the venues to which their
orders travel and to supply them with technology to deal with the presence of HFTs.
By some accounts, HFT volume rep-resents half of all industry volume. To pla-cate their worried customers, brokers have taken a range of steps to add safety to the trading experience. At a minimum, the brokers are working with industry group FIX Protocol Limited to supply trading venue information to the buyside with every trade report. At the other extreme, they’re building new trading venues from scratch.
Credit Suisse, for example, launched an ECN called Light Pool that largely ex-cludes high-frequency traders. Rival Mor-gan Stanley is completely revamping the matching methodology for its primary dark pool to favor larger orders, the type unlikely to be used by HFTs.
At the same time, the brokers aren’t about to let a money-making opportunity
pass them by. The SEC’s new sponsored access rule requires all firms providing direct market access to incorporate risk checks. This could slow down latency-sensitive HFTs, but is deemed crucial to protecting the marketplace.
Previously, many of the more success-ful providers of sponsored access did not incorporate risk checks. The big brokers, however, largely shied away from the busi-ness. But now that the playing field has been leveled, they are embracing spon-sored access wholeheartedly. Their efforts are appreciated by HFTs.
“If you find a bulge bracket firm who has either built or acquired a very com-petitive high-frequency trading platform, then you get all the trappings of a full-ser-vice prime brokerage offering to go with it,” Manoj Narang, founder and chief executive officer of HFT firm Tradeworx, told this publication.
— Peter Chapman
>>Brokers’ HFT Balancing Act
Long a distant relative to its U.S. cousin, the Canadian equities market spread its wings and emerged this year as its own
powerhouse marketplace—replete with multiple exchanges, dark pools, alterna-tive trading systems and more algorithms. The country’s rise from old-school trad-
ing to mainstream among modern global markets has been solidified by its commit-ment to a solid banking system, transpar-ency and focus on the retail investor.
Against a backdrop of the failed merg-er of the Toronto Stock Exchange and the London Stock Exchange earlier this year, the Canadian marketplace continued its
>>Canada Forges Ahead
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march toward becoming more like the U.S. There was continued venue growth and fragmentation in Canada, prompted by regulatory changes in 2001—the Na-tional Instrument 21-101 Market Place Operations and NI 23-101Trading Rules, together known as the “ATS rules.”
One area of growth has been in dark pools. Canada has always been a market dominated by a handful of banks that control trading in the public markets. But times have changed. This year alone, sever-al new dark pools have sprung up, adding to the handful present last year. Goldman Sachs launched its dark pool, Sigma X, in Canada this year. Instinet also brought dark liquidity to the marketplace.
Prior to this year, Liquidnet and ITG were the only dark pool operators in Can-ada.
Despite the dark venue growth, Can-ada’s main trading exchange remains the Toronto, which still sees nearly 60 percent of all trading volume. But new alterna-tives, such as TMX Select and Goldman Sachs’s dark pool, are posing challenges to current market leaders.
Other dark venues are to come, ac-cording to observers, but the Investment Industry Regulatory Organization of Canada, the self-regulator of the Cana-dian equities markets, recently proposed that dark pools must offer some type of price improvement over the national best bid and offer for trades to take place in unlit venues. Historically, Canadian trad-ing has primarily taken place on the pub-lic exchanges.
Until final rules are passed, dark vol-ume will likely stay mired in the 3 to 4 percent range, as it has been for the last
few years. But some, such as Mike Big-nell, president of Omega ATS, are opti-mistic that volume could reach upward of 6 or 7 percent in the coming year.
“I’m optimistic growth could climb,” Bignell said.
But that growth is expected to be tempered, according to Lida Preyma, di-rector, capital markets research in global finance at the G20 Research Group at the University of Toronto. She said that un-til Canadian regulators are done passing outstanding rule proposals regarding dark pools, growth could be tepid.
“What we see is that everyone is in a holding pattern to see where regulation is going to wind up—no one wants to spend money to set up a dark pool before regulations are in place,” Preyma said.
Venue growth has also prompted li-quidity providers to compete more heav-ily for business. In a bid to grab more market share, Omega ATS recently de-cided to eliminate taker fees. It eliminated the pass-through fee typically charged to investors who take liquidity from the marketplace, making it the only free ATS
for participants in Canada. As a result of more venues, a need for
connectivity solutions has emerged for both the buyside and sellside. Sang Lee, a managing partner at consultancy Aite Group, said U.S. trading solution provid-ers can expect to see increased demand for their services in Canada.
“The Canadian market is going through a tremendous amount of market structure changes—from fragmentation, adoption of more sophisticated strategies and algorithms to smart order routers,” Lee said. These technological changes, combined with the growing presence of high-frequency traders, he said, have cre-ated a demand for innovation and more product providers.
The buyside is said to be looking at smart order routers and crossing engines, as well as algorithms that will help them keep pace in changing times.
“Canada is an evolving market and on a technology trajectory to be very similar to the U.S.,” said Mark Skalabrin, chief executive at Redline Trading Systems.
—John D’Antona Jr.
With one exception, the year 2011 is proving a tough one for the nine bulge bracket equities shops.
In the first nine months, only Morgan Stanley managed to excel. The other eight either saw their revenues decline from last
year or grow only modestly. Conditions looked promising at the
top of the year. In the first quarter, Gold-man Sachs, Citigroup, UBS, Deutsche Bank and Morgan Stanley all reported higher levels of orders and commissions. That didn’t prevent most of them from
>>Bulge Weathers Rough Year
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further. Only Morgan Stanley, Goldman and
Credit Suisse were able to thrive during the tumultuous quarter. Morgan Stanley’s Porat again singled out the firm’s electronic trading services and its derivatives franchise for praise. Goldman reported robust commissions and improved market mak
Ttaking their place as a dominant part of the industry, all traders began looking to these instruments as a gateway to the brave new world of multi-asset trading.
Bryan Johanson, managing director for global index and exchange-traded products at NYSE Euronext, said ETFs can blur the lines between equities and other asset classes, since they themselves are equities, but their underlying assets might be fixed-income products, currencies, commodities or something else.
Currently, 39 percent of ETFs on NYSE Arca track domestic equities, while 26 percent of listings track international stocks. Commodities and futures-based funds make up 14 percent of listings, fixed-income funds make up 11 percent, and currencies funds are 3 percent.
To trade ETFs effectively, firms have to look beyond domestic equities, leveraging their resources on trading desks across as
>>ETFs
posting lower revenues overall, however. Citi reported a healthy cash equities
business, but still recorded a 9 percent drop in total revenues due to problems with “principal positions.” Goldman cited lower market making revenues for a 7 per-cent decline. (All figures are net of accounting gains and losses attributable to debt re-valuations.)
Morgan Stanley was one of the few to post a gain over the first quarter of 2010, fir-ing on all cylinders. Cash eq-uities, derivatives, and prime brokerage all did well, chief financial officer Ruth Po-rat told analysts at the time. Prime brokerage recorded its highest level of client balanc-es since the financial crisis of 2008, she noted.
By the second quarter, business conditions worsened as money mangers reined in their trading. Still, the five U.S. bulge banks managed to post double digit gains while the Europeans recorded declines. In the U.S., share volume was down 30 percent compared to the second quarter of 2010. In Europe, notional value traded (in Euros) was down 14 percent.
Deutsche Bank, Credit Suisse, and UBS all reported deterioration in their cash equities business. Deutsche Bank found conditions worse in Europe than in the U.S., where it found some success in derivatives trading. Still, the big Ger-man bank posted a 14 percent drop in the
quarter to €555 million. By contrast, UBS reported a big drop
in derivatives revenues due to “more chal-lenging trading conditions.”
The U.S. banks did well. Goldman overcame anemic inflows of stock orders with better market making results, espe-cially in derivatives. Morgan Stanley re-ported a 37 percent jump to $1.7 billion.
Again, the gains were across the board, according to Porat, stemming from “strong client activity.” In addition, growth in Morgan Stanley’s electronic trading services “continued to outpace the market,” she said, “while equity de-
rivatives were up significantly.” If the second quarter was dull, the third
quarter was anything but. In both the U.S. and Europe, volume and volatility soared
as panic over Europe’s debt woes set in. Despite heavy trading by clients, most of the bulge brokers got bruised during the quarter. Some re-ported a strong commission business, but were done in by their market making.
Much of the pain came in derivatives, a notoriously difficult business to manage during frothy market condi-tions. The volatility got the best of JP Morgan, according to chief financial officer Doug Braunstein, who reported an 8 percent drop in equities revenues to $1 billion during the quarter.
Others did much worse. UBS reported a 30 percent drop to 630 million Swiss francs because of lower rev-enues in both cash equities and derivatives. UBS took its derivatives hit in Europe,
while reporting better results in the U.S. (The figure does not include the 1.85 bil-lion Swiss franc charge UBS took for the losses of a rogue trader on its Delta One desk.)
Both Citi and BofA Merrill were also whipsawed in equities derivatives. Bruce Thomson, Merrill’s chief financial officer, reported that revenues from cash equities were down 7 percent during the quarter, but those from derivatives dropped even
Down DaysEquities Revenues for Bulge Bracket
First Nine Months 2011In Millions
2011 2010 CHANGE
1. GSCO $6,379 $6,086 4.8%
2. JPMI $3,670 $3,493 5.1%
3. CITI $2,169 $2,900 -25.2%
4. BAML $3,086 $3,362 -8.2%
5. MSCO $4,859 $3,731 30.2%
6. CSFB SFr. 4,000 SFr. 4,500 -11.1%
7. UBS SFr. 2,995 SFr. 3,523 -15.0%
8. DBAB € 1,882 € 2,236 -15.8%
9. BARC £1,446 £1,415 2.2%
Note: Figures net of accounting gains and losses attributable to debt revaluations (SFAS-159)
Source: Company reports
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further. Only Morgan Stanley, Goldman and
Credit Suisse were able to thrive during the tumultuous quarter. Morgan Stanley’s Porat again singled out the firm’s electron-ic trading services and its derivatives fran-chise for praise. Goldman reported robust commissions and improved market mak-
ing results. The latter was due to “effective risk management of customer-driven po-sitions” in the volatile environment.
As Traders Magazine was going to press the market conditions of the third quarter were still present. The stock mar-kets in the U.S. and Europe were still chewing over the European debt crisis as
concerns moved from Greece to Italy. Vol-ume in October and November was up significantly over last year and volatility, as measured by the VIX index, was at his-torically high levels. Equities departments are bracing for layoffs and significantly lower bonuses.
—Peter Chapman
Traditionally, single-stock trad-ers have rarely gotten involved with exchange-traded funds. But this year, as ETFs began
taking their place as a dominant part of the industry, all traders began looking to these instruments as a gateway to the brave new world of multi-asset trading.
Bryan Johanson, managing director for global index and exchange-traded products at NYSE Euronext, said ETFs can blur the lines between equities and other asset classes, since they themselves are equities, but their underlying assets might be fixed-income products, curren-cies, commodities or something else.
Currently, 39 percent of ETFs on NYSE Arca track domestic equities, while 26 percent of listings track international stocks. Commodities and futures-based funds make up 14 percent of listings, fixed-income funds make up 11 percent, and currencies funds are 3 percent.
To trade ETFs effectively, firms have to look beyond domestic equities, leveraging their resources on trading desks across as-
set classes. The expertise required to trade ETFs demands a multi-asset approach.
“That expertise, since it requires a broader understanding of portfolio con-struction, is typically not what you find on a cash equity desk,” said Tom Smykowski, who heads ConvergEx’s global portfolio and ETF desk. “You’re going to have to open your knowledge base to include dif-ferent asset classes.”
Smykowski noted that over the past year, volumes for ETFs have grown sig-nificantly compared with the rest of the market. Earlier this year, ETFs made up between 25 and 30 percent of total vol-ume, but this summer they rose to as high as 40 percent of volume for some days. Some believe that ETF trading added fuel to the volatility, though others argue that investors fled to the vehicles in response to volatile markets.
With ETF volumes that high, equity traders can’t afford to ignore the shift to-ward exchange-traded funds, which differ from traditional equities in a number of ways.
For one thing, volume does not always equal liquidity in ETFs. That is because authorized participants can create new ETF shares out of a fund’s underlying as-sets. They can also redeem ETF shares, converting them back into the underlying assets. Because of APs, an ETF can be liq-uid even when it’s only lightly traded.
Matt Tucker, managing director of U.S. fixed-income strategy at ETF giant BlackRock, said APs have helped to pro-mote even further collaboration among desks specializing in different asset classes, as that collaboration is vital to the cre-ation/redemption process.
Since ETFs are a hybrid vehicle, firms can come to a variety of conclusions in terms of who gets to trade them, Tucker said. While equity desks have tradition-ally had authority over ETFs, the vehicles can also be traded by those with the most knowledge of their underlying assets. Other firms have chosen to use ETF-spe-cific desks.
With this increased competition, trad-ers who formerly just focused on U.S.
>>ETFs Push Traders Toward Multi-Asset World
rivatives were up significantly.” If the second quarter was dull, the third
quarter was anything but. In both the U.S. and Europe, volume and volatility soared
as panic over Europe’s debt woes set in. Despite heavy trading by clients, most of the bulge brokers got bruised during the quarter. Some re-ported a strong commission business, but were done in by their market making.
Much of the pain came in derivatives, a notoriously difficult business to manage during frothy market condi-tions. The volatility got the best of JP Morgan, according to chief financial officer Doug Braunstein, who reported an 8 percent drop in equities revenues to $1 billion during
Others did much worse. UBS reported a 30 percent drop to 630 million Swiss francs because of lower rev-enues in both cash equities and derivatives. UBS took its derivatives hit in Europe,
while reporting better results in the U.S. (The figure does not include the 1.85 bil-lion Swiss franc charge UBS took for the losses of a rogue trader on its Delta One
Both Citi and BofA Merrill were also whipsawed in equities derivatives. Bruce Thomson, Merrill’s chief financial officer, reported that revenues from cash equities were down 7 percent during the quarter, but those from derivatives dropped even
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a prepackaged algo to keep up, but when there are massive jumps like those we saw this summer, the ability to quickly customize algos becomes more important.
Cthough investments in plants and new hiring was noticeably absent, corporations poured billions back into their own stocks.
This year, buybacks have increased 49 percent, with 2011 on a course to record $540 billion in buyback authorizations, according to Birinyi Associates. That would be the third-highest amount in U.S. history after 2006 ($655 billion) and 2007 ($863 billion).
During the first three quarters of this year, companies actually consummated more than $376 billion in stock buybacks. That already tops the $343 billion in buybacks consummated in 2010 and is well over the mere $156 billion consummated in 2009.
The month of August alone saw 198 new buyback authorizations. The last time the market saw buyback activity that significant was more than three years ago, when corporations announced 199 buybacks in the February before the financial crisis hit.
In September, Berkshire Hathaway
>>Buybacks
cash equities have to broaden their hori-zons—learning more about fixed-income, commodities, international stocks and foreign exchange.
“It has become important to involve traders with expertise in a variety of in-struments,” said NYSE’s Johanson. “We’re seeing more and more exotic and different
asset classes that are packaged as an ETF.”NYSE Arca has had more that 265
new ETF listings this year, with more an-ticipated by year’s end. Already, 2011 has broken the previous record set in 2007 of 223 new listings.
“Now you have a ton of volume in hundreds of ETFs that are out there,” said
Paul Weisbruch, vice president of ETF/options sales at Street One Financial. “There’s a lot of communication between desks and departments where they can hedge off exposure and probably more seamlessly get big trades done from asset class to asset class.”
— James Armstrong
For the past several years, buyside traders have been consolidating their algorithms, paring back the number of tools on their desk-
tops. During 2011, that process acceler-ated even further, with many firms decid-ing to cut back to just a handful of algos, often with each one tailored to specific needs.
“People are trying to get from maybe 14 or 15 algorithms per broker to some-thing more like four,” said Todd Lopez, managing director and co-head of Ameri-cas sales at Goldman Sachs Electronic Trading. “I think four has kind of been the magic number that we’ve seen.”
Lopez said clients were overwhelmed with different options and wanted to sim-plify how traders access various strategies. The ability to customize algos has been critical to limiting the number of tools traders use, he added.
Customization has not ended with specific algos for different desks. Rather, firms are trying to suit algos to the par-ticular needs of each trader, said Peter
Sheridan, vice president and head of al-gorithmic distribution for the Americas at Goldman Sachs Electronic Trading.
“What we find is, Trader A might have a very different need from Trader B,” Sheridan said. “The idea is not just to customize on a firm-wide level, but to customize right down to the individual-trader level.”
Sheridan stressed that algo providers are not reducing the number of strategies they offer, but are trying to drill down and target specific strategies for individual clients. After a while, too many offerings can become nothing but noise to traders, he said.
Nitin Gambhir, chief executive offi-cer of Tethys Technology, said the move toward fewer, more customized algos is all about making trading desks more ef-ficient—and more profitable.
“There’s this tremendous move hap-pening where clients are getting more and more sophisticated, and what they want is the algo parameters to be tweaked to ensure maximal use of capital,” Gambhir said.
Algo providers have to customize their products if they want their customers to get the best execution, he said.
As the market has gotten volatile, the natural response has sometimes been to bypass algos altogether and move to more hand management of trades. That, how-ever, can put traders at a disadvantage, said Dan Hubscher, who leads capital markets for Progress Software.
Hubscher said prepackaged algorithms always need to be tweaked when the mar-ket changes, because they tend to work on a set of assumptions that can become obso-lete when there is a major shift in trading.
“If you don’t have the power to change those in reaction to market events, you’re stuck,” Hubscher said. “While manual trading might feel a bit safer, you’re go-ing to be behind the people who are still in the market trading automatically, who have the power to change their algorithms very quickly, because they have custom-ization tools.”
He said when the market changes in a slow or predictable way, it is easier for
>>Algos: Better, Faster… Fewer
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a prepackaged algo to keep up, but when there are massive jumps like those we saw this summer, the ability to quickly cus-tomize algos becomes more important.
So while the number of algos on a desk might be declining, the algos that are there must be the most sophisticated available, not only tailored to meet the
needs of individual traders, but also flex-ible enough to adapt to rapidly changing market conditions.
— James Armstrong
Concerned about the future but still flush with cash, many companies sought to buy back their own stock in 2011. Al-
though investments in plants and new hiring was noticeably absent, corpora-tions poured billions back into their own stocks.
This year, buybacks have increased 49 percent, with 2011 on a course to record $540 billion in buyback authori-zations, according to Birinyi Associates. That would be the third-highest amount in U.S. history after 2006 ($655 billion) and 2007 ($863 billion).
During the first three quarters of this year, companies actually consummated more than $376 billion in stock buy-backs. That already tops the $343 billion in buybacks consummated in 2010 and is well over the mere $156 billion consum-mated in 2009.
The month of August alone saw 198 new buyback authorizations. The last time the market saw buyback activity that significant was more than three years ago, when corporations announced 199 buy-backs in the February before the financial crisis hit.
In September, Berkshire Hathaway
announced it would engage in its own buyback plan, a first for the investment company. Walt Disney, JPMorgan Chase, Wal-Mart, Intel, ConocoPhillips and Hewlett-Packard all authorized billions for share buybacks in 2011.
“Companies are still concerned about making capital investments, but they have an abundant amount of cash on their balance sheets,” said Jeffrey Yale Rubin, director of research for Birinyi Associates. “Buybacks are the way they’re going.”
So far this year, the financial sector has had the largest number of authorized buyback programs, followed by consumer discretionary companies and industrials. Technology companies, however, have authorized the largest amount in dol-lar terms, followed by companies in the healthcare sector.
Brett Klein, a trader at Cheevers & Co. who specializes in buybacks, said he is optimistic that buybacks will continue.
One recent trend he noted is that more company treasurers are setting up pre-ar-ranged trading strategies, which allow them to legally sidestep blackout periods when they are not ordinarily allowed to buy back their stock.
Corporations have about eight months out of the year when insider trading rules create blackout periods. However, under the SEC’s 10b5-1 rule, companies can set up a system to perform automatic stock buybacks during those times.
Treasurers are increasingly seeing these prearranged buybacks as a form of risk management, Klein said. Should a company’s stock fall below a certain level, a planned trade will be executed buying back stock on the company’s behalf.
Tim Sargent, chief executive officer of equity research company QSG, said his firm is working with the sellside and with companies doing buybacks to ensure they can get best execution.
“Increasingly in an era of high-fre-quency trading and questions surround-ing trade signaling and other kinds of slippage issues, these corporate manag-ers want to make sure games aren’t being played with the repurchase programs,” Sargent said.
A third-party provider can let compa-nies performing buybacks know if costs are in line with the marketplace and whether or not the behavior of a stock is normal during buyback executions, he said.
— James Armstrong
>>Buybacks Rebound From Financial Crisis Lows
Paul Weisbruch, vice president of ETF/options sales at Street One Financial. “There’s a lot of communication between desks and departments where they can hedge off exposure and probably more seamlessly get big trades done from asset
— James Armstrong
Algo providers have to customize their products if they want their customers to get the best execution, he said.
As the market has gotten volatile, the natural response has sometimes been to bypass algos altogether and move to more hand management of trades. That, how-ever, can put traders at a disadvantage, said Dan Hubscher, who leads capital markets for Progress Software.
Hubscher said prepackaged algorithms always need to be tweaked when the mar-ket changes, because they tend to work on a set of assumptions that can become obso-lete when there is a major shift in trading.
“If you don’t have the power to change those in reaction to market events, you’re stuck,” Hubscher said. “While manual trading might feel a bit safer, you’re go-ing to be behind the people who are still in the market trading automatically, who have the power to change their algorithms very quickly, because they have custom-
He said when the market changes in a slow or predictable way, it is easier for
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The year began with low vol-ume and little volatility, and then changed rapidly midyear, making 2011 a year of stark
contrasts. Usually, the end of July and the month of August are the summer doldrums, when not much happens. This year, it was when everything changed.
Both volume and volatility skyrock-eted this summer. The VIX volatility in-dex went from under 15 in April to a peak of 48 in August. Volume levels tended to mirror volatility, with monthly consoli-dated volume jumping more than 74 per-cent from July to August. (Volume this August was 53 percent higher than the same month last year.)
“We view the period from July 25 to the present as a radically different execu-tion environment, versus the first half of the year,” said Tim Reilly, head of North America electronic execution sales at Citi.
Reilly compared the market turn at the end of July—and the August sell-off that followed—to other recent game-chang-ers, such as the quant meltdown of 2007, the financial crisis of 2008 and the “flash crash” and its aftermath in May 2010.
As the markets became more volatile in the second half of this year, bid-offer spreads went up, especially for small- and mid-cap stocks, he said. Those spreads have now stabilized at new, higher levels, which have proven to have staying power.
The defining challenge in the first half of the year was liquidity discovery, but with the intraday volatility starting in late
July, Reilly saw an escalation in concerns about short-term trading strategies. Those concerns dampened somewhat when the market started going up, he added.
Though volatility—and the high vol-umes that typically go along with it—could go down, most traders are not look-ing for that to happen anytime soon.
“Just when you think we’re about to go back to those low volumes that we saw at the beginning of the year, something else creeps up that keeps volatility ratcheted
up,” said Ed Brown, executive vice presi-dent for business development at the in-terdealer broker ICAP.
Brown said that while few people saw the sea change in markets coming, the obvious signs were all there in the macro
environment. During the first half of the year, traders might just have overlooked some of those signs as they were so fo-cused on regulatory issues, he added.
Phil Lynch, chief executive officer of Asset Control which provides economic data to investors, said volatility will likely continue into the coming year.
“There are periods where the volatility is going to spike, but the trend is that the time frame in between those is going to be much shorter,” Lynch said.
Markets today are more electronic and far more global than they were only a few years ago, and with so much rapidly mov-ing capital today, volumes and volatility are bound to rise, he added.
— James Armstrong
>>Volume and Volatility: The Comeback Kids
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Consolidated Volume
In B
illio
ns
40 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
040_TMDec11 12 11/18/2011 8:34:12 PM
Volume is up for the ninth straight
year in the options industry,
but there’s a big difference this
year. Of the 21.6 percent increase in total
year-over-year volume through October,
over a third of the growth is coming from
contracts that expire weekly. That makes
weeklies one of the most successful product
launches in the industry’s history. Since
the creation of the listed marketplace in
1973, most options contracts have expired
monthly.
“There’s been a huge jump in volume
since the product was launched nearly
18 months ago,” Steve Crutchfield, chief
executive of NYSE Amex Options, told
Traders Magazine.
In the 10 months through October,
weeklies accounted for 9.1 percent of total
volume, according to data provided NYSE
Euronext. That’s up from 1.8 percent in the
same period last year.
The final tally for the year is likely to
be even higher, as a big chunk of the avail-
able classes only began trading on a weekly
basis in September and October.By
Pe
te
r C
ha
Pm
an
Weekly
Options
Surge in
Popularity
ShortSweetand
42 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
042_TMDec11 1 11/23/2011 12:32:47 PM
since the product was launched nearly
18 months ago,” Steve Crutchfield, chief
executive of NYSE Amex Options, told
In the 10 months through October,
weeklies accounted for 9.1 percent of total
volume, according to data provided NYSE
Euronext. That’s up from 1.8 percent in the
The final tally for the year is likely to
be even higher, as a big chunk of the avail-
able classes only began trading on a weekly
basis in September and October.
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043_TMDec11 2 11/23/2011 12:32:52 PM
Wtime, in an attempt to squeeze out some of the volatility in their stock portfolios.
The Santa Barbara County Employees Retirement System, the Hawaii Employees Retirement System, the Los Angeles Department of Water and Power Employees Retirement Plan, the Seattle City Employee Retirement System and the Alaska Retirement Management Board are all in various stages of adopting buy-write strategies benchmarked against the Chicago Board Options Exchange’s BXM index. The total to be hedged by all five plans could reach more than $1 billion.
“This is one of our approaches to dealing with the fact that the markets are much more volatile now than they used to be,” said Colin Bebee, an analyst with Portland, Ore.-based Pension Consulting Alliance, a consultancy advising four of the five plans. “Until recently, a buy-write strategy hasn’t been very popular with pension plans, so most of the managers we’re dealing with are just now entering into it.”
A buy-write, or covered call, strategy involves selling calls against a single stock or basket
In September, total volume attributable to weeklies was 10.6 per-cent, according to NYSE Euronext. In October, that figure was 12.2 percent.
Weekly volume can be even higher in some of the individu-al classes. In Netflix options, in October, for instance, weeklies comprised about 40 percent of all contracts. Trading in weekly SPY options in October was 23 percent of the total, while trad-ing in weekly options on Apple, Inc., was 27 percent.
(The percentages are of total industry volume. It is important to note however that weeklies only trade 40 weeks of the year. They do not trade during the third week of the month when the monthly contracts expire. Therefore, percentages would be higher if weeklies were only compared against total volume during the weeks in which they trade.)
Although the exchanges have had the authority to list weekly options since 2005, they only began in earnest in June 2010. From a handful of available classes then, the number of weeklies has jumped to about 100. The listings are typically of the more active names.
It has been the addition of new classes that is propelling the growth in trading, according to industry sources. “We opened up the floodgates,” explained Paul Stephens, director of international and institutional marketing at Chicago Board Options Exchange.
That was especially true in recent months. According to the Op-tions Clearing Corporation, 31 new names were added to the ros-ter in September and October. Each exchange is limited by the Se-curities and Exchange Commission to 15 listings apiece, but once listed they are tradable by any exchange. A few of the nine options exchanges have decided not to exploit into their allotments.
The popularity of the product has exchanges chafing at the SEC’s restrictions. Their brokerage customers are clamoring for new listings or complaining when one listing is dropped in favor of another. “We would like to expand the program,” Stephens
said. “There is certainly customer demand.”The CBOE was the driver behind the Short Term Option Se-
ries Program, as it is called, becoming the first and only exchange to list weekly options (on indexes) in 2005. The program stag-nated, however, as the irregular symbols used to denote weeklies caused complications for brokerage back offices. “Firms’ back offices were very much against weeklies,” Stephens noted, “and some of their front offices as well.”
But with the OCC-driven symbology effort, completed in May 2010, the door was thrown open to weeklies. Now all week-lies share the same root symbol with the regular options. That makes it easier for brokerages to process trades and customers to find specific contracts.
Charles Schwab & Co., which began its weeklies program in January of this year, has seen its active-trading customers jump on the new product. “It’s been dramatic,” said Randy Frederick, director of trading and derivatives at the Schwab Center for Fi-nancial Research. “Once we started offering them, our clients em-braced them very quickly and our volumes rose very sharply.”
Frederick points out that over half of all trading in monthly options occurs in the final week of the cycle. Given that, it’s a natural that traders would migrate to weeklies, Frederick said.
“You provide a lot of opportuni-ties for people to do things that they were only able to do once a month in the past,” Frederick said. “That creates an enormous amount of flexibility.”
Crutchfield points out that weeklies allow both buyers and sellers to fine-tune their ap-proaches to specific events, such as earnings announcements. Traders can take positions in the week of an occurrence rather than weeks in advance. For buy-ers, that reduces the premiums they must pay since premiums
typically drop the closer the option gets to expiration. “That’s the advantage of the product,” Crutchfield said.
Also contributing to the surge in
Pensions Eye Buy-Writes
Continued on page 46
Paul Stephens, CBOE
Randy Frederick, Schwab
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With crisis comes opportunity. That seems to be the message for the options industry as a group of public pension plans moves closer to incorporat-ing options into their portfolios, most for the first
time, in an attempt to squeeze out some of the volatility in their stock portfolios.
The Santa Barbara County Employees Retirement System, the Hawaii Employees Retire-ment System, the Los Angeles Department of Water and Power Employees Retirement Plan, the Seattle City Employee Retire-ment System and the Alaska Retirement Management Board are all in various stages of adopt-ing buy-write strategies bench-marked against the Chicago Board Options Exchange’s BXM index. The total to be hedged by all five plans could reach more than $1 billion.
“This is one of our approaches to dealing with the fact that the markets are much more volatile now than they used to be,” said Colin Bebee, an analyst with Portland, Ore.-based Pension Consulting Alliance, a consul-tancy advising four of the five plans. “Until recently, a buy-write strategy hasn’t been very popular with pension plans, so most of the managers we’re dealing with are just now entering into it.”
A buy-write, or covered call, strategy involves selling calls against a single stock or basket
of stocks. The short call position offsets the long stock position, giving the investor a hedge against dips in the market. As such, however, it can also cap any upside in the stock portfolio. In ad-dition to its hedging properties, the tactic can also be used to generate incremental income as the call seller receives the option’s premium.
Benchmarking against the CBOE’s
The CBOE was the driver behind the Short Term Option Se-ries Program, as it is called, becoming the first and only exchange to list weekly options (on indexes) in 2005. The program stag-nated, however, as the irregular symbols used to denote weeklies caused complications for brokerage back offices. “Firms’ back offices were very much against weeklies,” Stephens noted, “and
But with the OCC-driven symbology effort, completed in May 2010, the door was thrown open to weeklies. Now all week-lies share the same root symbol with the regular options. That makes it easier for brokerages to process trades and customers to
Charles Schwab & Co., which began its weeklies program in January of this year, has seen its active-trading customers jump on the new product. “It’s been dramatic,” said Randy Frederick, director of trading and derivatives at the Schwab Center for Fi-nancial Research. “Once we started offering them, our clients em-braced them very quickly and our volumes rose very sharply.”
Frederick points out that over half of all trading in monthly options occurs in the final week of the cycle. Given that, it’s a natural that traders would migrate to weeklies, Frederick said.
“You provide a lot of opportuni-ties for people to do things that they were only able to do once a month in the past,” Frederick said. “That creates an enormous amount of flexibility.”
Crutchfield points out that weeklies allow both buyers and sellers to fine-tune their ap-proaches to specific events, such as earnings announcements. Traders can take positions in the week of an occurrence rather than weeks in advance. For buy-ers, that reduces the premiums they must pay since premiums
typically drop the closer the option gets to expiration. “That’s the
Pensions Eye Buy-Writes
Continued on page 46
Continued on page 47
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045_TMDec11 4 11/23/2011 12:33:08 PM
interest this year has been rela-tively high levels of volatility, especially since August. The
appeal is to both buyers and sellers of options. Higher volatility translates into higher premiums, which are attractive to sellers. High volatility also means a greater chance for profit for buyers as
stocks bounce around more.The product is not limited to retail traders. “When weeklies came
out, most people assumed they would be used for speculation,” Eu-gene Kearns, an executive in Credit Suisse’s Advanced Execution Services group, said at this year’s meeting of the Chicago chapter of the Security Traders Association. “But it has turned out that institu-tions use them for risk management purposes as well.”
CBOE’s Stephens agrees that demand is coming from insti-tutions, but mostly short-term oriented hedge funds. Investors with longer time horizons opt for monthlies when writing cov-ered calls, for instance, he said.
For CBOE, hedge funds are behind much of the trading in the weekly version of the exchange’s venerable S&P 500 Index prod-uct, the SPX. Trading in weekly SPX contracts has accounted for
between 8 percent and 10 percent of total SPX volume—CBOE has a monopoly on SPX trading—this year during the weeks that weeklies trade.
That’s up sharply from last year when weeklies accounted for between 2 percent and 4 percent of total SPX volume. The reason for the upswing is because of changes CBOE made in December
2010, according to Stephens. First, CBOE changed the SPX weekly from an A.M.-settled contract to a P.M.-settled con-tract. Second, the exchange made it easier to trade the contract electronically.
“The customer for the weekly SPX is more of a hedge fund type,” Stephens said, “and more online.”
Some of the volume in weeklies has come at the expense of volume in comparable monthlies, industry sources acknowl-edge. Still, opinions diverge as to how much. Frederick and Stephens say very little weekly volume is “cannibalistic.” NYSE Amex’ Crutchfield says his unit has done some research, but is unable to quantify the shift.
“It’s difficult to quantify,” Crutchfield said. “You’re playing counter-factual. What would volume have been if there were no weeklies? I think there is a pretty healthy mix of new volume.
Still some has moved away from the front month.” Combined, NYSE Amex and NYSE Arca trade about a quarter of all weeklies volume, according to NYSE Euronext statistics.
Whatever is driving the volume, weeklies have become one
of the industry’s hottest innovations, arguably in the same league as contracts on the S&P 100 and S&P 500 indexes (1983); the advent of electronic trading and the International Securities Ex-change (2000); and the contract on the VIX (2007).
Certainly, the product has taken off. “Within the first month our expectations were exceeded,” Schwab’s Frederick said. “The activity was double what we thought it would be.” TM
Volume SurgeContinued from page 44
Expanding UniverseWeekly Options Contract Volume
January to October
2011 2010Total options volume 3.9 billion 3.2 billionTotal weeklies volume 355 million 58 millionWeeklies/total volume 9.1% 1.8%No. of weeklies at end of period 42 104
Sources: OCC, NYSE Euronext, CBOE
“It’s difficult to quantify. What would volume have been if there were no weeklies? I think there is a pretty healthy mix of new volume.”
STEvE CruTChfIEld, NYSE AMEx OpTIONS
selling a listed SPX option against a portfolio of S&P 500 stocks. In the past, the CBOE has funded studies that claim investors using a BXM strategy can come close to matching the performance of the S&P 500 over the long haul with only two-thirds of the volatility.
Buy-writes are part of a broader group of hedging strategies called “overlays” that use various derivatives including options, futures and swaps to hedge stock portfolios.
“We’re starting them off with the BXM idea,” Bebee said, “because using listed options is very transparent and you only have to deal with one option per month.”
These strategies have long been deployed by high-net-worth individuals, foundations and endowments, but less regularly by pension plans. Their popularity tends to surge after market downturns such as the crashes of 1987 and 2000, and then peter out. Money manager Loomis, Sayles & Co. was a big player in the
early 1990s in buy-writes for institutions, but as the bull market roared ahead, the business fell by the wayside.
Much of the renewed interest has been generated by the stock
Buy-WritesContinued from page 45
“Given the volatility of the last three years, we’ve seen a lot of interest. Certainly more
46 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
046_TMDec11 5 11/23/2011 12:33:24 PM
between 8 percent and 10 percent of total SPX volume—CBOE has a monopoly on SPX trading—this year during the weeks that
That’s up sharply from last year when weeklies accounted for between 2 percent and 4 percent of total SPX volume. The reason for the upswing is because of changes CBOE made in December
2010, according to Stephens. First, CBOE changed the SPX weekly from an A.M.-settled contract to a P.M.-settled con-tract. Second, the exchange made it easier to trade the contract
“The customer for the weekly SPX is more of a hedge fund
Some of the volume in weeklies has come at the expense of volume in comparable monthlies, industry sources acknowl-edge. Still, opinions diverge as to how much. Frederick and Stephens say very little weekly volume is “cannibalistic.” NYSE Amex’ Crutchfield says his unit has done some research, but is
“It’s difficult to quantify,” Crutchfield said. “You’re playing counter-factual. What would volume have been if there were no weeklies? I think there is a pretty healthy mix of new volume.
Still some has moved away from the front month.” Combined, NYSE Amex and NYSE Arca trade about a quarter of all weeklies
Whatever is driving the volume, weeklies have become one
of the industry’s hottest innovations, arguably in the same league as contracts on the S&P 100 and S&P 500 indexes (1983); the advent of electronic trading and the International Securities Ex-change (2000); and the contract on the VIX (2007).
Certainly, the product has taken off. “Within the first month our expectations were exceeded,” Schwab’s Frederick said. “The activity was double what we thought it would be.” TM
“It’s difficult to quantify. What would volume have been if there were no weeklies? I think there is a pretty healthy mix of new volume.”
BXM index is considered a rela-tively simple and transparent form of covered call writing as it involves
selling a listed SPX option against a portfolio of S&P 500 stocks. In the past, the CBOE has funded studies that claim investors us-ing a BXM strategy can come close to matching the performance of the S&P 500 over the long haul with only two-thirds of the volatility.
Buy-writes are part of a broader group of hedging strategies called “overlays” that use various derivatives including options, futures and swaps to hedge stock portfolios.
“We’re starting them off with the BXM idea,” Bebee said, “be-cause using listed options is very transparent and you only have to deal with one option per month.”
These strategies have long been deployed by high-net-worth individuals, foundations and endowments, but less regularly by pension plans. Their popularity tends to surge after market down-turns such as the crashes of 1987 and 2000, and then peter out. Money manager Loomis, Sayles & Co. was a big player in the
early 1990s in buy-writes for institutions, but as the bull market roared ahead, the business fell by the wayside.
Much of the renewed interest has been generated by the stock
market crash of 2008 and the subsequent bouts of volatility. Re-cently, for instance, as fears have mounted over the European
debt crisis, the CBOE’s VIX index has moved into the 30 to 35 range, signifi-cantly higher than its norm of about 20.
Players in the niche overlay market are reluctant to predict a gusher of new business this time out, but are still optimistic. “Given the volatility of the last three years, we’ve seen a lot of interest,” said Jack Han-sen, chief investment officer of the Clifton Group. “Cer-tainly more than four years ago. Still, in the context of all of the searches and
changes going on within institutional port-folios, it’s a relatively small number.”
Clifton is one of a handful of money managers that specializes in overlays. Oth-ers are Rampart Investment Management in Boston, which is managing a program for Santa Barbara County; Gateway Investment Advisers, which won the Hawaii Employees
mandate; market makers Gargoyle Group; and Capstone Asset Management. The big passive fund managers, Russell and State Street, have also recently entered the space. TM
Buy-WritesContinued from page 45
Jack Hansen, Clifton Group
“Given the volatility of the last three years, we’ve seen a lot of interest. Certainly more
than four years ago.”
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>ConvergEx Portfolio Algo For Dark Pools
ConvergEx Group re-cently announced the launch of the first in
a new series of portfolio al-gorithms, this one designed specifically for executing in domestic dark venues.
Dubbed Spectrum, the algo allows traders to maintain their required cash and sector bal-ances, something ConvergEx says is not usually available in algos for dark markets.
“If you worked on a port-folio desk for the last five years, it’s been really frustrat-ing,” said Gary Ardell, head of the financial engineering and advanced trading solutions group at ConvergEx. “All your peers over on the single-stock desks have been using better and better dark technologies. But you couldn’t use them, because the cash constraints and the risk management were just too hard.”
With most dark algos, an order can get executed quickly or remain pending for a con-siderable period of time, Ar-dell said. That simply won’t do for portfolio traders, who need to precisely manage risk and cash balances, he said.
Spectrum offers features that are included in many portfolio algos for lit markets but are not always available
in the dark. For instance, it offers three separate cash ob-jective options based on a cus-tomer’s preferred level of cash constraint, allowing them to make sure they are keeping the appropriate level of cash on their books for a portfolio.
The algo also supports three distinct settings for risk management, configuring to meet a user’s selected level of risk aversion.
—James Armstrong
>Lime Acquires Cactus Trading
Lime Brokerage, a wholly owned subsidiary of Wedbush Securities,
which caters to the high-fre-quency crowd, is buying Cac-tus Trading.
Cactus provides a low-la-tency, multi-asset-class trading engine, designed for imple-mentation, testing and deploy-ment of algorithmic trading strategies geared toward HFTs.
By integrating Cactus technology, Lime can now enable traders and quants to express their trading strategies in code, use that same code to back-test their strategies against historical data, simu-late trading against live data and then move to production trading.
“We are committed to in-vesting in and developing the Lime infrastructure so that clients can focus on trading and leave the technology to us,” said Jeff Bell, chief execu-tive of Lime.
Joe Signorelli, chief execu-tive of Cactus Trading, and David Don, chief operating officer, will become managing directors at Lime Brokerage.
—John D’Antona Jr.
>Algo Monitor Watches for HFTs
Santa Barbara, Calif.-based HCMI has devel-oped a real-time service
for the buyside that scans the market for evidence of high-frequency traders and their computerized strategies.
HCMI is a customer of data provider Nanex. The underly-ing technology behind HFT Alert comes from Nanex, and HCMI distributes and sup-ports HFT Alert software.
According to HCMI presi-dent Steve Hammer, HFT Alert monitors the smallest levels of algorithm activity in the marketplace at any given time by searching for “flut-tering.” Fluttering, Hammer said, is small changes in either the bid or ask price that are the precursor to a trade.
“HFTs are doing the flut-tering,” Hammer said. “The alert is an algo detection sys-tem that checks for various types of algo activity, such as fluttering or cycle repeaters.”
Once it detects flutter-ing in either the bid or ask, HFT Alert sends an audiovi-sual alert on the user’s desk-top. Once the trader receives the notification, he can then modify his trading strategy. The system can monitor an unlimited number of stocks or a single stock that exhibits a high degree of message or quote traffic, usually in excess of 1,000 quotes per second.
Hammer added that flut-tering can circumvent the national best bid and offer re-quirement mandated by Reg NMS. At one point in time, the new fluttered bid could be the best bid and the algo could execute a trade at one price on one exchange and at another fluttered price on an-other exchange.
“In essence, you have two NBBOs on two different exchanges,” Hammer said. “Portfolio managers can use this to help to prevent front-running of their orders.”
The system is targeted at the both the buyside and sell-side.
—John D’Antona Jr.
48 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
048_TMDec11 1 11/21/2011 2:20:36 PM
ContentsDECEMBER 2011 • VOLUME 24, NUMBER 331
T h e Wo r l d o f Tr a d e r sPictorial Coverage of Events and Conferences
50 DALLAS SECURITY TRADERS
ASSOCIATION
Annual Conference September 8-10, 2011Eric Cannon, Stifel Nicholas, Dallas; Daniel Lunsford, guest; Scott Bauer,
Nomura Securities, New York; John Daley, Stifel Nicholas, Dallas; Brendon Varley, FBR Capital Markets, Dallas.
George Troyan, Barclay’s, New York; Ben Deweese, Esposito Securities; Amanda and Kenny Kenvin, Esposito Securities; Clayton Duff , Capis, all Dallas.
55 SEATTLE SECURITY TRADERS
ASSOCIATION
Annual Conference August 25-28, 2011Tim Hoover, Nikki Hoover, both Russell Investments, Seattle; Bill Kitchens,
Morgan Keegan, Memphis; Stephanie Lipman, DA Davidson, Portland.
Carla Newsom, guest, Howard Lindsey, Goldman Sachs, New York; Ray and Randy Geiger, JonesTrading, Aaron Avallen, Pipeline Trading, all San Francisco.
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Greg Resnansky, Cantor Fitzgerald, Dallas; Chris Mitrando, Paul Ordinario,
Joann Orosco, DSTA, Dallas; Julie Halverson, Margo Rask, both guests.
Noelle Pepe, Mizuho Securities; Stephanie Fields, Ullink, both New York; David Gehrke, Liquidnet, San Francisco.
Natalie Banks, DSTA; Chris Cole, Capis; Christina Emi, DSTA, all Dallas.
Todd Terry, ConvergEx, Dallas; Ginny Andrews, Vicki Andrews, both guests.
Dan and Nelsy Mele, Claude Connelly, all Williams Financial Group, Dallas.
DALLAS SECURITY TRADERS ASSOCIATIONAnnual Conference
Four Seasons Resort • Irving, TX • September 8-10, 2011
1st row: Susan Ware, Director, Westwood Group; Scott Mullins, Director, Penson Finan-cial; Joann Orosco, Secretary; Dan Mele, 1st
Vice-President;
2nd row: Chip Miller, Director, Northpoint ConvergEx; Kenny Kenvin, Director, Esposito
Securities; Mike Rask, 2nd Vice-President, First Dallas Securities; Vic Topper, President;
3rd Row: John Daley, STA Governor, Stifel Nicholas; Chris Halverson, Treasurer, Capital
Institutional Services; Alan Marshall, STA Governor, Luther King, all Dallas.
Offi cers
RECEPTION
50 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
050_TMDec11 2 11/21/2011 6:19:32 PM
Greg Resnansky, Cantor Fitzgerald, Dallas; Chris Mitrando, Paul Ordinario, both Lazard, New York.
Joann Orosco, DSTA, Dallas; Julie Halverson, Margo Rask, both guests.
Samantha, Barbara and Joe Rosio, all guests.
Chris Halverson, Joanna Horton, both Capis; Mike Rask, First Dallas Securities, all Dallas.
D A L L A S
Todd Terry, ConvergEx, Dallas; Ginny Andrews, Vicki Andrews, both guests.
Dan and Nelsy Mele, Claude Connelly, all Williams Financial Group, Dallas.
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051_TMDec11 3 11/21/2011 6:19:52 PM
Brian Stuuka, Flextrade, Chicago; Joanne Horton, Capis, Dallas.
Sam Lippitt, BTIG, New York; Patti Andrews, BHMS, Dallas.
Steve Carolus, eTrade, Sue Lyall, Fred Ingles, both Citadel Execution Services, all Chicago; Bob Richmers, UBS, New York; Bill Jacobson, eTrade, Chicago.
Eric Geier, ConvergEx, New York; Seth Webber, Vandham Securities, Woodcliff
BUSINESS MEETING &PANEL DISCUSSION
State of Trading Today & TomorrowJohn Daley, Stifel Nicholas; Alan Marshall, Luther King Capital
Management, both Dallas; Joe Cangemi, ConvergEx; Brian Williams, Liquidnet, both New York.
STA UpdateJim Toes, STA, New York.
D A L L A S
Rob Kirk, 1st Global, Dallas; Ellen White, Penson Financial Group, Dallas; Rob Jacobs, PDQ ATS, Chicago.
Scott Mullins, Penson Financial Group, Dallas; Michael Miller, guest; Joann Orosco, DSTA, Dallas.
Jay and Tiff any Meagrow, Keybanc, Cleveland; Debbie and Kenny Gast, Instinet, St. Louis.
Khash Sarraf, Castlerock, New York; Rob Kirk, 1st Global, Dallas; Michael Marr, Castlerock, New York; Doug Throckmorton, Penson Financial Group, Dallas.
Ovidio Montemayor, John Lassen, Delon Mollett, Mike Gallagher, all TD Ameritrade, Ft. Worth.
Joe Velenza, Goldman Sachs; Lisa Utasi, Clearbridge Advisors, both New York; Mary McDermott-Holland, Nasdaq, Boston; Lauren O’Leary, Dahlman Rose,
New York; Roger Peterkin, SS&C, Boston.
52 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
052_TMDec11 4 11/21/2011 6:20:13 PM
Brian Stuuka, Flextrade, Chicago; Joanne Horton, Capis, Dallas.
Sam Lippitt, BTIG, New York; Patti Andrews, BHMS, Dallas.
Steve Carolus, eTrade, Sue Lyall, Fred Ingles, both Citadel Execution Services, all Chicago; Bob Richmers, UBS, New York; Bill Jacobson, eTrade, Chicago.
Eric Geier, ConvergEx, New York; Seth Webber, Vandham Securities, Woodcliff Lake.
Mike Gallagher, Gary Sjostedt, both TD Ameritrade, Omaha; Stan Thurley, UBS, New York; Vidio Montemayer, TD Ameritrade, Omaha; Mark McDermott,
Collins Stewart, New York.
D A L L A S
212.356.0500 www.rodm.com
Dean and Valerie Thompson, both guests. Kenny Kenvin, Esposito Securities; Chris Halverson, Capis, both Dallas.
&
John Daley, Stifel Nicholas; Alan Marshall, Luther King Capital Management, both Dallas; Joe Cangemi, ConvergEx;
STA UpdateJim Toes, STA, New York.
Ovidio Montemayor, John Lassen, Delon Mollett, Mike Gallagher, all
Joe Velenza, Goldman Sachs; Lisa Utasi, Clearbridge Advisors, both New York; Mary McDermott-Holland, Nasdaq, Boston; Lauren O’Leary, Dahlman Rose,
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Stephanie Libien, Jeff
D A L L A S
Scott Mullins, Penson Finacial; Mark Heng, Morgan Stanley, both Dallas.
Matt Ambrogi, ITG, Chicago; Zabi Fazal, UNX, Burbank.
Joe Turk, Southwest Securities, New York; Kurt Johnson, ADM Investor Services, Chicago.
John Nowak, Walker Smith Capital, Dallas; Joe Crisalli, Dahlman Rose, New York.
Andrew Weinberg, Pinebridge Investors, Dallas; Michael Savini, Raff erty Capital Management,
Chicago.
Stephen Capurson, Pat Malcolm, both Cantor Fitzgerald, Dallas.
Dean Kordalis, Knight Capital Group, Jersey City; Justin Burns, Esposito Securities, Dallas.
Lindsey Ater, Eze Castle, Dallas; Waylan Wouters, DA Davidson, Denver.
Joe Merrick, Credit Suisse, Chicago; Antonio Panos, Mixit, New York.
Jennifer Parsley, guest; John Cooley, Lacerte Capital, Dallas.
Terry Flynn, New York; John Standerfer, Austin, both S3 Technologies.
Chris and Julie Halverson, Capis, Dallas.
54 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
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Wendy and Tyler McCollough, McAdams Wright, Seattle; Richard Radulski, State Street Global Advisors, Boston.
Stephanie Libien, Jeff eries & Co., San Francisco; Katie Ludwig, Alex Frink, both Russell Investments, Seattle.
Robert Markulin, Cheevers & Co., Chicago; Doug Deatrick, Raymond James, Los Angeles; Brian Stuckey, Flextrade, Chicago.
Josh Foer, guest speaker, Brooks Daggett, Goldman Sachs, New York; Jesse Sullivan, Sparta Asset Management, Seattle.
SEATTLE SECURITY TRADERS ASSOCIATIONAnnual Conference
Suncadia Resort • Cle Elum, WA • August 25-28, 2011
Nenad Yashruti, Past President, Freestone Capital; Lori Winkelhake, Director, McAdams Wright Ragen; Tyler Platte, Vice President, Rainier Investment Management; Alex Frink, President, Russell Investments;
Andy Frey, Secretary, Summit Capital Management; Chris Lane, Russell Investments, all Seattle.
Offi cers
RECEPTION
Joe Turk, Southwest Securities, New York; Kurt Johnson, ADM Investor Services, Chicago.
Stephen Capurson, Pat Malcolm, both Cantor Fitzgerald, Dallas.
Joe Merrick, Credit Suisse, Chicago; Antonio Panos, Mixit, New York.
Chris and Julie Halverson, Capis, Dallas.
www.tradersmagazine.com� TRADERS MAGAZINE | DEcEMbER 2011 | 55
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Nenad and Nicole Yashruti; Richard and Lauren Lee, all Freestone Capital
Mike McCarthy, Oppenhiemer, Seattle; Mara Rieden, guest, David Geobels, Weeden & Co., Greenwich; Jason Rempel, Janney, San Francisco.
Aaron Avallon, Pipeline Trading; Brandi and Ray Geiger, JonesTrading, all San Francisco; Robert Markulin, Cheevers & Co., Chicago.
Jill and Greg Harrison, Sandler O’Neil, San Francisco; Mandy and Tyler Platte,
56 | |
S E A T T L E
Morgan Melchiorre, BATS Exchange, Kansas City; Charles Conner, CIBC, Toronto; Brian Stuckey, Flextrade, Chicago.
Brooks Doggett, Goldman Sachs, New York; Mike McCarthy, Oppenhiemer, San Francisco; Mara Rieden, guest.
Greg Harrison, Sandler O’Neil; Erin Williams, Stifel Nicholas, both San Francisco; Jill Harrison, guest.
Alex Brown, Knight Capital Group, San Francisco; Mike Kealy, Suntrust, Atlanta; Brian Dunderdale, B. Riley; Erik Johnson, Knight Capital Group, both
San Francisco.
Tyler McCollough, guest, Stephanie Lipman, DA Davidson, Portland; Richard Radulski, State Street Global Markets, Boston.
Chris Shea, Credit Suisse, San Francisco; Kim and Dan Chun, Washington Capital Management, Seattle.
Lori Winkelhake, McAdams Wright Ragen; Justin Kane, Rainer Investment Management, both Seattle; Kennedy James, guest.
Tim Hoover, Nikki Hoover, both Russell Investments, Seattle; Bill Kitchens, Morgan Keegan, Memphis; Stephanie Lipman, DA Davidson, Portland.
56 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
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S E A T T L E
Nenad and Nicole Yashruti; Richard and Lauren Lee, all Freestone Capital Management, Seattle.
Mike McCarthy, Oppenhiemer, Seattle; Mara Rieden, guest, David Geobels, Weeden & Co., Greenwich; Jason Rempel, Janney, San Francisco.
Aaron Avallon, Pipeline Trading; Brandi and Ray Geiger, JonesTrading, all San Francisco; Robert Markulin, Cheevers & Co., Chicago.
Jill and Greg Harrison, Sandler O’Neil, San Francisco; Mandy and Tyler Platte, Rainier Investment Management, Seattle.
Brooks Doggett, Goldman Sachs, New York; Andy Frey, Summit Capital, Seattle; Nancy Wallace, guest; Greg Pace, Weeden & Co., San Francisco.
Carla Newsom, guest, Howard Lindsey, Goldman Sachs, New York; Ray and Randy Geiger, JonesTrading, Aaron Avallen, Pipeline Trading, all San Francisco.
BUSINESS MEETING &PANEL DISCUSSION
Order Routing, Transparency and Broker SelectionTodd Brighton, Franklin Templeton, San Francisco; Savrabh Srivastana,
Credit Suisse; Mike Downey, NYSE; Bobby Greason, Rosenblatt Securities, all New York.
STA UpdateBrett Mock, BTIG,
San Francisco.
Tyler McCollough, guest, Stephanie Lipman, DA Davidson, Portland; Richard Radulski, State Street Global Markets, Boston.
Chris Shea, Credit Suisse, San Francisco; Kim and Dan Chun, Washington
Lori Winkelhake, McAdams Wright Ragen; Justin Kane, Rainer Investment Management, both Seattle; Kennedy James, guest.
Tim Hoover, Nikki Hoover, both Russell Investments, Seattle; Bill Kitchens, Morgan Keegan, Memphis; Stephanie Lipman, DA Davidson, Portland.
www.tradersmagazine.com� TRADERS MAGAZINE | DEcEMbER 2011 | 57
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| | 59
S E A T T L E
Brian Pears, Los Angeles; Daniel Tai, New York, both RBC Capital Markets.
Bill Kitchens, Morgan Keegan, Memphis; Nikki
and Tim Hoover, Jason and Mandie Lenzo, all Russell
Investments, Seattle.
Jim Griffi th, Knight Capital Group; Nicole Tuttle, Pipeline Trading, both San Francisco.
Alex Frink, Russell Investments, Seattle; Erin Williams, Stifel Nicholas, San Francisco.
Todd Brighton, Franklin Templeton; Sean Croll, Cowen & Co., both San Francisco.
Katie Ludwig, Russell Investments, Seattle; Jeff Kohl, Traders Magazine, Phoenix.
Travis Pakki, guest; Sharon Gueck, Becker Capital Management, Portland.
Nenad, Nicole, Jordan and Amaya Yashruti, Freestone Capital, Seattle.
Richard and Lauren Lee, Freestone Capital, Seattle.
www.tradersmagazine.com� TRADERS MAGAZINE | DEcEMbER 2011 | 59
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Aqua Equities ........................................................ 11
AX Trading ............................................................. 35
Bank of America Merrill Lynch ..............................GF
Bloomberg ...............................................................3
CDW Corporation ................................................. 13
Chicago Board Options Exchange........................ C3
Citigroup ............................................................... 15
Credit Suisse ......................................................... 21
Factset Research Systems ...................................... 51
Fidelity ...................................................................33
FlexTrade Systems....................................................1
Goldman Sachs..................................................... C4
JonesTrading ..........................................................23
Knight Capital Group ..............................................9
LeveL ATS ................................................................5
Liquidnet ............................................................... 31
OTC Markets Group ............................................. C2
Pragma Securities ..................................................25
Rodman & Renshaw............................................... 53
UBS..........................................................................7
60 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
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DECEMBER 2011 | TRADERS MAGAZINE www.tradersmagazine.com
SnapshotBuyside
With every crisis comes opportunity. In the case of Drew Harbeck, a trader at the small-cap shop Cortina Asset
Management, his opportunity came when he joined the Mil-waukee-based fi rm’s desk right before the market meltdown began, roughly three years ago.
“I didn’t expect to be get-ting my feet wet” in the midst of a major correction, he said, but noted that the benefi t “was being thrown into an incredibly hostile market and learning that there are times when you can’t be afraid to take risks trading.”
Harbeck was new to trading, but he did have the benefi t of doing a two-year apprenticeship at the fi rm out of college. He started in the back offi ce. But before long, he found himself on the desk as a trading assistant, gaining valuable insights.
His boss and mentor Kurt Kujawa said Harbeck couldn’t have asked for a better time to begin his career. Kujawa estimates that one year of trading during the re-cent upheaval is at least the equivalent of two years of experience in normal times. Kujawa should know. He found himself in a similar situation when he started as a Nasdaq market maker in February of 1987—only months before that year’s his-tory-making crash.
“If you can’t stomach those types of markets, then you’re in the wrong busi-ness,” Kujawa said. “I tell Drew all the time, ‘If you couldn’t have handled it, you wouldn’t be here today.’”
Harbeck calls his boss a good mentor. Th ere is a lot of “back
and forth” on the market and strategies, he said. “He’s a good guy to learn from, since he’s been on both sides of the Street,” Har-beck said of Kujawa. “We’ve got a good, solid relationship.”
Th e need to develop relationships among small-cap brokers is something Kujawa stressed early on. So Harbeck got involved in the Security Traders Association of Wisconsin when he was an assistant trader. His stature in the organization has grown—Har-beck is currently president of the 91-member STA affi liate. In October, he spoke on a panel at the STA’s national meeting—a stint typically reserved for more experienced traders.
“Th e small-cap side of the business is still very dependent and reliant upon relationships,” Harbeck said. “Th ere is still a lot of value provided by sellside brokers and they’ve helped us source liquidity that we normally wouldn’t have been able to access.”
Th at typically means fi nding blocks, though the fi rm uses crossing networks like Liq-uidnet, BIDS and Block-Cross. “If I send someone an order, and it’s one of my better relationships, they’re going to know exactly how I want that order worked.”
Harbeck admits he needs to keep learning and growing as a trader. And he only has to look across the desk to learn the les-sons from his mentor, who is passing the baton from one trading generation to another.
“Drew listens; he pays attention; he asks ques-
tions and doesn’t dwell on negatives; and he isn’t afraid to take a shot,” Kujawa said. “If someone is afraid to pull the trigger, they’re never going to be any good. You can’t trade scared.”
Passing the Baton
Cortina Asset Management
AUM: $1.9 billionDesk: Two tradersBroker List: 50 fi rms (80 research)Avg. Commission: 3.75 centsOMS: Advent’s Moxy
Drew Harbeck
B Y M I C H A E L S C O T T I
00_SnapshotDec11.indd 200_SnapshotDec11.indd 2 11/18/11 10:03:38 AM11/18/11 10:03:38 AM
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