Wall Street Letter Aug 11 - Aug 17 2011

7/29/2019 Wall Street Letter Aug 11 - Aug 17 2011

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A consortium of industry utilitiesis grappling with the mechanicsof the US governmentsproposed legal entity identifier(LEI) system after receivingthe nod last month as theindustrys choice to lead theinitiative, according to DennisGoodenough, senior businessmanager for securities initiativesat SWIFT Americas, who spoketo WSL .

The proposed system, which was included in the Dodd-Frank Act, would assign uniqueidentifiers to global financialentities and their affiliates in an

effort to allow regulators andindustry peers to better track financial transactions. There area number of identifiers, some widely distributed and othersproprietary, in use today, but useis voluntary. The proposed LEIsystem would be compulsory forcertain types of firms.

The utilities - theInternational Organization forStandardization, the Depository Trust & Clearing Corp. andits subsidiary AVOX, SWIFT,and the Association of National Numbering Agencies wererecommended for theinitiative by the Global

I dustry groupgets to grips witLEI i itiativeby jeanene timberlake

top story

In ThIS ISS Enews p l 05

news B d q a la add k ad al tCA05 Fo s f c a 15

vol xliii issue 29 11 - 17 AuGust 2011 . all l .c

t h d F i n i t i v u r c F r t r a d i n g n


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POST-TRADE

Northern exec:Buyside wantscommunications,OMS help

Buyside firms are looking for moreoptions in outbound communica-tions and order management sys-tems from their service providers,

according to DanHoulihan, head of global fund services

for North Americaat Northern Trust.His comments werepart of a presenta-tion on the futureof outsourcing hemade during the

TSAM North America conferencelast month in New York.

Responding to a question aboutwhat services buyside firms ask for the most, Houlihan said thetop request is related to client and

market communication, includ-ing things like fund fact sheets,reports, pitchbooks and webdeployment. He said requests fororder management systems are alsoheard regularly.

Startup clients want us to bringan OMS to the table, he said.Houlihan added that the idea is aninteresting one but said it is hardto envision a provider offering asingle, static OMS to satisfy many

clients needs. Northerns strategy in this case has been to strike uppartnerships with OMS providers,such as Charles River.

Houlihan also discussed thedifficulty of client integrations,noting that the process is still oneof the major challenges faced by outsourcing providers. We have

Financial Markets Association in a document released lastmonth. Goodenough said thatrecommendation spurred morediscussion among the utilities andthe industry about how the systemcould be rolled out in light of mandated time frames.

We can build a repository and setup a registration authority, but weneed to focus on who needs one [an

identi er], and what is the processfor getting an LEI? And what is thetimeline [for full rollout], because weprobably cant do this as a big bangprocess, Goodenough said.

He noted that the implementationis expected to be a phased, multiyearprocess, and that the rst grouplikely to be assigned the IDs wouldbe the rms identi ed as systemically important nancial institutions(SIFIs). Were very sure the focus

for LEIs will be on SIFIs, he said,

noting the number of SIFIs expected

may be under 200 rms, versus the1.5 to 2 million institutions originally estimated to require an LEI overtime.

e group is also still working outgovernance structure. Goodenoughsaid one thing that is still underconsideration is the creation of a new utility that would manage the processby taking a piece of the process fromeach of the involved utilities. Buthe stressed that nothing has been

decided either way. We may be ableto keep [the pieces] separate, butwe will have to have a really tightagreement between the four utilities,he said. e group also still needsa mandate from the governmentbefore any concrete decisions aremade. Goodenough said its not clearwhether the mandate will come fromthe O ce of Financial Research,tasked with adopting a standardidenti er for data reporting, or a

higher authority.

CONTINUED...01

DAN HOULIHAN:head of global fundservices for NorthAmerica


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come a long way and been success-ful with all our client conversions,but there is no silver bullet forthat, he said.

Northern is working with Cadis,an enterprise data managementprovider, to help with the process,Houlihan noted. The bank is work-ing with Cadis to build out a datadictionary across its many systemsto make integration more of a plug-

and-play process, he said.

exchAnGes & Ats

CBOE clampsdown on predatory flow The Chicago Board Options Ex-change is amending its rules to pro-hibit certain orders from resting in

the complex order book. The changeis an attempt to clamp down on the

potential for predatory flow to ag-gregate at the exchange, CBOE statedin a regulatory filing at the Securitiesand Exchange Commission. The new rule would prohibit traders fromrepeatedly sending complex ordersto rest in the complex order book (COB) when they sell orders pricedor executed at or above the maxi-mum value of a given strategy or buy orders priced or executed at or below

the minimum value for a strategy.The exchange set out the minimumand maximum values for differentcomplex order strategies, six strate-gies that are two-legged complexorders with a ratio of one-to-oneand two strategies for complexorders with three legs with a ratio of one-to-one.

The CBOE said there are sometrading permit holders that have senta disproportionate number of these

types of strategies at unusually highor low prices to the COB of late. The

flow appears to be predatory becausethese types of strategies wouldnt nor-mally execute outside a certain range,the exchange said, and while the

pricing isnt wrong they would typi-cally only execute against incomingerroneous orders or during a systemerror. The CBOE also noted that thelarge numbers of these orders createlarge amounts of market data, result-ing in additional cost to the exchangeand degradation of systems perform-ance. This activity also places anundue burden on competition amongmarket participants for complexorders in COB because it creates la-

tency, may impact the ability of othertrading permit holders to receivetimely executions, and may make itdifficult to assess and maintain a fairand orderly market, CBOE added.

exchAnGes & Ats

NYSE lowers DMMnet liquid assetconditionThe New York Stock Exchange plansto lower the level of net liquid assetsit will require of designated marketmakers on the exchange by 50%.NYSE currently requires the levelof net liquid assets, or assets readily convertible to cash, to equal $250million plus an add-on to accountfor market risk of three times itssecurities positions haircuts. Thelevel is reduced, as of February 2008,

from $1bn.NYSE said it would further reduce

this requirement to $125m plus amarket risk add-on of one times theDMMs securities positions haircuts.An alternative to the market risk add on that would use a value at risk calculation is also being eliminated,NYSE said. The changes reflectchanges to NYSEs market structure,as well as regulatory and trading de- velopments in the last few years, said

the exchange in a notice to the Secu-rities and Exchange Commission.

A new platform from TG Optimacombines traditional transaction costanalysis (TCA) with a measurement of risk for a more optimized trading strategy,according to Tony Gau, TG Optima CEO.

e Investment Optimizer, which waslaunched last month, targets hedge fundsand traditional institutional buyside rms.Gau described the platform as a portfolio

construction platform that uses an invest-ment managers risk appetite and desiredexposure to help design a trading strategy that might include traditional sellside con-siderations, such as participation rates andhow quickly the trade should be executedover a period of time. He noted that theplatform, available now, is in beta testing by potential clients.

Gau said the idea wasdeveloped during his timeon an equity programtrading desk when henoticed that sellside trad-ers had access to moretechnology, to help themdesign trading strategies,than buyside traders. He

noted that while buy-siderms have begun incorporating TCA into

their trading process, it most o en directly correlates cost to the number of tradesexecuted. When people look at transac-tion cost, people think its just basic cost,like commission and tax, but its more thanthat. We are talking about market impactcost, said Gau.

technoloGy

Buyside quant platform adds risk calculation to TCA

tony GAU: tGop ima ceo


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exchanges & ats

Goldman:Canadian ATSto meet current, pending rules

Goldman Sachs Canada (GSC) is stand-ing by a proposal it made to launcha version of its SIGMA X alternativetrading system in Canada in spite of comments from the Canadian NationalStock Exchange (CNSX) that claim the

proposal should be revised in line withrecently published regulatory positions.GSC earlier this year proposed to launchSIGMA X Canada with limit and peggedorders (WSL Online, 3/30 ).

CNSX told the Ontario SecuritiesCommission (OSC) it should hold off accepting or denying proposals untilexpected changes to the Canadian regu-latory framework are finalized. In par-ticular, it noted the OSC should considerGoldmans proposal in the context of the

joint position paper published earlier thisyear by the Canadian Securities Admin-istrators and the Investment Industry Regulatory Organization of Canada. Itnoted that while other proposals haventbeen held up to the same scrutiny,SIGMA Xs significant U.S. presenceand contribution to internalization is areason to use slightly differetn standardsfor the ATS.

But Goldman noted in its responsethat the proposal is consistent with

current rules and will be compliant withany future regulation. It also addressedCNSXs concerns about minimum priceincrements and minimum order sizes.On minimum price increments, Gold-man said orders entering the systemwill be held by that standard but thatin order to provide price improvementthey must be able to match at subpenny increments. The platform also does notimpose a minimum order size, whichCNSX noted was an issue raised in the

regulatory position paper. Goldmannoted in its response that no minimum

has been established but that it willcomply with those requirements if andwhen they are set.

post-trade

NSCC moves daysend ACATS process up

The National Securities Clearing Corp.plans to move the time for its end-of-day automated customer account trans-fer system (ACATS) processing up by nearly four hours. The operation, whichchanges the date for ACATS processing,typically occurs at 8pm EST but willnow take place immediately followingthe fifth intra-day processing cycle forACATS. That change will mean thatanything submitted after the operation,which will be approximately 4:30pm

EST, will be processed the followingbusiness day.

In a notice to members, NSCCwarned this time change will alsomean that any ACATS transactionssubmitted after the fifth intraday cycle starts, at 4pm EST, or before itends, at approximately 4:30pm EST,will be rejected and must be submit-ted for next day processing. ACATSsubmissions sent after the end of the fifth processing cycle will alsobe rejected if the correct date is not

indicated at the time of submission.The change will go into effect afterthe fifth cycle of ACATS processingon September 9.

market structure

SEC adopts largetrader reportingrule

Commissioners at the Securitiesand Exchange Commission late last

T he Boston Options xchange is addingto its rulebook to de ne professionaltraders and require trades from those rms to be marked as professional orders, according toa regulatory proposal from the exchange. Teaddition follo s similar recent amendments by other options and equities exchanges.

Members of the exchange ould be con-sidered professionals if they are not securities

broker-dealers but they trade more than 390orders in listed options daily, on average duringa month, for their o n accounts. Tose rms ill be required to mark their trades as profes-sionals. BOX said it decided to make the change because of the fact that other exchanges hadadopted the designation and having a variety of di erent rules bet een exchanges couldencourage regulatory arbitrage, especially hensome of BOXs members are members at othermarkets.

But unlike at other markets employing asimilar rule, BOX said it ill not assign a di er-ent price/time priority to professional orders,and they il l not receive di erent treatmentrelated to order protection or routing. Teexchange did not rule out the possibility that itmight adjust routing fees for professionals, not-ing that it may make adjustments in the future via fee-related lings ith the ecurities and

xchange Commission.

exchanges & ats

BOX adds professional traderdefinition


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Citisoft has hired Roberta Moore as direc-

tor. In her new role, Moore will leverageher extensive operations and client serviceexpertise across the range of Citisoftsadvisory services. Roberta has over 25 yearsof industry experience as a senior leader of operations and technology departmentsfor investment managers including Invesco,Columbia Management, and Scudder, Stevens& Clark. Most recently Roberta has beenconsulting independently on a variety of strategic advisory and delivery initiatives.

eFront has named Vineet Singh as productmanager, North America. Singh will ensureeFronts solutions meet customer needs andbusiness requirements in the alternative assetmarketplace throughout the U.S. and Canada.Singh will be responsible for developingproduct roadmaps, taking into considerationbusiness, customer care, usability and techni-cal issues. He will be based in the New York of ce and report to Eric Bernstein, COO of eFront in North America. Singh most recent-ly worked at Brook eld Asset Management,

where he spent three years as senior auditor and three years as manager of funds projects,responsible for planning, implementing anddelivering new front-end and database solu-

tions to support the companys private equity and structured lending operations.

The Depository Trust & Clearing Corpora-tion (DTCC) has appointed Gail Weiss asvice-president and head of global businessdevelopment, wealth management services.

Weiss, who has over 20 years of experi-

ence in the nancial services industry, will beresponsible for leading the business strategy aimed at securing DTCCs position in theglobal mutual funds processing arena. Shewill report to Ann Bergin, DTCC managingdirector and general manager. Before joiningDTCC, Weiss was based in London andheld the position of managing director of SunGards wealth management business for Europe, Middle East and Africa.

UBS Wealth Management Americas has

hired Ajay Mehra as head of manager and

fund research and managing director. He will

repor t to Tony Roth, head of wealth manage-ment strategies. Mehra will be responsible for delivering investment advice and guidance to

nancial advisors and clients covering more than $100bn of institutional and retail man-aged separate account assets and more than$200bn of mutual fund assets. Mehra joins

the rm from Columbus Nova, where hewas portfolio manager and partner. He alsoled equity research at State Street Research& Management and acted as lead manager of

two top ranked mutual funds.

Misys has selected Alan Riegler for thenewly created position of banking regionaldirector of the Americas. With over 20 yearsof experience in the nancial services indus-

try, particularly in minimizing risks for custom-ers during business transformation projects,Riegler will lead the Americas solutionsconsulting team. He is responsible for sales,product support, and client engagement ac-

tivities, as well as providing input on productroadmaps. He will be based in New York City

and will repor t directly to Tim Goodhind,head of solutions consulting at Misys. Riegler most recently spent three years as a par tner at CCG Catalyst Consulting Group. Prior to

this he was a principal at Ernst & Young in themanagement consulting unit and a director at PricewaterhouseCoopers in the nancialservices industry practice.

BNY Mellon has designated Michael Cole-Fontayn as its new chairman of its Europe,Middle East and Africa (EMEA) region. Cole-

Fontayn will lead the regional management team in executing the companys strategicplans and accelerating growth across this key region. He will continue in his existing roleand responsibilities as CEO of BNY deposi-

tary receipts. He takes over the role of chair-man from Tim Keaney, CEO of BNY assetservicing. Cole-Fontayn joined BNY Mellon in1984 and has worked within the depositary receipts business since 1992.

BGC Partners has engaged Mark Ben eld as

executive managing director and director of

month adopted the large trader re-porting rule and hinted that approvalof a proposed consolidated audit trailis not far behind.

The rule would require trad-ers whose activity reaches certainquantitative or value-based thresholdsto register with the SEC so that theirtrading activity can be monitored andidentified in the event that the Com-mission needs to reconstruct tradingactivity during a particular period of time. It will also give broker-dealerssome responsibility for monitoringclients that are large traders based onthe definitions.

Any trader or firm trading two mil-lion shares (or $20m in fair market value) in a day or 20 million shares(or $200m in fair market value) in amonth would be considered a largetrader. Authority was given by Con-gress in 1990 to conduct monitoringof large traders but the Commissionnever adopted a rule. The issue wasraised again in 2010 following theCommissions review of equity marketstructure and the May 2010 flash

crash drove the point home, accord-ing to Chairman Mary Schapiro incomments during an open meeting.

The final rules will take intoaccount industry concerns thatexceptions for certain transactions

should be expandedand that providingbroker identificationnumbers might bedifficult for a largetrader to acquire and

provide in the pro-posed form amongothers, according toRichard Holley, as-

sistant director at the SECs Divisionof Trading and Markets, during hispresentation to the Commissioners.

In their comments on the rule,Schapiro and other Commissionersnoted large trader reporting is just afirst step in bolstering the regulatorsability to monitor markets and that

the consolidated audit trail is the nextstep. Schapiro noted that the con-

p e o p l e m o v e s

Continued on p7

MARY SCHAPIRO:chairman, SEC


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to create a foreign securities affiliatecategory that will allow the exchangeto continue to monitor for potentialconflicts of interest that may arise inlight of the relationship between theU.S. and foreign firms. The applica-tion process will also be streamlined,reflecting similar, streamlined proc-esses at other exchanges, but also thefact that the Financial Industry Regu-latory Authority or another exchangeis the designated examining authority

for all NYSE and Amex members.Members would be required to

identify foreign securities affiliatesand persons and each affiliate mustconsent to jurisdiction, the exchangessaid. The focus on identification of affiliates and approved persons by each member organization and con-sent to jurisdiction by each approvedperson... would make the entireprocss more efficient while maintain-ing appropriate regulatory standards,

they said.

TECHNOLOGY

ASX moves tocarve out position with SOR dealA plan by the Australian SecuritiesExchange (ASX) to offer its memberssmart order router (SOR) technol-

ogy is part of a series of moves by the exchange to carve out a position

for itself under the future regulatory regime, according to David Raper,general manager at the exchange. Thecountrys regulators have approvedthe launch and operation of alterna-

tive trading systemsstarting in October,at which point theexchange could cedethe monopoly posi-tion it has held overthe last few years.

The exchange lastweek announceda partnership withFidessa to launch

ASX Best, which will help tradersroute orders for best execution acrossmultiple markets. Raper told WSL ASX Best is just one of the offeringsthe exchange has added in the pastfew years in preparation for the futurecompetitive environment, includingthe launch of the Australian Liquidity

Center for co-location services, ASXNet, a low-latency fiber network, andthe pending launch of ASX Pure, andplanned launched of lit and dark ASX venues.

These various initiatives demon-strate the resilience and versatility of the ASX Group we are a businessproviding exchange services be-yond traditional cash market tradeexecution only, he said, adding thatdiversification will be vital under the

new regime.ASX Best, developed by Fidessa,

WE CaN buiLd a rEpOsiTOrY aNd sET

up a rEGisTraTiON auTHOriTY, buT WENEEd TO fOCus ON WHO NEEds ONE [aNidENTifiEr], aNd WHaT is THE prOCEss fOr GETTiNG aN LEi? aNd WHaT is THE TimELiNE[fOr fuLL rOLLOuT], bECausE WE prObabLYCaNT dO THis as a biG baNG prOCEss

dENNis GOOdENOuGH cover story

quote of the weeksolidated audit trail would take moretime and work by market participantsto implement but would also gathermore information from participants

than large trader reporting is de-signed to do. None of the Comission-ers specified how soon the proposalon the consolidated audit trail wouldbe finalized, but Commissioner LuisAguilar said the staff is in the finalstages of preparing a recommenda-tion to the Commissioners.

Jamie Selway, head of liquidity management at ITG, said he hopedindustry effort to effect large traderreporting would be also be applica-

ble to future technology changes. Ihope the work done on large traderreporting will be forwards compat-ible with the consolidated audit trail.But, I understand the point, gettingthe SEC more information is good,so that it can be a better regulator,he added.

ExCHaNGEs & aTs

NYSE, Amex clarify oversightover affiliatesThe New York Stock Exchange andNYSE Amex are clarifying theirrules to indicate that their oversightdoesnt extend to the foreign affiliatesof the exchanges member organiza-tions. Both exchanges have rules thatrequire people or businesses affili-ated with member organizations to

register as approved persons on theexchange if these people or businessesassert any control over the memberorganization. Once approved theexchanges then have jurisdiction overthe groups in relation to exchangebusiness.

The exchanges want to changethose rules to eliminate their over-sight of members foreign affiliatesbecause they believe the current defi-nition is overbroad, according to reg-

ulatory filings from the exchanges onthe issue. Instead, the exchanges plan

daVid rapEr:gene l n ge t

the e ch nge


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will allow traders to route to all ASX venues and any non-ASX venues thatare offered in the country. The SOR will be co-located in the liquidity

center with the exchanges matchingengines and will run over ASX Net.

Steve Grob, director of groupstrategy at Fidessa, said the systemwill allow multiple users within asingle firm see prices across different venues before making a routing deci-sion, and, once the decision is made,an audit trail will be created in orderto outline the decision for regulators.Grob added that the platform is alsodesigned to accommodate differences

in the Australian market, such as thesingle symbology and tick size thatwill be prevalent across markets, aswell as differences in trading rules.

exchAnGes & Ats

Liquidnet eyesmore marketsfor block tradingservice

Liquidnet is in discussion with globalexchanges in a bid to offer a localblock trading service, similar tothe companys recent Swiss launch,according to Per Loven, head of inter-national strategy.

The existing partnership betweenLiquidnet and SIX Swiss Exchange al-lows local Swiss brokers to access theformers global liquidity pool directly

while also allowing Liquidnets globalbuy-side members to access block liquidity on the exchange.

Loven said the longer term strategy is to offer similar access in othermarkets. Its not a one-time deal.We will work to make this offering asuccessful offering, but we are talkingto others, he told WSL , though hedeclined to name the other exchangesthat are part of those discussions.

He said the decision to launch

this type of an offering in the Swissmarket first was based on the fact

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Continued from p5


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that block trading is prevalent in themarket. If you look at what tradeson the exchange compared to othermarkets they have the type of block

flow that would suit our community,he said, adding that there are fewerhigh frequency trading strategiesexecuted in the Swiss market than inothers.

Loven noted versions of the serviceLiquidnet could launch in othermarkets may not be exactly the sameas what is available in Switzerland butsaid the concept was scalable one.

For the implementation in Swit-zerland, Loven said expansion of the

offering to include securities fromother countries, including the U.K.,France, Germany and the Nether-lands, is expected to take place in thenext few weeks. Once securities fromthose markets are added, the additionof other markets will be considered,based on client demand, Loven said.

trading firms

Maxim on the prowl for salestradersMaxim Group, a boutique investmentbank in New York, is looking to hirestaff for its institutional sales and salestrading departments in the near term,according to Jamie Barker, managingdirector of institutional sales and salestrading.

The search, which Barker is head-

ing up, is part of the banks long-termplans to increase the firms reach andrevenue, which Barker said hopes todouble this year and next after thetrading group is built up.

Barker said Maxim is not look-ing to add staff just for the sake of increasing staff, so additions will bemoderate. We have nine in institu-tional sales and 12 sales traders now,and we want five more of each, hesaid, adding that Maxim is looking for

staffers with experience and an inter-est in working with a boutique firm.

The timing for the firm is based inpart on market conditions, but also onMaxims recent growth. Barker saidhe has spent his first year at Maxim,

building up the research group by hiring new analysts and expanding thecorporate access calendar. Combinedwith the firms fixed income, converti-bles and options trading desks, Barkersaid the infrastructure is in place forthe right sales traders to join the bank.Market conditions are also such thatthe opportunity exists to snap up trad-ers with the bulge bracket experienceand contacts, Barker added. Theres alot of dislocation right now and were

using this as an opportunity to hire.

post-trade

BNP Paribas rollsout global PB platformBNP Paribas Corporate and Invest-ment Banking has just launched a new global platform for prime brokerage,

providing clients access to securities,reporting and financing in non-U.S. jurisdictions with a single offering.The system, which BNP built fromscratch to replace a legacy platform,has been rolled out to the firms clientsand Jeff Lowe, head of equities prod-

uct development,told WSL the bank is already schedul-ing enhancements tofurther improve cli-

ent experience laterthis year.

The platformcombines financingactivities, technol-

ogy and reporting, global securitieslending and execution, and capitalintroduction. BNP had offered thosecapabilities prior to this launch, butLowe said the bank wanted a seamlessoffering. We could have connectedall those pieces together in a Franken-

stein approach, but we said, we havethe expertise and the local presence,

Jeff LoWe: h qu ucv l , Bnp

p b

lets build a prime brokerage platformon top of all of that, he added.

Lowe said BNPs clients have beenconverted to the new platform for a

while but the bank wanted to ensurethat the system was running smoothly before going ahead with the officialrollout. He noted that the bank hasalready added two clients, each withmore than $3bn in assets undermanagement, since completing thesystem.

He also noted that the firm hasalready begun a staged rollout of enhancements for the system. Sinceconverting existing clients, BNP has

added a corporate actions process-ing capability and will enhance theportfolio accounting system in a few months. That will be followed by anupdate to the website by the end of the year.

post-trade

Canadian Deposi-tory pushes back

platform revampCDS Clearing and Depository Serv-ices (CDS) in Canada has pushedback the implementation dates for aproject that would develop a link be-tween it and the Canadian DerivativesClearing Corp. in a bid to offer fixedincome clearing. The change willinitially allow for processing of repotransactions and later will processfixed income cash trades.

In a notice to the Ontario SecuritiesCommission this month, CDS saidphase one enhancements for reposhad originally been scheduled forJanuary 10, 2011 and fixed incomecash trade processing was expected tofollow shortly after. But the steer-ing committee that urged the twoorganizations to create the link optedto change the effective dates, pushingphase one to October 24 and phasetwo to February 2012.

The new process will allow users toconfirm the covered trades and report


9/16

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11-17 AUG 2011

Hanweck Associates is ocusing on its plansor expansion o the rms risk management

business as it looks at 2010. Hanweck ofersreal-time, intra-day risk management services.

e capability is powered by graphical process-ing engines or a high per ormance service.

e vendor currently ofers services to priceoptions and manage options risk through its

agship Volera Feed ofering, which streamsimplied volatility or equities and utures, andVolera Risk, which provides analysis o largeoptions port olios.

While the rms business has been largely domestic, Jerry Hanweck, ounder and ceo,

said expansion, targeted or 2012, would takethe business into global markets and moreasset classes. e rm is also looking to expandits staf with additional quantitative analysts,developers and customer support staf.

e ocus on expansion is driven by a needin the market or better risk management asmore complex instruments are being used by institutions. Banks and other rms spend tenso millions o dollars per user to calculate risk,but it tends to be an end-o -day calculation,he said. But he added systemic risk, and the

need or intra-day risk management, continues

to increase as highly correlated instrumentsbecome the norm. Large-scale, rm-wide risk needs are not being addressed, he said.

Most recently Hanweck Associates wasone o six rms participating in the FinTechInnovation Lab. Run by the New York City Investment Fund and Accenture, the programis a move to support nancial technology innovators in an attempt to help New York City maintain a leading role in global nancialservices.

Chris Wearing, managing director o capitalmarkets at Accenture, said in a presentation lastweek that the group will start taking applica-tions or the second version o the lab starting

in January. n

technoloGy

Hanweck Associates targetsexpansion

them to CDS. Trades that identi y themode o settlement to be the SOLAnetting system (CDCCs trade nettingplat orm) will be sent to CDCC or

novation, netting and clearing i themember is a ixed income memberat CDCC.

Once netted, trades will be re-ported back to CDS or settlementas part o the trade or trade process.Enhancements to CDSs system willinclude the ability to direct traders toCDCC and a requirement that repotrades be assigned a repo tag numberto link the various legs o the transac-tion in the system.

technoloGy

BofAML looksahead at next gentrading expansionThe Bank o America Merrill Lynchis looking to expand its recently launched next generation tradingplat orm beyond just equities, accord-ing to Tim Cox, director in GlobalExecution Services, who spoke toWSL . The irm o icially rolled outthe plat orm mid-month or equitiestrading. Cox said the irst expansion

under consideration would likely

target additional asset classes, such asutures and European equities.The irm partnered with Thesys

Technologies to develop the plat orm,

relying on the vendors technology but incorporating risk managementcapabilities native to Bo AML. Therisk management unctions includedwill allow help the irm, and userso the plat orm, be compliant withthe recently implemented sponsoredaccess rules adopted by the Securitiesand Exchange Commission. We havea view on risk management and whatcontrols need to be in place, said JohnGoeller, managing director in Global

Execution Services at Bo AML. Wehave a variety o plat orms we use ormarket access, this being one o them,and we want them to be as consistentas possible.

The plat orm was also designedto o er clients a low level o latency,which measures at less than 10 mi-croseconds wire to wire. Cox said thedecision to partner with Thesys wasalso based on the vendors experiencewith high per ormance technology.

We looked at it as an opportunity to cater to several types o clientelethat we serve today, but in a di erentway than we are currently, he said,re erencing both high requency trad-ers as well as institutional traders withlonger trading horizons.

mArket strUctUre

MarketAxess CEO

predicts SEF rulesthis fallRick McVey, ceoat MarketAxess,predicted during the

irms earnings call onWednesday that mar-ket participants couldsee rules or swapexecution acilities asearly as this all, al-

though he cautionedurther delays could be seen depend-

rick mcvey: ceo

a ma Ax


10/16

0

news

BATS Options Exchange is cutting rulesrecently approved by the Securities and Ex-change Commission that would have allowedthe exchange to implement a directed orderprogram.

e ofering, which was proposed inDecember, received negative comments romthe industry because the rule, introducingsub-penny trading and quoting ( WSL Online,1/7 ), would have limited exposure to onemarket maker and was criticized or creating

a private market ( WSL Online, 5/16 ).In a ling at the SEC, the exchange said

it had intended the program, which wasapproved on a pilot basis, to increase aggres-sive quoting and ultimately better executionprices or customers. BATS noted that a erreceiving negative comments it launched a

consultation with its members be ore anda er receiving approval.

BATS said its withdrawal is based on thosediscussions, in spite o the act that it stillbelieves the proposal is appropriate. eexchange believes there is su cient reasonto withdraw the directed order program andcontinue analyzing potential re nementsthat may better achieve the exchanges goal,it said.

A spokeswoman declined to comment

beyond the ling, re erencing the exchangesquiet period. But she pointed to the latestexchange newsletter rom Joe Ratterman,BATS CEO, which said that the risks raisedby members, including internalization andthe possibility it could disincentivize marketmakers, need to be addressed.

market structure

BATS cuts directed order program

ing on how the rules are written.MarketAxess has pushed regulators

to provide more de initive timelinesor inal rules to give the industry a

maximum amount o time to prepareor the new regime. A comment letter

to the Commodity Futures TradingCommission earlier this month romMcVey suggested the Commissionset out an implementation scheduleo inal rules or public comment andnoted the lack o a schedule has cre-ated increased uncertainty.

During the earnings call, McVey noted that there has been somediscussion as to whether both Com-

missions will need to re-proposesome rules, e ectively starting at thebeginning o the process, be ore issu-ing inal rules due to the number o changes expected.

In that case, they would open upanother comment period and prob-ably push the timeline or imple-mentation back three to six months,he said. I dont know i SEF ruleswould quali y but that is one o the risks.

market structure

NOM adds AONorders, adjustsIOCsThe Nasdaq Options Market plansto add all-or-none (AON) ordersto the marketplace and adjust itsguidelines or orders designated

as immediate-or-cancel (IOC).According to a proposal it submit-ted to the Securities and ExchangeCommission, the exchange ismaking the adjustments in orderto provide more choice in the way it processes order types or itsinvestors, as it compete with otheroptions exchanges.

NOM said its AON orders will besimilar to the minimum quantity or-ders already available, such that those

orders must be executed or a mini-mum number o contracts. AONs will

also be limit or market orders that areexecuted in ull or cancelled back to

members. I an AON order is receivedbe ore the opening cross or a termarket close it will be rejected, theexchange said.

Separately, NOM said its IOCdesignation can only be applied tolimit order, but it plans to expand thedesignation. Instead, members willhave the option to give any market-able orders, including limit ordersand market orders, an IOC tag. NOMnoted the change means that AON

orders will also be eligible or the IOCdesignation.

exchanges & ats

Nasdaq eyesadditions to propoptions contractsNasdaq OMX Groups options marketsare looking at ways to expand their

lines o proprietary options contracts,according to Tom Wittman, president

o Nasdaq OMXPhlx.

The exchange haslong o ered propri-etary options, mostrecently launchinga series o indicesbased on stock pairscalled Alpha indexes

(WSL Online, 4/8 ), with an o ering o contracts based on those indexes. Theadditional o erings under considera-tion would ideally increase volumeto the exchange but could also satis y

demand, which has increased recently in the orm o renewed interest inthe exchange groups older propri-etary products.

Wittman said the group expects toadjust its line o proprietary currency contracts and the world currency options it o ers. The changes thereshould create more interest romretail customers, he said. Other areaso expansion will be within the AlphaIndexes line, which pairs stocks with

the Standard & Poors 500 ETF. Thegroup has already made headway with

tOm WIttman:p id of n d qOmx P l


11/16

011

11-17 AUG 2011

11

plans to expand the line with pairsthat would compare the S&P 500 ETFwith other ETFs ( WSL Online, 7/6 ).Wittman said additional changes are

being considered but he declined todiscuss them in detail.

MARKET STRUCTURE

BX adds routingservice

Nasdaq OMX BX plans to providean outbound routing service forits members. The service will be

performed by Nasdaq ExecutionServices (NES), the exchange groupsrouting broker. The service willinclude seven routing options BTSG, BSKN, BSKP, BTFY, BMOP,and BCRT similar to what is avail-able on the Nasdaq Stock Market.

BX noted in its regulatory proposalthat the Securities and ExchangeCommission has expressed con-cern in the past with the affiliationbetween NES and other Nasdaq mar-

kets for which it provides routing, buthas approved the services by settingstrict operating conditions for NES.

Those conditions will continue tobe applied, BX said. Any membersthat do not want NES to route ordersmust enter orders into the system asimmediate-or-cancel orders or any other available order type that is noteligible for routing. The exchangesaid it would offer the service on apilot basis for a year to ensure the

service functions according to the setconditions.

MARKET STRUCTURE

Phlx allowesmarket makers prop day limitordersNasdaq OMX Phlx plans to allow

some of its market makers to enterday limit orders for their proprietary

accounts. The exchange told the Se-curities and Exchange Commissionin its proposal that the change wouldcreate consistency between rules for

market maker s and members, aswell as enhance liquidity.

The exchange has several types of market makers, including streamingquote traders (SQTs), who are mem-bers with a floor presence that is al-lowed to generate and submit quoteselectronically in assigned options,and remote SQTs, who have the samepermissions but no presence on thetrading floor. Both also have permis-sion to trade in their own accounts.

Exchange members that are not SQTsare allowed to enter day limit ordersfor their proprietary accounts butSQTs and RSQTs may not.

Phlx said it would give permissionto SQTs and RSQTs to enter day limitorders of 10 or more contracts intotheir proprietary accounts, similarto permissions members are given. If proprietary orders include less than10 contracts they must be submittedas immediate-or-cancel orders. The

exchange said this change will allow market makers to rest more ordersin the order book, which in turn willencourage liquidity. Phlx added thatthe restriction stemmed from con-cerns that allowing day limit orderscould discourage electronic tradingand quoting.

ExChAnGES & ATSs

NYSE, AMEX address reversemerger listingsThe New York Stock Exchange andNYSE Amex are strengthening theirlisting rules related to companiesthat offer public shares after a reversemerger transaction. The move followsa similar rule change by Nasdaq Stock Market earlier this year.

At issue are regulatory concerns

that have been raised following recentreverse mergers, especially in rela-

tion to accounting fraud allegations.Reverse mergers occur when a publicshell company mergers with a privatecompany and the emerging company is

the former shell.By becoming a public reporting

company via a reverse merger, a privateoperating company can access thepublic markets quickly and avoid thegenerally more expensive and lengthy process of going public by way of aninitial public offering, the exchangesnoted. But the Securities and ExchangeCommission has recently entered en-forcement proceedings against reversemerger companies and suspended trad-

ing for others due to concerns.The exchanges said that due to these

concerns, reverse merger companieswill not be eligible for listing until thecombined company has been traded forat least a year in the over-the-countermarket or on another national securi-ties exchange; maintained a minimumstock price of $4, and provided timely filings with the Commission for allreports since the reverse merger wascompleted.

They noted that the seasoningperiod would provide greater assur-ance that the companys operations andfinancial reporting are reliable. It willalso give independent auditors time toferret out irregularities and give regula-tors and the market time to scrutinizethe company.

50%AMoUnT ThE nySE plAnS TolowER lEvEl of nET liqUidASSETS iT will REqUiRE ofdESiGnATEd MARKET MAKERS

on ThE ExChAnGE


12/16

2

news

ExchangEs & aTs

BOX adds autocancellationfeatureMarket makers at the Boston OptionsExchange will soon have access to afeature that will automatically cancelexecutions based on preset param-eters.

The new feature will help marketmakers to eliminate risk of overexpo-sure in the marketplace due to large,unhedged principal positions, accord-

ing to BOXs proposal at the Securi-ties and Exchange Commission.

Market makers have an obligationto provide continuous quotes in themarketplace for options contracts thatthey are assigned to. They use theirown systems to determine prices andthe sizes of their orders but they canstill create the unhedged positionsdue to the speed at which they have tosubmit quotes.

BOX said the automatic quote

cancellation feature will eliminatethose positions without any prompt-ing from the market maker as long asit has submitted trigger parametersfor the system. Those parameters caninclude a specific number of contractsacross all series in an options class oran aggregate dollar amount tradedwithin a specific options class, amongothers. If those triggers are hit withina specific time period, the system willcancel all the quotes in that options

class. BOX said market makers canalso choose to program their ownsystems to perform the same autocancellation feature, instead of usingthe exchange system.

Trading firms

ITG sets plan forderivativesexpansionITG plans to target the expansion of

JamiE sELWaY: eo l qu ty e-

e t e v t vet iTg

its derivatives business by expandingdistribution to the buyside, accordingto Jamie Selway, the recently namedhead of liquidity management and

derivatives at the agency firm, whospoke to WSL .

The firm is mak-ing the move now to capitalize onincreased interestamong hedge fundsand traditional long-only firms, whichSelway attributedto the increase inalgorithmic and elec-

tronic trading, which in turn makestrading derivatives cheaper.

ITGs existing options and futuresbusiness has been focused on theprofessional trading community,Selway said. If you can service them,you can service anyone. We want totake the technology weve developed[in derivatives] and distribute it to thebuyside. Expansion of the optionsbusiness in particular is a target asthe integration of options into an in-

stitutions investment strategy woulddovetail with the investors analysis of the underlying stock.

Were trying to better integrateour options functionality into therest of the business, the institu-tional business, or ITG classic, saidSelway. The process will include afocus on technology, like algorithmdistribution and direct market accessofferings, but it would also includehigh touch services and access to

research. The integration is technol-ogy oriented, but the vision is thatderivatives could be as big as equitiesfor us, he added.

ExchangEs & aTs

Alpha ATS plans public multicastdata feeds

Canadian alternative trading systemAlpha ATS plans to offer public

multicast data feeds as part of its new trading engine. The trading engine,scheduled for release in November,will be version 5.0, and replaces ver-

sion 4.5 released earlier this year.The ATS provided details of the

data feeds in an alert to its members,noting that the public feeds will re-quire less bandwidth to consume andwill help reduce market data latency.

All of Alphas public feeds will beavailable via multicast, includingpublic orders and trades, plus top of the book and top five data, as well asprice depth data. Users consumingpublic and private data via direct feed

can continue to receive either or bothfeed at the same time as consumingthe multicast feed.

ExchangEs & aTs

NOM introduces bulk quoting

The Nasdaq Options Market is mov-ing forward with plans to introduce a

bulk quoting interface, as it continuesa project to enhance and improvetechnology and market makinginterfaces.

The bulk quoting interface will al-low market makers to send more thanquote or quote update to the systemat once. It also allows them to sendbids and offers in the same message,according to NOMs regulatory filingon the addition.

NOM said the offering will be

useful for market makers that areassigned multiple options for quotingas it eliminates the need to submitsingle, two-sided quotes using theorder-based interface for marketmakers.

The bulk quoting interface willalso include access to data that wouldshow the state of the options a marketmaker is trading, such as whether astock is trading or halted. Auctionnotices and system event messages

will also be included.The information being added to


13/16

01 3

11-17 AUG 2011

NYSE Arca and NYSE Amex are mak-

ing plans to allow quali ed contingentcross orders to be executed electronically from the oor of both exchanges, complet-ing a process they began in April to allow the trades on the exchange.

Amex and Arca were among exchangesthat said they would o er the order typein order to compete with the InternationalSecurities Exchange, which rst proposedthe concept. eir original proposal limitedQCCs to o - oor executions, but this latestproposal would reverse that restriction.

In separate regulatory lings, the ex-changes said they would allow oor brokersto submit QCCs from the oor withoutexposure to their respective systems. Orderswould only be accepted if no other customerorders were on the books for the same priceand if they were for 1,000 contracts.

e exchanges said they moved to changetheir rule a er an analysis of the Securi-ties and Exchange Commissions approval,which found no material di erences be-tween entering the orders from the oor or

from o the trading oor. But, Amex and

Arca noted that they will prohibit brokers

from entering the orders from the oor fortheir personal accounts.

e addition is the culmination of a longindustry debate over order types, that beganwith the International Securities Exchangeproposed to allow them in 2009. Amex andArca, as well as other options exchanges andindustry participants, vehemently opposedthe rules, saying it essentially allowed ordersto cross without much exposure or wideparticipation, and threatening to launchsimilar order types if ISE received an ap-

proval (WSL Online, 9/25 ).

mArket strUctUre

Arca, Amex expand QCC trades tofloor 13

these market making interfaces is forconvenience purposes so that marketparticipants utilizing them havean additional means to access the

information directly impacting theirquoting behavior, NOM stated. n

listinGs

BATS PushesBack Listings BizLaunchBATS Global Markets has moved the

launch of its listings business back three months. The launch of the

business, originally announcedin March, was scheduled forSeptember 1.

In a notice to members about

the delay, the exchange operatorsaid that it now plans to launchlistings December 2 to allow firmsmore time to test and developsystems in advance of the of-fering. The development wouldcode brokerage systems for BATSopening and closing auction proc-ess, which will be in the form of aDutch auction.

The exchange operator hasstated that plans to offer the

listings market is a move to offera competitive alternative to the

two U.S. listing markets at the New York Stock Exchange and the NasdaqStock Market, particularly in light of exchange merger activity and discus-

sion. n

listinGs

NOM AddsTrading ThresholdTo MarketThe Nasdaq Options Market is look-ing to add further functionality thatwould limit the range at which trades

can execute on the market, in an effortto limit dramatic price swings unre-lated to market events.

In its regulatory proposal, theexchange likened the functionality,Acceptable Trade Range, to marketcollar orders in the equities markets,but said its process was superior.

A market order is one that issubmitted with no price criteria otherthan the best market price, and addingthe collar to the order will limit execu-

tions to a maximum or minimumprice. NOM said its Acceptable TradeRange capability would apply whetheran order is priced or unpriced and if the maximum or minimum price isexceeded the order is not immediately cancelled.

The range is decided based on add-ing or subtracting a pre-determined value to the national best bid or offerand orders will be allowed to executeup (for buy orders) or down (for sell

orders) to the maximum or minimum value.

If an order is submitted outside theacceptable range, and the limit price isoutside the threshold the order will bereposted at the threshold and exposedfor one second or less to determinewhether liquidity is available. If not, anew threshold will be chosen.

NOM said it will set the thresh-olds so that a market pause is a rareoccurrence, though it noted that the

one-second pause is shorter thanwhat some equities markets take in


14/16

news

an attempt to dampen volatility. Theacceptable ranges will be the sameacross all options on the market,though fleixibility will be allowed

depending on the volatility of theunderlying security. n

Trading Firms

Concept Capitalacquires AlarisTradingConcept Capital Markets, a New York-based broker-dealer, has acquired

Alaris Trading, a broker-dealer alsolocated in New York, according toan exclusive report from WSL sisterpublication HFMWeek .

The transaction took place earlierthis month and terms of the dealhave not been disclosed. The mergedentity will offer institutional brokerageservices to hedge funds, asset manag-ers and registered investment advisersworldwide.

Bringing our two companies

together will allow us to capitalize oneach others best practices, enhance ouralready high level of customer service,and provide our customers with anexpanded offering, said Jack Seibald,co-founder and senior managingdirector of Concept Capital. Alaris is awell-established, fast growing firm witha very strong sales and operations team,and an enviable track record. Alarisis expected to be fully integrated withConcept by the end of the third quarter.

The deal continues the ongoingconsolidation in the prime broker-age arena that has taken place overthe last few years, as many firms havelooked to join forces to stay afloat.Last November it was reported thatI.A. Englander, one of the largestindependent US derivatives brokeragefirms, planned to acquire Alaris, but inMay the two parties mutually decidedto rescind the deal.

Concept has also recently launched

a registered investment advisor in amove to expand its service to hedge

a slight difference in its share of themarket from June, at 10.8%, to July when it executed 10.51% of contracts.

BATS Options moved up just

slightly, executing 4.15% of July contracts, up from 4.08% the monthbefore. Nasdaq Options Market saw just 3.63% of the market, representinga slight drop in share, while the BostonOptions Exchange gained someground, executing 3.37% of contractsover its 2.37% of contracts in June. C2Options Exchange also saw a slightincrease, executing 1.26% of contractsin July. n

PosT-Trade

Direct AccessPartners, Paladyneform partnershipPrime broker Direct Access Partners(DAP) and Paladyne Systems, a tech-nology platform for hedge funds andprime brokers, have formed a strategicrelationship, according to WSL sister

publication HFMWeek .The new partnership will allow

DAPs hedge fund managers to usePaladyne FastStart, a front-to-back office technology platform, to calibrateelectronic trading, portfolio manage-ment, and other attributes.

In addition, DAPs prime brokerageclients will be able to use the offeringsbroker-neutral and managed accountplatforms for hedge funds that wantto establish multi-prime relationships

and run separate structures to thefund, respectively.

We are committed to provide ourclients the best valuebe it capitalraising or trading solutions, said BenChinea, CEO of Direct Access Part-ners. The increase of institutional investment in hedge funds requires thatour clients have world-class operationsand technology solutions. Paladyne isthe leading provider to these firms andwe are pleased to provide our trading

and prime brokerage customers thePaladyne FastStart solution. n

fund clients. The RIA will allow theprime broker to run separately man-aged accounts for its strategies. Theentity, called Concept Asset Manage-

ment, runs a separately managedaccount platform, where both existingand potential investors can eitherallocate to the entire structure or indi- vidual investments. The platform hasapproximately 300 accounts in mainly liquid strategies.

The debut of Concept Asset Man-agements managed account platformmarks an ongoing trend among firmsto foray into these more liquid andtransparent structures due to allocator

demand. Most recently, LombardOdier Investment Managers, the assetmanagement business of Geneva-based Lombard Odier Darier Hentsch& Cie, was slated to migrate its fundof hedge funds portfolios to funds of managed accounts via the platform itestablished this year. n

exchanges & aTs

CBOE keepsoptions share leadThe Chicago Board Options Exchangehas held on to its market share leadamong options exchanges in spite of dropping some market share in thelast month. The exchange executed25.4% of trades in June but dropped to24.98% in July, according to monthly data from the OCC. Nasdaq OMXPhlx followed the exchange with 22.3%

of executions, just a slight drop fromits 22.53% of executions the monthbefore. Options trading volume totaled348,218,171 contracts in July, a nearly 26% increase over the same time lastyear, according to the Options Indus-try Council.

The International Securities Clear-ing Corp. executed 16.46% of options volume in July, while NYSE Amex Op-tions saw just 13.33% of the volume,with both differing from Junes execu-

tions by less than a percentage point.Similarly, NYSE Arca Options saw just


15/16

15

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a , w v g at ;$0.0021 add d qu d ty b tw 0.50% a d 1.25%o Tap A ADV o b tw15 a d 35 m o a ;$0.0020 o add d qu d ty o mo t a 10 to 15m o a o 0.50% o Tap A ADV

$0.0022 d tp a p

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51 m oa o

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a

Augu t 01 O y app ab to t o nYse- t du t w t a p a to k p o

$1.00 o mo . slP mu t m t 10% o mo quot g qu m t to v t

d t. P tag t o d w adju tmo t y ba d o t Us av ag da y

o o dat d a vo um Tap Au t o t at mo t .


16/16

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Documents

Wall Street Letter Aug 11 - Aug 17 2011