The Great Rebate Debate..Broker Disclosure IS Front-Burner Topic

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Exchange rebates paid to brokers for routing orders to their respective venues and the general issue with regard to the now ubiquitous “payment-for-order-flow” model that extends throughout the electronic trading ecosystem has been a topic of discussion for many years now. It may be confusing, but is certainly not an unknown concern to the universe of informed buy-side investors. For those who may be still be uninformed as to how/where/why/when (and how much?!) broker-dealers are on the receiving end of rebates, suffice to suggest its time you get yourself up to speed; your bottom-line can depend on it.

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Image Courtesy of April 2014 Wall Street Journal

Courtesy of financial industry media outlet MarketsMedia’s all-star journalist Terry Flanagan most recent dissertation “Got Transparency?” it is one that deserves an accolade from altruists within the industry, if not a check under the hood or bottom of Terry’s car before he starts the engine.

“One aggravating factor is a lack of transparency. Many market participants do not know either the amount of the rebate or where it ends up.”

As Flanagan points out, “..In institutional equity trading, rebates have been a point of contention since the late 1990s, when Bill Clinton was U.S. President and the Dow Jones Industrial Average scaled 10,000 for the first time.

Supporters say exchanges paying rebates on order flow is a perfectly legitimate practice of rewarding customers and offering volume discounts. Helped by rebates, trading commissions have dropped substantially over the years; the biggest decline from 2005 to 2017 was 68% for the lowest-touch direct market access / algorithmic trades, according to Tabb Group research.

“Most buy-side firms operate with ‘all-in’ pricing models and aren’t provided granularity into fees by order, but the decisions on when and how to route to particular venues significantly impact execution performance…” according to Stino Milito, Co-Chief Operating Officer at Dash Financial Technologies.

On the other hand, critics say rebates create conflicts of interest, and shortchange end investors if brokers route in ways that disadvantages clients……Helped by rebates, trading commissions have dropped substantially over the years; the biggest decline from 2005 to 2017 was 68% for the lowest-touch direct market access / algorithmic trades, according to Tabb Group research.

 “There is absolutely crap disclosure about broker-dealer routing strategies,” according to Dave Weisberger of ViableMkts. “If you can’t get a high-level view of how brokers route and what the outcomes are, then how can you be talking about a transaction fee pilot, or making claims about what rebates do to destroy the market?

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To read the entirety of Terry Flanagan’s piece in the latest edition of MarketsMedia, click here

The Great Rebate Debate..Broker Disclosure IS Front-Burner Topic

SEC Proposal To Address Brokers’ Conflicts of Interest Bashed

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Latest SEC Proposal Broker Conflict of Interest Causes More Than Confusion. Anyone Surprised?!

It would only seem logical that, after counting the thousands of instances (which are only partially revealed via Finra’s brokercheck database) in which retail investors have been ripped-off by licensed investment brokers who have sold an investment product without disclosing conflicts of interest courtesy of incentive fees or kickbacks those brokers are making from third parties when selling seemingly simple and/or complex investment products to the respective customers.  After all, the burden of establishing rules of the road and regulating the practice of selling investment instruments has long been the domain of the US Securities & Exchange Commission and secondarily on Finra, which is a self-regulated body that governs the broker-dealer space–which is comprised of the universe of brokers who sell investment products.  The SEC mandate–according to altruists–is to protect investors from abusive practices advanced by those selling investment products by establishing regulations that protect investors. Further, Finra’s mandate is to impose standards of compliance and to police broker-dealers to ensure they comport with SEC regulations.

Aside from the last comments being somewhat redundant, all of this would seem to make sense, were it not for the fact that Finra is the SEC’s biggest lobbyist. Finra member firms (who pay membership fees) are comprised of all of the brokerages that sell investment products to retail investors and by default, Finra is therefore conflicted when having the biggest lobbying influence on the SEC as to the rules and regulations that govern those member firms.

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Mr. Trump and Mr. Clayton (SEC Commissioner)

Yes, there are consumer advocacy groups that lobby the SEC to ensure proper protections are in place for unwitting investors. But, the fact is those advocacy groups do not have anywhere near the resources to effectively influence the handful of SEC Commissioners who are handpicked by the prevailing administration–meaning those sitting inside the White House. All one has to do is consider the circuitous path aggrieved investors must take when they’ve been wronged to realize the system is stacked against them, starting with investors having to bring their claims via an industry arbitration forum and foregoing their rights to sue the wrong-doers in an actual court of law. Once in arbitration, investors then face a forum that is typically overweighted with “expert” industry professionals–the folks who work for Finra member firms, whether as consultants or direct employees. More important, all one has to do is analyze the number of cases brought by investors against a member firm and their respective broker to recognize the cases resolved in favor of the investor are dwarfed by the number of instances in which a ‘no harm no foul’ determination is made in favor of the defendant.

The good news is that in recent years, enough outcry on the part of investors has led to among other things, the federal government establishing an independent watchdog in the form of the Consumer Financial Protection Bureau, whose role “is to make consumer financial markets work for consumers, responsible providers, and the economy as a whole. We protect consumers from unfair, deceptive, or abusive practices and take action against companies that break the law.”  Further, thanks to prior White House administration, the SEC adopted a new set of standards intended to better protect the investor from their investment brokers and imposing guidelines that called for greater transparency and more granular disclosure as to conflicts of interest on the part of investment brokers so that investors could fully understand exactly where their investment dollars were directed and the actual returns on investment they could anticipate receiving.

The bad news is that Finra has fought with tooth and nail to water down those regulations and much like the NRA, they’re experts at navigating the swamplands of Washington DC.  Further bad news-the Trump Administration’s doctrine to loosen regulations on banks and brokers with the goal of making it less onerous insofar as compliance overhead and regulatory oversight so banks can make big profits on transactions and enable them to be more leveraged has also taken aim at those pesky conflict of interest disclosure requirements imposed on investment brokers.

Before TrumpWorld (the political version of WestWorld), it was acknowledged that brokers should be disclosing fees they earn, including commission being charged to the customer and incentive fees the broker is getting paid from the manufacturer of the investment product.

But we know that Trumpeteers have long campaigned to turn the clock back and with the influence of the orange-haired guy sitting in the Oval Office, to bring the world back to the 1950′s so that business titans and US-styled oligarchs who play golf at Mar-A-Lago could become fatter cats than they already are.  And that mindset has included the investment broker space, as evidenced by Trump’s SEC latest proposal to water down existing rules and pending legislation that would favor investors as opposed to the brokers selling investment products–who after all-are either country club members or who vie to be. That’s what makes America great, right?

Something funny happened after the SEC’s latest proposal-investors and brokers have balked. Here’s the opening excerpt from the WSJ coverage..

SEC’s Proposed Curbs on Stockbroker Advice Under Attack

Plan from Trump-appointed officials at SEC runs into criticism from both brokers, investors

WASHINGTON—A government proposal to restrict incentives that can bias broker advice to clients is generating complaints both from Wall Street and investor advocates.

The plan by the Securities and Exchange Commission, developed by Trump-appointed officials, may replace some aspects of an Obama-era regulation by the Labor Department that Wall Street successfully challenged in court. A federal court invalidated the Labor rule, and the Trump administration declined to appeal the decision, killing it for good.

Now investor groups, brokerages and other business groups are taking shots at the SEC’s attempt to address brokers’ conflicts of interest, saying that it is too vague and won’t improve protections for investors. The commission must consider the comments before it can vote to implement the regulation, perhaps sometime in 2019.

The SEC proposal would require brokers to act in the best interest of clients, barring the picking of lackluster or unsuitable investments because they make more money for them or the brokerage firm.

Investor groups say the SEC’s proposed requirements are so ambiguous that they won’t change the status quo. Brokerage firms, meanwhile, complain the measure creates a new standard without telling them how their brokers might run afoul of it. They also complain it treats them more harshly than investment advisers, who have a fiduciary duty to put their clients’ needs first.

“This will only serve to harm the brokerage model and limit choice for those investors who prefer the brokerage advice model,” wrote the American Securities Association, whose members include Cowen Inc., Stifel Financial Corp. and LPL Financial Holdings Inc.

The SEC didn’t define “best interest” in its April proposal. It also didn’t explicitly state how brokers should “mitigate” conflicts of interest that can undermine their need to provide legitimate recommendations.

To read the full coverage, click here

TMX, BOX, ICE and Now SIX Get on Crypto Exchange Bandwagon

SIX Digital Exchange

The alphabet soup of exchange operators, Toronto’s TMX Group (TMX), the Boston Options Exchange (BOX), NYSE owner Intercontinental Exchange (ICE) and now Swiss exchange operator SIX are all shifting into high gear with plans for getting into the crypto exchange platform business.

On the heels of the recently announced tZero alignment with BOX, one that envisions a listing and trading marketplace for crypto land digital tokens, the Swiss stock exchange (SIX) jumped into the fray and announced that it too is going to open a cryptocurrency exchange, and the exchange operator claims it will be the first of its kind in the world.

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Jos Dijsselhof, CEO of SIX

The SIX plan, unveiled Friday is to build a “fully integrated trading, settlement and custody infrastructure for digital assets,” in order to “provide a safe environment for issuing and trading” established cryptocurrencies such as bitcoin, and tokens issued in so-called initial coin offerings.

The custody aspect formulated by SIX is notable, as the safety of stored cryptocurrencies is one of the big fears in this market.

SIX is in good company with many industry observers who have embraced the notion “You can’t put the Genie back in the bottle.” According to SIX CEO Jos Dijsselhof, “This is the beginning of a new era for capital markets infrastructures. For us it is abundantly clear that much of what is going on in the digital space is here to stay and will define the future of our industry.”

SIX hopes to go live with this new exchange in the first half of 2019, regulatory permission pending.

SIX is not the first operator of a traditional stock exchange to get into cryptocurrency trading. The TMX Group, which runs the Toronto Stock Exchange, announced its own cryptocurrency brokerage service earlier this year, and Intercontinental Exchange, which own the New York Stock Exchange, is reportedly also toying with the idea.

Securities industry veterans who have migrated to the crypto and digital token arena have continuously advocated that the ultimate success of cryptocurrency and digital tokenization in terms of institutional market acceptance of this new alternative asset class is dependent on fully-regulated exchange platforms. According to Former CBOE, NYSE, NYSEOptions and Amex member Jay Berkman, now senior advisor to investor offering document consultancy Prospectus.com LLC  “When looking back to the evolution of dual and multi-listing of equity options, and now seeing the pile on to get into crypto, t’s like deja vu all over again.”

Securities Token Exchanges Cranking Up in US: BOX +tZero

Lisa Fall, BOX Digital Exchange

Now that crypto cool kids are finally getting the memo: “These are Securities!” ,  the proposed first fully regulated Securities Token Exchange is coming to the US-via the Boston Options Exchange.

tZERO, the digital-themed broker-dealer created by Patrick Byrne and BOX Digital Markets LLC (BOX Digital)-a subsidiary of Boston Options Exchange, announced it has formed a joint venture to launch the industry’s first regulated security token exchange.

Lisa Fall, BOX Digital Exchange

Lisa Fall, Box Digital

On May 18, 2018, the two companies entered into a letter of intent to form an exchange to list and publicly trade security tokens for companies that issue, or convert existing stock to, security tokens. The proposed joint venture would be equally owned by tZERO and BOX Digital, with each having equal representation on the Board of Directors, together with one mutually agreed upon independent director. Lisa Fall, who currently serves as CEO of BOX Digital and as president of BOX Options Exchange LLC, would be the CEO of the joint venture.

“tZERO has proven to be a pioneer in the development and practical use of blockchain technologies for capital markets for a number of years,” said Ms. Fall. “tZERO’s track record and accomplishments in this innovative area, coupled with BOX’s expertise in operating a highly efficient and transparent equity options marketplace, made partnering together an easy decision and we look forward to building a world-class platform for listing and trading security tokens.”

tZERO plans to contribute cash and license tZERO’s blockchain technology for operation of the security token market. BOX Digital will contribute expertise and personnel toward obtaining regulatory approval and operation of the security token market. Approval of the U.S. Securities and Exchange Commission will be sought following execution of definitive documentation. Creation of the joint venture is subject to definitive documentation and customary conditions.

“Our partnership with BOX Digital Markets is a significant milestone that will create the first SEC-regulated exchange designed to efficiently trade crypto securities. Lisa Fall’s leadership, reputation and deep experience in the regulated securities exchange industry will be a major asset in achieving this objective,” said Saum Noursalehi, newly appointed CEO of tZERO. “Together, we will continue to work with the SEC as we develop a first-of-its-kind platform that will integrate blockchain capital markets into the current U.S. National Market System.”

According to electronic trading market veteran Jay Berkman, an Advisory Board member of fintech merchant bank SenaHill Partners and COO of investor documentation firm Prospectus.com LLC, “Now that pragmatic securities industry thought-leaders have figured out how to package crypto assets within the construct of a security so as to conform to the US regulatory regime, nobody can dispute the fact the genie is out of the bottle .  Added Berkman, “Securities Token Offerings (“STOs”) is a much more palatable approach, making way for a new mantra, “ICOs are dead, long live STOs”, until of course, another shoe drops.”

For the full story from Traders Magazine, click here

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Veteran-Owned Broker-Dealer’s Memorial Day Month Pledge

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Since its inception in 1995, boutique investment bank and institutional brokerage Mischler Financial Group (“MFG”) has been devoted to meeting the capital market needs of the nation’s leading corporations, municipal issuers and a broad spectrum of the industry’s most demanding investment managers and public plan sponsors. Positioned as a firm that ‘punches above its weight class in every metric’, Mischler is viewed by corporate treasurers and 6-pack banks as a ‘pure complement’ to the role played by lead underwriters. The firm’s highly-coveted middle-markets investor base, comprised of public plan sponsors and investment managers are notoriously ‘under-covered’ by the big Wall Street banks, and Mischler’s ability to bring these relationships to primary market offerings floated by Fortune corporations is a noticeable value add. The firm is also known for being the sell-side’s first and arguably, most foremost minority broker-dealer owned and operated by Service-Disabled Veterans.

Of equal importance, throughout its history, the firm has committed resources and year-round financial support to veteran-centric legislative initiatives, career building and mentoring veterans. This includes support of philanthropic programs focused on improving the quality of SDVs and their families’ lives as well as charitable programs that concentrate on supporting the families of military men and women who made the ultimate sacrifice in the course of serving our country.

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Mischler Financial Group CEO Dean Chamberlain

In connection with the firm’s year-round philanthropic mission, the months of May and November are specifically dedicated to honoring Memorial Day and Veterans Day. During these two months, Mischler contributes a percentage of the firm’s profit to select organizations that according to Chief Executive Officer Dean Chamberlain, a West Point grad and certified SDV,  “We deploy support to organizations that have a positive impact on the lives of vets, SDVs and Gold Star family members who simply do not have the depth of resources that so many of us take for granted.”

In honor of “Memorial Day Month 2018,” Mischler announced its annual pledge to the Semper Fi Fund, one of the country’s highest-rated charities. Formed in 2004, “SFF” is committed to providing immediate financial assistance, education scholarships, career transition programs and life-time support to post-9/11 combat wounded, critically ill and catastrophically injured members of all branches of the U.S. Armed Forces and their families.  Since its inception, Semper Fi Fund has distributed over $167 million to more than 20,000 service members and their families and MFG is therefore privileged to continue our support of SFF.

Stated Chamberlain, “On behalf of the entire Mischler Financial Group family, we are grateful and honored that clients of our firm will be supporting our Memorial Day Month 2018 pledge via our trading and capital markets desks and/or direct contribution to SFF.