Electronic Exchange Venue IEX’s Corporate Communication Exec Speaks Out re: BrokerDealer.com Blog Post

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As a professional courtesy, BrokerDealer.com blog is happy to post the following comment sent to us by IEX media representative Gerald Lam in response to our July 7 post, which merely extracted snippets from a July 7 WSJ article profiling the latest announcement from IEX, the electronic trading venue for block equities trading whose “anti-HFT” notoriety has spread far and wide thanks to the book “Flash Boys”

From: Gerald Lam <[email protected]>
Date: July 9, 2014 at 6:26:32 AM PDT
To: [email protected]
Subject: Contact email from Gerald Lam

I work at IEX, managing media & communications. I read your blog post on us from Monday, July 7 with concern.

Unfortunately, Bradley Hope’s article was misleading. And some of his inaccuracies have bled onto your piece.

For one thing, the “scheme” as you put it, is nothing new. We’ve offered it since the day we launched: October 25th, 2013.

Secondly, your second paragraph is wrong. Broker-dealer orders would not jump to the top of the order book over orders submitted by buy-side investors. Every buy-side investor (retail included) must be represented by a broker-dealer at IEX. There are no broker-dealer orders competing with non-broker-dealer orders here because every order at IEX is submitted by a broker-dealer.

Who does get “jumped”? Orders from other broker-dealers who are not providing both buyer and seller for a particular order at a particular price.

At the same time, investors (i.e. retail, mutual funds) who are represented by the internalizing broker-deal stand to benefit when they’re represented by the internalizing broker-dealer…their orders receive priority on the order book!

The bigger picture here is liquidity fragmentation — namely it’s detrimental impact to the investor experience. Our feature Broker Priority was designed to encourage brokers to internalize in once central, neutral (i.e. not owned by broker-dealers) venue.

I hope this sheds light on where the WSJ article got it wrong. I’m happy to talk through any of these issues.

I’d be grateful if you could address these clarifications in your blog.

Thank you,
gerald

Will BrokerDealers Get Busted For Promoting Maker-Taker Rebate Schemes? Finra Joins Investigation of Payment-For-Order Flow

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BrokerDealer.com blog reporting courtesy of this a.m. story from securities industry blog MarketsMuse

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

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

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

In a further sign that the current market structure could be cracking, one that has morphed away from a model based on centralization and transparency to disjointed fragmentation [a shift that has ironically been continuously supported Finra-sponsored government lobbies on behalf of that "regulatory authority's" senior constituents], Jeffrey Sprecher, the CEO of IntercontinentalExchange and owner of the New York Stock Exchange  appeared before a U.S. Senate hearing yesterday and called for the end of the now scrutinized fee and rebate system known as “maker-taker.” In what would seem like a walk-back given the NYSE’s own rebate scheme for brokerdealers as a means to attract order flow to that venue, Sprecher stated “Maker-Taker adds to the complexity and the appearance of conflicts of interest.”

BrokerDealer Blog: All Investment Categories Booming: Is This a Bubble?

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When headline stories such as the one that appeared on the front page of today’s New York Times (“From Stocks To Farmland, All’s Booming, or Bubbling”)

Courtesy of the NY Times

Courtesy of the NY Times

, broker-dealers, investment brokers, global investment bankers and others in the business of guiding investors and entrepreneurs across various asset classes are right to become concerned about a potential investing bubble. Particularly those who have seen similar peaks (and troughs) over at least the past 15 years.

Per the NY Times article:

In Spain, where there was a debt crisis just two years ago, investors are so eager to buy the government’s bonds that they recently accepted the lowest interest rates since 1789.

In New York, the Art Deco office tower at One Wall Street sold in May for $585 million, only three months after the going wisdom in the real estate industry was that it would sell for more like $466 million, the estimate in one industry tip sheet.

In France, a cable-television company called Numericable was recently able to borrow $11 billion, the largest junk bond deal on record — and despite the risk usually associated with junk bonds, the interest rate was a low 4.875 percent.

Welcome to the Everything Boom — and, quite possibly, the Everything Bubble. Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.

But frustrating as the situation can be for investors hoping for better returns, the bigger question for the global economy is what happens next. How long will this low-return environment last? And what risks are being created that might be realized only if and when the Everything Boom ends?

Safe assets, like United States Treasury bonds, have been offering investors paltry returns for years, ever since the global financial crisis. What has changed in the last two years is that risky assets, like stocks, junk bonds, real estate and emerging market bonds, have also joined the party.

Want to buy shares of American companies? At the current level of the Standard & Poor’s 500 index, every dollar invested in stocks buys you about 5.5 cents of corporate earnings, down from 7.4 cents two years ago — and lower than just before the global financial crisis in 2007-8.

 

BrokerDealers To Trade For Free in IEX Stock Exchange Proposal: The Death of Dark Pools?

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As reported by Bradley Hope in today’s WSJ, upstart equities trading venue IEX, the “dark-pool buster” profiled in the Michael Lewis book “Flash Boys,” announced today a new market structure scheme that would provide commission-free execution for orders submitted by brokerdealers.

According to the proposal, which is “expected to be submitted imminently” to the U.S. Securities and Exchange Commission in connection with IEX’s plan to move from its current status as an ECN (electronic communications network) and towards becoming a full-blown stock exchange, broker-dealer orders would receive priority in the IEX order book, meaning those orders would jump to the top of the order book if the price to buy or sell a stock was at least equal to the prevailing orders entered by non broker-dealers aka buy-side investors that include high-frequency trading firms, mutual fund firms and retail investors. In addition to brokerdealer orders being provided priority over other same-priced orders sent to the platform by non BD’s, broker-dealers would be able to execute commission-free.

In a move that is purposefully intended to disrupt the current market structure status quo and challenge the viability of loosely-regulated and so-called “dark pools,” in which pricing transparency is purposefully hidden so as to mitigate gaming of orders submitted by large institutions, IEX is embracing an approach that has become widely-embraced in Canada’s equity marketplace, whose primary equities trading is administered by TMX Group, that country’s largest stock-exchange provider. Noted TMX Group CEO Thomas Kloet, “The virtue of having more bids and asks consolidated in a few order books, rather than scattered across dozens of venues [such as what takes place in US markets) makes markets more transparent and provides for greater price efficiency.”

The IEX proposal comes close on the heels of recent events in which dark-pool operators have been accused by regulators and law enforcement agencies of various charges, including accusations filed against Barclays PLC by New York State Attorney General which alleges Barclay’s misleads its clients about the way its dark pool favors high-tech “high frequency traders.” Barclay’s system “Barclays LX” was the industry’s largest dark pool used by a broad universe of investors and competing banks, until those charges were filed last month. Since that time, Barclay’s has supposedly experienced a large exodus of clients using their platform, presumably because of concerns they too will be on the receiving end of New York AG subpoenas.

 

 

 

Jobs Available: Wall Street Scrambles to Hire Next Gen BrokerDealers

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BrokerDealer.com blog post courtesy of extract from July 5 story from The New York Times

nytimes logoA battle is raging on Wall Street as never before, with powerful factions scrambling for control of a precious resource.

On one side are the giant investment banks and broker-dealers, with names like Morgan Stanley and Goldman Sachs. Lined up against them, but also warring among themselves, are the giants of private equity — Kohlberg Kravis Roberts, Apollo Global Management and the Blackstone Group, to name just three. And the private-equity firms just happen to be the banks’ clients.

The prize they are fighting for is young talent.

This summer, dozens of junior bankers in their early to mid-20s will start jobs in private equity after spending their first two years out of college working at investment banks. Private-equity firms use billions of dollars of cash and plenty of debt to buy entire companies. They are seen by many young strivers as the next rung on an elite career ladder, promising higher status and more pay — around $300,000 a year, including salary and bonus, roughly double what a second-year banker might earn at Goldman.

But for junior bankers, who are known as analysts, securing such a job means stepping into the middle of a Wall Street struggle that has intensified since the financial crisis.

For the full story, please click here.