Courtesy of insight from Rebecca Healey of Liquidnet, the equities trading platform that connects buyside and sell-side traders from across the globe, “the latest FCA summary, published on March 3, 2017, highlights just how far the UK regulator believes firms are falling short of expectations in unbundling research and execution services. The regulator’s opinion is that poor market practice remains commonplace despite rules that have been in place for more than a decade. In particular, firms are still failing to adequately assess and budget for substantive research that is of value to their end clients’ investments.” Ms. Healey’s coverage is excerpted below, with a link to her recent posting in Tabb Forum.

Corporate Access

ESMA is of the view that arranging a meeting itself is not providing material or services which “explicitly or implicitly recommend or suggest an investment strategy and provide a substantiated opinion as to the present or future value or price of such instruments or assets.” (Recital 28) As such, Corporate Access is not to be considered “research” but as a separate service to be paid for commercially.

However, ESMA notes that it is important that the Corporate Access provider prices services at commercial levels and any access provided is not linked to or dependent on payments for research or execution services. Under Article 13(9), each benefit or service an investment firm provides must be “subject to a separately identifiable charge.”

ESMA is of the view that corporate access such as arranging meetings or field trips could involve the allocation of valuable resources by the provider and could influence the recipient’s behavior (Article 12(3)). As such, ESMA expects firms to assess whether corporate access services facilitated by an investment firm are material or of minor non-monetary benefit, and therefore, whether these services can be accepted. If the investor “road show” is freely and publicly open to analysts from investment firms and other investors, it could be considered acceptable minor non-monetary benefits under Article 12(3).

However, to avoid any conflict of interest, an investment firm wishing to meet a corporate issuer can approach the firm directly and/or pay for a third-party corporate access service provider that does not provide other MiFID investment services.

Macro-Economic Research

In ESMA’s opinion whether macro-economic analysis can be considered research should be weighed against the criteria set out in Recital 28. In particular, whether the research in question “informs views on financial instruments, assets or issuers within that sector or market” and whether “this material or service explicitly or implicitly recommends or suggests an investment strategy … could be used to inform an investment strategy.”

In ESMA’s view most macro-economic analysis is likely to suggest an investment strategy, unless it is sufficiently general to fall outside the definition of research. If it is considered research, it is then capable of being received (and paid for) by an investment firm, under Article 13.

If not, it does not automatically classify as a minor non-monetary benefit, and portfolio managers and independent advisors would need to make a commercial decision either to pay for this or not accept the service.

Prospectus.com team of capital markets experts and securities lawyers specialize in real estate investment trusts (REIT), preliminary offering prospectus, secondary offering prospectus and full menu of financial offering memorandum document preparation.For more info, visit www.Prospectus.com

No Carve Out for FICC

To continue reading, please visit Tabb Forum via this link

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Below video provides true color and frames the firm’s value proposition in a comprehensive manner. Further below is a Q&A with firm principals Michael Wallach and David Beth, both of whom are 25+ year sell-side trading market veterans and are each considered to be industry thought-leaders by both buyside clients and sell-side peers.

Q. I’m familiar with the term “inter-dealer-broker” aka “IDB”, a broker that serves as intermediary between competing sell-side broker/dealers for the purpose of maintaining anonymity; why does WallachBeth refer to the firm as “inter-market broker.”

Wallach: We go far beyond the typical sell-side boundaries, which is the universe that IDB’s limit themselves to.
Our trading relationships extend not only across the spectrum of competing Tier 1 sell-side facilitation desks, but also includes high-touch prop trading and market-making firms, along with a wide range of hedge funds and other buy-side managers, all of whom actively trade the underlying cash instruments, options, futures, fixed income or commodities that map to the products that we specialize in.

Q. The industry at large emphasizes the phrase “best price execution”, yet WallachBeth refers to “execution at the right price” as one of your value propositions. What’s the distinction between the two phrases?

Wallach: “Best ex” is a broadly-interpreted phrase; it means different things to different people. Best ex metrics are merely derived from one-dimensional pricing data displayed on screens.
The fact is that screens, including Level II, rarely display what is actually obtainable at a given point in time, simply because most liquidity providers won’t show their “best hand” on a screen. Independent best ex analytics don’t necessarily tell the real story. There’s no such thing as a truly accurate 360° best ex “view” for those trading volatile products, complex option spreads, or seemingly illiquid ETFs or options.

When we say “right price”, it’s the best obtainable price with the least market impact within the context of the actual market and the real liquidity available, displayed and hidden. That’s our definition of best execution.

Q. The issue of “capital commitment trades” or principal vs. “agency-execution” is a topic of ongoing and spirited debate. Where does WallachBeth sit in this discussion? And, why would I call you instead of calling or directing my order to my prime broker or my custodian’s facilitation desk?
Beth: The “need” for capital commitment trades is typically driven by a sense of urgency on the part customer who wants to quickly liquidate, or acquire a large block of stock, or a complex options position. In a perfect world, a “principal trader” is also extending the best price that can be obtained in that split-second moment in time. But the world isn’t always perfect.

WallachBeth discretely aggregates the Industry’s foremost capital commitment providers, often in less time than a customer might get a quote from a single “principal desk.” In many (but not all) cases, we can prove to be the de facto, single source of a particular product’s total capital-centric liquidity that’s immediately available to transact with.
That said, we also know that certain customers are compelled to direct orders to their custodian or “PB” when there’s an obligation to compensate for research or other “value-added” services received from the PB.

Wallach: We know the pendulum swings both ways. The ‘agency-only’ proposition is obviously compelling to managers who need to distance themselves from any potential conflicts of interest that their counterparty might have when offering a trade price. On the other hand, a principal trader is taking on risk in consideration for providing the customer immediate gratification. Nobody takes on risk without being compensated, and the fee paid for a capital commitment trade is necessarily a premium vs. an agency rate.

The higher rate paid for a principal trade vs. agency execution might be justifiable at the time, or it might seem nominal to some customers. For Alpha-centric managers, our aggregation model and our networking approach to securing the best price can noticeably impact a manager’s overall performance.

Speaking as a long-time principal trader, I’d argue that almost every order can be best executed only after properly canvassing the market for price improvement. The perceived need to execute “on the wire” can, in hindsight, prove to be very costly in more ways than one.

Q. Can WallachBeth administer customized orders or program orders?
Beth: Absolutely. Many of our clients depend on us to execute VWAP, TWAP and similar algo-dependent execution strategies. Our trading system technology connects to all market centers and supports a full-range of order strategies, including sophisticated option-related orders.

Q. Client “A” often requires step-out trades, average trade price reporting, and often, their trades need to be allocated and reported to more than one custodian. Does WallachBeth accommodate this type of reporting?
Beth: We use a very sophisticated technology platform that blends front-end DMA, EMS, and OMS with a full range of back-office modules. This enables us to seamlessly accommodate just about any type of the most demanding customer requirements, from “best ex metrics” to Commission Sharing Agreements, corporate actions and a full menu of regulatory reports.

Q. What type of research or market commentary does WallachBeth provide?
Wallach:When we formed the firm in 2008, our mandate was focused on filling a considerable Industry void by providing conflict-free trading market insight and integrity-rich best execution services for both institutional fund managers and sell-side liquidity providers. Since that time, our platform has grown exponentially and we’ve established a significant presence within multiple product areas.That said, and as our business has evolved, and as the industry at-large continues to be increasingly aware of enhanced fiduciary standards, we heard loud and clear from clients that even with today’s more proactive regulatory landscape, there is a dearth of un-conflicted, granular equity research available to institutional investors.
Our complementing best execution services with a product that delivers objective, unqualified and highly-exhaustive analysis specific to public companies within the Healthcare vertical is not only consistent with our mandate to be a niche provider of in-demand, yet under-served markets, it is an ideal complement to our providing true best execution

Q. When comparing institutional brokers, what makes WallachBeth unique?
Beth: Our culture and our approach to executing orders is much different than any other firm we know of. We have a team-based, customer-service model; our clients have a relationship with our firm, and are not dependent on a particular ‘covering broker.’
When you look at our team member bios’, you’ll find real trading market veterans with unparalleled experience and product knowledge.
In “former lives,” we were trading floor specialists at major stock and option exchanges, OTC market-makers, open-outcry trading pit brokers, upstairs proprietary fund managers, and traders that ran risk arb and facilitation desks at Tier 1 banks. Several of us were also instrumental in developing trading system technologies that are now used throughout the Industry. You simply won’t find that combination or caliber of professional at a typical “broker shop.”

Q. Aside from transaction costs, every buy-side manager is focused on internal infrastructure and operating costs. From the perspective of a buy-side client, how does WallachBeth improve a customer’s “operating efficiency”?
Beth: More than a few of our customers view us as a turnkey, but otherwise captive trading department. We provide more than 3 dozen expert traders, an Olympic-size liquidity pool, all of the ‘bells and whistles” with respect to trading and back office technology, and all without our customer(s) having to incur 1 penny of overhead insofar as office space, equipment, salaries, benefits or bonus.
Wallach: Let’s not forget the “Alpha” element, which is the real benchmark for operating efficiency. By virtue of continuously getting better price executions than what you might have received from a different firm, what might seem like a few pennies better “here and there” can actually make a real difference to overall operating efficiencies for any active manager with more than $10 million AUM. For those with more than $50 mil-$100mil AUM, the savings can, in theory, equate to six, if not seven figures annually.

Q. No doubt the depth and experience of the WallachBeth team is compelling, is there anything else that sets you apart?
Wallach: Anybody that knows us, or anybody that’s observed our trading floor knows that every customer order, however small, however big, or however complex, is treated as if it were our own order, for our own account.
It might sound like a cliché to some, but we truly believe that our revenue is derived from commissions that we earn, and that our profit is the trust that we’ve created.

Additional information about WallachBeth Capital can be found via their website: www.wallachbeth.com

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