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?

Are you a startup fintech or blocktech firm that is seeking to raise capital and finding yourself ‘short of’ a cogent business plan or the proper investor offering documents?

Schedule your call with the senior executives at Prospectus.com LLC today

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

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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Overstock.com’s Patrick Byrne To Launch Blockchain ATS for Stocks

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(MarketsMuse) 09 Sept–“What’s Next? Well, for those familiar with Patrick Byrne, the controversial and innovative founder of Overstock.com, one of the first online retailers to embrace the use of bitcoins, it should not be a surprise that Overstock’s chief honcho would ‘get the joke’ and realize its all about the underlying technology that powers cryptocurrency applications, known as distributed ledger. While bitcoin currency continues to encounter challenges in terms of mass embracement, the real grease that makes the makes the wheels turn is under the hood. With that, Overstock subsidiary “T0” (T-zero) is taking a page from both the industry consortium formed by R3 and the Senahill-backed Symbiont –both of which target institutional capital markets usage–and aiming it’s own sights on retail investors by setting to launch an equities-centric Alternative Trading System aka ATS powered by their own blockchain formula.

A distributed ledger is a consensus of replicated, shared, and synchronized digital data geographically spread across multiple sites, countries, and/or institutions.
A blockchain is a type of distributed ledger, comprised of unchangable, digitally recorded data in packages called blocks.
Rob Daly of MarketsMedia (not related to MarketsMuse) provides the scoop..

Online retailer Overstock.com expects trading to begin on its blockchain-based alternative trading system before the end of the year, according to company officials.

The ATS will be operated by Overstock.com subsidiary TO as part of the company’s Medici Project, and it will only handle trades in the company stock, at least at first. So while it’s not an immediate competitive threat to the existing field of 13 U.S. stock exchanges plus several dozen ATSs, the initiative will be closely watched as a gauge of the potential of distributed-ledger technology in capital markets.

The ATS will write completed trades to its blockchain instead of routing them to the National Securities Clearing Corp., a subsidiary of Depository Trust & Clearing Corp., for clearing.

Overstock.com plans to prime the liquidity on the ATS through a new issue of corporate shares to existing shareholders the day before trading commences on the new trading venue.

 

T0 officials plan to formally announce its partnership with a broker-dealer on Sept. 12. “For those who want to trade on the ATS, they will have to create an account with the broker-dealer,” said Overstock’s man-in-charge Judd Bagley, who declined to name the brokerage firm.

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To continue reading the story from MarketsMuse.com, click here

LPL Independent BrokerDealer Model Challenged

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Despite the assortment of advances courtesy of fintech (financial technology) applications, the brokerdealer business model has long posed challenges for individuals determined to sell financial products and earn commissions and fees for assets under management. As evidenced by the travails of newer business models introduced by independent firms such as LPL Financial, which offer better payouts and a bigger slice of fees for AUM vs. the traditional ‘wirehouses’ such as Merrill Lynch or Wells Fargo or Prudential Securities, all is not necessarily rosy for those independent broker platforms, as evidenced by the share price of LPL, which has lost nearly 45% since the start of the year.

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(WSJ)-March 26 The future of the brokerage business was supposed to be companies like  LPL Financial Holdings Inc., which works with the growing population of independent financial advisers. But a proliferation of competitors and a major regulatory overhaul are weighing on the company’s growth.

The company—whose brokers are independent contractors who own their own practices but pay LPL for various services—had been a growth juggernaut for years. It added hundreds of financial advisers and billions of dollars of client assets annually between 2010 and 2014. But LPL reported last month that growth slowed drastically last year, with the firm adding just 18 net new advisers and assets under management expanding just 0.1%.

Those numbers spooked shareholders and LPL’s stock tumbled 35% on Feb. 12, the day after it also reported an 8% year-on-year drop in quarterly revenue to $1.02 billion. Its shares are off 43% for the year so far.

Falling securities commissions were a big contributor to LPL’s revenue decline, as a volatile stock market and regulatory scrutiny of some of the alternative investment products sold by brokers weighed it down.

Revenue could be hit further by a coming Labor Department rule requiring advisers working with retirement savings to abide by tougher conflict-of-interest rules, analysts say.

“There’s a lot of uncertainty around the market backdrop right now, and then you layer on top of that regulatory uncertainty as well, that’s going to come together to create pressure” on the company and its stock, said JMP Securities analyst Devin Ryan.

LPL isn’t a household name like many of its rivals, despite the fact that it oversees the fourth-largest adviser force in the U.S. Its 14,054 advisers at the end of 2015 put it just behind Bank of America Corp.’s Merrill Lynch brokerage, which has 14,533 brokers, Wells Fargo & Co.’s brokerage arm, with 14,960, and Morgan Stanley’s 15,889 brokers.

To continue reading the story by WSJ’s Michael Wursthorn, please click here