Finra Focus On High-Frequency Trading; HFTs Might Need BrokerDealer License

Posted on March 26, 2015 by admin

BrokerDealer.com blog update profiles the latest shoe to drop as both the US Securities & Exchange Commission (SEC) and Finra contemplate regulatory changes that could require firms engaged in high-frequency trading aka HFT to become registered brokerdealers. Below is excerpt of coverage from FT.com

US regulators have moved to close a loophole that allows some high-frequency trading firms that trade equities away from regulated exchanges to operate with light supervision.

The Securities and Exchange Commission on Wednesday proposed requiring proprietary traders to become members of the Financial Industry Regulatory Authority, a markets regulator.

The change would give authorities greater oversight for the day-to-day operations and recordkeeping for many high-speed traders and electronic market makers who dominate much of trading on US equity markets.

“Today’s proposed rules would close a regulatory gap by extending oversight to a significant portion of off-exchange trading,” said SEC chair Mary Jo White.

It is the first move by the US regulator to tighten monitoring of high-speed electronic traders, which aim to profit from rapid-fire moves in the market, following intense scrutiny on the industry a year ago. Flash Boys, a book by author Michael Lewis, alleged that high-frequency traders were among the beneficiaries to a market structure that was “rigged”. That led to calls for greater oversight of HFTs and off-exchange trading which had been building as equity trading increasingly moved to venues outside the traditional exchanges.

The SEC’s proposal would amend a rule that exempts certain brokers and dealers from membership in a national securities association. The existing rule reflected practices more than two decades ago, when equity markets were dominated by floor-based exchanges which could more easily regulate all of their members’ trading activity.

That world has largely disappeared as the emergence of high-speed technology and alternative trading venueshas helped usher in a new breed of proprietary traders that dominate trading. Although some have registered as broker-dealers at Finra, such as RGM Securities, Quantlab Securities and Tradebot Systems, there are also many that have not.

To read the entire story from FT, click here

CEO of BrokerDealer Electronic Exchange Platform IEX Speaks Out (Again)

Posted on August 8, 2014 by admin

In a July 9 BrokerDealer.com blog post, we profiled the coverage of start-up company IEX, the innovative and self-acknowledged “disruptive” institutional equities order execution platform for brokerdealers that has received unheralded PR courtesy of the book “Flash Boys”, written by former securities industry member Michael Lewis.

Subsequent to BrokerDealer.com being contacted by IEX communications executive Gerald Lam in his effort to set the record straight re: erroneous news media coverage, this blog has kept an eye on IEX; below are extracts from an op-ed article written by IEX CEO Brad Katsuyama to Bloomberg LP and published on Aug 3

‘Flash Boys’ and the Speed of Lies

65 Aug 3, 2014 6:03 PM EDT

By Brad Katsuyama

IEX CEO Brad Katsuyama, Image Courtesy of Wall St. Journal

In the last few months, I have had a strange and interesting experience. In early April, I found myself the main character in Michael Lewis’s book “Flash Boys.” It told the story of a quest I’ve been on, with my colleagues, to expose and to prevent a lot of outrageous behavior in the U.S. stock market.

Many of us had worked at big Wall Street brokerdealer firms or inside stock exchanges, and many of us believed something was amiss in the market. But it took the better part of five years to discover exactly how the market had been organized to benefit financial intermediaries, rather than the investors, the companies or the economy it was meant to serve. Only after looking at a flurry of market innovations — 40-gigabit cross-connects, esoteric order types, microwave towers — did we understand that the market’s focus was less about capital formation and more about giving certain market participants an advantage over others. In the end, we felt that the best way to solve these problems was to build a stock market of our own, which we did.

After the book, our stock market, IEX Group Inc., became a topic of discussion — some positive, some negative, some true and some false. Fair enough. If you’re in the spotlight and doing something different, you should take the heat along with the light.

It’s for this reason that we have done our best to resist responding publicly to misinformation about our company — even when we read memos circulated inside banks that “Michael Lewis has an undisclosed stake in IEX” (he does not); that “brokers own stakes in IEX” (they don’t); or articles in the Wall Street Journal that said we let “broker-dealers jump to the front of the trading queue,” putting retail investors and mutual funds at a disadvantage (in reality, all orders arrive at IEX via brokers, including those from traditional investors). Our hope in staying quiet was that the truth would win out in the end. But in recent weeks, the misinformation campaign has hit a new high (or low), and on one particularly critical matter, we feel compelled to set the record straight.

For the entirety of IEX CEO Brad Katsuyama’s Aug 3 op-ed piece to Bloomberg News, in which he seeks to dispel the erroneous information published by industry news media and select broker-dealer industry analysts, please visit the Bloomberg site at http://www.bloombergview.com/articles/2014-08-03/flash-boys-and-the-speed-of-lies

For those who are challenged with reading, Katsuyama was interviewed on Bloomberg TV Aug 5…The link to that video is http://www.bloomberg.com/video/iex-s-katsuyama-on-hft-full-exchange-ambitions-B0MB~4T7SIiBquvLC8nbLQ.html

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

Posted on July 7, 2014July 7, 2014 by admin

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.