Traders Magazine (December 2011)

Citation preview

September 11, 2001

The Magazine for Securities Industry Professionals

www.tradersmagazine.com

STA Affiliate Coverage

Dallas • Seattle/Portland

DECEMBER 2011

>>A Raging Debate On Message Traffic Fees >>NYSE Floats Sub-Penny Pricing Again >>Low-Touch Trading Gets Personal

Trader Trends Brought to You by Bank of America Merrill Lynch

Ferris D’Angelo Head of Vendor Consulting Global Execution Services Bank of America Merrill Lynch

Which Trading platform is right for you?

A good trader spots all the right signals

As trading technology evolves, innovation across order and execution management systems is leading head traders to reassess the technology required to run

at just the right time.

their desks. By consolidating platforms, irms can drive signiicant cost savings while streamlining trading worklow. An investment in more robust technology today will help to minimize the cost required to change

All on Instinct.

or add systems in the future.

$Cost vs. Time Robust Order Management System with Execution capabilities

250,000

The new Instinct®Algo.

Accounting Platform Portfolio Management Real-time Market Data 200,000

Combining the strengths of our widely used algorithms, the new Instinct

Order Management System Risk Management

recognizes and adapts to more signals and more conditions more quick 150,000

Yet for all its innate sophistication, it’s incredibly easy to use. When you 100,000

perform at the highest levels, go with our Instinct.

Taking your opportunity further. That’s return on

50,000

0 Year 1

Year 2

Year 3 and Beyond

Source: Bank of America Merrill Lynch * Example of projected cost savings, individual results will vary.

View the Instinct® videos.* ba.ml.com/instinct

Whether you are a start-up hedge fund or a sizable asset manager, there are a variety of solutions that can streamline your front office technology portfolio and reduce

New York +1.212.449.6090 | Chicago +1.866.202.5908 | Europe +44.20.799.64521 | Japan +813.

the number of platforms needed to trade. Ferris D'Angelo Head of Vendor Consulting, Global Execution Services

New York 212.449.6090 | London +44.20.799.64521 Asia +852.2161.7550

*Standard data rates apply.

“Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other co afiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed Corporation (“Investment Banking Afiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated, which is a registered broker-dealer and member entities. Investment products offered by Investment Banking Afiliates: Are Not FDIC Insured r May Lose Value r Are Not Bank Guaranteed. Instinct® is a trademark or registered t countries. ©2011 Bank of America Corporation

t®Algo

kly than ever.

u want to

n relationship.

.6225.8398 | Asia +852.2161.7550

ommercial banking activities are performed globally by banking d globally by investment banking afiliates of Bank of America of FINRA and SIPC, and, in other jurisdictions, locally registered trademark of Bank of America Corporation in the U.S. and other

;]`S/Z^VO:Saa0SbO @S^`SaS\bW\U]dS`B`WZZW]\W\[O`YSbQO^WbOZWhObW]\´RSaWU\SRT]`bVS PSab=B1Q][^O\WSabVOb[SSbbVSVWUVSab¿\O\QWOZabO\RO`RaO\R ^`]dWRSVWUV_cOZWbgRWaQZ]ac`Sb]W\dSab]`a

4]`RSdSZ]^[S\babOUSQ][^O\WSabVObO`SQc``S\bW\bVSW``S^]`bW\Ub] bVSA31]`OCAPO\YW\U]`W\ac`O\QS`SUcZOb]`BVS`SO`S\][W\W[c[ ¿\O\QWOZabO\RO`RaT]`bVWabWS`

BVS]^S\bWS`bVObS\OPZSaP`]YS`RSOZS`ab]^`]dWRSb`O\a^O`S\bSfSQcbW]\ aS`dWQSab]bVSW`QZWS\baW\O\g=B1b`ORSRS_cWbgaSQc`Wbg1][^O\WSaW\bVWa bWS`VOdSdO`WOPZSRWaQZ]ac`SOdOWZOPWZWbg

4OQbaG]cAV]cZR9\]e Â=B1?F•ac`^OaaSR 'Q][^O\WSaW\W\Y— W\OdS`OUSR]ZZO`d]Zc[S Â W\Q`SOaSW\R]ZZO`d]Zc[S]Tb`ORSa`SacZbW\UT`][_c]bSa]\=B1:W\Y•aW\QS ?!  Â1][^O\WSaeWbVaSQc`WbWSab]bOZW\U#B`WZZW]\W\[O`YSbQO^O`S_c]bSR]\=B1:W\Y Â$$"\SeaSQc`WbWSaVOdSPSS\_c]bSR]\=B1:W\YW\ 

B]ZSO`\[]`SdWaWbeee]bQ[O`YSbaQ][]`QOZZcaOb  "!!$'

> > > > > > > > >

 |

DECEMBER 2011

|

TRADERS MAGAZINE

Pipeline Fine Shocks TradingWorld Regulators Look to Pacify the Market Low Volume Sparks Exchange PriceWar Brokers’ HFT Balancing Act Canada Forges Ahead Bulge Weathers Rough Year ETFs Push Traders Toward Multi-Asset World Algos: Better, Faster… Fewer Buybacks Rebound From Financial Crisis Lows Volume and Volatility: he Comeback Kids

www.tradersmagazine.com

 



 
 


 

'
(&'$#
) 
$%
$(%
$(%&












 
 

 

  

 
 
 


 


  






  






 
  


"$$#%'%$$!$#%&%
   %
" '!&"!
%
$&
"!*
&"
$&
#$"%%"!%
)"
$

&"

'%&" $%
"
&
$(!&
"" $
$""
!&&*
" '!&
%
##
*


"" $
$""

"" $
$""
'$"#
 &
'&"$+
!
$'&
*
&

!!
$(%
'&"$&*
"" $
$""
 $ '
&


"" $
$""
$(%

%
(%&
&&#)))"" $&$""" #%% $#
"$
"$
!"$ &"!
!

%&
"
$""
,&%
!("(
)&
"" $
$""
#$"'&%
!
##
'$%&"!%

Contents DECEMBER 2011 • VOLUME 24, NUMBER 331

STA and Other Industry Events 50 55

8

INSIDE TRADING

16

ON THE MOVE

18

RULES & REGS

42

OPTIONS

Dallas Seattle

> Dark pools’ integrity are questioned after recent settlement > Low touch trading is expected to more closely mirror high touch, according to a study > Two exchanges float sub-penny pricing schema once again

> Message traffic debate rages > he SEC considers rules limiting market makers > New parameters for market-wide circuit breakers proposed > Buysiders worried about new front-running rule > IOI proposal draws mixed reviews

> Volume surges with introduction of new weekly contract > Public pension plans look to invest in options —Peter Chapman

Member of BPA Worldwide

Traders Magazine (ISSN 0894-7295) Vol. 24 No. 331, is published monthly with additional issues in April and July by Source Media, One State Street Plaza, 27th Floor, New York, NY 10004. Subscription price: $120 (US) per year; $170 (US) per year in Canada and Mexico; $170 (US) per year in all other countries. Periodical postage paid at New York, NY and U.S. additional mailing offices. POSTMASTER: Send address changes to Traders Magazine, P.O. Box 530, Congers, NY 10920-1729. For subscriptions, renewals, address changes or delivery service issues, contact Customer Service at (800) 221-1809. Please direct editorial inquiries, manuscripts or correspondence to: Traders Magazine, One State Street Plaza, 26th Floor, New York, NY 10004. Back issues, when available, are $12 each, prepaid. Traders Magazine is a trademark used herein under license. Copying for other than personal use or internal use is prohibited without express written permission of the publisher. © 2011 SourceMedia and Traders Magazine. All rights reserved. www.tradersmagazine.com

 |

DECEMBER 2011

|

TRADERS MAGAZINE

48

TECH NOTES

62

BUYSIDE SNAPSHOT With every crisis comes opportunity. In the case of Drew Harbeck, a trader at Cortina Asset Management, his opportunity came when he joined the Milwaukee-based firm’s desk right before the market meltdown began, roughly three years ago. —Michael Scotti

The opinions expressed by the authors are not necessarily the opinions of the editorial staf. The editors disclaim any intent to make recommendations about securities and security markets. We are not responsible for unsolicited manuscripts. Manuscripts bought/paid for by the corporation are its property.

www.tradersmagazine.com

Liquidity

Anonymity Innovation

Customization

Trade on a Whole New LeveL!

For more information about LeveL ATS and how to connect, visit www.LeveLATS.com or contact us at 617-350-1600. LeveL ATS is a member of FINRA and SIPC

Published by SourceMedia, Inc.

Dictum Meum Pactum 1934 The Official Magazine of the Security Traders Association

VOL. 24, ISSUE 331

A Good Walk

S

ince 2007, T M’s December issue has featured a review of the year’s top stories. This year’s issue marks our fifth annual such edition and delivers some interesting recaps. One story is how the bulge bracket is cutting back on the number of algos it provides to the buyside. Over the last year, firms began streamlining their offerings to save money. They’ve shifted to supporting their most widely used products. Call it algo consolidation. Another reason behind this move is a greater demand for customized algos. Another story looks at how a bulge firm may wear two hats as it relates to highfrequency traders—it is both courting their business, and at the same time, looking to protect traditional clients from the more predatory rapid-fire strategies. These stories, as well as the others, are a good chance to look back on the year. Looking back at 2007’s top stories, there is little reference to high-frequency trading. That might come as a surprise, because it has been a nonstop topic of discussion for the last couple of years. In retrospect, however, the lack of HFT coverage then makes sense. Regulation NMS had only been implemented earlier that year. No one can argue that rapid-fire trading was helpful during the August 2007 meltdown, when volume set records, reaching between 9 and 10 billion shares each day for a week. High volumes returned again this August, when markets nose-dived after concerns were heightened about European debt problems. One emerging story for the year remains how the industry will need to comply with the Volcker Rule, which was part of Dodd-Frank and designed to curtail proprietary trading. The rub for equity traders is how the final rule will be written by the Securities and Exchange Commission. A proposal has been written, and the SEC is awaiting industry comment. All eyes are on the SEC, as its final rule could impact liquidity. It has its work cut out for it to separate what constitutes prop trading and market making. What happens in 2012 is anyone’s guess. A year ago, who would have thought that for nearly two months, a group calling itself “Occupy Wall Street” would decry the financial system and take over a park in lower Manhattan that no one previously knew the name of? Twice a day I walk past Zuccotti Park. Over time, OWS’s message became more muted and blended in with the rest of the city. I look forward to next year and wish you luck in all your endeavors. Buen camino.

---------------------------------------------------------------------------------------------------------------PUBLISHER Kenneth W. Heath [email protected] ---------------------------------------------------------------------------------------------------------------EDITORIAL DIRECTOR Michael Scotti/[email protected] EDITOR Peter Chapman/[email protected] MANAGING EDITOR John D’Antona/john.d’[email protected] SENIOR WRITER James Armstrong/[email protected] CONTRIBUTING EDITOR Gregory Bresiger/[email protected] ---------------------------------------------------------------------------------------------------------------GROUP EDITORIAL DIRECTOR John McCormick/[email protected] ---------------------------------------------------------------------------------------------------------------ADVERTISING SALES MANAGERS Jeff Kohl/[email protected] 917-838-1114 ADVERTISING COORDINATOR Jennifer Veras/[email protected] 212-803-8298 ---------------------------------------------------------------------------------------------------------------MARKETING MANAGER Mendee Morgan/[email protected] 917-915-8426 ---------------------------------------------------------------------------------------------------------------FOUNDING PUBLISHERS & EDITOR Michael P. Ceo, Anthony V. Ricotta, Annabelle Krigstein ---------------------------------------------------------------------------------------------------------------EXECUTIVE CREATIVE DIRECTOR Sharon Pollack/[email protected] ART DIRECTOR Nikhil Mali/[email protected] PRODUCTION MANAGER Eugene “Bud” Moccia/[email protected] ---------------------------------------------------------------------------------------------------------------DIRECTOR OF REPRINT SALES/WEB RIGHTS Denise Petratos/[email protected] 212-803-6557/Fax: 212-803-1577 CUSTOMER SERVICE 800-221-1809/[email protected] ---------------------------------------------------------------------------------------------------------------CREDIT MANAGER Keisha Coursey/[email protected] ---------------------------------------------------------------------------------------------------------------SVP & GROUP PUBLISHER Technology Division Rob Whitaker ----------------------------------------------------------------------------------------------------------------

Chief Executive Officer

Douglas J. Manoni

Chief Financial Officer

Richard Antoneck

EVP and Managing Director, Banking and Capital Markets

Karl Elken

EVP and Managing Director, Professional Services and Technology Bruce Morris EVP, Chief Content Officer

David Longobardi

EVP, New Business Development

Michael Scotti Editorial Director

Adam Reinebach

SVP, Conferences

John DelMauro

Vice President, Finance

Jamie Brokowsky

SVP, Human Resources and Office Management

 |

DECEMBER 2011

|

TRADERS MAGAZINE

Ying Wong

www.tradersmagazine.com

> DA R K P O O L S

Traders Wary After Pipeline Case

I

n the wake of Pipeline Trading Systems’ settlement with the Securities and Exchange Commission, many people are wondering if dark pools will be able to retain the trust of traders given the misrepresentations made by such a well-known venue. According to the SEC, Pipeline failed to disclose that the vast majority of orders in its dark pool were illed by an af- David Mechner iliate of the irm. hough Pipeline billed itself as providing natural liquidity, it has now admitted that, over the course of its history, its ailiate took the other side of the trade about 80 percent of the time. Pipeline did disclose in most of its subscriber agreements that unspeciied afiliates could be trading in the dark pool, but it did not disclose the vital role its ailiate played in providing liquidity, the SEC said. he revelations could have  |

DECEMBER 2011

|

TRADERS MAGAZINE

repercussions beyond Pipeline, as market participants take a closer look at alternative trading systems in general. Some dark pools have their own prop desks, which they do disclose, and in the wake of the Pipeline scandal, those desks could draw greater scrutiny. “It points up the general opaqueness of how ATSs disclose how they handle orders,” said David Mechner, chief executive oicer of Pragma. “he lack of transparency about details raises questions.” Mechner said he hopes the revelations about Pipeline don’t translate into a general backlash against dark pools, but added the case should be a wake-up call to the industry that transparency and disclosure are important. Joe Gawronski, president and chief operating oicer of Rosenblatt Securities, noted that many customers of Pipeline used the company’s dark

pool because they thought it would help them avoid gaming by high-frequency traders. Yet the Pipeline ailiate allegedly employed many HFT strategies, such as placing a large number of orders and then canceling them immediately afterward. Rosenblatt built a name for itself by being the irst irm to track dark-pool volume, but Gawronski said he would happily cede that part of his irm’s business if it meant dark pools started being more transparent without irms like his. “he industry should demand transparency,” Gawronski said. Joe Gawronski “We live in a much more complex world than before.” Dave Johnsen, head of U.S. liquidity strategy for Goldman Sachs Electronic Trading, said many customers have become paranoid in the wake of the Pipeline scandal, wondering if other dark pools might also be behaving in ways contrary to

what they have disclosed. Johnsen said that today’s complex market structure will not go back to where it was decades ago, in spite of wishful thinking from some on the buyside. Instead, irms have to construct algorithmic trading strategies to protect themselves, even in dark pools, he said. Among other things, dark pool participants need to be prepared to deal with HFT, said Dmitri Galinov, head of liquidity strategy for Credit Suisse Advanced Execution Services. “You need to understand what kind of strategies they’re using, and then you need to design algos to prevent information leakage,” Galinov said. Meanwhile, the trading industry is abuzz with chatter about Pipeline’s long-term prospects. he settlement in October came as a shock, since few knew the ailiate Continued on page 14

www.tradersmagazine.com

Being Smarter Is Key

Unlock your ability to experience a new standard of sophistication. FAN’s™ next-generation Order Awareness™ technology utilizes Knight’s unique execution data to intelligently develop a real time view of the liquidity landscape. This proven logic, which is at the core of our algorithmic strategies, acts with greater precision, resulting in reduced market impact, increased natural fill rates and price improvement – now you’ve got the key to trade smarter.

Scan the code above to unlock additional information.

For additional information: phone Americas + 1.212.479.2335 I Europe + 44 (0) 20.7997.7818 email [email protected] www.knight.com © September 2011 Knight Capital Group, Inc. All rights reserved. Offered by Knight Capital Americas, L.P. and Knight Execution & Clearing Services LLC, members of FINRA and SIPC and Knight Capital Europe, Ltd. a U.K. registered broker-dealer authorized and regulated by the Financial Services Authority. Each are wholly owned broker-dealer subsidiaries of Knight Capital Group, Inc. For additional information about Knight Capital Group, Inc. (NYSE Euronext: KCG), please visit www.knight.com.

> T RA D E P R I C I N G

NYSE Floats Sub-Penny Again

P

roposals by two of the exchanges operated by NYSE Euronext mark the second time in the past two years the exchange operator has looked to sub-penny pricing to gain an advantage over brokers in the trading of retail orders. he New York Stock Exchange and NYSE Amex have asked the Securities and Exchange Commission for approval to allow a special group of “Retail Liquidity Providers” to quote between a stock’s best bid and ofer in increments of one-tenths of a cent. he quotes would be hidden from view and only accessible by providers of retail order low. he intent is to provide the retail customer with better pricing than is visible on exchange books, a service now provided by wholesalers and other brokers that internalize their orders. Under the plan, the exchanges would pay order senders and charge the liquidity providers. Only bona ide retail order senders would qualify for the service. he RLPs will come from the 10 |

DECEMBER 2011

|

ranks of the exchanges’ Designated Market Makers and Supplemental Liquidity Providers. Still, under the SEC’s Reg-

played, quotes. hat contrasts with the proposal in the letter sent by NYSE, Nasdaq OMX, and BATS Global Markets last year to the SEC that called for using displayed quotes. “Why not do this in displayed fashion and put them on the SIP feeds?” Chris Isaacson, BATS’ chief operating oficer, asked at the conference. Besides the issue of transparency, the proposal is likely to impact the ongoing debate over a trade-at rule. he SEC is mulling a rule that would push wholesalers and other internalizers to ofer more price improvement to their Joe Mecane customers. he brokers have complained such ulation NMS, exa rule would kill “This [natural tick increment] changes are barred their business. has been subject to debate from quoting he SEC is in sub-pennies. worried that not since the SEC released its NYSE and NYSE enough low is Concept Release.” Amex are seeking making it out of exemptions to the brokerages’ trading rule, which does not apply to president, asked rhetorically at departments and to the public broker-dealers. October’s Security Traders Asmarkets. Giving exchanges Much retail low is intersociation’s annual conference. the right to trade in between nalized by broker-dealers. he “his has been subject to dethe spread could take the presproposal by NYSE marks its bate since the SEC released its sure of of the wholesalers. second attempt to win apConcept Release.” hat would “certainly proval from the SEC to quote he NYSE proposal calls move the trade-at discussion in sub-pennies as a way to for using hidden, not disContinued on page 14

TRADERS MAGAZINE

compete with internalizers. Last year, NYSE and two other exchanges wrote a joint letter to the SEC requesting the ability to trade in sub-pennies in certain low-priced stocks. he SEC did not approve the request. here has been some debate over the use of sub-pennies in recent years as spreads in many stocks have narrowed to a penny. Some trading oficials contend that a penny increment may be too high for some securities. “What is the natural tick increment at which stocks should trade?” Joe Mecane, an NYSE Euronext executive vice

www.tradersmagazine.com

> SA L E S T RA D I N G

Low-Touch Trading Gets Personal

A

s high-touch trades continue to decline and trading algos get more and more complicated, buyside irms are turning to the sellside for execution consulting that combines high-touch service with low-touch technology. hat’s according to a new report by Tabb Group, which found that by 2013 the way the sellside services clients will look radically diferent from today. Traders will seek out value-added insight from their electronic trading partners to help them traverse an ever-shifting maze of decisions, Tabb predicts. he report, “Execution Consulting: he Next Generation in Sales Trading,” envisions a new model for sales trading that requires reined skill sets to help buyside traders navigate market structure. Tabb interviewed the heads of sellside algo desks as well as head traders at major asset management irms and found that there is an increasing demand for the high-touch equivalent of insight and advice, but from the sellside’s low-touch algo coverage.

1 |

DECEMBER 2011

|

While today there is a distinct diference between a sales trader who has an opinion on a stock and an algo desk coverage person who can explain a change in a liquidity-seeking strategy, the future will see more of a hybrid approach, the report found. “You will ind that there are folks that have been hightouch sales traders who are now on sellside algorithmic trading desks,” said Laurie Berke, a principal at Tabb Group and study author. Sitting next to that former high-touch trader might be a quantitative analyst with very diferent skills, Berke said. To ofer execution consulting services, irms need to blend their two diferent approaches. Berke notes three skill sets the buyside is demanding. he irst is the ability to know and understand customers’ needs, a page out of the traditional sales trader playbook. Second is expertise in a irm’s own algos and trading technology. hird is a deep knowledge of market structure. “he bar is raised now for low-touch coverage,” Berke said. “hey need this unique

TRADERS MAGAZINE

blend of skill sets.” What really diferentiates one broker from another is an ability to apply trading tools

Laurie Berke

speciically to the needs of an individual customer, Berke said. he way to optimally use an algo is very diferent for a large-cap value manager than it is for a small-cap growth manager, she noted. “You’ve got to understand what’s driving the buyside client’s transaction,” she said. “What’s the objective of the trade?” Execution consultants will be able to demonstrate their value if they can help clients preserve and protect alpha,

something that will show up in TCA numbers, she said. Execution advisors could largely replace traditional sales traders, but the report predicts there will be fewer of them in the trading room. Berke said once execution consultants can prove they save money, they will be able to justify their fees. “You’re going to be able to quantify it, and the buyside will pay for it,” she said. Mark Kuzminskas, director of equity trading for Robeco Investment Management, told Traders Magazine he would be willing to pay for execution consulting if it could be shown to add value. Kuzminskas said he has seen the sellside beef up their low-touch areas, adding more contact individuals to provide updates, performance metrics and trend spotting. “As diferentiation amongst algos and the various oferings becomes harder and harder to discern, I think that’s led to the sellside placing more emphasis on distinguishing the value add from one to the next,” Kuzminskas said. —James Armstrong www.tradersmagazine.com

YOU NEED IT. WE GET IT. Cisco® Catalyst® WS-C3560E-24PD-S CDW 1173000

t

(C
&UIFSOFU
4'1
PS

(C&
4'1
t

'BDJMJUBUFT
UIF
EFQMPZNFOU
PG
TFDVSF
DPOWFSHFE
BQQMJDBUJPOT
GPS
FWPMWJOH
OFUXPSLT t

$PNCJOFT

BOE
DPOmHVSFT
XJUI

(JHBCJU
&UIFSOFU
VQMJOLT

CALL FOR PRICING

4XJUDIFT
ǏFZ
LFFQ
PSHBOJ[BUJPOT
NPWJOH
GPSXBSE
CZ
LFFQJOH
OFUXPSLT
GSPN
MBHHJOH
CFIJOE
8F
HFU
JU
BOE
IBWF
QBSUOFSTIJQT
XJUI
UIF
JOEVTUSZT
MFBEJOH
WFOEPST
UP
HFU
UIJOHT
NPWJOH
JO
OP
UJNF
.BOBHFE
PS
VONBOBHFE
Mounted or unmounted. Our account

Juniper Networks® EX4200-24T 24-port Ethernet Switch $%8


t

$PNCJOFT
UIF
)JHI
"WBJMBCJMJUZ
)"
BOE
DBSSJFSDMBTT
SFMJBCJMJUZ
PG
NPEVMBS
TZTUFNT t
&DPOPNJDBM
nFYJCMF
TUBDLBCMF
QMBUGPSN

NBOBHFST
BOE
TPMVUJPO
BSDIJUFDUT
DBO
mOE
UIF
SJHIU
POF
GPS
ZPVS
OFUXPSL
"MM
ZPV
IBWF
UP
EP
JT
DBMM
PS
DMJDL 800.399.4CDW | CDW.com/switches

t

%FMJWFST
B
IJHIQFSGPSNBODF
TDBMBCMF
EBUB
center solution

CALL FOR PRICING

HP Switch 6410cl $%8


t

*EFBM
GPS
CVJMEJOH
DPTU
FċDJFOU
TNBMM
UP
NFEJVN
OFUXPSLT
t
-PXDPTU
GVMM
-BZFS

(C&
TUBDLBCMF t
4VQQPSUT
BMM
mCFS
BOE
DPQQFS
TUBOEBSET t

"HHSFHBUFT
IJHI
QFSGPSNBODF
IJHI
UISPVHI
QVU
BQQMJDBUJPO
TFSWFST
BOE
XPSLTUBUJPOT

CALL FOR PRICING

Offers subject to CDW’s standard terms and conditions of sale, available at CDW.com. ©2011 CDW LLC. CDW®
$%8t(®
BOE
1&01-&
8)0
(&5
*5™
BSF
USBEFNBSLT
PG
$%8
--$


Dark Pools

Continued from page 

even existed. Even sources sympathetic to Pipeline have called its past marketing deceptive and inappropriate. he company’s block trading activities in the U.S. only amount to about 30 percent of its total business, according to knowledgeable sources. Pipeline’s analytic tool Alpha

Pro actually accounts for a larger portion of its business, but with a shadow cast over the irm’s dark pool, other units could lose customers as well. Several sources in the industry expressed doubts that irms would be eager to work with Pipeline on any of its ventures, even those not touched by the dark pool scandal. —By James Armstrong

Trade Pricing Continued from page 10

in a diferent direction,” Mecane said. Chris Nagy, a managing director at TD Ameritrade, contends the proposal, if approved, could difuse the trade-at issue. “It won’t be the demise of internalization,” Nagy told Traders Magazine. “But it’s

Busy Days Number of Days with Market Moves >4%

1 |

DECEMBER 2011

|

TRADERS MAGAZINE

a very elegant solution for trade-at.” Nagy contends the likely customers for the proposed service will come from the ranks of the wholesalers or internalizers, not irms like his. he exec is wary of the program as his mandate is to win price improvement for 80 percent of TD Ameritrade’s orders. “If I send in 100 orders, how many will get price improvement?” Still, one wholesaler found the proposal objectionable. Jef Martin, president of ATD/ Citi, found fault with the idea of letting a market maker’s hidden order take precedence over a displayed quote. “hat means I no longer have to enforce Manning either,” Martin said at STA. “[NYSE] has a resting order and allows someone to step inside for less than a penny.” Under the so-called Manning Rule, market makers like ATD can only trade ahead of their customers if the price they trade at is inferior to that a customer might receive by at least a penny. he NYSE proposal would let the exchange dealers trade at sub-pennies. hat’s why the proposal needs an exemption to Reg NMS Rule 612, Mecane said. —Peter Chapman www.tradersmagazine.com

>>

Robert Veek has been promoted to managing director and head of institutional trading at Summer Street Research. He will continue to cover accounts for the Boston-based health care boutique, which has three traders in Boston and three in New York. Prior to joining Summer Street last year, Veek spent ive years at White Cap Trading. hat came after 13 years at Fidelity Capital Markets as a trader and market maker in both Boston and New York. He reports to Al Sollami, the company’s chief executive.

>>Mike Stewart has become the sole head of UBS’s global equities division. He was formerly head of global equities at Bank of America Merrill Lynch and joined UBS in July as co-head of that bank’s global equities division. He assumed the role of sole head following the resignations of the other global equities chiefs, Yassine Bouhara and Francois Gouws, in the wake of the bank’s unauthorized trading scandal. Stewart reports to Carsten Kengeter, chief executive oicer of UBS’s investment bank.

>>Ryan Peterson joins agency-only broker Cheevers & Co. as its new chief compliance oicer. A seven-year veteran, Peterson was previously CCO for Fox River Execution Technology for just over a year. Prior to that, he spent four years as an attorney and compliance consultant at Regulation Technologies. He was also an investigator

1 |

DECEMBER 2011

|

for the Chicago Board Options Exchange. He now leads a three-person compliance team at Cheevers. He reports to president Laura Yunger.

>>Buckman, Buckman & Reid, a full-service brokerage irm, added an institutional trading group to its Shrewsbury, N.J. oice. he group was previously with Seton Securities.

TRADERS MAGAZINE

Bob Mezey, a 35-year veteran, heads brokerdealer sales. Veterans Ron D’Angelo and Tony Pontecorvo run trading. Also joining the irm as sales traders are veterans Frank Passalaqua, previously with Sterne Agee; Peter Battaglia, previously with the Vertical Group; Chuck Esposito; and Tony Lopez. he irm clears

through RBC Capital Markets.

>>Glenn Koh joined Bank of America Merrill Lynch to lead equity derivatives trading in the Americas. Koh spent 14 years at Morgan Stanley, most recently in charge of trading U.S. equity index derivatives. Koh reports to Henry Mulholland, head of Americas equities, and Fabrizio Gallo, global head of equities.

>>Jim Kelly joins Citigroup Global Markets’ capital introduction group as a director in New York. A 30year veteran, Kelly was previously at Morgan Stanley, where he headed its transition management group in the Americas. Prior to moving upstairs, he spent 28 years on the loor of the New York Stock Exchange, where he ran his own irm. Kelly was also a loor oicial and board member of the Alliance of Floor Brokers. He

reports to Beth Neely, who heads capital introduction in prime inance for the Americas at Citi.

>>John Hickey joins the Buckingham Research Group as a senior sales trader in New York. Hickey, a 22-year veteran, was previously with Sanford C. Bernstein, where he spent 11 years. Prior to that, he worked at Cantor Fitzgerald. He reports to Tony Sutera, who runs Buckingham’s equity trading desk.

>>Minority brokerage irm Williams Capital Group opened a Boston oice, hiring industry veterans Rick Gill and Ken Beaulieu as sales traders. Gill, a 27-year veteran, joins from Sterne Agee, where he spent four years. A past president of the Boston Securities Traders Association, Gill also worked at Oppenheimer & Co., Gruntal & Co. and Everen Securities. Beaulieu, a 13-year veteran

www.tradersmagazine.com

and a former board member of the BSTA Foundation, joins Williams from Avondale Partners, where he spent four years after spending much of his career at Banc of America Securities. Both report to Stephen Carl and Michael Ferry, co-heads of equity sales and trading.

>>Joseph Benanti has been promoted to director of sales at Rosenblatt Securities in New York. Benanti, a 30year veteran, joined Rosenblatt as a salesman nearly ive years ago after a long career as a trader on the loor of the New York Stock Exchange. He worked for several independent brokerages, including his own, and was also a loor governor. Benanti reports to Joe Gawronski, the irm’s president and chief operating oicer.

>>Canaccord Genuity has named Matthew Gaasenbeek president of the capital markets

www.tradersmagazine.com

division of Canaccord Genuity. Gaasenbeek, who joined the irm 18 years ago, has led the irm’s North American equities group for the last four years. In his new role, he will manage all aspects of the Canadian capital markets business, including investment banking, research, institutional sales and trading, ixed income and international trading. Prior to this, he was head of equities at Canaccord Genuity. Before Canaccord, Gaasenbeek worked as a management consultant at PriceWaterhouse.

>>Allison Jacobs joins Citi as a relationship manager covering equities and options in its broker-dealer sales group. Jacobs, a 12year veteran, comes from Bank of America Merrill Lynch, where she worked in the Global Execution Services group. Before that, she worked at Credit Suisse in the Advanced Execution

Services group. She reports to Tom Fasano, who heads U.S. brokerdealer sales.

>>Robert Weinstein joins Tullett Prebon as head of institutional equity sales and trading. A 19-year veteran of the industry, he was previously managing director for institutional sales and trading at Dahlman Rose

& Co. Prior to that, he oversaw a team of sales traders at Lighthouse Financial Group. Weinstein spent four years at Bear Stearns, where he was senior managing director for institutional sales and trading. Weinstein reports to Tom Bovitz, a senior managing director at Tullett Prebon.

a sales trader in Los Angeles. Nakamura, a 12-year veteran, was director of Japanese equities sales trading at UBS in Japan. Prior to joining the Asian-based TORA, she did stints at Citi and Goldman Sachs. She reports to managing directors Khahlil Kirtman and Rob Santos.

>>Miley Nakamura

>>Capstone Invest-

joins electronic trading provider TORA as

ments hires executives Alan Ebright, Douglas Livingston and Mark Sylvestri. Ebright, a 16-year veteran, joins as senior vice president institutional sales and comes from Miller Tabak & Co. Livingston, a 10-year veteran, comes on board as chief compliance oicer from IXE Securities. Sylvestri, a 12-year pro, joins as an equity analyst from SES Partners. All three report to president Steven Capozza.

>>Alan Rubenfeld joins Boston-based QuantShares as director of sales to promote its market-neutral ETFs. Rubenfeld has spent more than 20 years in portfolio trading and most recently worked at UBS, after a nearly two-year stint at BNP Paribas. He spent more than 10 years at Deutsche Bank. He will work out of New York. Rubenfeld reports to Richard Block, QuantShares’ chief administrative oicer and director of marketing. Block is the former head trader at Putnam Investments.

Got a new job? A promotion? Did a colleague? Send your particulars—or a colleague’s—to [email protected]

TRADERS MAGAZINE

|

DECEMBER 2011

| 17

> F RO N T- RU N N I N G

Trader Asks SEC to Look At Rule

P

eter Driscoll, a senior trader with the Northern Trust Co. and a former chairman of the Security Traders Association, has asked the Securities and Exchange Commission to reconsider its approval of a controversial New York Stock Exchange rule governing trading ahead, or front-running. Driscoll sent a letter to the SEC on Oct. 18, questioning the legality of the changes made by the NYSE Euronext unit to its Rule 92. he executive wants the SEC to kick back the rule to the NYSE and reopen Peter Driscoll the comment period, which ended Sept. 14. Driscoll made his request as a private citizen and not through his company. Northern Trust is one of the industry’s largest money managers. he rule change “reduces the protections currently aforded client orders and makes the trading process much less transparent,” Driscoll told the SEC. “Buyside stakeholders were surprised by this rule change.” As part of a “rule harmonization” process under way between NYSE Euronext and the Financial Industry Regulatory Authority, the three stock exchanges op-

1 |

DECEMBER 2011

|

TRADERS MAGAZINE

erated by NYSE Euronext reworked their trading ahead rules to conform with FINRA’s Rule 5320, better known as “Manning.” With the changes, brokers were relieved of their obligations to ask the buyside upon receipt of every order whether or not they could trade alongside, or ahead of, the order. Now, the buyside trader must raise the issue himself with every order. he New York Stock Exchange iled its changes for “immediate efectiveness” rather than go through the standard notice and comment process. he exchange

tive, the rule proposal did include a 30day comment period. he NYSE received no comments. Driscoll blamed both brokers and the NYSE for the lack of input from the buyside, noting that “the harmonization of NYSE Rule 92 escaped the attention of much of the buyside community.” At a recent industry conference, Rick Ketchum, president and chief executive oicer of FINRA, urged brokers to work closely with their customers on the new trading ahead rules. “From the standpoint of the customers, a surprise never works,” Ketchum said. “hey’re never positives. hey’re never received well by the regulators or the media. his is a great time for the sellside to take a step back and work toward an

The rule change “reduces the protections currently afforded client orders and makes the trading process much less transparent. Buyside stakeholders were surprised by this rule change.” told the SEC it was eligible to ile in expedited fashion partly because the rule does not “signiicantly afect the protection of investors or the public interest.” Driscoll disagrees with that assessment, telling the SEC that “many clients (buysiders) viewed this protection as fundamental.” Although iled as immediately efec-

environment where there is transparency and understanding of the alternatives.” It is not unheard of for the SEC to stay a rule it has approved. Typically, an aggrieved party must ile a “Petition for Review” with the regulator. he Chicago Board Options Exchange iled one in 2009 after the SEC approved the InterContinued on page 24

www.tradersmagazine.com

> M A R K E T DATA

Message Trafic Fee Debate Rages

D

espite complaints from brokers over soaring levels of market data, oicials from some of the leading exchanges indicated they weren’t enthusiastic about slamming on the brakes. “I don’t want to put on a fee that is onerous, or be forced to by the SEC,” Chris Isaacson, chief operating oicer at BATS Global Markets, said during a session on October 14 at the Security Traders Association’s annual conference in Palm Beach, Fla. “Everyone’s market data technology costs would probably go down, but spreads would widen and investors would be hurt.” At issue are broker complaints over the tremendous increase in quotes being streamed into exchanges by high-frequency trading irms and the cost of processing all those messages. Some irms, including Goldman Sachs, are questioning whether the Securities and Exchange Commission should step in and force exchanges to impose fees on those customers that send in a large number of quotes relative to the number of trades done. hat could lead to a reduction in the amount of quoting. he SEC is considering taking action. David Shillman, a senior oicial in the SEC’s Division of Trading and Markets, noted at a recent industry conference that the SEC was mulling the idea of directwww.tradersmagazine.com

ing exchanges to implement some sort of quote-to-orders fee. his doesn’t sit well with the exchanges. “We don’t think the regulators have the authority to dictate order-to-trade ratios or cancellation levels,” Bryan Harkins, chief operating oicer at Direct Edge, told the STA crowd. “hat’s a commercial decision.” According to data supplied by the Financial Information Forum, Direct Edge’s EDGA exchange sends out about 109,000 quotes per second. Some have criticized the exchanges for a lack of concern over the issue and an approach that favors the large quoters, which provide much of their liquidity, over other members. “he criticism is that the exchanges are HFTfriendly,” Harkins added. “But in fact not all traic is good traic. We have throttles. Not every customer likes throttles. We do that to protect the mar- Chris Isaacson ket. Every customer has a certain message limit per second.” hrottling, done to some degree by most exchanges, involves slowing down the rate at which an exchange will accept incoming messages. Nasdaq OMX is taking a look at the issue, according to Michel Finzi, Nasdaq’s

head of U.S. equities, but it is also worried about overburdening those members who provide the exchange with most of its liquidity. “If entities are sending a signiicant amount of quotes and never generating a trade, then it’s not a good idea for us to support that,” Finzi said at STA. “But one must also be careful because there are certain models and folks who provide value to the marketplace,” he added. “hat includes market-maker strategies with two-way prices in stocks. In volatile times, they have to address those and amend those quite regularly.” Even if the exchanges don’t act, it is not impossible that regulators won’t unilaterally try to rein in message traic with fees. hey do so in Canada, according to Robert Fotheringham, a senior vice president at the Toronto Stock Exchange. Fotheringham told STA attendees that the Investment Industry Regulatory Organization of Canada, the Canadian equivalent of the U.S.’s Financial Industry Regulatory Authority, has begun “factoring in messaging when they allocate charges for surveillance.” —Peter Chapman TRADERS MAGAZINE

|

DECEMBER 2011

| 19

> F I N RA

IOI Proposal Draws Mixed Reviews

A

rule proposed by the Financial Industry Regulatory Authority that could limit broker-dealers’ usage of indications of interest drew mixed reviews from those who submitted comment letters to the regulator. Brokers and their advocates shot down the proposal, while one major buyside shop praised FINRA. While respondents difered on the rule’s impact on buysidesellside relations, both sides managed to ind some common ground. “he STA is opposed to this amendment,” James Toes, president and chief executive of the Security Traders Association, told FINRA in its letter. “Rather than clearing up a perceived issue emanating from a small subset of the marketplace, this amendment would build a wall between market participants.” In favor of the change was Capital Research and Management Company, a large money manager based in Los Angeles. Saying he James Toes supported the “broad intent” of the rule, Matt Lyons, the irm’s global trading manager, urged FINRA to ine-tune it. Capital Research “applauds the ongoing work of FINRA to improving the quality and clarity between member irms and their customers,” Lyons said.

0 |

DECEMBER 2011

|

TRADERS MAGAZINE

At issue is a proposed amendment to Rule 5210, published last month, that attempts to bar brokers from sending out IOIs labeled as “natural” if they aren’t backed by an actual customer order. In its proposal, FINRA said it was concerned that brokers were disseminating misleading information regarding IOIs, including not accurately labeling them to relect their origination. he proposal addresses buyside complaints that some IOIs they receive are mislabeled. hey’re called “naturals,” but, in fact, are not associated with an actual order. here may be no order, or the “order” may, in fact, be a broker’s proprietary position. he proposal is the third time in the past ive years that FINRA has addressed the problem. In both September 2006 and May 2009, FINRA (or its predecessor NASD) sent out notices to its members reminding them to be “truthful” when using IOIs. he warnings apparently weren’t enough for some. “While we believe the 2009 notice was helpful, we received a number of comments from our committees and otherwise that without a clear deinition of a natural IOI, there is still potential for misuse,” FINRA president and chief executive oicer Rick Ketchum said

at a recent industry conference. “Namely, when the buyside trader attempts to reach out to a natural IOI, he inds there is no longer any trading interest behind it.” Most IOIs are not labeled as “naturals,” according to a vendor who distributes the trade advertisements for brokers. “Many broker-dealer irms disseminate hundreds of thousands of IOIs daily while marking only a few hundred or less as natural IOIs,” Raptor Trading Systems’ Nasser Sharara told FINRA. Still, those that are labeled natural get the buyside’s attention. “Many buyside traders consider the non-natural IOIs as noise and ignore them,” Sharara explained. “hey only view the natural IOIs.” In their letters, the brokers called FINRA’s proposal a bad idea. hey argued they sometimes received verbal instructions—but not actual orders— from their customers to send out IOIs on their behalf. hey told FINRA that that communiqué should suice. Brokers also pointed out that some of the so-called natural IOIs they send out are based on previous conversations with their customers. hey often label these IOIs as ITWs, or “In Touch Withs.” Toes, citing concerns from STA’s buyside members, said the requirement would impede money managers’ search for liquidity and “compromise the relationship between a broker-dealer and a client.” Whichever side they took, some of Continued on page 24

www.tradersmagazine.com

#% 
%
&#' $
%
! *
(*
%!
$%*

!
%


' 
)&%!
#'$

+

!#
%
*#$
%
!
!
' 
)&%!
#'$+  
$

%!
#%
%
&#'
'#*! 
$
!!($
#!
  
 
%!
&##

 
%!
%
!!


(
! % &
%!
#!
!&%
%#&*
(
 
# %
%#! 
%# 
"#!&%$

!'#
 !& %#$
!
$)
! %  %$

#%


!
 !'%!
!

!
!&#
 %$
 
'!(
%!
! % &
#% 
%
&#'
!# $
%!
!  
 

 

  
    

#*'("#(
# #
'&*'
#
(
#(
(('
&
%&$*
,
&(
)''
)&('
 

#
-!(
$
&(
)''
&$)%




#
*#
+)($#
&*'
&
&'(&
(&"& ' #
&$''-#&
'

(&"& 
$
&(
)''
&$)%

$&
('
-!('
. 
 



#$&
('
-!('
!!
&('
&'&*

> C I RC U I T B R E A K E RS

News Often Triggers Trading Halts

D

espite the hue and cry analyst at Credit Suisse. warning, circuit breakers can allow an over trades done in error, According to the report, trading halts orderly adjustment process in which marthe single-stock circuit attributable to news are potentially undeket participants have time to correct for breakers introduced after sirable to some market participants imbalances before the May 2010 lash crash who are looking to proit from a submitting their were triggered by news events more than irst-mover advantage. orders, the report half of the time, according to a report by Still, exchanges have always found. Credit Suisse. halted stocks when certain news is In the cases Titled “Pardon the Interruption—he pending to allow investors time to where news events Impact of Trading Halts,” the report digest all the relevant information. triggered the cirfound that 51 cuit breakers, no percent of tradharm came to the “Some people will always view ing halts from market, and in June 2010 to other cases the cirtrading halts as a nuisance, but September cuit breakers were they may not be as negative as 2011 came clearly helpful, the some people put them out to be.” after fundareport found. Ana Avramovic mental news Currently, the emerged about a stock. he report he single-stock circuit breakSecurities and discovered 111 trading halts during that ers can be seen as a continuation of that Exchange Commission plans to replace period—56 from news. practice. the single-stock circuit breakers with a About 11 percent of circuit breakers proposed limit up/limit down rule, which were triggered by a “fat inger” trade, and would introduce a pause for 15 seconds bad prints only caused about 6 percent of before enacting a full trading halt. Causes of Trading Halts trading halts, the report found. About 32 he limit up/limit down proposal for SSCBs percent of trading halts were in cheap or could eliminate trading halts caused by illiquid stocks. bad prints, Avramovic said. hat would News Event 51% During 2010, many traders publicly be an improvement over the current sinCheap, Illiquid Stock 32% grumbled about needless trading halts in gle-stock circuit breaker rule, she added. large stocks such as Citi, but the data runs Limit up/limit down faces opposition “Fat Finger” Trade 11% counter to the perception that most tradfrom within the futures and options inBad Print 6% ing halts were caused by errors. dustries, since derivative products could Source:Credit Suisse “Certainly, some people will always still continue trading during a pause in view trading halts as a nuisance, but they the underlying equity, which would make may not be as negative as some people put When important news is released hedging problematic. them out to be,” said Ana Avramovic, an during trading hours without advance —James Armstrong

 |

DECEMBER 2011

|

TRADERS MAGAZINE

www.tradersmagazine.com

Front Running Continued from page 1

national Securities Exchange’s clean cross order type. Nasdaq OMX iled one this month after the SEC prohibited it from making a fee change. Steve Nelson, principal at Nelson Law

IOI Proposal Continued from page 20

the respondents suggested that ine-tuning the labeling of IOIs was warranted. JMP Securities, for instance, recommends stratifying natural IOIs into three groups: those with associated orders; those based on verbal communications; and those

Firm, says the SEC has backtracked more frequently in recent years. hat’s due to pressure on the regulator to speed up its approval process of exchange and FINRA rules. “hey can’t really speed up because they don’t have the staf,” Nelson said. “So the rule goes into efect and then the SEC real-

izes it was a bad idea and abrogates it.” Driscoll, who was chairman of the Security Traders Association from 2008 to 2009, did not respond to an email seeking comment on whether he or any organization planned to ile a “Petition for Review” with the SEC. —Peter Chapman

based on past conversations—the “In Touch Withs.” Lyons, of Capital Research, suggests that FINRA add two more categories: “principal” IOIs, for those times when a broker is looking to unwind a position, and “In Touch With” IOIs. Some brokers already label their IOIs as “In Touch Withs,” but not all, Lyons noted.

Speaking at this year’s Security Traders Association conference in Palm Beach, Fla., Ketchum said FINRA was divided over the need to regulate IOIs. “We really do want comments on [the proposal],” he said. “Even within FINRA, there is a debate as to the appropriateness of how to handle this issue,” he said. —Peter Chapman

> E M P LOy M E N T

Ex-SEC Oficial Joins Law Firm

J

amie Brigagliano, a former co-acting director of the Division of Trading and Markets at the Securities and Exchange Commission, joined Sidley Austin as a partner in the irm’s securities and futures regulatory practice. Brigagliano spent 25 years with the SEC, working in the Division of Trading and Markets for 13 years. He became an associate director for trading practices and processing in 2007 and a co-acting director in 2009. Under his watch, the division tackled the issue of transparency in dark pools, including reporting and the use of indications of interest; sponsored access; and the fallout from the ‘“lash crash”

 |

DECEMBER 2011

|

TRADERS MAGAZINE

Jamie Brigagliano

of May 2010. Earlier, Brigagliano led the drafting and implementation of Regulation SHO, which updated the SEC’s oversight of short sales. More recently the attorney worked on new rules covering derivatives mandated by DoddFrank. Brigagliano won the division’s Jay Manning award in 2003, given to stafers for excellence in service. www.tradersmagazine.com

Your trading tools are history.

Broker-independent algorithmic technology Pragma is a leading trading technology firm focused on innovative solutions P U RE I NNOVATI ON

for the global financial services industry. We are dedicated to consistently providing top-quality execution and exceptional support and service.

212-612-9701




www.pragmatrading.com

PRAGMA SECURITIES, LLC | MEMBER OF FINRA, NASDAQ AND SIPC. PRAGMA LOGOS ARE TRADEMARKS OF PRAGMA SECURITIES, LLC. SYSTEM RESPONSE AND ACCOUNT ACCESS TIMES MAY VARY DUE TO TRADING VOLUMES, MARKET CONDITIONS, SYSTEM PERFORMANCE AND OTHER FACTORS.

 |

DECEMBER 2011

|

TRADERS MAGAZINE

www.tradersmagazine.com

Top 10 Stories in 2011

A

As 2011 nears its close, Europe, staying employed and Pipeline Trading were the most discussed topics this year, according to traders. For investors and equity traders, the end of July marked a watershed moment. hat’s when volatility kicked up and volumes skyrocketed after fears of a inancial blowup emerged in Europe from the region’s debt crisis. And stock markets took it on the chin, as a correction briely hit the 20-percent mark—a bear market—before recovering to positive territory in October.

www.tradersmagazine.com

TRADERS MAGAZINE

|

DECEMBER 2011

| 7

Up until then, the irst half of the year—to put it bluntly—was slow on the trading front, as volumes stagnated. Consequently, a number of irms laid of trading professionals and the fears of further layofs continued through the fall—despite the uptick in trading volume in the last half of the summer. Brokerage irms, from the bulge to the independents, handed out pink slips, while the buyside had its own concerns. As a result, it should not come as a surprise that total compensation is expected to be down between 20 and 30 percent for equities trading pros this year. hat comes after a similar decline in equities compensation last year. Some say the closing of proprietary trading desks, which will be required by Dodd-Frank, has also shrunk compensation. Pipeline Trading provided its own lesson in prop trading. As it turns out, the block crossing network had an afiliate broker-dealer facilitating trades—not the natural li-

quidity that it claimed to ofer. he Securities and Exchange Commission smacked the irm and its two top execs with a total of $1.2 million in ines. he action put a new focus on dark pools and forced the buyside to scramble to learn all it could about routing practices and how pools operate. Meanwhile, lower Manhattan’s Zuccotti Park took on the look of an urban Woodstock in September, as hundreds of disenfranchised mostly recent college graduates decried corporate greed and the workings of the inancial system. he group, “Occupy Wall Street,” became a lightning rod for a hodgepodge of points of view, from the Green Movement to redistributing wealth in America. As the weather grew colder, however, the OWS crowd dug in its heels and pitched tents. hey built themselves a makeshift city, and by doing so, ofered their own version of a popular saying during the protests of the 1960s: “Turn on, tune in, and camp out.” Amid this backdrop, Traders Magazine presents the top stories of the year.

>> Pipeline Fine Shocks Trading World

T

raders were shocked this year when Pipeline Trading Systems agreed to pay $1 million to settle charges brought by the Securities and Exchange Commission. Regulators alleged the company failed to disclose that, at times, more than 97 percent of the orders in its dark pool were illed by a trading operation ailiated with the irm. he SEC also reached settlements

 |

DECEMBER 2011

|

TRADERS MAGAZINE

with Pipeline founder Fred Federspiel and company chairman Alfred Berkeley, who each agreed to pay a $100,000 ine for their involvement. Berkeley is also a former president of Nasdaq. Under the agreement, neither man admitted nor denied wrongdoing. Pipeline launched its alternative trading system in 2004, billing itself as a crossing network that matched orders to provide natural liquidity. But the SEC

claimed Pipeline’s liquidity was anything but natural. he company owned a trading entity that has gone by multiple names, most recently Milstream Strategy Group. Milstream sought to predict the trading intentions of the dark pool’s customers, the SEC said. Milstream allegedly would then trade elsewhere in the same direction as those customers before iling their orders on Pipeline. www.tradersmagazine.com

In the irst four months after Pipeline launched, the ailiate, initially known as Exchange Advantage, was a party to 97.5 percent of all transactions in the dark pool, the SEC said. From the launch until the end of 2009, the ailiate allegedly participated in a total of about 80 percent of all trades. Pipeline told users that they were being treated the same, but in reality provided its ailiate with advantages over other users, according to the SEC. hose advantages allegedly included special access to certain information and data connections that made it easier for the ailiate to track activity in the dark pool. he company responded to the charges by reaching out to its customers, attempting to retain their business in spite of the

revelations. Pipeline scheduled in-person meetings with customers to explain how the ailiate provides liquidity and to emphasize the execution quality its dark pool provides. “We recognize that we should have been more forthcoming about the critical role of our ailiate and sincerely regret that we were not,” Pipeline said in a statement to customers. “We believe—and can show you in detail—that you have beneited in the past from our ailiate’s ability to provide liquidity in the Block Market, and you can beneit in the future.” In its defense, Pipeline has claimed it has a patented mechanism to align the interests of Milstream’s traders with those of customers. Under the system, traders are supposed to be penalized if they make

trading proits at a customer’s expense. In fact, Milstream has shown a cumulative net operating loss since it was launched along with Pipeline’s dark pool in 2004. hough in recent years Milstream has made trading proits, including $18.4 million in 2008, it was operating this year at close to breaking even. Pipeline maintains the purpose of the ailiate was to provide liquidity, not to make a proit. Still, for many in the industry, the issue comes down to a question of trust. “People were using that pool with an expectation that it was natural liquidity,” said one veteran broker. “Maybe Pipeline thought what they were doing was fair, but it’s disappointing.” — James Armstrong

>> Regulators Look to Pacify the Market

T

he Securities and Exchange Commission and other regulators had a busy year, addressing market concerns about how to create a more stable trading environment and restore conidence rattled by last year’s “lash crash.” Regulators introduced a myriad of rules this year and loated new proposals to ix market structure laws that led to the May 6, 2010 event. hey also want to get a better handle on the forces driving the market. Upon examining the “lash crash,” many pointed at high-frequency traders and their efect on the market—

www.tradersmagazine.com

exacerbating market volatility and contributing to the severity of price movements and liquidity issues. Also, the role of market makers in providing an orderly marketplace was questioned. To recap, 2011 saw the implementation of the sponsored-access rule; the approval of the “large trader” rule; and proposals for a limit up/limit down singlestock circuit-breaker rule and a revamped marketwide circuit-breaker rule. On top of that, a new consolidated audit trail gained traction, as did several ideas to curb the impact of HFTs. Busy, indeed. he large-trader rule requires large-

volume traders to code their trade tickets with a unique identiier and time stamp for trades they execute. It targets both buyside and sellside shops doing signiicant volume. If requested by regulators, trade information would have to be available one day after a trade is completed. he market-access rule requires brokers to screen all orders before they are sent to the exchanges. he rule prohibits traders from sending orders directly to exchanges and allows brokers to check for clearly erroneous “fat inger” errors or other obvious discrepancies. TRADERS MAGAZINE

|

DECEMBER 2011

| 9

Despite their preoccupation with implementing more requirements mandated by the recently enacted Dodd-Frank Act, regulators continue to loat new proposals to ine-tune the market structure and keep trades lowing smoothly. A limit up/limit down proposal was pitched as an improvement to the current circuit-breaker rule. Other ideas being discussed include a minimum time requirement for quotes, a message traic tax and speciic market-maker obligations. However, next year’s most likely

change to market structure will be the implementation of a consolidated audit trail. An audit trail will help provide regulators with a detailed picture of what trading looks like, allowing them to pinpoint causes of market stress and implement ixes to prevent major strains from happening again. “We have not seen the end of issues and concerns around the lash crash,” said Annette L. Nazareth, partner at Davis Polk & Wardwell, and a former SEC Commissioner and director of the regulator’s Divi-

sion of Trading and Markets. “he SEC continues to work on responses such as the implementation of a consolidated audit trail. his clearly is a priority, since the SEC remains concerned about the time it took to aggregate all the market data and analyze it.” Stephen Nelson, principal of the Nelson Law Firm, agreed. “Clearly, we are in the mode where there will be more regulation,” he said. —John D’Antona Jr.

>> Low Volume Sparks Exchange Price War!

W

ith volume slumping for the second year in a row, the industry’s major stock exchanges competed aggressively for brokers’ business. hat meant cutting prices. And, in the world of stock exchanges, price cuts translate into higher rebates. his year, the exchanges introduced new rebate programs and sweetened the terms of existing programs. hey added new rebate tiers, reduced the volume thresholds necessary to qualify for higher rebates and, simply, increased rebates. he upshot was to make it easier for liquidity providers to qualify for higher rebates. And while most of the liquidity providers are market makers and other high-frequency trading types, the exchanges looked to broaden their source of supply by creating rebate programs that

30 |

DECEMBER 2011

|

TRADERS MAGAZINE

appealed to nontraditional suppliers such as retail and institutional brokerages. “hey are looking to add more low to their platforms that is not high-frequency in nature,” Pankil Patel, a managing director of trading at Credit Suisse, told Traders Magazine earlier this year. “It’s important for [the exchanges] to get a good mix of low in the door,” Pankil added. To that end, Nasdaq expanded its “Investor Support Program,” while NYSE Arca created a similar program called “Investor Tiers.” Perhaps the most dramatic move came from BATS Global Markets, which had previously kept its pricing simple. Eschewing its “lat” pricing model, BATS tiered the pricing on its lagship BZX exchange in July. More liquidity now garners higher rebates. Much of the rebate activity occurred

in the irst half of the year, when average daily volume was trending at 7 billion to 7.5 billion shares. hat was down from a run rate of 8.4 billion shares in 2010 and 9.8 billion in 2009. he business turned around in August as concern over Europe’s debt crisis roiled the stock market, producing a run rate of 8 billion shares through October. Still, despite the recovery, the exchanges did not reverse course and kept tinkering with their rebates. In November, for instance, Nasdaq launched a new program for irms that do a lot of trading before the open. It added a new tier to a program targeting big takers of liquidity, and it tweaked its Investor Support Program. All the steps taken give more traders more opportunities to qualify for higher rebates. —Peter Chapman www.tradersmagazine.com

#1 ACROSS THE WORLD

Special thanks to our Members and partners for helping us become the #1 marketplace for institutional equities.

>> Brokers’ HFT Balancing Act

H

igh-frequency traders. Can’t live with ‘em. Can’t live without ‘em. hat was the message this year coming out of the bigger brokers as they took steps to both win HFT business and help their institutional clients thwart HFT trading. Now that the Securities and Exchange Commission’s Rule 15c3-5, or market access rule, has gone into efect, the brokers are scrambling to put into place an infrastructure that would allow them to process orders from latency-sensitive high-frequency trading irms. At the same time, they are deploying technology to help their money manager clients combat what they contend are the HFTs’ predatory trading practices. Brokers have reworked their algorithms, built new trading devices, deployed special-purpose ECNs, and, in one extreme example, completely reshaped their dark pools. But can they do both? Can the brokers serve two masters? Charles Susi, global cohead of direct execution at UBS, believes so. “By providing execution capabilities to all segments, we can bring diferent kinds of liquidity together—and ofer even more crossing opportunities,” the exec told Traders Magazine this summer. Despite the reassuring words, the buyside is still concerned about brokers’ handling of their orders. his year they stepped up their pressure on the sellside to both provide them with more information regarding the venues to which their

3 |

DECEMBER 2011

|

TRADERS MAGAZINE

orders travel and to supply them with technology to deal with the presence of HFTs. By some accounts, HFT volume represents half of all industry volume. To placate their worried customers, brokers have taken a range of steps to add safety to the trading experience. At a minimum, the brokers are working with industry group FIX Protocol Limited to supply trading venue information to the buyside with every trade report. At the other extreme, they’re building new trading venues from scratch. Credit Suisse, for example, launched an ECN called Light Pool that largely excludes high-frequency traders. Rival Morgan Stanley is completely revamping the matching methodology for its primary dark pool to favor larger orders, the type unlikely to be used by HFTs. At the same time, the brokers aren’t about to let a money-making opportunity

pass them by. he SEC’s new sponsored access rule requires all irms providing direct market access to incorporate risk checks. his could slow down latencysensitive HFTs, but is deemed crucial to protecting the marketplace. Previously, many of the more successful providers of sponsored access did not incorporate risk checks. he big brokers, however, largely shied away from the business. But now that the playing ield has been leveled, they are embracing sponsored access wholeheartedly. heir eforts are appreciated by HFTs. “If you ind a bulge bracket irm who has either built or acquired a very competitive high-frequency trading platform, then you get all the trappings of a full-service prime brokerage ofering to go with it,” Manoj Narang, founder and chief executive oicer of HFT irm Tradeworx, told this publication. — Peter Chapman

>> Canada Forges Ahead

L

ong a distant relative to its U.S. cousin, the Canadian equities market spread its wings and emerged this year as its own powerhouse marketplace—replete with multiple exchanges, dark pools, alternative trading systems and more algorithms. he country’s rise from old-school trad-

ing to mainstream among modern global markets has been solidiied by its commitment to a solid banking system, transparency and focus on the retail investor. Against a backdrop of the failed merger of the Toronto Stock Exchange and the London Stock Exchange earlier this year, the Canadian marketplace continued its www.tradersmagazine.com

'$# .#$ ...$.$ .#$ ...$ .! ...$ # #$ 
.#$ ...$.+... '$#$ .$  ... #'#'.'#


 



      $* *).#*0.

$" *). .#*0

#* .**-0.

.  *-0 *-0 .
". &.) -0. /

*& (0/

,.* .. "0

," .,))0


   

 . *"*).
"0

 -- .**-0

).**).*&)$) )#)$) #))   ) $&# )$ )))$$#) #0)( ) ))# )$) $&))$)  $#.) % )#$.)$)) )) .)#)'#!)$.) #)$.) )$.)$) # ) % )#0) $)$ ))$) % $ ) "!))*4)##))$$#)#)   )') #+)# $) '! $ )' )# )) # )&  ) &$ ))) $ )$  0 !). - . ".*.*.(..).*%**0

      



##)$$)$))6152142330 )4233))

0)##))   0) )   )$ &$!)$)   )&$!)$ $)  )$ ) )  )))

0  #)$ $#)$! ))$) )) $$#)$$#)   )

.) &' ) .)0) ,-,4/20602

))))))))))))))))

march toward becoming more like the U.S. here was continued venue growth and fragmentation in Canada, prompted by regulatory changes in 2001—the National Instrument 21-101 Market Place Operations and NI 23-101Trading Rules, together known as the “ATS rules.” One area of growth has been in dark pools. Canada has always been a market dominated by a handful of banks that control trading in the public markets. But times have changed. his year alone, several new dark pools have sprung up, adding to the handful present last year. Goldman Sachs launched its dark pool, Sigma X, in Canada this year. Instinet also brought dark liquidity to the marketplace. Prior to this year, Liquidnet and ITG were the only dark pool operators in Canada. Despite the dark venue growth, Canada’s main trading exchange remains the Toronto, which still sees nearly 60 percent of all trading volume. But new alternatives, such as TMX Select and Goldman Sachs’s dark pool, are posing challenges to current market leaders. Other dark venues are to come, according to observers, but the Investment Industry Regulatory Organization of Canada, the self-regulator of the Canadian equities markets, recently proposed that dark pools must ofer some type of price improvement over the national best bid and ofer for trades to take place in unlit venues. Historically, Canadian trading has primarily taken place on the public exchanges. Until inal rules are passed, dark volume will likely stay mired in the 3 to 4 percent range, as it has been for the last 3 |

DECEMBER 2011

|

TRADERS MAGAZINE

few years. But some, such as Mike Bignell, president of Omega ATS, are optimistic that volume could reach upward of 6 or 7 percent in the coming year. “I’m optimistic growth could climb,” Bignell said. But that growth is expected to be tempered, according to Lida Preyma, director, capital markets research in global inance at the G20 Research Group at the University of Toronto. She said that until Canadian regulators are done passing outstanding rule proposals regarding dark pools, growth could be tepid. “What we see is that everyone is in a holding pattern to see where regulation is going to wind up—no one wants to spend money to set up a dark pool before regulations are in place,” Preyma said. Venue growth has also prompted liquidity providers to compete more heavily for business. In a bid to grab more market share, Omega ATS recently decided to eliminate taker fees. It eliminated the pass-through fee typically charged to investors who take liquidity from the marketplace, making it the only free ATS

for participants in Canada. As a result of more venues, a need for connectivity solutions has emerged for both the buyside and sellside. Sang Lee, a managing partner at consultancy Aite Group, said U.S. trading solution providers can expect to see increased demand for their services in Canada. “he Canadian market is going through a tremendous amount of market structure changes—from fragmentation, adoption of more sophisticated strategies and algorithms to smart order routers,” Lee said. hese technological changes, combined with the growing presence of high-frequency traders, he said, have created a demand for innovation and more product providers. he buyside is said to be looking at smart order routers and crossing engines, as well as algorithms that will help them keep pace in changing times. “Canada is an evolving market and on a technology trajectory to be very similar to the U.S.,” said Mark Skalabrin, chief executive at Redline Trading Systems. —John D’Antona Jr.

>> Bulge Weathers Rough Year

W

ith one exception, the year 2011 is proving a tough one for the nine bulge bracket equities shops. In the irst nine months, only Morgan Stanley managed to excel. he other eight either saw their revenues decline from last

year or grow only modestly. Conditions looked promising at the top of the year. In the irst quarter, Goldman Sachs, Citigroup, UBS, Deutsche Bank and Morgan Stanley all reported higher levels of orders and commissions. hat didn’t prevent most of them from www.tradersmagazine.com

posting lower revenues overall, however. quarter to €555 million. rivatives were up signiicantly.” Citi reported a healthy cash equities By contrast, UBS reported a big drop If the second quarter was dull, the third business, but still recorded a 9 percent in derivatives revenues due to “more chalquarter was anything but. In both the U.S. drop in total revenues due to problems lenging trading conditions.” and Europe, volume and volatility soared with “principal positions.” as panic over Europe’s debt Goldman cited lower market woes set in. Despite heavy making revenues for a 7 pertrading by clients, most of cent decline. (All igures are the bulge brokers got bruised net of accounting gains and during the quarter. Some reEquities Revenues for Bulge Bracket losses attributable to debt reported a strong commission valuations.) business, but were done in by First Nine Months 2011 Morgan Stanley was one their market making. In Millions of the few to post a gain over Much of the pain came 2011 2010 CHANGE the irst quarter of 2010, irin derivatives, a notoriously ing on all cylinders. Cash eqdiicult business to manage 1. GSCO $6,379 $6,086 4.8% uities, derivatives, and prime during frothy market condi2. JPMI $3,670 $3,493 5.1% brokerage all did well, chief tions. he volatility got the 3. CITI $2,169 $2,900 -25.2% inancial oicer Ruth Pobest of JP Morgan, according 4. BAML $3,086 $3,362 -8.2% rat told analysts at the time. to chief inancial oicer Doug Prime brokerage recorded its Braunstein, who reported an 5. MSCO $4,859 $3,731 30.2% highest level of client balanc8 percent drop in equities 6. CSFB SFr. 4,000 SFr. 4,500 -11.1% es since the inancial crisis of revenues to $1 billion during 7. UBS SFr. 2,995 SFr. 3,523 -15.0% 2008, she noted. the quarter. 8. DBAB € 1,882 € 2,236 -15.8% By the second quarter, Others did much worse. business conditions worsened UBS reported a 30 percent 9. BARC £1,446 £1,415 2.2% as money mangers reined in drop to 630 million Swiss Note: Figures net of accounting gains and losses attributable to debt revaluations (SFAS-159) their trading. Still, the ive francs because of lower revU.S. bulge banks managed enues in both cash equities Source: Company reports to post double digit gains and derivatives. UBS took while the Europeans recorded its derivatives hit in Europe, declines. In the U.S., share volume was he U.S. banks did well. Goldman while reporting better results in the U.S. down 30 percent compared to the second overcame anemic inlows of stock orders (he igure does not include the 1.85 bilquarter of 2010. In Europe, notional value with better market making results, espelion Swiss franc charge UBS took for the traded (in Euros) was down 14 percent. cially in derivatives. Morgan Stanley relosses of a rogue trader on its Delta One Deutsche Bank, Credit Suisse, and ported a 37 percent jump to $1.7 billion. desk.) UBS all reported deterioration in their Again, the gains were across the Both Citi and BofA Merrill were also cash equities business. Deutsche Bank board, according to Porat, stemming whipsawed in equities derivatives. Bruce found conditions worse in Europe than from “strong client activity.” In addition, homson, Merrill’s chief inancial oicer, in the U.S., where it found some success growth in Morgan Stanley’s electronic reported that revenues from cash equities in derivatives trading. Still, the big Gertrading services “continued to outpace were down 7 percent during the quarter, man bank posted a 14 percent drop in the the market,” she said, “while equity debut those from derivatives dropped even

Down Days

3 |

DECEMBER 2011

|

TRADERS MAGAZINE

www.tradersmagazine.com

further. Only Morgan Stanley, Goldman and Credit Suisse were able to thrive during the tumultuous quarter. Morgan Stanley’s Porat again singled out the irm’s electronic trading services and its derivatives franchise for praise. Goldman reported robust commissions and improved market mak-

ing results. he latter was due to “efective risk management of customer-driven positions” in the volatile environment. As Traders Magazine was going to press the market conditions of the third quarter were still present. he stock markets in the U.S. and Europe were still chewing over the European debt crisis as

concerns moved from Greece to Italy. Volume in October and November was up signiicantly over last year and volatility, as measured by the VIX index, was at historically high levels. Equities departments are bracing for layofs and signiicantly lower bonuses. —Peter Chapman

>> ETFs Push Traders Toward Multi-Asset World

T

raditionally, single-stock traders have rarely gotten involved with exchange-traded funds. But this year, as ETFs began taking their place as a dominant part of the industry, all traders began looking to these instruments as a gateway to the brave new world of multi-asset trading. Bryan Johanson, managing director for global index and exchange-traded products at NYSE Euronext, said ETFs can blur the lines between equities and other asset classes, since they themselves are equities, but their underlying assets might be ixed-income products, currencies, commodities or something else. Currently, 39 percent of ETFs on NYSE Arca track domestic equities, while 26 percent of listings track international stocks. Commodities and futures-based funds make up 14 percent of listings, ixed-income funds make up 11 percent, and currencies funds are 3 percent. To trade ETFs efectively, irms have to look beyond domestic equities, leveraging their resources on trading desks across as-

www.tradersmagazine.com

set classes. he expertise required to trade ETFs demands a multi-asset approach. “hat expertise, since it requires a broader understanding of portfolio construction, is typically not what you ind on a cash equity desk,” said Tom Smykowski, who heads ConvergEx’s global portfolio and ETF desk. “You’re going to have to open your knowledge base to include different asset classes.” Smykowski noted that over the past year, volumes for ETFs have grown signiicantly compared with the rest of the market. Earlier this year, ETFs made up between 25 and 30 percent of total volume, but this summer they rose to as high as 40 percent of volume for some days. Some believe that ETF trading added fuel to the volatility, though others argue that investors led to the vehicles in response to volatile markets. With ETF volumes that high, equity traders can’t aford to ignore the shift toward exchange-traded funds, which difer from traditional equities in a number of ways.

For one thing, volume does not always equal liquidity in ETFs. hat is because authorized participants can create new ETF shares out of a fund’s underlying assets. hey can also redeem ETF shares, converting them back into the underlying assets. Because of APs, an ETF can be liquid even when it’s only lightly traded. Matt Tucker, managing director of U.S. ixed-income strategy at ETF giant BlackRock, said APs have helped to promote even further collaboration among desks specializing in diferent asset classes, as that collaboration is vital to the creation/redemption process. Since ETFs are a hybrid vehicle, irms can come to a variety of conclusions in terms of who gets to trade them, Tucker said. While equity desks have traditionally had authority over ETFs, the vehicles can also be traded by those with the most knowledge of their underlying assets. Other irms have chosen to use ETF-speciic desks. With this increased competition, traders who formerly just focused on U.S. TRADERS MAGAZINE

|

DECEMBER 2011

| 37

cash equities have to broaden their horizons—learning more about ixed-income, commodities, international stocks and foreign exchange. “It has become important to involve traders with expertise in a variety of instruments,” said NYSE’s Johanson. “We’re seeing more and more exotic and diferent

asset classes that are packaged as an ETF.” NYSE Arca has had more that 265 new ETF listings this year, with more anticipated by year’s end. Already, 2011 has broken the previous record set in 2007 of 223 new listings. “Now you have a ton of volume in hundreds of ETFs that are out there,” said

Paul Weisbruch, vice president of ETF/ options sales at Street One Financial. “here’s a lot of communication between desks and departments where they can hedge of exposure and probably more seamlessly get big trades done from asset class to asset class.” — James Armstrong

>> Algos: Better, Faster… Fewer

F

or the past several years, buyside traders have been consolidating their algorithms, paring back the number of tools on their desktops. During 2011, that process accelerated even further, with many irms deciding to cut back to just a handful of algos, often with each one tailored to speciic needs. “People are trying to get from maybe 14 or 15 algorithms per broker to something more like four,” said Todd Lopez, managing director and co-head of Americas sales at Goldman Sachs Electronic Trading. “I think four has kind of been the magic number that we’ve seen.” Lopez said clients were overwhelmed with diferent options and wanted to simplify how traders access various strategies. he ability to customize algos has been critical to limiting the number of tools traders use, he added. Customization has not ended with speciic algos for diferent desks. Rather, irms are trying to suit algos to the particular needs of each trader, said Peter

3 |

DECEMBER 2011

|

TRADERS MAGAZINE

Sheridan, vice president and head of algorithmic distribution for the Americas at Goldman Sachs Electronic Trading. “What we ind is, Trader A might have a very diferent need from Trader B,” Sheridan said. “he idea is not just to customize on a irm-wide level, but to customize right down to the individualtrader level.” Sheridan stressed that algo providers are not reducing the number of strategies they ofer, but are trying to drill down and target speciic strategies for individual clients. After a while, too many oferings can become nothing but noise to traders, he said. Nitin Gambhir, chief executive oicer of Tethys Technology, said the move toward fewer, more customized algos is all about making trading desks more eficient—and more proitable. “here’s this tremendous move happening where clients are getting more and more sophisticated, and what they want is the algo parameters to be tweaked to ensure maximal use of capital,” Gambhir said.

Algo providers have to customize their products if they want their customers to get the best execution, he said. As the market has gotten volatile, the natural response has sometimes been to bypass algos altogether and move to more hand management of trades. hat, however, can put traders at a disadvantage, said Dan Hubscher, who leads capital markets for Progress Software. Hubscher said prepackaged algorithms always need to be tweaked when the market changes, because they tend to work on a set of assumptions that can become obsolete when there is a major shift in trading. “If you don’t have the power to change those in reaction to market events, you’re stuck,” Hubscher said. “While manual trading might feel a bit safer, you’re going to be behind the people who are still in the market trading automatically, who have the power to change their algorithms very quickly, because they have customization tools.” He said when the market changes in a slow or predictable way, it is easier for www.tradersmagazine.com

a prepackaged algo to keep up, but when there are massive jumps like those we saw this summer, the ability to quickly customize algos becomes more important.

So while the number of algos on a desk might be declining, the algos that are there must be the most sophisticated available, not only tailored to meet the

needs of individual traders, but also lexible enough to adapt to rapidly changing market conditions. — James Armstrong

>> Buybacks Rebound From Financial Crisis Lows

C

oncerned about the future but still lush with cash, many companies sought to buy back their own stock in 2011. Although investments in plants and new hiring was noticeably absent, corporations poured billions back into their own stocks. his year, buybacks have increased 49 percent, with 2011 on a course to record $540 billion in buyback authorizations, according to Birinyi Associates. hat would be the third-highest amount in U.S. history after 2006 ($655 billion) and 2007 ($863 billion). During the irst three quarters of this year, companies actually consummated more than $376 billion in stock buybacks. hat already tops the $343 billion in buybacks consummated in 2010 and is well over the mere $156 billion consummated in 2009. he month of August alone saw 198 new buyback authorizations. he last time the market saw buyback activity that signiicant was more than three years ago, when corporations announced 199 buybacks in the February before the inancial crisis hit. In September, Berkshire Hathaway www.tradersmagazine.com

announced it would engage in its own buyback plan, a irst for the investment company. Walt Disney, JPMorgan Chase, Wal-Mart, Intel, ConocoPhillips and Hewlett-Packard all authorized billions for share buybacks in 2011. “Companies are still concerned about making capital investments, but they have an abundant amount of cash on their balance sheets,” said Jefrey Yale Rubin, director of research for Birinyi Associates. “Buybacks are the way they’re going.” So far this year, the inancial sector has had the largest number of authorized buyback programs, followed by consumer discretionary companies and industrials. Technology companies, however, have authorized the largest amount in dollar terms, followed by companies in the healthcare sector. Brett Klein, a trader at Cheevers & Co. who specializes in buybacks, said he is optimistic that buybacks will continue. One recent trend he noted is that more company treasurers are setting up pre-arranged trading strategies, which allow them to legally sidestep blackout periods when they are not ordinarily allowed to buy back their stock.

Corporations have about eight months out of the year when insider trading rules create blackout periods. However, under the SEC’s 10b5-1 rule, companies can set up a system to perform automatic stock buybacks during those times. Treasurers are increasingly seeing these prearranged buybacks as a form of risk management, Klein said. Should a company’s stock fall below a certain level, a planned trade will be executed buying back stock on the company’s behalf. Tim Sargent, chief executive oicer of equity research company QSG, said his irm is working with the sellside and with companies doing buybacks to ensure they can get best execution. “Increasingly in an era of high-frequency trading and questions surrounding trade signaling and other kinds of slippage issues, these corporate managers want to make sure games aren’t being played with the repurchase programs,” Sargent said. A third-party provider can let companies performing buybacks know if costs are in line with the marketplace and whether or not the behavior of a stock is normal during buyback executions, he said. — James Armstrong TRADERS MAGAZINE

|

DECEMBER 2011

| 39

>> Volume and Volatility: The Comeback Kids

0 |

DECEMBER 2011

|

TRADERS MAGAZINE

July, Reilly saw an escalation in concerns about short-term trading strategies. hose concerns dampened somewhat when the market started going up, he added. hough volatility—and the high volumes that typically go along with it— could go down, most traders are not looking for that to happen anytime soon. “Just when you think we’re about to go back to those low volumes that we saw at the beginning of the year, something else creeps up that keeps volatility ratcheted

environment. During the irst half of the year, traders might just have overlooked some of those signs as they were so focused on regulatory issues, he added. Phil Lynch, chief executive oicer of Asset Control which provides economic data to investors, said volatility will likely continue into the coming year. “here are periods where the volatility is going to spike, but the trend is that the time frame in between those is going to be much shorter,” Lynch said.

Consolidated Volume

In Billions

T

he year began with low volume and little volatility, and then changed rapidly midyear, making 2011 a year of stark contrasts. Usually, the end of July and the month of August are the summer doldrums, when not much happens. his year, it was when everything changed. Both volume and volatility skyrocketed this summer. he VIX volatility index went from under 15 in April to a peak of 48 in August. Volume levels tended to mirror volatility, with monthly consolidated volume jumping more than 74 percent from July to August. (Volume this August was 53 percent higher than the same month last year.) “We view the period from July 25 to the present as a radically diferent execution environment, versus the irst half of the year,” said Tim Reilly, head of North America electronic execution sales at Citi. Reilly compared the market turn at the end of July—and the August sell-of that followed—to other recent game-changers, such as the quant meltdown of 2007, the inancial crisis of 2008 and the “lash crash” and its aftermath in May 2010. As the markets became more volatile in the second half of this year, bid-ofer spreads went up, especially for small- and mid-cap stocks, he said. hose spreads have now stabilized at new, higher levels, which have proven to have staying power. he deining challenge in the irst half of the year was liquidity discovery, but with the intraday volatility starting in late

Jan

Feb

Mar

Apr

May

up,” said Ed Brown, executive vice president for business development at the interdealer broker ICAP. Brown said that while few people saw the sea change in markets coming, the obvious signs were all there in the macro

Jun

Jul

Aug

Sep

Oct

Markets today are more electronic and far more global than they were only a few years ago, and with so much rapidly moving capital today, volumes and volatility are bound to rise, he added. — James Armstrong www.tradersmagazine.com







 




 






#

 








  
 )#--#
.1%& $ %(
 
() $* 
%
'+ */
( $ 

  #''0
-$%#,*) $ $
 (*%(
"%"
+)*%/
$
"($ +) $))
.+* ,
%("- 
+( * )
(, ) 
 
  
 
    
  


 
    

 %,
-,%  (*%(
$ %(
(( 


  -!#0
##  (*%(
$)* *+* %$"
'+ */
")   

 $+%,-%)
#'#+!$%) $ $
 (*%(

%

'+ */
+$#$*"
( $

 
 

  /0*)
 #' $ $
 (*%(
"%"
" $*
+&&%(*
(, ) 
  

  

 

 #''*"0
* ,*) () $* 




 



# *+$
+##+  
&(* $
 ( 

 0'/%
*!!* $ $
 (*%(
$ %(
")
(( 

 

    

 #'%,,
%)(*) $ %(
'+ */
(( 

 *))
%#'", 
%
(!*
*(+*+(
%(
*
#( )

 
 


  
 $$**
0(* (*$(
$$ "
$)* *+* %$)
(%+&




  -$'##)

$##/#+,  
.+* ,
 ( 



 





!


)
#',#0  
$
 
)(
 ( 
 
  

 
 -!0
,$*''#0 (*$(
% 
%
.
$%#
")
$
*
#( )

 
 

"""$ 






   






 
  

Weekly Options Surge in Popularity

Short andSweet V

olume is up for the ninth straight

since the product was launched nearly

year in the options industry,

18 months ago,” Steve Crutchield, chief

but there’s a big diference this

executive of NYSE Amex Options, told

By PETER CHAPMAN

year. Of the 21.6 percent increase in total

 |

DECEMBER 2011

year-over-year volume through October,

In the 10 months through October,

over a third of the growth is coming from

weeklies accounted for 9.1 percent of total

contracts that expire weekly. hat makes

volume, according to data provided NYSE

weeklies one of the most successful product

Euronext. hat’s up from 1.8 percent in the

launches in the industry’s history. Since

same period last year.

the creation of the listed marketplace in

he inal tally for the year is likely to

1973, most options contracts have expired

be even higher, as a big chunk of the avail-

monthly.

able classes only began trading on a weekly

“here’s been a huge jump in volume |

Traders Magazine.

TRADERS MAGAZINE

basis in September and October. www.tradersmagazine.com

www.tradersmagazine.com

TRADERS MAGAZINE

|

DECEMBER 2011

| 3

In September, total volume attributable to weeklies was 10.6 percent, according to NYSE Euronext. In October, that igure was 12.2 percent. Weekly volume can be even higher in some of the individual classes. In Netlix options, in October, for instance, weeklies comprised about 40 percent of all contracts. Trading in weekly SPY options in October was 23 percent of the total, while trading in weekly options on Apple, Inc., was 27 percent. (he percentages are of total industry volume. It is important to note however that weeklies only trade 40 weeks of the year. hey do not trade during the third week of the month when the monthly contracts expire. herefore, percentages would be higher if weeklies were only compared against total volume during the weeks in which they Paul Stephens, CBOE trade.) Although the exchanges have had the authority to list weekly options since 2005, they only began in earnest in June 2010. From a handful of available classes then, the number of weeklies has jumped to about 100. he listings are typically of the more active names. It has been the addition of new classes that is propelling the growth in trading, according to industry sources. “We opened up the loodgates,” explained Paul Stephens, director of international and institutional marketing at Chicago Board Options Exchange. hat was especially true in recent months. According to the Options Clearing Corporation, 31 new names were added to the roster in September and October. Each exchange is limited by the Securities and Exchange Commission to 15 listings apiece, but once listed they are tradable by any exchange. A few of the nine options exchanges have decided not to exploit into their allotments. he popularity of the product has exchanges chaing at the SEC’s restrictions. heir brokerage customers are clamoring for new listings or complaining when one listing is dropped in favor of another. “We would like to expand the program,” Stephens  |

DECEMBER 2011

|

TRADERS MAGAZINE

said. “here is certainly customer demand.” he CBOE was the driver behind the Short Term Option Series Program, as it is called, becoming the irst and only exchange to list weekly options (on indexes) in 2005. he program stagnated, however, as the irregular symbols used to denote weeklies caused complications for brokerage back oices. “Firms’ back oices were very much against weeklies,” Stephens noted, “and some of their front oices as well.” But with the OCC-driven symbology efort, completed in May 2010, the door was thrown open to weeklies. Now all weeklies share the same root symbol with the regular options. hat makes it easier for brokerages to process trades and customers to ind speciic contracts. Charles Schwab & Co., which began its weeklies program in January of this year, has seen its active-trading customers jump on the new product. “It’s been dramatic,” said Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research. “Once we started ofering them, our clients embraced them very quickly and our volumes rose very sharply.” Frederick points out that over half of all trading in monthly options occurs in the inal week of the cycle. Given that, it’s a natural that traders would migrate to weeklies, Frederick said. “You provide a lot of opportunities for people to do things that they were only able to do once a month in the past,” Frederick said. “hat creates an enormous amount of lexibility.” Crutchield points out that weeklies allow both buyers and sellers to ine-tune their approaches to speciic events, such as earnings announcements. Traders can take positions in the week of an occurrence rather than weeks in advance. For buyRandy Frederick, Schwab ers, that reduces the premiums they must pay since premiums typically drop the closer the option gets to expiration. “hat’s the advantage of the product,” Crutchield said. Also contributing to the surge in Continued on page 46 www.tradersmagazine.com

Pensions Eye Buy-Writes

W

ith crisis comes opportunity. hat seems to be the message for the options industry as a group of public pension plans moves closer to incorporating options into their portfolios, most for the irst time, in an attempt to squeeze out some of the volatility in their stock portfolios. he Santa Barbara County Employees Retirement System, the Hawaii Employees Retirement System, the Los Angeles Department of Water and Power Employees Retirement Plan, the Seattle City Employee Retirement System and the Alaska Retirement Management Board are all in various stages of adopting buy-write strategies benchmarked against the Chicago Board Options Exchange’s BXM index. he total to be hedged by all ive plans could reach more than $1 billion. “his is one of our approaches to dealing with the fact that the markets are much more volatile now than they used to be,” said Colin Bebee, an analyst with Portland, Ore.-based Pension Consulting Alliance, a consultancy advising four of the ive plans. “Until recently, a buy-write strategy hasn’t been very popular with pension plans, so most of the managers we’re dealing with are just now entering into it.” A buy-write, or covered call, strategy involves selling calls against a single stock or basket www.tradersmagazine.com

of stocks. he short call position ofsets the long stock position, giving the investor a hedge against dips in the market. As such, however, it can also cap any upside in the stock portfolio. In addition to its hedging properties, the tactic can also be used to generate incremental income as the call seller receives the option’s premium. Continued on page 47 Benchmarking against the CBOE’s

TRADERS MAGAZINE

|

DECEMBER 2011

| 5

Volume Surge

interest this year has been relatively high levels of volatility, Continued from page 44 especially since August. he appeal is to both buyers and sellers of options. Higher volatility translates into higher premiums, which are attractive to sellers. High volatility also means a greater chance for proit for buyers as

between 8 percent and 10 percent of total SPX volume—CBOE has a monopoly on SPX trading—this year during the weeks that weeklies trade. hat’s up sharply from last year when weeklies accounted for between 2 percent and 4 percent of total SPX volume. he reason for the upswing is because of changes CBOE made in December 2010, according to Stephens. First, CBOE changed the SPX weekly from an A.M.-settled contract to a P.M.-settled contract. Second, the exchange made it easier to trade the contract electronically. “he customer for the weekly SPX is more of a hedge fund Weekly Options Contract Volume type,” Stephens said, “and more online.” January to October Some of the volume in weeklies has come at the expense 2011 2010 of volume in comparable monthlies, industry sources acknowledge. Still, opinions diverge as to how much. Frederick and Total options volume 3.9 billion 3.2 billion Stephens say very little weekly volume is “cannibalistic.” NYSE Total weeklies volume 355 million 58 million Amex’ Crutchield says his unit has done some research, but is Weeklies/total volume 9.1% 1.8% unable to quantify the shift. No. of weeklies at end of period 42 104 “It’s diicult to quantify,” Crutchield said. “You’re playing Sources: OCC, NySE Euronext, CBOE counter-factual. What would volume have been if there were no weeklies? I think there is a pretty healthy mix of new volume. stocks bounce around more. Still some has moved away from the front month.” Combined, he product is not limited to retail traders. “When weeklies came NYSE Amex and NYSE Arca trade about a quarter of all weeklies out, most people assumed they would be used for speculation,” Euvolume, according to NYSE Euronext statistics. gene Kearns, an executive in Credit Suisse’s Advanced Execution Whatever is driving the volume, weeklies have become one Services group, said at this year’s meeting of the Chicago chapter of the Security Traders Association. “But it has turned out that institutions use them for risk STEVE CRUTCHFIELD, NySE AMEX OPTIONS management purposes as well.” CBOE’s Stephens agrees that demand is coming from instiof the industry’s hottest innovations, arguably in the same league tutions, but mostly short-term oriented hedge funds. Investors as contracts on the S&P 100 and S&P 500 indexes (1983); the with longer time horizons opt for monthlies when writing covadvent of electronic trading and the International Securities Exered calls, for instance, he said. change (2000); and the contract on the VIX (2007). For CBOE, hedge funds are behind much of the trading in the Certainly, the product has taken of. “Within the irst month weekly version of the exchange’s venerable S&P 500 Index prodour expectations were exceeded,” Schwab’s Frederick said. “he uct, the SPX. Trading in weekly SPX contracts has accounted for activity was double what we thought it would be.” TM

Expanding Universe

“It’s dificult to quantify. What would volume have been if there were no weeklies? I think there is a pretty healthy mix of new volume.”

 |

DECEMBER 2011

|

TRADERS MAGAZINE

www.tradersmagazine.com

Buy-Writes

BXM index is considered a relatively simple and transparent form Continued from page 45 of covered call writing as it involves selling a listed SPX option against a portfolio of S&P 500 stocks. In the past, the CBOE has funded studies that claim investors using a BXM strategy can come close to matching the performance of the S&P 500 over the long haul with only two-thirds of the volatility. Buy-writes are part of a broader group of hedging strategies called “overlays” that use various derivatives including options, futures and swaps to hedge stock portfolios. “We’re starting them of with the BXM idea,” Bebee said, “because using listed options is very transparent and you only have to deal with one option per month.” hese strategies have long been deployed by high-net-worth individuals, foundations and endowments, but less regularly by pension plans. heir popularity tends to surge after market downturns such as the crashes of 1987 and 2000, and then peter out. Money manager Loomis, Sayles & Co. was a big player in the

market crash of 2008 and the subsequent bouts of volatility. Recently, for instance, as fears have mounted over the European debt crisis, the CBOE’s VIX index has moved into the 30 to 35 range, signiicantly higher than its norm of about 20. Players in the niche overlay market are reluctant to predict a gusher of new business this time out, but are still optimistic. “Given the volatility of the last three years, we’ve seen a lot of interest,” said Jack Hansen, chief investment oicer of the Clifton Group. “Certainly more than four years Jack Hansen, Clifton Group ago. Still, in the context of all of the searches and changes going on within institutional portfolios, it’s a relatively small number.” Clifton is one of a handful of money managers that specializes in overlays. Others are Rampart Investment Management in Boston, which is managing a program for Santa Barbara County; Gateway Investment Advisers, which won the Hawaii Employees mandate; market makers Gargoyle Group; and Capstone Asset Management. he big passive fund managers, Russell and State Street, have also recently entered the space. TM

“Given the volatility of the last three years, we’ve seen a lot of interest. Certainly more than four years ago.” early 1990s in buy-writes for institutions, but as the bull market roared ahead, the business fell by the wayside. Much of the renewed interest has been generated by the stock

www.tradersmagazine.com

TRADERS MAGAZINE

|

DECEMBER 2011

| 7

> ConvergEx Portfolio Algo For Dark Pools

C

onvergEx Group recently announced the launch of the irst in a new series of portfolio algorithms, this one designed speciically for executing in domestic dark venues. Dubbed Spectrum, the algo allows traders to maintain their required cash and sector balances, something ConvergEx says is not usually available in algos for dark markets. “If you worked on a portfolio desk for the last ive years, it’s been really frustrating,” said Gary Ardell, head of the inancial engineering and advanced trading solutions group at ConvergEx. “All your peers over on the single-stock desks have been using better and better dark technologies. But you couldn’t use them, because the cash constraints and the risk management were just too hard.” With most dark algos, an order can get executed quickly or remain pending for a considerable period of time, Ardell said. hat simply won’t do for portfolio traders, who need to precisely manage risk and cash balances, he said. Spectrum ofers features that are included in many portfolio algos for lit markets but are not always available  |

DECEMBER 2011

|

in the dark. For instance, it ofers three separate cash objective options based on a customer’s preferred level of cash constraint, allowing them to make sure they are keeping the appropriate level of cash on their books for a portfolio. he algo also supports three distinct settings for risk management, coniguring to meet a user’s selected level of risk aversion. —James Armstrong

> Lime Acquires Cactus Trading

L

ime Brokerage, a wholly owned subsidiary of Wedbush Securities, which caters to the high-frequency crowd, is buying Cactus Trading. Cactus provides a low-latency, multi-asset-class trading engine, designed for implementation, testing and deployment of algorithmic trading strategies geared toward HFTs. By integrating Cactus technology, Lime can now enable traders and quants to express their trading strategies in code, use that same code to back-test their strategies against historical data, simulate trading against live data and then move to production trading.

TRADERS MAGAZINE

“We are committed to investing in and developing the Lime infrastructure so that clients can focus on trading and leave the technology to us,” said Jef Bell, chief executive of Lime. Joe Signorelli, chief executive of Cactus Trading, and David Don, chief operating oicer, will become managing directors at Lime Brokerage. —John D’Antona Jr.

> Algo Monitor Watches for HFTs

S

anta Barbara, Calif.based HCMI has developed a real-time service for the buyside that scans the market for evidence of highfrequency traders and their computerized strategies. HCMI is a customer of data provider Nanex. he underlying technology behind HFT Alert comes from Nanex, and HCMI distributes and supports HFT Alert software. According to HCMI president Steve Hammer, HFT Alert monitors the smallest levels of algorithm activity in the marketplace at any given time by searching for “luttering.” Fluttering, Hammer said, is small changes in either the bid or ask price that are the precursor to a trade.

“HFTs are doing the luttering,” Hammer said. “he alert is an algo detection system that checks for various types of algo activity, such as luttering or cycle repeaters.” Once it detects luttering in either the bid or ask, HFT Alert sends an audiovisual alert on the user’s desktop. Once the trader receives the notiication, he can then modify his trading strategy. he system can monitor an unlimited number of stocks or a single stock that exhibits a high degree of message or quote traic, usually in excess of 1,000 quotes per second. Hammer added that luttering can circumvent the national best bid and ofer requirement mandated by Reg NMS. At one point in time, the new luttered bid could be the best bid and the algo could execute a trade at one price on one exchange and at another luttered price on another exchange. “In essence, you have two NBBOs on two diferent exchanges,” Hammer said. “Portfolio managers can use this to help to prevent frontrunning of their orders.” he system is targeted at the both the buyside and sellside. —John D’Antona Jr.

www.tradersmagazine.com

Contents DECEMBER 2011 • VOLUME 24, NUMBER 331

T h e Wo r l d o f Tr a d e r s Pictorial Coverage of Events and Conferences

50 DALLAS SECURITY TRADERS ASSOCIATION Annual Conference Eric Cannon, Stifel Nicholas, Dallas; Daniel Lunsford, guest; Scott Bauer, Nomura Securities, New York; John Daley, Stifel Nicholas, Dallas; Brendon Varley, FBR Capital Markets, Dallas.

September 8-10, 2011

George Troyan, Barclay’s, New York; Ben Deweese, Esposito Securities; Amanda and Kenny Kenvin, Esposito Securities; Clayton Duf, Capis, all Dallas.

55 SEATTLE SECURITY TRADERS ASSOCIATION Annual Conference Tim Hoover, Nikki Hoover, both Russell Investments, Seattle; Bill Kitchens, Morgan Keegan, Memphis; Stephanie Lipman, DA Davidson, Portland.

August 25-28, 2011

Carla Newsom, guest, Howard Lindsey, Goldman Sachs, New York; Ray and Randy Geiger, JonesTrading, Aaron Avallen, Pipeline Trading, all San Francisco.

www.tradersmagazine.com

TRADERS MAGAZINE

|

DECEMBER 2011

| 9

DALLAS SECURITY TRADERS ASSOCIATION Annual Conference Four Seasons Resort • Irving, TX • September 8-10, 2011 Oficers

1st row: Susan Ware, Director, Westwood Group; Scott Mullins, Director, Penson Financial; Joann Orosco, Secretary; Dan Mele, 1st Vice-President; 2nd row: Chip Miller, Director, Northpoint ConvergEx; Kenny Kenvin, Director, Esposito Securities; Mike Rask, 2nd Vice-President, First Dallas Securities; Vic Topper, President; 3rd Row: John Daley, STA Governor, Stifel Nicholas; Chris Halverson, Treasurer, Capital Institutional Services; Alan Marshall, STA Governor, Luther King, all Dallas.

RECEPTION

Noelle Pepe, Mizuho Securities; Stephanie Fields, Ullink, both New York; David Gehrke, Liquidnet, San Francisco.

Todd Terry, ConvergEx, Dallas; Ginny Andrews, Vicki Andrews, both guests.

Natalie Banks, DSTA; Chris Cole, Capis; Christina Emi, DSTA, all Dallas.

Dan and Nelsy Mele, Claude Connelly, all Williams Financial Group, Dallas.

50 |

DECEMBER 2011

|

TRADERS MAGAZINE

www.tradersmagazine.com

DALLAS

Greg Resnansky, Cantor Fitzgerald, Dallas; Chris Mitrando, Paul Ordinario, both Lazard, New York.

Samantha, Barbara and Joe Rosio, all guests.

Joann Orosco, DSTA, Dallas; Julie Halverson, Margo Rask, both guests.

Chris Halverson, Joanna Horton, both Capis; Mike Rask, First Dallas Securities, all Dallas.

www.tradersmagazine.com

TRADERS MAGAZINE

|

DECEMBER 2011

| 51

DALLAS

BUSINESS MEETING & PANEL DISCUSSION

Rob Kirk, 1st Global, Dallas; Ellen White, Penson Financial Group, Dallas; Rob Jacobs, PDQ ATS, Chicago.

State of Trading Today & Tomorrow John Daley, Stifel Nicholas; Alan Marshall, Luther King Capital Management, both Dallas; Joe Cangemi, ConvergEx; Brian Williams, Liquidnet, both New York.

STA Update Jim Toes, STA, New York. Scott Mullins, Penson Financial Group, Dallas; Michael Miller, guest; Joann Orosco, DSTA, Dallas.

Jay and Tifany Meagrow, Keybanc, Cleveland; Debbie and Kenny Gast, Instinet, St. Louis.

Ovidio Montemayor, John Lassen, Delon Mollett, Mike Gallagher, all TD Ameritrade, Ft. Worth.

Khash Sarraf, Castlerock, New York; Rob Kirk, 1st Global, Dallas; Michael Marr, Castlerock, New York; Doug Throckmorton, Penson Financial Group, Dallas.

Joe Velenza, Goldman Sachs; Lisa Utasi, Clearbridge Advisors, both New York; Mary McDermott-Holland, Nasdaq, Boston; Lauren O’Leary, Dahlman Rose, New York; Roger Peterkin, SS&C, Boston.

5 |

DECEMBER 2011

|

TRADERS MAGAZINE

www.tradersmagazine.com

DALLAS

Steve Carolus, eTrade, Sue Lyall, Fred Ingles, both Citadel Execution Services, all Chicago; Bob Richmers, UBS, New York; Bill Jacobson, eTrade, Chicago.

Eric Geier, ConvergEx, New York; Seth Webber, Vandham Securities, Woodclif Lake.

Brian Stuuka, Flextrade, Chicago; Joanne Horton, Capis, Dallas.

Mike Gallagher, Gary Sjostedt, both TD Ameritrade, Omaha; Stan Thurley, UBS, New York; Vidio Montemayer, TD Ameritrade, Omaha; Mark McDermott, Collins Stewart, New York.

Dean and Valerie Thompson, both guests.

Kenny Kenvin, Esposito Securities; Chris Halverson, Capis, both Dallas.

( 

( .0
##


) 
!  
/ 

  




 
 


  
  

 


  

 
 

 

212.356.0500

www.rodm.com

( 

( .0
##


$  
!%(
)!&

Sam Lippitt, BTIG, New York; Patti Andrews, BHMS, Dallas.

www.tradersmagazine.com

!%,)*$%*
%"!%

1


)#)

*(!%

1


'+!*-
()(

TRADERS MAGAZINE

|

DECEMBER 2011

| 53

DALLAS

Scott Mullins, Penson Finacial; Mark Heng, Morgan Stanley, both Dallas.

Matt Ambrogi, ITG, Chicago; Zabi Fazal, UNX, Burbank.

Joe Turk, Southwest Securities, New York; Kurt Johnson, ADM Investor Services, Chicago.

John Nowak, Walker Smith Capital, Dallas; Joe Crisalli, Dahlman Rose, New York.

Andrew Weinberg, Pinebridge Investors, Dallas; Michael Savini, Raferty Capital Management, Chicago.

Stephen Capurson, Pat Malcolm, both Cantor Fitzgerald, Dallas.

Dean Kordalis, Knight Capital Group, Jersey City; Justin Burns, Esposito Securities, Dallas.

Lindsey Ater, Eze Castle, Dallas; Waylan Wouters, DA Davidson, Denver.

Joe Merrick, Credit Suisse, Chicago; Antonio Panos, Mixit, New York.

Jennifer Parsley, guest; John Cooley, Lacerte Capital, Dallas.

Terry Flynn, New York; John Standerfer, Austin, both S3 Technologies.

Chris and Julie Halverson, Capis, Dallas.

5 |

DECEMBER 2011

|

TRADERS MAGAZINE

www.tradersmagazine.com

SEATTLE SECURITY TRADERS ASSOCIATION Annual Conference Suncadia Resort • Cle Elum, WA • August 25-28, 2011 Oficers

Nenad Yashruti, Past President, Freestone Capital; Lori Winkelhake, Director, McAdams Wright Ragen; Tyler Platte, Vice President, Rainier Investment Management; Alex Frink, President, Russell Investments; Andy Frey, Secretary, Summit Capital Management; Chris Lane, Russell Investments, all Seattle.

RECEPTION

Wendy and Tyler McCollough, McAdams Wright, Seattle; Richard Radulski, State Street Global Advisors, Boston.

Robert Markulin, Cheevers & Co., Chicago; Doug Deatrick, Raymond James, Los Angeles; Brian Stuckey, Flextrade, Chicago.

Stephanie Libien, Jeferies & Co., San Francisco; Katie Ludwig, Alex Frink, both Russell Investments, Seattle.

Josh Foer, guest speaker, Brooks Daggett, Goldman Sachs, New York; Jesse Sullivan, Sparta Asset Management, Seattle.

www.tradersmagazine.com

TRADERS MAGAZINE

|

DECEMBER 2011

| 55

SEATTLE

Morgan Melchiorre, BATS Exchange, Kansas City; Charles Conner, CIBC, Toronto; Brian Stuckey, Flextrade, Chicago.

Tyler McCollough, guest, Stephanie Lipman, DA Davidson, Portland; Richard Radulski, State Street Global Markets, Boston.

Brooks Doggett, Goldman Sachs, New York; Mike McCarthy, Oppenhiemer, San Francisco; Mara Rieden, guest.

Chris Shea, Credit Suisse, San Francisco; Kim and Dan Chun, Washington Capital Management, Seattle.

Greg Harrison, Sandler O’Neil; Erin Williams, Stifel Nicholas, both San Francisco; Jill Harrison, guest.

Lori Winkelhake, McAdams Wright Ragen; Justin Kane, Rainer Investment Management, both Seattle; Kennedy James, guest.

Alex Brown, Knight Capital Group, San Francisco; Mike Kealy, Suntrust, Atlanta; Brian Dunderdale, B. Riley; Erik Johnson, Knight Capital Group, both San Francisco.

Tim Hoover, Nikki Hoover, both Russell Investments, Seattle; Bill Kitchens, Morgan Keegan, Memphis; Stephanie Lipman, DA Davidson, Portland.

5 |

DECEMBER 2011

|

TRADERS MAGAZINE

www.tradersmagazine.com

SEATTLE

BUSINESS MEETING & PANEL DISCUSSION

Nenad and Nicole Yashruti; Richard and Lauren Lee, all Freestone Capital Management, Seattle.

Order Routing, Transparency and Broker Selection Todd Brighton, Franklin Templeton, San Francisco; Savrabh Srivastana, Credit Suisse; Mike Downey, NYSE; Bobby Greason, Rosenblatt Securities, all New York.

STA Update Brett Mock, BTIG, San Francisco. Mike McCarthy, Oppenhiemer, Seattle; Mara Rieden, guest, David Geobels, Weeden & Co., Greenwich; Jason Rempel, Janney, San Francisco.

Aaron Avallon, Pipeline Trading; Brandi and Ray Geiger, JonesTrading, all San Francisco; Robert Markulin, Cheevers & Co., Chicago.

Brooks Doggett, Goldman Sachs, New York; Andy Frey, Summit Capital, Seattle; Nancy Wallace, guest; Greg Pace, Weeden & Co., San Francisco.

Jill and Greg Harrison, Sandler O’Neil, San Francisco; Mandy and Tyler Platte, Rainier Investment Management, Seattle.

Carla Newsom, guest, Howard Lindsey, Goldman Sachs, New York; Ray and Randy Geiger, JonesTrading, Aaron Avallen, Pipeline Trading, all San Francisco.

www.tradersmagazine.com

TRADERS MAGAZINE

|

DECEMBER 2011

| 57







 




 





!"#
&

 







#
#
# 
!%
##,
) !(&%
!(
)(!
,#+!
&&
+,&%
#
&'
''
),

'!()!%
#' !%
) #%
+'(

!#
!%
%%))
-') 
%))
*-!"
#!((
!%$&%
%
#(,
&%%
!#(
),
( &##,
#
#$!
##&,
&(&%

#
&!%
&" $ (!
$
 
 

 
       


!
"'$
%&!'%
'%&
!
(!"&
%#$
!!
'$&

%%%#!!"'

!

 "!"
!#
"
## %%)
) 



 
   

SEATTLE

Brian Pears, Los Angeles; Daniel Tai, New York, both RBC Capital Markets.

Jim Griith, Knight Capital Group; Nicole Tuttle, Pipeline Trading, both San Francisco.

Alex Frink, Russell Investments, Seattle; Erin Williams, Stifel Nicholas, San Francisco.

Todd Brighton, Franklin Templeton; Sean Croll, Cowen & Co., both San Francisco.

Richard and Lauren Lee, Freestone Capital, Seattle.

Katie Ludwig, Russell Investments, Seattle; Jef Kohl, Traders Magazine, Phoenix.

Travis Pakki, guest; Sharon Gueck, Becker Capital Management, Portland.

Nenad, Nicole, Jordan and Amaya Yashruti, Freestone Capital, Seattle.

Bill Kitchens, Morgan Keegan, Memphis; Nikki and Tim Hoover, Jason and Mandie Lenzo, all Russell Investments, Seattle.

www.tradersmagazine.com

TRADERS MAGAZINE

|

DECEMBER 2011

| 59

Aqua Equities ........................................................ 11

FlexTrade Systems.................................................... 1

AX Trading ............................................................. 35

Goldman Sachs..................................................... C4

Bank of America Merrill Lynch ..............................GF

JonesTrading ..........................................................23

Bloomberg ............................................................... 3

Knight Capital Group .............................................. 9

CDW Corporation ................................................. 13

LeveL ATS ................................................................ 5

Chicago Board Options Exchange........................ C3

Liquidnet ............................................................... 31

Citigroup ............................................................... 15

OTC Markets Group ............................................. C2

Credit Suisse ......................................................... 21

Pragma Securities .................................................. 25

Factset Research Systems ...................................... 51

Rodman & Renshaw............................................... 53

Fidelity................................................................... 33

UBS.......................................................................... 7

0 |

DECEMBER 2011

|

TRADERS MAGAZINE

www.tradersmagazine.com

BUYSIDE & SELLSIDE INSIGHT AT THE SPEED OF CHANGE

”

TRADERS MAGAZINE adds tremendous value through the consolidation of information pertinent to market structure. I encourage all those on the desk to leverage Traders Magazine as a part of their own development. Portfolio Manager, Hedge Fund

”

Start your Free Trial Subscription to Traders Magazine instantly using your Smart Phone. Get the free mobile app at http://gettag.mobi

or visit us online at www.tradersmagazine/subscribe

Buyside Snapshot BY MICHAEL SCOTTI

Passing the Baton W

ith every crisis comes opportunity. In the case of Drew Harbeck, a trader at the small-cap shop Cortina Asset Management, his opportunity came when he joined the Milwaukee-based firm’s desk right before the market meltdown began, roughly three years ago. Cortina Asset Management “I didn’t expect to be getAUM: $1.9 billion ting my feet wet” in the midst Desk: Two traders of a major correction, he said, Broker List: 50 irms (80 research) but noted that the benefit “was Avg. Commission: 3.75 cents being thrown into an incredibly OMS: Advent’s Moxy hostile market and learning that there are times when you can’t be afraid to take risks trading.” Harbeck was new to trading, but he did have the benefit of doing a two-year apprenticeship at the firm out of college. He started in the back office. But before long, he found himself on the desk as a trading assistant, gaining valuable insights. His boss and mentor Kurt Kujawa said Harbeck couldn’t have asked for a better time to begin his career. Kujawa estimates that one year of trading during the recent upheaval is at least the equivalent of two years of experience in normal times. Kujawa should know. He found himself in a similar situation when he started as a Nasdaq market maker in February of 1987—only months before that year’s history-making crash. “If you can’t stomach those types of Drew Harbeck markets, then you’re in the wrong business,” Kujawa said. “I tell Drew all the time, ‘If you couldn’t have handled it, you wouldn’t be here today.’” Harbeck calls his boss a good mentor. here is a lot of “back DECEMBER 2011

|

TRADERS MAGAZINE

and forth” on the market and strategies, he said. “He’s a good guy to learn from, since he’s been on both sides of the Street,” Harbeck said of Kujawa. “We’ve got a good, solid relationship.” he need to develop relationships among small-cap brokers is something Kujawa stressed early on. So Harbeck got involved in the Security Traders Association of Wisconsin when he was an assistant trader. His stature in the organization has grown—Harbeck is currently president of the 91-member STA affiliate. In October, he spoke on a panel at the STA’s national meeting—a stint typically reserved for more experienced traders. “he small-cap side of the business is still very dependent and reliant upon relationships,” Harbeck said. “here is still a lot of value provided by sellside brokers and they’ve helped us source liquidity that we normally wouldn’t have been able to access.” hat typically means finding blocks, though the firm uses crossing networks like Liquidnet, BIDS and BlockCross. “If I send someone an order, and it’s one of my better relationships, they’re going to know exactly how I want that order worked.” Harbeck admits he needs to keep learning and growing as a trader. And he only has to look across the desk to learn the lessons from his mentor, who is passing the baton from one trading generation to another. “Drew listens; he pays attention; he asks questions and doesn’t dwell on negatives; and he isn’t afraid to take a shot,” Kujawa said. “If someone is afraid to pull the trigger, they’re never going to be any good. You can’t trade scared.” www.tradersmagazine.com


 
., 
2&/-$0 &3
)(
.#
&& & .,)($

*.$)(-
2#(" 

,
/*
.)
.#
!6
$ (3
.)35-
',% .
, +/$, -
1$.#
*'
$.#

().$)(&
-$4

", . ,
.#(

)*.$)(-
3)/
 ( 6
.
!,)'
&)1 ,
.,(-.$)(
)-.-
$.#
-#
- ..& ' (.
3)/
( 0 ,
#0
.)
.%
),
'%
 &$0 ,3
)!
-#, -
-)
3)/
(
'$($'$4
.,$("
2* (- -
&/-
3)/
#0
()
,$-%
)!
,&3
--$"(' (.
 /-
*'
)*.$)(-
,
/,)* (-.3&
2 ,$- 
 ,(
'),
.
   

*.$)(-
$(0)&0
,$-%
(
,
().
-/$.&
!),
&&
$(0 -.),-
,$),
.)
/3$("
),
- &&$("
(
)*.$)(

* ,-)(
'/-.
,  $0

)*3
)!
#,. ,$-.$-
(
$-%-
)!
.(,$4 
*.$)(-
)*$ -
,
0$&&
!,)'
3)/,
,)% ,
3
&&$("
 
),
!,)'
#
*.$)(-
& ,$("
),*),.$)(
.
111.# ))'

(
*'
,
- ,0$
',%-
)!

*.$)(-
2#(" 
(),*),. 
 

(


,
., ',%-
)!
.(,

)),5-
$(($&
 ,0$ -

(
#0
 (
&$ (- 
!),
/-
3
 
*'
$-
().
-*)(-), 
(),- 
-)&
),
*,)'). 
3
.(,

)),5-
(
.(,

)),5-
'% -
()
, *, - (..$)(
, ",$("
.#
0$-$&$.3
)!
$(0 -.$("
$(
*'
)*3,$"#.



*.$)(-
2#(" 
(),*),. 
&&
,$"#.-
, - ,0 


New thinking: better trading

TM

Why just settle for vanilla?

Let us show you how we go beyond the standard. Discover what Goldman Sachs Electronic Trading has to say about our sophisticated approach to innovation and client service at gsetnewthinking.com.

Goldman Sachs Electronic Trading gsetnewthinking.com © 2011 Goldman Sachs. All rights reserved. Member FINRA, SIPC.

,FH&UHDP7UDGHUV$GUGLQGG

30