Daily Specials Archive

Disclosing Activity: A step in the right direction

BATS Global Markets publishes their average matched daily volumes. BATS’ July volume was up 3.4% over their June volume. June’s volume was down from the May matched volume. Meanwhile the 2014 year to date matched volume is up significantly from 2013. The BATS exchange model continues to attract a greater percentage of volume routed to exchanges. BATS Options and the BATS 1000 index has grown as well.

This is a strong indication that matching exchanges are appealing to investors. Equity trading continues to be strong during this period of low interest rates.

It will be worth watching to see if this situation changes when interest rates start to rise while the Fed reduces their role in maintain low rates while the economy continues to improve.

Industry Professionals

It seems that regulators are uncomfortable with arbitrators that were associated, through employment or providing services to, with brokerage or other investment firms. I can understand the need for improving and safeguarding the process but it seems to be an overreach to exclude people that have industry experience just because there is a potential for bias. As a provider of training and consulting services, as well as a former employee of several firms, I am disappointed that regulators believe that I may be unable to perform the duties of an arbitrator in a professional manner.

In addition to being a FINRA Arbitrator I am also a Certified Mediator conducting community and civil court mediations sessions. In both of these roles I leave any bias I may have outside the room and treat each participant in a business-like manner while executing my responsibilities professionally.
Collateral Management: another outsourcing opportunity
Buy-side firms are considering outsourcing the collateral management function to external service providers. This approach will permit buy-side firms to leverage the expertise of service firms. This is driven by the anticipated impact of regulatory requirement. The requirement forces Buy-side firms to invest in technology and their infrastructure to support the collateral management function.

What’s the future of Government Sponsored Agencies?
A US Senate panel approved legislation that would wind down Fannie Mae (FNMA) and Freddie Mac (FHLMC). The plan is to replace these agencies with a new industry financed agency that would provide a government guarantee that would become activated once “large” losses were realized by private interests. The objective of this legislation is to avoid future taxpayer bailouts.

There are varied interest groups with opposing agendas that are complicating resolution of this issue. But it is critical to address this to ensure that homebuyers have access to mortgage money. A fundamental issue of any solution is to ensure that the future buyers are credit worthy and that the property is valued accurately.

I look forward to following Congress as they explore alternatives.  I am confident that they will address this critical foundational issue of the US economy.

FINRA CARDS – has the deal been dealt?
The FINRA “CARDS” trade surveillance system will be revised according to CEO Rick Ketchum. This is in response to the concerns, voiced across the brokerage community, about the costs to meet the initial CARDS design. Investor privacy also was a concern.

The biggest change, at this point, is that brokers won’t be required to provide information that would identify individual account holders. Another modification will allow more flexibility for small firms when sending trade data to FINRA

FINRA staff continues to meet with brokers to discuss the benefits of, and costs associated with implementing, CARDS. I expect that additional changes will result from the meetings.

Regulations lead banks to start U.S. Bond dark pool
Bank of America Merrill Lynch, Morgan Stanley and Citigroup are among those backing the startup of a dark pool for U.S. corporate bonds. The Codestreet Dealer Pool will permit anonymous trading. Increased capital costs helped create interest in the dark pool.
Traders Magazine Online (5/6)Financial Times (tiered subscription model) (5/6)

It’s interesting that dark pools, which have been associated with suspicion by regulators and some investors, are still being created to meet investor needs. I am referring to the recent announcement of Codestreet Dealer Pool. This is a Dealer-only pool and will trade investment grade, high yield and distressed debt issues.

Codestreet announced that 15 dealers have joined the platform with half already activated.

National Stock Exchange (NSX) asks SEC for permission to halt trading
One of the two remaining public exchanges is close to shutting down operations. This comes on the heels of the April shutdown of the CBOE Stock Exchange. Senior NSX management are seeking a buyer and hoping for an increase in volume but are preparing for the worst case.  Does this reflect a dim future for private exchanges?

With the marketplace saturated by public exchanges and a host of alternative trading systems Perhaps there are just too many marketplaces. Though the benefits of multiple markets are choice, competition and anonymity is it worth the resulting fragmentation and small execution lots?

As technology evolves and regulators continue to deploy effective surveillance techniques will that cause the numbers of markets to continue to shrink.  It’s interesting to project the marketplace of the future and does it result in 1 or 50+ providers?

Housing Finance Reform
Discussions continue in Washington on the future of the Government Sponsored Agencies (GSE) supporting the US residential housing market. Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) were taken cover by the federal government early in the credit crisis.

Since the takeover discussions have centered on transitioning the government out of their role in the mortgage backed securities (MBS) market. There are two critical points to be addressed in this transition. The first is that the current MBS issues, originally issued with the agency guarantee, must continue to be backed by government which assumed responsibility when they took over FNMA and FHLMC. The second point is that the new, non-governmental system will be structured to ensure the ongoing support of the US residential mortgage market.

It will be interesting to watch as Washington crafts a solution. Hopefully they will engage with leading investment community firms to ensure the best possible outcome.

One of my postings this month, April 14th, provided some perspective on why there are multiple processing systems and describes the challenges associated with maintaining these legacy systems. There are a number of other related issues that I will address in a future posting. For example there are operations areas silo’d alongside the product-centric systems, and the downside risks these legacy systems present to firms and other related challenges facing the industry. 

A strong Anti-money laundering (AML) regime continues to be an objective of global markets and regulators. Regulations continue to be refined and new regulations introduced to stem the tide of money moving through a country without being recorded properly. But the experience is that though there may be clear and comprehensive regulations in place, enforcement can be and often is subjective.