The memory lingers, and sometimes it casts a disturbing shadow, soon after the annual STA conference is over. The crowd departs in exhaustion, looking for solutions. It happened, once again, at this year's confab in the tony playground of sunny Boca Raton. A unanimous voice on the controversial issues – market structure, trading technology and regulation – is not what this interesting conference is about. Some might say it's about golf and a wee bit of adult beverage. Sure, but it is also about robust debate and the answers to the pressing issues: market fragmentation and getting some honest-to-goodness executions for institutional and retail investors. But if the crowd was expecting to find the Holy Grail, it might have had more luck getting a listed ITS execution on some second-rate ECN. At one session, Seth Merrin, innovator of the black box Liquidnet, took a stab at what's wrong. The markets are nowadays designed to satisfy the retail investor while serving the needs of the institutional community. This approach is impossible, he said.
It is not surprising then, that traders are worn to a thread by the rapid pace of change. They are worn down when, in reality, their lives should be much simpler. But it can't be simple when there are dozens of ways to skin a cat. It can't be simple in a market with dozens of order destinations. It can't be simple when there are agency orders here and riskless principal trades there. It can't be simple when the interpretations of what constitutes best execution cause blood pressure to rise. Oh brother! It can't be simple, when as Andy Brooks, the respected buyside trading executive from T. Rowe Price, remarked on one panel how some folks – get this – "are selling information prior to settlement." It's "unethical," Brooks snapped.
No, the trading markets are not simple and maybe that's in the nature of the beast. John Keane, administrator of the Jacksonville Police and Fire Pension Fund, spoke of how his group keeps abreast of its commission recapture arrangements. Since the group started a program several years ago, it has legally saved about $1 million dollars in expenses. One neutral observer in the conference hall expressed his confusion to me. "I've never understood these soft dollars arrangements," he said. "Why not cut the guy a check instead of having all this paperwork?" Sorry, but that's precisely the genius of laws like Section 28(e), which is the safe harbor of the Securities Exchange Act of 1934. It fostered a form of institutional discount brokerage, which functions as a Keynesian full-employment device for lawyers. Outside in the exhibit hall, an assortment of vendors and stock exchanges were putting on a good show. But it's rough. "[Profit] margins are really tight," said Paul Adcock, operations manager at Archipelago. In the royal temple, known as the Boca Resort lobby, one industry vendor was spread out, half-asleep across a stuffed sofa, his bored expression a shock in the air-conditioned afternoon. He's clocked up so many frequent flier miles, travelling the conference circuit, that one airline treats him like a Hollywood mogul, constantly upgrading this fellow to first class. So, he must have the answer? "Oh gosh, no, it's the same old stuff. The market structure is a mess."
John A. Byrne
Editor
