Friday, May 16, 2025

Traders Magazine

DEPARTMENTS
- All ALGOS/DMA Brokerage Buyside Cannabis Clearing Commentary commissions/TCA crossing networks Cryptocurrencies Digital Assets Equities ETFs Fixed Income foreign exchange FX Options People Regulation Technology Trading Reimagined Trading Venues
  
  Katie Koch’s Philosophy on Leadership and Life
  
  ETFs in US Gather Record Net Inflows
  
  Wintermute Expands Into U.S.; Makes New Policy Hire
  
  Capitolis Launches Futures Porting with Barclays & Citadel
FLASH FRIDAY
TECH TUESDAY
Newsletter
Podcast

TRADERS Q&A: Flash Trading Can Destabilize the Markets

April 2, 2014

In the wake of Michael Lewis expose Flash Boys and the news that the FBI is looking into high frequency trading, industry observers are speculating on the impact this interest will have on the high-speed corners of the financial markets. Traders sought out commentary from Roman Kozhan, associate professor finance at Warwick Business School in the UK, for his thoughts.

Traders: One of the accusations in Michael Lewis new book Flash Boys is that high-frequency trading has a negative impact on investors and that the investment arena is rigged. Is this true?

Dr. Roman Kozhan: There may be two possible aspects here. First question is whether or not high-frequency traders manipulate the markets. You can do it, possibly, by sending false signals to the market participants and expecting to turn their actions into profit a few seconds or milliseconds later. One of several possible ways of doing this is flash trading. There is a possibility of increasing market volatility and destabilizing the market by adopting these sorts of strategies.

[Heroes or Opportunists? Meet the Brad Katsuyama and his IEX team from “Flash Boys.”]

Traders: How will regulators respond?

Kozhan: There are some cases where regulators in the US and UK fined traders on the grounds of manipulating the markets and I think that most of market abuses that might come out of high-frequency trading will be of those sorts.

Traders: Is HFT a market abuse like insider trading?

Kozhan: Another question is whether or not the high-frequency traders are using insider information. If a particular trader is getting some material and non-public information before the general public, there may be some legal implications. However, this is an old issue which existed long before the introduction of high-frequency and algorithmic trading. Regardless of whether the trader manually entering orders based on illegal information or using a sophisticated computer-based algorithm, the implications are the same; in both cases the traders will be subject to insider trading regulations. So I do not think this is anything much to do with high-frequency trading per se.

Citigroup Fired Two Banamex Traders in 2013 for Code Violations

Editorial Staff

April 1, 2014

(Bloomberg) — Citigroup Inc., one of five U.S. banks to fail the Federal Reserves stress test last week, fired two traders at its Banamex unit in Mexico for violating internal policies.

Citi terminated two traders in 2013 for violating our code of conduct, Danielle Romero-Apsilos, a spokeswoman for the New York-based bank, said today in an e-mailed statement. We escalated this issue to regulators and took immediate action against these individuals.

The fixed-income traders engaged in unauthorized transactions that may have resulted in losses of as much as tens of millions of dollars, Reuters reported earlier today, citing two sources close to the matter.

Banamex, which Citigroup acquired in 2001, is the biggest unit in the banks Latin America operations, which account for about 20 percent of total revenue. Citigroup reported Feb. 28 that fraud on loans made by the unit to a Mexican oil-services firm would cut last years profit by $235 million.

Citigroup last week failed the central banks stress test to determine its ability to withstand a major recession or economic shock after regulators found multiple deficiencies in the banks planning practices. The Fed said it was concerned with the companys ability to project losses in material parts of its global operations.

COMMENTARY: Ominous Rumblings for High-Speed Traders

Editorial Staff

April 1, 2014

(Bloomberg) — The FBI is coming for high-frequency traders.

And has been for some time, I guess. Mostly for the usual – – spoofing and stuff — but “Another form of activity under scrutiny involves using high-speed trading to place orders to conceal that the transactions are based on an illegal tip,” and, come on, what? That makes literally zero sense. It’s almost as though the FBI is not the agency with the most expertise to regulate modern market structure. If only there were an agency in charge of regulating market structure. But, nope.

[Meet the heroes of Michael Lewis’ Flash Boys in a Traders’ profile of IEX and BradKatsuyama.]

Preet Bharara is coming for somebody.

He said in a speech that “you can expect that before too long a significant financial institution will be charged with a felony or be made to plead guilty to a felony, where the conduct warrants it.” This struck me as pretty nonspecific, but the subsequent tweet seems somehow more ominous? I’m going to outsource this one to Ryan Hardy, who tweeted, “Vague twitter threats: an essential tool for prosecutors, and key deterrent against financial misdeeds.”

Don’t sell insurance without a license.

I kind of can’t understand how MetLife (really AIG) was selling insurance in New York without a license? Like, it’s an insurance company. Presumably it knows how to get insurance licenses. That seems like the sort of thing that someone would handle. But apparently not, and MetLife is paying Benjamin Lawsky $60 million over it.

Don’t insider trade.

“During a drive to vacation in Reno, Nev., Chen overheard business calls by his wife, who previously advised Chen not to trade in Informatica securities under any circumstances.” So guess what he did! All insider trading is dumb, but there is a spectrum of dumbness, and insider trading directly in the stock of your wife’s company is just really catastrophically dumb, come on.

Enjoy your swaptions.

“Trading of options on indices comprised of credit default swaps has increased dramatically partly because — unlike credit default swaps themselves — the instruments are not required to be centrally cleared under new rules aimed at preventing a rerun of the financial crisis, according to traders.” Are there penny- strike CDS index options? You can probably construct the rest of the regulatory arbitrage from there.

Dan Loeb will have his day in court against Sotheby’s.

Loeb is trying to get rid of Sotheby’s poison pill, and a Delaware judge agreed to hear the case before Sotheby’s May 6 annual meeting. “Vice Chancellor Donald Parsons seemed sympathetic to the argument that the pill — which caps Mr. Loebs investment at just under 10% while other, passive, shareholders can own twice that — is unfair,” though if “unfair” were the standard Delaware corporate law would be very different from what it is. “Third Point owns about 10 times as much stock as Sothebys directors and executives he is fighting, Mr. Parsons noted,” suggesting that there’s no need to let him buy more, though I guess you might think that owning 10 times as much stock as the directors is a reason to let Third Point have some say over Sotheby’s management.

Things happen.

Go ahead, use a bitcoin ATM at a gun store. Maybe the libertarian police department will track down Mt. Gox’s bitcoins. Banks are relatively happy about the new U.S. leverage rules. Shareholders are bad for banks. Bob Diamond is taking over a Botswanan bank. John Nunziata, call your mother. “If one wants to keep the cash flow and enjoy the house for the summer, you can rent and it’s still a lot less than paying $45 million to buy.”

If you have three trillion euros in your briefcase …

… then you’re going to jail, and also, you don’t actually have three trillion euros in your briefcase. Ask yourself, if there was a briefcase in the world with three trillion euros in it, why would you have that briefcase? You wouldn’t. Remember, everything is a hoax, but everything is especially a hoax today, April 1, 2014. Be careful out there.

Matt Levine writes about Wall Street and the financial world for Bloomberg View. Contact him at mlevine51@bloomberg.net.

TRADERS ON THE MOVE: Gar Wood Hires a Trio, Schwartz Joins Alpha Omega

Editorial Staff

April 1, 2014

Sanford C. Bernstein has appointed David Liles as head of North American trading, taking over the reins from Jason Griffith who is no longer with the firm. Liles remains the firm’s global head of electronic trading.

If you’ve gotten a new job or promotion, let us know at onthemove@sourcemedia.com

Chicago-based boutique firm Gar Wood Securities hired a trio of seasoned sales traders – Darren Day, Christopher Calvert and Joseph McDonald. The three are part of Gar Wood’s expansion into the emerging manager space via ng prime brokerage services and capital introduction to new and emerging fund managers.

The new group offers a combined 40 years of financial market experience, as well as many aspects of fund formation, trading and capital raising. Darren Day was previously a board member and partner at Concept Capital Markets, after forming and subsequently selling Alaris Trading Partners to Concept Capital Markets. Christopher Calvert assisted in the launch and successful marketing of over 100 managers over the last eight years. Joe McDonald formed, co-managed and raised substantial assets for both Mutual Funds and Hedge Fund strategies by focusing on investor allocations from institutions and advisors.

San Francisco-based Alpha Omega’s appointed Stu Schwartz as a managing director and its head of sales. Schwartz, a veteran with over 20 years of industry experience, is responsible for driving the adoption of FIXAffirm, the company’s global post-trade FIX-based post-trade technology. He was previously director of information sales at global financial information services firm, Markit, and will be based in New York.

OTAS Technologies has hired three new people to grow its global businesses in both New York and London. In New York the firm brought on Nick Lieder as head of U.S. sales. In London OTAS recruited Sejal Amin and Amar Morjaria as head of account management and new business sales executive, respectively. Lieder came from Markit, where he worked for the last six years, most recently as vice president. He was responsible for all phases of the sales process. Previously, he was regional sales manager at StarMine, responsible for initializing and maintaining relationships with PMs, CIOS and CFOs in New York. Sejal arrived from Markit, where he was director of equity sales. Morjaria spent the last seven years as a new business and relationship manager at Bloomberg.

TECH TUESDAY: ITG’s Triton EMS Now Handles Futures Trades

Editorial Staff

April 1, 2014

For agency-only broker and technology firm ITG, it’s back to the future for its execution management system.

The firm’s EMS system, Triton, is now capable of executing futures trades for institutional clients, making the system a one-stop tool for buyside and sellside traders.

Triton EMS already handled equities, options and forex trading. In order to trade futures, Tritonnow uses a new universal Level 2 window. Level 2quotes show the full order book for a given stock or future. Level 2 stock software was originally for institutional traders and brokers but now allows anyone to access stock, and in this case, futuresquotes, electronically rather than through open outcry.

“Triton is a true multi-asset platform with unparalleled flexibility, offering customizable layouts and hot buttons for streamlined order entry,” said Will Geyer, ITG managing director and head of platforms, in a release.

The Triton suite includes Triton for global multi-asset portfolio trading, Triton Black for active single-stock and options trading, and Triton Derivatives for low latency derivatives trading via GUI or API. Each platform offers access to ITG’s futures algorithms, including ITG Dynamic Implementation Shortfall Algorithm, ITG Float Algorithm, ITG Reserve Algorithm, and ITG Pounce Algorithm, as well as many third party futures algos across a broad range of futures product classes. The suite also supports futures rolls, enabling traders to pair two futures legs.

TM FX: EBS Launches Mobile App for Spot FX Market

Editorial Staff

April 1, 2014

EBS, ICAP’s electronic foreign exchange trading business, is launching a new app for mobile devices that provide users data on the spot trading market.

The new app, dubbed “Watch EBS”, gives traders and other users near – real time overview of the global spot FX market.

How does it work?

The “Watch EBS” app features near real-time spot FX rates from the EBS Market platform, as well as precious metals rates, NDF rates and ICAP forward rates, according to EBS. The app updates content on a near real-time basis and allows customers to see EBS Market highs and lows, dynamic charts and news from FxWire Pro.

“Following customer interest, we launched Watch EBS to provide enhanced connectivity to the FX markets, allowing them to access research and analysis, dynamic charts and real-time news on-the-go,” said Viral Tolat, chief technology officer at EBS, in a statement.

The app can be personalized to align with user requirements and allows them to create personal portfolios, define their own news feeds, set alerts and build their own menus.

The app is now available via iTunes free of charge for iOS-based systems such as the iPhone and iPad, Android-based systems and BlackBerry devices.

FBI Seeks Help From High-Frequency Traders to Find Data Abuses

Editorial Staff

April 1, 2014

(Bloomberg) — Federal agents are making an unusual public plea for the financial industry to bare its secrets.

The Federal Bureau of Investigation has instead openly solicited traders and stock-exchange workers to blow the whistle on possible front-running and manipulation via high-speed computers.

The FBI joins a roster of authorities examining high- frequency trading, in which firms typically use super-fast computers to post and cancel orders at rates measured in thousandths or even millionths of a second to capture price discrepancies. The strategy to invite whistleblowers was prompted in part by the complexity of proving any misconduct, according to a person with direct knowledge of the matter.

Whistleblowers are ready to step forward from stock exchanges, Michael Lewis, author of Flash Boys, said today in an interview on NBCs Today Show. The FBI is encouraging anyone with knowledge of possible misconduct to contact them, according to an FBI spokesman.

The FBIs inquiry stems from a multiyear crackdown on insider trading, which has led to at least 79 convictions of hedge-fund traders and others. Agents are examining, for example, whether traders abuse information to act ahead of orders by institutional investors, according to the FBI. Even trades based on computer algorithms could amount to wire fraud, securities fraud or insider trading.

Alternative Venues

New York Attorney General Eric Schneiderman opened a broad investigation into whether U.S. stock exchanges and alternative venues give such traders improper advantages.

Regulators have focused for years on whether high-speed trading hurts market stability. More recent law enforcement investigations are shifting the focus to unfair practices and possible criminal activity.

Critics including some investors and regulators have said such trading, which captured the spotlight in the May 2010 flash crash that shook U.S. equities, serves little purpose, may distort the market and may leave individual shareholders at a disadvantage.

Services Scrutinized

Schneiderman is examining the sale of products and services that offer faster access to data and richer information on trades than whats typically available to the public. Wall Street banks and rapid-fire trading firms pay thousands of dollars a month for these services from firms including Nasdaq OMX Group Inc. and IntercontinentalExchange Group Inc.s New York Stock Exchange.

Robert Madden, a spokesman for Nasdaq, and Eric Ryan at the NYSE, declined to comment on the FBIs inquiry. Jim Margolin, a spokesman for Manhattan U.S. Attorney Preet Bharara, declined to comment when asked if the office was looking at high-frequency trading.

The FBI began focusing on high-frequency traders last year, before Schneiderman disclosed his inquiry this month. Market regulators have asked for years whether new restrictions on rapid-fire trading were needed.

Daniel Hawke, the head of the Securities and Exchange Commissions market-abuse unit, said in 2012 that the agency was examining practices such as co-location and rebates that exchanges pay to spur transactions. Last year, the Commodity Futures Trading Commission announced a review of speed trading and sought industry input.

Federal prosecutors have scored dozens of insider trading convictions in recent years, including several linked to SAC Capital Advisors LP, the hedge-fund firm run by Steven A. Cohen that is changing its name to Point72.

SAC agreed in November to pay a record $1.8 billion and plead guilty to securities fraud to settle allegations of insider trading. As part of the settlement, Cohen agreed to close SACs investment advisory business.

BofA Trims Options Algo Suite

Editorial Staff

April 1, 2014

Make it simple, stupid. That’s what Bank of America is doing to its options algorithm suite. The bulge firm, in response to its institutional clientele, has reduced the number of algos it’s offering clients to make trading easier and more efficient.

Prior to this, the firm offered nine algorithms to trade options. By simplifying its offering, BofA Merrill aims to provide more flexibility to traders by merging the functionality of several algorithms into four core strategies. Traders will no longer have to choose one capability at the expense of another; rather, they will be able to combine complimentary functions, Jonathan Werts, head of electronic derivatives at Bank of America Merrill Lynch, told Traders.

“After years of offering lots of proprietary algos in response to client’s needs, similar to what happened in the equities space, things got crowded and there were too many offerings,” Werts said. Thus, the pare back.

Now the firm is offering clients four electronic trading strategies: Clean Sweep, Fast Sweep, Delta-Adjusted and Smart Spreads. The strategies have incorporated more flexibility while minimizing complexity and allow for full customization, according to Werts.

Also, fewer algos means sales traders, as well as their clients, will have an easier time navigating the firm’s electronic products suite, he added.

Clean Sweep and Fast Sweep are liquidity-seeking algos that offer smart posting logic and aggressive liquidity capture. Fast Sweep is the more aggressive of the two, according to Meaghan Dugan, head of electronic derivative product management at Bank of America Merrill Lynch. The algo takes liquidity at the top of the book per venue up to the trader’s limit, aggressively seeking liquidity. When it is no longer marketable, it will smart post. It is less price-sensitive.

After sweeping initial liquidity, Clean Sweep will look for additional liquidity available at the same price level at the same venue before either sweeping or posting to multiple venues.

Delta-Adjusted is the firm’s adaptive algorithm that allows an order to dynamically update according to order-level parameters set by the user and the changing market. A user can set upward of six parameters: Algo Strategy, Starting Reference Price, Underlier Price, Options Delta, Underlier floor and Underlier ceiling.

Smart Spreads is the firm’s multi-legged strategy that intelligently moves spread orders among multiple exchange complex order books in an effort to maximize fill rates. This algo’s logic has been recently enhanced to better allow the algo to split parent orders into child orders for both liquidity seeking and passive orders.

CBOE Set to Trade Weeklies

Editorial Staff

April 1, 2014

The Chicago Board of Options Exchange has set an April 10 date for the trading of options with a weekly expiration date.

The short-term volatility indexed, or VIX options, or Short-Term Volatility Index contracts, will trade under the VXSTSM ticker beginning that Thursday, pending regulatory approval.

“We were pleased to introduce the Short-Term VIX Index in October, Short-Term VIX futures in February, and we now look forward to launching options on VXST,” CBOE Holdings CEO Edward Tilly said in a release. “We foresee investors using these new volatility products to better manage near-term volatility risk, to hedge short-term positions impacted by both event-driven and unexpected market moves, and to create strategies using VXST and VIX futures and options to capture changes in volatility term structure.”

According to the CBOE, the Short-Term Volatility Index and CBOE Volatility Index are complementary. Like the VIX Index, the VXST Index reflects investors’ consensus view of expected stock market volatility using CBOE’s proprietary VIX methodology. Both indexes use S&P 500 Index (SPXSM) options in their calculations.

The VIX Index uses SPX monthly options to measure expectations of 30-day volatility, while the VXST Index uses SPX options that expire every week to gauge expectations of nine-day volatility. The VXST Index’s shorter time horizon makes it responsive to short-term volatility triggered by market events such as corporate earnings and government reports.

The 30-day VIX Index and the nine-day VXST Index are highly correlated, but the VXST Index is generally more volatile than the VIX Index.

NYSE, Nasdaq Push for “Trade At” Rule

Editorial Staff

April 1, 2014

The two biggest exchange rivals are joining forces to push through a rule designed to curb trading that occurs off-board away from the public eye, according to a report in the Wall Street Journal.

People familiar with the matter told the Journal that Nasdaq OMX and NYSE Euronext have formed an alliance of sorts to jump-start the creation and implementation of a controversial rule, dubbed “trade-at,” to be added to a pilot program under consideration by the Securities and Exchange Commission to widen tick sizes, or the increments between price quotes, for certain companies.

The proposed trade-at rule would mandate that trades for those stocks take place on the exchanges unless other venues offer significant price improvements.

Analysts have said that a trade-at rule would almost certainly drive more trading back to the exchanges and increase their revenue. Exchange officials have traditionally argued that trading on exchanges is preferable because it is more transparent and regulated than dark pools.

Many big players in the brokerage industry and exchange operator BATS Global Markets Inc. oppose the provision.

Nasdaq and NYSE don’t often collaborate, but the rise in off-exchange trading has temporarily aligned their interests, according to people familiar with the matter.

A trade-at rule provision would join the already discussed tick-size pilot program, which was originally designed to boost trading volumes for small and medium-size companies. The inclusion of trade-at now has shifted the pilot into a more encompassing attempt to remedy perceived market structure failures.

The Journal reported that the SEC hasn’t indicated how the rules for a tick-size pilot program would be written, but it has asked the exchanges to come to a consensus on how it should work. Pressure is mounting after the House of Representatives passed a bill last month that would force the SEC to create optional 5-cent or 10-cent increments in the pilot program for companies whose market capitalization is under $750 million.

About 36 percent of stock trading took place off all exchanges in February, up from 10 percent a decade ago, according to research and consulting firm Tabb Group. The majority of that trading is done by large firms that match buy and sell orders from within their own inventories, while about 13 percent is traded in dark pools.

Nasdaq and NYSE have argued in private discussions with BATS and other industry participants that without the trade-at rule, off-exchange trading would continue to increase at the expense of the exchanges, and overall volumes wouldn’t expand. Nasdaq is open to certain exemptions in the rules to aid institutional investors, the Journal added, citing a person familiar with the matter.