InvestCloud Inc., a global FinTech firm, has announced a new division to add further accounting and Robo capabilities to its digital wealth management platform.
The creation of the InvestCloud icMAC (Modeling, Accounting & Custody) division follows the firms $20 million acquisition of London-based Babel Systems, announced in January 2017. Its launch completes the integration of Babel into InvestCloud, with Babel founder Steve Wise appointed to head up the new division.
The company will now relocate its European headquarters to larger premises on Londons Shaftesbury Avenue, as it targets growth in the region. InvestClouds European team has already doubled its headcount since 2016, with the firm signing a number of new wealth management and investment clients in the UK and Switzerland. The launch of icMAC brings the regional offices headcount to 60, incorporating a mix of sales, pre-sales, professional services and market data experts alongside former Babel staff.
Steve Wise, EVP of icMAC, said, The launch of icMAC tackles the greatest challenge facing wealth managers and financial institutions as they digitalize their services – the dependency on legacy technology. Those businesses looking to move on will find our approach particularly appealing, combining our market-leading Digital Warehouse with trading, accounting and middle office capabilities that provide a complete, modern solution currently absent in the market.
With an existing client base including leading Robo-advice provider Nutmeg as well as other progressive wealth managers, family offices and banks, the icMAC division provides the most modern trading and accounting platform in the international marketplace.
Will Bailey, EVP for Europe and Innovation, said, Both InvestCloud and Babel were born with the same idea – to transform the financial services industry. The two complement each other perfectly, and combining them ensures firms of all sizes will be able to access a low-friction, cost-effective and massively flexible platform.
Commenting on the new offices, Bailey added, Siting our new offices in the heart of Londons creative industries in Soho mirrors the location of our global headquarters at the Pacific Design Center in Los Angeles – an environment that appeals to designers, UX professionals, developers, data architects and financial services players alike. Our new base will act as a hub for European wealth managers and financial institutions to collaborate with us on innovative, user-centric solutions.
Broadridge Financial Solutions announced it has extended its global post-trade control capabilities for sell-side and buy-side firms in capital markets through the acquisition of Message Automation Limited, a specialist provider of posttrade control solutions.
The acquisition accelerates Broadridges ability to allow firms to transform their risk and compliance capabilities, particularly for complex asset classes where Message Automation is a proven leader. Terms of the deal were not disclosed.
Broadridge is a global leader in driving technology innovation and business model transformation. The addition of Message Automation will enhance our ability to help companies to reduce risk and enhance compliance while improving operational efficiency, said Charlie Marchesani, President of the Global Technology and Operations division of Broadridge. This is the third acquisition related to broadening our post-trade and data analytics capabilities. These recent acquisitions in securities financing, collateral management, and derivatives clearing have helped Broadridge establish a comprehensive suite of capabilities across asset classes globally, benefiting our clients who are seeking more efficiency from a single global market provider.
Financial institutions have had to implement regulatory trade and transaction reporting solutions for Dodd-Frank, EMIR and other G20 mandates and they still face waves of regulations including MiFID II and the Securities Financing Transactions Regulation (SFTR). Companies are faced with the growing challenge of improving their regulatory compliance and operational efficiency, under significant deadline pressures, said Tom Carey, President of Global Technology and Operations International for Broadridge. Our unique operational and technological insights, complemented by Message Automations leading technology and expertise on derivatives processing models, enable us to help clients address the fragmentation of data and connectivity standards in the post-trade marketplace.
We share Broadridges focus on delivering exceptional business value to clients, and we look forward to leveraging Broadridges scale and relationships to help accelerate industry transformation through our post-trade control solutions, said Hugh Daly, co-founder and CEO, Message Automation.
Message Automations central data model is highly extensible to handle new regulations and market changes. Message Automation is actively implementing its MiFID II solution with global firms in preparation for the January 2018 deadline, already working with Broadridge on addressing self-reporting needs for buy-side firms under MiFID II, and is in advanced planning for SFTR. In parallel, there is a strong demand for the harmonization of clearing reports, an area for which Message Automation has developed exceptional capabilities.
Quayle Munro acted as exclusive financial and strategic advisor to Message Automation Ltd.
Rival Systems (Rival), a provider of trading and risk management software, and Algo-Logic Systems, a FPGA ultra-low latency trading solutions provider, announced that they have teamed up to develop an integrated offering using Algo-Logics FPGA hardware and Rivals trading and algorithmic strategy development software.
The complete tick-to-trade out-of-the-box solution for futures and options enables traders and firms of all sizes to capture the sub-microsecond latency and deterministic performance that typically only the largest trading firms with expensive internal infrastructures have enjoyed.
Rival and Algo-Logic have begun sharing details with clients, and they expect the integrated offering will be ready for deployment in the second quarter. The integration will begin with Algo-Logics ultra-low latency Tick-to-Trade (T2T) System for the CME. The companies expect to provide similar capabilities for other exchanges going forward.
Rival Systems CEO Robert DArco said: At Rival, were always looking for new ways to help our users compete in the market. We reached out to the Algo-Logic team and are thrilled we were able to develop a turnkey offering that further enhances our platform. The seamless integration will allow users running the Rival Electronic Eye, Auto-Quoter and Rival API to leverage the accelerated solution automatically.
Algo-Logic CEO John Lockwood said: Trading firms are always facing that build vs. buy decision, and all but the very largest firms have to wonder whether the huge investment in infrastructure and time will pay off when they choose to build their own trading system from scratch. With this integration with Rival, they get the best of both worlds – a pre-built, easy-to-enable solution with the features they want, without an upgrade to their infrastructure.
Typical FPGA solutions in the market have significant limitations when it comes to trading a large number of instruments, DArco said. By combining the fastest software and hardware solutions, we have been able to find innovative ways to get around those constraints. From options market makers to futures algo traders, all Rival users will be able to benefit from the accelerated offering. The Algo-Logic integration is the next step in Rivals mission to empower professional traders.
Last year at this time, Rival announced that the latest version of its platform reduced latency by 25 percent. Rival is also the only trading software company to provide users with daily reports showing the true tick-to-trade latency of every order.
Algo-Logics FPGA trading system also allows for deterministic sub-microsecond latency on some types of trades. Unlike the Application-Specific Integrated Circuit (ASIC) chips, the Field Programmable Gate Arrays (FPGAs) are silicon chips that can be re-programmed to their desired application or functionality requirements after manufacturing.
Lockwood said: Algo-Logic fits complex designs in FPGA chips and meets timing and performance levels unattainable in software. With this integration, Rivals software developers have integrated with Algo-Logics API and custom programmed events so no additional development work is required from clients.
In the popular movie series “Back to the Future” the villain is a school bully named Biff Tannen. At the end of the first movie, he gets punched in the face by Marty McFlys father to enable the timeline to be restored. In the second movie, Biff goes back in time, and, with a sports almanac, uses it to bet his way to wealth and power. In the end, he is stopped by Marty, but not before sobering views of a future changed by Biffs actions.
In the ongoing saga of market structure debates over speed-bumps, I see a parallel between the CHXs attempt to introduce a speed-bump (to provide advantages to its market makers) and Biff. Their first proposal, for an asymmetric delay, was met by the equivalent of a punch in the face by commenters who argued that it would distort the markets. Unfortunately, their second proposal, which would provide a symmetrical delay, but one that excludes their best market makers, is arguably worse. This new proposal is a step backwards in time and is reminiscent of the structural advantages held by specialists on the old NYSE[1] or Nasdaq market makers on the old Selectnet system[2].
On the surface, the CHX proposal makes sense. It could turn out that incentivizing “obligated” market makers to quote more will improve liquidity and price discovery, but, then again, it might not. From the CHX perspective, becoming the first modern exchange to re-introduce structural advantages for market makers, could boost their market share and attract incremental activity. Unfortunately, due to a couple of outdated regulations (Rule 605 and the Order Protection Rule in Reg NMS), this proposal would be quite problematic. In addition, if it succeeds, we should expect the other exchanges to introduce similar models, magnifying the extent of the problems it could create.
The specific CHX proposal is to provide lead market makers (who have obligations to maintain defined statistical levels of two way quotes in all securities they are designated in) the ability to place liquidity providing orders as well as to cancel orders without restriction, while the CHX will uniformly apply a 350-micro-second delay to all other order placement and cancellation actions on the exchange.
This provides lead market makers an order placement advantage which would let them legally front-run other orders to provide liquidity at the front of order queues. In practice, whenever a lead market maker sees a price change on the other exchanges, they will be able to react and place re-priced orders on the CHX to gain primary position in the order queue while other participants (including client algorithms) are delayed. The ability to be the first quote, translates directly into more profit for the market maker, while the orders that were held back will suffer adverse selection. While this may end up as a worthwhile market innovation if it improves liquidity, it would be terrible policy for all exchanges to facilitate this sort of two-tiered market.
The proposal also confers a speed advantage for order cancellation and that is more problematic, under the current regulatory regime. The CHX proposal would allow their qualifying market makers to move their quotes AFTER an inbound order was sent to the exchange matching engine, whenever they believed that such a trade could lose them money. In practice, this means that a CHX quote, if it was the last quote among the 13 exchanges, would likely be impossible to access as the market maker would have strong incentive to move it. There are two problems with this. First, due to the Order Protection Rule, routing firms are required to send orders to access these quotes. Thus, an order routing firm, despite compelling evidence that in certain situations they will not receive an execution, will need to route to the CHX anyway. To make matters worse for routing firms, in addition to the time spent routing to the CHX, orders sent there will be delayed, translating into an increased risk of missing out on liquidity elsewhere. It is worth noting, however, that if there was no Order Protection Rule, routing firms would be able to decide if the potentially increased liquidity provided by the CHX market makers was worth the delay. This would then mirror the value proposition of the NEO exchange model in Canada, since that exchanges quotes are not protected.
Second, the ability to cancel displayed quotes during the time inbound orders are delayed distorts the NBBO provided by the SIP, which is designed to only include executable quotes. As I explained, the lead market makers would have a strong incentive to cancel their quotes whenever they see that they are the only quote or are about to become the only quote among all the exchanges at a price level. This would, in turn, provide the appearance of fake liquidity which will make the SIP quote less reliable. This is a problem because, under rule 605, all market centers report best execution statistics based on the SIP quote. Retail investors, in particular, would be harmed by this as their marketable orders are sent to wholesale market makers that are judged against the SIP quote. If the quote became less reliable, the amount of price improvement received by retail investors would be jeopardized.
It is important to note that the ability of market makers to move displayed quotes during the speedbump is in direct contrast to IEX, which does not allow any repricing or cancelation of displayed quotes during their delay. In fact, this point was made by several commenters, including myself, when discussing the SECs proposal to interpret Automated Quotations Under Regulation NMS. As I said in that comment letter: Exchange re-pricing logic within a delay would render such orders conditional upon the market data feeds that change during the delay. This would result in precisely the kind of “maybe” quotations Rule 611 was designed to prevent.[3]
To be clear, the issue with the CHX proposal is not that a market maker centric system is a bad idea, but rather that allowing such an exchange to have their quotes protected by the government is wrong. If the OPR were abolished, and best execution rules were based on a firm National Best Bid and Offer, which excludes quotes (like these) that are not fully executable, I would have no objection to CHX trying this as an innovation. Unfortunately, both rules exist, and lead to the inescapable conclusion that the CHX proposal should be rejected.
Hopefully, the SEC will stop this attempt, or we might need a time machine and a real-life Marty McFly to go back and undo the damage…
[1] Specialists had exclusive access to the full order book and matched all orders themselves at their post
[2] Nasdaq market makers had the ability to react to institutional trade requests with decline and move; The only automated execution was via SOES (Small Order Entry System) and the market makers famously referred to retail sized traders who executed orders against them at prices they thought were stale as SOES Bandits
Now that the Federal Reserve has raised short-term interest rates and the market has digested its statement, traders are relaxing and letting stocks trade a bit directionless.
Looking back last week, after its two-day policy meeting, the Federal Open Market Committee voted to raise the range of the federal funds rate to 0.75% and 1.00%, citing progress in labor market growth, business fixed investment and inflation. The move was widely expected.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise…the fed funds rate, the central bank wrote in its statement.
One member of the committee, Minneapolis Fed President Neel Kashkari, voted against the decision, preferring to keep the federal funds rate between 0.50% to 0.75%. Kashkari is a new voting member of the FOMC this year.
Lone wolf Kashkari voted against last weeks policy move and has been public voicing his concerns that the U.S. economy is still underperforming when it comes to job creation and there are few to no signs of inflation.
Even after the data support tightening, Kashkari said in a statement, the Fed should wait on raising interest rates until it publishes a detailed plan for how and when it will reduce its $4.5 trillion balance sheet.
The debate now looks to be how many more times the Fed will hike rates – with some traders betting on one more time while others say two more hikes will come. The consensus is for two more rate hikes – totaling no more than 50 basis points. But with the FOMC done – for now – the market is back to eyeing and pondering valuations and Presidential policies.
Were looking at a market now that has gotten what it wanted — a rate hike — and now is taking a pause to adjust and reflect on itself, said a floor trader. The market isnt going to make any dramatic moves to upside or downside. Everyone is talking about valuations being high – so theres limited upside. But there doesnt seem to be any conviction that they are too high, as no one is really selling.
Trading on U.S. equity exchanges reflected the general market malaise as volume was reported at an average 6.78 billion shares for the week ended March 17, just up slightly from the 6.76 billion shares per day for the week ended March 10, according to Bats Global Markets data. Prior to the US jobs report, volume spiked and averaged 7 billion shares per day or better.
With continued bullish economic news, favorable economic developments out of Washington, such as higher defense spending and no change in overall spending, market conditions seem ripe for a continued rally in U.S. equities, said William Mingione, Managing Director – Head of Equities at Drexel Hamilton.
The presidents budget seems to be a positive overall for stocks but the proof will be in the pudding. We continue to see lots of buy orders in the financial sector but the sector does not seem to be rallying as much as we would expect, Mingione said. This to us seems like it could be the sign of a pause in the sectors rally. We are also a little concerned about the REIT space as we feel the analysts are starting capitulate with two large banks downgrading the sector this week. We could be seeing a short-term bottom in the trading of the REIT space with this happening. Theres nothing to exciting ahead next week for the market to focus on.
In other market news, Virtu Financial made an unsolicited offer to buy KCG Holdings common stock for $18.50-$20.00 per share in cash, valuing the company at as much as $1.33 billion. And while the deal looks large, it is really about little things – the mom-and-pop trading orders for securities – that on their own seem insignificant – but when grouped into wholesale lots by firms like KCG translate into big business.
David Polen at Fidessa said that the potential acquisition appears to be a grab by the HFT firm for retail order flow, which wholesaler KCG has a solid foot in.
Credit Suisse in its latest trading research noted that profits for market makers, such as Virtu, have slumped in recent years and one trader at a regional broker thought this was the driver for an acquisition. Virtu, could by acquiring KCG and its valuable retail order flow, boost profitability and help it grow.
Market making is not as profitable as it once was, said the regional trader. So, in order to boost profits and tap into some of that rich retail order flow Virtu decides to make a play for KCG. And KCGs star has been on the rise – making technology and people investments.
Retail order flow is big business. According to KCG, Bloomberg and RegOne estimates, monthly retail order flow currently runs about net $30 billion in equities. Over the long run, retail order flow has grown from $10 billion in US equities in 2010 to just under $300 billion in 2016. In January, the most recent available period, KCG had 32.01% of retail volume as measured under rule 605 Eligible Volume requirements.
Also, the exchange-traded fund sector continues to be the darling of investors. Against the backdrop of the S&P 500 Index up 3.7% in February and 5.6% year-to-date (as of 2/28/17), investors continued to turn to ETFs to increase their equity exposure, as $32.5 billion of net new assets flowed into equity ETFs during the month, according to the US ETF Flash Flows report from State Street Global Advisors.
Lastly, the buy side could trim back as much as $200 million on research spend in the U.S. alone, and over 100 million in Europe over the next 12 months, based on a new Greenwich Associates report and estimate. The reason is MiFID II, the regulation set to go into effect in January 2018.
Exchange Data International (EDI) and Investment Tools have partnered and launched Woodseer Dividend Forecasting – a dividend forecasting data-set with global coverage.
Woodseer is the worlds most comprehensive dividend forecast data-set with 260,000+ forecasts across 40,000+ listings. www.woodseer.online
The Woodseer dividend forecast data is highly valuable for activities including stock selection, income planning, option pricing and dividend capture. Working from EDIs corporate actions database (dating back to 2012), the Investment Tools team spent a year developing the Woodseer algorithm which analyses predictable patterns to provide highly accurate forecasts of the payment amount, date and dividend type.
Jonathan Bloch, CEOof EDI said: We have been looking at forward dividends for some time and in Investment Tools Limited we have found a partner with the expertise, methodology and software that will meet the needs of our clients.
Based near Woodseer Street in the heart of Londons Fintech hub, Investment Tools team of analysts oversee the output to manually adjust where required and to constantly optimise the algorithm. The forecasts are available to clients broken down by region, country or index. Updated daily, the data is delivered via API, flat-file download or via direct site login.
Ed Dean, CEO of Investment Tools said: Dividend forecasting is a new and fast-growing sector and we are thrilled to have the opportunity to work so closely with EDI in combining their 20+ years of industry experience with our dividend forecasting expertise.
The exchange-traded fund sector continues to be the darling of investors.
Against the backdrop of the S&P 500 Index up 3.7% in February and 5.6% year-to-date (as of 2/28/17), investors continued to turn to ETFs to increase their equity exposure, as $32.5 billion of net new assets flowed into equity ETFs during the month, according to the US ETF Flash Flows report from State Street Global Advisors.
The report also noted that equity ETFs have now recorded four consecutive months with over $20 billion of inflows.
With almost every corner of the equity map moving higher, from the US to developed to emerging, equity fund inflows continued, SSGAs Matthew Bartolini, Head of SPDR Americas Research, SPDR ETFs and SSGA Funds wrote. Equity flows have now notched four consecutive months with over $20 billion of inflows. Based on these levels, there is still quite a lot of risk-seeking by investors.
Bartolini added that for the first time in a while, all major equity regions recorded inflows for the month. The US continues to be the favored region for investors, with over $22 billion deposited in the month of February, after taking in $15 billion in January.
The International-Broad category, however, is more intriguing with over $16 billion of inflows so far in 2017, Bartolini wrote. This segment has been led by flows into emerging market focused funds, with nearly $3 billion of inflows in February alone.
The interest in emerging markets space, he continued, contradicts the market narrative predicated by the Trump Trade of; higher rates, a stronger dollar, and the new administrations protectionist trade stance. However, after initially increasing post-election, both the dollar and interest rates have fallen, and the administration has begun to walk back a bit of the protectionist rhetoric from the campaign trail. For instance, China has not been labeled a currency manipulator and Trump has embraced the One China policy.
In sum, this has been a bit of a tailwind for emerging market equities, which are up over 8 percent to star the year, and outperforming both developed and US equities.
Amid these strong equity flows, bond ETFs continued to accumulate assets, attracting $12.3 billion of inflows in February. Corporate bond ETFs dominated, attracting nearly $5.9 billion in February, while aggregate exposures took in over $2.4 billion.
Also, on the sector level, Financial ETFs led with $2.7 billion of inflows during the month. Materials ETFs and Technology ETFs were also favored, attracting $1.9 billion and $1.4 billion, respectively.
After a stellar 2016, the hedge fund industry continues to look forward to great things, shooting for a 3.5% growth rate in assets this year.
In its latest annual hedge fund Investor Survey, Shifting Tides, Credit Suisse reported that hedge funds are now looking to grab $3.123 Trillion in assets under management or grow 3.5% this year. This follows 2016 all time high level of $3.018T.
The survey garnered information from over 320 institutional investors representing $1.3 trillion of hedge fund investments.
Also in the survey, the broker found that investors appear to be making real headway in the push for better alignment of terms, with 61% of respondents reporting that they had at least one manager in their portfolio with a hurdle rate, while 57% said their management fees were lowered in the past 12 months.
Global Macro-Discretionary was specified by investors as the most preferred strategy for 2017 with 26% net demand. Fixed Income Arbitrage/Relative Value, with 18% net demand, was ranked as the second most in demand strategy by investors. Emerging Markets-Equity rounded out the top three, also with 18% net demand.
Institutional investors remain strongly committed to hedge funds playing a role in their portfolios, said Robert Leonard, Managing Director and Global Head of Capital Services at Credit Suisse. However, they also appear to be following through and making real changes to their hedge fund allocations. This includes increased concentration with funds in their portfolios, adding strategies that are less correlated with equities and terms/structures that better align their long-term interests with those of their managers.
Other findings from the Survey included:
Sector Funds: Investors reflected a pivot from broad based Equity strategies towards sector focused ones. Top Equity Sector strategies include Healthcare (#5) with 16% net demand, Financials (#7) with 15% net demand and TMT (#12) with 10% net demand. Net demand for Equity Long/Short Fundamental declined, falling from #5 last year to #13 this year.
Quantitative/Systematic: Other strategies identified by investors for potential allocations in 2017 include systematic strategies like Equity Market Neutral – Quantitative (#4) with 17% net demand and Global Macro – Systematic (#6) with 15% net demand. This is a continuation of the trend from last years survey highlighting increased investor interest in quantitative strategies.
Ongoing commitment: 87% of investors indicated that they would maintain or increase their hedge fund exposures in the coming year. This is identical to last year, when 87% of investors also indicated that they would be maintaining/increasing their hedge fund allocations.
Target Returns: only 30% of investors said that their hedge fund portfolios had met or exceeded their expectations this year, down from 45% last year. Looking forward, investors shared that they were targeting annual returns of 7.2% for their hedge fund portfolios in 2017, above the industry average returns of 5.5% last year.
New launches: There remains significant appetite for start-up funds, with slightly less than half (44%) of respondents reporting investing in a start-up fund last year. Of those who allocated to a new launch last year, about 75% reported receiving discounted or founders share class terms.
Key Factors in Selecting Hedge Funds: The top three factors indicated for selecting hedge funds in an institutional portfolio were returns after fees, non-correlation with other investments, pedigree of risk takers and core team stability. Investors also considered risk management skills to be a very important factor in manager selection as well.
Significant Developments in 2017: When asked about potentially significant developments that might occur this year, investors mentioned additional fund closures, more fee compression, better alignment of terms and a decrease in the amount of financial regulations impacting hedge funds.
The survey, produced by Credit Suisses Hedge Fund Capital Services Group, focused on pension funds, endowments, foundations, consultants, private banks, family offices and funds of hedge funds-and with respondents diversified across all regions.
After more than a decade of debate, regulators are poised to act on a pilot for maker-or-taker pricing, a practice whereby market makers are paid a rebate to add liquidity and are charged a fee to remove liquidity by electronic trading venues.
The SECs Equity Market Structure Advisory Committee (EMSAC) has recommended to move forward with a pilot on reducing access fees to gain an understanding into how rebates and access fees influence order routing decisions.
The SEC could open the maker-taker pilot for public comment in 2017.
But, now analysts are suggesting that a maker-taker pilot is in limbo, or at the very least, could be postponed under the incoming Trump administration.
In a Jan. 9 article, Larry Tabb, founder and research chairman of TABB Group, told Pensions & Investments that a potential maker-taker pilot could be dead before it starts. The incoming administration would prefer to conduct a holistic review of Reg NMS market structure, Tabb told P&I. With the SEC transitioning to a new chairman under President Trump, Tabb said there is uncertainty as to what will be on the market structure agenda. Trumps nominee to head the agency, Jay Clayton, an attorney with Sullivan Cromwell, is due to go through confirmation hearings and has not yet had a chance to air his views in public.
Paul Atkins, a former Republican SEC Commissioner, who reportedly has served as President Trumps regulation advisor, could give Regulation NMS a second look, reported Reuters in A Post- Post Trump SEC. Atkins has critiqued SEC rules that require best price execution as causing fragmentation and harming price discovery by causing orders to go away from traditional exchanges to dark pools.
But Republican Commissioner Michael Piwowar, who was named acting chairman of the SEC in January, could revisit the rules sooner than later.
Too Much Complexity?
One of the concerns is that a maker-taker pilot would add complexity to the equity market structure. The industry is already conducting the tick-size pilot for small cap stock by widening spreads to a nickel and testing a Trade-At rule, which some industry folks contend has been expensive in terms of programming and too complex to implement.
However, supporters of the maker-taker pilot are speaking up. In a blog posted to their own site, Themis Trading partners Joe Saluzzi and Sal Arnuk, maintain that a maker-taker pilot will be proposed this year. Furthermore, they would like the pilot to include a flat-fee similar to what IEX charges.
In their blog, Maker Taker Needs to Happen, Messrs. Saluzzi and Arnuk illustrate how rebates can create a conflict of interest for algorithms executing a VWAP slice.
Running the pilot will be important to institutional investors who worry that their brokers are focusing on strategies to gain rebates more than seeking best execution.
Opposition to Maker-Taker
Buy-side firms are skeptical of the maker-taker pricing model believing that it skews brokers routing incentives in favor of best rate as opposed to best execution, said Richard Johnson, senior analyst at Greenwich Associates on a Dec. 16 webinar hosted by the Stamford, Conn.-based research firm. The rebates are seen as fuel for high frequency trading firms, said Johnson.
Fifty-five percent of buy-side traders think that maker-taker should be abolished in favor of a flat-fee price model, said Johnson referring to a Greenwich study of 400 U.S. buy-side traders. Other choices included a reduction in access fees and that the SEC should conduct a pilot program to determine the most effective model.
Only 5% of buy-side traders responding said they were happy with the current maker-taker pricing model, said Johnson. Without the complex web of multi-layered pricing structures across multiple venues, there would surely be less focus on speed and the routing and rerouting of orders that frustrate traders, he said.
However, maker-taker came about because the previous system was broken.
The practice has been controversial since it began with the Island ECN in 1997, but has been adopted by every stock exchange and many dark venues. Its associated with high-speed trading and fragmentation. But has also helped exchanges compete with rivals for liquidity and reduced trading costs.
Hedge funds and quant trading firms can earn rebates if they post limit orders that add liquidity to an exchange or dark pool, said Johnson. However, brokers usually do not pass on these fees to traditional asset managers. Even if brokers passed on the fees, it could still be a problem for the buy side.
Asset managers would like to see the elimination of maker-taker, but they will not get that in the pilot, said Johnson.
The popular choice for the buy side is abolishing maker-taker and going for a flat-fee structure, said Johnson. Or, the other option is trying to limit the access fee – the amount of rebate from .003 per share (or 30 cents per 100) to a lower number. This would reduce market making and high frequency trading to some extent, but it will also result in higher costs, said Johnson.
Capping Access Fees
The EMSAC recommendation is for capping access fees, explained Eric Noll, president and CEO of Convergex, who is a member of the committee and has recently released an analysis of the tick pilot. Access fees today are 30 mils (or 30 cents per 100 shares). Today, exchanges can use that money to pay a rebate. For example, on Nasdaq and on other exchanges, someone who removes liquidity is charged 30 mils, while the exchange can then use 28 mils to pay a rebate to a market maker as incentive to provide liquidity. The idea is not to eliminate maker-taker, but rather to test maker-taker at different price bands.
Instead of a 30 mil cap, EMSAC is proposing 20 mil cap for a set group of stocks, then a 10 mil cap for a another set of stocks, and a third group with a 2 mil cap, said Noll.
So by running the pilot across different bands, you will see whether maker-taker is positive for liquidity provision, negative for liquidity provision or creates distortions or eliminates distortions, said Noll in an interview. By checking bids and offers at different price bands, one can tell if bid/offer spreads tighten or widen, does information leakage happen more frequently or less frequently, and whether bid-offers become more stable or more fragile, added Noll.
Order Protection Rule
Another aspect of Reg NMS that has been questioned is the order protection rule, which prevents exchanges from trading through a better-priced order on another exchange. This was a popular rule at the time it was implemented with Reg NMS because investors could receive a worse execution depending on where they routed an order, said Johnson. Exchanges could trade-through a better price at another exchange. The order protection rule was based on the idea that lit markets had protected quotes and contributed to price discovery. A side effect was that firms tried to avoid fees and visibility on lit markets, which then led to an increase in dark pool trading from 24% in 2007 to 37% today, noted Johnson.
In response, some participants are asserting that trading priority should be given to orders that contribute to price discovery and have proposed a Trade-At rule. This would entail modifying the order protection rule to prevent trading in venues at the national best bid and offer (NBBO), unless these venues were quoting publicly at this price.
Though less than a majority, 45% of buy-side traders polled, favored replacing the trade-through rule with the trade-at rule, while 20% said no and 35% did not answer. It should be noted that this survey was taken prior to the tick pilot.
However, Noll doesnt see the buy side wanting a Trade-At rule. In fact most of the buy side would be opposed to a trade-at rule, he said.
Exchanges would like a trade-at rule, which would give the lit market primacy over the dark market, he said. Long-only asset managers tend to believe that the maker-taker creates artificial liquidity and distortions in pricing, he said.
They tend to believe if maker-taker is eliminated, then it would lead to more stable bid-offers, less artificial liquidity, less price volatility and increased trade sizes.
Regulators reviewing the market structure will be able to analyze data from the tick pilot, which contains a trade-at rule in the third test group.
Going Forward
As the SEC transitions to a new administration, there is naturally some uncertainty over its priorities. It remains to be seen whether the acting SEC commissioner and staff will push through the maker-taker pilot, or wait for the new chairman to settle in and spearhead a broad holistic review of Reg NMS.
SEC Republican Commissioner Piwowar could instruct the SEC staff to begin a broad review of Reg NMS before the new agency head arrives. Piwowar may ask the agency staff to review the 2005 Reg NMS framework that regulates U.S. stock exchanges along with corporate disclosure rules under Dodd Frank, according to Bloomberg in Interim SEC Boss Goes Beyond Caretaker Role to Revisit Rules. At the Baruch Financial Markets conference in November, Piwowar said he might conduct a roundtable on the small tick pilot after it was operating for six months to review the results with participants in case it needed tweaking. But, when asked if the SEC would move forward with the maker-taker pilot, Piwowar responded, Possibly. I hope so.
One ominous sign is that the EMSAC charter was renewed but it was renewed for only six months. The original charter was for two years, said Noll. But, the SEC has kept the EMSAC Committee around to review pieces of Reg NMS, such as the trade- though-rule and a block exemption for institutions. EMSACs charter could be extended beyond June depending on the SECs goals. Time will tell whether Trumps new SEC Chairman has the appetite to tackle an overhaul of Reg NMS.
Acadian Asset Management announced that it is the first investment firm to use the Bing Predicts macroeconomic indicators, offered by Microsoft, to augment its investment forecasting frameworks and seek greater potential investment returns.
Acadian will explore the use of Microsofts new predictive signals of economic activity derived from aggregated internet search and social activity.
Bing Predicts is a prediction engine developed by Microsoft that uses machine learning from data on trending social media topics (and sentiment towards those topics), along with trending searches on Bing.
For the last thirty years we have used data to make objective investment decisions. Throughout our history we have been early adopters of new and novel sources of data to help us make better decisions and we are excited about the ways that new technology can help draw insight from large information sets, said John Chisholm, chief investment officer of Acadian. Microsoft is an ideal partner in this project, given its internet expertise and prediction capabilities.
Were excited about the potential of Bing Predicts to improve investment results, and eager to collaborate with Acadian as a long term leader in quantitative investing, said George Zinn, Corporate Vice President and Treasurer for Microsoft.
Are Speed-Bumps, Market Structures Back to the Future? (and is the CHX Biff Tannen?)
In the popular movie series “Back to the Future” the villain is a school bully named Biff Tannen. At the end of the first movie, he gets punched in the face by Marty McFlys father to enable the timeline to be restored. In the second movie, Biff goes back in time, and, with a sports almanac, uses it to bet his way to wealth and power. In the end, he is stopped by Marty, but not before sobering views of a future changed by Biffs actions.
In the ongoing saga of market structure debates over speed-bumps, I see a parallel between the CHXs attempt to introduce a speed-bump (to provide advantages to its market makers) and Biff. Their first proposal, for an asymmetric delay, was met by the equivalent of a punch in the face by commenters who argued that it would distort the markets. Unfortunately, their second proposal, which would provide a symmetrical delay, but one that excludes their best market makers, is arguably worse. This new proposal is a step backwards in time and is reminiscent of the structural advantages held by specialists on the old NYSE[1] or Nasdaq market makers on the old Selectnet system[2].
On the surface, the CHX proposal makes sense. It could turn out that incentivizing “obligated” market makers to quote more will improve liquidity and price discovery, but, then again, it might not. From the CHX perspective, becoming the first modern exchange to re-introduce structural advantages for market makers, could boost their market share and attract incremental activity. Unfortunately, due to a couple of outdated regulations (Rule 605 and the Order Protection Rule in Reg NMS), this proposal would be quite problematic. In addition, if it succeeds, we should expect the other exchanges to introduce similar models, magnifying the extent of the problems it could create.
The specific CHX proposal is to provide lead market makers (who have obligations to maintain defined statistical levels of two way quotes in all securities they are designated in) the ability to place liquidity providing orders as well as to cancel orders without restriction, while the CHX will uniformly apply a 350-micro-second delay to all other order placement and cancellation actions on the exchange.
This provides lead market makers an order placement advantage which would let them legally front-run other orders to provide liquidity at the front of order queues. In practice, whenever a lead market maker sees a price change on the other exchanges, they will be able to react and place re-priced orders on the CHX to gain primary position in the order queue while other participants (including client algorithms) are delayed. The ability to be the first quote, translates directly into more profit for the market maker, while the orders that were held back will suffer adverse selection. While this may end up as a worthwhile market innovation if it improves liquidity, it would be terrible policy for all exchanges to facilitate this sort of two-tiered market.
The proposal also confers a speed advantage for order cancellation and that is more problematic, under the current regulatory regime. The CHX proposal would allow their qualifying market makers to move their quotes AFTER an inbound order was sent to the exchange matching engine, whenever they believed that such a trade could lose them money. In practice, this means that a CHX quote, if it was the last quote among the 13 exchanges, would likely be impossible to access as the market maker would have strong incentive to move it. There are two problems with this. First, due to the Order Protection Rule, routing firms are required to send orders to access these quotes. Thus, an order routing firm, despite compelling evidence that in certain situations they will not receive an execution, will need to route to the CHX anyway. To make matters worse for routing firms, in addition to the time spent routing to the CHX, orders sent there will be delayed, translating into an increased risk of missing out on liquidity elsewhere. It is worth noting, however, that if there was no Order Protection Rule, routing firms would be able to decide if the potentially increased liquidity provided by the CHX market makers was worth the delay. This would then mirror the value proposition of the NEO exchange model in Canada, since that exchanges quotes are not protected.
Second, the ability to cancel displayed quotes during the time inbound orders are delayed distorts the NBBO provided by the SIP, which is designed to only include executable quotes. As I explained, the lead market makers would have a strong incentive to cancel their quotes whenever they see that they are the only quote or are about to become the only quote among all the exchanges at a price level. This would, in turn, provide the appearance of fake liquidity which will make the SIP quote less reliable. This is a problem because, under rule 605, all market centers report best execution statistics based on the SIP quote. Retail investors, in particular, would be harmed by this as their marketable orders are sent to wholesale market makers that are judged against the SIP quote. If the quote became less reliable, the amount of price improvement received by retail investors would be jeopardized.
It is important to note that the ability of market makers to move displayed quotes during the speedbump is in direct contrast to IEX, which does not allow any repricing or cancelation of displayed quotes during their delay. In fact, this point was made by several commenters, including myself, when discussing the SECs proposal to interpret Automated Quotations Under Regulation NMS. As I said in that comment letter: Exchange re-pricing logic within a delay would render such orders conditional upon the market data feeds that change during the delay. This would result in precisely the kind of “maybe” quotations Rule 611 was designed to prevent.[3]
To be clear, the issue with the CHX proposal is not that a market maker centric system is a bad idea, but rather that allowing such an exchange to have their quotes protected by the government is wrong. If the OPR were abolished, and best execution rules were based on a firm National Best Bid and Offer, which excludes quotes (like these) that are not fully executable, I would have no objection to CHX trying this as an innovation. Unfortunately, both rules exist, and lead to the inescapable conclusion that the CHX proposal should be rejected.
Hopefully, the SEC will stop this attempt, or we might need a time machine and a real-life Marty McFly to go back and undo the damage…
[1] Specialists had exclusive access to the full order book and matched all orders themselves at their post
[2] Nasdaq market makers had the ability to react to institutional trade requests with decline and move; The only automated execution was via SOES (Small Order Entry System) and the market makers famously referred to retail sized traders who executed orders against them at prices they thought were stale as SOES Bandits
[3] https://www.sec.gov/comments/s7-03-16/s70316-18.pdf
David Weisberger isPresident of Exquam LLC