Editors always like to see a beefy issue with lots of news stories. This issue fits that bill. There are seven pages-11 stories in all-devoted to regulatory issues in our Rules & Regs section. Perhaps this shouldn’t come as a surprise. It’s been the regulatory changes over the last 10 years that have had the greatest impact on the equity market. Regulation is the culprit that has allowed technology to restructure equity trading.
Looking back a decade, one would be hard pressed to imagine the New York Stock Exchange executing less than 50 percent of its stocks. But that’s what we’ve got today. This month’s cover story takes a look at the new brain trust at the NYSE. Their task: Make the floor an important part of the execution process. The inability to trade in size today remains a huge issue on the Street. NYSE execs Duncan Niederauer and Larry Leibowitz think they have answers to remedy the problem, which makes for some interesting reading. The story also addresses other key matters that the NYSE is grappling with.
This issue explores the various fronts where the regulators are making their push. Would you be surprised if I said two of the stories relate to inspections? One concerns the SEC accessing information from the trade blotters of buyside traders during inspections. The other has to do with Reg NMS-related sweeps at brokerage houses, checking to see if they are compliant with the rule.
Perhaps the most intriguing regulatory story is FINRA and the SEC saying that they want to look into whether broker-dealers are using aggregated client information for their own trading purposes. The issue is essentially front running, and this topic has been the bogeyman of the industry for the last several years. Traders and salesmen talk about it as if it’s a foregone conclusion, but does it really exist? Agency brokers, particularly the electronic ones, have been using this to their advantage for years to sell their products. The fear factor can work wonders on the buyside. After all, they are paid good money to be paranoid. That’s their job. I once asked the head of electronic trading at a large brokerage why the bulge-bracket firms don’t respond to these charges. His reply? It’s a no-win situation. If you respond, then your protests might be received with even greater suspicion. Personally, I doubt the regulators will come up with anything-even if there is something there. The complexities of risk management will prove too great a barrier for them to understand the reason behind each trade. There are also two separate features in this issue that should provide valuable insights into current trends. There’s one on the rise of risk bids for program trades and another on how client commission arrangements are beginning to cut into the revenues of regional and niche brokers. Enjoy the issue.
Michael Scotti
Editorial Director
