Shake My Sweaty Hand
Today we would like to talk for a moment about the pervasive “liquidity handshake” that exists in our trading industry. You know of this handshake of course. It is the reason why so many different dark pools boast of 30% plus crossing rates (or whatever). Those pools will have you think that they have found some magical combination of 1) their technology (algorithm) and 2) their very special list of friends and “Liquidity Partners”, which will magically create clean liquidity for you to interact with.
In the past we have consulted and advised many of our friends who read our work on how to tweak their routing, or what to ask their brokers to tweak in their broker-sponsored routers on their behalf. In fact you may remember Joe’s editorial in Securities Industry News in June of 2010, written nearly a year ago, titled What’s In Your Router? You may have even seen us on various industry panels (Trader Forum, ICI, NOIP) talk about these same issues.
Today we touch on it again, by highlighting Morgan Stanley’s SEC Comment Letter on March 7th. We forwarded this letter to many of you earlier this month via email, and today we are happy to see that Trader’s Magazine has highlighted it as well.
Its key points:
– Brokers are engaging in aggressive routing practices, subjecting their customers to unnecessary leakage and costs by routing to who is cheapest for the broker to route to, and who will rebate them the greatest.
– Exchanges are also doing this! (NASDAQ, NYSE, and Direct Edge to name a few)
– Rule 606 needs to be updated (disclosure on where orders are executed) to included where order’s passed through on the way to their getting executed!
– The SEC should consider regulation that bans exchanges from routing out unfilled orders to “liquidity partners”
Kudos. Morgan Stanley was probably the first large firm to speak out against Flash Order types. Morgan Stanley also was among the first to criticize the exchanges for conflicts of interest. Their comment letter to the SEC’s concept release should be required reading for all buy-side traders; we even quoted from it in our letter to the SEC in 2010. We are happy to see their persistent urging of our regulators in the name of keeping the marketplace fair and clean.
It would probably be a worthy exercise for everyone to look at the websites, specs, and details of all your trading partners (be they exchanges, brokers, or dark pools) and be suspect of any type of “liquidity partner” arrangements. They usually include some kind of internalizers, flashing IOI’s of some sort, and these partners have all the transparency of a Libyan Government Agency.
Be educated and Insist on the very cleanest for your order flow!
On a lighter note…
You may remember that I traded my import pickup truck a few weeks ago for a brand new Subaru Forrester, pictured here:
Many of you have patted me on the back for such a wise and frugal choice. And some of you have quite viciously attacked my heterosexuality. And some of you have behind my back engaged in a side bet on how long this vehicle would stay parked outside 10 Town Square. I say to those of you in the last two groups that you are traitors, mean spirited, inconsiderate of my feelings, AND…
I declare Paul the winner. You all have placed bets that ranged from Memorial Day 2011 through November 2011. At least I take solace in the fact that I shamed all of you. The Subaru didn’t even last until the permanent license plates arrived at the dealer. It still has the Temp Sticker taped to the back windshield! And she is gone as of today!
I give you, the much more manly and suitable car for Themis Sal. The Chevy Effing Silverado in BTFD Green:
Where we left off 4:00pm EST:
INDU 12,279.01 +81.13
SPX 1,319.44 +9.25
CCMP 2,756.89 +26.21
Futures now at 7:00 am EST:
Key Data out today:
08:15: ADP Employment Change (expecting 208k)
Since the prior close, some key stories:
– Stock futures higher continuing on yesterday’s afternoon rally
– Irish Stress Tests May Leave Govt. in Control of All Irish Banks (Bloomberg).
– BLK will replace GENZ in the S&P500 on April Fool’s Day. Damn, and I had GENZ in the next stock that would Flash Crash to a penny. Oh well.
– VRX to acquire CEPH for $73 in cash.
– Rush For Deals Pushes Takeovers to Most Expensive Since Collapse of Lehman (Bloomberg).
– Barclays may leave the UK and headquarter in NY.
– Senate will likely vote this week on delaying new rules that cut debit cards fees. I vote that it dies. What say ye?
– Obama to make energy-related speech today. Will call on Oil companies to step up production. You can’t make this up.
– Merrill thinks TEPCO claims might rise to $132 billion.
– Gene Bennett, a director for numerous Chinese companies listed on US Exchanges, has a lying sham of a resume, and asks that you ignore it. See Absaroka letter here: http://www.absaroka.com/uploads/SHZ_Letter_032311.pdf #DueDiligenceFail.
Pre-market: AYI, AEZ, FDO, GU, LNN, SIG, UNF, WOR
After the Close: BGP, DRYS, GMR, MOS, OMER, TISI
Significant Movers This Morning:
CEPH +24%, OXM +12%, BLK +4.5%, VRX + 3.6%, SOMZ +3% UTA – 26%, VVTV -7%, ZOOM -6%, TIBX -4%, ZZ -11%