Are You Making Full Use of Your Six Blade Knife?



You know it keeps you strong
Yes and it’ll do me wrong
Your six blade knife – do anything for you

Dire Straits


It would be most convenient if someone – a regulator, an industry leader, a master arbitrator – could wave a magic wand and remove the most egregious conflicts of interest in our stock market plumbing. It would be grand if this could be done without dismantling all of the gains and benefits to our markets from the leveraging of technology. Regulators can, and will be, well-meaning. So will industry groups. So will private industry innovators – like IEX. However, none of them alone has the recipe for a perfectly investor-aligned equity market structure.

There is no magic wand, but despair not; we all in fact have some degree of choice (we always could use and insist on more), and we all have the means to become reasonably educated. We all have a six blade knife, and at the end of the day it is up to all of us to know how to use each of its blades to full potential.

Over the past several years you have heard recommendations from Themis on what we think could be done to improve market structure. Recently you have also witnessed other brokers, exchanges, and industry groups providing their opinions as well – particularly in the wake of Michael Lewis’s Flash Boys.

Yesterday, SIFMA released its recommendations on how to improve modern markets, and this morning we wish to highlight those for you.


SIFMA Market Structure Recommendations


What/Who is SIFMA?

The Securities Industry Financial Markets Association (SIFMA) is an advocacy/lobbying group that represents the interests of brokers, banks, and asset managers in Washington DC. Their membership is diverse, and includes brokers (like Barclays, Goldman Sachs, Instinet, Morgan Stanley, ETrade, and TD Ameritrade), asset managers (TRowe, Invesco, Vanguard, and MFS), high speed trading firms (Citadel, Latour Trading, Jane Street, and Two Sigma), as well as all sorts of data vendors and clearing firms. A complete membership list can be found here. Frankly, the gamut of firms that SIFMA represents is so varied and exhaustive that it is hard for us to imagine whose interests they do not represent, perhaps with the exception of major stock exchanges.

SIFMA typically speaks to regulators and provides them with well thought out and informed opinions and recommendations on important issues we all face in our markets. We often agree with their analysis and positions on market structure, although not always. Frankly, even within their own membership it is probably a stretch to think that their hundreds of members agree on every position SIFMA takes.

SIFMA regularly comments on proposed rules and regulations by exchanges and regulators in the US and abroad. For example, here is their comment letter on the SEC’s proposed rule changes regarding non-public trading interest in national market system stocks  (Dark Pool Proposal). Also, here is their comment letter on the SEC’s 2010 Concept Release on Equity Market Structure.


What Did They Release Yesterday – July 14th 2014?

 SIFMA just released its Recommendations for Enhancing Fairness, Stability, and Transparency in US Equity Markets. While SIFMA believes that our markets are the deepest and most liquid in the world – with tight spreads, cheap transaction costs, and speedy executions, they also acknowledge that fragmentation is a real issue going forward, as fragmentation leads to disparate treatment and issues of fairness, which ultimately discourages investor trust and confidence.

Consequently SIFMA recommends changes in three areas of market structure that can be bettered:

Market Complexity:

Cap exchange fees at 5 mils instead of 30 mils. The expensive exchange take fees provide an incentive to avoid routing to them, and potentially encourage bad broker routing practices.

Protect the NBBO only at exchanges with greater than 1% market share (over 3 quarters).

Currently there is a little loophole that allows for a 1 second cushion/exemption around the NBBO in determining compliance with Reg NMS. SIFMA wants it reduced to 1 millisecond.

Regulators, exchanges, and brokers should work together to achieve standardized kill switch mechanisms for safety.

The SEC should crack down on excessive message traffic…except for bona fide market makers (i.e. Virtu, KCG, Barclays, etc).

The SEC should look at order types, and force more transparency from the exchange than what currently exists.


Market Data Distribution:

Data should be distributed to all at the same time as a principle. The SIP should be sped up and improved in the short run, and replaced with private Market Data Aggregators (MDAs) in the long run.

A Market Data Plan (MDP) committee should be broad based in the industry with retail, institutional, dark pool, and investor representation. The committee should govern the MDA or SIP with great transparency.

Exchanges should use consistent data sources and calculate an NBBO just as fast for market participants, so that they don’t have to.

Transparency and Disclosure:


Regulators should make sure retail brokers improve order routing and execution reporting that is much easier to understand than current Rule 605/606 disclosures.

Retail brokers should consider broadcasting that they take payment for order flow even louder and more often than they currently do (account opening, annually, on confirms, and 606 disclosures).


All ATSs should publish their Form ATS.

Disclosure requirements by FINRA should be expanded to include off-exchange broker venues (i.e. Citadel).

The SEC should mandate that the exchanges provide standardized order routing disclosures and data on things like order type interaction, as well as volume by displayed and undisplayed orders.

FINRA should mandate brokers to provide institutional clients only (i.e. not Themis) some standardized venue execution reports that includes things like execution fill rates and added versus taken liquidity.

FINRA should mandate that brokers publish monthly things like venues they access, order types they support, fill rates in aggregate, etc.


Discussion of SIFMA’s Recommendations:

 Two of the three categories of recommendations that’s SIFMA is advocating for (Market Complexity and Market Data Distribution) concern stock exchanges, none of which are SIFMA members. SIFMA is calling for government price controls for stock exchanges (5mil cap), yet there is no mention of any such controls for brokers and dark pool venues. We like the idea of lower fees (who doesn’t?), but if the issue that SIFMA is really attempting to redress is market fragmentation, we would also like to think they would advocate that the SEC implements its very own 2009 Dark Pool Proposal! That proposal would contribute just as much to a solution for market fragmentation as a 5 mil government price control on only one subset of market participants.

Additionally, with regard to Market Data Distribution, perhaps it is about time that SIFMA advocated for, and the industry adopted, Opt-in – Opt-out rules for market data. After all, it is the order originator, and investors in general, that own the data theoretically. Perhaps they should be given the right to opt in or out of direct data feed inclusion (we recommend opting out), which is something we have advocated for since our White Paper – Data Theft on Wall Street.

With regard to increased disclosure, I think we all can agree that more is necessary. Flash Boys drove the point home, as dis AG Schneiderman with his Barclays LX suit. However, why should any broker have to wait to provide that increased level of disclosure? Why can’t they each provide it at present? At last count only perhaps 15% of dark pools have made their Form ATS’s public. Also, while mandating public posting of Form ATSs, I think we all can agree that some provide more information than others; they are a rather poor proxy for transparency in present form.

Finally we would like to note a little irony around at least some of SIFMA’s Recommendations.  SIFMA advocates specifically for providing some general public disclosures by institutional brokers and dark pool owners. SIFMA specifically mentions things like fill rates and route data. We can attest that some very prominent SIFMA members, when asked by Themis Trading to provide these very same aggregate statistics, particularly around conditional orders, declined. They said no.

Credibility is important. Transparency is important. Advocating for change is important. If we can leave you with one takeaway from today’s note, it’s that if you all want change you must consistently and strenuously push for it. Your economic clout is one blade in your six blade knife; make maximum use of it!

There will be no shortage of organizations that put out sound bites which give the impression that they are for reform and change. SIFMA is a great organization, but if you are waiting for any group or regulator to come together and fix the conflicts embedded in our structure, and to fix your execution experiences, do not hold your breath. Instead, use your six blade knife and hold their feet to the fire.