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December 2011
www.tradersmagazine.com
The Magazine for Securities Industry Professionals
STA Affiliate Coverage
Dallas Seattle/Portland
>> A raging Debate On message Traffc Fees
>> NYSe Floats Sub-Penny Pricing Again
>> Low-Touch Trading Gets Personal
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affliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affliates of Bank of America
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Head of Vendor Consulting
Global Execution Services
Bank of America Merrill Lynch
Trader Trends
Brought toYou by Bankof America Merrill Lynch
Which Trading platform is right for you?
As trading technology evolves, innovation across
order and execution management systems is leading
head traders to reassess the technology required to run
their desks. By consolidating platforms, frms can drive
signifcant cost savings while streamlining trading
workfow. An investment in more robust technology
today will help to minimize the cost required to change
or add systems in the future.
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asset manager, there are a variety of solutions that can
streamline your front ofce technology portfolio and reduce
the number of platforms needed to trade.
Ferris D'Angelo
Head of Vendor Consulting, Global Execution Services
$Cost vs. Time
New York 212.449.6090 | London +44.20.799.64521
Asia +852.2161.7550
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with Execution capabilities
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*Standard data rates apply.
Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking
affliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affliates of Bank of America
Corporation (Investment Banking Affliates), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated, which is a registered broker-dealer and member of FINRA and SIPC, and, in other jurisdictions, locally registered
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Bank of America Merrill Lynch
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Contents
DECEMBER 2011 VOLUME 24, NUMBER 331
26 Cover Story
Top 10 Stories of 2011
> Pipeline Fine Shocks TradingWorld
> Regulators Look to Pacify the Market
> Low Volume Sparks Exchange PriceWar
> Brokers HFT Balancing Act
> Canada Forges Ahead
> Bulge Weathers Rough Year
> ETFs Push Traders Toward Multi-Asset World
> Algos: Better, Faster Fewer
> Buybacks Rebound From Financial Crisis Lows
> Volume and Volatility: Te Comeback Kids
| December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
002_TMDec11 1 11/22/2011 11:13:43 AM
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005_TMSep11 3 8/26/2011 10:38:22 AM
4 | |
Contents
DECEMBER 2011 VOLUME 24, NUMBER 331
Traders Magazine (ISSN 0894-7295) Vol. 24 No. 331, is published monthly with additional
issues in April and July by Source Media, One State Street Plaza, 27th Floor, New York, NY
10004. Subscription price: $120 (US) per year; $170 (US) per year in Canada and Mexico;
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additional mailing ofces. POSTMASTER: Send address changes to Traders Magazine, P.O.
Box 530, Congers, NY 10920-1729. For subscriptions, renewals, address changes or delivery
service issues, contact Customer Service at (800) 221-1809. Please direct editorial inquiries,
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York, NY 10004. Back issues, when available, are $12 each, prepaid. Traders Magazine is a
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prohibited without express written permission of the publisher.
2011 SourceMedia and Traders Magazine. All rights reserved. www.tradersmagazine.com
Member of BPA Worldwide
The opinions expressed by the authors are not necessarily the opinions of the editorial
staf. The editors disclaim any intent to make recommendations about securities and
security markets. We are not responsible for unsolicited manuscripts. Manuscripts
bought/paid for by the corporation are its property.
STA and Other Industry Events
50 Dallas
55 Seattle
8 INSIDE TRADING
> Dark pools integrity are questioned after recent
settlement
> Low touch trading is expected to more closely mirror
high touch, according to a study
> Two exchanges oat sub-penny pricing schema once again
16 ON THE MOVE
18 RULES & REGS
> Message tra c debate rages
> Te SEC considers rules limiting market makers
> New parameters for market-wide circuit breakers
proposed
> Buysiders worried about new front-running rule
> IOI proposal draws mixed reviews
42 OPTIONS
> Volume surges with introduction of new weekly contract
> Public pension plans look to invest in options
Peter Chapman
48 TECH NOTES
62 BUYSIDE SNAPSHOT
With every crisis comes opportunity. In the case of Drew
Harbeck, a trader at Cortina Asset Management, his
opportunity came when he joined the Milwaukee-based
rms desk right before the market meltdown began,
roughly three years ago.
Michael Scotti
| December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
004_TMDec11 2 12/1/2011 10:48:58 AM
For more information about LeveL ATS and how to connect,
visit www.LeveLATS.com or contact us at 617-350-1600.
LeveL ATS is a member of FINRA and SIPC
Trade on a Whole New LeveL!
Liquidity
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005_TMMar11 3 2/16/2011 5:00:29 PM
S
ince 2007, Tiaoiis Macazixis December issue has featured a review of the
years top stories. Tis years issue marks our fth annual such edition and deliv-
ers some interesting recaps. One story is how the bulge bracket is cutting back
on the number of algos it provides to the buyside. Over the last year, rms be-
gan streamlining their oerings to save money. Teyve shifted to supporting their most
widely used products. Call it algo consolidation. Another reason behind this move is a
greater demand for customized algos.
Another story looks at how a bulge rm may wear two hats as it relates to high-
frequency tradersit is both courting their business, and at the same time, looking to
protect traditional clients from the more predatory rapid-re strategies. Tese stories, as
well as the others, are a good chance to look back on the year.
Looking back at 2007s top stories, there is little reference to high-frequency trading.
Tat might come as a surprise, because it has been a nonstop topic of discussion for
the last couple of years. In retrospect, however, the lack of HFT coverage then makes
sense. Regulation NMS had only been implemented earlier that year. No one can argue
that rapid-re trading was helpful during the August 2007 meltdown, when volume set
records, reaching between 9 and 10 billion shares each day for a week. High volumes
returned again this August, when markets nose-dived after concerns were heightened
about European debt problems.
One emerging story for the year remains how the industry will need to comply with
the Volcker Rule, which was part of Dodd-Frank and designed to curtail proprietary
trading. Te rub for equity traders is how the nal rule will be written by the Securities
and Exchange Commission. A proposal has been written, and the SEC is awaiting indus-
try comment. All eyes are on the SEC, as its nal rule could impact liquidity. It has its
work cut out for it to separate what constitutes prop trading and market making.
What happens in 2012 is anyones guess. A year ago, who would have thought that for
nearly two months, a group calling itself Occupy Wall Street would decry the nancial
system and take over a park in lower Manhattan that no one previously knew the name
of? Twice a day I walk past Zuccotti Park. Over time, OWSs message became more
muted and blended in with the rest of the city. I look forward to next year and wish you
luck in all your endeavors. Buen camino.
Michael Scotti
Editorial Director
A Good Walk
Published by SourceMedia, Inc.
Dictum Meum Pactum
1934
The O cial Magazine of the Security Traders Association
VOL. 24, ISSUE 331
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| December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
006_TMDec11 1 11/21/2011 10:17:57 AM
007_TMJul11 4 6/24/2011 3:40:58 PM
I
n the wake of Pipeline
Trading Systems settle-
ment with the Securities
and Exchange Commis-
sion, many people are won-
dering if dark pools will be
able to retain the trust of trad-
ers given the mis-
representations
made by such
a well-known
venue.
According to
the SEC, Pipeline
failed to disclose
that the vast ma-
jority of orders in
its dark pool were
flled by an af-
fliate of the frm.
Tough Pipeline billed itself
as providing natural liquid-
ity, it has now admitted that,
over the course of its history,
its afliate took the other side
of the trade about 80 percent
of the time.
Pipeline did disclose in
most of its subscriber agree-
ments that unspecifed af-
fliates could be trading in the
dark pool, but it did not dis-
close the vital role its afliate
played in providing liquidity,
the SEC said.
Te revelations could have
repercussions beyond Pipe-
line, as market participants
take a closer look at alterna-
tive trading systems in gener-
al. Some dark pools have their
own prop desks, which they
do disclose, and in the wake
of the Pipeline
scandal, those
desks could draw
greater scrutiny.
It points
up the general
opaqueness of
how ATSs dis-
close how they
handle orders,
said David
Mechner, chief
executive ofcer
of Pragma. Te lack of trans-
parency about details raises
questions.
Mechner said he hopes
the revelations about Pipeline
dont translate into a general
backlash against dark pools,
but added the case should be
a wake-up call to the industry
that transparency and disclo-
sure are important.
Joe Gawronski, president
and chief operating ofcer of
Rosenblatt Securities, noted
that many customers of Pipe-
line used the companys dark
pool because they thought it
would help them avoid gam-
ing by high-frequency traders.
Yet the Pipeline afliate alleg-
edly employed many HFT
strategies, such as placing a
large number of orders and
then canceling them immedi-
ately afterward.
Rosenblatt built a name
for itself by being the frst
frm to track dark-pool vol-
ume, but Gawronski said he
would happily
cede that part of
his frms business
if it meant dark
pools started be-
ing more trans-
parent without
frms like his.
Te industry
should demand
t ransparency,
Gawronski said.
We live in a
much more complex world
than before.
Dave Johnsen, head of U.S.
liquidity strategy for Goldman
Sachs Electronic Trading, said
many customers have become
paranoid in the wake of the
Pipeline scandal, wondering if
other dark pools might also be
behaving in ways contrary to
what they have disclosed.
Johnsen said that todays
complex market structure will
not go back to where it was
decades ago, in spite of wish-
ful thinking from some on the
buyside. Instead, frms have to
construct algorithmic trading
strategies to protect them-
selves, even in dark pools, he
said.
Among other things, dark
pool participants need to be
prepared to deal
with HFT, said
Dmitri Galinov,
head of liquid-
ity strategy for
Credit Suisse Ad-
vanced Execution
Services.
You need to
understand what
kind of strategies
theyre using, and
then you need to
design algos to prevent in-
formation leakage, Galinov
said.
Meanwhile, the trading
industry is abuzz with chat-
ter about Pipelines long-term
prospects. Te settlement
in October came as a shock,
since few knew the afliate
Traders Wary After Pipeline Case
>Dark Pool s
David Mechner
Joe Gawronski
Continued on page 14
| December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
008_TMDec11 1 11/18/2011 8:30:27 PM
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P
roposals by two of
the exchanges op-
erated by NYSE
Euronext mark the
second time in the past two
years the exchange operator
has looked to sub-penny pric-
ing to gain an advantage over
brokers in the trading of retail
orders.
Te New York Stock Ex-
change and NYSE Amex have
asked the Securities and Ex-
change Commission for ap-
proval to allow a special group
of Retail Liquidity Providers
to quote between a stocks best
bid and ofer in increments
of one-tenths of a cent. Te
quotes would be hidden from
view and only accessible by
providers of retail order fow.
Te intent is to provide
the retail customer with bet-
ter pricing than is visible on
exchange books, a service now
provided by wholesalers and
other brokers that internalize
their orders.
Under the plan, the ex-
changes would pay order
senders and charge the liquid-
ity providers. Only bona fde
retail order senders would
qualify for the service. Te
RLPs will come from the
ranks of the exchanges Des-
ignated Market Makers and
Supplemental Liquidity Pro-
viders.
Still, under the SECs Reg-
ulation NMS, ex-
changes are barred
from quoting
in sub-pennies.
NYSE and NYSE
Amex are seeking
exemptions to the
rule, which does not apply to
broker-dealers.
Much retail fow is inter-
nalized by broker-dealers. Te
proposal by NYSE marks its
second attempt to win ap-
proval from the SEC to quote
in sub-pennies as a way to
compete with internalizers.
Last year, NYSE and two oth-
er exchanges wrote a joint let-
ter to the SEC requesting the
ability to trade in sub-pennies
in certain low-priced stocks.
Te SEC did not approve the
request.
Tere has been some de-
bate over the use of sub-pen-
nies in recent years as spreads
in many stocks have narrowed
to a penny. Some trading of-
fcials contend that a penny
increment may be too high
for some securities.
What is the natural tick
increment at which stocks
should trade? Joe Mecane, an
NYSE Euronext executive vice
president, asked rhetorically at
Octobers Security Traders As-
sociations annual conference.
Tis has been subject to de-
bate since the SEC released its
Concept Release.
Te NYSE proposal calls
for using hidden, not dis-
played, quotes. Tat contrasts
with the proposal in the letter
sent by NYSE, Nasdaq OMX,
and BATS Global Markets last
year to the SEC that called for
using displayed quotes.
Why not do this in dis-
played fashion and put them
on the SIP feeds? Chris Isaac-
son, BATS chief operating of-
fcer, asked at the conference.
Besides the issue of trans-
parency, the proposal is likely
to impact the ongoing debate
over a trade-at rule. Te SEC
is mulling a rule that would
push wholesalers and other
internalizers to ofer more
price improvement to their
customers. Te brokers have
complained such
a rule would kill
their business.
Te SEC is
worried that not
enough fow is
making it out of
brokerages trading
departments and to the public
markets. Giving exchanges
the right to trade in between
the spread could take the pres-
sure of of the wholesalers.
Tat would certainly
move the trade-at discussion
NYSE Floats Sub-Penny Again
>Trade Pri ci ng
This [natural tick increment]
has been subject to debate
since the SEC released its
Concept Release.
Joe Mecane
continued on page 14
10 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
010_TMDec11 2 11/18/2011 8:30:47 PM
011_TMApr11 5 3/28/2011 10:32:10 AM
A
s high-touch trades
continue to decline
and trading algos
get more and more
complicated, buyside frms
are turning to the sellside for
execution consulting that
combines high-touch service
with low-touch technology.
Tats according to a new
report by Tabb Group, which
found that by 2013 the way
the sellside services clients
will look radically diferent
from today. Traders will seek
out value-added insight from
their electronic trading part-
ners to help them traverse an
ever-shifting maze of deci-
sions, Tabb predicts.
Te report, Execution
Consulting: Te Next Gen-
eration in Sales Trading, en-
visions a new model for sales
trading that requires refned
skill sets to help buyside trad-
ers navigate market structure.
Tabb interviewed the heads
of sellside algo desks as well
as head traders at major asset
management frms and found
that there is an increasing
demand for the high-touch
equivalent of insight and ad-
vice, but from the sellsides
low-touch algo coverage.
While today there is a dis-
tinct diference between a sales
trader who has an opinion on
a stock and an algo desk cov-
erage person who can explain
a change in a liquidity-seek-
ing strategy, the future will see
more of a hybrid approach,
the report found.
You will fnd that there
are folks that have been high-
touch sales traders who are
now on sellside algorithmic
trading desks, said Laurie
Berke, a principal at Tabb
Group and study author.
Sitting next to that former
high-touch trader might be a
quantitative analyst with very
diferent skills, Berke said. To
ofer execution consulting ser-
vices, frms need to blend their
two diferent approaches.
Berke notes three skill sets
the buyside is demanding. Te
frst is the ability to know and
understand customers needs,
a page out of the traditional
sales trader playbook. Second
is expertise in a frms own al-
gos and trading technology.
Tird is a deep knowledge of
market structure.
Te bar is raised now for
low-touch coverage, Berke
said. Tey need this unique
blend of skill sets.
What really diferentiates
one broker from another is an
ability to apply trading tools
specifcally to the needs of an
individual customer, Berke
said. Te way to optimally use
an algo is very diferent for a
large-cap value manager than
it is for a small-cap growth
manager, she noted.
Youve got to understand
whats driving the buyside
clients transaction, she said.
Whats the objective of the
trade?
Execution consultants will
be able to demonstrate their
value if they can help clients
preserve and protect alpha,
something that will show up
in TCA numbers, she said.
Execution advisors could
largely replace traditional sales
traders, but the report predicts
there will be fewer of them in
the trading room.
Berke said once execution
consultants can prove they
save money, they will be able
to justify their fees.
Youre going to be able to
quantify it, and the buyside
will pay for it, she said.
Mark Kuzminskas, director
of equity trading for Robeco
Investment Management,
told Traders Magazine he
would be willing to pay for ex-
ecution consulting if it could
be shown to add value.
Kuzminskas said he has
seen the sellside beef up their
low-touch areas, adding more
contact individuals to provide
updates, performance metrics
and trend spotting.
As diferentiation amongst
algos and the various oferings
becomes harder and harder
to discern, I think thats led
to the sellside placing more
emphasis on distinguishing
the value add from one to the
next, Kuzminskas said.
James Armstrong
Low-Touch Trading Gets Personal
>Sal eS tradi ng
laurie Berke
12 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
012_TMDec11 3 11/18/2011 8:40:25 PM
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013_TMDec11 7 11/23/2011 10:02:17 AM
even existed. Even sources
sympathetic to Pipeline have
called its past marketing de-
ceptive and inappropriate.
Te companys block trad-
ing activities in the U.S. only
amount to about 30 percent
of its total business, accord-
ing to knowledgeable sources.
Pipelines analytic tool Alpha
Pro actually accounts for a
larger portion of its business,
but with a shadow cast over
the frms dark pool, other
units could lose customers as
well.
Several sources in the in-
dustry expressed doubts that
frms would be eager to work
with Pipeline on any of its ven-
tures, even those not touched
by the dark pool scandal.
By James Armstrong
Dark Pools
Continued from page
in a diferent direction, Me-
cane said.
Chris Nagy, a managing
director at TD Ameritrade,
contends the proposal, if ap-
proved, could difuse the
trade-at issue.
It wont be the demise of
internalization, Nagy told
Traders Magazine. But its
Trade Pricing
Continued from page 10
a very elegant solution for
trade-at.
Nagy contends the likely
customers for the proposed
service will come from the
ranks of the wholesalers or
internalizers, not frms like
his. Te exec is wary of the
program as his mandate is to
win price improvement for 80
percent of TD Ameritrades
orders. If I send in 100 or-
ders, how many will get price
improvement?
Still, one wholesaler found
the proposal objectionable.
Jef Martin, president of ATD/
Citi, found fault with the idea
of letting a market makers
hidden order take precedence
over a displayed quote.
Tat means I no longer
have to enforce Manning ei-
ther, Martin said at STA.
[NYSE] has a resting order
and allows someone to step
inside for less than a penny.
Under the so-called Man-
ning Rule, market makers like
ATD can only trade ahead of
their customers if the price
they trade at is inferior to that
a customer might receive by at
least a penny.
Te NYSE proposal would
let the exchange dealers trade
at sub-pennies. Tats why the
proposal needs an exemption
to Reg NMS Rule 612, Me-
cane said.
Peter Chapman
Busy Days
Number of Days with Market Moves >4%
14 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
014_TMDec11 4 11/18/2011 8:30:51 PM
015_TMDec11 8 11/23/2011 10:02:27 AM
and a former board
member of the BSTA
Foundation, joins
Williams from Avon
dale Partners, where
he spent four years
after spending much
of his career at Banc
of America Securities.
Both report to Stephen
Carl and Michael Ferry,
co-heads of equity sales
and trading.
>>Joseph Benanti
been promoted to di
rector of sales
at Rosenblatt
Securities in
New York.
Benanti, a 30-
year veteran,
joined Rosenblatt as
a salesman nearly fve
years ago after a long
career as a trader on the
foor of the New York
Stock Exchange. He
worked for several in
dependent brokerages,
including his own, and
was also a foor gov
ernor. Benanti reports
to Joe Gawronski, the
frms president and
chief operating ofcer.
>>Canaccord Genuity
has named
Gaasenbeek
of the capital markets
>>Robert Veek has
been promoted to man-
aging director and head
of institutional trading
at Summer Street
Research. He will con-
tinue to cover accounts
for the Boston-based
health care boutique,
which has three traders
in Boston and three
in New York. Prior to
joining Summer Street
last year, Veek spent
fve years at White
Cap Trading. Tat
came after 13 years
at Fidelity Capital
Markets as a trader
and market maker in
both Boston and New
York. He reports to Al
Sollami, the companys
chief executive.
>>Ryan Peterson
joins agency-only
broker Cheevers &
Co. as its new chief
compliance ofcer.
A seven-year veteran,
Peterson was previously
CCO for Fox River
Execution Technology
for just over a year.
Prior to that, he spent
four years as an at-
torney and compliance
consultant at Regula-
tion Technologies. He
was also an investigator
for the Chicago Board
Options Exchange. He
now leads a three-per-
son compliance team at
Cheevers. He reports to
president Laura Yunger.
>>Buckman, Buckman
& Reid, a full-service
brokerage frm, added
an institutional trading
group to its Shrews-
bury, N.J. ofce. Te
group was previously
with Seton Securities.
Bob Mezey, a 35-year
veteran, heads broker-
dealer sales. Veterans
Ron DAngelo and
Tony Pontecorvo run
trading. Also join-
ing the frm as sales
traders are veterans
Frank Passalaqua,
previously with Sterne
Agee; Peter Battaglia,
previously with the
Vertical Group; Chuck
Esposito; and Tony
Lopez. Te frm clears
through RBC Capital
Markets.
>>Glenn Koh joined
Bank of America
Merrill Lynch to lead
equity derivatives trad-
ing in the Americas.
Koh spent 14 years at
Morgan Stanley, most
recently in charge of
trading U.S. equity
index derivatives. Koh
reports to Henry
Mulholland, head of
Americas equities, and
Fabrizio Gallo, global
head of equities.
>>Jim Kelly joins
Citigroup Global Mar-
kets capital
introduction
group as a di-
rector in New
York. A 30-
year veteran,
Kelly was previously at
Morgan Stanley, where
he headed its transition
management group
in the Americas. Prior
to moving upstairs,
he spent 28 years on
the foor of the New
York Stock Exchange,
where he ran his own
frm. Kelly was also a
foor ofcial and board
member of the Alliance
of Floor Brokers. He
reports to Beth Neely,
who heads capital
introduction in prime
fnance for the Ameri-
cas at Citi.
>>John Hickey joins
the Buckingham Re-
search Group
as a senior sales
trader in New
York. Hickey,
a 22-year
veteran, was
previously with Sanford
C. Bernstein, where he
spent 11 years. Prior
to that, he worked at
Cantor Fitzgerald. He
reports to Tony Sutera,
who runs Buckinghams
equity trading desk.
>>Minority brokerage
frm Williams Capital
Group opened a Boston
ofce, hiring industry
veterans Rick Gill and
Ken Beaulieu as sales
traders. Gill, a 27-year
veteran, joins from
Sterne Agee, where
he spent four years.
A past president of
the Boston Securities
Traders Association,
Gill also worked at
Oppenheimer & Co.,
Gruntal & Co. and
Everen Securities. Beau-
lieu, a 13-year veteran
>>Mike Stewart has become the sole
head of UBSs global equities division.
He was formerly head of global equities
at Bank of America
Merrill Lynch and
joined UBS in July as
co-head of that banks
global equities division.
He assumed the role
of sole head following
the resignations of the
other global equities
chiefs, Yassine Bouhara
and Francois Gouws, in
the wake of the banks unauthorized trad-
ing scandal. Stewart reports to Carsten
Kengeter, chief executive ofcer of UBSs
investment bank.
16 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
016_TMDec11 1 11/18/2011 8:40:50 PM
and a former board
member of the BSTA
Foundation, joins
Williams from Avon-
dale Partners, where
he spent four years
after spending much
of his career at Banc
of America Securities.
Both report to Stephen
Carl and Michael Ferry,
co-heads of equity sales
and trading.
>>Joseph Benanti has
been promoted to di-
rector of sales
at Rosenblatt
Securities in
New York.
Benanti, a 30-
year veteran,
joined Rosenblatt as
a salesman nearly fve
years ago after a long
career as a trader on the
foor of the New York
Stock Exchange. He
worked for several in-
dependent brokerages,
including his own, and
was also a foor gov-
ernor. Benanti reports
to Joe Gawronski, the
frms president and
chief operating ofcer.
>>Canaccord Genuity
has named Matthew
Gaasenbeek president
of the capital markets
division of Canaccord
Genuity. Gaasenbeek,
who joined the frm 18
years ago, has led the
frms North Ameri-
can equities group for
the last four years. In
his new role, he will
manage all aspects of
the Canadian capital
markets business,
including investment
banking, research,
institutional sales and
trading, fxed income
and international
trading. Prior to this,
he was head of equities
at Canaccord Genu-
ity. Before Canaccord,
Gaasenbeek worked as a
management consultant
at PriceWaterhouse.
>>Allison Jacobs
joins Citi as a relation-
ship manager covering
equities and
options in its
broker-dealer
sales group.
Jacobs, a 12-
year veteran,
comes from Bank of
America Merrill Lynch,
where she worked in
the Global Execution
Services group. Before
that, she worked at
Credit Suisse in the
Advanced Execution
Services group. She
reports to Tom Fasano,
who heads U.S. broker-
dealer sales.
>>Robert Weinstein
joins Tullett Prebon as
head of institutional
equity sales and trading.
A 19-year veteran of the
industry, he
was previously
managing
director for
institutional
sales and trad-
ing at Dahlman Rose
& Co. Prior to that, he
oversaw a team of sales
traders at Lighthouse
Financial Group. Wein-
stein spent four years at
Bear Stearns, where he
was senior managing
director for institu-
tional sales and trading.
Weinstein reports to
Tom Bovitz, a senior
managing director at
Tullett Prebon.
>>Miley Nakamura
joins electronic trading
provider TORA as
a sales trader in Los
Angeles. Nakamura,
a 12-year veteran, was
director of Japanese
equities sales trading at
UBS in Japan. Prior to
joining the Asian-based
TORA, she did stints
at Citi and Goldman
Sachs. She reports to
managing directors
Khahlil Kirtman and
Rob Santos.
>>Capstone Invest-
ments hires executives
Alan Ebright, Douglas
Livingston and Mark
Sylvestri. Ebright, a
16-year veteran, joins
as senior vice president
institutional sales and
comes from Miller Ta-
bak & Co. Livingston,
a 10-year veteran,
comes on board as
chief compliance
ofcer from IXE
Securities. Sylvestri,
a 12-year pro, joins
as an equity analyst
from SES Partners.
All three report to
president Steven
Capozza.
reports to Beth Neely,
who heads capital
introduction in prime
fnance for the Ameri-
cas at Citi.
John Hickey joins
the Buckingham Re-
search Group
as a senior sales
trader in New
York. Hickey,
a 22-year
veteran, was
previously with Sanford
C. Bernstein, where he
spent 11 years. Prior
to that, he worked at
Cantor Fitzgerald. He
reports to Tony Sutera,
who runs Buckinghams
equity trading desk.
Minority brokerage
frm Williams Capital
Group opened a Boston
ofce, hiring industry
Rick Gill and
Ken Beaulieu as sales
traders. Gill, a 27-year
veteran, joins from
Sterne Agee, where
he spent four years.
A past president of
the Boston Securities
Traders Association,
Gill also worked at
Oppenheimer & Co.,
Gruntal & Co. and
Everen Securities. Beau-
lieu, a 13-year veteran
Got a new job? A promotion?
Did a colleague? Send your
particularsor a colleaguesto
onthemove@sourcemedia.com
>>Alan Rubenfeld joins Boston-based
QuantShares as director of sales to pro-
mote its market-neutral ETFs. Rubenfeld
has spent more than 20
years in portfolio trad-
ing and most recently
worked at UBS, after
a nearly two-year stint
at BNP Paribas. He
spent more than 10
years at Deutsche Bank.
He will work out of
New York. Rubenfeld
reports to Richard Block, QuantShares
chief administrative ofcer and director
of marketing. Block is the former head
trader at Putnam Investments.
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 17
017_TMDec11 2 11/18/2011 8:31:05 PM
P
eter Driscoll, a senior trader
with the Northern Trust Co.
and a former chairman of the
Security Traders Association,
has asked the Securities and
Exchange Commission to
reconsider its approval of
a controversial New York
Stock Exchange rule gov-
erning trading ahead, or
front-running.
Driscoll sent a letter to
the SEC on Oct. 18, ques-
tioning the legality of the
changes made by the NYSE
Euronext unit to its Rule
92. Te executive wants the
SEC to kick back the rule
to the NYSE and reopen
the comment period, which
ended Sept. 14.
Driscoll made his request as a
private citizen and not through his
company. Northern Trust is one of
the industrys largest money man-
agers.
Te rule change reduces the
protections currently aforded client or-
ders and makes the trading process much
less transparent, Driscoll told the SEC.
Buyside stakeholders were surprised by
this rule change.
As part of a rule harmonization pro-
cess under way between NYSE Euronext
and the Financial Industry Regulatory
Authority, the three stock exchanges op-
erated by NYSE Euronext reworked their
trading ahead rules to conform with FIN-
RAs Rule 5320, better known as Man-
ning.
With the changes, brokers were re-
lieved of their obligations to
ask the buyside upon receipt
of every order whether or
not they could trade along-
side, or ahead of, the order.
Now, the buyside trader
must raise the issue himself
with every order.
Te New York Stock Ex-
change fled its changes for
immediate efectiveness
rather than go through the
standard notice and com-
ment process. Te exchange
told the SEC it was eligible to fle in expe-
dited fashion partly because the rule does
not signifcantly afect the protection of
investors or the public interest.
Driscoll disagrees with that assess-
ment, telling the SEC that many clients
(buysiders) viewed this protection as fun-
damental.
Although fled as immediately efec-
tive, the rule proposal did include a 30-
day comment period. Te NYSE received
no comments. Driscoll blamed both bro-
kers and the NYSE for the lack of input
from the buyside, noting that the har-
monization of NYSE Rule 92 escaped the
attention of much of the buyside com-
munity.
At a recent industry conference, Rick
Ketchum, president and chief executive
ofcer of FINRA, urged brokers to work
closely with their customers on the new
trading ahead rules.
From the standpoint of the custom-
ers, a surprise never works, Ketchum
said. Teyre never positives. Teyre nev-
er received well by the regulators or the
media. Tis is a great time for the sellside
to take a step back and work toward an
environment where there is transparency
and understanding of the alternatives.
It is not unheard of for the SEC to
stay a rule it has approved. Typically, an
aggrieved party must fle a Petition for
Review with the regulator. Te Chicago
Board Options Exchange fled one in
2009 after the SEC approved the Inter-
Trader Asks SEC to Look At Rule
>F rONT- rUNNI NG
Peter Driscoll
The rule change reduces the protections currently
afforded client orders and makes the trading process
much less transparent. Buyside stakeholders
were surprised by this rule change.
Continued on page 24
18 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
018_TMDec11 1 11/18/2011 8:31:29 PM
D
espite complaints from
brokers over soaring levels
of market data, ofcials
from some of the leading
exchanges indicated they
werent enthusiastic about slamming on
the brakes.
I dont want to put on a fee that is
onerous, or be forced to by the SEC,
Chris Isaacson, chief operating ofcer
at BATS Global Markets, said during
a session on October 14 at the Security
Traders Associations annual conference
in Palm Beach, Fla. Everyones market
data technology costs would probably go
down, but spreads would widen and in-
vestors would be hurt.
At issue are broker complaints over
the tremendous increase in quotes being
streamed into exchanges by high-frequen-
cy trading frms and the cost of processing
all those messages.
Some frms, including Goldman
Sachs, are questioning whether the Secu-
rities and Exchange Commission should
step in and force exchanges to impose fees
on those customers that send in a large
number of quotes relative to the number
of trades done.
Tat could lead to a reduction in the
amount of quoting.
Te SEC is considering taking action.
David Shillman, a senior ofcial in the
SECs Division of Trading and Markets,
noted at a recent industry conference that
the SEC was mulling the idea of direct-
ing exchanges to implement some sort of
quote-to-orders fee.
Tis doesnt sit well with the exchanges.
We dont think the regulators have
the authority to dictate order-to-trade
ratios or cancellation levels, Bryan Har-
kins, chief operating ofcer at Direct
Edge, told the STA crowd. Tats a com-
mercial decision.
According to data supplied by the Fi-
nancial Information Forum, Direct Edges
EDGA exchange sends out about 109,000
quotes per second.
Some have criticized
the exchanges for a lack of
concern over the issue and
an approach that favors the
large quoters, which pro-
vide much of their liquid-
ity, over other members.
Te criticism is that
the exchanges are HFT-
friendly, Harkins added.
But in fact not all trafc
is good trafc. We have
throttles. Not every cus-
tomer likes throttles. We
do that to protect the mar-
ket. Every customer has a
certain message limit per second.
Trottling, done to some degree by
most exchanges, involves slowing down
the rate at which an exchange will accept
incoming messages.
Nasdaq OMX is taking a look at the
issue, according to Michel Finzi, Nasdaqs
head of U.S. equities, but it is also wor-
ried about overburdening those members
who provide the exchange with most of
its liquidity.
If entities are sending a signifcant
amount of quotes and never generating a
trade, then its not a good idea for us to
support that, Finzi said at STA.
But one must also be careful be-
cause there are certain models and folks
who provide value to the marketplace,
he added. Tat includes market-maker
strategies with two-way
prices in stocks. In volatile
times, they have to address
those and amend those
quite regularly.
Even if the exchanges
dont act, it is not impos-
sible that regulators wont
unilaterally try to rein in
message trafc with fees.
Tey do so in Canada, ac-
cording to Robert Fother-
ingham, a senior vice pres-
ident at the Toronto Stock
Exchange.
Fotheringham told
STA attendees that the In-
vestment Industry Regulatory Organiza-
tion of Canada, the Canadian equivalent
of the U.S.s Financial Industry Regula-
tory Authority, has begun factoring in
messaging when they allocate charges for
surveillance.
Peter Chapman
Message Traffc Fee Debate Rages
>Market data
Chris Isaacson
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 19
019_TMDec11 2 11/18/2011 8:40:43 PM
A
rule proposed by the Fi-
nancial Industry Regulatory
Authority that could limit
broker-dealers usage of in-
dications of interest drew
mixed reviews from those who submitted
comment letters to the regulator.
Brokers and their advocates shot down
the proposal, while one major buyside
shop praised FINRA. While respondents
difered on the rules impact on buyside-
sellside relations, both sides managed to
fnd some common ground.
Te STA is opposed to this amend-
ment, James Toes, president and chief
executive of the Security
Traders Association, told
FINRA in its letter. Rather
than clearing up a perceived
issue emanating from a
small subset of the mar-
ketplace, this amendment
would build a wall between
market participants.
In favor of the change
was Capital Research and
Management Company, a
large money manager based
in Los Angeles. Saying he
supported the broad in-
tent of the rule, Matt Lyons, the frms
global trading manager, urged FINRA to
fne-tune it. Capital Research applauds
the ongoing work of FINRA to improving
the quality and clarity between member
frms and their customers, Lyons said.
At issue is a proposed amendment to
Rule 5210, published last month, that at-
tempts to bar brokers from sending out
IOIs labeled as natural if they arent
backed by an actual customer order.
In its proposal, FINRA said it was con-
cerned that brokers were disseminating
misleading information regarding IOIs,
including not accurately labeling them to
refect their origination.
Te proposal addresses buyside com-
plaints that some IOIs they receive are
mislabeled. Teyre called naturals, but,
in fact, are not associated with an actual
order. Tere may be no order, or the or-
der may, in fact, be a bro-
kers proprietary position.
Te proposal is the third
time in the past fve years
that FINRA has addressed
the problem. In both Sep-
tember 2006 and May
2009, FINRA (or its pre-
decessor NASD) sent out
notices to its members re-
minding them to be truth-
ful when using IOIs.
Te warnings apparently
werent enough for some.
While we believe the
2009 notice was helpful, we received a
number of comments from our commit-
tees and otherwise that without a clear
defnition of a natural IOI, there is still po-
tential for misuse, FINRA president and
chief executive ofcer Rick Ketchum said
at a recent industry conference. Namely,
when the buyside trader attempts to reach
out to a natural IOI, he fnds there is no
longer any trading interest behind it.
Most IOIs are not labeled as naturals,
according to a vendor who distributes the
trade advertisements for brokers. Many
broker-dealer frms disseminate hundreds
of thousands of IOIs daily while mark-
ing only a few hundred or less as natural
IOIs, Raptor Trading Systems Nasser
Sharara told FINRA.
Still, those that are labeled natural get
the buysides attention. Many buyside
traders consider the non-natural IOIs as
noise and ignore them, Sharara explained.
Tey only view the natural IOIs.
In their letters, the brokers called
FINRAs proposal a bad idea. Tey ar-
gued they sometimes received verbal in-
structionsbut not actual orders from
their customers to send out IOIs on their
behalf. Tey told FINRA that that com-
muniqu should sufce.
Brokers also pointed out that some of
the so-called natural IOIs they send out
are based on previous conversations with
their customers. Tey often label these
IOIs as ITWs, or In Touch Withs.
Toes, citing concerns from STAs buy-
side members, said the requirement would
impede money managers search for li-
quidity and compromise the relationship
between a broker-dealer and a client.
Whichever side they took, some of
IOI Proposal Draws Mixed Reviews
>F I NRA
James Toes
Continued on page 24
20 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
020_TMDec11 3 11/18/2011 8:31:24 PM
Crou|ng ho curo
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o suy uhoud o |.
Aduncod Exocu|on Sor|cos

For on yours, ho gou| o Aduncod Exocu|on Sor|cos

(AES) hus boon o crouo ho curo ooryono o|so o||ows. From ln||no |n
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AES

- The Standard |n A|gor|thm|c Trad|ng


cred|t-su|sse.com
lnvestment banking services in the nited States are provided by Credit Suisse Securities (SA) LLC, an afhliate of Credit Suisse Group AG. AES and Advanced Execution Services are registered trademarks,
and Crosshnder is a trademark, of Credit Suisse Group AG or its afhliates. 2011 CPEDlT SlSSE GPOP AG and/or its afhliates. All rights reserved.
021_TMDec11 9 11/23/2011 11:21:20 AM
D
espite the hue and cry
over trades done in error,
the single-stock circuit
breakers introduced after
the May 2010 fash crash
were triggered by news events more than
half of the time, according to a report by
Credit Suisse.
Titled Pardon the InterruptionTe
Impact of Trading Halts, the report
found that 51
percent of trad-
ing halts from
June 2010 to
Sept ember
2011 came
after funda-
mental news
emerged about a stock. Te report
discovered 111 trading halts during that
period56 from news.
About 11 percent of circuit breakers
were triggered by a fat fnger trade, and
bad prints only caused about 6 percent of
trading halts, the report found. About 32
percent of trading halts were in cheap or
illiquid stocks.
During 2010, many traders publicly
grumbled about needless trading halts in
large stocks such as Citi, but the data runs
counter to the perception that most trad-
ing halts were caused by errors.
Certainly, some people will always
view trading halts as a nuisance, but they
may not be as negative as some people put
them out to be, said Ana Avramovic, an
analyst at Credit Suisse.
According to the report, trading halts
attributable to news are potentially unde-
sirable to some market participants
who are looking to proft from a
frst-mover advantage.
Still, exchanges have always
halted stocks when certain news is
pending to allow investors time to
digest all the relevant information.
Te single-stock circuit break-
ers can be seen as a continuation of that
practice.
When important news is released
during trading hours without advance
warning, circuit breakers can allow an
orderly adjustment process in which mar-
ket participants have time to correct for
imbalances before
submitting their
orders, the report
found.
In the cases
where news events
triggered the cir-
cuit breakers, no
harm came to the
market, and in
other cases the cir-
cuit breakers were
clearly helpful, the
report found.
Currently, the
Securities and
Exchange Commission plans to replace
the single-stock circuit breakers with a
proposed limit up/limit down rule, which
would introduce a pause for 15 seconds
before enacting a full trading halt.
Te limit up/limit down proposal
could eliminate trading halts caused by
bad prints, Avramovic said. Tat would
be an improvement over the current sin-
gle-stock circuit breaker rule, she added.
Limit up/limit down faces opposition
from within the futures and options in-
dustries, since derivative products could
still continue trading during a pause in
the underlying equity, which would make
hedging problematic.
James Armstrong
News Often Triggers Trading Halts
>Ci rCui t breakers
Some people will always view
trading halts as a nuisance, but
they may not be as negative as
some people put them out to be.
ana avramovic
Causes of Trading Halts
for SSCBs
News Event 51%
Cheap, Illiquid Stock 32%
Fat Finger Trade 11%
Bad Print 6%
source:Credit suisse
22 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
022_TMDec11 4 11/22/2011 5:16:17 PM
023_TMDec11 10 11/23/2011 10:02:43 AM
national Securities Exchanges clean cross
order type. Nasdaq OMX fled one this
month after the SEC prohibited it from
making a fee change.
Steve Nelson, principal at Nelson Law
Firm, says the SEC has backtracked more
frequently in recent years. Tats due to
pressure on the regulator to speed up its
approval process of exchange and FINRA
rules.
Tey cant really speed up because they
dont have the staf, Nelson said. So the
rule goes into efect and then the SEC real-
izes it was a bad idea and abrogates it.
Driscoll, who was chairman of the Se-
curity Traders Association from 2008 to
2009, did not respond to an email seek-
ing comment on whether he or any or-
ganization planned to fle a Petition for
Review with the SEC.
Peter Chapman
Front Running
Continued from page 18
J
amie Brigagliano, a former co-acting director of the Di-
vision of Trading and Markets at the Securities and Ex-
change Commission, joined Sidley Austin as a partner in
the frms securities and futures regulatory practice. Briga-
gliano spent 25 years with the SEC, working in the Divi-
sion of Trading and Markets for 13 years. He became an as-
sociate director for trading practices and processing in 2007 and
a co-acting director in 2009.
Under his watch, the division tackled the issue of transparency
in dark pools, including reporting and the use of indications of
interest; sponsored access; and the fallout from the fash crash
of May 2010.
Earlier, Brigagliano led the draft-
ing and implementation of Regula-
tion SHO, which updated the SECs
oversight of short sales. More recently
the attorney worked on new rules cov-
ering derivatives mandated by Dodd-
Frank.
Brigagliano won the divisions Jay
Manning award in 2003, given to
stafers for excellence in service.
Ex-SEC Offcial Joins Law Firm
>EmploymEnt
Jamie Brigagliano
the respondents suggested that fne-tun-
ing the labeling of IOIs was warranted.
JMP Securities, for instance, recommends
stratifying natural IOIs into three groups:
those with associated orders; those based
on verbal communications; and those
based on past conversationsthe In
Touch Withs.
Lyons, of Capital Research, suggests
that FINRA add two more categories:
principal IOIs, for those times when a
broker is looking to unwind a position,
and In Touch With IOIs. Some bro-
kers already label their IOIs as In Touch
Withs, but not all, Lyons noted.
Speaking at this years Security Trad-
ers Association conference in Palm Beach,
Fla., Ketchum said FINRA was divided
over the need to regulate IOIs. We really
do want comments on [the proposal], he
said. Even within FINRA, there is a de-
bate as to the appropriateness of how to
handle this issue, he said.
Peter Chapman
IOI Proposal
Continued from page 20
24 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
024_TMDec11 5 11/18/2011 8:31:52 PM
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26 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
026_TMDec11 1 11/18/2011 8:38:25 PM
A
As 2011 nears its close, Europe, staying employed and
Pipeline Trading were the most discussed topics this year,
according to traders. For investors and equity traders, the
end of July marked a watershed moment. Tats when
volatility kicked up and volumes skyrocketed after fears of
a fnancial blowup emerged in Europe from the regions
debt crisis. And stock markets took it on the chin, as a
correction briefy hit the 20-percent marka bear mar-
ketbefore recovering to positive territory in October.
Top 10
Stories
in 2011
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 27
027_TMDec11 2 11/18/2011 8:38:11 PM
T
raders were shocked this year
when Pipeline Trading Systems
agreed to pay $1 million to
settle charges brought by the
Securities and Exchange Commission.
Regulators alleged the company failed to
disclose that, at times, more than 97 per-
cent of the orders in its dark pool were
flled by a trading operation afliated with
the frm.
Te SEC also reached settlements
with Pipeline founder Fred Federspiel
and company chairman Alfred Berkeley,
who each agreed to pay a $100,000 fne
for their involvement. Berkeley is also a
former president of Nasdaq. Under the
agreement, neither man admitted nor de-
nied wrongdoing.
Pipeline launched its alternative trad-
ing system in 2004, billing itself as a
crossing network that matched orders to
provide natural liquidity. But the SEC
claimed Pipelines liquidity was anything
but natural.
Te company owned a trading entity
that has gone by multiple names, most
recently Milstream Strategy Group. Mil-
stream sought to predict the trading in-
tentions of the dark pools customers, the
SEC said. Milstream allegedly would then
trade elsewhere in the same direction as
those customers before fling their orders
on Pipeline.
In the frst four months after Pipeline
launched, the afliate, initially known as
Exchange Advantage, was a party to 97.5
percent of all transactions in the dark
pool, the SEC said. From the launch un
til the end of 2009, the afliate allegedly
participated in a total of about 80 percent
of all trades.
Pipeline told users that they were be
ing treated the same, but in reality provid
ed its afliate with advantages over other
users, according to the SEC. Tose advan
tages allegedly included special access to
certain information and data connections
that made it easier for the afliate to track
activity in the dark pool.
Te company responded to the charges
by reaching out to its customers, attempt
ing to retain their business in spite of the
Up until then, the frst half of the yearto put it
bluntlywas slow on the trading front, as volumes stag-
nated. Consequently, a number of frms laid of trading
professionals and the fears of further layofs continued
through the falldespite the uptick in trading volume
in the last half of the summer. Brokerage frms, from the
bulge to the independents, handed out pink slips, while
the buyside had its own concerns.
As a result, it should not come as a surprise that to-
tal compensation is expected to be down between 20 and
30 percent for equities trading pros this year. Tat comes
after a similar decline in equities compensation last year.
Some say the closing of proprietary trading desks, which
will be required by Dodd-Frank, has also shrunk compen-
sation.
Pipeline Trading provided its own lesson in prop trad-
ing. As it turns out, the block crossing network had an af-
fliate broker-dealer facilitating tradesnot the natural li-
quidity that it claimed to ofer. Te Securities and Exchange
Commission smacked the frm and its two top execs with
a total of $1.2 million in fnes. Te action put a new focus
on dark pools and forced the buyside to scramble to learn
all it could about routing practices and how pools operate.
Meanwhile, lower Manhattans Zuccotti Park took on
the look of an urban Woodstock in September, as hundreds
of disenfranchised mostly recent college graduates decried
corporate greed and the workings of the fnancial system.
Te group, Occupy Wall Street, became a lightning rod
for a hodgepodge of points of view, from the Green Move-
ment to redistributing wealth in America. As the weather
grew colder, however, the OWS crowd dug in its heels and
pitched tents. Tey built themselves a makeshift city, and
by doing so, ofered their own version of a popular saying
during the protests of the 1960s: Turn on, tune in, and
camp out. Amid this backdrop, Traders Magazine pres-
ents the top stories of the year.
>>Pipeline Fine Shocks Trading World
T
create a more stable trading environment
and restore confdence rattled by last years
fash crash.
Regulators introduced a myriad of
rules this year and foated new proposals
to fx market structure faws that led to
the May 6, 2010 event. Tey also want to
get a better handle on the forces driving
the market. Upon examining the fash
crash, many pointed at high-frequency
traders and their efect on the market
>>Regulators
28 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
028_TMDec11 3 11/18/2011 8:32:10 PM
claimed Pipelines liquidity was anything
Te company owned a trading entity
that has gone by multiple names, most
recently Milstream Strategy Group. Mil-
stream sought to predict the trading in-
tentions of the dark pools customers, the
SEC said. Milstream allegedly would then
trade elsewhere in the same direction as
those customers before fling their orders
In the frst four months after Pipeline
launched, the afliate, initially known as
Exchange Advantage, was a party to 97.5
percent of all transactions in the dark
pool, the SEC said. From the launch un-
til the end of 2009, the afliate allegedly
participated in a total of about 80 percent
of all trades.
Pipeline told users that they were be-
ing treated the same, but in reality provid-
ed its afliate with advantages over other
users, according to the SEC. Tose advan-
tages allegedly included special access to
certain information and data connections
that made it easier for the afliate to track
activity in the dark pool.
Te company responded to the charges
by reaching out to its customers, attempt-
ing to retain their business in spite of the
revelations. Pipeline scheduled in-person
meetings with customers to explain how
the afliate provides liquidity and to em-
phasize the execution quality its dark pool
provides.
We recognize that we should have
been more forthcoming about the criti-
cal role of our afliate and sincerely regret
that we were not, Pipeline said in a state-
ment to customers. We believeand can
show you in detailthat you have ben-
efted in the past from our afliates ability
to provide liquidity in the Block Market,
and you can beneft in the future.
In its defense, Pipeline has claimed it
has a patented mechanism to align the
interests of Milstreams traders with those
of customers. Under the system, traders
are supposed to be penalized if they make
trading profts at a customers expense.
In fact, Milstream has shown a cu-
mulative net operating loss since it was
launched along with Pipelines dark pool
in 2004. Tough in recent years Milstream
has made trading profts, including $18.4
million in 2008, it was operating this year
at close to breaking even.
Pipeline maintains the purpose of the
afliate was to provide liquidity, not to
make a proft. Still, for many in the in-
dustry, the issue comes down to a ques-
tion of trust.
People were using that pool with an
expectation that it was natural liquidity,
said one veteran broker. Maybe Pipeline
thought what they were doing was fair,
but its disappointing.
James Armstrong
quidity that it claimed to ofer. Te Securities and Exchange
Commission smacked the frm and its two top execs with
a total of $1.2 million in fnes. Te action put a new focus
on dark pools and forced the buyside to scramble to learn
all it could about routing practices and how pools operate.
Meanwhile, lower Manhattans Zuccotti Park took on
the look of an urban Woodstock in September, as hundreds
of disenfranchised mostly recent college graduates decried
corporate greed and the workings of the fnancial system.
Te group, Occupy Wall Street, became a lightning rod
for a hodgepodge of points of view, from the Green Move-
ment to redistributing wealth in America. As the weather
grew colder, however, the OWS crowd dug in its heels and
pitched tents. Tey built themselves a makeshift city, and
by doing so, ofered their own version of a popular saying
during the protests of the 1960s: Turn on, tune in, and
Traders Magazine pres-
T
he Securities and Exchange
Commission and other regula-
tors had a busy year, addressing
market concerns about how to
create a more stable trading environment
and restore confdence rattled by last years
fash crash.
Regulators introduced a myriad of
rules this year and foated new proposals
to fx market structure faws that led to
the May 6, 2010 event. Tey also want to
get a better handle on the forces driving
the market. Upon examining the fash
crash, many pointed at high-frequency
traders and their efect on the market
exacerbating market volatility and con-
tributing to the severity of price move-
ments and liquidity issues. Also, the role
of market makers in providing an orderly
marketplace was questioned.
To recap, 2011 saw the implementa-
tion of the sponsored-access rule; the
approval of the large trader rule; and
proposals for a limit up/limit down single-
stock circuit-breaker rule and a revamped
marketwide circuit-breaker rule. On top
of that, a new consolidated audit trail
gained traction, as did several ideas to
curb the impact of HFTs. Busy, indeed.
Te large-trader rule requires large-
volume traders to code their trade tickets
with a unique identifer and time stamp
for trades they execute. It targets both
buyside and sellside shops doing signif-
cant volume.
If requested by regulators, trade infor-
mation would have to be available one
day after a trade is completed.
Te market-access rule requires brokers
to screen all orders before they are sent to
the exchanges. Te rule prohibits traders
from sending orders directly to exchanges
and allows brokers to check for clearly er-
roneous fat fnger errors or other obvi-
ous discrepancies.
>>Regulators Look to Pacify the Market
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 29
029_TMDec11 4 11/18/2011 8:32:10 PM
Despite their preoccupation with im-
plementing more requirements mandated
by the recently enacted Dodd-Frank Act,
regulators continue to foat new propos-
als to fne-tune the market structure and
keep trades fowing smoothly.
A limit up/limit down proposal was
pitched as an improvement to the current
circuit-breaker rule. Other ideas being dis-
cussed include a minimum time require-
ment for quotes, a message trafc tax and
specifc market-maker obligations.
However, next years most likely
change to market structure will be the
implementation of a consolidated au-
dit trail. An audit trail will help provide
regulators with a detailed picture of what
trading looks like, allowing them to pin-
point causes of market stress and imple-
ment fxes to prevent major strains from
happening again.
We have not seen the end of issues and
concerns around the fash crash, said An-
nette L. Nazareth, partner at Davis Polk
& Wardwell, and a former SEC Commis-
sioner and director of the regulators Divi-
sion of Trading and Markets. Te SEC
continues to work on responses such as
the implementation of a consolidated au-
dit trail. Tis clearly is a priority, since the
SEC remains concerned about the time it
took to aggregate all the market data and
analyze it.
Stephen Nelson, principal of the Nel-
son Law Firm, agreed.
Clearly, we are in the mode where
there will be more regulation, he said.
John DAntona Jr.
W
ith volume slumping for
the second year in a row,
the industrys major stock
exchanges competed ag-
gressively for brokers business.
Tat meant cutting prices.
And, in the world of stock exchanges,
price cuts translate into higher rebates.
Tis year, the exchanges introduced new
rebate programs and sweetened the terms
of existing programs.
Tey added new rebate tiers, reduced
the volume thresholds necessary to qual-
ify for higher rebates and, simply, in-
creased rebates. Te upshot was to make
it easier for liquidity providers to qualify
for higher rebates. And while most of the
liquidity providers are market makers and
other high-frequency trading types, the
exchanges looked to broaden their source
of supply by creating rebate programs that
appealed to nontraditional suppliers such
as retail and institutional brokerages.
Tey are looking to add more fow to
their platforms that is not high-frequency
in nature, Pankil Patel, a managing direc-
tor of trading at Credit Suisse, told Trad-
ers Magazine earlier this year.
Its important for [the exchanges] to
get a good mix of fow in the door, Pankil
added. To that end, Nasdaq expanded its
Investor Support Program, while NYSE
Arca created a similar program called In-
vestor Tiers.
Perhaps the most dramatic move came
from BATS Global Markets, which had
previously kept its pricing simple. Eschew-
ing its fat pricing model, BATS tiered
the pricing on its fagship BZX exchange
in July. More liquidity now garners higher
rebates.
Much of the rebate activity occurred
in the frst half of the year, when average
daily volume was trending at 7 billion to
7.5 billion shares. Tat was down from a
run rate of 8.4 billion shares in 2010 and
9.8 billion in 2009.
Te business turned around in August
as concern over Europes debt crisis roiled
the stock market, producing a run rate of
8 billion shares through October.
Still, despite the recovery, the exchang-
es did not reverse course and kept tinker-
ing with their rebates.
In November, for instance, Nasdaq
launched a new program for frms that do
a lot of trading before the open. It added
a new tier to a program targeting big tak-
ers of liquidity, and it tweaked its Inves-
tor Support Program. All the steps taken
give more traders more opportunities to
qualify for higher rebates.
Peter Chapman
>>Low Volume Sparks Exchange Price War!
30 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
030_TMDec11 5 11/18/2011 8:32:28 PM
#1 ACROSS THE WORLD
Special thanks to our Members and
partners for helping us become the
#1 marketplace for institutional equities.
015_TMNov11 8 10/20/2011 11:08:41 AM
H
igh-frequency traders. Cant
live with em. Cant live
without em.
Tat was the message this
year coming out of the bigger brokers as
they took steps to both win HFT business
and help their institutional clients thwart
HFT trading.
Now that the Securities and Exchange
Commissions Rule 15c3-5, or mar-
ket access rule, has gone into efect, the
brokers are scrambling to put into place
an infrastructure that would allow them
to process orders from latency-sensitive
high-frequency trading frms. At the
same time, they are deploying technol-
ogy to help their money manager clients
combat what they contend are the HFTs
predatory trading practices. Brokers have
reworked their algorithms, built new
trading devices, deployed special-purpose
ECNs, and, in one extreme example,
completely reshaped their dark pools.
But can they do both? Can the brokers
serve two masters? Charles Susi, global co-
head of direct execution at UBS, believes
so.
By providing execution capabilities to
all segments, we can bring diferent kinds
of liquidity togetherand ofer even
more crossing opportunities, the exec
told Traders Magazine this summer.
Despite the reassuring words, the
buyside is still concerned about brokers
handling of their orders. Tis year they
stepped up their pressure on the sellside
to both provide them with more informa-
tion regarding the venues to which their
orders travel and to supply them with
technology to deal with the presence of
HFTs.
By some accounts, HFT volume rep-
resents half of all industry volume. To pla-
cate their worried customers, brokers have
taken a range of steps to add safety to the
trading experience. At a minimum, the
brokers are working with industry group
FIX Protocol Limited to supply trading
venue information to the buyside with
every trade report. At the other extreme,
theyre building new trading venues from
scratch.
Credit Suisse, for example, launched
an ECN called Light Pool that largely ex-
cludes high-frequency traders. Rival Mor-
gan Stanley is completely revamping the
matching methodology for its primary
dark pool to favor larger orders, the type
unlikely to be used by HFTs.
At the same time, the brokers arent
about to let a money-making opportunity
pass them by. Te SECs new sponsored
access rule requires all frms providing
direct market access to incorporate risk
checks. Tis could slow down latency-
sensitive HFTs, but is deemed crucial to
protecting the marketplace.
Previously, many of the more success-
ful providers of sponsored access did not
incorporate risk checks. Te big brokers,
however, largely shied away from the busi-
ness. But now that the playing feld has
been leveled, they are embracing spon-
sored access wholeheartedly. Teir eforts
are appreciated by HFTs.
If you fnd a bulge bracket frm who
has either built or acquired a very com-
petitive high-frequency trading platform,
then you get all the trappings of a full-ser-
vice prime brokerage ofering to go with
it, Manoj Narang, founder and chief
executive ofcer of HFT frm Tradeworx,
told this publication.
Peter Chapman
>>Brokers HFT Balancing Act
L
ong a distant relative to its U.S.
cousin, the Canadian equities
market spread its wings and
emerged this year as its own
powerhouse marketplacereplete with
multiple exchanges, dark pools, alterna-
tive trading systems and more algorithms.
Te countrys rise from old-school trad-
ing to mainstream among modern global
markets has been solidifed by its commit-
ment to a solid banking system, transpar-
ency and focus on the retail investor.
Against a backdrop of the failed merg-
er of the Toronto Stock Exchange and the
London Stock Exchange earlier this year,
the Canadian marketplace continued its
>>Canada Forges Ahead
32 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
032_TMDec11 6 11/18/2011 8:32:50 PM
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march toward becoming more like the
U.S. Tere was continued venue growth
and fragmentation in Canada, prompted
by regulatory changes in 2001the Na-
tional Instrument 21-101 Market Place
Operations and NI 23-101Trading Rules,
together known as the ATS rules.
One area of growth has been in dark
pools. Canada has always been a market
dominated by a handful of banks that
control trading in the public markets. But
times have changed. Tis year alone, sever-
al new dark pools have sprung up, adding
to the handful present last year. Goldman
Sachs launched its dark pool, Sigma X, in
Canada this year. Instinet also brought
dark liquidity to the marketplace.
Prior to this year, Liquidnet and ITG
were the only dark pool operators in Can-
ada.
Despite the dark venue growth, Can-
adas main trading exchange remains the
Toronto, which still sees nearly 60 percent
of all trading volume. But new alterna-
tives, such as TMX Select and Goldman
Sachss dark pool, are posing challenges to
current market leaders.
Other dark venues are to come, ac-
cording to observers, but the Investment
Industry Regulatory Organization of
Canada, the self-regulator of the Cana-
dian equities markets, recently proposed
that dark pools must ofer some type of
price improvement over the national best
bid and ofer for trades to take place in
unlit venues. Historically, Canadian trad-
ing has primarily taken place on the pub-
lic exchanges.
Until fnal rules are passed, dark vol-
ume will likely stay mired in the 3 to 4
percent range, as it has been for the last
few years. But some, such as Mike Big-
nell, president of Omega ATS, are opti-
mistic that volume could reach upward of
6 or 7 percent in the coming year.
Im optimistic growth could climb,
Bignell said.
But that growth is expected to be
tempered, according to Lida Preyma, di-
rector, capital markets research in global
fnance at the G20 Research Group at the
University of Toronto. She said that un-
til Canadian regulators are done passing
outstanding rule proposals regarding dark
pools, growth could be tepid.
What we see is that everyone is in a
holding pattern to see where regulation
is going to wind upno one wants to
spend money to set up a dark pool before
regulations are in place, Preyma said.
Venue growth has also prompted li-
quidity providers to compete more heav-
ily for business. In a bid to grab more
market share, Omega ATS recently de-
cided to eliminate taker fees. It eliminated
the pass-through fee typically charged
to investors who take liquidity from the
marketplace, making it the only free ATS
for participants in Canada.
As a result of more venues, a need for
connectivity solutions has emerged for
both the buyside and sellside. Sang Lee,
a managing partner at consultancy Aite
Group, said U.S. trading solution provid-
ers can expect to see increased demand for
their services in Canada.
Te Canadian market is going
through a tremendous amount of market
structure changesfrom fragmentation,
adoption of more sophisticated strategies
and algorithms to smart order routers,
Lee said. Tese technological changes,
combined with the growing presence of
high-frequency traders, he said, have cre-
ated a demand for innovation and more
product providers.
Te buyside is said to be looking at
smart order routers and crossing engines,
as well as algorithms that will help them
keep pace in changing times.
Canada is an evolving market and on
a technology trajectory to be very similar
to the U.S., said Mark Skalabrin, chief
executive at Redline Trading Systems.
John DAntona Jr.
W
ith one exception, the year
2011 is proving a tough
one for the nine bulge
bracket equities shops.
In the frst nine months, only Morgan
Stanley managed to excel. Te other eight
either saw their revenues decline from last
year or grow only modestly.
Conditions looked promising at the
top of the year. In the frst quarter, Gold-
man Sachs, Citigroup, UBS, Deutsche
Bank and Morgan Stanley all reported
higher levels of orders and commissions.
Tat didnt prevent most of them from
>>Bulge Weathers Rough Year
34 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
034_TMDec11 7 11/18/2011 8:32:48 PM
035_TMDec11 14 11/23/2011 10:02:56 AM
further.
Only Morgan Stanley, Goldman and
Credit Suisse were able to thrive during
the tumultuous quarter. Morgan Stanleys
Porat again singled out the frms electron
ic trading services and its derivatives fran
chise for praise. Goldman reported robust
commissions and improved market mak
T
taking their place as a dominant part of
the industry, all traders began looking
to these instruments as a gateway to the
brave new world of multi-asset trading.
Bryan Johanson, managing director
for global index and exchange-traded
products at NYSE Euronext, said ETFs
can blur the lines between equities and
other asset classes, since they themselves
are equities, but their underlying assets
might be fxed-income products, curren
cies, commodities or something else.
Currently, 39 percent of ETFs on
NYSE Arca track domestic equities, while
26 percent of listings track international
stocks. Commodities and futures-based
funds make up 14 percent of listings,
fxed-income funds make up 11 percent,
and currencies funds are 3 percent.
To trade ETFs efectively, frms have to
look beyond domestic equities, leveraging
their resources on trading desks across as
>>ETFs
posting lower revenues overall, however.
Citi reported a healthy cash equities
business, but still recorded a 9 percent
drop in total revenues due to problems
with principal positions.
Goldman cited lower market
making revenues for a 7 per-
cent decline. (All fgures are
net of accounting gains and
losses attributable to debt re-
valuations.)
Morgan Stanley was one
of the few to post a gain over
the frst quarter of 2010, fr-
ing on all cylinders. Cash eq-
uities, derivatives, and prime
brokerage all did well, chief
fnancial ofcer Ruth Po-
rat told analysts at the time.
Prime brokerage recorded its
highest level of client balanc-
es since the fnancial crisis of
2008, she noted.
By the second quarter,
business conditions worsened
as money mangers reined in
their trading. Still, the fve
U.S. bulge banks managed
to post double digit gains
while the Europeans recorded
declines. In the U.S., share volume was
down 30 percent compared to the second
quarter of 2010. In Europe, notional value
traded (in Euros) was down 14 percent.
Deutsche Bank, Credit Suisse, and
UBS all reported deterioration in their
cash equities business. Deutsche Bank
found conditions worse in Europe than
in the U.S., where it found some success
in derivatives trading. Still, the big Ger-
man bank posted a 14 percent drop in the
quarter to 555 million.
By contrast, UBS reported a big drop
in derivatives revenues due to more chal-
lenging trading conditions.
Te U.S. banks did well. Goldman
overcame anemic infows of stock orders
with better market making results, espe-
cially in derivatives. Morgan Stanley re-
ported a 37 percent jump to $1.7 billion.
Again, the gains were across the
board, according to Porat, stemming
from strong client activity. In addition,
growth in Morgan Stanleys electronic
trading services continued to outpace
the market, she said, while equity de-
rivatives were up signifcantly.
If the second quarter was dull, the third
quarter was anything but. In both the U.S.
and Europe, volume and volatility soared
as panic over Europes debt
woes set in. Despite heavy
trading by clients, most of
the bulge brokers got bruised
during the quarter. Some re-
ported a strong commission
business, but were done in by
their market making.
Much of the pain came
in derivatives, a notoriously
difcult business to manage
during frothy market condi-
tions. Te volatility got the
best of JP Morgan, according
to chief fnancial ofcer Doug
Braunstein, who reported an
8 percent drop in equities
revenues to $1 billion during
the quarter.
Others did much worse.
UBS reported a 30 percent
drop to 630 million Swiss
francs because of lower rev-
enues in both cash equities
and derivatives. UBS took
its derivatives hit in Europe,
while reporting better results in the U.S.
(Te fgure does not include the 1.85 bil-
lion Swiss franc charge UBS took for the
losses of a rogue trader on its Delta One
desk.)
Both Citi and BofA Merrill were also
whipsawed in equities derivatives. Bruce
Tomson, Merrills chief fnancial ofcer,
reported that revenues from cash equities
were down 7 percent during the quarter,
but those from derivatives dropped even
Down Days
Equities Revenues for Bulge Bracket
First Nine Months 2011
In Millions
2011 2010 CHANGE
1. GSCO $6,379 $6,086 4.8%
2. JPMI $3,670 $3,493 5.1%
3. CITI $2,169 $2,900 -25.2%
4. BAML $3,086 $3,362 -8.2%
5. MSCO $4,859 $3,731 30.2%
6. CSFB SFr. 4,000 SFr. 4,500 -11.1%
7. UBS SFr. 2,995 SFr. 3,523 -15.0%
8. DBAB 1,882 2,236 -15.8%
9. BARC 1,446 1,415 2.2%
Note: Figures net of accounting gains and losses attributable to debt revaluations (SFAS-159)
Source: Company reports
36 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
036_TMDec11 8 11/18/2011 8:33:08 PM
further.
Only Morgan Stanley, Goldman and
Credit Suisse were able to thrive during
the tumultuous quarter. Morgan Stanleys
Porat again singled out the frms electron-
ic trading services and its derivatives fran-
chise for praise. Goldman reported robust
commissions and improved market mak-
ing results. Te latter was due to efective
risk management of customer-driven po-
sitions in the volatile environment.
As Traders Magazine was going to
press the market conditions of the third
quarter were still present. Te stock mar-
kets in the U.S. and Europe were still
chewing over the European debt crisis as
concerns moved from Greece to Italy. Vol-
ume in October and November was up
signifcantly over last year and volatility,
as measured by the VIX index, was at his-
torically high levels. Equities departments
are bracing for layofs and signifcantly
lower bonuses.
Peter Chapman
T
raditionally, single-stock trad-
ers have rarely gotten involved
with exchange-traded funds.
But this year, as ETFs began
taking their place as a dominant part of
the industry, all traders began looking
to these instruments as a gateway to the
brave new world of multi-asset trading.
Bryan Johanson, managing director
for global index and exchange-traded
products at NYSE Euronext, said ETFs
can blur the lines between equities and
other asset classes, since they themselves
are equities, but their underlying assets
might be fxed-income products, curren-
cies, commodities or something else.
Currently, 39 percent of ETFs on
NYSE Arca track domestic equities, while
26 percent of listings track international
stocks. Commodities and futures-based
funds make up 14 percent of listings,
fxed-income funds make up 11 percent,
and currencies funds are 3 percent.
To trade ETFs efectively, frms have to
look beyond domestic equities, leveraging
their resources on trading desks across as-
set classes. Te expertise required to trade
ETFs demands a multi-asset approach.
Tat expertise, since it requires a
broader understanding of portfolio con-
struction, is typically not what you fnd on
a cash equity desk, said Tom Smykowski,
who heads ConvergExs global portfolio
and ETF desk. Youre going to have to
open your knowledge base to include dif-
ferent asset classes.
Smykowski noted that over the past
year, volumes for ETFs have grown sig-
nifcantly compared with the rest of the
market. Earlier this year, ETFs made up
between 25 and 30 percent of total vol-
ume, but this summer they rose to as high
as 40 percent of volume for some days.
Some believe that ETF trading added fuel
to the volatility, though others argue that
investors fed to the vehicles in response
to volatile markets.
With ETF volumes that high, equity
traders cant aford to ignore the shift to-
ward exchange-traded funds, which difer
from traditional equities in a number of
ways.
For one thing, volume does not always
equal liquidity in ETFs. Tat is because
authorized participants can create new
ETF shares out of a funds underlying as-
sets. Tey can also redeem ETF shares,
converting them back into the underlying
assets. Because of APs, an ETF can be liq-
uid even when its only lightly traded.
Matt Tucker, managing director of
U.S. fxed-income strategy at ETF giant
BlackRock, said APs have helped to pro-
mote even further collaboration among
desks specializing in diferent asset classes,
as that collaboration is vital to the cre-
ation/redemption process.
Since ETFs are a hybrid vehicle, frms
can come to a variety of conclusions in
terms of who gets to trade them, Tucker
said. While equity desks have tradition-
ally had authority over ETFs, the vehicles
can also be traded by those with the most
knowledge of their underlying assets.
Other frms have chosen to use ETF-spe-
cifc desks.
With this increased competition, trad-
ers who formerly just focused on U.S.
>>ETFs Push Traders Toward Multi-Asset World
rivatives were up signifcantly.
If the second quarter was dull, the third
quarter was anything but. In both the U.S.
and Europe, volume and volatility soared
as panic over Europes debt
woes set in. Despite heavy
trading by clients, most of
the bulge brokers got bruised
during the quarter. Some re-
ported a strong commission
business, but were done in by
their market making.
Much of the pain came
in derivatives, a notoriously
difcult business to manage
during frothy market condi-
tions. Te volatility got the
best of JP Morgan, according
to chief fnancial ofcer Doug
Braunstein, who reported an
8 percent drop in equities
revenues to $1 billion during
Others did much worse.
UBS reported a 30 percent
drop to 630 million Swiss
francs because of lower rev-
enues in both cash equities
and derivatives. UBS took
its derivatives hit in Europe,
while reporting better results in the U.S.
(Te fgure does not include the 1.85 bil-
lion Swiss franc charge UBS took for the
losses of a rogue trader on its Delta One
Both Citi and BofA Merrill were also
whipsawed in equities derivatives. Bruce
Tomson, Merrills chief fnancial ofcer,
reported that revenues from cash equities
were down 7 percent during the quarter,
but those from derivatives dropped even
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 37
037_TMDec11 9 11/18/2011 8:33:30 PM
a prepackaged algo to keep up, but when
there are massive jumps like those we saw
this summer, the ability to quickly cus
tomize algos becomes more important.
C
though investments in plants and new
hiring was noticeably absent, corpora
tions poured billions back into their own
stocks.
Tis year, buybacks have increased
49 percent, with 2011 on a course to
record $540 billion in buyback authori
zations, according to Birinyi Associates.
Tat would be the third-highest amount
in U.S. history after 2006 ($655 billion)
and 2007 ($863 billion).
During the frst three quarters of this
year, companies actually consummated
more than $376 billion in stock buy
backs. Tat already tops the $343 billion
in buybacks consummated in 2010 and is
well over the mere $156 billion consum
mated in 2009.
Te month of August alone saw 198
new buyback authorizations. Te last
time the market saw buyback activity that
signifcant was more than three years ago,
when corporations announced 199 buy
backs in the February before the fnancial
crisis hit.
In September, Berkshire Hathaway
>>Buybacks
cash equities have to broaden their hori-
zonslearning more about fxed-income,
commodities, international stocks and
foreign exchange.
It has become important to involve
traders with expertise in a variety of in-
struments, said NYSEs Johanson. Were
seeing more and more exotic and diferent
asset classes that are packaged as an ETF.
NYSE Arca has had more that 265
new ETF listings this year, with more an-
ticipated by years end. Already, 2011 has
broken the previous record set in 2007 of
223 new listings.
Now you have a ton of volume in
hundreds of ETFs that are out there, said
Paul Weisbruch, vice president of ETF/
options sales at Street One Financial.
Teres a lot of communication between
desks and departments where they can
hedge of exposure and probably more
seamlessly get big trades done from asset
class to asset class.
James Armstrong
F
or the past several years, buyside
traders have been consolidating
their algorithms, paring back the
number of tools on their desk-
tops. During 2011, that process acceler-
ated even further, with many frms decid-
ing to cut back to just a handful of algos,
often with each one tailored to specifc
needs.
People are trying to get from maybe
14 or 15 algorithms per broker to some-
thing more like four, said Todd Lopez,
managing director and co-head of Ameri-
cas sales at Goldman Sachs Electronic
Trading. I think four has kind of been
the magic number that weve seen.
Lopez said clients were overwhelmed
with diferent options and wanted to sim-
plify how traders access various strategies.
Te ability to customize algos has been
critical to limiting the number of tools
traders use, he added.
Customization has not ended with
specifc algos for diferent desks. Rather,
frms are trying to suit algos to the par-
ticular needs of each trader, said Peter
Sheridan, vice president and head of al-
gorithmic distribution for the Americas at
Goldman Sachs Electronic Trading.
What we fnd is, Trader A might
have a very diferent need from Trader
B, Sheridan said. Te idea is not just
to customize on a frm-wide level, but to
customize right down to the individual-
trader level.
Sheridan stressed that algo providers
are not reducing the number of strategies
they ofer, but are trying to drill down
and target specifc strategies for individual
clients. After a while, too many oferings
can become nothing but noise to traders,
he said.
Nitin Gambhir, chief executive of-
cer of Tethys Technology, said the move
toward fewer, more customized algos is
all about making trading desks more ef-
fcientand more proftable.
Teres this tremendous move hap-
pening where clients are getting more and
more sophisticated, and what they want is
the algo parameters to be tweaked to ensure
maximal use of capital, Gambhir said.
Algo providers have to customize their
products if they want their customers to
get the best execution, he said.
As the market has gotten volatile, the
natural response has sometimes been to
bypass algos altogether and move to more
hand management of trades. Tat, how-
ever, can put traders at a disadvantage,
said Dan Hubscher, who leads capital
markets for Progress Software.
Hubscher said prepackaged algorithms
always need to be tweaked when the mar-
ket changes, because they tend to work on
a set of assumptions that can become obso-
lete when there is a major shift in trading.
If you dont have the power to change
those in reaction to market events, youre
stuck, Hubscher said. While manual
trading might feel a bit safer, youre go-
ing to be behind the people who are still
in the market trading automatically, who
have the power to change their algorithms
very quickly, because they have custom-
ization tools.
He said when the market changes in
a slow or predictable way, it is easier for
>>Algos: Better, Faster Fewer
38 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
038_TMDec11 10 11/18/2011 8:33:28 PM
a prepackaged algo to keep up, but when
there are massive jumps like those we saw
this summer, the ability to quickly cus-
tomize algos becomes more important.
So while the number of algos on a
desk might be declining, the algos that
are there must be the most sophisticated
available, not only tailored to meet the
needs of individual traders, but also fex-
ible enough to adapt to rapidly changing
market conditions.
James Armstrong
C
oncerned about the future
but still fush with cash, many
companies sought to buy back
their own stock in 2011. Al-
though investments in plants and new
hiring was noticeably absent, corpora-
tions poured billions back into their own
stocks.
Tis year, buybacks have increased
49 percent, with 2011 on a course to
record $540 billion in buyback authori-
zations, according to Birinyi Associates.
Tat would be the third-highest amount
in U.S. history after 2006 ($655 billion)
and 2007 ($863 billion).
During the frst three quarters of this
year, companies actually consummated
more than $376 billion in stock buy-
backs. Tat already tops the $343 billion
in buybacks consummated in 2010 and is
well over the mere $156 billion consum-
mated in 2009.
Te month of August alone saw 198
new buyback authorizations. Te last
time the market saw buyback activity that
signifcant was more than three years ago,
when corporations announced 199 buy-
backs in the February before the fnancial
crisis hit.
In September, Berkshire Hathaway
announced it would engage in its own
buyback plan, a frst for the investment
company. Walt Disney, JPMorgan Chase,
Wal-Mart, Intel, ConocoPhillips and
Hewlett-Packard all authorized billions
for share buybacks in 2011.
Companies are still concerned about
making capital investments, but they
have an abundant amount of cash on
their balance sheets, said Jefrey Yale
Rubin, director of research for Birinyi
Associates. Buybacks are the way theyre
going.
So far this year, the fnancial sector
has had the largest number of authorized
buyback programs, followed by consumer
discretionary companies and industrials.
Technology companies, however, have
authorized the largest amount in dol-
lar terms, followed by companies in the
healthcare sector.
Brett Klein, a trader at Cheevers &
Co. who specializes in buybacks, said he
is optimistic that buybacks will continue.
One recent trend he noted is that more
company treasurers are setting up pre-ar-
ranged trading strategies, which allow
them to legally sidestep blackout periods
when they are not ordinarily allowed to
buy back their stock.
Corporations have about eight months
out of the year when insider trading rules
create blackout periods. However, under
the SECs 10b5-1 rule, companies can set
up a system to perform automatic stock
buybacks during those times.
Treasurers are increasingly seeing
these prearranged buybacks as a form of
risk management, Klein said. Should a
companys stock fall below a certain level,
a planned trade will be executed buying
back stock on the companys behalf.
Tim Sargent, chief executive ofcer of
equity research company QSG, said his
frm is working with the sellside and with
companies doing buybacks to ensure they
can get best execution.
Increasingly in an era of high-fre-
quency trading and questions surround-
ing trade signaling and other kinds of
slippage issues, these corporate manag-
ers want to make sure games arent being
played with the repurchase programs,
Sargent said.
A third-party provider can let compa-
nies performing buybacks know if costs are
in line with the marketplace and whether
or not the behavior of a stock is normal
during buyback executions, he said.
James Armstrong
>>Buybacks Rebound From Financial Crisis Lows
Paul Weisbruch, vice president of ETF/
options sales at Street One Financial.
Teres a lot of communication between
desks and departments where they can
hedge of exposure and probably more
seamlessly get big trades done from asset
James Armstrong
Algo providers have to customize their
products if they want their customers to
get the best execution, he said.
As the market has gotten volatile, the
natural response has sometimes been to
bypass algos altogether and move to more
hand management of trades. Tat, how-
ever, can put traders at a disadvantage,
said Dan Hubscher, who leads capital
markets for Progress Software.
Hubscher said prepackaged algorithms
always need to be tweaked when the mar-
ket changes, because they tend to work on
a set of assumptions that can become obso-
lete when there is a major shift in trading.
If you dont have the power to change
those in reaction to market events, youre
stuck, Hubscher said. While manual
trading might feel a bit safer, youre go-
ing to be behind the people who are still
in the market trading automatically, who
have the power to change their algorithms
very quickly, because they have custom-
He said when the market changes in
a slow or predictable way, it is easier for
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 39
039_TMDec11 11 11/18/2011 8:33:48 PM
T
he year began with low vol-
ume and little volatility, and
then changed rapidly midyear,
making 2011 a year of stark
contrasts. Usually, the end of July and
the month of August are the summer
doldrums, when not much happens. Tis
year, it was when everything changed.
Both volume and volatility skyrock-
eted this summer. Te VIX volatility in-
dex went from under 15 in April to a peak
of 48 in August. Volume levels tended to
mirror volatility, with monthly consoli-
dated volume jumping more than 74 per-
cent from July to August. (Volume this
August was 53 percent higher than the
same month last year.)
We view the period from July 25 to
the present as a radically diferent execu-
tion environment, versus the frst half of
the year, said Tim Reilly, head of North
America electronic execution sales at
Citi.
Reilly compared the market turn at the
end of Julyand the August sell-of that
followedto other recent game-chang-
ers, such as the quant meltdown of 2007,
the fnancial crisis of 2008 and the fash
crash and its aftermath in May 2010.
As the markets became more volatile
in the second half of this year, bid-ofer
spreads went up, especially for small- and
mid-cap stocks, he said. Tose spreads
have now stabilized at new, higher levels,
which have proven to have staying power.
Te defning challenge in the frst half
of the year was liquidity discovery, but
with the intraday volatility starting in late
July, Reilly saw an escalation in concerns
about short-term trading strategies. Tose
concerns dampened somewhat when the
market started going up, he added.
Tough volatilityand the high vol-
umes that typically go along with it
could go down, most traders are not look-
ing for that to happen anytime soon.
Just when you think were about to go
back to those low volumes that we saw at
the beginning of the year, something else
creeps up that keeps volatility ratcheted
up, said Ed Brown, executive vice presi-
dent for business development at the in-
terdealer broker ICAP.
Brown said that while few people saw
the sea change in markets coming, the
obvious signs were all there in the macro
environment. During the frst half of the
year, traders might just have overlooked
some of those signs as they were so fo-
cused on regulatory issues, he added.
Phil Lynch, chief executive ofcer of
Asset Control which provides economic
data to investors, said volatility will likely
continue into the coming year.
Tere are periods where the volatility
is going to spike, but the trend is that the
time frame in between those is going to be
much shorter, Lynch said.
Markets today are more electronic and
far more global than they were only a few
years ago, and with so much rapidly mov-
ing capital today, volumes and volatility
are bound to rise, he added.
James Armstrong
>>Volume and Volatility: The Comeback Kids
Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Consolidated Volume
I
n

B
i
l
l
i
o
n
s
40 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
040_TMDec11 12 11/18/2011 8:34:12 PM
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058_TMDec11 16 11/23/2011 10:02:58 AM
V
olume is up for the ninth straight
year in the options industry,
but theres a big diference this
year. Of the 21.6 percent increase in total
year-over-year volume through October,
over a third of the growth is coming from
contracts that expire weekly. Tat makes
weeklies one of the most successful product
launches in the industrys history. Since
the creation of the listed marketplace in
1973, most options contracts have expired
monthly.
Teres been a huge jump in volume
since the product was launched nearly
18 months ago, Steve Crutchfeld, chief
executive of NYSE Amex Options, told
Traders Magazine.
In the 10 months through October,
weeklies accounted for 9.1 percent of total
volume, according to data provided NYSE
Euronext. Tats up from 1.8 percent in the
same period last year.
Te fnal tally for the year is likely to
be even higher, as a big chunk of the avail-
able classes only began trading on a weekly
basis in September and October.
B
y

P
e
t
e
r

C
h
a
P
m
a
n
Weekly
Options
Surge in
Popularity
Short
Sweet
and
42 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
042_TMDec11 1 11/23/2011 12:32:47 PM
since the product was launched nearly
18 months ago, Steve Crutchfeld, chief
executive of NYSE Amex Options, told
In the 10 months through October,
weeklies accounted for 9.1 percent of total
volume, according to data provided NYSE
Euronext. Tats up from 1.8 percent in the
Te fnal tally for the year is likely to
be even higher, as a big chunk of the avail-
able classes only began trading on a weekly
basis in September and October.
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 43
043_TMDec11 2 11/23/2011 12:32:52 PM
W
time, in an attempt to squeeze out some of the volatility in their
stock portfolios.
Te Santa Barbara County Employees Retirement System,
the Hawaii Employees Retire
ment System, the Los Angeles
Department of Water and Power
Employees Retirement Plan, the
Seattle City Employee Retire
ment System and the Alaska
Retirement Management Board
are all in various stages of adopt
ing buy-write strategies bench
marked against the Chicago
Board Options Exchanges BXM
index. Te total to be hedged by
all fve plans could reach more
than $1 billion.
Tis is one of our approaches
to dealing with the fact that the
markets are much more volatile
now than they used to be, said
Colin Bebee, an analyst with
Portland, Ore.-based Pension
Consulting Alliance, a consul
tancy advising four of the fve
plans. Until recently, a buy-write
strategy hasnt been very popular
with pension plans, so most of
the managers were dealing with
are just now entering into it.
A buy-write, or covered call,
strategy involves selling calls
against a single stock or basket
In September, total volume attributable to weeklies was 10.6 per-
cent, according to NYSE Euronext. In October, that fgure was
12.2 percent.
Weekly volume can be even higher in some of the individu-
al classes. In Netfix options, in October, for instance, weeklies
comprised about 40 percent of all contracts. Trading in weekly
SPY options in October was 23
percent of the total, while trad-
ing in weekly options on Apple,
Inc., was 27 percent.
(Te percentages are of total
industry volume. It is important
to note however that weeklies
only trade 40 weeks of the year.
Tey do not trade during the
third week of the month when
the monthly contracts expire.
Terefore, percentages would
be higher if weeklies were only
compared against total volume
during the weeks in which they
trade.)
Although the exchanges have had the authority to list weekly
options since 2005, they only began in earnest in June 2010.
From a handful of available classes then, the number of weeklies
has jumped to about 100. Te listings are typically of the more
active names.
It has been the addition of new classes that is propelling the
growth in trading, according to industry sources. We opened up
the foodgates, explained Paul Stephens, director of international
and institutional marketing at Chicago Board Options Exchange.
Tat was especially true in recent months. According to the Op-
tions Clearing Corporation, 31 new names were added to the ros-
ter in September and October. Each exchange is limited by the Se-
curities and Exchange Commission to 15 listings apiece, but once
listed they are tradable by any exchange. A few of the nine options
exchanges have decided not to exploit into their allotments.
Te popularity of the product has exchanges chafng at the
SECs restrictions. Teir brokerage customers are clamoring for
new listings or complaining when one listing is dropped in favor
of another. We would like to expand the program, Stephens
said. Tere is certainly customer demand.
Te CBOE was the driver behind the Short Term Option Se-
ries Program, as it is called, becoming the frst and only exchange
to list weekly options (on indexes) in 2005. Te program stag-
nated, however, as the irregular symbols used to denote weeklies
caused complications for brokerage back ofces. Firms back
ofces were very much against weeklies, Stephens noted, and
some of their front ofces as well.
But with the OCC-driven symbology efort, completed in
May 2010, the door was thrown open to weeklies. Now all week-
lies share the same root symbol with the regular options. Tat
makes it easier for brokerages to process trades and customers to
fnd specifc contracts.
Charles Schwab & Co., which began its weeklies program in
January of this year, has seen its active-trading customers jump
on the new product. Its been dramatic, said Randy Frederick,
director of trading and derivatives at the Schwab Center for Fi-
nancial Research. Once we started ofering them, our clients em-
braced them very quickly and our volumes rose very sharply.
Frederick points out that over half of all trading in monthly
options occurs in the fnal week of the cycle. Given that, its a
natural that traders would migrate to weeklies, Frederick said.
You provide a lot of opportuni-
ties for people to do things that
they were only able to do once
a month in the past, Frederick
said. Tat creates an enormous
amount of fexibility.
Crutchfeld points out that
weeklies allow both buyers and
sellers to fne-tune their ap-
proaches to specifc events, such
as earnings announcements.
Traders can take positions in the
week of an occurrence rather
than weeks in advance. For buy-
ers, that reduces the premiums
they must pay since premiums
typically drop the closer the option gets to expiration. Tats the
advantage of the product, Crutchfeld said.
Also contributing to the surge in
Pensions Eye Buy-Writes
Continued on page 46
Paul Stephens, CBOE
Randy Frederick, Schwab
44 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
044_TMDec11 3 11/23/2011 12:33:07 PM
W
ith crisis comes opportunity. Tat seems to be the
message for the options industry as a group of
public pension plans moves closer to incorporat-
ing options into their portfolios, most for the frst
time, in an attempt to squeeze out some of the volatility in their
stock portfolios.
Te Santa Barbara County Employees Retirement System,
the Hawaii Employees Retire-
ment System, the Los Angeles
Department of Water and Power
Employees Retirement Plan, the
Seattle City Employee Retire-
ment System and the Alaska
Retirement Management Board
are all in various stages of adopt-
ing buy-write strategies bench-
marked against the Chicago
Board Options Exchanges BXM
index. Te total to be hedged by
all fve plans could reach more
than $1 billion.
Tis is one of our approaches
to dealing with the fact that the
markets are much more volatile
now than they used to be, said
Colin Bebee, an analyst with
Portland, Ore.-based Pension
Consulting Alliance, a consul-
tancy advising four of the fve
plans. Until recently, a buy-write
strategy hasnt been very popular
with pension plans, so most of
the managers were dealing with
are just now entering into it.
A buy-write, or covered call,
strategy involves selling calls
against a single stock or basket
of stocks. Te short call position ofsets the long stock position,
giving the investor a hedge against dips in the market. As such,
however, it can also cap any upside in the stock portfolio. In ad-
dition to its hedging properties, the tactic can also be used to
generate incremental income as the call seller receives the options
premium.
Benchmarking against the CBOEs
Te CBOE was the driver behind the Short Term Option Se-
ries Program, as it is called, becoming the frst and only exchange
to list weekly options (on indexes) in 2005. Te program stag-
nated, however, as the irregular symbols used to denote weeklies
caused complications for brokerage back ofces. Firms back
ofces were very much against weeklies, Stephens noted, and
But with the OCC-driven symbology efort, completed in
May 2010, the door was thrown open to weeklies. Now all week-
lies share the same root symbol with the regular options. Tat
makes it easier for brokerages to process trades and customers to
Charles Schwab & Co., which began its weeklies program in
January of this year, has seen its active-trading customers jump
on the new product. Its been dramatic, said Randy Frederick,
director of trading and derivatives at the Schwab Center for Fi-
nancial Research. Once we started ofering them, our clients em-
braced them very quickly and our volumes rose very sharply.
Frederick points out that over half of all trading in monthly
options occurs in the fnal week of the cycle. Given that, its a
natural that traders would migrate to weeklies, Frederick said.
You provide a lot of opportuni-
ties for people to do things that
they were only able to do once
a month in the past, Frederick
said. Tat creates an enormous
amount of fexibility.
Crutchfeld points out that
weeklies allow both buyers and
sellers to fne-tune their ap-
proaches to specifc events, such
as earnings announcements.
Traders can take positions in the
week of an occurrence rather
than weeks in advance. For buy-
ers, that reduces the premiums
they must pay since premiums
typically drop the closer the option gets to expiration. Tats the
Pensions Eye Buy-Writes
Continued on page 46
Continued on page 47
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 45
045_TMDec11 4 11/23/2011 12:33:08 PM
interest this year has been rela-
tively high levels of volatility,
especially since August. Te
appeal is to both buyers and sellers of options. Higher volatility
translates into higher premiums, which are attractive to sellers.
High volatility also means a greater chance for proft for buyers as
stocks bounce around more.
Te product is not limited to retail traders. When weeklies came
out, most people assumed they would be used for speculation, Eu-
gene Kearns, an executive in Credit Suisses Advanced Execution
Services group, said at
this years meeting of
the Chicago chapter
of the Security Traders
Association. But it has
turned out that institu-
tions use them for risk
management purposes
as well.
CBOEs Stephens agrees that demand is coming from insti-
tutions, but mostly short-term oriented hedge funds. Investors
with longer time horizons opt for monthlies when writing cov-
ered calls, for instance, he said.
For CBOE, hedge funds are behind much of the trading in the
weekly version of the exchanges venerable S&P 500 Index prod-
uct, the SPX. Trading in weekly SPX contracts has accounted for
between 8 percent and 10 percent of total SPX volumeCBOE
has a monopoly on SPX tradingthis year during the weeks that
weeklies trade.
Tats up sharply from last year when weeklies accounted for
between 2 percent and 4 percent of total SPX volume. Te reason
for the upswing is because of changes CBOE made in December
2010, according to Stephens. First, CBOE changed the SPX
weekly from an A.M.-settled contract to a P.M.-settled con-
tract. Second, the exchange made it easier to trade the contract
electronically.
Te customer for the weekly SPX is more of a hedge fund
type, Stephens said, and more online.
Some of the volume in weeklies has come at the expense
of volume in comparable monthlies, industry sources acknowl-
edge. Still, opinions diverge as to how much. Frederick and
Stephens say very little weekly volume is cannibalistic. NYSE
Amex Crutchfeld says his unit has done some research, but is
unable to quantify the shift.
Its difcult to quantify, Crutchfeld said. Youre playing
counter-factual. What would volume have been if there were no
weeklies? I think there is a pretty healthy mix of new volume.
Still some has moved away from the front month. Combined,
NYSE Amex and NYSE Arca trade about a quarter of all weeklies
volume, according to NYSE Euronext statistics.
Whatever is driving the volume, weeklies have become one
of the industrys hottest innovations, arguably in the same league
as contracts on the S&P 100 and S&P 500 indexes (1983); the
advent of electronic trading and the International Securities Ex-
change (2000); and the contract on the VIX (2007).
Certainly, the product has taken of. Within the frst month
our expectations were exceeded, Schwabs Frederick said. Te
activity was double what we thought it would be.
TM
Volume Surge
Continued from page 44
Expanding Universe
Weekly Options Contract Volume
January to October
2011 2010
Total options volume 3.9 billion 3.2 billion
Total weeklies volume 355 million 58 million
Weeklies/total volume 9.1% 1.8%
No. of weeklies at end of period 42 104
Sources: OCC, NYSE Euronext, CBOE
Its diffcult to quantify. What would volume have been if there were
no weeklies? I think there is a pretty healthy mix of new volume.
STEvE CruTChfIEld, NYSE AMEx OpTIONS
selling a listed SPX option against a portfolio of S&P 500 stocks.
In the past, the CBOE has funded studies that claim investors us
ing a BXM strategy can come close to matching the performance
of the S&P 500 over the long haul with only two-thirds of the
volatility.
Buy-writes are part of a broader group of hedging strategies
called overlays that use various derivatives including options,
futures and swaps to hedge stock portfolios.
Were starting them of with the BXM idea, Bebee said, be
cause using listed options is very transparent and you only have
to deal with one option per month.
Tese strategies have long been deployed by high-net-worth
individuals, foundations and endowments, but less regularly by
pension plans. Teir popularity tends to surge after market down
turns such as the crashes of 1987 and 2000, and then peter out.
Money manager Loomis, Sayles & Co. was a big player in the
early 1990s in buy-writes for institutions, but as the bull market
roared ahead, the business fell by the wayside.
Much of the renewed interest has been generated by the stock
Buy-Writes
Continued from page 45
Given the volatility of the last three years,
weve seen a lot of interest. Certainly more
46 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
046_TMDec11 5 11/23/2011 12:33:24 PM
between 8 percent and 10 percent of total SPX volumeCBOE
has a monopoly on SPX tradingthis year during the weeks that
Tats up sharply from last year when weeklies accounted for
between 2 percent and 4 percent of total SPX volume. Te reason
for the upswing is because of changes CBOE made in December
2010, according to Stephens. First, CBOE changed the SPX
weekly from an A.M.-settled contract to a P.M.-settled con-
tract. Second, the exchange made it easier to trade the contract
Te customer for the weekly SPX is more of a hedge fund
Some of the volume in weeklies has come at the expense
of volume in comparable monthlies, industry sources acknowl-
edge. Still, opinions diverge as to how much. Frederick and
Stephens say very little weekly volume is cannibalistic. NYSE
Amex Crutchfeld says his unit has done some research, but is
Its difcult to quantify, Crutchfeld said. Youre playing
counter-factual. What would volume have been if there were no
weeklies? I think there is a pretty healthy mix of new volume.
Still some has moved away from the front month. Combined,
NYSE Amex and NYSE Arca trade about a quarter of all weeklies
Whatever is driving the volume, weeklies have become one
of the industrys hottest innovations, arguably in the same league
as contracts on the S&P 100 and S&P 500 indexes (1983); the
advent of electronic trading and the International Securities Ex-
change (2000); and the contract on the VIX (2007).
Certainly, the product has taken of. Within the frst month
our expectations were exceeded, Schwabs Frederick said. Te
activity was double what we thought it would be.
TM
Its diffcult to quantify. What would volume have been if there were
no weeklies? I think there is a pretty healthy mix of new volume.
BXM index is considered a rela-
tively simple and transparent form
of covered call writing as it involves
selling a listed SPX option against a portfolio of S&P 500 stocks.
In the past, the CBOE has funded studies that claim investors us-
ing a BXM strategy can come close to matching the performance
of the S&P 500 over the long haul with only two-thirds of the
volatility.
Buy-writes are part of a broader group of hedging strategies
called overlays that use various derivatives including options,
futures and swaps to hedge stock portfolios.
Were starting them of with the BXM idea, Bebee said, be-
cause using listed options is very transparent and you only have
to deal with one option per month.
Tese strategies have long been deployed by high-net-worth
individuals, foundations and endowments, but less regularly by
pension plans. Teir popularity tends to surge after market down-
turns such as the crashes of 1987 and 2000, and then peter out.
Money manager Loomis, Sayles & Co. was a big player in the
early 1990s in buy-writes for institutions, but as the bull market
roared ahead, the business fell by the wayside.
Much of the renewed interest has been generated by the stock
market crash of 2008 and the subsequent bouts of volatility. Re-
cently, for instance, as fears have mounted over the European
debt crisis, the CBOEs
VIX index has moved into
the 30 to 35 range, signif-
cantly higher than its norm
of about 20.
Players in the niche
overlay market are reluctant
to predict a gusher of new
business this time out, but
are still optimistic. Given
the volatility of the last
three years, weve seen a lot
of interest, said Jack Han-
sen, chief investment ofcer
of the Clifton Group. Cer-
tainly more than four years
ago. Still, in the context
of all of the searches and
changes going on within institutional port-
folios, its a relatively small number.
Clifton is one of a handful of money
managers that specializes in overlays. Oth-
ers are Rampart Investment Management in
Boston, which is managing a program for
Santa Barbara County; Gateway Investment
Advisers, which won the Hawaii Employees
mandate; market makers Gargoyle Group; and Capstone Asset
Management. Te big passive fund managers, Russell and State
Street, have also recently entered the space.
TM
Buy-Writes
Continued from page 45
Jack Hansen, Clifton Group
Given the volatility of the last three years,
weve seen a lot of interest. Certainly more
than four years ago.
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 47
047_TMDec11 6 11/23/2011 12:33:27 PM
> ConvergEx Portfolio
Algo For Dark Pools
C
onvergEx Group re-
cently announced the
launch of the frst in
a new series of portfolio al-
gorithms, this one designed
specifcally for executing in
domestic dark venues.
Dubbed Spectrum, the algo
allows traders to maintain their
required cash and sector bal-
ances, something ConvergEx
says is not usually available in
algos for dark markets.
If you worked on a port-
folio desk for the last fve
years, its been really frustrat-
ing, said Gary Ardell, head of
the fnancial engineering and
advanced trading solutions
group at ConvergEx. All your
peers over on the single-stock
desks have been using better
and better dark technologies.
But you couldnt use them,
because the cash constraints
and the risk management
were just too hard.
With most dark algos, an
order can get executed quickly
or remain pending for a con-
siderable period of time, Ar-
dell said. Tat simply wont
do for portfolio traders, who
need to precisely manage risk
and cash balances, he said.
Spectrum ofers features
that are included in many
portfolio algos for lit markets
but are not always available
in the dark. For instance, it
ofers three separate cash ob-
jective options based on a cus-
tomers preferred level of cash
constraint, allowing them to
make sure they are keeping
the appropriate level of cash
on their books for a portfolio.
Te algo also supports
three distinct settings for risk
management, confguring to
meet a users selected level of
risk aversion.
James Armstrong
> Lime Acquires
Cactus Trading
L
ime Brokerage, a wholly
owned subsidiary of
Wedbush Securities,
which caters to the high-fre-
quency crowd, is buying Cac-
tus Trading.
Cactus provides a low-la-
tency, multi-asset-class trading
engine, designed for imple-
mentation, testing and deploy-
ment of algorithmic trading
strategies geared toward HFTs.
By integrating Cactus
technology, Lime can now
enable traders and quants to
express their trading strategies
in code, use that same code
to back-test their strategies
against historical data, simu-
late trading against live data
and then move to production
trading.
We are committed to in-
vesting in and developing the
Lime infrastructure so that
clients can focus on trading
and leave the technology to
us, said Jef Bell, chief execu-
tive of Lime.
Joe Signorelli, chief execu-
tive of Cactus Trading, and
David Don, chief operating
ofcer, will become managing
directors at Lime Brokerage.
John DAntona Jr.
> Algo Monitor
Watches for HFTs
S
anta Barbara, Calif.-
based HCMI has devel-
oped a real-time service
for the buyside that scans the
market for evidence of high-
frequency traders and their
computerized strategies.
HCMI is a customer of data
provider Nanex. Te underly-
ing technology behind HFT
Alert comes from Nanex, and
HCMI distributes and sup-
ports HFT Alert software.
According to HCMI presi-
dent Steve Hammer, HFT
Alert monitors the smallest
levels of algorithm activity in
the marketplace at any given
time by searching for fut-
tering. Fluttering, Hammer
said, is small changes in either
the bid or ask price that are
the precursor to a trade.
HFTs are doing the fut-
tering, Hammer said. Te
alert is an algo detection sys-
tem that checks for various
types of algo activity, such as
futtering or cycle repeaters.
Once it detects futter-
ing in either the bid or ask,
HFT Alert sends an audiovi-
sual alert on the users desk-
top. Once the trader receives
the notifcation, he can then
modify his trading strategy.
Te system can monitor an
unlimited number of stocks
or a single stock that exhibits
a high degree of message or
quote trafc, usually in excess
of 1,000 quotes per second.
Hammer added that fut-
tering can circumvent the
national best bid and ofer re-
quirement mandated by Reg
NMS. At one point in time,
the new futtered bid could
be the best bid and the algo
could execute a trade at one
price on one exchange and at
another futtered price on an-
other exchange.
In essence, you have two
NBBOs on two diferent
exchanges, Hammer said.
Portfolio managers can use
this to help to prevent front-
running of their orders.
Te system is targeted at
the both the buyside and sell-
side.
John DAntona Jr.
48 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
048_TMDec11 1 11/21/2011 2:20:36 PM
Contents
DECEMBER 2011 VOLUME 24, NUMBER 331
The Wor l d of Tr a de r s
Pictorial Coverage of Events and Conferences
50 DALLAS SECURITY TRADERS
ASSOCIATION
Annual Conference
September 8-10, 2011
Eric Cannon, Stifel Nicholas, Dallas; Daniel Lunsford, guest; Scott Bauer,
Nomura Securities, New York; John Daley, Stifel Nicholas, Dallas;
Brendon Varley, FBR Capital Markets, Dallas.
George Troyan, Barclays, New York; Ben Deweese, Esposito Securities;
Amanda and Kenny Kenvin, Esposito Securities; Clayton Duf, Capis, all Dallas.
55 SEATTLE SECURITY TRADERS
ASSOCIATION
Annual Conference
August 25-28, 2011
Tim Hoover, Nikki Hoover, both Russell Investments, Seattle; Bill Kitchens,
Morgan Keegan, Memphis; Stephanie Lipman, DA Davidson, Portland.
Carla Newsom, guest, Howard Lindsey, Goldman Sachs, New York; Ray and
Randy Geiger, JonesTrading, Aaron Avallen, Pipeline Trading, all San Francisco.
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 49
049_TMDec11 1 11/21/2011 6:19:39 PM
Greg Resnansky, Cantor Fitzgerald, Dallas; Chris Mitrando, Paul Ordinario,
Joann Orosco, DSTA, Dallas; Julie Halverson, Margo Rask, both guests.
Noelle Pepe, Mizuho Securities; Stephanie Fields, Ullink, both New York;
David Gehrke, Liquidnet, San Francisco.
Natalie Banks, DSTA; Chris Cole, Capis; Christina Emi, DSTA, all Dallas.
Todd Terry, ConvergEx, Dallas; Ginny Andrews, Vicki Andrews, both guests.
Dan and Nelsy Mele, Claude Connelly, all Williams Financial Group, Dallas.
DALLAS SECURITY TRADERS ASSOCIATION
Annual Conference
Four Seasons Resort Irving, TX September 8-10, 2011
1st row: Susan Ware, Director, Westwood
Group; Scott Mullins, Director, Penson Finan-
cial; Joann Orosco, Secretary; Dan Mele, 1st
Vice-President;
2nd row: Chip Miller, Director, Northpoint
ConvergEx; Kenny Kenvin, Director, Esposito
Securities; Mike Rask, 2nd Vice-President,
First Dallas Securities; Vic Topper, President;
3rd Row: John Daley, STA Governor, Stifel
Nicholas; Chris Halverson, Treasurer, Capital
Institutional Services; Alan Marshall, STA
Governor, Luther King, all Dallas.
Offcers
RECEPTION
50 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
050_TMDec11 2 11/21/2011 6:19:32 PM
Greg Resnansky, Cantor Fitzgerald, Dallas; Chris Mitrando, Paul Ordinario,
both Lazard, New York.
Joann Orosco, DSTA, Dallas; Julie Halverson, Margo Rask, both guests.
Samantha, Barbara and Joe Rosio, all guests.
Chris Halverson, Joanna Horton, both Capis; Mike Rask, First Dallas Securities,
all Dallas.
DAL L AS
Todd Terry, ConvergEx, Dallas; Ginny Andrews, Vicki Andrews, both guests.
Dan and Nelsy Mele, Claude Connelly, all Williams Financial Group, Dallas.
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 51
051_TMDec11 3 11/21/2011 6:19:52 PM
Brian Stuuka, Flextrade, Chicago;
Joanne Horton, Capis, Dallas.
Sam Lippitt, BTIG, New York;
Patti Andrews, BHMS, Dallas.
Steve Carolus, eTrade, Sue Lyall, Fred Ingles, both Citadel Execution Services,
all Chicago; Bob Richmers, UBS, New York; Bill Jacobson, eTrade, Chicago.
Eric Geier, ConvergEx, New York; Seth Webber,
Vandham Securities, Woodclif
BUSINESS MEETING &
PANEL DISCUSSION
State of Trading Today & Tomorrow
John Daley, Stifel Nicholas; Alan Marshall, Luther King Capital
Management, both Dallas; Joe Cangemi, ConvergEx;
Brian Williams, Liquidnet, both New York.
STA Update
Jim Toes, STA, New York.
DAL L AS
Rob Kirk, 1
st
Global, Dallas; Ellen White, Penson Financial Group, Dallas;
Rob Jacobs, PDQ ATS, Chicago.
Scott Mullins, Penson Financial Group, Dallas; Michael Miller, guest;
Joann Orosco, DSTA, Dallas.
Jay and Tifany Meagrow, Keybanc, Cleveland; Debbie and Kenny Gast, Instinet,
St. Louis.
Khash Sarraf, Castlerock, New York; Rob Kirk, 1
st
Global, Dallas; Michael Marr,
Castlerock, New York; Doug Throckmorton, Penson Financial Group, Dallas.
Ovidio Montemayor, John Lassen, Delon Mollett, Mike Gallagher, all
TD Ameritrade, Ft. Worth.
Joe Velenza, Goldman Sachs; Lisa Utasi, Clearbridge Advisors, both New York;
Mary McDermott-Holland, Nasdaq, Boston; Lauren OLeary, Dahlman Rose,
New York; Roger Peterkin, SS&C, Boston.
52 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
052_TMDec11 4 11/21/2011 6:20:13 PM
Brian Stuuka, Flextrade, Chicago;
Joanne Horton, Capis, Dallas.
Sam Lippitt, BTIG, New York;
Patti Andrews, BHMS, Dallas.
Steve Carolus, eTrade, Sue Lyall, Fred Ingles, both Citadel Execution Services,
all Chicago; Bob Richmers, UBS, New York; Bill Jacobson, eTrade, Chicago.
Eric Geier, ConvergEx, New York; Seth Webber,
Vandham Securities, Woodclif Lake.
Mike Gallagher, Gary Sjostedt, both TD Ameritrade, Omaha; Stan Thurley, UBS,
New York; Vidio Montemayer, TD Ameritrade, Omaha; Mark McDermott,
Collins Stewart, New York.
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Dean and Valerie Thompson, both guests. Kenny Kenvin, Esposito Securities;
Chris Halverson, Capis, both Dallas.
&
John Daley, Stifel Nicholas; Alan Marshall, Luther King Capital
Management, both Dallas; Joe Cangemi, ConvergEx;
STA Update
Jim Toes, STA, New York.
Ovidio Montemayor, John Lassen, Delon Mollett, Mike Gallagher, all
Joe Velenza, Goldman Sachs; Lisa Utasi, Clearbridge Advisors, both New York;
Mary McDermott-Holland, Nasdaq, Boston; Lauren OLeary, Dahlman Rose,
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 53
053_TMDec11 5 11/21/2011 6:20:12 PM
Stephanie Libien, Jef
DAL L AS
Scott Mullins, Penson Finacial;
Mark Heng, Morgan Stanley, both Dallas.
Matt Ambrogi, ITG, Chicago;
Zabi Fazal, UNX, Burbank.
Joe Turk, Southwest Securities, New York;
Kurt Johnson, ADM Investor Services, Chicago.
John Nowak, Walker Smith Capital, Dallas;
Joe Crisalli, Dahlman Rose, New York.
Andrew Weinberg, Pinebridge Investors, Dallas;
Michael Savini, Raferty Capital Management,
Chicago.
Stephen Capurson, Pat Malcolm, both
Cantor Fitzgerald, Dallas.
Dean Kordalis, Knight Capital Group, Jersey City;
Justin Burns, Esposito Securities, Dallas.
Lindsey Ater, Eze Castle, Dallas;
Waylan Wouters, DA Davidson, Denver.
Joe Merrick, Credit Suisse, Chicago;
Antonio Panos, Mixit, New York.
Jennifer Parsley, guest;
John Cooley, Lacerte Capital, Dallas.
Terry Flynn, New York; John Standerfer, Austin,
both S3 Technologies.
Chris and Julie Halverson, Capis, Dallas.
54 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
054_TMDec11 6 11/21/2011 6:20:31 PM
Wendy and Tyler McCollough, McAdams Wright, Seattle;
Richard Radulski, State Street Global Advisors, Boston.
Stephanie Libien, Jeferies & Co., San Francisco; Katie Ludwig, Alex Frink,
both Russell Investments, Seattle.
Robert Markulin, Cheevers & Co., Chicago; Doug Deatrick, Raymond James,
Los Angeles; Brian Stuckey, Flextrade, Chicago.
Josh Foer, guest speaker, Brooks Daggett, Goldman Sachs, New York;
Jesse Sullivan, Sparta Asset Management, Seattle.
SEATTLE SECURITY TRADERS ASSOCIATION
Annual Conference
Suncadia Resort Cle Elum, WA August 25-28, 2011
Nenad Yashruti, Past President, Freestone Capital; Lori Winkelhake, Director, McAdams Wright Ragen;
Tyler Platte, Vice President, Rainier Investment Management; Alex Frink, President, Russell Investments;
Andy Frey, Secretary, Summit Capital Management; Chris Lane, Russell Investments, all Seattle.
Offcers
RECEPTION
Joe Turk, Southwest Securities, New York;
Kurt Johnson, ADM Investor Services, Chicago.
Stephen Capurson, Pat Malcolm, both
Cantor Fitzgerald, Dallas.
Joe Merrick, Credit Suisse, Chicago;
Antonio Panos, Mixit, New York.
Chris and Julie Halverson, Capis, Dallas.
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 55
055_TMDec11 7 11/21/2011 6:20:51 PM
Nenad and Nicole Yashruti; Richard and Lauren Lee, all Freestone Capital
Mike McCarthy, Oppenhiemer, Seattle; Mara Rieden, guest, David Geobels,
Weeden & Co., Greenwich; Jason Rempel, Janney, San Francisco.
Aaron Avallon, Pipeline Trading; Brandi and Ray Geiger, JonesTrading, all
San Francisco; Robert Markulin, Cheevers & Co., Chicago.
Jill and Greg Harrison, Sandler ONeil, San Francisco; Mandy and Tyler Platte,
56 | |
SE AT T L E
Morgan Melchiorre, BATS Exchange, Kansas City; Charles Conner, CIBC,
Toronto; Brian Stuckey, Flextrade, Chicago.
Brooks Doggett, Goldman Sachs, New York; Mike McCarthy, Oppenhiemer,
San Francisco; Mara Rieden, guest.
Greg Harrison, Sandler ONeil; Erin Williams, Stifel Nicholas, both
San Francisco; Jill Harrison, guest.
Alex Brown, Knight Capital Group, San Francisco; Mike Kealy, Suntrust, Atlanta;
Brian Dunderdale, B. Riley; Erik Johnson, Knight Capital Group, both
San Francisco.
Tyler McCollough, guest, Stephanie Lipman, DA Davidson, Portland;
Richard Radulski, State Street Global Markets, Boston.
Chris Shea, Credit Suisse, San Francisco; Kim and Dan Chun, Washington
Capital Management, Seattle.
Lori Winkelhake, McAdams Wright Ragen; Justin Kane, Rainer Investment
Management, both Seattle; Kennedy James, guest.
Tim Hoover, Nikki Hoover, both Russell Investments, Seattle; Bill Kitchens,
Morgan Keegan, Memphis; Stephanie Lipman, DA Davidson, Portland.
56 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
056_TMDec11 8 11/21/2011 6:20:53 PM
SE AT T L E
Nenad and Nicole Yashruti; Richard and Lauren Lee, all Freestone Capital
Management, Seattle.
Mike McCarthy, Oppenhiemer, Seattle; Mara Rieden, guest, David Geobels,
Weeden & Co., Greenwich; Jason Rempel, Janney, San Francisco.
Aaron Avallon, Pipeline Trading; Brandi and Ray Geiger, JonesTrading, all
San Francisco; Robert Markulin, Cheevers & Co., Chicago.
Jill and Greg Harrison, Sandler ONeil, San Francisco; Mandy and Tyler Platte,
Rainier Investment Management, Seattle.
Brooks Doggett, Goldman Sachs, New York; Andy Frey, Summit Capital, Seattle;
Nancy Wallace, guest; Greg Pace, Weeden & Co., San Francisco.
Carla Newsom, guest, Howard Lindsey, Goldman Sachs, New York; Ray and
Randy Geiger, JonesTrading, Aaron Avallen, Pipeline Trading, all San Francisco.
BUSINESS MEETING &
PANEL DISCUSSION
Order Routing, Transparency and Broker Selection
Todd Brighton, Franklin Templeton, San Francisco; Savrabh Srivastana,
Credit Suisse; Mike Downey, NYSE; Bobby Greason, Rosenblatt
Securities, all New York.
STA Update
Brett Mock, BTIG,
San Francisco.
Tyler McCollough, guest, Stephanie Lipman, DA Davidson, Portland;
Richard Radulski, State Street Global Markets, Boston.
Chris Shea, Credit Suisse, San Francisco; Kim and Dan Chun, Washington
Lori Winkelhake, McAdams Wright Ragen; Justin Kane, Rainer Investment
Management, both Seattle; Kennedy James, guest.
Tim Hoover, Nikki Hoover, both Russell Investments, Seattle; Bill Kitchens,
Morgan Keegan, Memphis; Stephanie Lipman, DA Davidson, Portland.
www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 57
057_TMDec11 9 11/21/2011 6:21:13 PM
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Nenad, Nicole, Jordan and Amaya Yashruti,
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www.tradersmagazine.com TRADERS MAGAZINE | DEcEMbER 2011 | 59
059_TMDec11 10 11/22/2011 11:11:41 AM
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Liquidnet ............................................................... 31
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Rodman & Renshaw............................................... 53
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60 | December 2011 | TrADerS mAGAZINe www.tradersmagazine.com
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DECEMBER 2011 | TRADERS MAGAZINE www.tradersmagazine.com
Snapshot
Buyside
W
ith every crisis comes opportunity. In the case of Drew
Harbeck, a trader at the small-cap shop Cortina Asset
Management, his opportunity came when he joined the Mil-
waukee-based rms desk right
before the market meltdown
began, roughly three years ago.
I didnt expect to be get-
ting my feet wet in the midst
of a major correction, he said,
but noted that the benet was
being thrown into an incredibly
hostile market and learning that
there are times when you cant
be afraid to take risks trading.
Harbeck was new to trading, but he did have the benet of
doing a two-year apprenticeship at the
rm out of college. He started in the back
o ce. But before long, he found himself
on the desk as a trading assistant, gaining
valuable insights.
His boss and mentor Kurt Kujawa said
Harbeck couldnt have asked for a better
time to begin his career. Kujawa estimates
that one year of trading during the re-
cent upheaval is at least the equivalent of
two years of experience in normal times.
Kujawa should know. He found himself
in a similar situation when he started as
a Nasdaq market maker in February of
1987only months before that years his-
tory-making crash.
If you cant stomach those types of
markets, then youre in the wrong busi-
ness, Kujawa said. I tell Drew all the time, If you couldnt have
handled it, you wouldnt be here today.
Harbeck calls his boss a good mentor. Tere is a lot of back
and forth on the market and strategies, he said. Hes a good guy
to learn from, since hes been on both sides of the Street, Har-
beck said of Kujawa. Weve got a good, solid relationship.
Te need to develop relationships among small-cap brokers
is something Kujawa stressed early on. So Harbeck got involved
in the Security Traders Association of Wisconsin when he was an
assistant trader. His stature in the organization has grownHar-
beck is currently president of the 91-member STA a liate. In
October, he spoke on a panel at the STAs national meetinga
stint typically reserved for more experienced traders.
Te small-cap side of the business is still very dependent and
reliant upon relationships, Harbeck said. Tere is still a lot of
value provided by sellside brokers and theyve helped us source
liquidity that we normally wouldnt have been able to access.
Tat typically means nding blocks, though the rm uses
crossing networks like Liq-
uidnet, BIDS and Block-
Cross. If I send someone
an order, and its one of my
better relationships, theyre
going to know exactly how
I want that order worked.
Harbeck admits he
needs to keep learning and
growing as a trader. And
he only has to look across
the desk to learn the les-
sons from his mentor, who
is passing the baton from
one trading generation to
another.
Drew listens; he pays
attention; he asks ques-
tions and doesnt dwell on negatives; and he isnt afraid to take
a shot, Kujawa said. If someone is afraid to pull the trigger,
theyre never going to be any good. You cant trade scared.
Passing the Baton
Cortina Asset Management
AUM: $1.9 billion
Desk: Two traders
Broker List: 50 frms (80 research)
Avg. Commission: 3.75 cents
OMS: Advents Moxy
Drew Harbeck
B Y M I C H A E L S C O T T I
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