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Wall St watchdog to shut penny-stock market, boost OTC oversight

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By John McCrank

NEW YORK, Oct 8 (Reuters) – Wall Street’s industry-funded
watchdog plans to shutter its antiquated, quarter-century old
trading system for penny stocks, while increasing its oversight
of over-the-counter (OTC) securities traded elsewhere, according
to a regulatory filing.

In the early 1990s, if retail investors or other market
participants wanted to see a price quote for an unlisted stock,
the Financial Industry Regulatory Authority’s OTC Bulletin Board
(OTCBB) system, which was started for just that purpose, was the
place to look. But over the years private firms have enabled
electronic trading in OTC stocks, and the OTCBB, which brokers
still have to pick up a phone to trade through, has seen its
market share slide to well under 1 percent.

Now FINRA aims to close the OTCBB, while tightening
regulations around data collection from, and fair access to, OTC
marketplaces, according to a document posted on the U.S.
Securities and Exchange Commission website on Wednesday.

There are nearly 10,000 U.S. and global quoted OTC stocks.
These securities are not listed on any national stock exchange
and are often small companies that do not meet exchange listing
requirements, though there are larger OTC-quoted entities as
well, such as the government-controlled mortgage finance
companies, Fannie Mae and Freddie Mac.

There are so few market makers quoting bids and offers on
OTCBB, that FINRA is concerned that investors looking to the
inter-dealer quotation system for pricing information could be
harmed, according to the filing.

“FINRA believes that the remaining OTCBB information being
disseminated to investors is so incomplete as to be potentially
misleading with respect to the current pricing in these
securities,” it said.

FINRA also proposed in the filing that OTC marketplaces
grant open access to their systems and that they be required to
report each attributed quotation displayed on their systems by a
broker-dealer, to the regulator. Currently, the brokers have to
report the quotes.

OTC Markets Group Inc, which is now the dominant OTC
marketplace, said it supports FINRA’s decision to get out of the
trading business, and to boost regulatory requirements of market
operators, which for the most part OTC Markets already complies
with.

“FINRA shouldn’t operate a system that nobody uses. What
they should be is our regulator,” Cromwell Coulson, chief
executive officer of OTC Markets, said in an interview.

FINRA, which is the primary regulator of broker-dealer
trading on most national securities exchanges, said it would
continue to offer centralized last sale transaction reporting
through the FINRA OTC Reporting Facility.

It added that if the availability of quality OTC quotation
information to investors were to significantly decline, the
regulator would consider getting back into the inter-dealer
quotation system business. These differ from stock markets in
that they do not match buy and sell orders, but rather connect
brokers and provide pricing data.

(Reporting by John McCrank; Editing by Lisa Shumaker)


ConvergEx CEO says firm’s “dark pools” being remodeled

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By John McCrank

NEW YORK, Oct 10 (Reuters) – ConvergEx Group LLC
is revamping its two alternative trading systems, or “dark
pools,” due in part to expectations of tighter industry
regulations, Eric Noll, chief executive of the brokerage and
trading services provider, said on Friday.

Dark pools – private, broker-run venues where trading
information is kept secret until after trades are completed -
have faced intense scrutiny in recent months. Several regulators
are probing how the venues operate, and New York’s attorney
general has filed a lawsuit against Barclays accusing
the bank of misleading investors about its dark pool. Barclays
is fighting the lawsuit.

New rules for the industry are likely, Noll said.

“I think this is a train that is leaving the station, and we
want to be out ahead of it,” the former Nasdaq executive said at
a Society of American Business Editors and Writers conference.

ConvergEx has two dark pools, called Millennium and Vortex.
Noll said ConvergEx will relaunch Millennium by the end of
October as a marketplace where orders can only be executed at
the mid-point of the national best bid and offer available on
public stock exchanges, guaranteeing meaningful price
improvement.

The firm will relaunch Vortex in 2015 as a venue that will
give different pricing levels to different market participants
based on whom they want to trade with, Noll said on the
sidelines of the conference.

Some firms use complex algorithms to quickly flip shares for
profit. That can cause stock prices to move and the buyer or
seller may not get the best price. Others take a longer-term
investing approach. In Vortex, participants will be able to
choose the types of counterparties they want to interact with,
and will pay less to trade with the more aggressive firms and
more to trade with other investors.

Dark pools began as places for institutional investors, like
mutual funds, to buy and sell large amounts of stock without
tipping their hand to the wider market, which could cause the
price to move against them.

There are now more than 40 dark pools. While some still
cater to institutional clients, the average size of transactions
overall is not even 200 shares, which is less than on exchanges.

Around 15 percent of all trading happens in dark pools, and
because those venues do not reveal trading intentions before a
trade had taken place, they play little role in helping to find
the fair value of the stocks that trade on them.

Canada and Australia have taken steps to curb off-exchange
trading by requiring, for instance, that such trades be of a
minimum size or have a significantly better price than can be
found on an exchange. Europe and Hong Kong are also considering
new rules.

For the week of Sept. 15, Millennium was the 22nd largest
U.S. dark pool, with more than 29 million shares traded, while
Vortex was 28th, with nearly 18 million, according to the latest
data from the Financial Industry Regulatory Authority.

(Reporting by John McCrank; Editing by Bernard Orr)

U.S. gasoline prices lowest in nearly a year -Lundberg survey

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By John McCrank

NEW YORK, Oct 12 (Reuters) – The average price of a gallon
of gasoline in the United States dropped 12 cents in the past
three weeks to its lowest point in nearly a year, driven by the
latest round of falling oil prices, according to the Lundberg
survey released on Sunday.

Prices fell to an average of $3.26 per gallon for regular
grade gasoline, according to the survey conducted on Oct. 10.
Prices have fallen for the past 16 weeks, survey publisher
Trilby Lundberg said.

The price of a gallon is nearly 13 cents below what it was a
year ago and is at its lowest point since Nov. 22, she added.
The price peaked on May 2 and is down 46.5 cents since then.

Crude oil prices have fallen over the past several months to
near four-year lows, pressured by ample supply and concerns
about the strength of the global economy.

That has translated into buying discounts for refiners,
which have in turn slashed their wholesale gasoline prices,
Lundberg said.

“These have been deep and fast wholesale gasoline price cuts
and retailers have yet to pass the entire price cut through,”
she said. “We can expect another several cents at the pump in
the next few days,” she said, adding that would change if oil
prices were to suddenly rise.

The San Francisco Bay Area had the highest price within the
survey area, at $3.66 per gallon for regular, while the lowest
price was in Tulsa, Oklahoma, where regular grade cost $2.93 per
gallon.

(Reporting by John McCrank in New York; Editing by Lisa
Shumaker)

Nasdaq’s Friedman sharpens focus on listings, Silicon Valley

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By John McCrank

NEW YORK (Reuters) – Nasdaq OMX Group (NDAQ.O: Quote, Profile, Research, Stock Buzz) said on Monday it promoted several managers to executive vice president positions, sharpening the exchange operator’s focus on listings, Silicon Valley, and market technology, under new co-President Adena Friedman.

Friedman runs Nasdaq’s non-transactions based businesses, which now make up around three quarters of the exchange operator’s revenues. Sources told Reuters in June that Friedman is the clear successor to Chief Executive Robert Greifeld, who has led Nasdaq for more than 10 years.

“It’s a natural evolution of the business,” Friedman said in an interview, referring to the management reshuffle. “We’ve had great success and built up a great practice over the last 10 years and now we want to look forward to what’s going to happen over the next 10 years.”

Nasdaq has had a strong year for IPOs, with over 145 so far, but it missed out on Chinese e-commerce juggernaut Alibaba, which went with the New York Stock Exchange. Sources told Reuters that Alibaba executives worried about Nasdaq’s ability to handle the massive IPO, since the exchange had botched Facebook’s market debut two years earlier.

Friedman said Alibaba and Facebook had nothing to do with the changes announced on Monday.

“We’ve had hundreds of successful IPOs since the Facebook IPO and we continue to have success in that area,” she said. “Alibaba is one listing where we’re happy for them to have success in where they’ve chosen to list. We actually saw their IPO as a good catalyst for other companies to want to go public.”

KEY MOVES

As part of the reorganization, planned by Friedman and Greifeld, Bruce Aust will become Nasdaq’s vice chairman and a senior adviser to Friedman, relocating to San Francisco from New York. The former EVP, global head of listings, will pay special attention to key Nasdaq clients, and try to woo new listings in California’s Silicon Valley and beyond.

Nelson Griggs will take over as EVP in charge of Nasdaq’s listing services and be focused on wining new listings, retaining Nasdaq’s more than 3,000 listed companies, and trying to flip firms to Nasdaq from its rivals.

Bob McCooey, a senior vice president within the listings group, will also be responsible for developing and leading a new global key account management program aimed at shepherding Nasdaq’s key client relationships. 

Lars Ottersgard was promoted to EVP of Nasdaq’s market technology business, which has more than $200 million in annual revenue and customers in more than 70 marketplaces in 50 countries. The former global head of sales for Nasdaq’s commercial technology business will also stay at the helm of the company’s global market surveillance business, and its global risk and controls software business. 

All of the executives moving jobs will report to Friedman, who rejoined Nasdaq in June after spending three years as chief financial officer at private equity firm Carlyle Group.

Nasdaq’s transaction business is led by Co-President Hans-Ole Jochumsen.

(Reporting by John McCrank; Editing by Bernard Orr)

Wells Fargo to shut its ‘dark pool’ as demand falls

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By John McCrank

NEW YORK, Oct 16 (Reuters) – Wells Fargo is closing
down its alternative trading system, or “dark pool,” due to
decreased customer demand, the company said on Thursday.

The San Francisco-based bank will still offer its clients a
full suite of electronic trading tools to help them execute
orders, but will stop offering access to the company’s dark pool
on Friday, a spokeswoman from the bank told Reuters.

“Our products are customized to fit client trading
objectives and the products we offer are aligned with client
demand. Effective October 17, our product suite no longer
includes the Wells Fargo Liquidity Crosser,” the bank said in a
statement.

Dark pools are electronic broker-run electronic trading
venues, and every big bank has one. They allow investors to
trade shares anonymously and only make trading data available
after a trade happens, reducing the chance that others in the
market will catch wind of the buyer’s or seller’s intentions and
move the price against them.

The move by Wells Fargo comes as regulatory scrutiny over
dark pools has intensified over concerns about the lack of
transparency in the trading venues. Several regulators have
ongoing probes into dark pool operators and New York’s attorney
general has launched a lawsuit accusing Barclays PLC of
securities fraud for activities related to its dark pool.

Wells Fargo said the closure of its dark pool was not due to
increased regulatory scrutiny, but rather a lack of demand.

Wells Fargo’s dark pool ranks 32nd out of 41 alternative
trading systems tracked by the Financial Industry Regulatory
Authority in terms of volume. For the week of Sept. 22, the
Wells pool traded just under 7 million shares. By comparison,
Credit Suisse’s dark pool, at the top of the list, traded just
under 350 million shares.

With over 40 dark pools competing for much of the same order
flow along with 11 U.S. stock exchanges, critics say the venues
add to the fragmentation of the market, which increases
complexity and costs for market participants.

Wells Fargo said it would still be routing orders to other
dark pools for any customer that wishes it to do so.

(Reporting by John McCrank; Editing by Chris Reese and Cynthia
Osterman)

Exclusive: Wells Fargo to shut its ‘dark pool’ as demand falls

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By John McCrank

NEW YORK (Reuters) – Wells Fargo (WFC.N: Quote, Profile, Research, Stock Buzz) is closing down its alternative trading system, or “dark pool,” due to decreased customer demand, the company said on Thursday.

The San Francisco-based bank will still offer its clients a full suite of electronic trading tools to help them execute orders, but will stop offering access to the company’s dark pool on Friday, a spokeswoman from the bank told Reuters.

“Our products are customized to fit client trading objectives and the products we offer are aligned with client demand. Effective October 17, our product suite no longer includes the Wells Fargo Liquidity Crosser,” the bank said in a statement.

Dark pools are electronic broker-run electronic trading venues, and every big bank has one. They allow investors to trade shares anonymously and only make trading data available after a trade happens, reducing the chance that others in the market will catch wind of the buyer’s or seller’s intentions and move the price against them.

The move by Wells Fargo comes as regulatory scrutiny over dark pools has intensified over concerns about the lack of transparency in the trading venues. Several regulators have ongoing probes into dark pool operators and New York’s attorney general has launched a lawsuit accusing Barclays PLC of securities fraud for activities related to its dark pool.

Wells Fargo said the closure of its dark pool was not due to increased regulatory scrutiny, but rather a lack of demand.

Wells Fargo’s dark pool ranks 32nd out of 41 alternative trading systems tracked by the Financial Industry Regulatory Authority in terms of volume. For the week of Sept. 22, the Wells pool traded just under 7 million shares. By comparison, Credit Suisse’s dark pool, at the top of the list, traded just under 350 million shares.

With over 40 dark pools competing for much of the same order flow along with 11 U.S. stock exchanges, critics say the venues add to the fragmentation of the market, which increases complexity and costs for market participants.

Wells Fargo said it would still be routing orders to other dark pools for any customer that wishes it to do so.

(Reporting by John McCrank; Editing by Chris Reese and Cynthia Osterman)

US stock options markets agree to need for trading halts on big moves

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By John McCrank

NEW YORK, Oct 23 (Reuters) – U.S. options market operators
have agreed in recent months on the need for new automatic
trading halts when stock options prices suddenly surge or
plunge, in a bid to reduce excess volatility and blunt the
impact of erroneous trades, according to five sources with
knowledge of their discussions.

The plan, which takes its cue from a rule known as “Limit
Up/Limit Down” that U.S. stock markets put in place in response
to the May 6, 2010 “Flash Crash,” is still in the early stages,
with market operators trying to figure out how a similar rule
could be applied to options trading, the sources said.

In the stock market, if the price of a stock moves outside
of a range of prices it has recently traded in for more than 15
seconds, the stock is briefly halted to give traders a chance to
figure out if the move was justified, or if it might have been
in error.

There are currently 12 options markets in the United States,
run by Nasdaq OMX Group, BATS Global Markets, Deutsche
Boerse’s ISE unit, TMX Group’s BOX Options Exchange,
Miami International Holdings Inc and Intercontinental Exchange
Inc’s NYSE unit.

“This initiative makes great sense for the industry to
pursue and we’re happy to work with market participants and
regulators to make it a reality,” said Jeromee Johnson, who runs
BATS’ options market.

Boris Ilyevsky, managing director of ISE’s options
exchanges, said that ISE supports the concept of a theoretical
price band for options, noting that it would be an added risk
protection mechanism for the market. He said the exchange is in
discussion with regulators and other exchanges, adding that
“much work remains to be done to create a structure that
provides sufficient protection but also allows sufficient
flexibility in volatile market conditions.”

The other market operators declined to comment.

The options market plan is likely years away from being
implemented. But the move by market operators highlights growing
concerns over the speed and complexity of options markets, which
are dominated by computerized trading, after a series of
operational snafus in the markets in recent years. These include
a software error by Goldman Sachs Group Inc in August
2013 that flooded stock options markets with bad trades, sending
some options prices down sharply.

Operational risks are not limited to the options markets and
there are worries that because of the interconnectedness of the
ultra-fast electronic markets, a problem in one market could
quickly spiral out of control and affect other asset classes.

The idea of adding Limit Up/Limit Down to the options market
has merit, said Michael Schwartz, chief options strategist at
Oppenheimer & Co Inc.

“It would let them be able to stop and say, ‘Did you mean to
do that?’” he said. “It gives them a chance to make certain
these are not erroneous and could affect other options that are
trading.”

The Financial Industry Regulatory Authority declined to
comment.

LONG PROCESS

Market structure changes can take time to implement, as
different operators must come to agreement, figure out the
technical details and have regulators sign off on the plans. The
Limit Up/Limit Down rule in stock markets, for example, was
proposed by the U.S. Securities and Exchange Commission in April
2011. It was approved in June 2012, but not fully implemented at
the exchanges until May 2014.

The task is much more complicated in options markets, which
means the equities rule cannot be simply pasted into the options
rule book, the sources said.

The issues include the question of whether to base the price
band on the option itself, or on the underlying stock. Further,
there are around 5,000 companies publicly listed on U.S. stock
exchanges to which the price bands apply. But there are more
than half a million options series based on those stocks, and
many of them rarely trade.

Cognizant of these difficulties, options market operators
have decided to take a two-step approach to bringing order to
their markets, which currently operate under a disparate set of
rules.

Sources previously told Reuters that the first part of the
plan, which creates a uniform set of rules on how to deal with
erroneous trades, is soon to be filed with regulators.

Options market operators would like to apply the price bands
to options as the second phase of the plan, the sources said.

(Reporting by John McCrank; Editing by Paritosh Bansal and
Martin Howell)

Exclusive: U.S. stock options markets agree to need for trading halts on big moves

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By John McCrank

NEW YORK (Reuters) – U.S. options market operators have agreed in recent months on the need for new automatic trading halts when stock options prices suddenly surge or plunge, in a bid to reduce excess volatility and blunt the impact of erroneous trades, according to five sources with knowledge of their discussions.

The plan, which takes its cue from a rule known as “Limit Up/Limit Down” that U.S. stock markets put in place in response to the May 6, 2010 “Flash Crash,” is still in the early stages, with market operators trying to figure out how a similar rule could be applied to options trading, the sources said. 

In the stock market, if the price of a stock moves outside of a range of prices it has recently traded in for more than 15 seconds, the stock is briefly halted to give traders a chance to figure out if the move was justified, or if it might have been in error.

There are currently 12 options markets in the United States, run by Nasdaq OMX Group, BATS Global Markets, Deutsche Boerse’s ISE unit, TMX Group’s BOX Options Exchange, Miami International Holdings Inc and Intercontinental Exchange Inc’s NYSE unit.

“This initiative makes great sense for the industry to pursue and we’re happy to work with market participants and regulators to make it a reality,” said Jeromee Johnson, who runs BATS’ options market.

Boris Ilyevsky, managing director of ISE’s options exchanges, said that ISE supports the concept of a theoretical price band for options, noting that it would be an added risk protection mechanism for the market. He said the exchange is in discussion with regulators and other exchanges, adding that “much work remains to be done to create a structure that provides sufficient protection but also allows sufficient flexibility in volatile market conditions.”

The other market operators declined to comment.

The options market plan is likely years away from being implemented. But the move by market operators highlights growing concerns over the speed and complexity of options markets, which are dominated by computerized trading, after a series of operational snafus in the markets in recent years. These include a software error by Goldman Sachs Group Inc in August 2013 that flooded stock options markets with bad trades, sending some options prices down sharply. 

Operational risks are not limited to the options markets and there are worries that because of the interconnectedness of the ultra-fast electronic markets, a problem in one market could quickly spiral out of control and affect other asset classes.

The idea of adding Limit Up/Limit Down to the options market has merit, said Michael Schwartz, chief options strategist at Oppenheimer & Co Inc.

“It would let them be able to stop and say, ‘Did you mean to do that?’” he said. “It gives them a chance to make certain these are not erroneous and could affect other options that are trading.”  

The Financial Industry Regulatory Authority declined to comment.

   

LONG PROCESS

Market structure changes can take time to implement, as different operators must come to agreement, figure out the technical details and have regulators sign off on the plans. The Limit Up/Limit Down rule in stock markets, for example, was proposed by the U.S. Securities and Exchange Commission in April 2011. It was approved in June 2012, but not fully implemented at the exchanges until May 2014.

The task is much more complicated in options markets, which means the equities rule cannot be simply pasted into the options rule book, the sources said.   

The issues include the question of whether to base the price band on the option itself, or on the underlying stock. Further, there are around 5,000 companies publicly listed on U.S. stock exchanges to which the price bands apply. But there are more than half a million options series based on those stocks, and many of them rarely trade.

Cognizant of these difficulties, options market operators have decided to take a two-step approach to bringing order to their markets, which currently operate under a disparate set of rules.   

Sources previously told Reuters that the first part of the plan, which creates a uniform set of rules on how to deal with erroneous trades, is soon to be filed with regulators. 

Options market operators would like to apply the price bands to options as the second phase of the plan, the sources said.

(Reporting by John McCrank; Editing by Paritosh Bansal and Martin Howell)


KCG reports loss, says could sell Hotspot FX trading venue

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By John McCrank

NEW YORK, Oct 30 (Reuters) – Trading firm KCG Holdings Inc
, which reported a third quarter loss on Thursday, said
it may sell its electronic foreign exchange trading venue,
Hotspot, as regulatory pressures in the FX market may make the
unit more attractive to potential buyers.

KCG reported a net loss of $9.6 million, or 9 cents per
share in the period, compared with a profit of $227.8 million,
or $1.99 a share, a year earlier. The company said that several
factors pressured revenues during the quarter, including a
seasonally slow July and August in U.S. equities, along with
heightened competitive pressures in the market making business.

The Jersey City, New Jersey-based firm said it had begun to
explore strategic options for Hotspot, and that it would aim to
sell the unit if doing so would create the best value for its
shareholders.

The $5.3 trillion-a-day foreign exchange market has been the
focus of a probe by regulators in Britain following allegations
that bank traders used advance knowledge of client orders to try
and manipulate foreign exchange benchmarks. JPMorgan, UBS and
Deutsche Bank each set aside more than $1 billion in the third
quarter for extra legal costs, which sources have said is mostly
to cover potential fines relating to currency market
investigations. Barclays Plc set aside around $800 million in
the quarter for potential fines.

The regulatory pressures could cause more banks to shift the
big voice-based orders at the center of the currency market
scandal to more transparent electronic systems. That in turn
could make Hotspot, which has a client base of banks,
professional trading firms and institutional investors, a hot
commodity.

“I think we’ve seen this movie before,” KCG Chief Executive
Daniel Coleman said on a call with analysts to discuss the
company’s results. “You start with fines, then you start with
regulatory change and then you start with market change. I think
Hotspot is really well positioned to play a big role here and I
think there is an opportunity for shareholders to get a good
value if we go that route,” he said.

KCG may in the future also consider selling its stake of
just under 20 percent in privately held exchange operator BATS
Global Markets, Coleman said.

“We are very happy owners of the BATS stake and we think
it’s a great organization … but if there’s a great opportunity
for us to monetize, we would consider it,” he said.

KCG, which trades equities, fixed income, currencies and
commodities through both voice and automated execution, and
includes an agency brokerage and off-exchange trading platforms,
formed in July 2013 after trading firm Getco bought rival Knight
Capital Group.

(Reporting by John McCrank; editing by Andrew Hay)

U.S. options exchanges say new rule threatens to hurt investors

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By John McCrank

NEW YORK (Reuters) – U.S. equity options exchange operators warned on Thursday that a new rule to be implemented on Jan. 1 aimed at making sure banks have adequate capital levels could significantly raise costs for many investors that trade options.

The rule, known as the Collins Amendment, is part of the 2010 Dodd-Frank Wall Street reform law. While aimed at making sure banks keep capital and credit risks in line, the rule would also apply to the options market-making arms of the banks, which would be required to measure credit risks more strictly than many do now. Market makers post buy and sell orders on exchanges so that securities are easier to trade, profiting from the spread between the bid and the offer.

The rule would boost capital costs for the market makers in some cases by five or six times from where they are now, said Steve Crutchfield, head of NYSE’s options markets at Intercontinental Exchange Inc. Those capital costs would ultimately be borne by investors, he said.

“This is not a question about cushioning the banks from effective regulation or appropriate capital rules,” he said at the Securities Industry and Financial Markets Association’s Listed Options Symposium. “This is a question of a policy that would have, we believe, a significant punitive effect on investors that trade with market makers, which is the vast majority of customer orders coming in to our markets.”

In September, 86 percent of options orders traded on NYSE’s Amex and Arca exchanges had a market maker on one side of the trade, he said.

Options exchanges were unaware that the rule would affect their markets until just a few weeks ago, because calculating risk in a listed equity options position is different from calculating credit risk on a bank balance sheet, said Jeromee Johnson, head of options at BATS Global Markets.

He said the exchanges, along with banks and others, are currently lobbying members of Congress to pressure the Federal Reserve to delay the effective date of the rule so that the industry has time to appropriately respond.

“The Fed has the ability to delay enforcement. The Fed has the ability to provide some interpretive guidance. If we want some relief, that’s where it needs to end up,” he said at the symposium. Options

Executives from Nasdaq OMX Group, Deutsche Boerse’s ISE unit, TMX Group’s BOX Options Exchange, Miami International Holdings Inc, and CBOE Holdings Inc also warned of the potential costs to options investors.

“Obviously, this wasn’t the intent of Dodd Frank,” said David Gray, vice president of business development at CBOE. “I don’t think any of us here or anybody on the Hill would think that the intent of Dodd Frank was to push business away from the listed derivatives community.”

(Reporting by John McCrank; Editing by David Gregorio)

IEX Group says to allow visible stock orders in late January

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By John McCrank

NEW YORK (Reuters) – IEX Group, which runs an alternative trading system known as a “dark pool,” said on Monday it plans to allow members to begin posting visible orders on its platform as of Jan. 31 as it prepares to become a full-fledged stock exchange.

Dark pools are broker-run electronic trading venues that allow investors to match buy and sell orders anonymously, making trading data available only after a trade happens in an attempt to prevent the others in the market from moving the price against them. Dark pools are more lightly regulated than exchanges, but cannot conduct initial public offerings and house listings, among other differences.

IEX said in a note to traders it plans to allow visible orders to subscribers of its TOPS data feed, helping them identify available interest in the market.

The quotes shown on IEX will be “unprotected,” meaning they will not be included in the data feed that displays the national best bid and offer. On registered exchanges, brokers must send their orders to the exchange showing the best bids and offers available.

New York-based IEX, which was featured in Michael Lewis’ book “Flash Boys: A Wall Street Revolt,” has said it aims to become a registered stock exchange by the end of 2015, competing with the likes of Nasdaq OMX Group (NDAQ.O: Quote, Profile, Research, Stock Buzz) and BATS Global Markets.

IEX opened shop in October with a stated goal of creating a market that was simple and fair. It uses an electronic speed bump to take away any advantages of high-speed traders. It does not pay rebates to entice order flow. It has only four order types versus hundreds at some exchanges, and it is owned by fund companies and individual investors, not by banks or brokers.

(Editing by Matthew Lewis)

BATS appoints market veteran Concannon as new president

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By John McCrank

NEW YORK (Reuters) – BATS Global Markets, the No. 2 U.S. stock exchange operator by volume, said on Tuesday it appointed market veteran Chris Concannon as its president, effective Dec. 15.

Concannon, most recently president and chief operating officer of trading firm Virtu Financial, was among two leading candidates for the job, Reuters reported on Oct. 1.

Prior to Virtu, Concannon spent six years at Nasdaq OMX Group (NDAQ.O: Quote, Profile, Research, Stock Buzz) helping lead its transaction services business.

“It’s an exciting time in U.S. equity market structure and that’s a certain passion of mine and I am returning to that passion,” Concannon said in an interview.

One major challenge will be to help improve investors’ confidence in the markets, he said.

“We have systems that break, markets that go down, and we have a raging debate around market structure,” he said, referring to the U.S. stock market in general. “I want to remind people that we have the best markets in the world.”

The debate around the fairness of the U.S. stock market moved to Main Street from Wall Street in late March with the release of author Michael Lewis’ book “Flash Boys: A Wall Street Revolt,” which claimed that the markets were rigged to favor high-speed traders through special access to exchanges.

Shortly after the book was released, former BATS president William O’Brien took part in a heated exchange on live television with Lewis and others, who questioned his facts on how some high-speed firms connect to the exchange. The next day, BATS took the extraordinary step of publicly clarifying some of O’Brien’s comments.

Then in July, BATS, which also runs the largest pan-European equities exchange and a U.S. options exchange, abruptly announced that O’Brien had left the company.

His departure came less than six months after BATS merged with rival Direct Edge, where O’Brien had been chief executive. BATS CEO Joseph Ratterman took on the dual CEO/president role, which he also held from June 2007 through January 2014.

Regulators have recently been eying changes to how the stock markets operate. Specifically, the U.S. Securities and Exchange Commission has been working with the exchanges to put together a one-year test program that would increase the minimum trading increments for the stocks of companies with small- and mid-sized capitalizations to see if doing so would lead to more trading.

The current plan “needs some fixing,” but the pilot program is a good idea, Concannon said.

“A stock that trades once a month shouldn’t be in the same market structure as Cisco (CSCO.O: Quote, Profile, Research, Stock Buzz) and Microsoft (MSFT.O: Quote, Profile, Research, Stock Buzz), so that’s the area that we need to focus and spend time on,” he said.

Concannon, who early in his career worked as an attorney for the SEC, will report directly to BATS Chief Executive Joe Ratterman.

(Editing by Chizu Nomiyama and Matthew Lewis)

Exclusive: BATS to settle biggest-ever fine to an exchange – source

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By John McCrank

NEW YORK (Reuters) – BATS Global Markets is expected to settle a U.S. regulatory probe related to its dealings with high-frequency trading firms for $15 million, in what is likely to be the biggest fine ever handed out to an exchange operator, according to a source familiar with the situation.

The U.S. Securities and Exchange Commission has been investigating how Direct Edge, which merged with BATS in late January, may have selectively disclosed information about how firms can advantageously place orders on its market.

An announcement is expected as early as Friday, but could be delayed by a week or two, said the person, who did not have permission to speak with the media.

The SEC and BATS declined to comment.

Previously, the largest penalty ever levied against a stock exchange was $10 million to Nasdaq OMX Group (NDAQ.O: Quote, Profile, Research, Stock Buzz) in May 2013 to settle civil charges stemming from mistakes made during Facebook’s initial public offering in 2012.

On Tuesday, BATS, the second largest U.S. stock exchange by volume, said it appointed market veteran Chris Concannon as its president, effective Dec. 15.

In July, the company, based near Kansas City, abruptly announced that its president, William O’Brien, had left. Less than six months earlier, BATS merged with Direct Edge, where O’Brien had been chief executive. Ratterman took on the dual CEO/president role, which he also held from June 2007 through January 2014.

BATS also runs an options exchange and the biggest pan-European stock market.

(Reporting by John McCrank; Editing by David Gregorio)

Exclusive: Wall St. firms seek bigger say in market issues – sources

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By John McCrank

NEW YORK (Reuters) – A major Wall Street trade group is lobbying to get legislation passed that would give trading firms, banks and institutional investors a greater say in how the U.S. stock market is governed, according to three people familiar with the plans.

The Securities Industry and Financial Markets Association (SIFMA) is making the case to lawmakers on Capitol Hill that the costs to implement and maintain market initiatives to its members, which include about 400 banks, brokers and asset managers, are significant, yet they have little input in crafting those rules. SIFMA has drafted the legislation and is looking for sympathetic ears, the people said.

The lobbying effort is in the early stages and there is no guarantee that SIFMA will be successful in getting the legislation passed, the sources said.

The sources declined to be identified because they were not permitted to speak with the media. SIFMA declined to comment.

Currently, only self-regulated organizations, or SROs, which include registered stock and options exchanges and the Financial Industry Regulatory Authority, vote on matters related to what is known as the National Market System. SIFMA is seeking a vote for banks and another vote for asset managers in such matters. 

The issue has long been a thorn in the side of SIFMA, but was pushed to the forefront in recent months as the SROs attempted to pick a manager for the stock market data processor that was at the center of a three-hour trading halt in Nasdaq-listed stocks last autumn, one source said. The contract was awarded to Nasdaq OMX Group on Wednesday, but only after months of deadlock among the exchanges.

The SROs also recently drafted the rules for a one-year program to see if raising the minimum trading increments for the stocks of companies with small- and mid-sized capitalizations will lead to an increase in trading in those names. Several in the securities industry have complained that the plan is overly complicated and will be expensive to implement.

Brokerages have to pay exchanges for trading data that they must subscribe to by law to prove they are getting the best possible executions for their customers. They feel like they are being “held hostage” by the exchanges because they have no say on the fees they have to pay exchanges for data that they help create by trading, said two of the sources.   

The Wall Street firms are included in industry committees that make recommendations to the SROs on major market issues, but their recommendations are not binding.   

In July, SIFMA published a list of market structure recommendations that included: lowering the access fees that exchanges charge; not forcing brokers to connect to exchanges that have less than 1 percent of overall market volume; and making order routing disclosures more transparent and easier to understand for retail investors.    

(Reporting by John McCrank; additional reporting by Lauren Tara LaCapra and Herbert Lash; Editing by Bernard Orr)

Exclusive – Wall Street firms seek bigger say in market issues: sources

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By John McCrank

NEW YORK (Reuters) – A major Wall Street trade group is lobbying to get legislation passed that would give trading firms, banks and institutional investors a greater say in how the U.S. stock market is governed, according to three people familiar with the plans.

The Securities Industry and Financial Markets Association (SIFMA) is making the case to lawmakers on Capitol Hill that the costs to implement and maintain market initiatives to its members, which include about 400 banks, brokers and asset managers, are significant, yet they have little input in crafting those rules. SIFMA has drafted the legislation and is looking for sympathetic ears, the people said.

The lobbying effort is in the early stages and there is no guarantee that SIFMA will be successful in getting the legislation passed, the sources said.

The sources declined to be identified because they were not permitted to speak with the media. SIFMA declined to comment.

Currently, only self-regulated organizations, or SROs, which include registered stock and options exchanges and the Financial Industry Regulatory Authority, vote on matters related to what is known as the National Market System. SIFMA is seeking a vote for banks and another vote for asset managers in such matters. 

The issue has long been a thorn in the side of SIFMA, but was pushed to the forefront in recent months as the SROs attempted to pick a manager for the stock market data processor that was at the centre of a three-hour trading halt in Nasdaq-listed stocks last autumn, one source said. The contract was awarded to Nasdaq OMX Group (NDAQ.O: Quote, Profile, Research) on Wednesday, but only after months of deadlock among the exchanges.

The SROs also recently drafted the rules for a one-year programme to see if raising the minimum trading increments for the stocks of companies with small- and mid-sized capitalizations will lead to an increase in trading in those names. Several in the securities industry have complained that the plan is overly complicated and will be expensive to implement.

Brokerages have to pay exchanges for trading data that they must subscribe to by law to prove they are getting the best possible executions for their customers. They feel like they are being “held hostage” by the exchanges because they have no say on the fees they have to pay exchanges for data that they help create by trading, said two of the sources.   

The Wall Street firms are included in industry committees that make recommendations to the SROs on major market issues, but their recommendations are not binding.   

In July, SIFMA published a list of market structure recommendations that included: lowering the access fees that exchanges charge; not forcing brokers to connect to exchanges that have less than 1 percent of overall market volume; and making order routing disclosures more transparent and easier to understand for retail investors.    

(Reporting by John McCrank; additional reporting by Lauren Tara LaCapra and Herbert Lash; Editing by Bernard Orr)


SEC chief says undertaking comprehensive U.S. stock market review

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By John McCrank

NEW YORK (Reuters) – Regulators are undertaking a comprehensive data-driven review of the rules underpinning the U.S. equity markets, including the pricing and rebate system used by exchanges, the head of the Securities and Exchange Commission said on Monday.

The SEC is looking at its National Market System rule set, as well as the role of exchanges acting as self-regulated organizations, to see if adjustments should be made to help reduce complexity, improve transparency and make the markets more robust, said SEC Chair Mary Jo White.

One of the issues that the regulator is looking at is the “maker-taker” model of fee-based incentives used by many exchanges to attract traders. In that system, brokerages earn rebates by sending in resting orders to bring more liquidity, and must pay fees if they take away liquidity through orders that can be executed immediately.

But critics argue that maker-taker pricing distorts stock order routing practices.

“Maker taker is one of the issues we’ve heard a lot about,” White said at the Securities Industry and Financial Markets Association’s annual meeting. “It’s clearly an important priority as we’re going through this review, but again, we want to be data-driven and be right about whatever adjustments that we make.”

She also said that the SEC plans to finalize, possibly by year-end, a new rule known as Regulation Systems Compliance and Integrity, which focuses on strengthening exchanges and certain “dark pool” trading venues against technology failures and cyber attacks.

That rule was proposed following a raft of high-profile technology snafus in recent years, including the botched initial public offering of Facebook Inc (FB.O: Quote, Profile, Research, Stock Buzz) by exchange operator Nasdaq OMX Group (NDAQ.O: Quote, Profile, Research, Stock Buzz) and the near collapse of Knight Capital, now part of KCG Holdings (KCG.N: Quote, Profile, Research, Stock Buzz), after it suffered a $461 million trading error.

“You never get to a point where you sort of declare ‘mission accomplished,’” White said. “The markets have evolved and continue to evolve and technology is continuing to evolve, and so it is a process to enhance the resiliency and robustness of the market.”

(Reporting by John McCrank, editing by G Crosse)

Virtu aiming for spring 2015 IPO -sources

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By John McCrank

NEW YORK, Nov 13 (Reuters) – Electronic trading company
Virtu Financial LLC hopes to go public in the spring, about a
year after it originally planned its market debut, two sources
familiar with the matter said on Thursday.

Virtu, a global market maker in equities, fixed income,
currencies and commodities markets, is aiming for an initial
public offering in April or May, said the sources, who both
spoke on the condition of anonymity because the matter is not
public.

The exact timing depends on market conditions and the
regulatory environment, one of the sources said.

A spokesman for New York-based Virtu, which is backed by
private equity firm Silver Lake, declined to comment.

Last April, Virtu indefinitely postponed its plans for an
IPO to raise $200 million to $250 million, which would have
valued the company at about $3 billion.

That decision came shortly after the release of Michael
Lewis’ book, “Flash Boys: A Wall Street Revolt,” which made the
claim that the stock market was rigged in favor of high-speed
traders. Its release nearly coincided with the filing of a
high-profile lawsuit by New York’s attorney general accusing
Barclays Plc of securities fraud in its U.S.
alternative trading system, or “dark pool.” Barclays has denied
the allegations.

Those two events led to an intense debate over the fairness
of the equity markets, and the regulatory chill sent shares of
public trading firms and exchanges tumbling.

That made the idea of trying to raise capital through an IPO
for an electronic market maker less appealing, and Virtu shelved
its plans, people familiar with the matter told Reuters at the
time.

Valuations have risen since then, and Virtu is looking once
again to the public markets.

(Reporting by John McCrank and Jessica Toonkel; Editing by
Meredith Mazzilli and Lisa Von Ahn)

Exclusive: Virtu aiming for spring 2015 IPO – sources

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By John McCrank

NEW YORK (Reuters) – Electronic trading company Virtu Financial LLC hopes to go public in the spring, about a year after it originally planned its market debut, two sources familiar with the matter said on Thursday.

Virtu, a global market maker in equities, fixed income, currencies and commodities markets, is aiming for an initial public offering in April or May, said the sources, who both spoke on the condition of anonymity because the matter is not public.

The exact timing depends on market conditions and the regulatory environment, one of the sources said.

A spokesman for New York-based Virtu, which is backed by private equity firm Silver Lake, declined to comment.

Last April, Virtu indefinitely postponed its plans for an IPO to raise $200 million to $250 million, which would have valued the company at about $3 billion.

That decision came shortly after the release of Michael Lewis’ book, “Flash Boys: A Wall Street Revolt,” which made the claim that the stock market was rigged in favor of high-speed traders. Its release nearly coincided with the filing of a high-profile lawsuit by New York’s attorney general accusing Barclays Plc of securities fraud in its U.S. alternative trading system, or “dark pool.” Barclays has denied the allegations.

Those two events led to an intense debate over the fairness of the equity markets, and the regulatory chill sent shares of public trading firms and exchanges tumbling.

That made the idea of trying to raise capital through an IPO for an electronic market maker less appealing, and Virtu shelved its plans, people familiar with the matter told Reuters at the time.

Valuations have risen since then, and Virtu is looking once again to the public markets.

(Reporting by John McCrank and Jessica Toonkel; Editing by Meredith Mazzilli and Lisa Von Ahn)

‘Flash Boys’ executive says U.S. regulators making progress

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By John McCrank

NEW YORK, Nov 21 (Reuters) – The trading executive at the
center of Michael Lewis’ book “Flash Boys” said U.S. regulators
have made progress in protecting investors against abusive
trading practices.

Brad Katsuyama, chief executive of IEX Group, has spent
years figuring out how high-speed traders collect a few cents on
every trade in the U.S. stock market, and is building a business
to protect longer-term investors from these traders, an effort
chronicled in “Flash Boys: A Wall Street Revolt” published in
March.

Regulators are helping to better inform investors about how
the market works, Katsuyama said in an interview this week.

The U.S. Securities and Exchange Commission is pressing
exchanges and other stock trading markets to more clearly
disclose how exactly they link up buyers with sellers, which
helps investors better understand what happens when they place
an order.

The SEC has also been investigating whether some exchanges
have selectively given information to high-speed traders about
how to place orders to buy or sell stocks that are more likely
to actually turn into trades.

The concern is that this information helped high-speed
traders insert themselves into more trades to increase profits,
while investors with inferior knowledge of the order types found
their orders unfilled, or filled at a worse price.

Regulators’ steps clarify the rules of the marketplace, but
it is up to market participants to set up exchanges where
longer-term investors come first, Katsuyama said.

Katsuyama said IEX is trying to do just that.

“Complaining is one thing, but the only way to tackle that
head on is to become an exchange and show that there is a
different and better way,” Katsuyama said at IEX’s new office on
the 44th floor of 4 World Trade Center in Manhattan.

IEX hopes to give long-term investors a better shake through
steps like implementing “speed bumps” to reduce the advantage
that high-speed traders have in executing trades faster.

IEX is matching up buyers and sellers of stock as an
alternative trading system, which is more lightly regulated than
an exchange, but hopes to turn IEX into an exchange by the third
quarter of next year.

Customers executed their first stock order on IEX about a
year ago, but the company is now the fifth-largest U.S.
alternative trading system, according to the most recent data
from the Financial Industry Regulatory Authority.

In the comparison of 39 alternative trading systems, IEX was
ahead of more established off-exchange trading platforms run by
Morgan Stanley, Goldman Sachs, and J.P. Morgan. Still, IEX only
counts for about 1 percent of U.S. stock trading volume.

The SEC is expected to soon fine Direct Edge, which is now
part of BATS Global Markets, $15 million as part of its probe
into disclosure on types of orders.

(Editing by Daniel Wilchins and Grant McCool)

Citigroup to shutter LavaFlow stock trading venue

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By John McCrank

NEW YORK, Dec 2 (Reuters) – Citigroup Inc is shutting
down its alternative stock trading venue LavaFlow, the bank said
on Tuesday, at a time when regulatory scrutiny has increased
around broker-run trading platforms, forcing banks to rethink
the costs.

“Following a recent review of the LavaFlow ECN, we have
decided that our capital, resources and efforts would be better
redeployed to other areas within Citi’s Equities Division,” Citi
said in a statement. The decision was first reported by Reuters.

LavaFlow, an alternative trading system (ATS) that
electronically matches buy and sell orders for listed stocks, is
one of about 40 such venues competing for much of the same
business as the 11 registered U.S. stock exchanges such as
Nasdaq OMX Group and the New York Stock Exchange.
Critics say the venues add to the fragmentation of the market,
increasing complexity and costs for market participants.

LavaFlow was the sixth largest ATS for stocks for the week
of Nov. 10, according to the latest data from the Financial
Industry Regulatory Authority. The trading venue is known as an
electronic communications network (ECN), which unlike like other
ATSs known as “dark pools,” displays pre-trade information.

Wells Fargo & Co shut down its “dark pool” in
October, citing a lack of customer demand. Dark pools allow
investors to trade anonymously and only make data available
after a trade, reducing the chance that others in the market
will catch wind of a buyer’s or seller’s intentions and move the
price against them.

The moves by Citi and Wells Fargo come as regulatory
scrutiny has intensified over alternative trading systems on
concerns about transparency. Several regulators have ongoing
probes into dark pool operators and the New York state attorney
general has launched a lawsuit, accusing Barclays Plc
of securities fraud for activities related to its dark pool.

(Editing by Chizu Nomiyama and Jeffrey Benkoe)

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