Tagged: ICE

Buy the Rights

Know the song by OMC?  Jumped into the Chevy. Headed for big lights. Wanna know the rest? Hey, buy the rights.  How bizarre, how bizarre…

The market-structure mashup recently took a somewhat bizarre turn. InterContinental Exchange, owner of the NYSE, bought the rights to high-speed trading patents.

Said David Goone, ICE’s Chief Strategy Officer: “ICE acquired these patents with the goal of preventing third parties from using these intellectual property rights against our customers. ICE intends to make these patents available broadly for license to customers that provide beneficial liquidity in ICE’s and NYSE’s markets.”

ICE says the patents are for an automated trading system that makes pricing and trading decisions based on market-price information, and the associated intellectual property covers electronic trading in both derivatives and stocks.

What makes it odd at first blush – but certainly clever – is ICE’s opposition to high-speed trading. “You shouldn’t pay people to trade,” ICE CEO Jeff Sprecher said in October 2013, voicing dislike for the system where exchanges pay brokers for trades that create liquidity attractive to orders from others. To oppose high-speed trading and then buy patents customers can use to bring high-speed liquidity-producing trades to the NYSE seems smart but contradictory. (more…)

Take and Make

What if exchanges stopped paying fast traders to set prices? Oh, you didn’t know? Read on.

Off Salt Island in the British Virgins is the wreck of the HMS Rhone, a steamer that sank in an 1867 hurricane.  Even if you’re a snorkeler like me rather than a diver, in the clear BVI water you can see the ribs, the giant drive shaft, the shadowy hulk of a first-rate vessel for its day, 70 feet below the surface.  A storm surprised the Rhone, and after losing an anchor in the channel trying to ride out the squall, the captain ran for open water, unwittingly slamming into the teeth of the tempest.

What’s a 19th century Caribbean wreck got to do with high-frequency trading?  What seems the right thing to do can bring on what you’re trying to avoid by doing it in the first place.

On July 15, Senator Carl Levin called on the Securities and Exchange Commission to end the “maker-taker” fee structure under which exchanges pay traders to sell shares.  I’ve long opposed maker-taker, high-frequency trading and Regulation National Market System.

We have Reg NMS thanks to Congress.  In 1975, that body set in motion today’s HFT flap by inserting Section 11A, the National Market System amendments, into the Securities Act of 1934, and instead of a “free market system,” we had a “national market system.” What a difference one word made.

The legislation mandated a unified electronic tape for stock prices. The NYSE claimed the law took its private property – the data – without due process.  Regulators responded with concessions on how exchanges would set prices for trading. The result: The Consolidated Tape Association (CTA).

Today, the CTA is comprised of the registered US stock exchanges.  Its rules governing quoting and trading determine how exchanges divide roughly $500 million in revenue generated through data that powers stock tickers from Yahoo! Finance to  E*Trade.  If an exchange quotes stocks at the best national bid or offer 50% of the time, and matches 25% of the trades, it gets the lion’s share of data revenue for those stocks. And the more price-setting activity at an exchange, the more valuable their proprietary data products and technology services become. Data has value if it helps traders make pricing decisions.

Here’s where history meets HFT. Reg NMS requires trades to meet at the best price. Exchanges have no shares because they’re not owned by brokers with books of business as in the past. They pay traders to bring shares and trades that create the best prices.  In 2013, NASDAQ OMX paid $1 billion in rebates to generate $385 million of net income.  Subtract revenue from information services and technology solutions ($890 million in 2013, built on pricing data) and NASDAQ OMX loses money.  Prices matter.  NYSE owner Intercontinental Exchange (ICE) opposes maker-taker presumably because it made $550 million in profit without the NYSE in 2012, and half that adding the NYSE in 2013. For a derivatives firm, equities are a tail to wag the dog. (more…)

Behind the Trade

We were in King Soopers and they were out of lemons.

For those of you elsewhere in the country and world, King Soopers is a Kroger-run grocery chain and I’m sure you’re thinking as I did when I first saw one, “Who names a store King Soopers?”

I bet you’re also thinking, how do you run out of lemons? Answer: deliveries hadn’t arrived. We take for granted that stuff will be on the shelves. Having lived a year in Sri Lanka in college, where oftentimes there wasn’t anything on the shelf because no shipments had come, I grasp limited liquidity.

When stocks rise in price, we figure there must be more buyers than sellers. When they decline, the opposite must be true. You laugh, yes. But how do shares get on shelves in the first place?

A long time ago, there were just a couple stores, like the New York Stock Exchange, owned by the firms who stocked the shelves – literally. Brokers had books of business comprised of owners of shares. In 1792 under a buttonwood tree in lower downtown New York City one May day, 24 brokers agreed to confederate, recognizing that pooling business would create a marketplace. The NYSE was born (next week it becomes a subsidiary of derivatives market The ICE). (more…)

The IR Jetsons

What surprised me most was how twice as many people knew “high-frequency trading” compared to “dark pools.”

The Nasdaq’s Mike Sokoll, Liquidnet’s Nicole Olson and I kicked off a session on how equity markets work at NIRI’s conference on IR fundamentals in Santa Monica yesterday. As we were unfolding the map of market behavior, we polled the audience:

How many of you have heard of “high-frequency trading?”

It appeared to me that two-thirds of the hands in the room went up, and there were between 80-100 investor-relations and treasury professionals in the ballroom at the Loews Beach Hotel.

And yes. It was lovely there, above Muscle Beach (I walked from the sandy side of the hotel to the front for a cab back to the airport, five minutes in the lovely January sea air in suit and tie).

When we asked how many had heard of dark pools, only a third said so. That may change soon. One big reason more people know about high-frequency trading is that the media have given it ink. Yesterday, FINRA announced plans to scrutinize dark pools over whether gaming occurs, where traders may post orders on stock exchanges that create arbitrage opportunity in members-only markets where no price information is offered (dark pools).

Which leads us to IR 101 in 2013. I was trading notes recently with a friend and fellow IR veteran about the Nasdaq buying Thomson Financial and The ICE buying the NYSE, and we got to talking about what’s changed and what hasn’t in our profession.

Fifteen years ago it was 1998. eBay went public Sept 24 and closed up 163% at $47.38 (raising $63 million on 3.5 million shares offered). IR pros were doing the Big Four (positioning their companies in the capital markets, shaping internal and external financial communications, building capital-markets relationships, monitoring how equity is traded). (more…)