Tagged: liquidity providers

Making Water

If someone says he’s going to make water, it means one thing.  If he says he’s providing liquidity, it means another.  We should clear (and perhaps clean) that up.

In the stock market, some firms call themselves “liquidity providers.” The term suggests they’re creating something somebody else needs (here we depart sharply from making water). Liquidity by definition is the availability of assets to a market. Providing assets is important, helpful and benign, it would seem.

Hudson River Trading, one of the biggest liquidity providers (the terms high-frequency trader and liquidity-provider can be interchangeable), said in its last 13f it had 64 positions, the largest at $32 million in the exchange-traded S&P 500 fund SPY, leading a baker’s dozen ETFs topping its holdings. The biggest stock position was XOM at $1.5 million or 19,000 shares. A retail investor could own as much. Hudson River trades thousands of securities and millions of shares daily. If one could see its short positions, I bet the two would about cancel out. Effectively, zero assets.

If liquidity is availability of assets, how do you deliver assets when you don’t own any?

The NYSE enlists the help of a group it calls Supplemental Liquidity Providers (scroll to see them). SLPs, the exchange says, “trade only for their proprietary accounts, not for public customers or on an agency basis.” In its fee schedule the NYSE says it pays SLPs $0.06-$0.30 per hundred shares.

Did you catch that? The NYSE pays firms to supply liquidity but only proprietary trades – their own orders – qualify. The traders it’s paying are just like Hudson River. If the NYSE isn’t paying them to bring assets, the only other thing they can offer of value to the exchange is prices.  And setting prices is really arbitrage.

The Nasdaq does the same thing.  It pays traders around $0.31 per hundred shares to “add liquidity.” We’ve written for years about the system of incentives in the stock market. It’s called the “maker-taker model” because buying and selling are treated differently, not as the same activity.  Search our blog for “maker taker” for more and read this one.

Are there auto parts liquidity providers?  Grocery liquidity providers? There are automobile distributors, yes, who buy inventory wholesale from manufacturers. But they sell to the public and fold service, financing and support into the customer experience.

Broker-dealers like Citigroup or Raymond James that sell shares to investors write research, commit capital, provide trading services and account management, underwrite offerings, syndicate financings.  You won’t know the names of many equity liquidity providers. Most offer no services and have no customers.

What’s the value?  Little for you, issuers and investors. They are price-setters for exchanges, which in turn are data-sellers. Best prices are valuable data. The REST of the market participants with customers (humans and software systems alike register as brokers) must by law buy data about the best prices to make sure customers get them.

It’s perverse. Exchanges pay traders with no purpose save arbitrage – which call themselves liquidity providers – to set prices for anyone who actually IS a real buyer or seller. Sound to you like making water into the wind? Yup. But to quote humorist Dave Barry, we’re not making any of this up.

Facebook Friends Morgan Stanley

While Florida voted, Morgan Stanley won the Facebook primary.

A unit of Thomson Reuters broke word that the big bank will helm a team of other big banks for what in May could be the biggest IPO, raising perhaps $10 billion.

We don’t care who underwrites the deal. But thinking about Facebook and its banking soldiers of fortune, the giant and the mighty in massive conformity, we thought of the markets.

In the data we track, Morgan Stanley is king of index program-trading executions. For large clients of ours, its volumes surpass those of small exchanges. At the Nasdaq, Morgan Stanley is the top liquidity provider, trumping fraternal behemoths BofA Merrill and Barclays and high-frequency clearing maestro Wedbush. Last June, Global Custodian’s annual ranking of prime brokers – banks bundling securities services for the buyside – slotted Morgan Stanley a close second to Goldman Sachs.

We wrote in September how the same names show up everywhere. The ones running books of derivatives, making markets in Treasuries, trading bonds electronically and correlating seas of equity executions are the same.

Lost in the long shadows of the large was word that technology research boutique Kaufman Brothers closed its doors this week. Ticonderoga Securities shut down earlier is month. Formerly Reynders Gray & Co. on the floor of the NYSE, the firm offered differentiated research, direct-access trading and agency executions. WJB Capital, another boutique, shuttered around January 4 after failing to raise capital and seeing its financing costs rise as high as 25%. (more…)

Datafeed Speed and Market Structure

If you absolutely must have trading data fast, who’s your huckleberry?

Burstream, apparently. The firm claims it can serve up actionable, meaningful trading data, no matter what market mayhem, in 600 nanoseconds. That’s 600 billionths of a second. The catch? You have to trade at the Nasdaq.

Burstream’s system is being installed at the Nasdaq OMX market center in New Jersey so the exchange’s important proprietary-trading customers will have a split-second – taken to the extreme – advantage. Customers wanting to use these superfast capabilities will be able to load their algorithms onto Burstream servers parked next to boxes housing the Nasdaq’s trade-matching engines.

Burstream systems will go near the Chicago Mercantile Exchange too. The idea is to unify data streams on stocks, commodities and derivatives so decisions about trading on divergence can be made faster than ever before possible. This is, of course, arbitrage.

Burstream says at its website: “Enable your high frequency trading algorithms to hit liquidity when it is revealed. Trade through market bursts while competitors exit the market. Sustained nanosecond speeds, even during message bursts will give your latency-sensitive algorithms a performance advantage.”

What makes Burstream special is its use of field-programmable gate-array chips (FPGAs) that can perform multiple calculations simultaneously, thus delivering a speed advantage over conventional hardware-processing techniques. (more…)

Your Volume and the Maker-Taker Model

You’ve heard the saying “six of one, half-dozen of the other?”

The DXY, the spot market for the US dollar, declined 7% in July. Stocks were up 7%. May was a good month for the DXY, which rose from 81 to 87, roughly. May crucified equities and gave us the Flash Crash on the heels of a surge in the value of the dollar.

Is it six of one, half a dozen of the other? The dollar in your pocket loses 7% of its purchasing power versus other currencies in July. Stocks appreciate 7%. Call me simple, but it seems that when a thing you buy is worth more because the thing you buy it with is worth less, that these sort of cancel each other out. (more…)