Some Kickball Etiquette From the SEC; Commission Management Goes on Trial

Here at Incisive Media in New York, we have a company kickball team that played valiantly in defeat last night.

Now, mind you, our opponent had won their previous game 24-0 ... which, in a game that lasts only six innings or an hour (whichever comes first), is pretty impressive ─ nearly impossible really. So we expected an uphill battle.

What we didn't expect is that they would actively bend (and in many cases break) as many rules as possible — where, as anyone who has played in a club sport will know, the umpires at these things usually aren't all that observant.

As my colleague Anthony Malakian often says when the subject of steroids in sport comes up, "if you ain't cheatin', you ain't tryin.'" But it's a bit worse when you turn the "cheatin'" into the game itself, knowing full well that you'll get away with it.

I get the feeling that some (certainly not all) dark pool operators have treated their business this way a little bit over the years, too. Running dark liquidity, you get a bit used to having a lot of proprietary information flowing in about both the markets in general and certain participants — anonymous on-screen or not — in particular.

It's a constant battle trying to create new ways to attract those participants, or keep them happy, and that means a lot of test projects and algos running at once. For agency-only brokers especially, there are a lot of fine lines to straddle and walls to mind, and falling afoul of any can get you into a sticky situation.

Likewise, it's a constant battle trying to create new ways to attract those participants, or keep them happy, and that means a lot of test projects and algos running at once. For agency-only brokers especially, there are a lot of fine lines to straddle and walls to mind, and falling afoul of any can get you into a sticky situation very quickly.

Again, in most cases, they're able to get away with it, catching themselves and making the needed technical fixes before anyone gets wise.

This week, though, ITG had to pay the piper after the mainstay broker settled the largest penalty ever for an ATS with the US Securities and Exchange Commission (SEC) — shortly after a new chief executive was installed.

In relative terms, a roughly $20 million penalty is tiny compared to the massive fines recently levied on banks in the hundreds of millions; the dollars aren't meant to create a real bite here, especially given the voluntary turnover in the C-suite.

But it's a marker nonetheless, and portends more trouble for the bank-owned dark pools already under review by enforcement authorities for potential breaches of client confidence.

The umpires, it seems, have had enough.

A Different Storm Gathering

Not every commission is of the regulatory variety, though. Investment research commission dollars have long represented a reliable, low-margin boon for the sell side over the years.

Some say it's been too reliable and easy, though. Clouds are starting to gather in Europe, where ESMA has made a surprisingly large deal out of commission unbundling as part of the run-up to MiFID II in 2017 — most notably requiring investment managers to keep closer track of their broker voting and budgeting processes, and worse, by requiring them to develop alternative ways to pay for research ... either through charging investors or running it through their own internal P&L. Quite the squeeze.

This could kill research as we know it, argued one source — calling it a hugely unnecessary but predictable consequence of overreach — or, in the very least, it could nudge some asset managers' operations offshore in a clear-as-day case of regulatory arbitrage.

Whether that happens or not, or how, still remains to be seen. But what is crystal clear is that the tech community needs to step up and help the buy side cope. A number of providers — both new and established, big and small — are already jumping into the mix; some building out full commission management workflows while others focus on custom modules. Clearly, change is afoot.

I'll be examining the issue in-depth for the September issue of Waters, and anyone with thoughts on all of this should feel free to reach out on 646 490 3968 or shoot me an email.