Regulation special report


April 2011 - sponsored by: Deloitte, MarketAxess, SIX Telekurs

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Whining or winning?

The star of the original Wall Street movie has gone off the rails, as pretty much anyone with even a transistor radio is aware of by now, with his odd pronouncements about "winning."

Real-life Wall Streeters are all about winning, and deride as "whining" what they see as overreactions by regulators to the 2008 fi nancial crisis and last year's Flash Crash. Just over a month ago, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) issued their joint recommendations in reaction to the Flash Crash, which included continuing single-stock circuit breakers and placing limits on the internalization of orders.

As participants say in the roundtable that begins on page 8, actions such as setting price bands for limits in trade orders will impact trading centers, requiring more work on data systems and upgrades of related solutions. The still uncertain fate of these recommendations and implementation of Dodd-Frank rules, however, leaves a haze obscuring what solutions brokers will need.

The SEC and CFTC appear to agree with the "whining" criticisms, keeping a lot of restrictions on high-frequency trading out of the recommendations, based on the notion that this will freeze liquidity in the markets. But the sophistication of trading systems and algorithmic trading makes it likely that market professionals would be able to program in the constraints contained in new rules, and keep on winning despite them.

The industry's fi rst stop on that winning path should be rethinking microstructures used to control high-speed markets, independent fi nancial technology consultant Bob Giffords said recently. Secondary messaging containing latency data, alpha or risk signals, news data and other meta data will play a part in these efforts, he noted.

These types of technological advances in market operations were not acknowledged in the SEC-CFTC recommendations, Giffords says. If the regulators' recommendations are a step behind market realities, their lack of resources appears to be the cause, says Robert Colby, partner at Davis Polk & Wardwell, and former SEC deputy director of trading and markets. "They probably have 35 more proposals in the pipeline," he says. "If someone asks if they want to talk about dark [liquidity] disclosure, they say, ‘Yes, next year.'"

Even if the new rules are a step behind the best technology, that may not be so for every market participant. As our roundtable participants see it, there still will be systems and solutions work to be done to ensure compliance. Why risk losing by ignoring that?

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