Securities Industry News - October 8, 2007

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OCTOBER 8, 2007

NEWS DESK

Data aggregator Albridge signs a clearer; Townsend adds Merrill’s algos; Portware starts product strategy group; and more. PAGE 3

PERSPECTIVES

GUEST COMMENT: Hedge fund managers Steve Marsh and Robert Tymoczko don’t believe that trading models were responsible for the subprime crisis, but they do see issues in funds’ overvaluation of illiquid securities.

PAGE 4

ORIGINAL SOURCES: The benefits to investors of financial innovations such as securitized credit are clear, according to Treasury’s Anthony Ryan. But as credit derivatives become increasingly complex, it is ever more important that investors “perform independent and adequate due diligence prior to making an investment decision,” he says. PAGE 6

DEPARTMENTS

TRADING: Dow Jones has collaborated with supercomputer-driven news analytics provider Raven-

Pack on a developer’s kit that speeds the creation and use of news-oriented algorithmic trading models. The tools, which fully integrate Dow Jones news into proprietary trading platforms, can relate “current events to similar events in the past,” says Dow Jones’ Robert Prinsky. PAGE 8

Could Analytics Have Averted Credit Crisis? Downturn has firms reevaluating risk control, analysis tools

BY J.R. MAGEE

As the credit crunch and subprime mortgage problems continue to cloud financial markets, some securities industry observers are asking whether technology, in the form of risk control and analytics, could have been used more wisely to prevent the situation— and whether it can lead the way out. On Sept. 18, the Federal Reserve Board reduced the federal ^{Michael Bykhovsky}funds rate to 4.75 percent—the kets have remained in flux. half-point cut was the first in four “There seems little doubt that years—in an effort to keep the U.S. the subprime mortgage problem from sinking into a recession was in large part due to excess op-sparked by fallout from the hous- timism among lenders,” said Brian ing-market collapse. Days earlier, Ranson, managing director of the Labor Department announced Moody’s KMV, a San Francisco-that 4,000 jobs had been lost in Au- based unit of Moody’s Corp. that gust and retail numbers were lower provides credit analysis tools. than expected. The financial mar- Continued on page 14

ASSET SERVICING: Omgeo links to Brown Brothers Harriman’s Infomediary communications platform, giving the buy side a consolidated view of the post-trade life cycle. PAGE 8

Multitude of Benefits Beneath Surface of Nasdaq Deal for BSE

BY JOHN HINTZE

When Nasdaq Stock Market agreed to acquire BSE Group, the holding company of the Boston Stock Exchange, a move driven in part by new regulatory requirements, it opened up a series of opportunities for the second-largest U.S. exchange. One has been a long-time goal—competing against the Wall Street utility Depository Trust & Clearing Corp. (DTCC).

The acquisition, announced Oct. 2, does not include BSE’s main rev-enue-generating asset, a 21.9 percent stake in the consortium-owned Boston Options Exchange (BOX) whose volume of executed shares consistently trails that of the other five U.S. options exchanges. BSE announced a month ago that it was shutting down its Boston Equities Exchange due to lagging trading volume.

The deal does include BSE’s eq-uities-exchange and options-exchange licenses—two features that should play major roles in Nasdaq’s aim to make the transaction accretive to earnings within 12 months— as well as other, less tangible assets

that could benefit the exchange down the road.

Chris Concannon, EVP of transaction services at Nasdaq, in a conference call with Nasdaq CFO David Warren and several analysts and reporters, said that the firm lost about 3 percent of its execution market share last year when it consolidated its Brut electronic communications network (ECN) onto its Inet plat-

form along with Nasdaq’s Super-Montage. By acquiring BSE’s equities exchange license, Nasdaq will be able to introduce a second matching engine for securities listed on the New York Stock Exchange, the regional exchanges and Nasdaq— known as Tape A, B and C securities.

Nasdaq plans to use its Inet platform for the second matching en-

Continued on page 17

Corporate Actions, Central Repositories Dominate Data Management Discussions

Sibos panelists cite intra-, inter-company cooperation

BY CHRIS KENTOURIS

While regulatory, cost and operational pressures have made accurate enterprisewide data a priority for operations executives, achieving it is no easy task, according to panelists who had ample advice for delegates at Swift’s annual Sibos conference last week.

David Easthope, senior analyst at research firm Ce- ^p18lent who moderated a panel ^p18on the challenges of globalization in corporate actions, reminded attendees at the

Boston conference of some of the obstacles to achieving ^Michael ^Atkinstraight-through processing: inconsistent data quality, disparate systems and reliance on manual processing. Along with the proliferation of diverse corporate actions—there are nearly 100 types—finan-

Continued on page 16

TRADING: A Chicago Board Options Exchange proposal would lower the minimum investment requirement for its credit default options. PAGE 10

TRADING : A remote membership with the Australia Securities Exchange allows agency brokerage Instinet to directly access the market. PAGE 11

OTC Market in Need of STP

BY CHRIS KENTOURIS

Recent stock market volatility has drawn attention to systemic processing flaws and a lack of transparency in the credit derivatives and structured products markets, said panelists at Swift’s Sibos conference last week in Boston.

Investment banks’ recent heavy losses are a clear indication of the need to reduce the risks of over-the-counter derivatives trading, Godfried DeVidts, director of European affairs at interdealer brokerage Icap in London, said in a session on that subject. “The crisis we’ve seen in the past few months was caused by the lack of confidence in marking-to-market,” he said, pointing to one of a number of risk management gaps that persist in the OTC market.

As Tim Dudley, global head of derivatives control at Barclays Global Investors, observed: “The biggest risk is not being able to understand your exposure properly—this requires timely access to a consolidated, real-time view of your position.”

The prevalence of manual processes can make ob-

Continued on page 17

SEC: Too Early To Make Penny Pilot Changes

Refuting critics, agency says data inconclusive

BY JOHN HINTZE

In its approval to proceed with the pilot test of penny-incre-ment pricing for options, issued Sept. 28, the Securities and Exchange Commission countered arguments made by a major options market maker that the test should be slowed down and the classes included be reevaluated. According to the SEC, the data generated thus far is not sufficient to draw conclusions.

Chicago-based Citadel Investment Group, one of the largest options market-makers and order routers, said, in a letter filed on Sept. 12 with the six U.S. options exchanges, that options on indices such as the Nasdaq 100, or QQQQ, saw increases in relative trading volume, while options on single stocks such as Microsoft saw significant decreases. Citadel asserted that the penny pricing works well for index and sector options classes, but lower relative trading volume coupled with a decrease in displayed liquidity—by more than 80 percent for most pilot participants—was problematic for single-stock classes.