www.securitiesindustry.com
MARCH 31, 2008
NEWS DESK
LCH.Clearnet, SIS x-clear agree—
again—to connect; CodeStreet adds
latency tools; Citigroup veteran
forms Radical Analytics.
SEC Taking Aim
At Naked-Shorting
Brokerage Clients
Major ARS Write-Downs, 2007
$ Millions
Face Impairment
Value Charge
Company
Discount
US Airways
$411
$58
14.1%
PAGE 3
PERSPECTIVES
COMMENT: While data management experts regularly promote the
importance of clean data to financial firms, quantitatively measuring
the effects that faulty data has on
an enterprise can be difficult.
PAGE 4
BYJOHNHINTZE
Seeking to bolster short-selling
regulations, the Securities and
Exchange Commission has proposed getting tough on customers
who falsely tell their brokers they’ve
located securities to borrow.
The proposed Rule 10b-21 addresses so-called naked shorts, in
which parties selling securities short
do not secure the stock for delivery. In a typical short-sale transaction, the seller borrows a security
and then sells it, with the goal of
purchasing it at a lower price in the
future and pocketing the difference.
Critics say those pursuing naked
shorts are essentially creating phantom shares to sell and drive down
a stock’s price.
To satisfy the locate requirements of the SEC’s Regulation
SHO, which went into effect in
2005, broker-dealers must borrow
the security, have entered a bona
fide arrangement to do so, or have
reasonable grounds to believe the
stock can be obtained before settlement.
Under Reg SHO, broker-dealers are permitted to accept customer assurances that they have
identified a source of borrowable
securities. “We are concerned,
however, that some short sellers
Continued on page 17
3M Worldwide
$34
$18
52.9%
Bristol-Myers Squibb
$811
$392
48.3%
Elbit Systems
$32
$11
34.4%
ORIGINAL SOURCES: The “
regulatory networks” needed to oversee the
futures industry require investment
in technology and relationships, says
Walter Lukken, acting chairman of
the Commodity Futures Trading
Commission, who adds that his
agency is “pouring significant
amounts of its capital into modernizing our surveillance network.”
PAGE 4
DEPARTMENTS
TECHNOLOGY: For its Institutional
Client Platform, Microsoft teamed
with several partners to integrate com-
munication tools and
customer relationship
management applications with trading desk
data. “The driving force
here is to provide improved customer
service,” says Microsoft’s Ian Warford.
PAGE 8
Hard Times for Auction Rate Securities
Liquidity and valuation issues in a tumultuous market
BYCHRISKENTOURIS The turmoil in the $330 billion
Merrill Lynch & Co., Morgan market has presented investors
Stanley and Citigroup were with a twofold problem: how to
sued by clients last week in sepa- find ways to sell their holdings and
rate actions; UBS and its broker- how to value what they own to
age arm were the target of litiga- meet financial reporting require-tion earlier this month. Those are ments. The investors—typically
the tip of the iceberg in a series of corporations, hedge funds and
legal maneuverings and finger- high-net-worth individuals—can
pointing by disgruntled investors no longer value them at par, nor
who purchased auction rate secu- can they simply mark them down
rities (ARSs). to zero.
In all the cases, investors claim Auction rate securities are a
that the firms misrepresented the type of long-term paper backed
risk of ARSs and that they should mainly by municipal bonds, stu-be compensated for losses incurred Continued on page 16
when auctions they promoted
failed; some are even seeking punitive damages.
The brokerages counter that
they informed investors that the securities do not have the same liquidity as money market funds and
should not be held accountable for
problems related to the broader liquidity crunch.
Korea Gets First
Crossing Network
Instinet, Samsung to roll
out alternative trading venue
BY MAYUR PAHILAJANI
Samsung Securities Co. and
agency brokerage Instinet are
announcing today that they will
launch Korea’s first crossing network, KoreaCross, on April 7.
New York-based Instinet will
jointly operate KoreaCross,
which has received approval from
Korea’s Ministry of Finance and
the Korea Exchange (KRX), with
Seoul-based Samsung Securities,
the country’s biggest investment
bank. The companies anticipate
the platform attracting more liquidity to the budding Korean equities market.
Instinet—a subsidiary of
Japan-based Nomura Holdings—already has two alternative trading systems (ATS) operating in the Asia-Pacific region, both in Japan: Japan-Crossing, an undisplayed block
trading venue that opened in
Continued on page 14
TRADING: Interdealer brokerage Tullett signs on to T-Zero’s trade affirmation platform for credit derivatives
processing. PAGE 7
TECHNOLOGY: Merrill Lynch extends Microsoft’s Windows Workflow Foundation and makes it
work for concurrent tasks. PAGE 8
DATA MANAGEMENT: Transamerica
Financial Advisors adds e-signature
functionality to its paperless system
for brokers and advisers. PAGE11
Spitzer SAR Disclosure an AML Breach
BYJOHNSANDMAN port (SAR) following his wiring of
Former New York Governor funds to a shell corporation that
Eliot Spitzer’s fall from power fronted a prostitution ring where
not only provides an example of he had been a customer. Informa-how well the U.S. tion about the SAR
anti-money-launder- filing appeared in
p19 ing (AML) regime some news accounts
p19 now works, but may before he stepped
also offer an illustra- down on March 12.
tion of how the system A source in the of-can be breached. fice of a state banking
The event that trig- regulator, who spoke
gered the eventual res- Richard Webber on condition of
ignation of Spitzer, who developed anonymity, said that the disclosure
a tough-on-crime reputation as of the SAR that tied Spitzer to the
New York’s attorney general, was ring was a topic of conversation at
the filing of a suspicious activity re- Continued on page 19
DATA MANAGEMENT: Goldman
Sachs’ Hudson Street inks distribution agreement with QSG.
PAGE 12
▼
Company Index
People Index
▲
On the Web
LiquidityHub closes down; an
industry commitment to better
derivatives processing; and
more. See Breaking News at:
www.securitiesindustry.com.
A Crackdown on High-Volume Traders
SEC tightening reins on unregulated trading firms
BYJOHNHINTZE the Tuco litigation. SEC offi-
In a move that could affect rev- cials declined to comment on
enues in a resilient and growing any pending litigation.
segment of the trading communi- Day trading firms gained
ty, the Securities and Exchange prominence in the late 1990s
Commission recently shut down with the advent of electronic
an unregulated trading firm and trading. Many of the firms
reportedly is looking at others with Continued on page 18
similar operational structures.
The SEC on March 4 filed a law
suit against Tuco Trading and its
sole managing member Douglas
Frederick in the U.S. District
Court in the Southern District of
California, alleging that the firm
had behaved like a broker-dealer,
even though it was unregistered,
and violated rules applying to those
entities. On March 17, the regulator filed an injunction to shut down
the firm.
Sources familiar with the matter said the SEC is conducting similar investigations of other firms
and anticipates bringing additional cases on the same basis used in
