Securities Industry News

www.securitiesindustry.com

MAY 26, 2008

NEWS DESK

Chinese regulators encourage offsite trading in wake of Sichuan earthquake; Broadridge adds LiquidPoint order routing tools; and more.

PAGE 3

Reversal of Fortune For Maker-Taker Options Exchanges

Goldman, Morgan Stanley and UBS Ink Dark Pool Access Deals

PERSPECTIVES
GUESTCOMMENT: To prevent future
crises, the financial services indus-
try needs risk management systems
that can detect a “change in risk fac-
tors that signals an increase in fu-
ture loses,” writes Financial Inter-
Group’s Allan Grody. PAGE 4

ORIGINALSOURCES: The recent market turmoil offers financial institutions and regulators alike an opportunity to evaluate their approach to risk management, says Fed chairman Ben Bernanke. The firms that fared best placed emphasis on validation and independent review and “also continually refined their models and applied a healthy dose of skepticism to model output.” PAGE 6

DEPARTMENTS

DATA MANAGEMENT: Market participants agree on the need to bring transparency to complex instruments but are farther apart on how to achieve it.

PAGE 8

Pro-rata venues are reclaiming market share

BYJOHNHINTZE

Since the advent of penny-increment quoting in select options classes, exchanges that echo pricing models from the equities market have been gaining the upper hand. But a combination of higher execution costs, liquidity concerns, adjustments to routing tools by order providers and exchange initiatives appears to be turning the tide.

In January 2007, the penny pilot launched with 13 classes and NYSE Arca became the first options exchange to adopt equities-like features. The Boston Options Exchange (BOX) adopted similar functionality in September, when 22 classes were added. The Nasdaq Options Market, which began operations on March 31—three days after another 28 classes were added—has taken the same approach.

NYSE Arca Options and BOX saw their market shares increase to-

Continued on page 17

Vendors Call on Fund Industry to

Adopt Guidelines for Valuation

BYCHRISKENTOURIS

Three companies are recommending that hedge fund managers and their service providers—prime brokerages, fund administrators and pricing specialists—establish industrywide guidelines for the valuation of portfolios.

In a white paper issued last week—“Hedge Fund Portfolio Pricing Best Practices”—Thomson Reuters, Paladyne Systems, a provider of technology to hedge funds, and NumeriX, which offers pricing and trade analytics software, urge the alternative investment community to adopt consistent pricing standards and methodologies.

A standardized approach would give investors more-accurate net asset valuations (NAV), say the companies, and allow them to better understand how prices are derived for their financial instruments. The need for transparency is being fueled by the institutionalization of the hedge fund industry as pension funds, endowments and insurance companies join the ranks of investors.

“Two different hedge funds could price the exact same portfolio differ-

“The first step toward
resolving inconsistent
pricing and valuation is for
the industry to [define]
consistent pricing policies
and methodologies that
would be applied
universally and, in effect,
become law.”
—“Hedge Fund Portfolio Pricing Best
Practices” white paper

DATA MANAGEMENT: Markit offers low-volume hedge funds free access to its reference entity database.

PAGE 8

ently—both considered correct and fair,” said Sameer Shalaby, CEO of New York-based Paladyne Systems. “The high degree of variance by individual managers means that the underlying securities in a hedge fund’s portfolio may not reflect the most accurate market values.” Paladyne provides a hosted front-to-back-of-fice service for about 65 funds.

Depending on their magnitude, pricing discrepancies can affect the performance fees fund managers earn—and investors pay. Errors can also have an impact on the fees

Continued on page 16

TRADING: Digiterre’s new STP hub will provide a single interface to multiple derivatives confirmation services. PAGE 10

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On the Web

Rising Star Brazil Ramps Up Securities Processing

Local depository seeks Settlements Skyrocket at Brazilian Depository stronger ties with Omgeo,

DTCC and Euroclear ²⁰⁰⁷^1,272.29^37.5BYCHRISKENTOURIS ²⁰⁰⁶^627.61^21.5Brazil has become a major player ₂₀₀₅_420.7915. 5 in the global securities markets.

Now, the country’s central securities ^{2004 314.05}¹³^{. 3}depository and clearinghouse is try- _{2003 203.55}9. 9
ing to strengthen ties with three of
the world’s biggest post-trade pro- ^{2002 136.92}⁷^.0cessing entities—Omgeo, the De-
pository Trust & Clearing Corp. Billion R$ Quantity (millions)
p19 (DTCC) and Euroclear. ^{Source: Bovespa}p19 The Brazilian Clearing & De- CBLC has also inked memoran- CBLC are unrelated to the New
pository Corp. (CBLC), one of dums of understanding (MOUs) York-basedutility’s, accordingto the
Latin America’s largest market in- with DTCC and Euroclear to foster Brazilian depository.
frastructures, is in talks with trade closer relationships between the se- “New or expanded affiliations
management services provider nior management of the Brazilian with Omgeo, DTCC and Euro-
Omgeo to forge a partnership it depository and its counterparts in clear can only serve to upgrade the
says would improve post-trade the U.S. and Belgium. Although depository’s processing infrastruc-
communications between domes- Omgeo is a joint venture of the ture domestically and on a cross-
tic and cross-border participants member-owned DTCC and Thom- border basis,” said CBLC chief op-
for transactions done in Brazil. son Financial, its discussions with Continued on page 14

TECHNOLOGY: A new association aims to help banks adopt a service-orient-ed architecture by sharing technical expertise and methodologies. PAGE 11

TRADING: Nasdaq’s pan-European alternative trading system has appointed a president and selected a clearer.

PAGE 12

BYALEXAJAWORSKI

Responding to increasing fragmentation of liquidity across non-displayed trading venues, Goldman Sachs, Morgan Stanley and UBS have signed bilateral agreements that will give their respective clients access to each other’s dark pools.

Under the deals, announced May 20, algorithmic trading flow from each firm will interact in Goldman Sachs’ Sigma X, Morgan Stanley’s MS Pool and UBS’s PIN alternative trading system (ATS)—three of the largest broker-dealer-operated dark books in the U.S.

Sigma X’s average daily volume in the first quarter was 140 million shares, according to Tabb Group’s Liquidity Matrix, while PIN’s was 33 million. Morgan Stanley does not disclose numbers for its MS Pool.

“Given their concerns about fragmentation, clients have been asking their brokers for access to more liquidity through a smaller set of tools,” said Will Sterling, managing director of UBS’s electronic trading group. “Through these agreements, we certainly help accomplish that.”