Special Report: Electronic Bond Trading, page 11
www.securitiesindustry.com
DECEMBER 1, 2008
NEWS DESK
Interactive Data to acquire majority share of Japanese data provider;
Linedata Services introduces hybrid
ASP offering; DIFX rebranded Nasdaq Dubai. PAGE 3
PERSPECTIVES
COMMENT: As Congress considers
regulation of hedge funds, MIT’s Andrew Lo told the House Oversight
Committee that a Capital Markets
Safety Board would offer “greater
transparency into the hedge fund industry” by investigating the blowups
that contribute to systemic risk.
PAGE 4
SPECIAL REPORT
Despite the credit crunch, Tradeweb,
a ten-year-old institutional electronic
bond trading platform,
has been expanding its
offerings. Citing the
company’s mission to
build efficient tools to
access liquidity across products, CEO
Lee Olesky points to areas of growth
both expected—new instruments in
Asia—and unexpected, such as brisk
business in unsecured bank deposits.
Now, Tradeweb is planning to leverage its acquisition of interdealer voice
broker Hilliard Farber in launching
an electronic market for pass-through mortgage-backed securities.
Also in this report: Retail bond platforms thriving; and GFI Group targets U.S. credit derivatives. PAGE 11
DEPARTMENTS
TRADING: Euroclear buys the International Capital Market Association’s
Xtrakter subsidiary, which operates a
trade matching and reporting system.
PAGE 6
Time to Rein In Algorithms?
Calls for algo certification growing louder
BYKATHERINEHEIRES
While trading algorithms are
regularly praised for their
speed and efficiency, a growing
contingent of professional traders,
financial engineers, consultants and
academics say they are being misused, or are faulty from the start.
Their answer? Establish best practices and increase training to keep
algorithms from doing more damage than good.
The impetus for the movement
is the fear that the availability of sophisticated trading strategies to a
wider audience with varying levels
of expertise could cause havoc in
the markets—and already has, in
the view of many. If the industry
does not do something to fix the
problem, then regulators may have
to take action, with potentially disastrous results for the algorithmic
trading business.
“If you are a professional trad-
ing firm, you have to certify that
you are following the FIX protocol in your trading activities. But
there is no equivalent to that—a
driver’s license, so to speak—for algorithmic trading,” pointed out
Michel Debiche, a veteran of the
proprietary trading desks of CIBC
World Markets, Daiwa Securities
America and Credit Suisse.
Debiche, CEO and founder of
Princeton, N.J.-based Quantia
Capital Management, which advises buy-side firms and technology
suppliers on quantitative trading
systems, has been raising concerns
about errors in electronic trading.
According to Debiche, incorrect
parameters are often applied to an
algorithm, traders make poor strategy selections for a given goal and,
increasingly, algorithms are poorly coded and inadequately tested.
Such issues, he said, are not only
Continued on page 17
Portfolio Margin
Accounts Gain
As Investors Look
For Leverage
STANDARDS & PROTOCOLS:
Nonprofit FIX Protocol Ltd. names a
long-time volunteer to a new full-time position—technical director.
BYJOHNHINTZE
PAGE 6
COMPLIANCE: Global financial regulators are likely to make banks formalize risk management procedures,
says Martin Wheatley of Hong
Kong’s Securities and Futures Commission. PAGE 8
Debits in portfolio margin accounts are making up an ever-larger portion of total margin debt,
reflecting both repatriation of U.S.
hedge fund assets and traders’ desire for additional leverage.
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On the Web
Traditionally, use of margin decreases during volatile markets, as
investors place a higher priority on
the risk of collateral calls than the
p3 benefits of leverage. In fact, portfo-
p19 lio margin debt in August 2007 fell
p19 to $45 billion from $58 billion in
July, while overall debt dropped to
$331.4 billion from $381 billion, apparently in reaction to sizable stock
market moves.
NYSE Arca links to Liquidnet
H2O; Eurex, Clearstream to
offer stock-loan CCP.
See Breaking News at:
www.securitiesindustry.com.
However, those volumes were
still impressive, given that only 12
self-clearing broker-dealers, including a handful of bulge-bracket firms,
Richard Closs
had been approved to offer the accounts three months earlier. In February 2008, portfolio margin debt
ballooned to $144.2 billion, or 43
percent of $335 billion in total margin debt; by the end of July that
number had grown to $187.1 billion—60 percent of $313 billion.
According to NYSE Euronext,
the total margin debt of its members—including all the major firms
approved for portfolio margining—
stood at $300 billion by October.
However, the Financial Industry
Regulatory Authority, which provided the portfolio margin data and
has begun requesting the informa-
Continued on page 16
SEC’s Short-Sale
Moves Are Driving
Volatility, Says
Thinkorswim Exec
BYJOHNHINTZE
Since opening in 1999, thinkorswim, an online brokerage and Tom Sosnoff
software developer with an emphasis on options, has attracted 100,000 vestor education.
active retail customers and won in- On July 15, the SEC issued
dustry acclaim—it finished second an emergency order requiring
this year in Barron’s Best Online that brokers have a bona-fide
Brokers survey after placing first in borrowing arrangement in
2007. Having weathered the pop- place before shorting the stocks
ping of the technology bubble, how- of 19 major financial firms.
ever, thinkorswim is facing its sec- That order was aimed at elim-ond financial storm as the major in- inating naked shorts, or selling
dexes leap and plummet. a security short with no inten-
The Securities and Exchange tion of delivering. But for short
Commission likely exacerbated that sellers accustomed to far more
volatility when it imposed new re- lenient rules, it greatly restrict-quirements on short sellers, ac- ed their activity in those names.
cording to Tom Sosnoff, president Following the collapse of
of thinkorswim, which has a repu- Lehman Brothers in Septem-tation for offering sophisticated ber, the SEC imposed an out-tools and technology, along with in- Continued on page 18
Hedge Funds Bracing for
Likely Disclosure Mandates
New administration, volatility not regulated and face no lim-
increase odds for regulation its or capital adequacy requirements,” said Andrew Lo, direc-
BYCHRISKENTOURIS tor of the Massachusetts Insti-
Hedge funds, dealing with the tute of Technology’s Laborato-demands of a growing insti- ry for Financial Engineering, at
tutional investor base and the a House Oversight Committee
specter of regulatory oversight, are Continued on page 7
increasingly performing a balancing act: Release sufficient information to capture investors’ dollars
without revealing valuable strategies and methodologies.
Transparency will be subject to
greater regulation under the incoming administration of President-elect Barack Obama, according to
77 percent of hedge fund managers
in a survey conducted last month by
accounting firm Rothstein Kass. But
even defining transparency, which
is often used as a catch-all term synonymous with disclosure, has become controversial.
“Hedge funds now provide many
of the same services as banks but are
