Friday, 28 August 2015

Trade system performance - state of the art

I get asked about this a bit. What latency, wire to wire, stimulus to response, would be state of the art for a trading system or EMS?

How quaint: 1 ms == 1,000,000 ns
Ask two people and you'll get seven opinions. This post represents my current meandering point of view. At least until later today, perhaps.

First, a little historical context.  A little after the turn of the century, I started a new job at Susquehanna. Someone had drawn with a marker the important goal for the team on the window. It simply said, "< 2ms." In those ye olde times of yore, the fastest vendor system going around was Orc's Liquidator which was not far from around 0.5 ms with its approximately seven figure price tag. Seems positively Penny Farthing now. Today we count nanoseconds.

Ignoring other factors, which are almost always more important, my view on state of the art engineering, assuming a 10G connection, is roughly:

Ho-hum <  2,000 ns
Good <     500 ns
Excellent <     100 ns

Ho-hum < 10,000 ns
Good <  5,000 ns
Excellent <  2,000 ns

Today, low latency is a necessary but insufficient condition for success. Sufficient speed is assumed. You have to dial in your peculiar "sufficiency" for your circumstance. Fast enough with an eye to cost as you can only win with trades you can afford to do. Low latency capabilities are now widespread and thus the main focus is typically elsewhere.

However, we all need to remember, Knuth's "premature optimization is the root of all evil" does not apply here. Architecture has to be planned. Too late is too late.

Waste not, want not.


The following Asset Managers need to select their tools with greater care:

Monday, 24 August 2015

ITG Posit - Aug 3 Finra ATS stats - was 62% higher before scandal

The first full week of trading after the announcement of a possible ITG SEC settlement has percolated out via the FINRA ATS Statistics for Tier 1 US stocks. The statistics are post the ITG press release but before the gory SEC details were available. The SEC's settlement announcement and details were published August 12.

The raw numbers for ITG POSIT are:

Date Num Shares ATS share%
3-August-2015 96,944,300 2.62%
27-July-2015 144,365,800 3.88%
20-July-2015 175,855,300 4.92%
13-July-2015 142,353,700 4.57%
6-July-2015 167,849,900 4.84%

The 96.9M shares reported for the week of August 3 has to be increased 62.5% to get to the average of 157.6M shares reported for the weeks from July 27 to July 6. This is a cute way of describing a 38.5% fall in the numbers of shares traded by POSIT compared to the prior weeks' average.

Below is a rather hastily put together chart of the history of recent ATS Tier 1 stocks (click on the picture to enlarge). ITG POSIT is the large orange line with the big circular symbols. IEX has picked up share as ITG has fallen and, to a lesser extent, so has MSPL MS POOL (ATS-4) as other ATS stats also lifted slightly.

ITG continues to trade significantly above its 52 week low and further board changes have not yet been announced.
ATS data is provided via and is copyrighted by FINRA 2015

Thursday, 13 August 2015

ITG - post settlement meanderings

Ex-CEO Robert Gasser's compensation from 2010 to 2014 was:

$15,695,178 = 77% of the SEC settlement

The SEC's findings suggest there may be a case for clawback.

Reflections in a Dark Pool (source)
Given the Securities Exchange Act of 1934 Section 17 violations already found and admitted, there seems to be a prima facie case for the same argument for the non-omega $70+M ITG has made from prop trading since 2002.

There is no direct evidence of interaction with customer flows from those trades, just hearsay and scepticism. Nevertheless, the same SEC argument applies: many buy-side customers were misled as to the agency-only nature of the firm directly by ITG, or indirectly via their sales and marketing collateral.

Perhaps further penalties would be lighter than the previous ratio of nine to one ($18M to $2M)? That would be for the best as otherwise any disgorgement of such profits would be a significant portion of ITG's June 30 cash balance of $211.79M.

I do wonder what interest really exists in the various ITG investor class suits. It seems likely to be more distraction than reality. The top 10 institutions own 46.36% but the median holding is just 0.015% of assets. This suggests the main shareholders have more important things to worry about. Perhaps aggrieved customers would be a better target for the law firms as a refund of trading fees may be of interest. Not quite the same cookie-cutter type of class lawsuit though.

ITG's insider sales list may be due for some scrutiny.

Kevin J.P. O'Hara's resignation from the board looks better today. 

The board allowed Project Omega to start. Why is the rest of the board not being held to account?

A sale or merger (reverse or otherwise) seems inevitable as a different level of trust is only possible with completely new management, and a new board.

It's not the end of the beginning but the beginning of the end.


ITG - Prop trading for June Q 2015, Y2014, Y2013 and down the rabbit hole

As I've nauseously over-meandered previously, here (Dec 2014), here (one line July 2015), here (Dead Firm Walking), here (Gasser Gone), and here (Settlement), ITG continues to proprietary trade.

Here are the rough figures from 2000 that I could find in the 10Qs and 10Ks. Generally it represents ITG Canada's "Other" revenue line (excluding some mentioned items):

$ in thousands
Q2 2015 1,770
Q1 2015 1,834
Y2014 8,526
Y2013 8,193
Y2012 6,020
Y2011 6,282
Y2010 5,572
Y2009 8,450
Y2008 - Peak? 16,512
Y2007 11,042
Y2006 8,800
Y2005 increased
Y2004 ?
Y2003 ?
Y2002 ?
Y2001 ?
Y2000 ?

Total 83,001

Roughly, ITG's non-Omega prop trading was worth somewhere between $70M and $100M. It is not clear though and $70M would seem too low. 2005 was the year I was made aware of it but it wasn't obvious from the financial reports back then. Perhaps there is more in other line items I've not touched on here.

So, quite a bit more profit than Project Omega's $2M from the SEC settlement. ITG was not so hopeless at prop trading that the limited $2M made them seem.

Here are a few quotes from the reports:
2008: "Interlisted arbitrage trading revenues improved to $15.9 million compared with $10.9 million in the prior year, benefiting from higher market volatility."
2007: "Other revenues included $10.9 million from our interlisted arbitrage activities versus $8.8 million in 2006"
2002: "(e) income/loss from positions taken by ITG Canada as customer facilitations (a customary practice in the Canadian marketplace) as well as income from same day Canadian interlisted arbitrage trading."
2009: "Revenues from principal trading (included in other revenues) were down in 2009 compared to 2008. Aside from an unfavorable foreign exchange impact of $0.6 million, the reduction was attributable to several factors including lower market volatility and the expanding presence of high frequency participants (which has narrowed spreads and therefore reduced profitable trading opportunities)."
2010: "Revenues from principal trading (included in other revenues) were lower in 2010 as the expanded presence of professional trading firms has significantly reduced the spread to be earned and thus limited principal."
In ITG's latest 10-Q filed with the SEC on August 10, 2015, on page 20 of the ITG report to the SEC,
"Other revenues include: (i) income from principal trading in Canada, including arbitrage trading,"
However, this quarter ITG is more circumspect than usual in the Canadian segment and fail to elaborate what the "Other" line item consists of in any regard. In previously quarters "Other" has typically been mainly prop trading via the US / CAD interlisted stock arbitrage, but there are no indications this time. If typical, prop trading would be most of the $1.77M "Other" revenue for the quarter.

In the 10-K for the year ended Dec 31 2014, we can see the further mention on page 31 and page 32,

with the following comment,
"Other revenues increased slightly due to an increase in income earned on foreign exchange transactions and principal arbitrage trading, partially offset by losses on client accommodations and the impact of currency translation."
So, it seems around $8M for both 2014 and 2013 for ITG's prop trading? Prop trading certainly may help the bottom line.

We don't know if customer or pool activity is involved directly or indirectly for stock or FX as part of this prop arb.

At least in the 10-K on page 12 with regard to risks we can read,

"We incur limited principal trading risk in our Canadian Operations. 

        A limited portion of our revenues is derived from principal trading in our Canadian Operations, including arbitrage trading and the net spread on foreign exchange contracts executed to facilitate equity trades by clients in different currencies. As a result of this trading, we may incur losses relating to the purchase or sale of securities and currencies for our own account. Although we attempt to close out all of our positions by the end of the day, we bear the risk of market fluctuations and we may incur losses due to changes in the prices of such securities and currencies. Any principal gains or losses resulting from these positions could have a disproportionate effect, positive or negative, on our revenues and profits, and could also result in reputational damage."
Maybe ITG should stop prop trading?


PS: I wonder if any of these insider sales may be problematic? 

ITG - Project Omega's SEC settlement

ITG's well publicised fall from grace with respect to Project Omega's prop trading against POSIT has been settled with the SEC. The sums are in-line with those previously mentioned by ITG, totalling approximately $20M.
Board accountability?
ITG share price from 1999 sourced via Google Finance
(click to enlarge)

SEC press release is here.
SEC settlement PDF is here.
ITG Investor Relations: ITG completes settlement with SEC.
Hitesh Mittal terminated Aug 9 by AQR [WSJ Bradley Hope].

From the ITG press release,
"Interim Chief Executive Officer, Jarrett Lilien, said: “...we now have the opportunity and the responsibility to restore the bond of trust with our clients and make it stronger than ever before."
A noble goal.

There are some awkward parts to meander through:
"Even within ITG, Project Omega was only to be discussed on a “need-to-know” basis, and even the customer-facing side of ITG was not informed of Omega’s existence." [paragraph 28]
ITG analysed which customers were "best" to facilitate against,
"Based on these ongoing profit and loss analyses, and without POSIT subscribers’ knowledge or consent, the Omega team made decisions about whether to stop trading with a small number of subscribers and to continue trading with others." [paragraph 46]
The "Basic Facilitation" strategy example given by SEC,
"Step 1: Using the Aleri Feed, Omega detects an ITG sell-side customer order to buy shares of XYZ stock where the best bid is $10.00 and the best offer is $10.02 per share.
Step 2: Omega buys XYZ stock for $10.00 per share in a displayed market. 
Step 3: ITG algorithm routes ITG sell-side customer order to buy XYZ stock to POSIT. 
Step 4: Omega sells XYZ stock to ITG sell-side customer in POSIT for $10.02 per share,resulting in trading revenues of $0.02 per share for ITG." [paragraph 44]

The "Heatmap" example from the SEC report,
"Step 1: Using the Heatmap Feed, Omega detects a midpoint execution for an ITG customer on an order to sell XYZ stock in an external dark pool (“ABC Dark Pool”) where the best bid is $10.00 and the best offer is $10.02 per share. Omega infers that more midpoint liquidity could exist in ABC Dark Pool.
Step 2: Omega buys XYZ stock for $10.00 per share in a displayed market.
Step 3: Omega sells XYZ stock at the midpoint for $10.01 per share in ABC Dark Pool, resulting in revenues of $0.01 per share for ITG." [paragraph 57]
Liquidity executive was reprimanded. Omega shut-down. Omega adjusted. Omega restarted with Liquidity executive in place with no organisational changes. [paragraphs 64-66].
"...Project Omega continued to have improper access to information identifying POSIT subscribers. In addition, the Omega team continued to coordinate with ITG’s POSIT development team to identify the sell-side subscribers for Omega to trade with in POSIT and to ensure that such subscribers were configured to trade “aggressively” in POSIT." [paragraph 67]
Notably the number of shares traded against Heatmap was not discussed by the SEC:
"Project Omega traded a total of approximately 1.3 billion shares, including approximately 262 million shares traded with unsuspecting subscribers in POSIT in connection with the Facilitation Strategy." [paragraph 70]
The active rounding up of customers to be aggressive within the pool so ITG could take advantage of them is especially troubling. Customers are not sheep.

Board accountability? 

"Thereafter, on the recommendation of senior management, Group’s Board of Directors approved a proprietary trading desk that was limited in scope..." [paragraph 22]
Enough said. 

If in doubt refer to the last 15 years of share price history.

Further proprietary trading by ITG?

Given these SEC comments and findings:

13. ITG has historically operated and marketed itself, and has a reputation as, an independent “agency-only” brokerage firm. This designation was meant to convey that the firm did not engage in proprietary trading for its own account. 
27. Proprietary trading represented a significant departure from ITG’s core “agency-only” business model and public profile, and ITG had concerns that Project Omega or proprietary trading at ITG could result in reputational risk for the firm...
79. As a result of the conduct described above, ITG Inc. and AlterNet willfully violated:
a. Sections 17(a)(2) of the Securities Act, which prohibits, directly or indirectly, in the offer or sale of securities, obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and 
b. Section 17(a)(3) of the Securities Act, which prohibits, directly or indirectly, in the offer or sale of securities, engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
What do we make of the rest of the ongoing ITG proprietary trading, as mentioned previously here and here? It has been going on for well over a decade now. Hidden in plain sight, that prop trading has been far more profitable than Project Omega ever was, according to ITG's own 10-Q filings. Has it ever interacted with ITG's customers or pools?  Given what the SEC has found out about the hidden nature, and need to know basis, of Project Omega, perhaps ITG's client facing staff really don't know the full details? They certainly can't be sure.

The main strategy reported in the ITG Inc's 10-Q filings is the ongoing proprietary trading of US securities as part of the interlisted arb by their Canadian subsidiary. We don't know if there are other strategies involved beyond this stock and currency focused arb. The interlisted stocks may be traded in both CAD and USD. Such trades may cleared by DTCC, and the Canadian CDS Clearing and Depository Services Inc due to their joint arrangements and the securities' fungibility. They are the same stocks in both countries with the same ISINs after all. These stocks are fairly well integrated and joined at the hip via the Canadian and US national market systems.

Is it the domain of the SEC, or IIROC to investigate? US & Canadian customers. US and Canadian securities. US listed entity with SEC filings but a Canadian subsidiary. US control and reporting.

At the end of the day if a customer in the US has traded one of the interlisted stocks tabled below, that customer was competing with ITG Inc via their subsidiary, ITG Canada. The SEC facts and findings in this settlement with respect to proprietary trading and Section 17 of the Securities Act may also be relevant in this instance.

Furthermore, I'm not sure who should care about ITG's testimony to the US Senate to understand if the testimony was at all misleading. Someone should. ITG Canada is registered as market maker with TMX.  Should an Attorney General care? Which one?

A number of potential lawsuits, previously noted, that sprang up after ITG's original PR on the matter have evolved from expressions of interest, to actual filings of class action lawsuits. This seems unsurprising as you'd have to think there may be reasonable grounds for such filings based on the SEC findings. As this should be no surprise, it seems a contingent liability should have already been put on the balance sheet given the SEC settlement was accounted for in the last set of accounts. So far the lawsuits filed, or advertised, are shareholder focused rather than customer focused which I wouldn't have predicted given the normal enterprising nature of legal firms. Give them time, I guess.

In a world of many alternatives, you'd have to be a bit mad to continue with ITG services if you didn't have to. However, it's not always easy to rework your processes. The downward spiral could take many months. For the Asset Managers out there, it may be that the pooled efficiency and accountability of a buy-side owned broking firm with DMA, algo, internalisation, and HFT skills could be a greater immediate need than Luminex.

So, now that the SEC settlement for Project Omega is done, perhaps ITG can get on with the important task at hand: a sale or merger (reverse or otherwise). A different level of trust may be possible with completely new management, and a new board.

I'm sure ITG's many good, previously uninformed, client facing staff would also appreciate understanding if they are delivering to their customers, not only a full accounting of historical events, but also a truthful "agency-only" message.

Happy trading,


Interlisted stocks [TMX source]

Almaden Minerals Ltd. AAU:US
Advantage Oil & Gas Ltd. AAV:US
Barrick Gold Corporation ABX:US
Agnico Eagle Mines Limited AEM:US
AEterna Zentaris Inc. AEZS:US
First Majestic Silver Corp. AG:US
Alamos Gold Inc. AGI:US
Agrium Inc. AGU:US
Asanko Gold Inc. AKG:US
Atlantic Power Corporation AT:US
Atlatsa Resources Corporation ATL:US
Golden Minerals Company AUMN:US
Yamana Gold Inc. AUY:US
Avalon Rare Metals Inc. AVL:US
Alderon Iron Ore Corp. AXX:US
Banro Corporation BAA:US
Brookfield Asset Management Inc. BAM:US
BlackBerry Limited BBRY:US
Brookfield Renewable Energy Partners L.P. BEP:US
Progressive Waste Solutions Ltd. BIN:US
Brookfield Infrastructure Partners L.P. BIP:US
Ballard Power Systems Inc. BLDP:US
Bank of Montreal BMO:US
Bank of Nova Scotia (The) BNS:US
Brookfield Canada Office Properties BOXC:US
Brookfield Property Partners L.P. BPY:US
Baytex Energy Corp. BTE:US
B2Gold Corp. BTG:US
Burcon NutraScience Corporation BUR:US
Bellatrix Exploration Ltd. BXE:US
Cameco Corporation CCJ:US
Central Fund of Canada Limited CEF:US
Colliers International Group Inc. CIGI:US
Celestica Inc. CLS:US
Canadian Imperial Bank Of Commerce CM:US
Canadian National Railway Company CNI:US
Canadian Natural Resources Limited CNQ:US
Cott Corporation COT:US
Canadian Pacific Railway Limited CP:US
CounterPath Corporation CPAH:US
Crescent Point Energy Corp. CPG:US
Cardiome Pharma Corp. CRME:US
Catamaran Corporation CTRX:US
Cenovus Energy Inc. CVE:US
Concordia Healthcare Corp. CXRX:US
Cynapsus Therapeutics Inc. CYNA:US
Dominion Diamond Corporation DDC:US
Dejour Energy Inc. DEJ:US
Denison Mines Corp. DNN:US
DragonWave Inc. DRWI:US
Descartes Systems Group Inc. (The) DSGX:US
Ecopetrol S.A. EC:US
Encana Corporation ECA:US
Entree Gold Inc. EGI:US
Eldorado Gold Corporation EGO:US
Enbridge Inc. ENB:US
Endo International plc ENDP:US
Enerplus Corporation ERF:US
Endeavour Silver Corp. EXK:US
Franco-Nevada Corporation FNV:US
Fortuna Silver Mines Inc FSM:US
FirstService Corporation FSV:US
Goldcorp Inc. GG:US
CGI Group Inc. GIB:US
Gildan Activewear Inc. GIL:US
General Motors Company GM:US
General Moly Inc. GMO:US
Great Panther Silver Limited GPL:US
Granite Real Estate Investment Trust GRP.U:US
Golden Star Resources Ltd. GSS:US
Gran Tierra Energy Inc. GTE:US
Central GoldTrust GTU:US
Gazit-Globe Ltd. GZT:US
HudBay Minerals Inc. HBM:US
U.S. Geothermal Inc. HTM:US
Hydrogenics Corporation HYGS:US
IAMGold Corporation IAG:US
iShares Gold Trust IAU:US
Imperial Oil Limited IMO:US
IntelliPharmaCeutics International Inc. IPCI:US
Just Energy Group Inc. JE:US
Kingsway Financial Services Inc. KFS:US
Kinross Gold Corporation KGC:US
Kelso Technologies Inc. KIQ:US
Lake Shore Gold Corp. LSG:US
Mad Catz Interactive, Inc. MCZ:US
MDC Partners Inc. MDCA:US
Mountain Province Diamonds Inc. MDM:US
Methanex Corporation MEOH:US
Mercer International Inc. MERC:US
Manulife Financial Corporation MFC:US
Magna International Inc. MGA:US
Minco Gold Corporation MGH:US
Mines Management Inc. MGN:US
Mitel Networks Corporation MITL:US
Merus Labs International Inc. MSLI:US
McEwen Mining Inc. MUX:US
MAG Silver Corp. MVG:US
Northern Dynasty Minerals Ltd. NAK:US
NovaCopper Inc. NCQ:US
Neptune Technologies & Bioressources Inc. NEPT:US
Novagold Resources Inc. NG:US
New Gold Inc. NGD:US
North American Energy Partners Inc. NOA:US
Nevsun Resources Ltd. NSU:US
Neovasc Inc. NVCN:US
Novadaq Technologies Inc. NVDQ:US
Oncolytics Biotech Inc. ONCY:US
Open Text Corporation OTEX:US
Pan American Silver Corp. PAAS:US
Pembina Pipeline Corporation PBA:US
Points International Ltd. PCOM:US
Precision Drilling Corporation PDS:US
Pattern Energy Group Inc. PEGI:US
Pengrowth Energy Corporation PGH:US
Platinum Group Metals Ltd. PLG:US
Polymet Mining Corp. PLM:US
Potash Corporation of Saskatchewan Inc. POT:US
Primero Mining Corp PPP:US
Performance Sports Group Ltd. PSG:US
Pretium Resources Inc. PVG:US
Penn West Petroleum Ltd. PWE:US
Restaurant Brands International Inc. QSR:US
Ritchie Bros. Auctioneers Incorporated RBA:US
Rubicon Minerals Corporation RBY:US
Rogers Communications Inc. RCI:US
Rare Element Resources Ltd. REE:US
Resolute Forest Products Inc. RFP:US
Royal Gold Inc. RGLD:US
Richmont Mines Inc. RIC:US
Royal Bank of Canada RY:US
Seabridge Gold Inc. SA:US
Sandstorm Gold Ltd. SAND:US
Shopify Inc. SHOP:US
Shaw Communications Inc. SJR:US
Sun Life Financial Inc. SLF:US
Silver Wheaton Corp. SLW:US
SMART Technologies Inc SMT:US
Sprott Physical Platinum and Palladium Trust SPPP:US
Silver Standard Resources Inc. SSRI:US
Student Transportation Inc. STB:US
SunOpta Inc. STKL:US
Stantec Inc. STN:US
Suncor Energy Inc. SU:US
Silver Bull Resources, Inc. SVBL:US
SilverCrest Mines Inc. SVLC:US
Silvercorp Metals Inc. SVM:US
Sierra Wireless Inc. SWIR:US
TransAlta Corporation TAC:US
Tahoe Resources Inc. TAHO:US
TransAtlantic Petroleum Ltd TAT:US
Thompson Creek Metals Company Inc. TC:US
Teck Resources Limited TCK:US
Tucows Inc. TCX:US
Toronto-Dominion Bank (The) TD:US
TearLab Corporation TEAR:US
TransGlobe Energy Corporation TGA:US
Taseko Mines Limited TGB:US
Timmins Gold Corp. TGD:US
International Tower Hill Mines Ltd THM:US
Thomson Reuters Corporation TRI:US
TransCanada Corporation TRP:US
Turquoise Hill Resources Ltd. TRQ:US
Tanzanian Royalty Exploration Corporation TRX:US
Transition Therapeutics Inc. TTHI:US
TELUS Corporation TU:US
Domtar Corporation UFS:US
Ur-Energy Inc. URG:US
Energy Fuels Inc. UUUU:US
Vermilion Energy Inc. VET:US
Vista Gold Corp. VGZ:US
Valeant Pharmaceuticals International Inc. VRX:US
Westport Innovations Inc. WPRT:US
Western Copper and Gold Corporation WRN:US
Solitario Exploration & Royalty Corp. XPL:US
Exeter Resource Corporation XRA:US

Sunday, 9 August 2015

Trading rebates - a choice, not an evil

There is often an outcry against offering trade fee discounts to market-makers. Some pundits call rebates, or negative fees, evil. That is naive. It's just a choice that has arguable rationale.
Dante's Lucifer contemplating why he is being blamed for trading rebates.

(scan of engraving by Gustave Doré illustrating Canto XXXIV of
Divine Comedy, Inferno, by Dante Alighieri.
Caption: Lucifer, King of Hell, 1861-1868)

I've been sufficiently annoyed motivated to meander through Fees-101 so I can point people to this post rather than engaging in a tiresome debate. This post is definitely not worth reading for a market professional.

Let's start at the beginning. Placing a limit order to buy at the bid is passive. You have to wait till you're hit. Passive orders, aka posting liquidity, and aggressive orders, aka crossing the spread, are different. When you use an aggressive order, that is, cross the spread, you are getting a worse price than the mid-point as a trade-off for the immediacy.

A passive order sits in the book as posted liquidity on the favourable side of the mid-market indication. However, there is a great danger in a passive order than you get traded through and you're immediately showing a loss on the execution.

You are taking a risk by posting liquidity.

The benefit to taking this risk of posting of liquidity is that you have the potential to be on the good side of the value of the product. You do have a prospect of also getting on the other side of the mid point to "earn the spread," if that's want you want.

Posting liquidity is inherently riskier than taking it. Posting liquidity may lead to a better price some of the time. It is a statistical game of thrones.

A passive order is a market microstructure option. I like to call it a micro-option. When you post liquidity, the benefit is the nett spread you average, or the nett price improvement relative to crossing the spread you gain. That benefit has to be considered nett of fees. This gain is the premium you hope to earn for the risk of the trade going badly against you.

This is the holistic view.

Now, many markets have the same fee for posting and taking liquidity. The extra risk of the micro-option is worthwhile if you have a net gain in price for your trade benefit. Fierce competition usually keeps such things in fine balance.

For a market-place, posting liquidity is useful. Not everyone wants to trade in a market without prices. Plenty of liquidity at best, and a depth of liquidity makes for a healthy market. Trading by appointment is not so efficient.

For an exchange to encourage liquidity there are many things they could do. One thing they can do is make order types to suit posting liquidity to make passive orders "safer" or advantageous. That quickly gets out of hand and we end up with today's crazy proliferation of order types. Anyone for a discretionary peg order with a double twist, pike, and unverifiable proprietary conditions? The history of order types is simply: good intentions gone bad.

"The evil that is in the world almost always comes of ignorance, and good intentions may do as much harm as malevolence if they lack understanding." (Albert Camus)

Another approach is to differentiate on transaction cost pricing. You can make passive orders cheaper. Furthermore, you can make passive orders cheaper but only if Mr Passive gives commitments or guarantees to post liquidity. Do that and you end up with market-maker programmes, such as being a Designated Market-Maker.

Making passive orders cheaper is simply a choice. Giving them a negative cost is just sliding the rule further down that scale and is not inherently evil. It is just a choice to encourage liquidity.

It can be very difficult to grow markets. It took CME FX futures over 30 years to get decent liquidity after their inception in the early 1970s. That is a long time and not necessarily related to their fees. It does emphasise that forming useful market-places can be hard.

You could also make an argument for higher fees for posting liquidity if the marketplace is trying to attract customers who prefer taking liquidity. If the net spreads or passive pricing gains remain "good enough", liquidity will still be posted. Some companies, such as BATS, have experimented with such differentiation in pricing for posting liquidity in alternate market places. Competition is tough.

For an asset manager, being traded through on a passive order is not the real problem it is for a market maker. An asset manager wants the inventory after all. FOMO is the real risk for them. Your order may not get filled at all as you're trading immediacy for potential price gain which turns into a worse execution if you miss out. Compared to a market-maker, passivity is a dissimilar, but nevertheless real, risk for an asset manager.


Posting liquidity is a micro-option. A potential gain in pricing for a passive order is offset against:
  • the risk of trading through and being immediately underwater on value; or, 
  • missing out and needing to chase which requires a worse price to complete. 
Fee alterations for passivity can make sense to encourage different behaviours and customer types. Rebates are not inherently evil, nor required, they just offset the inherent risks.  Growing market-places is a balance of many concerns. Fee differentiation is just one of those many concerns with no inherently "right" answer.

Rebates are not evil.

Happy trading,


PS: Going beyond stating the obvious above, this is an earlier book on market microstructure by Maureen O'Hara that sits on my bookshelf here. If you want to dig further, it is a good place to start. The book is still relevant and worthwhile, though a little dated. There is nothing in it on board accountability.

Wednesday, 5 August 2015

ITG update - Gasser gone

Tim Cave reported on August 4th,
"Anyone who dialled into ITG’s hastily-arranged client call on July 31 would have heard the sound of laughter coming down the line. The mic was on shortly before the call was due to start in earnest and whoever was on the other end clearly hadn’t realised. It was hardly the way to begin a mea culpa call and certainly wouldn’t have reassured clients whose faith in ITG had just been shaken."
Bob Gasser in happier times: 2008 - source.
Little did we know, some of those traders
being moulded were in-house prop traders.

Robert Gasser has been removed as CEO. Mats Goebels stepped down from GC. ITG market share has dropped 25% but it is early daze given the likely client reliance of some of ITG's tools. Change is not always easy.

Curiously, ITG is trading well above its 52 week low of $14.65.

In my previous ITG note, I had some references to 10-Q's from SEC's Edgar supporting my claim that ITG has participated in prop trading for over a decade. Hidden in plain sight.

Interestingly @ThemisSal tweeted earlier today a reference to a document from the ITG web site [pdf] titled,

before the
December 18, 2012
Room 538, Dirksen Senate Office Building"

I'm no expert in US Senate testimony, but it sounds important to tell the truth in that kind of a situation. On page three there is this sentence and a half,
"ITG is not a market maker, and we do not take on proprietary positions. In other words, we do not have “skin in the game...”

You wouldn't lie to the US Senate, would you? It made me think that maybe I was out of date with my previous information. Perhaps ITG may have actually stopped prop trading by 2012? So I checked the ITG 10-Q  for the fiscal period ended September 30, 2014. On page 20 you may read, "Other revenues include: (i) income from principal trading in Canada, including arbitrage trading." And on page 24, "Other revenues increased primarily due to lower client trade accommodations and higher income earned on foreign exchange transactions and principal arbitrage trading." It seems it was not a great quarter for prop trading for ITG with only $2.1M recorded in that "other" column. So, ITG continued prop trading before, through, and after the US Senate testimony of December 2012.

It appears ITG's CEO, Bob Gasser, was telling the truth to the SEC in the 10-Q and was not telling the truth to the US Senate. I don't know how problematic that is. It may add to the legal woes.

I previously noted a hungry pack of law firms, quite rightly, are seeking parties interested in claims as a prospective SEC settlement does nothing for ITG shareholders nor customers. Some clients may have been aware of the prop trading as it was publicly reported each quarter to the SEC. Many in the industry, like myself, clearly have been aware. However the marketing material has long been a little obtuse or even somewhat deceptive. If a client had indeed been misled for a decade about ITG being agency-only, I wonder what a claim for claw-back and damages may conceivably look like?

Not pretty.

It seems hard to envisage a future where ITG survives as in independent listed entity but the removal of Gasser is a step in the right direction. There are many good staff at ITG, so let's hope the firm gets "rescued" soon enough allowing staff to refocus on service to clients instead of this distraction*.


[Update: ITG earnings call transcript via SeekingAlpha]
*Yeah, it's a distraction. My linkedin profile seems to have a lot of hits from ITG staffers for some reason...

Sunday, 2 August 2015

ITG - dead firm walking?

Last Friday, ITG rallied 10.8% on the rebound from an approximate loss of 24% the previous day.

ITG's market cap is around $700M, so ITG is not huge but also not small.

There is much more to be disclosed about the improper disclosure of proprietary trading at ITG. Let me meander through the story so far and touch on what else is yet to come into clear focus.
A storm is a brewing...    (source)

The news announced by ITG is that it is hopeful of a settlement with the SEC over prop trading and misusing client information in its business. The potential cost is $US 20.3M divided into a $18M penalty, $2.1 disgorgement of trading revenue, and $0.25M in prejudgment interest. Final resolution has not yet been achieved.

Kevin J.P. O'Hara resigned from the board. As an ex-SEC official, one can only imagine why after his resignation letter was reported to contain, “Although I believe in the importance of the governance concept of ‘loyal opposition,’ alas, to everything there is a season.” An honourable resignation.

The story has been widely reported:
The WSJ reported a slump in trading orders being routed to ITG, "A handful of asset managers and broker-dealers, including Sanford C. Bernstein & Co., removed connections to the firm’s dark pool on Thursday in response to the disclosure..."

ITG's response has been to apologise and for their CEO Robert Gasser to claim it was isolated to AlterNet. There appears to be some effort to point the finger at a previous employee, Hitesh Mittal, who is taking temporary paid leave from his current role at AQR. Gasser is reported to have said the problematic behaviour was led by a senior employee who operated in a manner that violated ITG policy.

Not so fast

I've briefly mentioned the conflicts at ITG in this blog previously well before this story broke: here (Dec 2014) and here (12 July 2015). ITG have long been up there with Pipeline in their propensity to mislead their clients in my mind.

There are three big issues to be confronted by ITG.

Firstly, their customers have long been misled and deserve recompense, not just for this incident but for historic and continuing non-disclosure surrounding proprietary trading by ITG.

Secondly, ITG needs to come clean with respect to their complete proprietary trading flow, how it has operated and how customer orders have potentially intermingled with their own trading.

Thirdly, this is an existential crisis and trust in ITG should be recognised to be completely broken. ITG, as it stands, is irreparable. Bob Gasser needs to stand down and someone trustworthy, such as ITG's Mats Goebels, needs to be appointed to prepare for the sale of assets, or, the purchase of the damaged goods by a firm who can benefit from its customer base and ageing technology assets. ITG has no future as a listed company.

ITG's prop trading

More disclosures should come. ITG has long held itself out as an agency only broker to its clients where they don't have to be concerned about conflicts of interest such as those that may arise from internal proprietary trading. This has long been a lie. Customers have been misled for well over a decade and continue to be misled. Funnily enough, most of what you need to know about this has been hidden in plain sight in ITG's filings with the SEC.

In this ITG 10-Q  from 2008 you'll see in the Canadian section on page 23, "Interlisted arbitrage, included in other revenues in the Condensed Consolidated Statements of Income, trading revenues improved to $7.2 million compared with $4.6 million in the prior year."  That's for a quarter. If you've been asking ITG to execute on one of the approximately 250 interlisted securities, ITG may have also been proprietary trading on that name by way of interlisted arb with some of those executions potentially being in their pool rather than on a transparent public market place. Feel free to meander though other ITG 10-Qs which discuss their prop trading further, such as page 28 from Sep 2006, "partially offset by a decrease in our inter-listed arbitrage trading."

I have long been aware of this as I was unfortunate to be involved with the ex-Asia Pac ITG CEO Greg Robinson, a pseudo-intellectual, criminal type of persona who used IP he stole from ITG to further his interests, including correspondence and contacts relating to ITG's interlisted arb. Robinson was stationed in the US for sometime. From time to time, Robinson was part of the sales effort that misled clients about being agency only when he and others were well aware of the prop trading activity. I worked with him for quite sometime and besides tiring of his stories of screwing around and drinking, I was somewhat flabbergasted by the contempt that was evident in his stories relating to ITG customers.

What is a customer to do?

The law firms have started circling around just the currently disclosed potential SEC settlement. Quite rightly too. The SEC settlement includes penalties and disgorgement but there is nothing in the prospective settlement for clients. Clients should be able to receive compensation and damages for the wrongdoing in addition to the SEC penalties. It is surprising that ITG didn't also account for that potential legal outcome in their recent announcement as they should be aware of such a likelihood as a mature firm. Here are a few of the announcements or PR from various legal firms:

Clearly customers deserve some recompense from ITG. As the above meanderings suggest, there is perhaps more to this story and we'll have to wait and see if there is indeed more yet to unfold. Hopefully the SEC will investigate matters further. 

ITG clients need to stop using ITG. ITG pioneered many activities in dark pools, with the original POSIT, algos, and TCA, but they are not the leading shop they once were. There are plenty of alternatives for customers. Agency-only shouldn't be the main concern, execution and trust should be. Newedge was an agency only broker and now it has been integrated with SocGen it continues to offer exemplary service as do Citi, JP Morgan, Goldman Sachs, and Morgan Stanley. There are indeed plenty of good or better alternatives, so you have no reason to compromise on trust by continuing to use ITG. Asset managers need good algos and TCA to do their jobs without the trust issues.

Pipeline died. Bankers Trust struggled after its customer breaches in the 90s requiring an acquisition. Likewise Arthur Andersen never recovered from Enron. Whilst Gasser has overseen this debacle, the culture of prop trading without proper disclosure pre-dates his tenure. It is unfortunate for the many good staff at ITG but the future is deservedly not bright.