Thursday, 9 August 2018

Further legal exposure exposed in new ITG filing

In addition to employing too many people for the services offered, ITG has added some indication of further legal rumblings it hopes may soon be behind it. Once again, POSIT is the subject of historical meandering over at the SEC. 

A $12M charge has been taken as an expected legal hit, with a little more in fees. The Gasser suits still awaits. A class action was settled but the insurers take the $18M hit with future insurance premiums unlikely to go down. It also seems the IIROC has not connected the dots on the historical games in ITG's Canadian biz which is curious.

ITG chart: yahoo source
(click to enlarge)
GAAP loss of $3M for this filing.

--Matt.
______________________

From the 10-Q Edgar filing at the SEC:

(19) Contingencies – Legal Matters
The Company is presently engaged in discussions with the SEC staff regarding a possible resolution of an investigation relating to the operational features of the U.S. POSIT alternative trading system and access to U.S. POSIT data, together with certain related disclosures.
With regard to the operational features of U.S. POSIT, the potential resolution is focused on: (i) the technological infrastructure supporting the matching engine from 2010 through mid-2014, which affected the ability of mainly clients engaged in low-latency trading to interact with other POSIT flow and (ii) a delay feature added in 2014 to ITG’s Liquidity Guard anti-gaming technology designed to prevent latency arbitrage by temporarily preventing day orders submitted by certain clients engaged in low-latency trading from interacting with day orders from other clients.  The potential resolution is also focused on: (i) overbroad internal access to, and internal sharing of, U.S. POSIT data, (ii) between October 2010 and July 2015, the sharing of anonymized lists of the top 100 symbols executed in U.S. POSIT and the top 100 symbols sent to U.S. POSIT as immediate-or-cancel orders on the prior trading day mainly with clients or prospective clients engaged in low-latency trading, (iii) between June 2009 and November 2017, the sharing of a venue analysis report that contained up to 15 symbols (and associated aggregated, anonymized volume) executed in U.S. POSIT on the prior trading day with users of the Company’s algorithms and (iv) instances of sharing of anonymized U.S. POSIT execution information with clients.
The Company has taken meaningful remedial actions during the course of the SEC’s investigation, including imposing additional limitations on access to U.S. POSIT data as well as enhancing POSIT’s Form ATS and other disclosures.
While the Company is engaged in discussions with the SEC staff to resolve the investigation, there can be no assurance that these discussions will be successful. Based on recent discussions, the Company incurred a charge of $12.0 million during the three and six months ended June 30, 2018 to establish an accrual for a potential settlement of this matter. The SEC staff has indicated that they will recommend this penalty amount to the Commission. The Company also incurred approximately $0.2 million in legal fees associated with this matter during the second quarter of 2018.  Resolution of the matter is subject to further discussions with the SEC staff and agreement with the SEC staff on the terms of a settlement, which would be subject to review and approval by the Commission. The Company cannot predict the timing of any settlement or the ultimate resolution of the SEC investigation.  It is possible that a materially higher amount than the amount accrued could be required to achieve a resolution of the matter. In addition, the Company cannot predict the impact that the matter may have on its business going forward.
In addition to the above, the Company’s broker-dealer subsidiaries are subject to, or involved in, investigations and other proceedings by government agencies and self-regulatory organizations, with respect to which the Company is cooperating. Such investigations and other proceedings may result in judgments, settlements, fines, disgorgements, penalties, injunctions or other relief. Given the inherent uncertainties and the current stage of these inquiries, and the Company’s ongoing reviews, the Company is unable to predict the outcome of these matters at this time.
The Company is not a party to any pending material legal proceedings other than claims and lawsuits arising in the ordinary course of business, except a putative class action lawsuit and a derivative action have been filed with respect to the Company and certain of its current and former directors and/or executives in connection with the Company’s announcement of the SEC matter described in the following paragraph (and other related actions could be filed).
On August 12, 2015, the Company reached a final settlement with the SEC in connection with the SEC’s investigation into a proprietary trading pilot operated within AlterNet for sixteen months in 2010 through mid-2011. The investigation was focused on customer disclosures, Form ATS regulatory filings and customer information controls relating to the pilot’s trading activity, which included (a) crossing against sell-side clients in POSIT and (b) violations of Company policy and procedures by a former employee. These violations principally involved information breaches for a period of several months in 2010 regarding sell-side parent orders flowing into ITG’s algorithms and executions by all customers in non-POSIT markets that were not otherwise available to ITG clients.  According to the terms of the settlement, the Company paid an aggregate amount of $20.3 million, representing a civil penalty of $18 million, disgorgement of approximately $2.1 million in trading revenues and prejudgment interest of approximately $0.25 million. 
In connection with the announcement of the SEC investigation regarding AlterNet, two putative class action lawsuits were filed with respect to the Company and certain of its current and former executives, which were consolidated into a single action captioned In re Investment Technology Group, Inc. Securities Litigation before the U.S. District Court for the Southern District of New York. The complaint alleges, among other things, that the defendants made material misrepresentations or omitted to disclose material facts concerning, among other subjects, the matters that were the subject of the SEC settlement regarding AlterNet and the SEC investigation that led to the SEC settlement. The complaint seeks an unspecified amount of damages under the federal securities laws. On April 26, 2017, the court granted in part and denied in part the Company’s motion to dismiss the complaint and granted the plaintiff leave to file a motion to amend its complaint. On June 12, 2017, the plaintiff filed a motion to amend its complaint against certain of the individual defendants who were dismissed from the case in the court’s April opinion. On March 23, 2018, the court denied plaintiff’s motion to amend, thereby affirming its dismissal of certain of the individual defendants from the case.
On April 19, 2018, the Company reached an agreement in principle to settle the consolidated securities class action lawsuit. In exchange for a release of claims and a dismissal with prejudice, the settlement includes a payment to class members of $18 million, which is well within the policy limits of, and is expected to be paid by, the Company’s insurance carrier. The condensed consolidated statements of financial condition as of June 30, 2018 include a payable to class members of $18.0 million in accounts payable and accrued expenses (also, see Note 11, Accounts Payable and Accrued Expenses) that is fully offset by a receivable from the Company’s insurance carrier in other assets. As a result, the settlement is not expected to impact the Company’s results. The settlement reached is solely to eliminate the uncertainties, burden and expense of further protracted litigation and does not constitute an admission of liability by the Company or its current or former executives or directors.  Specifically, the Company and its current and former executives and directors deny any liability or responsibility for the claims made and make no admission of any wrongdoing. The parties anticipate entering into a final settlement agreement outlining the complete terms of the settlement. The settlement is subject to certain conditions, including, among others, preliminary and final court approval and notice to the class of plaintiffs in the lawsuit. There is no assurance that a final settlement will be completed, court approval will be obtained or that class member participation will be sufficient.
On November 27, 2015, a purported shareholder of the Company filed a shareholder derivative action captioned Watterson v. Gasser et al. against eleven current or former officers and directors of the Company in the Supreme Court for the State of New York. The Company is named as a nominal defendant, and the plaintiff purports to seek recovery on its behalf. The complaint generally alleges that the individual defendants breached their fiduciary duties to the Company in connection with the matters that were the subject of the SEC settlement regarding AlterNet.
While the Company cannot predict the outcome of the derivative lawsuit, the Company intends to defend it as appropriate. No reserve has been established for the derivative lawsuit since the Company is unable to provide a reasonable estimate of any potential liability given the stage of the proceeding. The Company believes, based on information currently available, that the outcome of the derivative lawsuit will not likely have a material adverse effect on its consolidated financial position.  In light of the inherent uncertainties of such proceeding, an adverse outcome may have a material impact on the results of operations for any particular period.

Monday, 6 August 2018

Tempest reminder

Yup, tempest is still a thing, even for LCDs. No, it's not an urban myth. Through walls. Even tens of metres away:



H/T to Mr Newham. It's getting a lot more accessible. Be aware and beware,


--Matt.

Saturday, 4 August 2018

The secrets to OSE option trading and the Canadian interlisted arb

The Kickstarter for "The Accidental HFT firm" closes in twenty-something hours.

The Korean trading will get some more meat on the bone beyond the original piece. We'll have a new meander around how successful trading can work for futures and options at the OSE for the Nikkei-225. This was a feat my old firm failed at after I left. Silly people. It wasn't that hard. We'll talk about the main elements of success for OSE. As a tease, hardware was no help. Tricks were more important than low latency hardware. You'll find out why.

In Canada, the accidental firm struggled to successfully make markets in the first instance. However, a nice solution was dialled in that lead to that accidental 13-and-a-bit per cent of RIM trading in a day from my home office in Duffy's Forest, Sydney. We'll talk about what made the difference. It may be interesting for you.

There will be a few more details on how the implied vol was modelled plus the details on the trading strategy which was used to do over a million index options a day in the KRX. Some people have asked for great technical detail and others have asked to keep it simple, so I'll attempt to break out the technical bits to provide the wanted detail without polluting the stream.

The Zeptonics saga, the development of dedicated hardware, becoming the world's fastest switch, the ATS that nearly was, and the corruption in court we encountered that ultimately sunk it. This includes the drunk appeal judge, the dis-Honourable Judge Gilmour who unusually retired early this year in March 2018. The registrar that refused to step aside and acted in favour of his acquaintances. Judge Michelle Gordon's compromised actions, adultery, political favours, work liaisons, eventual recusal, and then an unjustified appointment to the High Court. An action that was answered before it was served due to the leaking from the court. The court of review that refused to hear about the continual and knowing mendacity from the opposing solicitor Matthew Critchley. Just the tip of the iceberg. Favours, friends, and corruption in the law and the judiciary. No surprises but an interesting, if twisted, tail to the tale. Intriguing for a brief meander, but the book is about trading, not the legal saga.

The good news story about stepping aside from Zeptonics to let an investor take on the old hardware team giving birth to the success of Metamako. We'll hear about the lead-up, but not the details there. That is for others.

We'll hear about risk, strategy adaption and combinations. A brief mention of how to make FPGA market data feeds better, by request, as part of the hardware story. We'll have a fireside chat about market microstructure and what I think makes for a good exchange. It may be worth pointing out some opportunities that still exist in that space.

Life is stranger than fiction sometimes. I hope you will enjoy it.

Happy trading,

--Matt.




Thursday, 2 August 2018

July NMS action - plus IEX lowlights

July 2018 was a meandering month for NMS exchanges. Volume started out pretty low thanks to some thoughts of Independence. I can't imagine why a revolution in government may seem relevant today still.

Average turnover for July from the exchanges was $304.66 billion per day. A bit lower than June's $350.10 billion but still higher than typical. Not quite the ten-year peak we saw on one day in February of $699.83 billion. The tension between trade wars, tech, and summer ho-hum is set to continue.
(click to enlarge)
 You can see in the following leptokurtic chart, showing a normal in red, that volume at over $300 billion per day remains strong despite the feelings of summer and the decay since the February vol explosion:

(click to enlarge)
 We're out around the 80% mark. Above a credit but not quite a high distinction:
(click to enlarge)

IEX's month


IEX continue their noisy irrelevance. 79.9% of handled volume at IEX was not lit. Dark and expensive and still not a restaurant. The usual charts are below.

(click to enlarge)
The Data Core scandal at IEX percolates along. I hear there are some peeps on the IEX Exchange's board that didn't know about it and also don't particularly think it is the wisest move, which is wise.

IEX cloud a few issues in their relations between the group holding company and the exchange, as has been highlighted in the ongoing Nasdaq patent case. That also continues in the operational side of the business with exchange employees soliciting for the Data Core expansion as you may see in the advertisement to the right.

IEX's credibility issues are further highlighted in a recent filing I avoided meandering about. This particular filing attracted a bit of attention after Mr John McCrank was duped a little by the IEX spin in the filing, "Proposed rule change to revise the threshold for imposition of the Crumbling Quote Remove Fee.

IEX claims they're narrowing their crummy Crumbling Quote, that usually means the opposite. Yet the applicability is both a broadening (removes minimum threshold) and a narrowing (specific ports). You could argue about the nett effect in a Liskov substitution principle kind of way but the real arbiter is that it raises more money, expected to be over $80k per month, thanks to removing the 1M share threshold. That would be a broadening then.

Tweet source (click to enlarge)
The filing's dubious spin highlights some of the problems in IEX's approach. Firstly, the overall thing is meh, where they are adding a bit of a mud to their pig and it remains a pig. They are staying true to their dubious principle of preventing people managing risk as prices change by doubling down on the usually wrong and unauditable crumbling quote signal. The larger issue is how IEX bend themselves out of shape, stretch reality, and write such a long filing for such a simple change. I'd like to see the SEC simply turn back a filing one day due to it being too long. 

Mr McCrank's tweet is reasonable as the exchange's filing's notes they receive 18.2 per cent of its marketable orders in brief periods, you know, those periods where prices change. However, it's an unfortunate regurgitation of IEX's weak spin. It's just the way markets work. Activity is centred around those fleeting moments prices change. IEX seems surprised by this as they try to prevent their clients managing risk at those times. Perhaps IEX are in the wrong industry? Overall, this artifice deceives clients by artificially spiking some statistical measures whilst costing those clients money with poor execution at the same time. If best execution was really a thing it seems unlikely IEX would trade at all.

IEX also tripled their spread crossing fee from $0.0003 to $0.0009, "Proposed Rule Change to Increase the Spread-Crossing Eligible Remove Fee to $0.0009 per share for Executions at or Above $1.00 that Remove Non-Displayed Liquidity." Maybe that will lift volumes for them?

In other IEX news, Mr Alexander Osipovich writes in the WSJ, "IEX Exchange Has Wall Street Fame But No Listings". Well, I would suggest infamy, rather than fame, but that's me for you :P Some quotes:
But so far, IEX has failed to list any companies, despite approaching hundreds over the past several years, including household names such as Amazon.com Inc.,  Starbucks Corp. and air carrier United Continental Holdings Inc., people familiar with the listings effort said.
... 
Four years ago, The Wall Street Journal reported that IEX told investors it hoped to list as many as 250 companies by 2017. By last year, IEX was telling some people that it would initially have around a half-dozen. 
“As the ‘Flash Boys’ aura faded, listed companies increased their focus on the details of IEX as a listing venue and they came away unimpressed,” said former NYSE Group President Thomas Farley.
I can't imagine a CFO deciding an IEX listing solves any problems with its rules, risk of rule change, vendor risk, Wynn #metoo aftermath, along with IEX's spin and mendacity problems. A job risk for a CFO. A very dubious proposition. 

Happy trading,

--Matt.



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Saturday, 21 July 2018

Raft cut loose: HF tower for HFT refused

Sniper's Tweet (click to enlarge)
Alexandre Laumonier, aka @SniperInMahwah, noted via tweet an HF and microwave tower for HFT application has been refused in the UK by a parish council.

In the application from Doron Bar of Raft Technologies, from a popular address in Israel, Raft wanted to put a fairly modest tower for HF with microwave links "near the settlement of Taplow, close by Maidenhead in Berkshire but within the administrative area of South Bucks District Council."


Tower site near Taplow (click to enlarge)
Approximate coordinates: 51°31'26.6"N 0°41'18.7"W (51.524065, -0.688536).
(click to enlarge)

(click to enlarge)
Note to self: if you are going to put in a disguised tower, at least use a picture of a disguised tower to improve your chances. Putting a picture of a tower that proudly stands out in the skyline may not be the best way to convey discretion for a Green Belt. Whilst it is a great picture of such a tower, I couldn't imagine a worse picture for a council application. The picture looks much more imposing than it actually would be. Oops.

Source (click to enlarge)

Alexandre has some interesting details yet to come on the HF comings and goings on his side of the pond. Worth waiting for...


Happy trading,

--Matt.

Tuesday, 17 July 2018

Mr Bob Van Valzah on "Why your transatlantic trades are getting picked off"

Mr Bob Van Valzah spoke at STAC on HF for HFT at STAC in New York on 13th of June.


Here is STAC's page, with the link to the video of the presentation: "Why your transatlantic trades are getting picked off."

The slides are available at that web, or directly here.

Thanks Bob for the shout out to "Lines, radios, and cables - oh my."


Happy trading,


--Matt.

Monday, 16 July 2018

US Finra ATS Tier 1 statistics released 16-July-2018 for 25-June-2018

ats_20180716.md ATS

EBXL Level ATS levels up two levels. The tussle from third to sixth remains tight.

ATS share
click to enlarge

# ATS T1 share % Qty Trades Avg trade size Δ
1 UBSA UBS ATS 18.51 521.2 M 3,431,533 152
2 CROS CROSSFINDER 10.21 287.6 M 1,856,190 155
3 MSPL MS POOL (ATS-4) 7.04 198.3 M 848,206 234
4 EBXL LEVEL ATS 6.79 191.3 M 967,859 198 +2
5 JPMX JPM-X 6.61 186.2 M 947,457 196 -1
6 DBAX SUPERX 6.42 180.9 M 924,705 196 -1
7 LATS BARCLAYS ATS (“LX”) 6.33 178.2 M 930,130 192
8 SGMT SIGMA X2 5.52 155.4 M 967,646 161
9 BIDS BIDS TRADING 5.07 142.7 M 105,619 1,351
10 MLIX INSTINCT X 3.28 92.2 M 429,612 215
11 ITGP POSIT 3.06 86.1 M 257,815 334
12 ICBX INSTINET CONTINUOUS BLOCK CROSSING SYSTEM (CBX) 2.86 80.6 M 411,902 196
13 MSTX MS TRAJECTORY CROSS (ATS-1) 2.13 59.9 M 362,201 165
14 KCGM VIRTU MATCHIT 1.97 55.6 M 325,149 171
15 DLTA DEALERWEB 1.90 53.4 M 197 271,178
16 LQNA LIQUIDNET H2O 1.63 45.8 M 2,135 21,459
17 JPBX JPB-X 1.49 42.1 M 301,343 140
18 IATS IBKR ATS 1.38 38.7 M 148,894 260
19 BLKX BLOCKCROSS 1.32 37.1 M 2,999 12,386
20 CXCX CITI CROSS 1.14 32.2 M 154,611 208 +1
21 XSTM CROSSSTREAM 1.09 30.6 M 90,006 340 -1
22 LQNT LIQUIDNET ATS 1.08 30.5 M 787 38,728 +1
23 LMNX LUMINEX TRADING & ANALYTICS LLC 0.85 23.9 M 574 41,595 -1
24 MSRP MS RPOOL (ATS-6) 0.78 21.9 M 124,404 176 +1
25 PDQX CODA MARKETS, INC. 0.55 15.4 M 70,695 218 +1
26 XIST INSTINET CROSSING 0.38 10.6 M 3,300 3,208 -2
27 CBLC CITIBLOC 0.31 8.8 M 532 16,606
28 CIOI CIOI 0.22 6.2 M 87 71,238
29 AQUA AQUA SECURITIES L.P. 0.06 1.6 M 195 8,179
30 WDNX XE 0.04 1.0 M 961 1,066
31 PROS PRO SECURITIES ATS 0.01 0.2 M 441 535
32 USTK USTOCKTRADE SECURITIES, INC. 0.00 0.0 M 828 59
33 MAGM MAGMA ATS 0.00 0.0 M 28 650

ATS share
click to enlarge

ATS share
click to enlarge


Saturday, 14 July 2018

Crypto crime - a recycled vignette

The US filed against the Russian hackers today. The ever-vigilant Mr Kipp Rogers tweeted these wise words:
Twitterish linkage of sorts
(click to enlarge)
I remain convinced crypto-crime is the most likely threat to the longevity of various coins, including $BTC. Though crime is more of a problem with the coinage designed for completely anonymous transactions such as Monero, Dash, Zcash, etcetera.

Here is a forte reverberation of something I wrote a few months ago, previously buried in the mix of the article, "The market factory: things that make you go hmmm."





It seems a little more relevant today after the DoJ's filing.

--Matt.
_______________________


Crypto-currency crime
February 2018


Bubbles come and go. Meh. Being libertine at heart -  even though the libertine part seems to be shrinking with age - I'm disturbed by my disturbance at the marketing around so-called virtual currencies. Octogenarian family friends, who can't use an iPad, make enquiries about BitCoin. I suspect you, as a knowledgeable technology or finance peep, have been asked similar questions even if you are no longer reading this all too long meander.

If you are no longer reading I presume you will still know if you've been asked about such coinage - despite the breaking of the fourth wall. It is a worry the National TV News from the public broadcaster here has had BitCoin prices and commentary in the nightly finance report for many months. Crazy stuff for something with the mirage of the modest market cap of a single stock. When remote Tasmanian retail, or the shoe-shiner, asks about Bitcoin, you know you have a retail problem that needs some unfortunate regulatory consideration.

I wrote a child-like meander about crypto-currency and crime last week, "Your crypto-currency response will be weighed." It serves little purpose other than as therapy but I enjoyed the music. The important aspect is to realise, according to the UN, there are some 40,000,000 modern slaves in the world and they deserve their AML back. There are kids being abused and photographed with their pictures being hosted on servers paid for with BitCoin.

Yep, slavery is still a thing:




My musing meandered me to the point of view that crime may destroy BitCoin before other factors, say bubbles. The regulators have been asleep at the wheel. Perhaps with its minor transaction flow profile virtual currencies didn't deserve too much attention, but the genie escaped that bottle years ago. The regulators could have nipped this nightmare in the bud with some pretty simple regulations. They failed in their mission.

Most disagreed with this point of view in comments sent back, though I appreciated some support. I'm hoping this is another Søren Kierkegaard moment where my minority view may be right.

Society has a point. There is a minor fraction of real currency that is laundered. There is a minority, estimated to be a much bigger minority, of virtual currency that is likewise laundered. For the non-virtual case, we've developed some pretty flawed regulations and laws in a ham-fisted attempt to stem such criminal activities. They have a point as the best we can do for now. The same regulations should be equally applied to virtual currencies.

Money laundering is a pretty big deal:

(Sourced from PWC - click to enlarge)

unless you think $2 trillion a year is nothing to worry about.

I've been especially critical of the CFTC's and SEC's tepid response. That seems to be changing as they ramp up their rhetoric to counter their embarrassing lack of action. See this sensible Written Testimony from the last week by Chairman J. Christopher Giancarlo. There is a lot of good work in there, including this piece on virtual currencies,
VIRTUAL CURRENCIES
Let’s turn to virtual currencies. Emerging financial technologies are taking us into a new chapter of economic history. They are impacting trading, markets and the entire financial landscape with far ranging implications for capital formation and risk transfer. These emerging technologies include machine learning and artificial intelligence, algorithm-based trading, data analytics, “smart” contracts, and distributed ledger technologies. Over time, these technologies may come to challenge traditional market infrastructure. They are transforming the world around us, and it is no surprise that these technologies are having an equally transformative impact on U.S. capital and derivatives markets.
Supporters of virtual currencies see a technological solution to the age-old “double spend” problem – that has always driven the need for a trusted, central authority to ensure that an entity is capable of, and does, engage in a valid transaction. Traditionally, there has been a need for a trusted intermediary – for example a bank or other financial institution – to serve as a gatekeeper for transactions and many economic activities. Virtual currencies seek to replace the need for a central authority or intermediary with a decentralized, rules-based and open consensus mechanism. An array of thoughtful business, technology, academic, and policy leaders have extrapolated some of the possible impacts that derive from such an innovation, including how market participants conduct transactions, transfer ownership, and power peer-to-peer applications and economic systems.
Others, however, argue that this is all hype or technological alchemy and that the current interest in virtual currencies is overblown and resembles wishful thinking, a fever, even a mania. They have declared the 2017 heightened valuation of Bitcoin to be a bubble similar to the famous “Tulip Bubble” of the seventeenth century. They say that virtual currencies perform no socially useful function and, worse, can be used to evade laws or support illicit activity. Indeed, history has demonstrated to us time-and-again that bad actors will try to invoke the concept of innovation in order to perpetrate age-old fraudulent schemes on the public. Accordingly, some assert that virtual currencies should be banned, as some nations have done.
There is clearly no shortage of opinions on virtual currencies such as Bitcoin. In fact, virtual currencies may be all things to all people: for some, potential riches, the next big thing, a technological revolution, and an exorable value proposition; for others, a fraud, a new form of temptation and allure, and a way to separate the unsuspecting from their money. 
Perspective is critically important. As of the morning of February 12, the total value of all outstanding Bitcoin was about $149 billion based on a Bitcoin price of $8,800. The Bitcoin “market capitalization” is less than the stock market capitalization of a single “large cap” business, such as Disney around $156 billion. The total value of all outstanding virtual currencies was about $430 billion. Because virtual currencies like Bitcoin are sometimes considered to be comparable to gold as an investment vehicle, it is important to recognize that the total value of all the gold in the world is estimated by the World Gold Council to be about $8 trillion, which continues to dwarf the virtual currency market size. Clearly, the column inches of press attention to virtual currency far surpass its size and magnitude in today’s global economy. 
Yet, despite being a relatively small asset class, virtual currency presents complex challenges for regulators. Chairman Jay Clayton of the U.S. Securities and Exchange Commission (SEC) and I recently wrote: 
The CFTC and SEC, along with other federal and state regulators and criminal authorities, will continue to work together to bring transparency and integrity to these markets and, importantly, to deter and prosecute fraud and abuse. These markets are new, evolving and international. As such they require us to be nimble and forward-looking; coordinated with our state, federal and international colleagues; and engaged with important stakeholders, including Congress.
 It is this perspective that has guided our work at the CFTC on virtual currencies. Our work has six broad elements: (1) staff competency; (2) consumer education; (3) interagency cooperation; (4) exercise of authority; (5) strong enforcement; and, (6) heightened review of virtual currency product self-certifications.
The interagency mess is quite troubling. Self-certification is also troubling in this domain. We have the various SROs, SEC, CFTC, FinCEN, FBI, DOJ, FSOC, FSB, IOSCO all with a stake.

We have to be careful with our technology and regulations. Just because cameras are used for kiddie porn, we don't ban cameras. Similarly, mathematical truths and cryptography are too important for the good of humanity to limit or ban. The FBI and NSA are not too happy with solid cryptography being used in the wild. Shame on them. As a society, we have chosen another path. We choose to use society's lubricant, money, as one of the primary mechanisms to keep our children safe and to act against slavery. This, to me, remains a valid choice. Virtual currencies are subverting this due to a lack of oversight.

The docile and inactive FinCEN at least prosecuted the $4B laundry-o-mat that was BTC-e. A $110M fine was levied. Part of the case included highlighting not only the problem of bitcoin mixers but the clear and present danger of newer virtual currencies that provide untraceable features. Dash in this case:


With many next-generation coins, such as Zcash, and then Monero, improving on the usefulness of virtual currencies for crime, we need to wake up and process this nightmare that refuses to sleep. It is not possible for me to accept that Monero should be available for any reasonable transaction size given the impossibility of AML/KYC application to such a beast.

Australia introduced new virtual currency laws recently but a punter can still buy Monero at exchanges touting AML compliance. Many buy BTC at Coinbase and then convert to Monero.  It would seem there needs to be a central body or regulation that has viral properties. You can't expect global rules to be negotiated or exist - certainly not in a timely manner. A viral approach where you can't transact with a non-member or a non-compliant body is the only workable solution. A cabal of countries agreeing would be better, but the US or the EU could go it alone if necessary, again.

A further step would be for compliant venues to raise a Suspicious Transaction Report requirement for coinage going to non-compliant venues or being tumbled. It is right there in the chain and popular addresses are known or derivable. That is somewhat better than cash in that you can track the trackable, but not the new generation of crime-based coinage such as Monero. The viral possibilities in such an approach are better than what we have with cash. There is hope.

It does make you wonder if there is a grand conspiracy in that Bitcoin may be a long game where the US government is trying to corral all the criminals into a tight space where one sucker punch will bring many undone. Alas, government incompetence and Hanlon's razor makes this unlikely. Yet, it makes me go, "Hmmm."

Virtual currencies are a cesspool that need not be so. Regulators are belatedly picking up the ball, but not fast enough. ICOs and the vulnerability of poorly educated retail are one dimension but I worry more about crime. You should too. This is a thing that should make us all go, "Hmmm."


Nasdaq's IEX patent suit meanders on

There is no reals news to meander here.

In response to the suit, IEX filed for a dismissal, as is normal practice. Nasdaq responded on 10th July with a response to the dismissal:

"PLAINTIFFS’ MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS’ MOTION TO DISMISS COMPLAINT"

PDF of the fifty-page filing
(click to enlarge)

All the normal course of events in pre-trial manoeuvrings. Nothing to see here. You may meander over the entrails as you wish.

Happy trading,

--Matt.

Wednesday, 11 July 2018

NYSE takes the gloves off: IEX

Apologies for a short meander on IEX. I agree with you. It is getting tiring...

I must say I'm hoping the IEX board takes on their problem so we don't have to worry about such IEX hyperbole and mendacity for much longer. The prospect of a down round may help focus the board's mind.

Anyhow, the latest comment letter from NYSE on the dumb fee pilot was a pointed rebuttal of IEX's false and misleading claims. Hat tip to Mr Osipovich for the heads up:


NYSE's conclusion was strong and clear (page 14):
"In the real world, the IEX model has failed. It trades mostly in the dark, has no listings, and has not achieved its promised growth. If there were truth to the IEX narrative, or if its model created significant value, it would have been more successful. Blaming competitors whose business models work and lodging false accusations do not change objective facts.
Respectfully submitted,

The start was strong too (page 1):
Two years ago, Investors Exchange LLC (“IEX”) was an ATS that traded roughly 2% of US equity volume, consisted of about 80% dark trading activity, and listed zero securities. Two years later, it is an exchange that trades roughly 2% of US equityvolume , consists of about 80% dark trading activity, and lists zero securities.
By any objective measure, IEX has failed to have a meaningful impact as an exchange. So how does it try to cling to relevance when its high-cost, low-volume business model is jeopardized? By blaming others and disparaging NYSE’s name to attract attention.
Generally, we have chosen not to respond to IEX’s business-driven marketing ploys. But now IEX has sunk to a new low. For its own commercial interest, the so-called “Investors Exchange” propagates a lie that the proposed Transaction Fee Pilot 1 would have no impact on displayed prices in the market and thus no impact on investors or issuers. We have no choice but to respond.

The gloves are definitely off. Not before time.

You should just read the letter if you have time, but here are some cherry-picked fun pieces to meander through:

Is IEX abusing the SEC comment process?

With its business model clearly failing despite its initial fanfare, IEX has resorted to making a mockery of the Commission’s comment process in an attempt to ingratiate itself with the media, order flow providers, companies, and regulators.

Is the NYSE misleading issuers? Is IEX offensive?

In its letter, IEX repeatedly states that because certain investors have submitted positive comment letters, NYSE is purposefully misleading issuers and investors with its analysis of investor harm. This is untrue and offensive.

Does IEX impugn NYSE's integrity?

Against this broad and well-reasoned opposition, IEX opts to accuse NYSE of fearmongering and breaching the trust of issuers. Those outcries beg an obvious question: Why is IEX choosing to impugn NYSE’s integrity? One clue might be that when IEX wrote its first comment letter supporting the Proposal without attacking NYSE, it failed to generate publicity. It fared better in its second swing.

On co-location, one of IEX's biggest flaws:

Likewise, the NYSE Group co-location services provide regulated, equal access to our market data and trading platforms, access that neither dark pools nor IEX provide. For all of IEX’s claims of fairness, it has no control over either how customers gain access to IEX at the first IEX entry point or the costs associated with getting closer access to that entry point. It is remarkable that IEX accuses other exchanges of “selling speed,” while it facilitates unequal access to its POP through a lack of regulated co-location space.

IEX claims issuers are dumb sheep:

Notwithstanding IEX’s smear campaign and accusation that we are purposefully misleading issuers, over two dozen listed companies have chosen to submit comment letters opposing the Proposal. Companies that have met the NYSE-listing standards are sophisticated and self-interested actors. If they choose to write a letter opposing the Proposal, it is because they have independently concluded that it is in their best interest to do so (and for reasons similar to why ETF issuers have expressed that they do not want an ETF included in a test bucket). To insinuate, as IEX has, that they are naïve or were misled is offensive to issuers.

IEX fiction on NYSE on MMs:

IEX next turns to fiction, claiming that NYSE believes that liquidity is posted only by electronic market makers. NYSE Group never took that position. In fact, rebates on NYSE and NYSE Arca are available to any liquidity provider.

IEX wants to shut out brokers and insist on friendlier routing. Does IEX need to submit yet another rule filing?

IEX takes the untenable position that even with disclosures, investors would not be in a position to know whether or how much fee conflicts may have impacted routing of their orders. This runs contrary to how institutional investors already demand detailed trade cost analyses (“TCA”) from their brokers and that brokers already readily provide data and analysis to such customers. Institutional investors employ numerous considerations in determining which broker to use and readily have the ability to find a broker that satisfies any demands for transparency in routing decisions.
Potentially IEX makes this nonsensical claim so that it can promote its forthcoming commercial TCA offering. We look forward to the rule filings IEX will submit to introduce this service as a facility of the exchange.

I think it is a technical knockout in favour of the NYSE. You?


Happy trading,


--Matt.