Buyside, Buyside, Watcha Gonna Do?

A recent headline in The Trade caught our attention: “Buy-side brace for further regulatory scrutiny.” While the article focuses on the European Union, and MiFID II, we believe that the buyside should take this under consideration in the European Union, the United States and elsewhere.

Why is this the case? In Europe, Best Execution is coming under a regulatory microscope after foundational regulatory changes with MiFID II. In the UK, the FCA is already paying close attention, and has come out to say that the buyside is failing to ensure appropriate oversight of best execution and failing to meet the FCA’s expectations with commission sharing and soft dollars. European authorities will likely examine these same issues once MiFID II is in force (still scheduled for January 2018).

In the United States, we have seen a clear trend of enforcement from regulators. This has entailed significant enforcement actions in the past few years targeted at: exchanges, ATSs and broker-dealers. All of these enforcement actions have had a common theme - they’ve either involved technology and data, or accurate disclosures.

These trends have also included substantive regulatory rule proposals increasing transparency and disclosure requirements (which we have championed for years), including for ATSs and institutional order routing. It should be clear what the next step of the process will be - a deeper examination of buyside firms. We expect regulators will be asking the following questions, demanding far more depth and expertise than in the past:

  • Do asset managers have comprehensive and sufficient best execution policies and procedures in place? Are past bast execution procedures still sufficient given new technology and data?
  • Are asset managers accurately representing what these policies and procedures are?
  • How are asset managers using current public disclosures?
  • How will asset managers incorporate enhanced public disclosures into their best execution procedures?
  • How are asset managers handling the conflict-of-interest that soft dollars and commission sharing present?

Unfortunately, there is significant informational asymmetry with regards to best execution. Regulators have not been clear about their expectations of asset managers, likely because they want flexibility for future enforcement.

Asset managers don’t like to discuss it with each other because it can be a sore subject. Within firms, trading teams can see it as a way for management to second-guess their trading decisions. Compliance groups can have trouble making the business case for more robust execution decision analysis and procedures. Portfolio management and research teams are concerned about ensuring their favorite research and deal flow sources receive enough trading commissions.

Trading, portfolio management, legal and compliance can all see it as a big waste of time and money. It doesn’t have to be.

There are distinct advantages to adopting a best practices approach to best execution that go beyond covering one’s regulatory exposure. This includes cost savings across multiple departments and alpha creation from optimizing the trading process. It can enhance existing broker relationships, and ensure a holistic approach to these relationships that is customized to an individual asset manager’s needs through broker scorecards. It can make it easy to assuage concerns of potential investors that are raised in the questionnaire / due diligence process, and to be sure you are representing yourself accurately. It can help to set apart an asset manager from others who have not done the necessary work, potentially winning investments that are becoming increasingly competed over.

At KOR Group, we’ve helped dozens of asset managers, of all sizes (from $1B to $1T of AUM), adopt a Modern Approach to Best Execution. This is a forward-looking, future-proof approach that ensures these firms have adopted the absolute best possible practices given their size and trading activity. It means understanding what your peers are doing, and leveraging our expertise and exposure to many different firms in the industry to understand how to adapt peer best practices to a firm’s unique trading style and strategy. It means leveraging quantitative analysis of order routing data, which is often much harder than just buying some TCA software. It means realizing significant cost savings from optimizing order routing decisions and broker relationships. It means ensuring soft dollars and commission sharing is managed appropriately and consistently across geographic regions.

Are you concerned that your best execution practices may not measure up? Are you unsure of the implications of MiFID II on your firm? Are you struggling to figure out how to measure algorithmic trading performance? Have you been disappointed by the results of your TCA efforts, or feel that there must be a better way to analyze the results? Has it been years since you’ve revisited your best execution policies and practices? Do you know how firms of similar size and trading style are managing these issues?

Contact us today and we’ll help you answer all of these questions.

Affordable and Effective Transaction Cost Analysis: Less Can Be More!

Transaction Cost Analysis (TCA) should help a buyside firm achieve two simple objectives: demonstrate Best Execution, and provide insight into trading performance to improve trader decisions. The ultimate goal is always to lower trading costs and increase portfolio returns.

One of the problems with classic TCA offerings is that they are generally expensive, complex, and can rarely help determine the optimal broker/algo/venue combination. All too often, classic TCA creates more work than intended. The reports are generally long, complex and require a significant investment of time to digest to make sense of. It is often difficult to separate the signal from the noise in the reports without spending considerable time slicing up data via cross-sectional analysis (simple examples include looking at algo performance by market cap, or parent order % of ADV). Even then, the signal might be confusing or contradictory. In many ways, this defeats the value of the exercise itself and can actually hamper the duty of Best Execution.

KOR Group has found that for TCA, one size truly does not fit all firms.

Traders and Portfolio Managers who try to move in the markets quickly and nimbly don’t want to be bogged down reviewing complex reports and statistical measures that may or may not help to guide future decisions. In a fragmented trading environment with many brokers, algos and even asset classes, this chore becomes all the more difficult with classic TCA.

At KOR Group, we’ve done dozens of consulting engagements that help firms create reports customized for their purposes, or to make sense of their existing reports. We strongly believe a consultative, customized approach works better for many advisors - both big and small. We’ve helped to create different reports for different audiences within (and external to) a firm - a critically important consideration in effective TCA.

We have set about to address the shortcomings of classic TCA, and to make TCA both affordable and effective. We have found that often less is much, much more. Instead of strict quantitative analysis, we work with clients to understand what each report means, and what actions they can take. With our decades of experience, we can help our clients answer the questions:

  • What does it all mean?

  • How does it match up to historic trends?

  • What are the most important metrics to monitor?

  • What are the outliers?

We realized that it’s not good enough to know what happened in the past; that pre-trade decision making should be guided by a combination of quantitative analysis and deep market structure expertise. We’ve pushed the envelope through customized, quantitative analysis projects for our clients, leveraging machine learning techniques such as unsupervised clustering, decisions trees and more advanced estimation techniques.

Have you struggled to turn classic TCA analysis into action that reduces implicit and explicit costs? Do you find the data overwhelming to deal with? Have you struggled to track the results of order routing changes? Do you feel that the money paid for TCA is well spent? Or would you prefer something simpler, yet more effective? As budgets tighten but client expectations and due diligence increases, we can help you better understand what’s happening to your orders while demonstrating true Best Execution.

A Modern Approach to Best Execution

For a long time, guidance by regulators regarding Best Execution responsibilities for investment advisors has not gotten the attention it deserves. As markets have evolved and become more complex, high-speed and data-driven, the Best Execution Review Committee of the past simply does not cut it.

Best Execution has long meant different things to different firms, whether they are hedge funds, pension plans, mutual funds or even broker/dealers and internalizers. In the US, a firm’s Best Execution obligation is a part of their fiduciary duty if they are an investment advisor (Section 206 of the Advisor’s Act of 1940), or FINRA Rule 5310 if they are a broker/dealer. FINRA’s recent enhanced guidance and attention on Best Execution shows that firms need to continue to improve and modernize their approach. We expect the SEC to follow FINRA down this path.

In Europe, the obligation stems from the original MiFID rules passed in 2004, and has been strengthened by MiFID II. MiFID II places a heavy emphasis on improving investor protection and extends to the introduction of robust controls to avoid conflicts of interest, to encourage greater transparency both pre and post-execution and to ban the use of soft dollars (so-called unbundling).

In Canada, Best Execution is defined under National Instrument 23-101 as the “most advantageous execution terms reasonably available under the circumstances”, and the NI 23-101 obligation is to use “reasonable efforts” to achieve best execution. For IIROC regulated dealers, the obligation as set out in Rule 5.1 of the Universal Market Integrity Rules (UMIR) is to “diligently pursue the execution of each client order on the most advantageous execution terms reasonably available under the circumstances.”

KOR has helped firms of all sizes adopt industry-leading Best Execution policies, procedures and quantitative analysis. We strongly believe that Best Execution needs to be tailored to individual firms based on their size and trading activity. We also believe that firms can learn from each other and from good regulations around the world, even if they are not subject to them in their jurisdiction.

Best Execution does not mean just getting the best price in the market, nor does it just mean performing transaction cost analysis. Best Execution is a firm-wide responsibility which should involve Compliance, Legal, Trading and Portfolio Management all working together. The “regular and rigorous” aspects of Best Execution should at a minimum include meetings with actionable results, robust quantitative analysis, simple and forthright policies and procedures, and strict broker/venue (and potentially sub-advisor) diligence and oversight. 

Broker and venue diligence is a particularly hot topic, and even garnered a comment from SEC Chair Mary Jo White last week. The SEC will be unveiling a plan this week to force brokers (and routing operations of exchanges) to provide better information to their clients and publicly. This is a critically important step for investment advisors, so that they can compare brokers to each other. Most importantly, enhanced public disclosure will allow firms to better evaluate brokers they are not using, a recent addition to Best Execution standards from FINRA. KOR has helped clients design and maintain broker scorecards and continues to believe this technique provides the best oversight. 

Firms should assess whether they are staying ahead of their Best Execution obligations by asking themselves the following questions:

  • Have you looked at your Best Execution Policy lately?
  • Are you maintaining industry-leading Best Execution procedures?
  • Are you appropriately accounting for soft dollars? Have you tried to unify your policies with MiFID II’s unbundling requirements coming?
  • Are your annual broker surveys covering all the right items?
  • How are you evaluating the venues your broker sends orders to?
  • How do you evaluate brokers and venues that you are not connected to?
  • Are you still relying on reports from the sell-side to analyze execution quality?
  • How detailed are your quantitative analytics, and are you sure brokers are calculating metrics and recording data properly?
  • Do you know what other firms of your size are doing? 

KOR can help you with all of these questions and more. Where we lack the expertise, we have partnered with firms who specialize in securities law and regulation, securities lending, transaction cost analysis and more. We provide the only independent Best Execution consulting that combines quantitative and qualitative analysis, compares it with industry-leading best practices, and provides concrete, actionable recommendations prioritized by effort and impact. Whether you manage $100M or $500B, Best Execution requires this holistic approach.

We can help you make it happen.


CHX SNAP Auctions: Guest Article by Steve Givot

The guest article by Steve Givot SVP of Strategy & Product Management for Chicago Stock Exchange, Inc. (CHX) was originally published in the June 2015 edition of KOR Group's Market Structure Insights.

CHX SNAP Auctions: A Dark Auction in a Lit Market

In 2014, the Chicago Stock Exchange (CHX) began development on a new process for facilitating the block trading of securities, in response to a market need to address market fragmentation.  The goal was to design a functionality, supported by a transparent set of rules, which would attract and consolidate buying and selling interest in a given security at CHX, while minimizing speed advantages, gaming opportunities, and information leakage.  The result of CHX’s effort is SNAP (Sub-second Non-disclosed Auction Process) Auctions, which is currently pending review by the U.S. Securities and Exchange Commission (“SEC”).

There have been several unintended consequences of Regulation NMS.  One of the most notable is that locating liquidity for a large block transaction has become far more complicated.  Several iterations of market response to Regulation NMS have left the marketplace with less displayed liquidity in most issues and fewer readily-identifiable liquidity providers to approach in most issues when working a block size order.

The U.S. equities market is highly fragmented, with the majority of trading centers being “dark pools,” operating under Regulation ATS, with little or no rule transparency.  Computational speed has become an important feature in trading.   The algorithmic slicing and dicing of large “parent” orders into numerous and smaller “child” orders seeking to mask the existence of the parent order has given rise to claims that the market is unfair and suspect to gaming.  Institutions attempting to execute block size orders are heavily focused on minimizing information leakage, which has resulted in increased execution costs.  Suffice it to say, market participants wishing to execute block size orders face significant challenges in the current environment.  SNAP is well-positioned to address those challenges.

SNAP is an innovative process where CHX, a lit national securities exchange, would transitions into, and out of, a dark auction in a requested security – all in less than one second.  If approved by the SEC, SNAP Auctions in a given security could occur numerous times during the trading day, subject to certain timing requirements, and would only be initiated at the request of a market participant. Specifically, a SNAP Auction would begin when CHX receives an order – a SNAP Order – which requests an intra-day auction in a security.  CHX would start a SNAP Auction upon receipt of a SNAP Order if the order meets specific time, size, price, and side requirements, as detailed under the proposed CHX rules (additional details are provided at  Notably, the SNAP Order must be marketable or hypermarketable upon receipt and must meet a minimum size requirement based on the order’s limit price.  In short, CHX will only start a SNAP Auction upon receipt of bona fide aggressively priced trading interest of a substantial size.

When CHX announces the start of a SNAP Auction, it will only identify the symbol of the security subject to the SNAP Auction.  CHX will not disclose the side, size, or price of the SNAP Order – although it would be clear, by virtue of the requirements to initiate a SNAP Auction, that the order would meet a minimum size requirement and would be priced at or through the contra-side of the NBBO.  When CHX starts a SNAP Auction, CHX will go completely dark with respect to the subject security.  To this end, CHX will withdraw its quote(s) from the National Market System.  CHX will also suspend dissemination of its private book feed (CHX Book Feed) with respect to the subject security and, thus, during a SNAP Auction, the CHX Book Feed will not provide any information for the subject security concerning orders, trades, or any other information aside from that a SNAP Auction is underway in the subject security.

CHX would then assemble orders for the SNAP Auction Book.  These orders would come from five sources:  (1) the SNAP Order which initiated the SNAP Auction, (2) resting orders in the CHX book at the time the SNAP Order was received (minus orders which were marked to cancel rather than participate in a SNAP Auction), (3) orders responding to the SNAP Auction accepted during the SNAP Order Acceptance (which would last between 475 to 525 milliseconds from the beginning of the auction, randomized to discourage gaming), (4) a collection of SNAP Auction Only Orders, as described below, and (5) the top of book (protected) quote from every other national securities exchange and the Financial Industry Regulatory Authority’s Alternative Display Facility (“FINRA ADF”).

During the SNAP Order Acceptance Period, CHX would not permit any order, including the SNAP order which initiated the SNAP auction, to be cancelled or modified.  This aspect eliminates significant gaming opportunities.  Immediately after the SNAP Order Acceptance Period has concluded, CHX would (1) calculate a single SNAP Auction price, (2) route Regulation NMS-compliant Intermarket Sweep Orders to other markets to satisfy Rule 611 requirements and/or to satisfy Protected Quotations at the SNAP Auction price if there is an order imbalance on the SNAP Auction Book (if applicable), (3) wait for responses to routed orders (if necessary), and (4) cross the remaining size at the single SNAP Auction Price.  CHX would then process any queued orders or cancels that were not processed earlier in the SNAP Auction process and resume automated trading in the subject security.

A unique aspect of SNAP Auctions is the Auction Only Order (AOO).  AOOs would be accepted by CHX starting at 6 AM C.T. each trading day.  AOOs would never be placed in the CHX order book for automated trading and, thus, AOOs cannot be matched during automated trading, cannot be “pinged,” and cannot otherwise be detected by any market participant. AOOs will be limit orders or pegged orders (i.e., pegged to the NBB or NBO (with or without an offset) or pegged to the NBBO midpoint) with or without an overriding limit price.  Pegged AOOs would be algorithmically priced during the SNAP Auction.  AOO time priority would be based on the time the AOO was initially received and, thus, AOOs held by CHX before the start of a SNAP Auction would always have time priority over orders of the same price received after the SNAP Auction begins.

In sum, SNAP Auctions will offer the following benefits to the market:

Reduce Fragmentation: by conducting a Regulation NMS-compliant auction which protects – and thereby draws into the SNAP Auction – the (protected) top of book of any exchange and the FINRA ADF, SNAP Auctions will reduce market fragmentation. It is important to note that while SNAP Auctions cannot protect size below the published away top of book, as such information would not be known to CHX, it is this very fact that could influence order senders to submit orders to participate in the SNAP Auction.  Specifically, SNAP Auctions may create a dilemma for order senders with orders resting on away markets at prices below the away markets’ top of book, as such orders may be traded-through by the SNAP execution.  As a solution, such away orders (e.g., retail orders placed by a brokerage firm or a wholesaler/market maker) could be canceled on the away market and temporarily moved to CHX to seek protection and/or price improvement in the SNAP Auction.  Failure to move such away orders to CHX may expose the brokerage firm or wholesaler to customer service issues, if such away orders were placed on behalf of a customer.  Similarly, such away orders placed by institutions, market makers, high frequency trading firms, or others may be traded through and then executed at a price inferior to the SNAP Auction price, which would likely result in profits to SNAP Auction participants at the expense of those who opted not to join the SNAP Auction.  Thus, there are numerous financial incentives for market participants to – at least temporarily – consolidate their buying or selling interest at CHX during a SNAP Auction.


Minimize Speed Advantages, Gaming Opportunities, and Information Leakage: the use of AOOs would meaningfully minimize the speed advantages enjoyed by some market participants, by reducing its impact in establishing execution priority within the SNAP Auction Book.  Also, randomization of the SNAP Order Acceptance Period and prohibiting order cancelations by order senders during a SNAP Auction would minimize gaming opportunities. Finally, not disclosing material terms of the SNAP Order, conducting the SNAP Auction entirely in the dark, and making AOOs – which are expected to provide a major source of auction liquidity – virtually impossible to detect during automated trading, would all significantly reduce information leakage.

Given its status as a national securities exchange, CHX is required to maintain rules approved by the SEC, pursuant to the Securities Exchange Act of 1934, detailing, among other things, the operation of its trading functionalities, such as the SNAP Auction. The fact that CHX is proposing to provide detailed and comprehensive rules governing SNAP Auctions, the approval of which is subject to public comment and SEC review, is a hallmark of the transparency offered by national securities exchanges, which is in stark contrast to ATSs, none of which are obligated to maintain the same level of transparency.  CHX has gone to great lengths to design SNAP Auctions to address the current challenges in today’s marketplace that exist when seeking liquidity to execute a block size transaction.  Only time will tell the extent to which CHX has been successful in addressing these challenges.  However, SNAP Auctions are certainly a new and innovative approach for locating block size liquidity, which is worthy of consideration by all market participants.

Mr. Givot is Senior Vice President of Strategy and Product Management for Chicago Stock Exchange, Inc. (CHX). From 1979 to 2006, Mr. Givot was an owner and officer of a CHX member firm.

 Prior to joining the Exchange, Mr. Givot served on the board of the CBOE and worked for the Harrison Trading Group and the Boston Options Exchange.  Mr. Givot earned an M.B.A. with Honors from the Graduate School of Business of the University of Chicago in 1974, an M.Sc. in Management Science with a Mark of Distinction from the London School of Economics in 1973, and an S.B. in Electrical Engineering from the Massachusetts Institute of Technology in 1971.

The SEC Approval of CHX SNAP Auctions can be found here:

The CHX press release on SNAP can be found here:


Retail Brokers Show Dramatic Routing Differences

The following charts show the routing practices of 3 retail brokers over the past 4 quarters: Schwab, Etrade and Fidelity. Fidelity stopped accepting Payment For Order Flow towards the end of 2014, instead diverting all flows to price improvement (although when they did accept PFOF in 2014, their rates were roughly half that of Schwab and Etrade). We are posing a simple question to our readers: How can all three brokers be achieving Best Execution? Schwab had a guarantee to send orderflow to UBS until the contract ended last year—but if they were getting Best Ex with UBS, wouldn’t they have continued routing all their flows there? What about a broker with relatively unconflicted routing, such as Fidelity? Shouldn’t other brokers look very similar? How can these three pictures all represent Best Execution?

Take into consideration last month’s FIF reports, which demonstrated that not all wholesalers are created equal, that there are execution quality differences.

Another question: If a broker is regulatorily mandated to conduct a ”regular and rigorous review” of execution quality, which includes venues they do not route to, why is it that none of the brokers are routing to IEX? If price improvement is supposed to be considered before payment, and most IEX executions are at the midpoint (far more price improvement than the wholesalers), wouldn’t you expect to see at least de-minimis routing? We are not trying to promote IEX, and in fact are sure there would be evidence that superior price improvement would be found at other predominantly midpoint venues, such as BIDS, which has roughly the same percentage of midpoint executions.

In the following charts, you’ll note some interesting trends. Schwab routes a similar amount to UBS right now as Etrade routes to G1X. The difference is that Etrade is contractually obligated to route to G1X. Further, Fidelity’s routing remains consistent and diverse over time. So who’s getting Best Ex, and does the term even mean anything anymore?






So is this really important? Can the difference be quantified? Using last month’s FIF reports, we can actually quantify it dramatically. Etrade does not disclose price improvement by order size, and probably with good reason as they know what the numbers would show. We can assume they would look very similar to Schwab’s, as a retail broker that diverts most flows to payment, rather than price improvement, thus maintaining perverse routing incentives and questionable Best Execution adherence.

Here is a comparison of Fidelity vs Schwab in terms of average price improvement per order, by order size. We would be happy to repeat this comparison if other major retail brokers make the data available. The difference is stark:


There’s little to say when you turn this into percentage terms:

[table id=15 /]

Someone really needs to explain how PFOF provides for Best Ex (not Good Ex, or Okay Ex, but BEST Ex!). And Fidelity is single-handedly ending the argument that it keeps commissions low and services high, we all know that it simply accrues to the bottom line and into the dividend.

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Enhanced Retail Execution Statistics Are Out

On June 16th, the Financial Information Forum (“FIF”), collaborating with a “FIF Working Group” comprised of  retail brokers Charles Schwab, Fidelity and Scottrade, as well as  wholesale market makers Citadel, KCG, Two Sigma Securities and UBS, released enhanced statistics on retail execution quality. The goal of the FIF Working Group was to improve access and create uniform execution quality statistics for particular firm’s orders. These would allow the retail community to make apples to apples comparisons of metrics across firms. At KOR Group, we welcome quality statistics and increased transparency. However, these enhanced statistics are very narrow in scope,  covering only market orders and employing just five metrics (Average Order Size; Shares Executed at Current Market Quote or Better; Price Improvement; Average Savings per Order; and Average Execution Speed).

Although the statistics are narrow in scope, there are interesting bits of information to be gleaned from the reports. Most interesting to us is the disparity of Price Improvement and Average Savings per Order given to Odd Lot trades. Schwab averages just 68% Price Improvement with Odd Lot Trades in S&P 500 stocks while Round Lot trades from 100-9,999 shares averaged 85% in Price Improvements. Worse yet, S&P 500 Odd Lots with Schwab averaged just $0.05 in savings per order compared to $4.33 for orders from 100-9,999 shares. Fidelity’s statistics didn’t fare much better, with Odd Lots receiving 73.413% in Price Improvement and $0.49 Average Savings, while Round Lots averaged $9.17 in overall savings per order. And while Scottrade’s Price Improvement percentages were comparable to Round Lot trades, Odd Lot average Savings were a scant $0.07 per Order compared to Round Lot savings of $14.00 per order.

Few would argue that Odd Lot trades are the most benign orders. Moreover, given their potential toxicity, most would agree that they should be subject to the highest levels of Price Improvement. This, however, is not the case.  At a recent conference, we posed questions to some of the wholesalers participating in the program regarding the disparity of Odd Lot Price Improvements. In response, they claimed that in the coming quarters, Odd Lots will see higher metrics.

We are befuddled by this response. It’s not as though the publication of the FIF statistics are a revelation regarding the disparity of Odd Lot Price Improvements. Each of the firms in the working group has had access to these statistics internally for many years. Odd Lots also comprise a significant share of overall transactions as retail investors typically invest by dollar amount, providing active S&P 500 stocks like AAPL, CMG, NFLX, PCLN, GOOG and MA with a high percentage of retail Odd Lot trades.

As we delve with greater detail into Odd Lot Price Improvement by looking at average price improvement per share (Average shares/Average Savings Per Order), a different story emerges. Here, Fidelity provides more than a penny of Price Improvement per share, towering over competitors Schwab and Scottrade, each of which provides less than ¼ of a cent in Price Improvement per share.


In our full report available to subscribers we examine many more aspects of the statistics and examine which wholesalers are providing the highest quality executions. You can read the full report and much more of KOR Group’s research by subscribing via the following link:

You can learn more about FIF’s program and associated statistics here.

KOR Group and Healthy Markets ATS Transparency Index

KOR Group and Healthy Markets ATS Transparency Index Alternative Trading Systems (ATSs) have received quite a bit of attention over the past year. From Flash Boys to the New York Attorney General, the spotlight has focused squarely on ATSs and more specifically on broker-owned ATSs. Brokers who route orders face a non-trivial conflict-of-interest if they also operate their own ATS. While conflicts-of-interest will never be eliminated, in the face of such conflicts transparency and disclosure are crucial. Transparency and disclosure are one of the driving principles behind Healthy Markets’ and KOR’s efforts to shed more light to the darkest corners of US capital markets. Many ATSs have touted their “unprecedented” transparency, which usually involves publishing their Form ATS alone. KOR and Healthy Markets have delved deeper and are proud to publish the very first ATS Transparency Index™. Data from ATSs have been collected by scouring publicly available information and by distributing a detailed questionnaire to every ATS. We have formulated the most comprehensive ATS questionnaire in the industry. Buy-side firms that are interested in the questionnaire, and more broadly working with KOR to understand ATSs and how interacting with them can affect execution quality, should contact us for more information. The KOR and Healthy Markets ATS Transparency Index™ does not pass judgment on ATSs – while we believe ATSs with pegged order types should use direct feeds to price the NBBO, ATSs that price from the SIP were not penalized – provided that they disclose what feeds they use. The ATS Transparency Index™ is strictly a measure of what information ATSs are willing to adequately disclose, not whether we like the content of those disclosures. After all, some firms may disagree with our judgements, but nobody would disagree that firms cannot make responsible order routing decisions without a complete picture of the capabilities and operations of each ATS. In fact, we would argue that firms that fail to account for this should be concerned about whether they are meeting their regular and rigorous Best Execution obligations.

Our Methodology We have restricted this analysis to significant-volume ATSs. We have separated scoring into two broad categories: Publicly Available Data and Questionnaire Responses. We have also given firms credit for publicly available information, regardless of whether they responded to our questionnaire or not. We chose these categories and individual questions carefully, based on our experience analyzing equity market structure and working with buyside firms to analyze execution quality and order routing decisions.

The categories firms were scored on are:

  • Publicly Available Data
    • Form ATS
    • Statistics on trading activity and execution quality
    • Raw FINRA 4552 data
    • Order type guide
    • Fees disclosed
  • Questionnaire Responses
    • Technology
    • Order Type and Matching Behavior
    • Conflicts of Interest: General
    • Conflicts of Interest: Broker-Owned Dark Pools
    • Block Trading Statistics
    • Other Trading Statistics

The scoring methodology is simple and straightforward. If a firm publishes the piece of Publicly Available Data, they receive 1 point. For the Questionnaire Responses, a firm receives between 0 and 1 point based on the percentage of questions that they answered adequately. For example, if they answer 5 of 10 questions in the Technology section (or if we are able to find responses to those questions from publicly available information) they receive 0.5 points. Each category is therefore equally weighted, in an attempt to avoid bias. Many firms might disagree with this, and we are happy to provide custom weightings to firms that are interested. We have strived to ensure that this is an objective scoring mechanism, driven only by what we consider to be important disclosures. This technique is similar to the Linaburg Maduell Transparency Index, the Open Budget Index, the JLL Global Real Estate Transparency Index and many other measures of transparency in different industries. Some of these indices apply subjective, rather than equal weighting, and that is a modification we may consider in the future. The raw scores are then normalized to come up with a Composite score. Scores above 0 indicate that an ATS is sufficiently transparent relative to its peers. Scores below 0 indicate that an ATS is not disclosing a sufficient amount of information, and we would encourage firms to be cautious when routing. With that said, here is the first ATS Transparency Index:

KOR ATS Transparency Index

As you can see, IEX is by far the most transparent of all ATSs, disclosing detailed data on trading and operations. BIDS, SuperX, Bloomberg Tradebook and LeveL are also very transparent and broadly very responsive to inquiries. On the other hand, KOR and Healthy Markets were unable to find any publicly available information on Apogee, Interactive Brokers, JPMX, LightPool or MS POOL. All ATSs were contacted – these ATSs did not respond or refused to provide questionnaire responses.

We expect the ATS Transparency Index™ to evolve over time as ATSs become more transparent (we hope that it will no longer be needed when the industry reaches a better level of mandatory or voluntary disclosure). We encourage opinions and ideas be submitted on how to improve it. We also encourage ATSs to improve their level of disclosure and complete the ATS Questionnaire so that their score can be updated. Final Thoughts:

  • How can you make informed order routing decisions if ATSs refuse to publicly disclose critical details about their core functionality?
  • How can you know that you are fulfilling your Best Execution obligations without insight into the venues your orders are routed to?
  • Are you sufficiently incorporating qualitative and quantitative data in your order routing decisions and execution quality analysis?

Please feel free to contact KOR to get our questionnaire, and if you are interested in the full ATS Transparency report.


CAT NMS Plan progress moving forward

Though many in the industry would cite that progress on the CAT plan has been slow, for those of us who are following the effort closely, progress on the CAT plan continues at a steady pace.  On March 3rd, 2015, the SROs amended and restated the CAT plan submission.  The amended plan provides considerable insight into the overall progress of the plan including renewed cost estimates.  Before we dive into the amendments let’s look at some of the notable progress thus far: July 11, 2012 – The SEC adopts Rule 613 to require the National Securities Exchanges and National Securities Association to jointly submit a consolidated audit trail and central repository.

February 26, 2013 – The CAT participants published a request for proposal soliciting bids from parties interested in serving as the plan processor and submit their bids by March 5, 2013.  Initially 31 bidders submitted their intention to submit RFP’s.

September 4, 2013 The CAT participants filed with the SEC an NMS plan to govern the process for participant review of the bids submitted.  The SEC approved the NMS selection plan on February 21, 2014.

On March 21, 2014 – the CAT participants received ten bids in response to the RFP and over the course of several months the CAT Selection Committee whittled the list down to six shortlist bidders on July 1, 2014 including:

  • AxiomSL and Computer Sciences Corporation (CSC)
  • EPAM Systems, Inc.
  • J. Streicher Analytics on behalf of the CATPRO Consortium: Hewlett Packard, Booz Allen, Buckley Sandler
  • SunGuard Data Systems, Inc.
  • Thesys Technologies, LLC

CAT participants during this time also established a website seeking industry feedback and to provide updates on the CAT plan. Participants also engaged multiple firms across a wide range of roles and expertise to assist with the project such as Deloitte & Touche as Project manager and Wilmer Cutler Pickering Hale and Dorr to serve as legal counsel in drafting the plan.  Participants have held approximately 608 meetings related to CAT.  CAT participants also created a Development Advisory Group “DAG” to serve as a gateway for feedback with CAT development.  DAG members include:

CAT Working group

The DAG has held 43 meetings to discuss, among other things, technical and operational aspects that CAT participants were considering for the plan. This includes capturing customer IDs, timestamps and server clock synchronization, reporting requirements for order handling scenarios, cost and funding, error handling and corrections, and potential elimination of rules made redundant by the CAT.

The amended plan establishes the CAT as a Delaware limited liability company known as CAT NMS, LLC of which the CAT participants will jointly own an equal share of the company.  The CAT may seek to become a 501(c)(6) “not-for-profit” trade association at a later date.  Each SRO currently registered with the Commission will be a plan participant.  Additionally any firm approved by the Commission as an SRO may become a participant of the plan after the effective date.

Notable features of the plan include:

  • A revised cost estimate of $234.8 million
  • 50 millisecond clock synchronization requirements
  • Full data retention for six years
  • Requirement that industry members report to the central repository within 2 years (3 years for small industry members) following the effective date and report records by 8:00am est on the trading day following the day such information is recorded.
  • Required a unique “Customer-ID” to be associated with each record
  • Fixed fees payable by industry members based on message traffic generated by such industry member.  The CAT Operating Committee will establish at least five and no more than nine tiers of fixed fees, based on message traffic

Of course a significant drawback to the plan is coverage is not cross asset-class and contains no provisions currently for products overseen by the CFTC.

Reading the Tea Leaves in the SEC’s New Equity Market Structure Advisory Committee

            On June 5th, 2014, SEC Chair Mary Jo White delivered a landmark speech on “Enhancing Our Equity Market Structure” in which she announced the formation of a new Market Structure Advisory Committee. On January 13th, just a shade over seven months later, the committee members were announced. While we can’t predict exactly what the coming year holds for this committee, its members offer us some pretty telling clues. So if you will allow it, we’ll treat the Advisory Committee’s newly named participants as tea leaves from which to divine the future. It helps that there are a lot of familiar names on this list, a fact which makes our fortune-telling venture just a little bit easier.

  • Matthew Andresen, Co-Chief Executive Officer, Headlands Technologies LLC – Headlands Technologies is a proprietary trading firm that focuses on Futures and Bonds. So why pick Andresen? Well, prior to  his services as CEO at Headlands, Citadel and Sanford Bernstein, Andresen was CEO of Island ECN, one of the first Alternative Trading Systems post SEC Rule 301 enactment. Andresen is widely credited for instituting the maker-taker fee structure that now permeates both the equity and options marketplaces. In fact, when it adopted Regulation NMS, the SEC essentially took its fee schedule from Island’s maker-taker scheme. If the SEC is looking to transform the M/T model, enlisting a pioneer of the practice is a great starting point.
  • Reginald Browne, Senior Managing Director & Global Co-Head, ETF Group, Cantor Fitzgerald & Co. –If you are a trader, and particularly if you dabble in ETF’s, then you know that Reggie Browne is the leading behind-the-scenes force in the $2.4 Trillion ETF market. Browne and his team have helped create hundreds of funds through their advisory service to top providers like BlackRock, iShares, Schwab and Vanguard. Most who know him would agree that Browne has been a central figure in the ETF market’s steady global growth. The SEC is pledging greater commitment to retail investors this year. In turn, retail investors are continuing to drive the dramatic growth of ETFs and are comprising a significant chunk of daily volumes. There is no better person than Browne to help get the SEC and retail investors on the same page.
  • Kevin Cronin, Global Head of Trading, Invesco Ltd. – Perhaps one of the most outspoken and visible individuals representing the buy-side, Cronin is passionate on market structure issues and will bring a unique perspective to the committee.
  • Brad Katsuyama, President and CEO, IEX Group Inc. – The hero of Flash Boys, this sell-side trader turned entrepreneur and ATS operator brings perspective to the dark side of the equation. As IEX moves towards becoming a full-fledged exchange later this year, Katsuyama brings a Wall Street start-up mentality to the table.
  • Ted Kaufman, Professor, Duke University Law School and former U.S. Senator from Delaware – After years of Senate floor speeches and letter-writing campaigns, former Senator Kaufman finally gets a seat at the table and it’s an important one. Kaufman was one of the first in Congress to recognize the fallacies of Rules 605 and 606. His selection to the committee is surely intended to help improve disclosure rules and remedy conflicts of interest.
  • Richard Ketchum, Chairman and CEO, FINRA – Should any actionable items germinate within the committee, FINRA will no doubt do much of the heavy lifting with respect to rulemaking and surveillance.
  • Manisha Kimmel, Managing Director, Financial Information Forum – We were perhaps most surprised by Kimmel’s selection, at least at first. However, upon further consideration, Kimmel and the FIF organization will provide a gateway for feedback from members on tactical issues surrounding market data, metrics and audit trail mechanisms.
  • Mehmet Kinak, Vice President and Head of Global Equity Market Structure and Electronic Trading, T.Rowe Price Group – T.Rowe has appeared before Congress and the SEC on numerous occasions so this pick was of no surprise to us. Kinak’s participation will help to round out the buy-side perspective of the Committee.
  • Andrew Lo, Charles E. and Susan T. Harris Professor of Finance and Director, Laboratory for Financial Engineering, MIT Sloan School of Management and Chairman and Chief Investment Strategist, AlphaSimplex Group — Andy is an interesting pick, particularly if the SEC intends to better understand and apply quantitative analysis to finance and risk. Lo’s research spans a wide spectrum of subjects from Alzheimer’s Therapeutics to the origin of Risk Aversion.
  • Joseph Mecane, Managing Director, Barclays PLC – While Mecane is a former executive of NYSE and barely weeks into his new role with Barclays, one wonders if this selection was the SEC’s way of snubbing the Big Board.
  • Jamil Nazarali, Senior Managing Director & Head of Execution Services, Citadel Securities – Citadel executes a large segment of retail-based order flow, making Nazarali the Committee’s leading respresenative of internalizers and retail order sending firms.
  • Eric Noll, President & CEO, Convergex Group – Another snub? The SEC’s selection of this former Nasdaq executive appears to take a swipe at the exchange. Noll sat at the helm during the Facebook IPO fiasco. This makes his input valuable as the Committee works to prevent such occurrences in the future.
  • Maureen O’Hara, Robert W. Purcell Professor of Finance, Johnson Graduate School of Management, Cornell University and Chairman of the Board, Investment Technology Group Inc. – We predicted O’Hara’s inclusion on the Committee long before this month’s announcement so it was no surprise to see her name appear on the list. As one of the developers of order flow toxicity, VPIN, O’Hara will bring an academic point of view to the debate over market fragility and toxicity.
  • Joe Ratterman, CEO, BATS Global Markets Inc. – Unlike his counterparts at ICE and NASDAQ, Joe Ratterman is soft-spoken and operates with transparency. Ratterman represents the perspective of exchanges and brings a particular knowledge of current maker-taker pricing, which is sure to be an agenda item up for discussion this year. Ratterman often acts directly in his shareholders’ interests, so expect him to represent wholesalers and market makers through his work on the Committee.
  • Nancy Smith, Corporate Secretary & Chief Integration Officer, AARP – Smith is a former director of the Office of Investor Education and Assistance at the SEC. The AARP is an interesting choice to join the Committee’s buy side team and one with impressive political clout. Nancy can help the Committee wield more influence with Congress, which may well have been part of the SEC’s intent with this selection.
  • Chester Spatt, Kenneth B. and Pamela R. Dunn Professor of Finance, Tepper School of Business, Carnegie Mellon University and Director of its Center for Financial Markets – Spatt, the author of many highly-regarded papers on trading, serves as another of the Committee’s academic voices. Spatt co-authored “Equity Trading in the 21st Century” with James Angel and Larry Harris, noting the problems caused by maker-taker pricing. We view Spatt as the likeliest of the Committee’s members to advocate for M/T reform.
  • Gary Stone, Chief Strategy Officer, Bloomberg Tradebook LLC – Stone is an advocate for maker-taker reform and a critic of all forms of payment for order-flow. His selection to the Committee solidifies our view that the SEC is seeking to reform pricing structure. Stone’s knowledge of market structure, his experience in the industry, and his  balanced, well-supported views, bode well for the Committee.

So what do these assorted tea leaves tell us? In no particular order, these are the Committee objectives and rule-making initiatives that we see when we look into the future:

  • Maker-Taker reform
  • Rule 605/606 Modernization
  • Conflicts of Interest Resolution
  • Disclosure Refinement
  • Best Execution Standards

Of course, one thing we can’t augur is when action on any of these initiatives might actually take place. Knowing the SEC as we do, we’re at least willing to predict that it will be a while.