Tag Archives: Securities and Exchange Commission

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SEC Proposes System to Catch Market Manipulators

In effort to thwart the “Catch Me If You Can” crowd, the SEC has proposed a new audit system that will purportedly allow regulators to track every bid and offer submitted to stock and options exchanges in effort to catch market manipulators.

(WSJ)–U.S. market regulators on Wednesday proposed a massive data repository that will eventually allow them to sift through billions of daily trading records to detect market manipulation and probe bouts of extreme market disruption.

The Securities and Exchange Commission’s consolidated audit trail will,enable regulators to track 58 billion daily transactions submitted to stock and options exchanges, as well as private-trading venues maintained by brokerage firms. Plans for the CAT, as it is called, were spurred by the May 6, 2010, flash crash, when more than 20,000 trades were executed at clearly erroneous prices and nearly $1 trillion in equity-market value was wiped out before prices rebounded.

The project has taken years to get off the ground, as industry groups have disagreed over its scope, costs and governance. Regulators believe the system will become a powerful means of quickly investigating excessive volatility and could be harnessed for other purposes, such as detecting insider trading and whether brokers are getting the best price for their clients.

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Kara Stein

“This will help us to fully understand the trading that is occurring in our markets within a matter of days, instead of months,” SEC Commissioner Kara Stein said at a meeting where the agency unanimously approved the plan. “The need for the CAT has unfortunately been proven over and over again.”

According to one market structure expert who spoke with MarketsMuse, “Another intriguing idea brought forth by a bureaucracy that has proven it has no fluency in technology and no real ability to implement policy that might infringe on the interests of Wall Street. They’ll be talking about this pipe dream for another four years, then spend 3x the amount budgeted and then discover the system is flawed.”

The proposal also sets several deadlines to ensure the system is fully operational within four years. The SEC must take final action to approve the CAT within six months. Exchanges would have to begin reporting trading data to the system by late 2017. Large brokers would have to comply by 2018, and small brokers would have until 2019 to report their activity.

Regulators still have to choose who will build the system, a decision that could come late this year or early in 2017. A selection committee has narrowed the choice to three bidders—the Financial Industry Regulatory Authority, Fidelity National Information Services Inc. unit SunGard and Thesys Technologies LLC.

The project’s supporters say it would have been useful last August, when huge price swings triggered more than 1,000 trading halts in stocks and exchange-traded products. It took the SEC nearly six months to issue a paper explaining the factors that influenced the barrage of trading halts on Aug. 24.

For the full story from the WSJ, click here

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SEC Chair White: “I Have A Dream..”

SEC Mary Joe White has a dream, and even if she aspires to leverage the inspirational outlook of  Dr. Martin Luther King, securities industry members are debating whether her dream could prove to be a reality any sooner than the civil rights agenda expressed by Dr. King so many years ago.  In a series of comments during the past several weeks from Chairperson White regarding the SEC’s agenda for the remainder of her tenure as President Obama’s designated SEC Chairperson, Ms. White, who is operating with only 3 of 5 Commissioners until two open vacancies are filled before the Second of Never,  she is vowing one of the top three items on her list includes “better understanding exchange-traded funds aka ETFs before the SEC approves prospectuses.” That makes sense.

One only wonders why that elementary concept had never occurred to any one previously—despite repeated calls from among others, former SEC Commissioner Steve Wallman (1994-1997) who has long questioned the approval process for many of the complex exchange-traded products the SEC has rubber-stamped, including inverse and commodities-related products that even professionals often do not understand.  Since his departure from the SEC, Wallman has proven adept at doing the right things while serving at the helm as Founder/Chairman/CEO of the investment firm Foliofn.com.

Other matters of importance according to White include “the desire on part of SEC to introduce “fiduciary definitions for registered advisers and brokers..” which in plain speaks means : White’s agenda is to figure out how to completely change the culture of the securities brokerage industry by forcing people to be ethical and moral. MarketsMuse sources have indicated White is proposing to have those folks swear an oath that says:

“My first obligation is to protect my clients’ interest above all else and to make sure I never even think of trying to sell them something that might be inappropriate for their goals or possibly even toxic—despite the fact my office manager says I have to sell house product only or I’m out of a job. After I meet that first obligation, my second obligation is to then make enough money to pay for my kids college and have enough left over for that condo in Florida.”

Insiders familiar with White’s agenda have told MarketsMuse that she has acknowledged her seemingly altruistic mission is not without challenge or headwinds given that the “securities industry at large is much like the NRA when it comes to influential prowess.”

Directly and indirectly, Wall Street firms and its executives contribute hundreds of millions of dollars every year to lobby SEC Officials and members of Congress(which the SEC reports to) on behalf of their interests—which presumably includes two big drivers that have driven the investment industry since the days of Joe Kennedy Sr.: (i) selling investment vehicles that look great on paper and in marketing collateral [even if they might or might not prove to be toxic at some point and might or might not be appropriate for a specific individual given that people’s moods change a lot] (ii) how to pay the mortgage on the brokers’ first house, the $200k for each of their kids college tuition bills, the country club memberships that provides venues in which to sell those investment products,  sharpen up the golf game, and of course, pay for the second and third homes, etc etc.

Another item on White’s laundry list is to expand the  exam program for registered brokers and advisers. Currently, 10% of the nearly 12,000 advisers sit and take ‘refresher tests’ that are abridged versions of the Series 7—an exam that has approximately 40% brokers FAIL the first time and 30% fail the second time. Some could argue the test is maybe too difficult, given the national average score is 67 vs. a passing grade of 72. Or, one could argue the barrier to entry to become a registered broker or adviser is simply being a good test taker. Idiots and Muppets can get licensed, as long as they take 8 practice exams the night before the actual exam and memorize the correct answers. So, Chairperson White wants more folks taking more tests; a good thing for the SEC because this is big a revenue-generator for the Agency—which has repeatedly claimed it does not have enough money to even pay for air conditioning in its Washington DC office. Staff members have said this alone is vexing, given that SEC examiners and enforcement agents have become accustomed to keeping windows wide open five months of the year and continuously grapple with files on their desks blowing out of their windows and many of those files pertain to complaints filed by investors and updated paper notes sent by from enforcement agents in the field via courier pigeons.

Courtesy of  an admittedly more illustrious news media outlet than MarketsMuse might be, the following is ‘official coverage from InvestmentNews.com:

(InvestmentNews) Despite missing two of its five members, Securities and Exchange Commission Chairwoman Mary Jo White said Friday the agency will forge ahead on rules to raise investment-advice standards and enhance oversight of advisers.

“At the moment, as you know, we are a commission of just three members, but — as has occurred in the past — we can carry forward all of the business of the commission,” Ms. White said at the Practising Law Institute conference in Washington. “And, while we look forward to welcoming new colleagues, Commissioners Stein, [Michael] Piwowar and I are fully engaged in advancing the commission’s work.”

The Obama administration has nominated Republican Hester Peirce and Democrat Lisa Fairfax to replace two members who have departed the SEC, Republican Daniel Gallagher and Democrat Luis Aguilar, but the Senate has not yet begun the confirmation process. Continue reading

John Hancock Selects Dimensional to Manage Smart Beta ETFs

Marketsmuse updates that fund giant John Hancock Investments will partner with Dimensional Fund Advisors on six “smart-beta” exchange-traded funds, according to paperwork filed with regulators early on Monday.

Dimensional, based in Austin, Texas, is one of the earliest proponents of factor investing. They blend elements of index-based investing and active investing in order to predictably exploit market returns and minimize trading costs. Many of today’s smart beta products — from index providers including FTSE Russell, WisdomTree, Research Affiliates — are based on a similar premise.

John Hancock unveiled in its preliminary prospectuses for the factor-based ETFs that DFA, the market-beating investment firm that adheres to the academic work of Eugene Fama and Kenneth French, will be the sub-advisor for its ETFs. John Hancock has worked with DFA on mutual funds and asset-allocation strategies since 2006.

John Hancock initially filed plans for ETFs nearly four years ago, but has yet to bring an ETF to market. However, a new filing with the Securities and Exchange Commission indicates the firm is getting closer to launching its first ETFs.

The new filing provides details and expense ratios on the proposed ETFs. For example, the John Hancock Multifactor ETF, which is expected to charge 0.35% per year, will track an index comprised a subset of securities in the U.S. Universe issued by companies whose market capitalizations are larger than that of the 801st largest U.S. company at the time of reconstitution. In selecting and weighting securities in the Index, the Index Service Provider uses a rules-based process that incorporates sources of expected returns. This rules-based approach to index investing may sometimes be referred to as multifactor investing, factor-based investing, strategic beta, or smart beta.

John Hancock manages nearly $130 billion in mutual funds and money-market funds. Dimensional manages $406 billion. Dimensional already advises on John Hancock-branded mutual funds that have $3.2 billion in assets.

SEC Has Eye On ETFs

MarketsMuse ETF update profiles the inevitable: The U.S. Securities & Exchange Commission (SEC) now has their cross-hairs on the exchange-traded fund industry.

 As reported by Traders Magazine (among others), the Securities and Exchange Commission announced that it is seeking public comment to help inform its review of the listing and trading of new, novel, or complex exchange-traded products (ETPs).

 “Exchange-traded products have become an increasingly important investment vehicle to market participants ranging from individuals to large institutional investors,” said SEC Chair Mary Jo White. “As new products are developed and their complexity grows, it is critical that we have broad public input to inform our evaluation of how they should be listed, traded, and marketed to investors, especially retail investors.”

 The request, made via its website, looks to address key issues that arise when exemptions are sought by a market participant to trade a new ETP or when a securities exchange seeks to establish standards for listing new ETPs. Due to the expansion of ETP investment strategies in recent years that has led to a significant increase in the number and complexity of these requests, the Commission determined it would be beneficial to receive public input on these issues.

To read more, click here. 

Goldman Sachs Readies ETF Launch

MarketsMuse blog update profiles Goldman Sachs preparing for a launch of its own ETFs. Goldman Sachs is the largest U.S. investment bank and they are finally going to make the move to become a huge player in the ETF industry.  The firm has completed all its necessary paperwork with the SEC as of May 4th for its six ETFs. These six new ETFs include: Goldman Sachs ActiveBeta International Equity ETF (GSIE), Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM), Goldman Sachs ActiveBeta Europe Equity ETF (GSEU), Goldman Sachs ActiveBeta Japan Equity ETF (GSJY), Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC) and the Goldman Sachs ActiveBeta U.S. Small Cap Equity ETF (GSSC). This MarketsMuse blog update is courtesy of ETFTrends’ Tom Lydon and his article, “Goldman ETFs Near Liftoff“, with an excerpt below. 

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Goldman Sachs (NYSE: GS), the largest U.S. investment bank, is getting closer to launching its own exchange traded funds.

In a filing with the Securities and Exchange Commission dated May 4, New York-based Goldman Sachs revealed tickers and fund managers for its six “ActiveBeta” ETFs as well as tickers for its five passively managed ETFs.

Among Goldman the managers for the ActiveBeta ETFs are “Steve Jeneste, a managing director most recently oversaw portfolio management of macro and multi-asset strategies. Another is Raj Garigipati, vice president, who most recently served as chief risk officer for Goldman’s QIS unit,” reports Chris Dieterich for Barron’s.

To continue reading about Goldman Sachs preparing  for the launch of its six “ActiveBeta” ETFs, click here.

 

Market Manipulation or Rapid Fire Trading? Regulators Eye Spoofing

MarketsMuse update courtesy of Feb 21 WSJ story by Bradley Hope

One June morning in 2012, a college dropout whom securities traders call “The Russian” logged on to his computer and began trading Brent-crude futures on a London exchange from his skyscraper office in Chicago.

Over six hours, Igor Oystacher ’s computer sent roughly 23,000 commands, including thousands of buy and sell orders, according to correspondence from the exchange to his clearing firm reviewed by The Wall Street Journal. But he canceled many of those orders milliseconds after placing them, the documents show, in what the exchange alleges was part of a trading practice designed to trick other investors into buying and selling at artificially high or low prices.

Traders call the illegal bluffing tactic “spoofing,” and they say it has long been used to manipulate prices of anything from stocks to bonds to futures. Exchanges and regulators have only recently begun clamping down.

Spoofing is rapid-fire feinting, and employs the weapons of high-frequency trading, aka “HFT”. A spoofer might dupe other traders into thinking oil prices are falling, say, by offering to sell futures contracts at $45.03 a barrel when the market price is $45.05. After other sellers join in with offers at that lower price, the spoofer quickly pivots, canceling his sell order and instead buying at the $45.03 price he set with the fake bid.

The spoofer, who has now bought at two cents under the true market price, can later sell at a higher price—perhaps by spoofing again, pretending to place a buy order at $45.04 but selling instead after tricking rivals to follow. Repeated many times, spoofing can produce big profits. Make no mistake, spoofing is not limited to the fast-paced world of futures contracts; high-frequency traders are notorious for spoofing and anti-spoofing tactics across listed equities, options and other electronic markets.

The 2010 Dodd-Frank financial-overhaul law outlawed spoofing, but the tactic is still being used to manipulate markets, traders say. “Spoofing is extremely toxic for the markets,” says Benjamin Blander, a managing member of Radix Trading LLC in Chicago. “Anything that distorts the accuracy of prices is stealing money away from the correct allocation of resources.”

For the full story from the WSJ, please click here