Recently Trillium’s owner Lee Maschler was asked to comment on trends in electronic trading for Bobsguide. Lee’s remarks were featured in an article available here, but we thought you might find his unexcerpted answers to be of interest:

1. How has electronic trading developed in recent years?

I think it has matured from a disruptive to an incumbent technology, one that needs to handle all of the mature aspects of an incumbent business. This includes data protection, by which I mean protecting client information from cyber-attacks. There’s also an extraordinary amount of data, and new methods such as offsite and co-located hosting that have been set up to handle it.

One of the biggest trends that continues to be top of everyone’s mind is speed. While you don’t necessarily need to be the fastest, you certainly can’t be the slowest.

2. After the emergence of dark pools, do you think that banks will tackle problems arising from private share trading venues?

I do. There are banks that offer their own dark pools while others are large clients to dark pools. While there are benefits to both approaches, as with any business, there are going to be challenges. As dark pools continue to evolve, they are going to continue to change and make the markets more efficient.

3. What changes should be made to improve market control in times of extreme volatility?

For starters, I think we need to define extreme volatility. Is it a naturally occurring phenomenon or an unnatural phenomenon that needs to be regulated or in some way mitigated?

Markets are complex systems, I think volatility of the sort we saw in 1987, 1998 or 2008 will return. I believe it’s natural. We should build our systems to prepare for extreme volatility as opposed to trying to prevent it.

4. Do you think the implementation of blockchain technology would get rid of the cost and hassle of trading?

I have a small objection to the phrase “cost and hassle” of trading. I don’t think that trading in 2016 is all that costly or that much of a burden on market participants or end clients.

I believe saying that blockchain is the solution to everything is a bit naïve. As Wall Street decides how it wants to move from a T+3 to a T+1 or near-real time processing environment, it needs to examine all options either through a competitive or collaborative process. Blockchain should definitely be in the conversation, but it’s definitely not the only option.

5. Will blockchain minimize trading risk?

Maybe. I think that blockchain’s a solution looking for a problem, especially in the U.S. equity market. Here there’s no outside trading risk that isn’t already handled and managed pretty effectively. Can blockchain help? Maybe. There are other areas of the world where they are building out new technology, such Australia’s new post-trade clearance system, where it might help. Here in America, it’s far from the only potential solution.

6. How are new players affecting the traditional trading industry?

In any mature business, especially in one as large as the trading industry, there are going to be new entrants. They are going to be nimble and work hard. There are some that are going to be incorporated into the market. And there are players that have robust ideas that won’t find a market. I think all three are coming into the market.

There are some entrants affecting new markets. IEX is one of them. Ultimately do I think the IEX trading application will have a seismic effect on the market? No, but I think the conversation they are encouraging is an important one. Ultimately it’s a tempest in a teapot.

7. Do you see a future for computer driven trading systems?

Absolutely. I see a future for computer-driven systems, neural networks and machine learning across the entire range of operations and support in the trading space. The exchanges are going to be using them to make their matching engines better, faster and more efficient. Large retail brokers are using computer-driven trading systems to allocate their shares across investments, including with robo-advisers.

This is important and exciting as it is going to make markets more liquid, more transparent and ultimately less costly.

8. Will machine learning technology eradicate human traders?

No, but it will augment the current role of human traders. There will always be a place on Wall Street for human traders.

At Trillium, we invest in human traders and the technology to support them. The rumors of the death of the trader have been greatly exaggerated. There have been changes in the industry. We’ve seen the role of the market maker move from human to automatic trader in the past few years.

Since 2001, we have changed, we have adopted and we have thrived. Now it’s 2016 and we’re thriving in a market that supposedly dominated by computers.

Lee is the owner of Trillium Management, a premier proprietary trading and technology firm. He’s also co-founder of Lion Cave capital, a proprietary trading firm operated by a world-class team of computer scientists. He’s a visiting lecturer on equity market micro-structure at Cornell University.

The post 2016: Year of the Trading Tech Boom? appeared first on Trillium Management, LLC.

Trillium’s Surveyor was featured in a story on market abuse detection in Financial News.

The paywalled story, available to Financial News subscribers here, recounts the genesis of Trillium’s efforts to build an order surveillance system from scratch, which eventually became Surveyor.

The post Responsibility for detecting market abuse looms over buyside appeared first on Trillium Management, LLC.

Surveyor was featured in a story on leveraging big data to detect financial fraud in today’s Financial Times.

The post Will big data mining prove a top sleuth for investors? appeared first on Trillium Management, LLC.

Trillium Surveyor Team at the Nasdaq Studio

Trillium Surveyor was honored on April 29th to be invited by Nasdaq to host the Closing Bell Ceremony and ring the market out for the day. The team came to the Nasdaq studio for the event, and Lee Maschler, Trillium Chairman, was presented with an award.

Closing the Market

Lee gave a speech to the studio audience, as well as to viewers on four television live networks, and Nasdaq’s online livestream. Afterwards, he left his signature on behalf of the Trillium Surveyor team.

See Lee’s speech and more footage from the event, recorded in the video above.

Lee was also interviewed for the Facebook live video feed of the event, which you watch by clicking here, or on the video still below.

Alongside the ceremony at the studio, Surveyor was featured on the Times Square 7-story tall Nasdaq tower video display and marquee for an hour.

Remarks from the Team

The whole Trillium Surveyor team is deeply honored to have been invited by Nasdaq to close the market, and the recognition for Surveyor as a leading tool to detect spoofing, layering, and other market manipulations.

See how Surveyor can help your firm

The post Trillium Surveyor hosts the Nasdaq Closing Bell Ceremony appeared first on Trillium Management, LLC.

FINRA made news recently by publicly releasing the number of shares executed in what was once called the “upstairs” market – trades matched internally at brokerage firms without being routed to exchanges or dark pools. These figures include trades matched by wholesale brokers who purchase order flow from online retail brokers.

There was an extra two week lag in reporting volume for less popular Tier 2 stocks, but those results are now in, and the true division of execution market share has finally come into focus for the first time. The big picture is this (all data from FINRA’s ATS Transparency website or from BATS’ Historical Market Volume Data for the week of April 4, 2016):

The general split of a little less than 2/3 on-exchange, split roughly equally among the three large exchange operators, and a little more than 1/3 off-exchange, weighted more towards interlizers than dark pools, should come as no surprise to industry followers. 

What is news is how top-heavy the distribution of trading is within the internalized category. Two firms – Citadel and KCG – account for 25.6% and 18.5% (respectively) of all internalized shares traded, which translates to 5.8% and 4.2% of the entire market.

When the internalized and dark pool volume of firms that do both are combined, the league table of overall market share by parent company looks something like this:

Again, most of this table is not a surprise – the big exchange groups are on top, and the Tier 1 banks are in the mix below them. But the market power of the major electronic trading firms – Citadel, KCG, Susquehanna, Two Sigma – has never been clearer. Together those four firms account for over 14% of the whole market as executing venues, almost exactly the same market share as the Tier 1 banks combined, making the following a valid reorganized summary:

Moreover, Citadel has announced plans to acquire Citi’s ATD unit, which will shift about 1.2% of market share from the “Big Banks” category to “Electronic Trading Firms.” Commentary on the ATD deal suggests that Big Banks are not well suited to invest in the frequent infrastructure upgrades necessary to compete in the order matching space, and are therefore deliberately ceding it to the electronic trading firms who are. 

Now for only question anyone talks about these days: What does this mean for IEX?

IEX’s exchange application supported by the Big Banks. Its exchange application is opposed by the Exchanges and Electronic Trading Firms. Is the battle over IEX’s exchange application really just a fight over execution market share? 

There is some superficial appeal to this view. The firms that are still actively competing for execution market share have an incentive to keep new players out, while the firms that have largely given up on this business line are more willing to throw their support behind a new upstart.

But the opposition to IEX is based on these firms’ market making business lines, not their order matching. The most cogent opposing comments, from Citadel’s John Nagel and former Two Sigma (now Markit) exec Dave Weisberger, raise concerns that IEX’s “speed bump,” if permitted to be implemented by all exchanges, would force market makers to widen their spreads. The firms that stand ready to buy and sell at today’s tightest spreads are saying they will no longer be able to provide those tight spreads in a world where quotes are deliberately delayed and may not actually be accessible.

The downside of this scenario for investors is obvious. Wider spreads translate directly into higher overall transaction costs. One would expect Big Banks to oppose such an outcome, since they usually support whatever might help their institutional investor customers.

But the Big Banks have been IEX’s biggest supporters. Why don’t they want to keep their customers’ transaction costs down? They may be assuming more of their clients read Michael Lewis books than Citadel comment letters. They may be right.

Correction: An earlier version of this post incorrectly stated the ownership of IEX. 

The post Is the battle over IEX’s exchange application really just a fight over execution market share? appeared first on Trillium Management, LLC.

The post David Lazarus Wins Wall Street Decathlon Age Group — Again appeared first on Trillium Management, LLC.

The post Trillium Launches Surveyor 2.0 appeared first on Trillium Management, LLC.

In the past month, NYSE and Nasdaq prevailed in a decade-long litigation defending their ability to charge premium prices for depth-of-book market data. At the same time, IEX is planning to launch without selling depth-of-book market data at all. What’s behind these seemingly opposite models of the same business?

The SIFMA lawsuit—which started out as a challenge to NYSE’s first application to charge fees for depth-of-book data after it acquired Arca in 2006, and evolved into an antitrust case against both NYSE and Nasdaq that was not decided until 2016—revealed some interesting facts about who actually uses depth-of-book data.

NYSE and Nasdaq data sales reps testified that fewer than 200 firms subscribe to depth-of-book data feeds, and only around 60 subscribe to both NYSE’s and Nasdaq’s feeds. These subscribers are the largest players in the equity markets, responsible for upwards of 90% of all market volume on Nasdaq. A Nasdaq rep testified:

“[T]he only customers who absolutely need depth-of-book data from all the exchanges are customers such as algorithmic and high-frequency traders, who are a small proportion of the overall total of customers, but who exert enormous power over the Exchanges because they represent a gigantic percentage of the trading market.”

Despite SIFMA’s expert testimony that the audience for depth-of-book data was broader—“without depth-of-book data from all the exchanges, a trader seeking to execute a particularly large order would not know how to make his routing and trading decisions”—the substantial order flow controlled by the largest depth-of-book customers ultimately lost them the SIFMA case. An unnamed firm retaliated against certain Nasdaq data fee increases by routing their order flow to other venues. The administrative law judge hearing the case found that the undisputedly vibrant competition for order flow spilled into the same parties’ market data fee negotiations, making those competitive too.

SIFMA has not yet announced whether it will appeal this ruling to the DC Circuit, which has already shown some skepticism towards the exchanges’ order-flow-competition-constrains-market-data-prices theory in an earlier ruling in the same case.

Meanwhile, the newest exchange, IEX, is planning not to offer depth-of-book feeds at all, at any price. Only top-of-book quotes on IEX will be published, and those will be available for free.

Why are NYSE and Nasdaq willing to pay a decade’s worth of litigation costs to defend their right to charge a relatively short list of customers for depth-of-book data, while IEX is opting out of that revenue stream completely? Here are a few possibilities:

1. IEX’s position may be temporary. There is a well-worn path of new venues not charging for market data in their early days as they build market share. Island and Archipelago, the first ECNs, gave away depth-of-book data for free until they were acquired by Nasdaq and NYSE. BATS did not charge for depth-of-book data until July 2013. (Days after the SIFMA decision was released last month, BATS, which was not a party to that case, announced plans to raise its depth-of-book data subscription fees.) Mature exchanges, particularly publicly traded ones, are more interested in building stable recurring revenue streams that insulate their earnings from inevitable market volume fluctuations. Selling data products fits that mature business model nicely.

2. Publishing depth-of-book quotes requires expensive infrastructure. The bandwidth needed to distribute that data in real time is significantly greater than what is needed to distribute top of book only. IEX may have chosen to defer that overhead investment.

3. IEX may be making a political statement. As revealed in the SIFMA case, the biggest users of depth-of-book data are the HFT firms that many IEX supporters dislike. IEX itself has thus far been friendly to these players in private, needing their market-making order flow to grow market share. But depth-of-book data, while a separate product, is usually sold alongside colocation services to HFT firms that are latency sensitive. Because IEX’s story has been its opposition to firms who use colocation to outrun those who don’t, it could be perceived as off-message to start profiting from a product that is perceived to be associated with colocation.

4. Publishing depth-of-book quotes could expose a technical inconsistency between intermarket sweep orders (ISOs) and IEX’s 350 microsecond speed bump. ISOs enable traders to execute against displayed quotes inferior to the NBBO if orders are simultaneously routed to execute against protected BBO quotes at other venues. If IEX displayed inferior quotes, those quotes would occasionally attract ISOs, some of which would not get filled if the inferior quote was stale due to the speed bump (e.g., if it was cancelled fewer than 350 microseconds before the ISO was entered). This “bait and switch” result would frustrate users of ISOs whose objective is to access larger blocks of stock at inferior prices. To be sure, there is always a risk of missing stale quotes on IEX due to the speed bump, even at the top of book, but the downside of missing large blocks at inferior prices in ISOs can be worse because the other sweep orders are likely to print and impact prices. To avoid frustrating customers, IEX may be choosing not to publish depth-of-book ISO bait.

As long as those responsible for routing orders have access to all available depth-of-book quote data, it shouldn’t matter whether one venue chooses to keep all its depth-of-book quotes hidden.

But what about the latest use case for depth-of-book market data: trade surveillance? Are the exchanges’ data business plans ready for that demand?

The Market Access Rule requires all registered broker-dealers to monitor their customers’ order flow for potential manipulation, including spoofing and layering. To effectively detect these types of behavior, it is necessary for broker-dealers to compare their own firm’s local order message traffic with the visible order book.

As prosecutors have alleged in the much-publicized ongoing “Flash Crash Spoofer” case against Navinder Sarao, in a layering scheme a trader seeks to deceive other investors by “creating a false appearance of market depth.” See U.S. v. Navinder Sarao, No. 15 Cr. 75 (N.D. Ill. Feb. 11, 2015), Complaint at 6. Sarao’s alleged layering entailed “typically plac[ing] his orders in the middle of the order book on the sell side, such as at levels 4 through 8” of the order book. Id. at 9. Sarao allegedly developed automated trading software to reprice his orders as the market moved, so that they would always remain several ticks above the best offer. Id. at 10. The only way to identify behavior of this sort – orders placed at levels 4 through 8 of the order book – is to know where levels 4 through 8 of the order book are. The only way to know that is to consume depth-of-book market data.

The Sarao case is hardly the only example of regulators referencing depth-of-book data to identify spoofing and layering. See, e.g., U.S. v. Michael Coscia, No. 14 Cr. 551 (N.D. Ill. Oct. 1, 2014) Indictment at 5 (“The quote orders would typically be the largest orders in the market within three ticks of the best bid or offer price, usually doubling or tripling the total quantity of contracts within the best bid or offer price”); Proposed FINRA Rule 4554, 81 FR 11851, Mar. 7, 2016 (requiring ATSs to report depth-of-book quote changes in order to “greatly enhance FINRA’s ability to perform certain order-based surveillance, including layering, quote spoofing and mid-point pricing manipulation surveillance, by enabling FINRA to more fully reconstruct an ATS’s order book”);Remarks of CFTC Commissioner Mark Wetjen, May 21, 2015 (“In order to detect other types of manipulation like spoofing, layering, and flipping, plus new types of gaming strategies, receiving order book and message data is necessary”).

My firm’s work in developing and bringing to market our Surveyor platform has shown us first hand the necessity of using depth-of-book quote data to effectively detect spoofing and layering. For an example of our depth-of-book-based layering analysis, click here.

Because regulators now require market participants to monitor their trading for spoofing and layering, and because detection of spoofing and layering requires analysis of depth-of-book quotes, not consuming all available depth-of-book quotes as part of their compliance program puts firms at their own regulatory peril.

The trade surveillance use case for depth-of-book market data could change the analysis in the SIFMA case. The universe of firms required to monitor for spoofing and layering is much broader than the core group with sufficient order flow to exert price pressure over the exchanges. The logic used to justify the exchanges’ prices to HFT firms does not apply to smaller firms who still need depth-of-book data for trade surveillance. The exchanges could avoid this problem by offering reduced prices for surveillance use. Some exchanges already do allow free use of delayed depth-of-book data, which is sufficient to monitor for spoofing and layering.

The absence of depth-of-book quotes on IEX is not a problem for broker trade surveillance. The harm of spoofing and layering is deceiving the market using visible non-bona fide quotes. Quotes that are not displayed cannot deceive.

The post Exchanges Take Opposite Approaches On Depth-Of-Book Market Data appeared first on Trillium Management, LLC.

The post Sterling Trader Partners with Trillium Surveyor to Enhance Post-Trade Surveillance appeared first on Trillium Management, LLC.

AMZN finally crossed $1000 a share today, an occasion not missed by many media outlets to question whether it is time for AMZN to split. Matt Levine’s take this morning was as follows:

The basic rational discussion about stock splits goes like this:

Our stock is at $200. Is that a problem?

No that is a meaningless number.

Okay should we split it in two so that each share is worth a more manageable $100?

No come on that is dumb.

I mean, it’s fine! It’s fine. Do the split, or don’t, whatever. The price of one share of stock doesn’t matter, and it is silly to spend much time thinking about optimizing it.

I agree that share price is meaningless for most purposes, but price does matter when it comes to orderly trading practices. On Friday on CNBC, Eric Chemi recounted a conversation he had with me earlier in the year about how nosebleed share prices can increase the chances a stock will be manipulated.

To explain why, consider this side by side comparison of trading in AMZN and MSFT, two stocks in the same sector with similar market caps, at exactly 11:00 am Friday:

The main difference, of course, is that AMZN trades in the $1000 range while MSFT trades in the $70 range. If share price really doesn’t matter, one would expect most measures of trading performance to mimic the roughly 14:1 ratio of share prices. But that isn’t what we see here. Note the following:

1. The bid-ask spread in MSFT is always one penny. The spread in AMZN is 34 cents at the moment shown but had been 66 cents a few seconds earlier (you can pull up these charts yourself and move around in them for free here). The spread in AMZN is considerably worse than the 14:1 ratio you would expect if price levels were meaningless. Wide spreads mean higher costs for investors.

2. The order book in MSFT shows several thousand shares quoted at every penny price tier on both sides of the market. The order book in AMZN shows wide gaps of eligible price tiers with no shares quoted at all (e.g., the second best bid is 33 cents lower than the best bid), and where there are quotes they are often odd lots (less than 100 shares) which are not protected from trade throughs under Reg NMS. To buy $2 million worth of MSFT (about 28,000 shares at these prices), assuming you could access what was quoted, you could expect to have to pay 3-4 cents through the market in these conditions. To buy $2 million worth of AMZN (2,000 shares), you would have to go 19 tiers into the book and pay prices over $1 away from the best bid. Again, much worse than the 14x multiple one would expect if price didn’t matter.

3. The thin order book in AMZN makes it more vulnerable to market manipulation. Spoofing and layering are manipulation schemes in which a trader deceives other traders as to the true price of a stock by displaying artificial bids or offers that disrupt the natural balance of supply and demand. In listed stocks and futures, the balance of supply and demand can be seen visually in the shares quoted on each side of the order book. A spoofer puts his thumb on that scale, causing prices to tilt in his favor. In MSFT, we see around 75,000 shares quoted in the top 10 tiers of each side of the order book. To add a 20% thumb on the scale here, a spoofer would have to enter orders for around 15,000 shares, which would expose him to over $1 million of risk. In AMZN however, where only 1,000 shares are quoted in the top 10 tiers, a 20% thumb on the scale would require only 200 shares, or $200,000 of risk. It is thus 5x cheaper to spoof AMZN than it is to spoof MSFT.

So what should AMZN do? To have a robust well-functioning order book, with tight spreads, deep liquidity, and inhospitable conditions for spoofing, large cap companies like AMZN are better off with share prices under $100. Share prices under $30 lead to a different issue with artificially wide spreads caused by the one penny minimum tick size in Reg NMS, so the optimal range is $30-$100. AMZN and the other large cap stocks priced above $100 would do their investors a favor by annually splitting to keep share prices in that range.

-MJF

The post Why AMZN Should Split appeared first on Trillium Management, LLC.

The House Financial Services Committee’s Subcommittee on Capital Markets, Securities and Investments held a hearing this week on U.S. Equity Market Structure, and the topic of conflicts of interest between brokers and their customers caused by the maker-taker rebate system was front and center. Matt Lyons, the head trader of over $1.5 trillion in assets at The Capital Group, put this first on his list of suggested priorities, and numerous Congressmen appeared receptive to some reform there.

The issue, for the uninitiated, is that many exchanges have a pricing model for the “access fees” they charge brokers for each trade whereby the broker who got there first (the “maker,” because he “makes” liquidity on the exchange) receives a subsidy or rebate, and the broker who gets there second and trades as counterparty to the maker (the “taker,” because he “takes” liquidity away from the exchange) pays a fee. The taker’s fee is always slightly larger than the maker’s rebate (usually $0.0030 fee/$0.0029 rebate per share), and the exchange pockets the difference. The purpose of the maker/taker model is to encourage market makers to display more quotes, which aids in price discovery and reduces transaction costs by narrowing spreads. The conflict of interest flagged by Lyons is that the maker/taker pricing model may encourage brokers to send orders to the venue that is most likely to pay the broker a rebate rather than to the venue that is most likely to execute the trade at the best price for the broker’s customer.

In response to criticisms like Lyons’, the SEC’s Equity Market Structure Advisory Committee recommended a pilot study that would experiment with changing the sizes of the rebates and fees, but would leave intact the basic maker/taker model and the $0.0001 difference between fee and rebate. Nasdaq also experimented with a unilateral reduction in the size of its rebates and fees for 14 symbols over a four month period in 2015. IEX, and now also one of CBOE’s venues, disclaim the maker/taker model entirely and instead charge maker and taker alike the same flat fee.

None of these experiments both remove the maker/taker conflict and preserve the liquidity incentive of rebates. There is a different approach which does both, and it was first formulated by a panel of professors over 13 years ago. The solution is to include the access fee owed by the taker in each quoted bid or offer. Here’s what this would look like:

The dotted lines represent the price the maker will pay if a buyer (or receive if a seller). The solid lines represent the price the taker will pay if a buyer (or receive if a seller) after the exchange collects its access fees. The quote displayed to the market is the solid line, not the dotted line. In all cases, the spread is wider after the fee is collected (solid) than before (dotted). But note that the narrowest spread occurs where the venue collects the smallest fee.

From the maker’s perspective, a market maker willing to buy at $20.33 and sell at $20.35 will appear higher in the order book, and therefore get filled sooner, by routing to an exchange that only inflates that spread by $0.0002 than he will by routing to an exchange that inflates that spread by $0.0003.

From the exchange’s perspective, the exchange with the lowest access fee attracts the most quotes. This creates an obvious incentive for exchanges to compete on price that does not currently exist, which happens to be the stated purpose of the Securities Acts Amendments of 1975, the statute under which Reg NMS was promulgated.

From the taker’s perspective, the venue with the smallest fee is also the venue with the best price for the customer. Voila, no more conflict between broker and customer.

At the time quoting net of fees was first proposed in the comment period for Reg NMS in 2004, it was rejected partially because it would require hundredth-of-a-penny tick sizes to show access fees measured in mils ($0.0001 per share) in quotes. Some observers questioned the technical challenges of displaying an extra two decimal places, but those challenges have since been overcome for stocks priced under a dollar, where hundredth-of-a-penny tick sizes are permitted. As the great Josh Levine once observed, tick sizes cannot be smaller than a hundredth of a penny because “four decimal places is the smallest increment that results in a change in the net settlement amount of a single round lot (100 shares),” so there is no danger of a race to infinitesimal ticks if the current whole-penny floor is removed.

Hundredth-of-a-penny tick sizes would have another great benefit to market structure. Many of the most unsavory aspects of modern trading arise from the race among market makers to be first in line to be executed, where they can off-load risk before being run over by real price moves. The high-cost arms race to reduce latency with colocation, FPGA chips, and microwave towers, as well as the proliferation of complex exchange order types, came about in order to help market makers claw their way to the top of an order priority queue that is often quite long in liquid stocks with one-penny spreads. Hundredth-of-a-penny tick sizes would allow market makers to compete on price to get to the top of the queue, greatly reducing the relative advantages of being fastest.

It’s a simple change that could fix a lot.

-MJF

The post How To Align Broker and Customer Interests and Make Exchanges More Competitive appeared first on Trillium Management, LLC.

Recently, Trillium was proud to support the Security Traders Association New York – Women in Finance (STANY – WIF) event, Cocktails with a Cause for The Foundation for Women Warriors.

As part of STA-WIF’s Spring Campaign, the STANY-WIF Committee hosted a fun-filled, fund-raiser to benefit the Foundation for Women Warriors. More than 100 members and guests supported the event at Pennsylvania 6. Though the generosity of the community, the STANY-WIF raised $4,200 for the Foundation.

The post Trillium Supports Security Traders Association New York Women in Finance appeared first on Trillium Management, LLC.

On July 13th, Trillium Surveyor and the Trillium team were honored to be invited back by Nasdaq for the Closing Bell Ceremony a second time, after a first appearance the year before in April 2016. Nasdaq and Trillium celebrated the addition of cross-asset trade surveillance to Trillium Surveyor, a major milestone in detecting cross-asset market manipulations including mini-manipulation.

Lee Maschler, Trillium’s Chairman (pictured above on the right, with Trillium CEO Barry Schwarz on the left), gave remarks and pressed the button to signify the market closing.

Watch the live video of the event here on Nasdaq’s Facebook page.

The post Trillium Surveyor Rings Nasdaq Stock Market Closing Bell a Second Time appeared first on Trillium Management, LLC.

Last week, the enforcement divisions of the three major exchange groups released a settlement agreement with JP Morgan Securities imposing an $800,000 fine for inadequate pre-trade controls and post-trade surveillance.

The post-trade surveillance portion of the settlement agreement revealed that JPMS used an unnamed “commercial non-proprietary Third-Party Surveillance System” (it wasn’t Surveyor), but set the parameters of that system “at levels that were unreasonable to detect activity that may be indicative of layering and spoofing activity.”

The settlement agreement explained:

“For example, one threshold requires that potential non-bona fide orders must be priced within a certain number of ticks of the NBBO which, as currently employed by the Firm, would fail to identify instances of potential layering or spoofing when the non-bona fide orders were displayed and priced at the NBBO or established ‘a new best bid or offer.’ Additionally, another threshold requires that the volume on the opposite side of the market must exceed a certain set percentage of the ADTV of the relevant security for the preceding 30 day period in order for an alert to be generated. However, since this percentage is the same for all securities regardless of the ADTV of a security, this exception report would be less likely to identify potential layering or spoofing in a security with a significant ADTV.”

As a result of these mis-set parameters, JPMS’s trade surveillance system failed to detect “potentially violative spoofing activity” over a three month period in 2015.

This is not the first time a large brokerage firm has been sanctioned for investing in a commercial trade surveillance platform but then not using it properly. In 2015, the same SROs fined Wedbush Securities $1.8 million for, among other things, implementing “some surveillance reviews via Nasdaq’s SMARTS surveillance system,” but then assigning only one individual to review the output of that system. The SROs found that “given Wedbush’s status as a leading liquidity provider, it was not reasonable to assign just one person to this task.” The one reviewer fell behind in his work, and did not review numerous instances of potential manipulative activity by Wedbush customers over a three month period in 2013.

In addition, several firms have been sanctioned for attempting to build their own trade surveillance systems that either (i) did not adequately detect manipulative conduct or (ii) were manually adjusted to reduce the number of alerts, to the exclusion of events that required attention. FINRA’s 2016 settlement with ETC and the SEC’s pending enforcement action against Lek Securities both involve that fact pattern.

The common thread in these cases is that trade surveillance platforms often generate a lot of alerts, many of which are false positives. A common response to that problem is to adjust the system’s parameter settings to reduce the number of alerts. Such adjustments are fraught with risk. The goal of any adjustments must be to improve accuracy, a by-product of which may be reduced alert counts. Reduced alert counts alone cannot be the primary goal.

At Surveyor, our starting point for designing or modifying detection filters is always accuracy. We are the only trade surveillance platform that uses depth-of-book market data to determine whether a trade sequence does or does not generate an alert. Our method for doing so is patented. By looking not just at our customers’ order sequences, but where they occurred in the order book and how other traders reacted to them, we are able to automatically exclude many legitimate trade sequences that our competitors cannot. In most cases, this preempts the problem of “too many alerts” before it begins.

To be sure, there are occasional instances where a new customer has an unusual style of trading that triggers repeated alerts but is objectively not manipulative. We do make filter adjustments in those circumstances, but any changes are back tested against our library of customer trade data before being released into production, to ensure that other valid alerts are not inadvertently excluded by the change.

It also helps to rely on a third party trade surveillance vendor to decide what filter changes should or should not be made. In several of the cases listed above, the broker deliberately modified its filters to avoid flagging the regular trade activity of a lucrative customer. A third party vendor is less likely to be play favorites with which customer’s alerts are excluded by a parameter change. In the JP Morgan case, there is no indication of such willful avoidance, but the broker did make changes that left open a gap in its surveillance umbrella. Relying on third party vendors allows brokers to leverage the vendor’s expertise in current industry standards and the most current enforcement precedent to avoid such gaps.

The post JPMorgan Fined for Bad Trade Surveillance Parameter Settings appeared first on Trillium Management, LLC.

In the past week, a coordinated effort has been launched, by members of Congress and by the exchanges who wrote the CAT plan in the first place, to delay the deployment of the Consolidated Audit Trail. The stated grounds for a delay are that the SEC—which is neither building nor hosting the CAT—has recently revealed its imperfect track record on cybersecurity with its EDGAR corporate filing system.

These arguments are either wrong or misguided, for several reasons.

First, CAT is being built by a very competent trading technology firm, Thesys Technologies, which has had its eye on the cybersecurity ball since the beginning of the bidding process. Here’s a slide from Thesys’s bid submission in 2014:

While no system is completely hack-proof, the one Thesys is building exceeds the security standards required by the exchanges in writing the RFP. The EDGAR system that was hacked, by contrast, was built in 1992, and extensive modernization efforts are ongoing. Needless to say, a vulnerability in a 1992 system that was exploited in 2015 is in no way indicative that an unrelated system built in 2017 will also be vulnerable.

Second, the first batch of data scheduled to be delivered to CAT next month is not very sensitive. It contains trading records from exchanges that is already publicly available (for a fee) from the exchanges. It does not contain any personally identifiable information, nor does it show which broker customer is responsible for each order. Only the broker for each order is identified. The much more sensitive data will come from the brokers directly—and will contain PII and identify which customer sent which order—but it is not due to be delivered to CAT until November 2018. To the extent there are any real security concerns with CAT, there are still 13 months to address them.

Third, the concerns recently voiced about CAT containing PII are off the mark. Hacking into CAT to steal PII would be like breaking into Fort Knox to steal the security guards’ wallets. It is there, and worth something, but something else is also there that is worth orders of magnitude more. In the case of CAT, it is the customer ID-tagged order messages that are the real treasure. That data is sufficient to reverse engineer the trading strategies of the world’s most lucrative quant funds. Bloomberg has reported that one of these funds alone “has made about $55 billion over the past 29 years, thanks to average returns after fees of an astounding 40 percent.” The right combination of hacker, rogue data scientist, and advanced trading tools could conceivably access all of a successful quant fund’s orders, analyze them, reverse engineer and copy the trading strategy, and replicate the fund’s returns, without anyone even knowing the data was breached.

Finally, concerns about the CAT database getting breached by hackers ignore the possibility of the same data leaving through the front door. All 22 equity and options exchanges will have authorized access to the full CAT database in order to perform market surveillance. Most of those exchanges are owned by the major exchange groups (ICE, Nasdaq, CBOE), which most industry participants trust to use the data as intended (although there is always the possibility of a disloyal employee at one of those exchanges abusing his or her access).

Larry Tabb recently flagged a potentially greater threat. One of the 22 exchanges with full CAT access is the Chicago Stock Exchange, which is the subject of a pending acquisition by a consortium led by Chongqing Casin Enterprise Group. Bloomberg has reported that Casin “has no apparent experience in running an exchange” and instead “invests in real estate and operates sewage treatment plants” in China.

Given China’s track record of stealing the intellectual property of U.S. businesses, it is not crazy to imagine a scenario where, if the Casin-CHX deal is approved, Casin (or others in China with influence over Casin) might use CHX’s authorized access to CAT to obtain and exploit the invaluable trading strategies it contains. This scenario is made more plausible by the fact that Thesys is planning to allow exchanges to “remove” CAT data from the CAT database to run surveillance checks in house.

The fear of unauthorized access to CAT data is thus a good reason to rethink approval of the Casin-CHX deal, and adding restrictions on control of exchange medallions in general, but it is not a good reason to delay the rollout of CAT.

The post Scaredy CAT appeared first on Trillium Management, LLC.

CHICAGO–(BUSINESS WIRE)–High volume futures broker Advantage Futures today announced it selected Trillium’s Surveyor trade surveillance platform to detect potential disruptive trading practices.

“We evaluated numerous trade surveillance products and were really impressed with Surveyor’s ease of use and the personalized support we received from the team at Trillium,” said Phil Zacharski, Chief Risk Officer of Advantage.

Surveyor emphasizes a visual approach to trade surveillance. Its user interface was designed by award-winning UI/UX architects and includes a natural language story panel explaining what generated each alert. A case study on Surveyor’s design is available here.

“We started out in the world of equities, so it is gratifying to see all the hours we have invested in Surveyor translated into successful deployments on the futures side,” said Barry Schwarz, CEO of Trillium. “We look forward to continued engagement with other FCMs and futures proprietary trading firms in the months and years to come.”

More information on Surveyor is available here.

The post Advantage Futures Selects Trillium Surveyor for Trade Surveillance appeared first on Trillium Management, LLC.

The Surveyor team was pleased to be awarded ‘Best Regulatory Alert Management Solution’ at the RegTech Awards 2017 ceremony in November, pictured above. Read more about the Surveyor features that brought in the award here.

The awards press release follows below:

A-Team Group announced the winners of its inaugural RegTech awards during a well-attended ceremony after the close of the company’s RegTech Summit for Capital Markets in New York today. The awards are designed to recognise both start-up and established RegTech solutions and service providers, and were presented to winning organisations by Tim Lind, principal at RTech Advisors.

Award categories ranged from best data management solution for regulatory compliance to best innovative solutions for specific regulations, best reference data for regulatory compliance, best trade surveillance solution, best voice and mobile messaging solution, and the most innovative use of AI for compliance.

As well as specific product categories, the awards covered the best alliance between solutions providers addressing regulatory compliance, and legal and consultancy regulatory services. A complete list of all categories and winners can be found below.

Lind said: “It is a privilege to present the first A-Team Group RegTech awards and recognise some of the leading vendors and start-ups offering RegTech solutions designed to significantly improve the regulatory response and provide efficient and effective compliance. Never before has the industry been under such pressure to change its approach to compliance technology, and it is RegTech that will lead the way.”

Andrew Delaney, chief content officer at A-Team Group and host of the RegTech awards, said: “Congratulations to the winners of this year’s A-Team Group RegTech awards and thank you to everyone who voted. We had a large number of nominations and votes across all categories, which signals growing dependence on RegTech by firms in capital markets.”

The post Trillium Surveyor Wins ‘Best Regulatory Alert Management Solution’ at RegTech Awards 2017 appeared first on Trillium Management, LLC.

ICE, CFE, Eurex, Euronext markets added; Looping and Flickering detection filters added.

Trillium today announced a new slate of covered markets and new detection filters for its award-winning Surveyor trade surveillance platform.

Surveyor now supports surveillance of trading on ICE’s U.S. and European futures exchanges, the Cboe Futures Exchange, Eurex’s futures exchanges, and Euronext’s equity and index derivatives products.

Trillium also announced the release into production of two new detection filters, both targeted at abusive algorithmic trading. Surveyor’s new Looping filter detects instances where an algorithm repeatedly enters and cancels buy or sell orders at a single price within a short time interval, and Surveyor’s new Flickering filter detects instances where an algorithm repeatedly alternates entering and canceling buy or sell orders at multiple prices within a short time interval.

The new markets and filters complement Surveyor’s existing suite of disruptive and manipulative trading checks across other equities, options and futures markets in North America and Europe. Complete lists of Surveyor’s supported markets and filters are available at TRLM.com/surveyor.

“We are continuously adding new features to Surveyor and expanding its market coverage,” said Trillium CEO Barry Schwarz. “We are seeing strong demand for our next-generation trade surveillance tool. While the competitive landscape has consolidated, we remain committed to expanding Surveyor’s reach and making its award-winning features even better.”

Surveyor is marketed to sell-side and proprietary trading firms who actively trade listed equities, futures, and options. It was recently named Best Regulatory Alert Management System at the 2017 RegTech Awards. For a free demo, please contact sales@TRLM.com.

The post Trillium Announces Q4 Feature Releases For Its Surveyor Trade Surveillance Platform appeared first on Trillium Management, LLC.

U.S. regulators brought 15 major (criminal or fines of more than $100,000) enforcement actions for spoofing or layering in 2017, the same number as in the previous four years combined. As detailed in our running table of trade surveillance related enforcement actions, the vast majority of enforcement activity centers on spoofing and layering, with wash trades a distant second and abusive messaging and marking the close next.

Of the 23 major enforcement actions for all trade surveillance related activity in 2017, 11 were brought by SROs, 9 by the CFTC, 2 by the DoJ, and 1 by the SEC. 18 involved futures trading and 5 involved securities.

Regulators levied just over $40 million in total fines in major enforcement actions in 2017, with a mean of $2.1 million and a median of $312,000. The largest levy of the year by far was the CFTC’s $25 million fine of Citi in January for spoofing in US Treasury futures. The allegations included veteran traders teaching a new trader how to spoof, which DealBreaker dubbed a “Spoofing Academy.” The three traders involved cooperated in the investigation and were rewarded with non-prosecution agreements, in accordance with a new CFTC policy announced the same day to more explicitly barter cooperation for reduced penalties.

A couple of emerging trends hidden in the data: (1) increased scrutiny by the CME of pre-open “pinging” orders that are small enough to not create order book imbalances required for traditional spoofing, but are large enough to impact indicative opening prices (these matters generally resulted in fines too small to be included in our table, but with growing frequency); and (2) “mini-manipulation” (aggressively trading an underlying product to improve the value of a held derivative position), which has long been a staple of energy market manipulation and “banging the close” in general, emerged unmoored to energy products or the daily close in the Lek Securities case, where traders stand accused of manipulating stocks in mid-session to improve the value of options positions they entered and exited the same day.

The lesson of this data is clear: Regulators have gotten their act together when it comes to enforcing trading misconduct, and there is very real chance that firms who do not spend adequate resources on trade surveillance now–particularly on detecting spoofing and layering–will end up spending way more on fines and litigation expenses later. To find out how Surveyor can help keep you off of next year’s list, email sales@TRLM.com.

The post 2017 Trade Surveillance Enforcement Year in Review appeared first on Trillium Management, LLC.

The post Gelber Group Signs with Trillium Surveyor for Trade Surveillance appeared first on Trillium Management, LLC.