There are a number of articles of interest in the January issue of Traders magazine:

• New Lease on Life — Under new parent NYSE Euronext, the former American Stock Exchange gets a new market structure, technology and pricing, and looks to rediscover its role among markets.

• Dark-Pool Blocks Shrink — There was a tidal wave of trading near the end of 2008, but not for the industry’s electronic crossing networks.

• This Year’s Crystal Ball: Eight Calls on Market Structure for 2009 — Jamie Selway makes his annual predictions and, to his credit, reviews how he did with last year’s forecast. I like that accountability.

• High-touch versus low-touch at Knight Equity Markets, as described by Joseph Mazzella, who oversees the listed block-trading desk (sorry, no link; excerpt):

What happened is the pendulum swung big-time to the low-touch side. And it was pegged there for a while. Algorithms are great, and there’s a place in the market for them, and there always will be. But the buyside wants that human interaction, that dialogue, especially in these times where any little bit of color can be beneficial and can help you implement the trade better. We’ve seen that pendulum swing from the low-touch side and come back to a more neutral stance.

Here’s a little historical musical trivia/interlude for your Friday. Have a good weekend, folks.

On This Day (NYTimes.com) in 1969, the Beatles performed as a group for the last time in public in a 45-minute gig on the roof of their Apple Records headquarters in London during the filming of “Let it Be.”

Your humble blogger was vaguely aware that NYSE Euronext was cobbling together a pretty big roster of indices, oh. probably, say, 20 or 30 of them, and then this press release came out last week announcing the 2008 performance of some of our 300 indices. Three double-oh, three hundred indices.

Please forgive my appalling lack of knowledge on this subject. Which is not a surprise given my appalling lack of knowledge on most subjects, but please forgive me anyway.

So now we have a Global Index Group, comprising index specialists from NYSE Arca, NYSE Euronext and the newly acquired American Stock Exchange. They provide design, real-time calculation and dissemination services for NYSE Euronext, third-party customized indices and Exchange Traded Products intra-day indicative values, the press release says. And we have these 300 indices.

To which you might respond: so what? Or more specifically, what do all these indices tell us?

The answer is: pretty much anything you want to know about the markets in which NYSE Euronext operates, including the main indices of continental Europe: AEX, BEL, CAC 40 and PSI-20. We have indices of stocks of various sizes and industries, denominated in dollars or euros; plus indices focusing on various strategies including leverage and short selling.

And obviously there’s more to tell, because the list is growing. Recently we announced a new global airline index and an index of European companies with low carbon footprints.

You can learn more at the home page for our Global Index Group. And certainly, I myself can learn more. Should learn more. Will learn more — new year’s resolution. OK, enough beating up on myself for one day.

A couple of weeks ago, my first post on this blog explained the advantages of using NYSE Arca’s ArcaDirect order-entry platform. Its speed and relatively small messages provide the fastest, most efficient access for high-frequency traders. At the risk of boring the majority of readers, in this post, I would like to explain the advantages of using the NYSE Arca FIX gateway.

NYSE Arca’s FIX API was developed back in the late ’90s, when Arca was still an electronic communications network (ECN). Though we switched technology platforms when we became an exchange, we maintained the same standard FIX API. This allowed us to switch technologies without our clients having to make changes to their apps. The only difference clients saw when the platform changed was improved performance.

When Arca acquired the Pacific Stock Exchange in 2005, we ran on the PCX systems for a short period of time, then moved the platform to the Arca matching engine and FIX gateway platform. We simply had to expand the internal Arca API to support Options order flow and provide clients the additional FIX tags to route orders through their Arca FIX sessions to the new Arca Options platform. Clients that already had access to the Arca equities platform could become members of the Options exchange and easily modify their FIX applications to route to it. This migration was the first of many and served as a model for future projects. Over the years, we have added support for several exchanges. The NYSE Arca gateway can now deliver orders to the following market centers:

NYSE Arca Equities
NYSE Arca Options
NYSE Amex Options
NYSE Equities (via the PO+ order)
NYSE Bonds
NYBX (New York Block Exchange)
MatchPoint
Liffe

Note - Many of these market centers are accessible over a single FIX session.

The NYSE Arca FIX gateway provides access to all the above exchanges while providing great performance. average response time is 2 milliseconds. Customers who want access to multiple exchanges through one standard FIX interface should consider using the NYSE Arca FIX gateway.

Wrongdoing seems to know no generational boundaries, it has a very short memory, and it never seems to learn from past mistakes. We are reminded of all this by a couple of articles in the last week.

The first — a Reuters article — reports that suspected insider-trading cases reached an all-time high last year:

NYSE Regulation, the Big Board’s oversight body, referred 146 cases of suspected insider trading to the U.S. Securities and Exchange Commission in 2008, five more than in 2007, the previous record year, and more than twice as many as in 2004.

You might have assumed (as I had) that last year’s downturn in mergers, acquisitions and public offerings would have correlated with a decline in insider trading because there was less deal-related information to be traded on or passed around in advance of public announcements. And of course, we know what happens when we assume. The article explains:

Insider trading spiked in the late 1980s, highlighted by the 1989 mass indictment for racketeering and securities fraud of U.S. financier Michael Milken, who was ultimately charged with lesser violations.

A sharp regulatory crackdown was followed by a quiet 1990s, but the number of cases has risen steadily over the last five years. [John] Malitzis, [executive VP of Market Surveillance for NYSE Regulation], 41, said the average trader working today “was probably in elementary school” during the late 1980s crackdown.

“When a new generation comes up that wasn’t front row to the lessons of the late ’80s, they think it’s easy to do and no one’s going to catch them,” he said. “But the fact is it’s very easy for us to catch these folks. And I think they’re learning the hard way.”

So for those too lazy or ignorant to go to school on Ivan Boesky and Dennis Levine, the School of Hard Knocks is always open to new students. Your trading records? Available to regulators. Your access to advance, material, non-public information, or to others who have it? Available as well. Put them together with some investigative work, and you have an excellent chance of getting caught, even if you’re outside the securities industry:

“That’s where we saw a shift in our referrals — to the relative of a corporate insider … or a colleague, or a member of a country club, or somebody in their inner circle,” Malitzis told Reuters.

A historical thread also runs through It’s Hard To Believe There Are Still Pirates Among Us, written by longtime NYSE member Bernard McSherry for Advanced Trading magazine:

[The Madoff scandal] is not the first time that a captain of Wall Street has been accused of high crimes. In the late 1930’s New York Stock Exchange Chairman Dick Whitney was convicted of embezzlement from the Exchange’s widows and orphans fund and other accounts for which he served as a trustee. He was disgraced and served a brief period of time in prison, but many contemporary observers felt that he got off easy. Unfortunately, his sentence is all too common. The list of disgraced financiers is long, and few of them have faced serious punishment. Over the next months, as investigators sift through the detritus of our recent financial crisis, I suspect that a few more well-respected names may become notorious. Will they get off easy, too?

As we watch the Madoff story unfold, let’s not be drawn into the temptation to view this as another harmless white collar example of the rich preying upon the rich. Lives have been ruined and charitable organizations have been gutted just as surely as if a cutlass was used to coerce the victims. Meanwhile, the alleged perpetrator is under house arrest in his luxury Park Avenue apartment and will surely be marshalling a flotilla of lawyers to minimize his punishment. …

… As our own authorities belatedly move against the perpetrators of financial piracy, the public is understandably skeptical that the Madoff affair will turn out to be one more example of a powerful figure who perpetrated massive crimes and managed to escape serious prosecution. With public cynicism at an all time high, and in the wake of shaken investor confidence, it is vital that we prosecute financial misdeeds with appropriate zeal.

Cutlass, flotilla — McSherry’s got a way with metaphor. He’s also got a good point. Looking at today’s markets from a historical perspective, with investor confidence at low tide (to borrow McSherry’s metaphor), vigorous enforcement and prosecution are more important than ever.

NYSE MatchPoint is excited to welcome the New York Block Exchange (NYBX) as the newest non-displayed facility of the New York Stock Exchange. NYBX will revolutionize liquidity aggregation between the displayed and non-displayed markets, combining the extensive liquidity of the NYSE (and away markets) with the informational control and execution dexterity of a dark pool.

Together, MatchPoint’s scheduled matching sessions and NYBX’s continuous trading environment will provide a neutral, centralized and regulated marketplace for all market participants.

When the Securities and Exchange Commission wrote Reg. National Market System (NMS), they highlighted the importance of “competition between markets” as a way to foster innovation which would thus help “minimize” transactions costs for investors. Yet today we find a marketplace awash in alternative trading system (ATS) business models competing on the basis of liquidity, speed and rates rather than dark-order innovation and quality of execution. Sure there are a bunch of ways to commercialize existing internal liquidity or pricing schemes to attract new order flow, but most dark pools are pretty much the same. All are anonymous and their primary innovation focus seems to be concessions on order opacity to improve their hit rate. It is not a quality-of-execution strategy but a quantity-of-execution strategy.

This lack of quality innovation is not just an interesting sidebar; it has profound consequences for the investor and our marketplace.

If we reflect on our old friend the “transaction cost iceberg” it is clear that fees and spreads are just the visible tip of the iceberg. Underneath the “waterline” are the hidden transactions costs of market impact, execution delay, information leakage, price drift or slippage and gaming. It is these hidden costs not the visible ones that threaten to sink the investor’s “ship” and the ultimate irony is that the SEC’s “competition between markets” philosophy adopted by the ATS marketplace has actually increased transaction costs for investors rather than decrease them.

Clearly some of the blame falls on the ATS industry’s commercially driven focus on the quantity strategy (visible costs) as opposed to the quality strategy (hidden costs). We seem more eager to find new ways of making a dark order more visible (and executable) and yet still call it dark than to actually create new ways to control information leakage or reduce execution delay. Just look at the ATS average trade size, the growth of dark algorithms, rebate models, indications of interest (IOIs) and routing out.

And to compound this problem there is the fragmentation caused by so many competing dark pools and their collective effect on liquidity. Investors are forced to probe, ping, IOI, slice and dice their way through 50+ competing and independent dark pools. By the time they complete their order, delay has eroded their investment alpha and thousands of trades to the tape have betrayed their valuable order and trading-strategy information. Whatever intrinsic value that may be found in each individual dark pool, it is forfeited (and then some) by the hidden costs arising from the over-serviced ATS marketplace.

Interestingly, the solution to the ATS fragmentation problem and the way to effectively reduce transactions costs for investors will be found not through dark-pool competition but through exchange neutrality. Rather than fragment liquidity through competition, an exchange facility as a neutral business and trading environment can bring competing brokers together and aggregate liquidity for everyone’s benefit.

The power of neutrality can be seen through the dramatic rise of the pioneers in the ATS industry; the electronic agency brokers. They used their agency neutrality as a primary way to attract liquidity. But of course, as agency brokers their neutrality begins and ends with “best efforts” execution. As they have gotten bigger, they have become more of a competitor to other brokers than a neutral destination.

But, exchange facilities like NYSE’s MatchPoint and the soon-to-be-launched New York Block Exchange, using neutrality as a core principle, represent the next and possibly final chapter of the ATS revolution.

Supported by published rules governing fairness and operational transparency, global infrastructure, and a robust surveillance and enforcement effort, these neutral exchange facilities are a perfect blend of dark-order innovation and exchange neutrality. A winning combination for all investors.

The author is vice president of NYSE MatchPoint and ATS Strategy, NYSE Euronext.

Here is an update on the enhancements to the New York Stock Exchange trading model. You’ll recall that we announced last October, and gave you a progress report in November. Here’s what’s happened since then, and a look at what’s ahead.

In brief, there’s been a lot of progress and some encouraging results. First, here are the latest numbers:

• The percentage of time that our Designated Market Makers’ (DMMs, formerly Specialists) quotes were at the national best bid or offer nearly doubled to 18.5 percent in December 2008 from 9.9 percent in August. In addition, the DMMs’ participation rate increased to 7.0 percent from 3.2 percent during that period.

• The percentage of shares executed that NYSE routes to other market centers dropped to 9.2 percent in December 2008 from 11.5 percent in August. The December figure is the lowest level since May 2008. The decrease in routing out is another indication that we’re at the best price more frequently. Routing out less frequently is important to saving our customers from incurring other markets’ high fees; as you know, NYSE has the industry’s lowest fee for taking liquidity.

• The size of our quote improved to 977 shares in December 2008 from 771 shares in August, a 27-percent increase.

Our performance in these measures is even better in our more actively traded issues. One caveat:, these statistics measure a relatively brief period of time; this rollout was not complete until the end of December.

On share of trading, you might have seen in our monthly press release about transaction activity that our matched market share ticked up to 43.4% in December compared to 42.7% in November, but note, this reflects NYSE and NYSE Arca combined.

I’d also like to emphasize that although these trends are positive, we are anything but complacent. The sense I get from hanging around colleagues and members is that they’re still in overdrive, developing and rolling out enhancements to what we do. As Lou Pastina, our Executive VP of NYSE Operations, told me: “We’ve turned the corner, but there’s a lot more to come.”

Now onto some of those changes we’ve made, and a glance at what’s ahead:

• On 30 Dec. 2008, we completed the rollout of all NYSE-listed issues onto the automated Capital Commitment Schedule (CCS). The CCS is used by the Designated Market Makers (DMMs, formerly Specialists) to pre-program their responses to incoming orders, without seeing the orders. This means that neither the DMMs nor their algorithms have an advance look at incoming orders; the information playing field is level in every way.

• Streamlining and upgrading of our systems in the last three months have reduced latency another 28 percent to 62 milliseconds from 86. (This is the time it takes for our systems to execute an order.) Greater system speed increases our customers’ ability to hit a bid or take an offer here before the price changes.

• Later this quarter or early next, latency will further decline to single-digit milliseconds, when we replace our SuperDot order-processing system and our Post Support System (which supports internal routing) with a new Super Display Book (SDBK). SDBK will be our new database and processing engine, receiving orders, safe-storing them, handling odd lots, and routing orders to the NYSE’s matching engine or other markets as appropriate.

SDBK will be powered by blade servers (as compared with our current non-stops), which will make our systems easily scalable, more efficient to run, and improve our flexibility and speed to add new products, features and services. The software is based on proven and super-fast NYSE Arca technologies.

• Two Supplemental Liquidity Providers (SLPs) are online, and additional firms are in the process of applying to become SLPs. As a reminder, these are upstairs, electronic, high-volume members incented to add liquidity on the NYSE. The program rewards aggressive liquidity suppliers, who complement and add competition to existing quote providers.

• Brokers on the NYSE Trading Floor are continuing to use their new algorithmic trading tools — which came online in August — to complement their other electronic tools and their presence in the physical auctions on the floor. Their role has been particularly valuable to customers in the big price dislocations last autumn, when the sourcing of deep liquidity and the discovery of real price were at a premium.

• Customers increasingly are using the new Dark Reserve Orders and Block Reserve Orders, which is adding to the depth of the market.

• DMMs are moving to enable additional issues to “open on a trade,” which means the issues can open automatically within certain parameters, without the specialist punching a key. This means that stocks will open even faster, and there will be less of a chance of having your opening order hit in another market at an aberrant price. This technology is used on our NYSE Alternext U.S. market, where more than 60 percent of issues open within 5 seconds of 9:30:00, most of those within the first second.

• Our Universal Trading Platform, now being introduced in our European markets, is scheduled to be rolled out in the U.S. at the end of this year, bringing with it even greater speed and efficiency.

• NYSE is nearly half-way finished with an upgrade to our quote-publishing service. The upgrade is powered by technology we picked up in the acquisition of Wombat (now part of NYSE Technologies) and the enhanced service will be far faster than its predecessor.

Thanks for reading, and for your business. We’ll keep on updating you as we continue rolling out good new stuff and strengthening NYSE.

Enjoy your Inauguration Day, folks. I don’t know about you, but I can’t wait to see it.

Today in NYSE History
20 Jan. 1870 — Woodhull, Claflin & Co., the first brokerage firm operated by women, opened at 44 Broad St.

You have to watch this video of Neil Young’s new song, “Fork in the Road.” It’s funny and cutting all at the same time. There are barbs aimed at Wall Street and corporations and Apple and the music industry and the government and the war and the economy and the repo guys hauling away his flat-screen TV and Neil himself.

The clip shows Neil via a Web cam, singing over a stomping track and offering his five-minute time capsule of what he sees. (Note, there’s a little off-color language.) Impossible to do it justice here, but let me pull out a couple of lines. One chorus goes like this:

There’s a bailout coming, but it’s not for me.
It’s for all those creeps watching tickers on TV.

I have to think he means stock tickers there, not news tickers, but it’s hard to know for sure. That’s probably a distinction without a difference anyway. I do know he likes to hold up a mirror to the world, and the image, to me, is one of a society obsessed with the micromovements of the market and the minutia of the world.

I know, I’m probably reading too much into it, but hey, I’m blogging, work with me!

Another chorus goes like this:

There’s a bailout coming but it’s not for you.
It’s for all those creeps hiding what they do.

Is he talking about Bernard Madoff there? Over-the-counter derivative markets? Crooks? Again, it doesn’t much matter — consider it a call for transparency. Quit being creeps, quit doing business in the dark, let in some sunlight — pretty simple.

Are we listening?

You can dismiss it as “just a rock song,” but personally I think that’s a mistake. Neil Young is not only a big rock star, but a profoundly patriotic guy who is engaged in the issues of the day. He’s turning his old Lincoln into an electric car and he performs at benefits for farmers and the poor and the other left-behind people he sings about. He’s also been a good barometer of what people are thinking; remember, long before the outcome of last year’s election was obvious to anyone, he sang:

Someone walks among us, and I hope he hears the call.
Maybe it’s a woman, or a black man after all.

No business exists without public permission, and in finance that means the trust and confidence of investors and the public at large. The events of the last year have wiped out any good will that the Street might have had. Neil Young has just delivered a little musical reminder that we have a long road ahead to get it back. And if it’s not too corny for me to say it, the road back is paved with transparency and good practices.

Hat tip to RollingStone.com for posting the video and to my friend Ed for sending me the link.

My colleague Tom Haines, managing director in our Exchange Traded Products and Indexes Group, submits the following:

The NYSE Arca Auction Closing Auction crossed 31 million SPDR S&P 500 ETF shares on Monday, 12 Jan. Even though the NYSE Arca Auctions trade millions of ETF shares every day, this recent feat is worth notice. As the leader in ETF liquidity and listings, NYSE Arca is also a source of block liquidity using NYSE Arca Auctions.

NYSE Arca conducts three single-price auctions for NYSE Arca primary listings and ETFs: Limit Opening Auction, Market Order Auction and Closing Auction. The Limit Opening Auction occurs at 4 a.m ET, the Market Order Auction commences the Core Trading Session at 9:30 a.m. ET; and the Closing Auction concludes the Core Trading Session at 4 p.m. ET.

The auction allows participants to participate in real-time price discovery and match orders at the price that maximizes the amount of tradable stock. As part of the Auction process, NYSE Arca calculates and continually disseminates the indicative match price, indicative match volume and auction imbalances. These values are disseminated to the Arca Book.

Determining Closing Auction Price

Until the time the Closing Session is run, orders entered in core session will continue to trade in the core session. Market On Close (MOC) and Limit On Close (LOC) orders that add to the imbalance may be sent up to 3:59:00 pm ET. Any imbalance may be reduced by new orders entered on the side of the market opposite the imbalance. At 4 p.m., all orders for Closing Auction in addition to all orders in NYSE Arca Book will be in Closing Auction.

The NYSE Arca Closing Auction accepts all live orders in the Core Trading Session as well as Market on Close, Limit on Close and Auction Only orders. All trades are reported to Consolidated Tape.

We welcome your questions in the Comments box below, or contact your Relationship Manager. Thanks for helping us get the NYSE Arca auctions off to a very successful start!

Allow me to introduce myself. My name is David Weiss, I am VP of Connectivity for NYSE Euronext. I am an NYSE Arca “lifer” and have been involved in the evolution of the Arca electronic platform. For the last 10 years I have been responsible for getting our client base connected to the Exchange. I have also been involved in developing new functionality and technologies on the NYSE Arca platform. I will be blogging on things related to new technology and functionality on the NYSE and NYSE Arca platforms. My plan is to spur discussion on the direction of our platforms and to solicit feedback on what we can do to make things better for you.

As a topic for my first post, I will explain what ArcaDirect is and why it has become popular among our high frequency trading customers.

ArcaDirect is a platform we developed several years ago in response to feedback we got from our clients. They were paying an arm and a leg for bandwidth as a result of increased message rates and relatively large FIX messages. ArcaDirect is a proprietary order entry platform which uses a fixed-length protocol very similar to our internal messaging protocol. The result is very small messages (10 times smaller than a standard FIX
message) that don’t require a whole bunch of translation before being delivered to our matching engines. These efficient, smaller messages result in a system that has more throughput and lower response times.

Throughput and response times:

FIX: 2,500 messages per second; 2 millisecond acknowledgements
ArcaDirect: 5,000 messages per second; 700 microsecond acknowledgements

Currently, ArcaDirect can be used to enter orders into the NYSE Arca equities, NYSE Equities (Using the PO+ order type), NYSE Arca Options, and NYSE Amex options market centers. There are plans to deploy ArcaDirect for order entry into the Universal Trading Platform, which will be deployed globally on all NYSE Euronext exchange platforms. This modified ArcaDirect platform will be called UTP Direct. We are confident that it will be adopted by many high-frequency traders globally as an alternative to our standard FIX connectivity.

If you are a high-frequency trader or are simply interested in the fastest access to the NYSE Arca platform, you should consider using ArcaDirect.