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					Security Traders Association

         Summer 2008

            August 2008
August 2008
       STA Special Report
• Published in May 2008
• Distributed May-June
• Well received in Washington
• Positive industry comments
• Refreshes and enhances STA brand in
• Received extensive media coverage

                 August 2008
     Media Coverage – STA Special
•   Wall Street Journal
•   Wall Street Letter
•   Traders Magazine
•   Advanced Trading
•   Securities Industry News
•   Bloomberg
•   Pensions & Investments
•   Bobsguide
•   Global Investment Technology
•   Canadian Investment News
•   BNA Securities & Regulation Report

                            August 2008
Special Report Focus

    » Volatility

    » Technology

    » Exchange Structure

    » Regulation

              August 2008
Structural Changes Contributing to
 • Increased Number of Hedge Funds and
   Assets controlled by Hedge Funds
 • The advent of 130/30 Funds
 • Decimalization
 • The Explosive growth of derivatives usage
 • Technological Advances
    – The NYSE Hybrid
        • Reduced Liquidity provider of last resort participation
    – The growth of Algorithmic Trading

                           August 2008
Exchange Structure
 • For Profit Exchanges

 • Alternative Liquidity Pools

 • The Competitive Opening

               August 2008
  Changing Relationships
SEC Chairman Chris Cox recognized this problem in a letter to
Congressman Paul Kanjorski dated January 18, 2008, saying:

You also note that many exchanges have
demutualized in recent years and become competitive,
profit-seeking entities. I strongly agree that the
changed relationship between for-profit exchanges
and the broker-dealers that formerly owned them
requires new thinking about how best to ensure that
exchanges continue to meet the needs of investors

                            August 2008
Dark Trading…Nothing New Here
•   NYSE floor brokers traditionally only displayed a small portion of their
    trading intentions

•   Institutional participants believe that these alternative liquidity venues
    are a more efficient way to execute their orders.

•   Efficiency has come at a significant cost to transparency

•   As these pools continue to grow their absorption of orders before they
    arrive at traditional venues may lead to more fragmentation in the
    market and less robust price discovery in those traditional venues.
    Ironically the very price discovery that dark pools depreciate is the
    major externality of traditional venues that dark pools rely upon to
    price their internalized trades.

                                  August 2008
  The Opening Process

• Recent technological advances and
  exchange structure changes now allow
  venues to efficiently trade issues listed on
  competing venues.

• This could have profound implications to the
  price discovery process and investor

                    August 2008
     May 8, 2008 ADS Open
us;ADS       Alliance Data Systems Corp OI            Common Stock
- 58.130 Dn 0.100 H 59.100 L 57.690 V 116,779 08-May-08
   Price Vol-00 Exc Time      ActMMID          Price Vol-00 Exc Time      ActMMID
  58.250     2 (D)     58.180  1 (P),ex
  58.250     1 (D)     58.180  1 (P),ex
  58.250     1 (N)       58.170  1 (D)
  58.240     4 (N)       58.110  1 (P),ex
  58.240     2 (D)       58.230  1 (P),ex
  58.240     2 (D)       57.690  1 (N)
  58.240     2 (T)       57.700  1 (P)
  58.240     4 (T)       57.930 114 (N)
  58.240     1 (T)       59.100  1 (D)
  58.240     1 (T)       59.090  1 (T)
  58.240     1 (N)       59.090  1 (T),ex
  58.240     1 (D)     59.100  1 (P),ex
  58.380     1 (N)       59.100  1 (P)
  58.380     1 (N)     59.100  1 (D)
  58.380     1 (N)     59.100  1 (P),ex
  58.380     1 (D)09.31.19                     59.100      1 (P)
  58.280     1 (N)       59.090  1 (T)
  58.250     4 (N)       59.090  1 (T),T
  58.250     1 (N)
  58.240     1 (N)
us;ADS/tt/sq=1120 08-May-08 10:39 NYC        For help: /TT/? (c) REUTERS

                                         August 2008
                 STA Opening Issue
               NOT Cooperation Vs. Competition

                        Cooperative Competition
•   STA hosted a conference call to dialogue on this topic
•   General agreement that 9:30 openings are preferred – the Nasdaq
    methodology works
•   NYSE working hard to move in a similar direction
•   STA to mediate discovery of best practices for the industry, as opposed to it
    being a regulatory decision
•   Affiliates encouraged to participate in identifying best practices to resolve the

                                      August 2008
   STA’s Objective - Openings
“Develop a highly automated, highly
transparent investor friendly opening
process that preserves the robust price
discovery of today’s opening process.”

Establishing an official opening that
represents the above description and occurs
as close to 9:30:00 a.m. as practical
                   August 2008
• The Order Protection Rule
  – 17 exemptions
  – No Protection where Dark Orders are allowed
  – Growth of venues allowing Dark Orders will
    disincent Displayed Liquidity

• Market Data Fees
• Reg SHO
• Clearly Erroneous
                  August 2008
                   Market Data
• Market data fees are intended to be used by exchanges to
  pay for consolidation of the data they receive, distribution
  of the consolidated data, and market regulation.

• The pool of market data fees is significant and exchanges
  have employed a practice of rebating a portion of these
  revenues to market participants. These rebates have
  formed an important economic tool used to encourage
  order flow and thus greater market share.

                               August 2008
                Regulation SHO
•   Regulation SHO and its removal of the “tick test” for short sales have been
    demonized as the root of current volatility. However, the markets are much
    too complex for this alone to be the case.

•   STA has long held that short selling enhances overall liquidity and
    represents a valid investment alternative.

•   Market professionals have long known strategies that allowed them to
    establish positions equivalent to short sales without regard to any price

•   The SEC recognized the flaws that had rendered the price test rules
    obsolete and proactively attempted to formulate rules that could effectively
    prevent abusive short selling. Regulation SHO was the result of those

                                     August 2008
     Price Tests Will Fail
• In any event, it would be extremely difficult to
  reestablish and regulate a “tick test” or “bid
  test” in the current market structure.
• The primary markets’ volumes (NYSE &
  NASDAQ) have eroded to less than 40% and
  the quote traffic now changes at multiple
  markets multiple times per second.

                      August 2008
           Clean up the Fails
•   The other provisions of Regulation SHO, such as the positive locate
    rule and delivery requirements provisions, should be more
    aggressively and rigorously enforced.

•   Rules against collusion and manipulation need to be enforced.

•   Interpretations of the Locate provision allow registered
    broker/dealers to rely on other entities, some of which are not
    registered with the SEC, for their performance under the rule should
    be revised or rescinded.

                                August 2008
                   We Agree
House Financial Services Committee Chairman Barney Frank’s statement in a
letter to SEC Chairman Christopher Cox on April 4, 2008, that:

“Under appropriate conditions, short selling
contributes to the efficiency of capital markets.
But manipulative or collusive short selling
threatens the market’s integrity.”

                               August 2008
August 2008
August 2008
 You Can Help

         August 2008
• STA leadership conducted visits on June
  3-4, 2008
• 14 appointments – SEC, House, Senate
• Major points:
  – Special Report well received
  – Equity markets functioning well
  – Focus turning to options
  – Reg NMS headed toward options
                    August 2008
• Affiliate visits to elected officials successful
  at May conference but under utilized
• A powerful resource – highly
• Affiliates encouraged to plan ahead for
  May 5-6, 2009

                     August 2008
         Education (STAU)
• A critical new development is about to be
  announced by Education chairman Lisa
• STAU and the New York Institute of
  Finance have entered into an exciting
  development which will provide
  exponentially greater opportunities for STA
  members – reasonably priced – user

                   August 2008
        2008 STA Elections
• The process has commenced
• Full information sent to Affiliates
• Process enhanced to ensure the best
  possible leadership for STA
• AP’s invited to contact STA Governors or
  Nominating Committee members with any

                  August 2008
           STA’s 75th Annual
• We are excited out October 15-19 – our
  75th Anniversary. Your presence in
• Highlights include
  – Hedge Funds – Richard Baker – CEO Managed
    Funds Association
  – Options – Top flight update on the fastest growing
    equity area.
  – Regulation – SEC and FINRA commentary

                        August 2008
                STA’s 75th
Buy-Side Focus – Free registration to qualified
buy-side members. (Recommended as a
recruiting tool for new members.)
  • Two 90 minute breakouts for buy-side only
    featuring topics targeted by STA’s Institutional

                      August 2008
               Thank you
• The Officers and Governors of STA are
  most appreciative of the efforts of our
  Affiliates. You are doing much good
  blending business, education and charity,
  while at the same time preserving the
  critical elements of people and

                   August 2008