Risk Management

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David Downey
David Downey
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Swimming With Sharks Is a Dangerous Pastime

After a sensational news program said the entire US equity market was rigged, there was an inevitable lawsuit and OneChicago got caught in the shark attack.

Swimming with sharks is a dangerous pastime. It is imperative to be constantly aware of your surroundings and take steps to avoid them if possible, as they are often indiscriminate hunters in search of any prey that splashes around in the water. If you do find yourself in an environment full of sharks, you should take every measure to not look like food, especially when their killer instincts are elevated by the presence of blood. You can’t blame the sharks as it’s simply in their DNA.

Similarly, it is wise to protect yourself in an environment where class action lawyers, driven into a frenzy due to sensational -- bordering on unprofessional -- reports delivered on a popular television show claiming that the entire US equity market is rigged, decide to take action. Again, you can’t blame the lawyers as it is simply in their DNA.

My entire career has been in the financial markets working for firms that were market makers in equity and equity derivative exchanges worldwide, as well as an online brokerage offering similar global access. I currently reside at OneChicago, which is an innovative equity finance exchange regulated by both the CFTC and the SEC. I may not have written a book, but markets are my passion and I study them every day. With this background I can confidently say the US exchange traded equity and equity derivative markets are not rigged.

Subsequent to the sensational news program there was the inevitable lawsuit. This lawsuit was very expansive in an apparent attempt to corral any SEC registered exchange, large prime brokers, and most of the more well-known trading groups known as high frequency traders. OneChicago was incorrectly caught up in the frenzy as it was assumed that we had a full Section 6 registration status as a National Securities Exchange at the SEC. We don’t. OneChicago is a Designated Contract Market under the CFTC and is noticed registered with the SEC under Section 6(g) of the Act. Furthermore, none of the large prime brokers nor any of the high frequency traders named in the suit have ever had electronic connections to our exchange. Clearly this was a case of mistaken identity.

Lawyers have another side to them. They can be convinced by the facts and overwhelming evidence. OneChicago simply reached out to the plaintiff’s attorneys and explained that users of our Single Stock Futures (SSF) are less trader oriented and much more investor oriented. Users of SSFs are able to carry equity positions on much more favorable financing terms over long time frames rather than obtaining financing from their brokerage firm (this is why none of the firms connect). A few simple statistics later and my faith in the legal system was restored as we came to an agreement to take the appropriate steps to have OneChicago dismissed from the action.

So remember, when you find yourself swimming with sharks, it's best not to look like a seal.

David G. Downey joined OneChicago as CEO in 2007, where he is responsible for the growth of the exchange. Previously, he spent seven years at Interactive Brokers, a provider of direct global access trade execution and clearing services to institutional and professional ... View Full Bio
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Byurcan
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Byurcan,
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5/22/2014 | 12:11:06 PM
Intereting tale
Thanks for sharing, gives some insight into the complicated world of capital markets.
Nathan Golia
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Nathan Golia,
User Rank: Author
5/22/2014 | 4:39:22 PM
Another animal metaphor
Scapegoating — as old as time itself, especially in business. Do you think the legal action, however, will do anything to drive any changes in the markets to reverse the view that it is rigged?
Jonathan_Camhi
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Jonathan_Camhi,
User Rank: Author
5/23/2014 | 12:26:37 PM
Re: Intereting tale
I think this definitely highlights the misunderstanding around equity and derivative markets that can com from the markets just being so complex for outsiders to understand.
Becca L
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Becca L,
User Rank: Author
5/30/2014 | 12:46:00 PM
Re: Intereting tale
Jonathan, so right. There's so much confusion around these debates on every level. Lawyers specialized in this space are likely few and far between, and perhaps smart enough not to have put this kind of case together.
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