The storm troopers have arrived.
The Street’s high-speed stock traders are being dumped overboard as more layoffs and closures rock the thinning ranks of demoralized equity desks.
Slammed by stricter regulatory enforcement and mediocre volume, the US electronic stock-trading business continues to retrench — and it’s taking down some high-profile stars.
Citigroup is one of the latest victims. Last week, the bank confirmed its plan to shut down its private electronic stock-trading network, LavaFlow ECN, early next year.
LavaFlow agreed to pay the Securities and Exchange Commission $5 million, including a $2.85 million penalty, on charges it failed to protect sensitive information. And this past October, Wells Fargo said it was shuttering its “dark pool” alternative trading system (ATS).
Both Citi and Wells cited practical business realities for their exit. But people familiar with the markets said they aren’t fooled — the intense US regulatory focus on high-frequency trading played into the Citi and Wells decisions, they said.
“What do you expect them to say?” one well-connected trading exec, who does not work for either Citi or Wells, told The Post. “My experience is that a regulatory action does cause Citi to look at a business line and ask, is it really important enough to take the extra scrutiny from regulators and the media?”
There’s another open wound. Even as the Dow hits record highs, stock-trading volume has contracted sharply since peaking in 2009.
High-frequency traders then accounted for 61 percent of overall trading activity, compared with under 50 percent today, according to the Tabb Group.
Hundreds of once-highly paid stock traders have been made redundant as margins, subdued volatility and lower volume crimp profitability. “Unless a big uptick in volume comes along, I could see where certain ATSs may find themselves squeezed further — and having to scale back their operations and headcount,” said George Hessler, CEO of the Deep Liquidity ATS, which is bravely expecting to launch next year.
The two high-speed ATS operators are small fry compared to the largest, Credit Suisse’s dark pool, which can bang out well over 300 million shares in a good week.
Wells was happy to eke out 7 million to 8 million shares weekly. But the slaughter is across the board. The giant BATS Global Markets, reportedly facing a record $12 million to $13 million fine over how it handled customer orders, is planning to fire 56 workers in the New Year.
BATS’ former president, William O’Brien, left under a cloud last summer as the SEC investigated potentially lethal “orders types” offered by Direct Edge and others, including the New York Stock Exchange. (Direct Edge merged with BATS last year.)
Street execs say law enforcement is sapping morale — and resources. High-speed traders are accused of ripping off ordinary investors with complex business practices and dodgy arrangements. “The regulatory efforts on market fairness and best trade execution are only now beginning to catch up as a result of being back-burned due to significant work with Dodd-Frank and other congressionally mandated initiatives,” said industry consultant Chris Nagy.
Investigations have cut a broad swath. Credit Suisse has come under the microscope. The Financial Industry Regulatory Authority fined Goldman Sachs $800,000 for failure to prevent so-called trade-throughs on its SIGMA X alternative trading system. Goldman returned $1.67 million to customers. New York Attorney General Eric Schneiderman has sued Barclays on allegations of questionable favoritism toward high-speed traders in its dark pool. And SEC Chairwoman Mary Jo White entered the fray last summer, targeting these gunslingers for stepped-up enforcement.
Some firms have reshuffled management in light of the tougher environment. Last week saw the departure of Jose Marques, global head of electronic equity execution at Deutsche Bank in New York. The bank declined comment. UBS, seeking to bolster its global equities business, is transferring Mike Stewart, its current head, to a new role in wealth management in January.
“As the number of broker dealers and trading volume have declined over the past several years, regulation continues to be a growth area — it’s a curious thing,” said the New York-based Hessler. “Maybe eventually we will need to take a look at the proper amount of regulation given the current market maturity and volumes.”