Recapping STAC

For reasons that will forever escape me, the Securities Traders Association of Chicago (STAC) chooses to hold its big, annual meeting in Chicago during the first part of January. Maybe it’s to get a good start to the New Year or maybe it’s because people need something to do in the middle of the winter. It certainly isn’t because of the weather.

That being said, the conference had a number of compelling panel presentations and featured a rousing keynote from one of the most loved sports figures in town; Chicago Cubs Chairman, and CEO, Tom Ricketts.

Day One: Dodd Frank and the Tick Size Pilot

In addition to panels on equity derivatives, women in finance (see Tidbits below), and risk management technology, two standout panels of the day were on Dodd Frank and an assessment of the equity market Tick Size pilot results.

The “Pending Dodd Frank Changes” panel was instructive as a template for how many change initiatives are likely to unfold with the incoming administration. As Pat Hickey of Optiver pointed out, the very title of the panel was misleading because nothing definitive is pending to change the Act. In addition to Hickey, the panel included Mark Longo of the Options Insider as moderator, Paul Jiganti from IMC, John Hague of RSM, and Joe Corcoran from OCC. While all of the panelists were generally negative on Dodd Frank and could name specific policies that had the most deleterious impacts on the market, no one was so bold as to predict that wholesale changes will be coming. Many pointed to Jeb Hensarling’s CHOICE Act as a likely source of changes, while Jiganti posited out that it’s most likely that changes to Dodd Frank will be made to policies that don’t even touch the derivatives and trading business. If that is the case, it will once again prove that despite big talk and good intentions, regulation is usually a one-way street: once it’s in place, there’s no going back.

The most heavily attended session of the day was ‘Execution Quality – Post Tick Size Pilot’¹, and for good reason. The press was excluded from the panel and to good effect: the gloves came off and the panelists gave a brutally frank assessment of how the pilot is doing in its first three months. Interestingly, the concurrence and divergence of opinion even in this small group of six panelists was emblematic of the current debate regarding market structure as a whole: there is agreement on the fact that there are market conditions that are problems, such as decreasing liquidity in many individual markets, but the proposed remedies are as different as noses (everyone has one and they all smell!). At the end of the day, no one is an enthusiastic supporter of the Tick Pilot and many, if not most, feel that it has done more harm than good. It remains to be seen if the new administration does anything about it, with the general consensus being that it’s more likely that the Tick Pilot will be extended beyond its intended two year run than it is that it will be ended early.

Day Two: Trading Under Trump and Innovation in Technology

Day One of STAC ends with an all-star band of industry musicians, the LaSalle Street Blues Band, playing until 1:00 in the morning. Consequently, day two starts a little slowly and builds from there.

The first panel of the day was on a theme that is sure to be a part of many conferences this year, Trading Under Trump. Moderated by Drew Mauck of 3Points Communications and featuring Deanna Lahre from Starfutures Inc., Bob Iaccino from Path Trading Partners, the Chicago Tribune’s Michael Lev, and Lanre Sarumi from Level Trading Field, the panel tried to distill some method from the madness. Some of the highlights included:

• Iaccino suggested that Trump is skillfully picking fights that he can win in his tweet storms, much like a rising boxer picks matches with a “tomato can”.
• Trump’s use of Twitter is right in line with other Presidents use of technology to reach the public: Washington with his farewell address, FDR and his radio fireside chats, and Kennedy’s use of TV, according to Michael Lev.
• There was a split decision on Secretary of State nominee Rex Tillerson, with Lahre liking his appreciation for global commerce as a driver of policy and Sarumi finding his confirmation testimony to be lacking.
• An expectation that the reaction to Trump’s tweets will lessen over time, much the way that the market reaction to terrorist attacks declined in the early 2000’s, as voiced by Iaccino.

Fintech is ascendant and the final panel of the day was Innovation in Technology. The panel featured Feargal O’Sullivan from USAM Group as moderator, Brian Clark of Ascent Technologies, Tim Hogan from CrowdSourceFunded, Thomson Reuters’ Scott Manuel, Don Ross from PDQ / Coda Markets, and Joe Wald of Clearpool. Each of these enterprises deserves a look but, for the sake of brevity, three themes continually came up: cloud, blockchain/distributed ledger, and AI. Here’s what each panelist predicted we will be talking about in three years:

• Clark: AI, particularly because the regulatory sandbox has “3,200 sides, not 4”
• Hogan: the evolution of the U.S. economy from a services consumption economy to a services ownership economy
• Manuel: huge investments in AI across all verticals
• Ross: the unleashing of AI due to market structure improvements from Coda and others
• Wald: the overhaul of Reg NMS

Keynote: Tom Ricketts, Chicago Cubs Executive Chairman and Incapital Co-Founder

While the Tick Pilot panel attracted a big crowd on day one of the meeting, the appearance of Chicago Cubs Chairman Tom Ricketts had the room packed to capacity at the end of day two. Everybody loves a winner.

Ricketts gave an entertaining yet thorough account of how the Cubs made it to becoming World Series champions. The way they turned things around in 5 short years can be distilled down to several central tenets:

1. Know your business: Ricketts took the time to get to know every aspect of the business, from the training academy in the Dominican Republic to the player facilities at Wrigley Field. From there, they improved in every facet of their operation.
2. Know what drives success: The Cubs adopted the goal of building a foundation for sustained success and to do this they put a premium on data and analysis. They learned, for example, that it’s better to make the playoffs as many times as you can than it is to have the best record and that you can’t simply buy your way to a championship.
3. Hire the best people and get out of their way: This doesn’t mean not being part of the conversation but it does mean that you have to let your people have the freedom to do what they do best. Simple but so often ignored.
4. Culture means a lot: So many conversations came down to the chemistry that players and other personnel brought to the team. Values mean a lot and even more so for a group of people that have to eat, travel, and work side by side everyday for seven straight months!

In the Q&A session, Ricketts was asked if there was one thing in the championship celebration that was the best for him. He told the story of riding on the top of a double decker bus in the victory parade and seeing a young girl sitting on top of what was probably her father’s shoulders holding a sign that read: “We did it Grandpa”. That, to him, encapsulated how much a Cubs World Series win meant to so many people.

Tidbits

• Jeff Chang of CBOE Vest presented a fine example of the best of fintech from his spot on the Equity Derivatives panel. Vest comes at investments from a different angle or, as Chang said, they offer alternatives for those who “want the cake, not the recipe; want the ¼ inch hole, not the drill.”
• Jessica Darmoni led a panel on Women In Finance, which had several highlights:
  • Margaret Nagle of Wolverine Execution Services (WEX) described how the Women of Wolverine (WOW) group addressed the conundrum of “you can’t be what you can’t see” by supporting each other across departments and disciplines
  • Emily Kasparov of the Chicago Stock Exchange (CHX) exemplified how millennial women are creatively and forcefully powering forward
  • Carolyn Leonard of DyMynd and Kristina VanLiew of Greystone Consulting demonstrated how paying attention to the needs and perspectives of women can pay off in big ways. Very inspiring.

¹ Tick Size Pilot Program
On May 6, 2015, the Securities & Exchange Commission (SEC) issued an order approving the National Market System (NMS) Plan to implement a Tick Size Pilot Program by the National Securities Exchanges and FINRA. The Order approved the NMS Plan for a two-year period and officially commenced on October 3, 2016.

The Tick Size Pilot is a data-driven test to evaluate whether or not widening the Tick Size for securities of smaller capitalization companies would impact trading, liquidity, and market quality of those securities. The pilot consists of a control group and three test groups, with each test group having approximately 400 securities.

The groups are defined as follows:

• The control group is quoted and traded at their current Tick Size increment.
• The first test group is quoted in $0.05 increments, but continues to trade at their current price increment.