During the past two years, Clarke Capital Management, Inc.
(CCM) has
experienced a significant growth in assets under management in its
futures programs. As our assets have grown so has the size of our
orders. Also over the past several months we have seen many large and
volatile moves in a number of the futures markets that we follow. We
have noticed an increase in the frequency and magnitude of "temporarily
discontinuous" markets. These are markets where, due to news or
other events, normal amounts of bids and/or offers disappear for a given
period of time. Large price gaps to distant new price areas take place
with little or no trading at intervening prices.
Our orders, because of their size and
their placement with multiple brokers on the floor or on an electronic
trading platform, carry with them the possibility of “moving the
markets.” This is exacerbated in these times of discontinuous markets.
That is to say, they have the ability to influence the price discovery
process, thereby distorting a commodity’s value in any given market.
This distortion effect can be either short-term or long-term, depending
upon other factors. Our ability for us to continue to deliver the
performance our clients expect of us is impacted somewhat by price
movement driven by our order size, their style of placement, and
the more frequent and larger temporarily discontinuous markets that we
are seeing.
We at CCM have given this situation and how we should respond to it a
great deal of thought.
The emergence and growth of electronic markets, while presenting new
challenges, has also created new opportunities for us to take advantage
of a faster, cleaner, more liquid marketplace than the trading pits of
old.
We have come to the conclusion that by
employing multiple brokerage firms to execute our orders, we are losing
the battle for market transparency, an important ingredient for the
successful and timely execution of our orders.
By simply having our orders visible in the market, awaiting execution,
we put ourselves at a distinct disadvantage to those who make their
living “knowing what every other market participant wants to do.”
Also, consistent disparities in
order fill prices between these execution desks can have the effect of
creating an “uneven” playing field for all CCM clients as a group.
For these reasons, among others, CCM has decided that it would be in the
best interests of our clients to consolidate our order execution under
one roof. We gave serious consideration to building our own in-house
execution staff. But after reviewing the situation we realized that we
already had a strong relationship with one of the premier execution
teams in the futures business at one of the larger brokerage firms that
we are using. We have reached an agreement to work closely with staff
personnel dedicated to handling CCM's order flow. We view this a
superior option to building our own in-house trading staff.
Essentially, we are sub-contracting out to a group that is
already in place; a talented group that has worked together for many
years and with which we have a smooth and professional interaction.
We understand that some clients
will be charged a give-up fee for order executions filled by an FCM
other than their own. We are confidant that the attention our orders
will receive (by way of better fill prices and less price-slippage) will
more than offset any give-up fee charged to the client’s account.
