Market Making function being removed from financial institutions which hold client funds

In a piece by Bloomberg today they talk about large financial institutions removing the market making function within their business, most recent is B of A. We have seen this trend within the last few years in the retail Forex space as the conflict of interest is too much to overcome sometimes creating a barrier of trust between broker and trader.

The article states:

– It was announced that Bank of America Corp. is dismantling an electronic market-making unit created last year to serve the lender’s Merrill Lynch wealth-management division, said two people with knowledge of the decision. Increased regulatory scrutiny of U.S. equity markets and managers’ concerns for the potential perception of a conflict of interest killed the project, said the people.

– “Bank of America’s decision doesn’t necessarily indicate similar businesses will also close…” said Joe Saluzzi, co-head of equity trading at Themis Trading LLC in Chatham, New Jersey.

– Citadel. KCG, Citigroup Inc. and UBS AG are among the biggest firms that execute stock trades for retail brokerages.

Brokerages serving individual investors typically don’t execute clients’ orders and prefer to sell that right to third-party specialists such as Citadel LLC and KCG Holdings Inc. (KCG), which view the orders as valuable to trade against.

Why is closer scrutiny being lobbied at brokerage firms and exchanges? It remains mostly a mystery to how the infrastructure for trading works for your average retail trader, but for the first time in the electronic trading age, people want to know what is happening behind the scenes when their orders are placed.

– The fairness of stock trading has been under unprecedented scrutiny since the March 31 publication of “Flash Boys,” the Michael Lewis book that argues the stock market is rigged.

You can view the whole article here.

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