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Pipeline Moves to Divest Milstream

Following a management shakeup, Pipeline acknowledges that buy-side customers are not comfortable trading in the Block Market ATS as long as Milstream, the controversial trading affiliate, is given access.

Moving quickly to address the controversy swirling around its dark liquidity pool, Pipeline Financial Group said that subsidiary Pipeline Trading Systems will no longer give its affiliated trading entity, Milstream Securities, access to Pipeline's Block Market.

In addition, Pipeline has decided to divest itself of the Milstream operation, which operated as a subsidiary of the parent company.

"A majority of Pipeline clients have told us they are not comfortable trading in the Block Market as long as Milstream is given access," stated Jay Biancamano, Pipeline's recently-named Executive Chairman in today's release.

The statement continues: "We apologize to other clients who have been comfortable accessing Milstream-provided liquidity by trading in the Block Market, but we wish to meet the needs of the majority of our clients, so Milstream's subscription to the Block Market has been terminated, and we will be divesting ourselves of the Milstream operation."

The Milstream operation has been at the center of storm since Oct. 24 when the Securities and Exchange Commission settled charges with Pipeline Financial Group over failing to disclose to customers that the vast majority of their orders were matched against liquidity from the wholly owned trading affiliate and not from natural counterparties as advertised. The practice had been going on since 2004 when Pipeline's alternative trading venue was launched.

According to the SEC's administrative order, Milstream, an automated trading firm, sought to trade ahead of customer orders on the same side in other venues, a practice known as prepositioning. They would predict on which side of the trade the customer orders resided and would then trade on the same side as those orders in other trading venues before filling them on the Pipeline ATS.

The news of Milstream's divestment follows yesterday's announcement on the appointment of Biancamano as Executive Chairman, effective November 16, as well as the resignation of Fred J. Federspiel as CEO on November 13, and the recent retirement of Alfred R. Berkeley III, who was chairman of the company. Federspiel, a nuclear physicist and Berkeley, a former president and vice chairman of the Nasdaq Stock Market, aggressively marketed the ATS as a way to protect institutions against information leakage and interaction with predators, such as high-frequency trading firms who are able to risk a small amount of capital to probe dark pools and jump in front of their large orders.

The company paid a $1 million fine to settle the charges on violating Regulation ATS and client confidentiality, while both Federspiel and Berkeley each had to pay a $100,000 fine to the SEC.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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