Friday, December 12, 2008

Fragmentation, Burgundy, NZX, CESAME, Bondi results

G’day All,

Hectic week, so afraid I have not kept up with the news.

Just a quick word on fragmentation. Yes, there is an arms race going on out there. No, maybe MTFs are not the right people to own SOR Technology. Best execution. I find it pretty wild to suggest that some SORs include the post trade or elements of the clearing and settlement cost. I mean how much latency does that add? (especially as different CCPs have different volume bands – so you need to make some assumptions) along with the more material fact that settlement is a net value and trades are charged gross to execute and clear. On a post trade basis, we need to look at the costs to the industry. Even with todays technology, by the time you balance the respective post trade models and tariffs the trading opportunity would be lost. If there is a vendor out there, factoring in C&S, please give me a demo. If it works, I’d love to sing your praises.

Market Share Reports:
JPM: Where is your weekly fragmentation index available?

Other stuff:
IBM: STG 200 million is too big a material outsourcing in my view. I don’t expect this deal to be re-newed. As for Chile, the exchange moves up to 3K trades per second w/ IBM. Chi-X is running at 115K orders per second. (more than 30 times)
NZX: JSE looks like giving a stocking filler, whilst their IT partner adds staff.
EC: CESAME report on the six Giovannini Barriers to post-trading

What you could buy today…if you hadn’t spent the cash on ABN. Wow.
One from my bro: I liked the Dryblower view.

Roles: I got a note from an agency this week looking to fill clearing sales (1) and relationship management (2) roles in UK.
I don’t think any pay over 90K STG. If you have interest I’ll forward the agents details for you to register.

Never enough time, but slowly I’m trying to spend some time on:

I’m still alive after the Bondi / Bronte swim. As one reader commented, fortunately I didn’t lose one arm to a shark, or I’d still be swimming in circles.

Sons b’day this week-end. So pizza and pool party for me!

Good w/end all,


FSA will not stand in the way of LSE’s dark order plans

Two MTFs could fail in 2009 - NET2S

Chi-X introduces historical data analytics tool

AES could escape Credit Suisse cuts
(wonderful news!)

ICAP enters dark pool market despite volume, regulatory concerns
….anyone know where I can see the… J.P. Morgan’s weekly fragmentation index ????

SIX x-clear to start new year with price cuts
(this is good news and I think a step forward for comparability too).

Burgundy welcomes DnB NOR as shareholder
(Burgundy is set to launch in the first half of 2009. The platform’s other shareholders include Avanza Bank, Carnegie & Co, Danske Bank, Evli Bank, HQ Bank, Kaupthing Bank (Sverige), NeoNet, Nordnet, SEB, Svenska Handelsbanken, Swedbank and Öhman.
10th Dec… zero yield.
Market Snapshot: Stocks Fall as Investors Flock to TreasuriesInvestors bought $30 billion of T-bills at a yield of 0%, indicating continued fear in the market. Poor earnings reports weighed on sentiment.

INSTINET EXECUTION DATA SHOWS 'MTF EFFECT' ON EUROPEAN SHARE TRADING The success of new alternative European trading venues in winning business away from incumbent domestic exchanges has been demonstrated in the latest batch of execution figures released by Instinet Europe covering the 12 months since the introduction of the Markets in Financial Instruments Directive (MiFID).
Full story:

BIG BLUE SCORES WITH FRIENDS PROVIDENT AND THE CHILEAN STOCK EXCHANGE UK life and pensions outfit Friends Provident has inked a 10 year, £200 million, IT and infrastructure services outsourcing deal with IBM.
Full story:

JSE WINS SUPPORT FOR REVISED BOND EXCHANGE TENDER The Johannesburg Stock Exchange has reached agreement to buy the Bond Exchange of South Africa after raising its initial offer price by 39% from R173 million to R240.58 million.
Full story:


EC report on cross-border securities transactions clearing and settlement published:
The report provides an overview of the work done on the six Giovannini Barriers to post-trading and of the state of play on nine Barriers attributed to the public sector.

Nomura to launch European electronic trading service in early 2009

FINANICAL NEWS: Europe’s New MTFs Pass the Stress Test By Tom Fairless 12/8/08Europe’s stock markets have had a rough year. Little more than 10 months after new laws threw open the continent’s equities trading infrastructure to competition, a series of tumultuous news forced the nascent system through a brutal initiation ceremony.
The collapse of Lehman Brothers, government bailouts of US insurance giant AIG and mortgage lenders Fannie Mae and Freddie Mac, and the fire-sale of Merrill Lynch triggered a frantic rush by investors to offload assets.
The resulting surge in volatility constituted a severe test for an infrastructure that has been profoundly remodelled since November, when the EU’s markets in financial instruments directive ushered in an array of new multilateral trading facilities and anonymous trading venues, or dark pools.
Alasdair Haynes, chief executive of broker ITG International, said: “There has been more message traffic than at any other point in history. The new system has been stress-tested very early in its life.”Nevertheless, observers feel the infrastructure coped well. George Andreadis, head of advanced execution services liquidity strategy at Credit Suisse, said: “The systems performed well. Most multilateral trading facilities built their systems from scratch, so they had a lot of capacity to cope with the higher volumes.”Some observers argue that, far from weakening the system, the MTFs provided additional trading capacity that relieved the stress on primary exchanges. Peter Randall, chief executive of MTF Chi-X Europe, said: “Without the extra capacity provided by the MTFs, the situation would have been far worse.”The network that links market participants with new and old trading venues also coped well with the massive volumes, according to Emmanuel Carjat, chief executive of Atrium Network, a trading software firm.He said: “We remained well within our capacity limits because we built the infrastructure to handle huge US-style loads.”National stock exchanges, for their part, were boosted by recent investments in technology. Last year, the LSE completed a four-year, £40m (€47m) programme to raise capacity and slash latency, turning the market into what its chief executive Clara Furse has called “the most advanced technology platform of any central marketplace.”Andreadis said: “The LSE instituted a massive upgrade last year, so was pretty well-placed to cope with the increase in volumes.”That investment did not, though, avert the one serious failure to befall Europe’s trading infrastructure during the recent turmoil.On September 8, as global trading activity surged on news of a US decision to bail out Fannie Mae and Freddie Mac, a system failure at the LSE cut off trading for more than seven hours.Crucially, traders put their efforts into restoring links with the LSE rather than switching to the new venues, demonstrating the market’s continued reliance on the primary exchange. One reason for this suggested by market participants is that liquidity at the new venues is driven largely by statistical arbitrage, which involves trading on price discrepancies between the LSE and other platforms.Another theory is that firms have been slow to link up to the new venues because they had grown used to the status quo. Others believe rival trading systems were unable to price stocks accurately without the primary market.Haynes said escalating fear caused traders to shun MTFs in favour of traditional exchanges. He said: “The market did not move away from the LSE when its system crashed because people go to safety in times of turmoil.”However, others see no evidence for such a shift. Richard Balarkas, chief executive of agency broker Instinet Europe, said: “The price improvements offered by MTFs remained attractive to many players.”Meanwhile, the post-trade equities infrastructure – loosely, clearing and settlement systems – held up well during the crisis, although gaps in the system emerged as participants scrutinised their trading more closely. One such gap was the absence of centralised clearing in Scandinavia, which heightened counterparty risk on some exchanges, according to Balarkas.Nasdaq OMX plugged this gap in October, taking a 22% stake in European Multilateral Clearing Facility, the clearing house owned by troubled Dutch lender Fortis, and agreeing to use EMCF to clear trades in its Nordic cash equity markets.Another crack in the post-trade infrastructure involves the reporting of off-exchange trades. Mifid requires participants to report all such transactions, but varying interpretations of the rules means they do so at different times and in disparate locations, making it difficult to get a view of the whole market.Andreadis said: “There have been some issues with how to interpret Mifid’s post trade transparency requirements, but this is by and large being sorted out by the market.”There are those among the trading community who believe lessons can be learned from the US to create a national best bid and offer, whereby all platforms send data to a single consolidated tape. The FSA is in talks with UK investment banks and fund managers to address this issue, according to sources close to the matter.A further issue to emerge during the bout of volatility was the lack of harmonised regulation in key areas, such as short sales, according to Randall. He said: “Changes to the rules that restricted short-selling were not introduced on a pan-European basis, which led to uncertainty.”Overall, participants feel the restructuring of equities markets has increased their ability to withstand external shocks. Haynes said: “My gut feeling is that market fragmentation helped the situation. I am still a massive advocate for competition.”Nevertheless, the unusual conditions make it difficult to judge whether some of the new players’ business models are viable in the longer term. Haynes said: “We are right in the middle of something the markets have never seen.”The MTFs may have held up well simply because they bought in their technology from elsewhere. Balarkas said: “The underlying technology is not necessarily new just because the name on the brass plate is new. MTFs may have bought in their technology.”There are also outstanding questions around how to calculate indices such as the FTSE 100 if the LSE doesn’t open. Balarkas said: “It is surprising how slow the market is at thinking through such issues.”

A variation on this stat has been doing the rounds for a few weeks now, so forgive me if you've seen it before. I picked this up from the aptly-named
Doomsday Report blog.
In October last year, RBS paid $100 billion for ABN Amro (80% cash), and faced a fair amount of shareholder opposition to the valuation. If they were to use that money today, according to current market caps, they could buy the following:
Morgan Stanley: $16.3 billion
Goldman Sachs: $26.2 billion
Merrill Lynch $19.3 billion
Deutsche Bank: $17.4 billion
Barclays: $12.9 billion
And still have enough spare to change to buy the entire auto industry!

A number of people have asked me about Markit’s launch of its fragmentation analysis (see Reading this it seems that Markit has a different (although still valuable) objective from our own. To quote: “The service ranks brokers on each European trading venue, stock or index according to the volume and value of their trades”. If I have understood this correctly then it will show the market share that brokers have on different venues and indices which is completely different from measuring liquidity fragmentation across the actual venues themselves. Isn’t this basically the same as AutEx BlockDATA® whose website says it “is the most comprehensive tool available for gauging broker market share in global equity markets. AutEx BlockDATA® ranks brokers based on trading activity by volume or value traded in selected stocks, markets, or industries.”?
I guess fragmentation fever has resulted in some slight confusion about the different goals of our respective offerings. I can see how Markit’s service will help the buy-side better understand the venues that brokers are trading on but I don’t see how it helps the trading community “identify pools of liquidity” given that it ignores the venues themselves and only covers 60% of the traded volume. Still, I would certainly like to find out more - if anyone has a view then please let me know.
You may view the latest post at

Fidessa Fragmentation Index has posted a new item, 'FFI extends into the 250'
Thanks to the Xmas elves at Fidessa Labs working overtime, we now include coverage of the FTSE 250 which many of you have requested via email. Having had a quick look this morning it’s interesting to see that Chi-X is making a big dent in the 250 (as well as the FTSE 100) and that, whilst their numbers are relatively low, BATS and Nasdaq OMX are beating Turquoise into 4th spot on FTSE 250 stocks. Turquoise on the other hand seems to be keeping its gains made recently in FTSE 100 stocks.
Looking at the FTSE 250 data today provides another reminder of one of the central themes of this blog - that MTFs need to compete through specialisation not price wars. These ideas are developed further in the excellent Crossing the Chasm series of books by Geoffrey A. Moore which have been required texts for all of us here at Fidessa Towers this year. There are a lot of firms with deep pockets backing the MTF community and so being cheaper looks like a long and very expensive strategy. Differentiation, on the other hand, has been the way forward for many successful technology companies which, by the way, is the business that the MTFs are in. In fact, I was chatting yesterday about this with the CEO of an MTF who said that each venue needs to develop its own “personality”. This will then help the trading community know where to direct different types of flow. Anyway, I promise I won’t bring this point up again but I suspect that once these personalities hav e emerged we will all have a much clearer understanding of fragmentation.You may view the latest post at

IF DRYBLOWER believed the gloomy analysts at Merrill Lynch, the mining world faces even tougher times next year. If he believed the more optimistic analysts at Goldman Sachs, there is a light on the horizon. His solution to this investment banking credibility dilemma is to top up his glass.
He’s not alone. There is profound confusion about which way the world will jump in 2009 with only two things certain.Firstly, that not much is going to happen for the next few months because we are now in the eye of the storm, and secondly that a glass of something cold helps dull the sense of anxiety.Before slipping into a comfortably dull mental condition known by its medical name of “who gives a rats” Dryblower did take the time late last week to try and find some sort of consensus among the world’s financial experts. He failed.Not only are we in the eye of the storm, but the outlook is a bit like the eternal search for beauty, it’s in the eye of the beholder.In other words, everyone seems to be fumbling in the dark.However, while exploring for a consensus view of the world, and enjoying a crisp New Zealand white, it became clear that much of the bad news is coming from analysts working for investment banks which have themselves been severely hurt by the Global Financial Crisis – or GFC as it is fast becoming known.Merrill Lynch, the mob who frightened the iron ore sector on Friday with a forecast of big production cuts next year, is itself being torn apart and reassembled as a division inside the much bigger, and financially stronger, Bank of America.Dryblower’s prediction about that marriage of convenience is that it will end in divorce sooner rather than later because the entrepreneurial culture of the stockbrokers inside Merrill Lynch will clash instantly with the banker (with a W) mentality in a conventional bank. It always has, and always will.Perhaps the anxiety inside Merrill Lynch itself caused its analysts to hit a new level of panic when suggesting BHP Billiton might need to cut iron ore output by a whopping 25% in 2009 as world steel production crumbles.We all know times are tough, but the forecast of a 25% production cut is astonishing, especially as BHP Billiton itself has just announced a $4.8 billion expansion of its iron ore business in Western Australia.The view of the world from the window of Goldman Sachs – a firm which has orchestrated its survival quite brilliantly thanks partly to having friends in very high places – is quite different when it comes to the mining world.A few days before Merrill Lynch published its modern-day equivalent of “we’ll all be rooned, said Hanrahan in accents most forlorn” the chaps at Goldman discovered a silver lining that brightened Dryblower’s day, and perhaps his year.In a fascinating examination of the GFC, Goldman probed the question of timing in the de-stocking process through which we are passing. In a nutshell, it found a cut in the production of end product, such as steel, can lead to a dramatic short-term reduction in the supply of fresh raw material.Goldman doesn’t use this ultra-simple explanation devised by Dryblower, but it’s actually all about “first in, first out”. In other words, if you have a stockpile of iron ore, nickel, vanadium and molybdenum in your yard you use that first and tell the supply to hold off on deliveries. And, once you’ve eaten into your stockpiles, you call for fresh supplies – and a large price cut, please.It was this simple discovery of the obvious that caused Goldman to get rather excited and suggest we are in the middle of a dramatic de-leveraging process which is being exacerbated by speculators dumping their “paper” investments in commodities.The key point from Goldman is that a 10% fall in steel production “could easily translate into a temporary 50% fall in iron ore shipments”.But, once the crisis is past a new normality returns, which will be based on a 10% reduction in demand and not 50%, which is how it feels right now, leading to a rebound in shipments from mid-2009.Both views, that from Merrill Lynch and that from Goldman Sachs, are interesting theories – and almost as interesting is the fact that one came from a deeply troubled firm (the pessimists) and the other from a firm of survivors (the optimists).Dryblower’s final word on all this mumbo-jumbo: Cheers!

Results are up:
I was swimmer 1151.
Time: 35.21
I came 50th in age 40-44.
469 (1,384) in the men and 594 (1,846) overall (incl. girls)
As a novice, I’m happy with that.
I think I could easily have shaved a minute off this but I wanted to enjoy the event and get familiar with the course etc.
This was a great event that I thoroughly recommend.
Good fun.
I’m now going to do another one: Roughwater on 11/Jan.

On a tour of NZ, the Pope took a couple of days off to visit the ocean for some sightseeing.
He was cruising along the beach at Wanganui in his car, when there was a frantic commotion just off the shore.
A helpless man wearing a green and gold Aussie rugby jersey was struggling frantically to free himself, from the jaws of a 5-metre shark.

As the Pope watched horrified, a Waka cruised up alongside with two men wearing All Black jerseys.
Rangi quickly threw a harpoon into the shark's side.
Hohepa reached out and pulled the mauled, bleeding and semiconscious Aussie from the water.
Then, using long clubs, Rangi and Hohepa killed the shark and hauled it into the boat.

Immediately the Pope summoned them to the beach, 'I give you my blessing for your brave actions,' he told them.
'I heard that there was some bitter rivalry between New Zealand and Australia , but now I have seen with my
own eyes that this is not true.'

As the Pope drove off, Rangi asked Hohepa 'Who the hell was that, bro?'
'That was the Pope cuz' Hohepa replied. 'He's in direct contact with God bro, and has access to all of God's wisdom.'
'Well' Rangi said, 'he may have access to God's wisdom, but he don't know bugger all about shark fishing .........
Is the bait holding up okay, or do we need to get another Aussie?".

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