G’day All,
Turquoise: Announces fee cuts, but I wonder if this is a step away from transparency. Their rate table has aggressive, accelerated, etc. etc.
I’m still a fan of Chi-X (.3bps aggressive / .2bps rebate) all markets all stocks. And EMCF 5cents, all markets all stocks. That is transparency and comparability.
Dark Pools: New York Block Exchange gets approval in the US as does Smartpool in Europe.
Securities lending CCPs: Sorry, I’m still a bit sceptical. Prod me if I need to move with the times.
Default funds: SGX proposes a revision to the guarantee fund. I think these are in line with international practice and of course pushes more responsibility onto users whilst providing the CCP (exchange owned) with greater flexibility.
BATS: Congratulations on becoming the 3rd largest exchange, not bad from a standing start in Jan 2006.
DTCC: So much debate about DTCC being 10 times cheaper etc than Europe, and only now they seek to address novation at the point of execution. I still feel there is much that can be learnt from the maturity of the European Clearing business and models.
ASX continues to muddy the waters in the Australian infrastructure game. I just feel bad for every investor in Australian securities every day – they’re getting ripped off and the government is just allowing it.
FinNews and clearing round up.
Side effect of GFC (Global Fin Crisis), carbon emissions now 12 euros per tonne. My brother feels the price naturally mitigates the cost of compliance during the GFC but I can’t help but feel sorry for our planet. What incentive to clean up at 12 Euros?
Anyway, better dash, just in case Aust can claw themselves a win after the shame of losing both the Test series and One Days to SA. Congratulations to SA.
Super 14 round the corner which means 6 Nations too.
Easy ones: Italy nah, Scotland nah, Ireland, try hard but nah. Wales, (last test beat the wallabies), England, (every nation will pull out their best performance), and France (some up, some down). So, Wales to win the 6 Nations.
Have a great week-end all,
History at:
S
The big swim was indeed a big swim.
This year they put the markers out so it was at least 2.9km.
I like to swim ‘wide’ (I mean, there is a whole ocean) to avoid both the main swimming group and the chop of the surf at the headland.
Not sure how successful this was as all swimmers complained of rough seas this year.
I did go ‘deep’ and wide of the headland, maybe too far, anyway, I did avoid the crowd.
What I did find in the deep was jelly fish (apart from sharks, I hate jelly fish.)
Fortunately they were the non stinging kind.
At first I could see them in the deep but then I felt them as I pushed them aside during my arm stroke.
I just hoped for none of the nasty blue ones (they hurt) and eventually I managed to come through unscathed once I rounded the headland.
The sea was pretty unforgiving throughout.
Tough break to get out from Palm Beach (which I thought would favour me).
Rough sea to the headland (which has 2 ‘false’ heads), some stingers, and then a very choppy rounding after about 1.7kms.
Run into Whale Beach was clear water with a mixed swell.
Didn’t manage to catch the big wave in so had to settle with being dumped onto the sandbank.
Will I ever do this again? You bet!
Next one is:
http://www.rainbowclubaust.com.au/oceanswim/course.htm
Oh, the results:
Pretty disappointed actually to come 933 out of 1,141 (men) or 1,574 entrants.
I came 112 out of 179 in my age group (oh well, still room to improve).
Time of 57.15 not great either, but everyone had the same conditions.
I think the timing chips are great, but I notice a lot of people don’t observe the correct start wave nor handicap. (but who cares?)
Also happy to be in the main wave – there was about one person per second crossing the line for the 3 minutes before and after me.
I’m just happy to have done the distance and to have had plenty of fuel in the tank at the end.
Results here:
http://www.thebigswim.org.au/
A good recap here:
http://www.oceanswims.com/nsw89/090125.html
An interesting blog / comments of the day:
http://oceanswims.blogspot.com/2009/01/big-day-for-big-swim.html
26/01/2009 11:37:00
TURQUOISE INCREASES REBATES FOR HIGH VOLUME TRADERS
As the battle for market share in European stocks ramps up, bank-backed equity trading venue Turquoise says it will increase the rebates it pays to members for posting bids on its order books.
More on this story: http://www.finextra.com/fullstory.asp?id=19563
See also:
http://www.tradeturquoise.com/doclibrary/Tariff_Schedule.pdf
Turquoise price cuts may not reach buy-side
28/01/2009 13:00:00
SMARTPOOL GREENLIGHTED BY FSA TO BEGIN TRADING NEXT WEEK
SmartPool, the new multi-lateral trading facility (MTF) set up by Nyse Euronext, BNP Paribas, HSBC and JPMorgan, has received Financial Services Authority (FSA) approval to launch its dark pool for block trading in European stocks.
More on this story: http://www.finextra.com/fullstory.asp?id=19574
BATS CLAIMS WORLD'S THIRD LARGEST STOCK EXCHANGE IN NOTIONAL VALUE TRADED
http://www.finextra.com/fullpr.asp?id=25685
27/01/2009 12:06:00
NYSE EURONEXT AND BIDS GET SEC APPROVAL FOR BLOCK TRADING JV (i.e. New York Block Exchange)
Nyse Euronext and Bids Holdings are set to launch a block trading execution platform later this week, after receiving the greenlight from the Securities and Exchange Commission.
More on this story: http://www.finextra.com/fullstory.asp?id=19567
29/01/2009 16:06:00
DTCC PLANS REAL-TIME TRADE GUARANTEE
The Depository Trust & Clearing Corporation (DTCC) has outlined plans to implement a real-time trade date guarantee for equity and corporate and municipal bond transactions, as it looks to ease concerns among market participants over security of settlement.
More on this story: http://www.finextra.com/fullstory.asp?id=19581
27/01/2009 16:12:00
QUADRISERV AND EUREX CLEARING TEAM ON TRANSATLANTIC CCP FOR SECURITIES LENDING
Eurex Clearing is partnering North America's Quadriserv to offer central counterparty (CCP) clearing and settlement services for securities lending of European equities.
More on this story: http://www.finextra.com/fullstory.asp?id=19569
SINGAPORE EXCHANGE LOOKS TO REVISE DERIVATIVES CLEARING FUND STRUCTURE
http://www.finextra.com/fullpr.asp?id=25615
http://info.sgx.com/SGXWeb_RMR.nsf/NEWDOCNAME/PC_230109
BATS EUROPE LAUNCHES MARKET SHARE DISPLAY FREE OF CHARGE
http://www.finextra.com/fullpr.asp?id=25632
NASDAQ OMX renamed the Philadelphia Board of Trade, the small futures exchange piece of the recently acquired Philadelphia Stock Exchange, as NASDAQ
OMX Futures Exchange (NFX).
Nasdaq OMX revises Nordic CCP plans
NASDAQ OMX COMPLETES EMCF STAKE ACQUISITION
http://www.finextra.com/fullpr.asp?id=25715
INSTINET BECOMES AUSTRALIAN CLEARING MEMBER
http://www.finextra.com/fullpr.asp?id=25713
FIRST DERIVATIVES SECURES £3M FROM INVEST NORTHERN IRELAND FOR JOB CREATION Banking software developer First Derivatives has secured over £3 million in funding from Invest Northern Ireland (InvestNI), the country's economic development organisation, to support the creation of 142 new jobs.
Full story: http://www.finextra.com/fullstory.asp?id=19577
AUSTRALIAN FINANCIAL REVIEW: ASX Rivals Impatient for Licence GrantsBy Matthew Drummond1/27/09ASX Ltd’s sweeping overhaul to its trading systems could be put on hold after its aspirant competitors urged the federal government not to approve the changes until it had decided on their applications to set up rival exchange platforms.Marking a more gloves-off approach, Chi-X chief executive officer Tony Mackay slammed ASX’s conduct as “opportunistic” and “typical of monopolists battling to maintain their positions”.ASX has proposed a range of new services that Chi-X believes copy its own business plan, a plan which has been on ice for a year while the, government considers granting it a licence and ending ASX’s monopoly.“First they come out and do scaremongering... and tell you that these new systems will cause huge structural problems to the markets and we should stop them at all costs. And then in the background they are feverishly trying to introduce these new innovations themselves and saying you don’t need competition because we’ve brought this in ourselves,” Mr Mackay said.“They have defeated so many diversions in the mind of the government by bringing up issues that they have now had to completely backtrack on.”Mark Weldon, chief executive of NZX Ltd, which part-owns AXE ECN, said he had the same concerns. AXE-ECN had been waiting for a licence to compete in Australia for three years, he said.“This stuff is going around and if Australia has aspirations to be a global financial centre it needs to address this state of affairs pretty quickly.”Chi-X and AXE-ECN hope to offer faster share-trading services at a lower cost to the ASX.After one year of operating in the UK, Chi-X said it had taken 14 per cent of the market in trades for FTSE 250 stocks off the London Stock Exchange.The government’s go-slow on deciding whether to end ASX’s monopoly is one bright spot among otherwise bleak trading conditions for the exchange. Analysts have steadily crimped their earnings forecasts for ASX as trading volumes weaken. Morgan Stanley noted last week that 2008 was the first year since 1990 that value traded on the ASX had fallen — by 12 per cent year on year. It expects value traded to fall 23 per cent this year.On Friday, ASX spokesman Matthew Gibbs rejected Mr Mackay’s criticism and said that ASX did not seek to deny market entry to trading-venue operators that preserved market quality.“The issues for ASX have been about what needs to go in the legislative framework that would be necessary to achieve this, and what market models are inconsistent with this objective and therefore should not be permitted,” he said.In representations made to the Australian Securities and Investments Commission and Corporate Law Minister Nick Sherry, Chi-X accused ASX of bringing in the same services that it had warned could create a disorderly market if brought in by rival platform operators.The new services, announced late last year, would widen ASX offerings to fund managers and other large investors to shift large parcels of stock away from smaller investors, preventing price movements and lowering transaction costs.The services include a “dark pool”, to be called VolumeMatch, where large investors can anonymously move big share parcels and “iceberg orders”, allowing traders to enter a large trade but reveal only a small amount of the total volume.Chi-X’s director of markets and operations in Australia, Jason Keady, said ASX had originally claimed such reforms would lead to a lack of market transparency, but now appeared to have “completely back- flipped on their previous policy”.Mr Gibbs said ASX’s proposed services could not be characterised as the same as those proposed by aspirant operators. VolumeMatch had inbuilt transparency mechanisms lacking in the proposed models of potential rivals at the time of ASX’s submission to ASIC, he said.ASIC is still to decide whether to approve the new services, which require changes to the ASX’s market rules.
=====================FINANCIAL NEWS: Clearing Competition Feels the Squeeze By Luke Jeffs 1/26/09The hope expressed last year by consultants Boston Consulting Group that banks can save hundreds of millions of dollars by “optimising their clearing networks” may well ring true in theory, but European institutions may be left muttering: “Chance would be a fine thing”.More than a year after the adoption of the European Commission’s code of conduct on clearing and settlement, which required the region’s clearing houses to foster competition between themselves by linking up, only one such example of mutual interoperability has emerged despite numerous requests.Europe’s largest exchanges and clearers, also known as central counterparties, remain publicly bullish about the code of conduct but behind the scenes they tell a different story: the code has become mired in protectionism and finger-pointing.Miranda Mizen, a senior consultant at research house Tabb Group, said: “There are more than 80 requests for access and interoperability outstanding, languishing in lawyers’ offices and in CCP inboxes, stuck behind differences in national laws, market practices and facing foot-dragging resistance to competition. Most of the 80 will never see light of day.”A lack of clearing house interoperability may not seem such a big deal, particularly in the current financial climate, but without it banks will not be able to “optimise their clearing networks” as Boston Consulting Group recommends and realise its headline savings.The lone example of interoperability – which involved the London Stock Exchange opening up to Swiss clearing house SIX x-clear in addition to its incumbent provider LCH.Clearnet four months ago – offers some hope.Swiss bank UBS jumped at the chance to consolidate its UK and Swiss equity clearing on SIX x-clear in December last year, saying it would look to bundle as much of its clearing activity through one CCP as possible. Robert Barnes, managing director, equities, at UBS, said banks face higher fees for processing the same amount of business because the value of trading is plummeting while the volume of trades continues to increase, a function of increased electronic trading.Exchanges and their rival multi-lateral trading facilities base charges on the value of orders but clearing house fees typically correlate with the number of trades.Barnes said: “User choice in clearing is an important mechanism to help reduce the frictional cost of front-to-back trading and it is for this reason that UBS has backed the user choice model and for this reason that it moved its business to SIX x-clear on December 12 – a move that was technically easy to implement and continues to deliver smooth on-time settlement.”Rival clearing houses said UBS’ part ownership of SIX x-clear was a factor in its decision but the bank has denied this.Barnes said: “If a clearing house is functionally attractive and chooses to offer an attractive clearing tariff then it makes sense for us to route business there, and if they are offering attractive volume discounts across multiple markets it makes sense for us to send as much business as possible to that clearer.”Even LCH.Clearnet, which lost out on the deal, is philosophical. Alberto Pravettoni, managing director, corporate strategy at the Anglo-French CCP, said: “In the case of the LSE opening up to X-Clear this is an isolated example where we have lost business but we are open to competition in the UK market and with X-Clear we have proved that interoperability can work.”He added that he was confident there would be further examples of interoperability between European clearing houses this year.He said: “The multi-lateral trading facilities in particular may take the lead here by reviewing their single clearing house strategies and I think we are well positioned to take advantage of that.”Europe’s MTFs – Chi-X Europe, Turquoise, Nasdaq OMX Europe and Bats Trading – use a single CCP to support their businesses but Pravettoni believes these platforms may look to embrace competition in a bid to drive down costs for their customers.Diana Chan, the chief executive of EuroCCP, the CCP to Turquoise, is frustrated by the lack of progress and questions whether all the MTFs will look to embrace competition, insisting it is up to the brokers using these platforms to make them offer a choice of clearers.She said: “Some exchanges and MTFs may have economic interests not to offer competitive clearing, but even when an MTF has no economic interest, the incumbent clearer could say it has no time to work on it. Switching clearing houses entirely is effectively not an option open to an MTF because many of the trading firms don’t have the technology budget to be able to switch.”Chan’s assertion that “competitive clearing is fine in principle but without mandated interoperability, the incumbent will not find time to work on it with a challenger” does not bode well but there are signs that things may be about to change.US group the Depository Trust & Clearing Corporation, also the owner of EuroCCP, is quietly moving ahead with its plan to buy LCH.Clearnet in a deal estimated to be worth €739m ($958m).Second, European equity trading, dominated by large exchanges and the start-up MTFs, may be set for consolidation if the value of trading, the basis for their main revenue, continues to fall, as it has done over the last three months.Chan said: “I think the future of European clearing will be dictated by what happens at the trading level. If there is a merger between two exchanges or an exchange and an MTF, this will hasten consolidation between clearers faster than interoperability and competition.”Finally, there are the regulators. The code of conduct may have been largely ineffectual but it is unlikely Europe’s lawmakers, smarting from criticism of their handling of the credit crisis, are going to tolerate “foot-dragging” over managing counterparty risk, their bête noire after the fall of Lehman Brothers.Transatlantic merger would cut costsThe debate about the efficacy of the EC’s code of conduct could be made largely redundant by the proposed DTCC/ LCH.Clearnet merger, a transaction that would create first transatlantic clearing house and offer huge savings to European customers.The combination will allow the Anglo-French clearer to leverage the US group’s massive clearing volumes and offer tariffs in line with those in the US, where fees are a fraction of those paid by European banks and brokers.Alberto Pravettoni, managing director, corporate strategy at LCH.Clearnet, said: “The DTCC deal, assuming it goes ahead, will provide us with access to the economies of scale and the technology that will allow us to be more aggressive on fees, which is one of the key drivers behind the proposed deal.”Miranda Mizen, a senior consultant at research house the Tabb Group, said consolidation was the key to driving down European clearing fees.She said: “Clearing is a volume game and CCPs need to create economies of scale and diversification across markets and industries to leverage common platforms and create multiple revenue streams. This is only possible through consolidation of CCP services into larger, more diverse companies that reach across borders.”If the DTCC/LCH.Clearnet deal goes through, any fee cuts by LCH.Clearnet could set a benchmark that its European rivals will have to match if they want to remain competitive.
*****************************************************************
CO2 Emissions Trading: Financial Crisis Drives Down Price of PollutionAs the economic effects of the financial crisis deepen, it has become surprisingly cheap to pollute. Prices for carbon dioxide emissions permits have fallen below 12 euro per ton. Some companies are selling them to generate much needed cash.
http://www.spiegel.de/international/europe/0,1518,603521,00.html
Thursday, January 29, 2009
Thursday, January 22, 2009
G30, Consolidated tape, CESR, EC, NeoNet, Nasdaq CC, Evolving European Markets, ML decorations
G’day All and welcome back,
I hope one and all had a festive break.
Did I manage to do any holiday reading? Nah, not a bit.
I did however take my son to his first 20Twenty cricket matches (Qld V Sth Aust) and then (Aust v Sth Africa).
Anyway, back to the office and straight off the bat we have 29 pages (10 of content) on 18 recommendations from the good ‘folks’ at G30.
Within this there are 4 ‘Core’ recommendations:
Close regulatory supervisory gaps;
Improve prudential regulatory quality;
Institutional policies (risk, capital etc) to be improved; and
Increase transparency of products.
All common sense but we don’t want is to stifle the flow of capital (R1c). I strongly agree that even a modest system of regulation can result in a false impression (R4b). [more to follow]
G30 Financial Reform recommendations:
http://www.group30.org/
http://www.group30.org/pubs/recommendations.pdf
Good news from Reuters on a consolidated tape, but it not the final solution. The pricing lacks some transparency (i.e. I understand it is 10Euros plus the costs for whatever they consolidate). Anyway, plenty of other more expert people have commented on this. Try:
Call for evidence on the impact of MiFID on secondary markets functioning
http://www.cesr-eu.org/index.php?page=responses&id=125
Also of interest is:
Public review of CESR's preliminary draft advice on access and interoperability arrangements
http://www.cesr-eu.org/index.php?page=consultation_details&id=130
I noticed HK-CCASS (CPP) is preparing to take a hit from Lehman and joins the creditors line up. I thought all CCPs managed to get off the Lehman hook. Is anyone aware of other CCPs that experienced a default (and hence call on the mutual guarantee fund contribution?)
European Financial Integration Report 2008The report is an annual analysis of the integration in the EU financial sector and its effects on competition, efficiency, financial stability and competitiveness.
Good to see CCPs get a mention and Box 3.1 mentions the downward pressure on post trade fees.
Web site: http://ec.europa.eu/internal_market/finances/fim/index_en.htm
Full report:
http://ec.europa.eu/internal_market/finances/docs/cross-sector/fin-integration/efir_report_2008_en.pdf
I would be re-miss not to note the other big story of the week, the inauguration of Barack.
I can’t remember where I read it but one of the lasting impressions for me is that now a new generation will grow up knowing an African American in the White House. This will provide a new perspective to the youth of tomorrow, which I must say, I think is a great thing both for black and white. I’m also very impressed by his speech writer (I think a mere 28yrs old!)
Inauguration of Barack Obama
Addressing the Muslim world, he said that “we seek a new way forward, based on mutual interest and mutual respect.” Perhaps alluding to Iran, he said “we will extend our hand if you are willing to unclench your fist.”
http://www.economist.com/daily/news/displaystory.cfm?story_id=12964418&fsrc=nwl
From a Headhunter:
I am currently conducting a search in London for a sales / relationship specialist to sell clearing services for an international exchange – my client. Is there anyone in your network who you may be able to recommend
It is Australia Day here on Monday so will no doubt be at a Barbie somewhere. (No snow anticipated!)
The big event for me this week-end is the Big Swim.
Wish me luck!
http://www.thebigswim.org.au/
Welcome on board to Deutsche Bank offers post-trade services to Chi-X and Turquoise
Also below are a couple of good stories (at least in my opinion) on;
Nasdaq Clearing initiative;
The changing actors in the new capital markets; and
A cheeky story on 'why do these banks collapse' (ML).
Oh, and if you get a chance try and click through to:
http://clearingandsettlement.blogspot.com/
Any suggestions would be appreciated.
And so much more I didn’t read!
Great week-end all,
S
Euronext MTFs on track for launch in next few weeks
Equiduct aims for Q1 launch despite setbacks
Equiduct plans to offer access to three clearing houses, LCH.Clearnet Ltd, LCH.Clearnet SA and SIX X-Clear, upon its launch.
Euronext’s single order book to cut buy-side post-trade costs
8 years in the making and finally the single order book is here. In my view settlement is a natural monopoly, and should be commoditised and regulated as such. Trading, Clearing and Custody should all be open to market forces. Competition has arrived in the clearing space and the market has already enjoyed more price savings than any merger has delivered.
09-05 ASIC extends ban on covered short selling of financial securitiesWednesday 21 January 2009http://www.asic.gov.au/asic/asic.nsf/byheadline/09-05+ASIC+extends+ban+on+covered+short+selling+of+financial+securities?openDocument
19/01/2009 10:55:00
THOMSON REUTERS LAUNCHES CONSOLIDATED STOCK FEED
Thomson Reuters has launched a consolidated pan-European securities data feed in an initiative designed to combat the fragmentation of market data prices under the MiFID regulatory regime.
More on this story: http://www.finextra.com/fullstory.asp?id=19534
Another interpretation / explanation of this is available at:
http://fragmentation.fidessa.com/2009/01/22/turquoise-and-the-tale-of-tape/
Consolidated tape stifled by incumbent exchanges
It also observed the “vague” nature of MiFID’s approach to clearing and settling, arguing that a lack of harmony between member states has increased clearing costs. “It is clear that this approach seriously undermines the harmonisation efforts of MiFID and the Code of Conduct on clearing and settlement, as it considerably increases the cost for accessing non-domestic CCPs and/or the time required to obtain regulatory clearance for such access.”
http://www.thetradenews.com/operations-technology/market-data/2661
Whilst I agree with most of what Equiduct’s Artur Fischer says, I think his clearing comments need qualification. Equiduct plans to offer access to three clearing houses, LCH.Clearnet Ltd, LCH.Clearnet SA and SIX X-Clear, upon its launch rather than using one of the new entrants.
Equiduct is 53 per cent owned by Börse Berlin, with 23 per cent held by Jos Peeters, a Belgian venture capitalist and a former founder of the Easdaq exchange, with the rest held by Knight Capital and other investment banks, including Goldman Sachs through a former investment in Easdaq.
This effectively prohibited Lehman Brothers SA from settling any of its positions in HKSCC’s Central Clearing and Settlement System (CCASS) and completing settlements with its customers (excepting returning fully paid shares to customers). As a result, HKSCC had to fill a $2.5 billion funding gap in a very tight credit market to fulfil its settlement obligations as the central counterparty. It had to close out LBSA’s total outstanding positions of $3.5 billion created before the restriction notice, resulting in a loss of approximately $160 million for HKEx, which in turn will be an added claim in the LBSA insolvency.
http://www.hkex.com.hk/publication/newsltr/2009-01-07-e.pdf
Industry Mulls Potential of Nasdaq Clearing InitiativeWith Nasdaq OMX slated to launch a clearing service in the third quarter, exchange officials are pressing industry players for feedback on how to compete against the National Securities Clearing Corp.
DTCC Says It Will Support All Central CDS Clearing Initiatives
http://www.securitiesindustry.com/news/23119-1.html
16/01/2009 18:29:00
NEONET ABANDONS TAKEOVER TALKS
Swedish agency broker and systems supplier Neonet has pulled out of take-over talks with an un-named counterparty and says that no offer has been received for the company.
More on this story: http://www.finextra.com/fullstory.asp?id=19532
(Neonet, a Swedish-based agency brokerage and technology provider, has called off cooperation talks with a “counterparty”, widely believed to be German stock exchange group Deutsche Börse.)
http://www.thetradenews.com/trading/2665
Industry Mulls Potential of Nasdaq Clearing Initiative Does the NSCC utility need a competitor?
January 19, 2009By John Hintze
With Nasdaq OMX Group slated to launch a clearing service in the third quarter, exchange officials have been pressing industry players for feedback on how best to compete against the National Securities Clearing Corp. (NSCC) in the continuous net-settlement arena.
Self-clearing broker-dealers largely view the prospect of an NSCC rival favorably. "Conceptually, firms would be crazy not to be interested in creating competition and bringing innovation and additional value to the industry," said Jeff Bell, EVP of clearing and technology at Los Angeles-based Wedbush Morgan.
But Nasdaq will face major hurdles. In today's bear market, broker-dealers may prefer to devote their operational resources to more urgent tasks than developing connectivity to a new clearing service. And although Nasdaq points to price as its competitive focus, most brokerages view the charges from NSCC--a not-for-profit Depository Trust & Clearing Corp. subsidiary that returns excess fees to members--as reasonable, especially after a series of cuts last year.
"Nasdaq is doing this at a really challenging time, and it's going to put a lot of pressure on [broker-dealers] to have to change their systems around and interface with a second clearinghouse," said Bell, adding that he shared his views with both NSCC and Nasdaq early last week.
The clearing facility appears to be part of Nasdaq's long-term strategy to build market share. Brokerage executives contacted by Securities Industry News said Chris Concannon, Nasdaq's EVP of transaction services, told them that unlike NYSE Euronext, which has made pre-trade services a priority with the acquisitions of market data technology provider Wombat Financial Software and connectivity vendor TransactTools, Nasdaq is concentrating on post-trade processing.
Exchange operators are seeking to distinguish themselves with added services, said Adam Sussman, an analyst at New York-based Tabb Group, adding that the OMX part of the transatlantic company has been a major provider of matching and post-matching technology in Europe. "Nasdaq is looking to build its brand and attract more customers, and I think it can do that initially by making clearance a cost leader," said Sussman.
Although Nasdaq has publicly released few details about its gestating clearing unit, some information has been conveyed in one-on-one meetings with potential customers. Sources that have met with Concannon said he has focused on firms' traders rather than the back-office executives closer to the clearing function. "Concannon is not marketing the service to the head of clearance at a large broker," said Sussman, who pointed to Concannon's experience working not only at Nasdaq but at Instinet and Island ECN, where he has frequently dealt with traders. "He's trying to sell the value proposition to the traders and leverage them to sell it to the clearance guys. The clearance guys will never want to switch."
That reluctance may be warranted, given that NSCC and the other subsidiaries of DTCC have become the backbone of the securities industry. DTCC's various entities not only clear across asset classes, but also offer ancillary services such as processing of automated customer account transfers and institutional delivery services. "That's where NSCC has a strong product," said Sussman. "It offers cross margining, risk management--all the benefits of a central counterparty. Nasdaq's not doing all of that stuff. All they're saying right now is, 'we're going to clear equity trades.'"
Stuart Goldstein, managing director of corporate communications at DTCC, asserted that "at a time when the industry is facing the worst financial crisis in history, the one bright spot of certainty and stability has been the seamlessness in DTCC's post-trade clearing and settlement process, and the management of market volatility. Bifurcating clearing and settlement in the U.S. would introduce a new element of systemic risk, and we'll have to see if financial firms and regulators think that is a good idea."
Nasdaq obtained the clearing license in its August acquisition of the Boston Stock Exchange (BSE), which also brought an exchange license that was used Jan. 16 to launch a second platform--Nasdaq OMX BX. Establishing the continuous net settlement facility will likely prove far more challenging.
DTCC created the Depository Trust Corp. (DTC) and NSCC in the early 1970s, when brokerages were overwhelmed by the demands of paper stock certificates. DTC provided a central depository and book-entry accounting so that the certificates no longer had to change hands, while NSCC offered multilateral netting, allowing brokers to combine buy and sell orders into a single position, thereby reducing capital requirements. Other net settlement entities emerged over the years, including BSE's and another that cleared the trades of the Pacific Exchange, which through a series of mergers is now part of NYSE Euronext. Those market centers eventually integrated their clearing operations into NSCC.
Brian Hyndman, SVP of transaction services at Nasdaq, said the exchange has been crafting its proposal and intends to file it shortly with the Securities and Exchange Commission. NSCC has been a monopoly for about 20 years, he said, adding, "We're going to leverage Inet technology and compete on costs. We think we can do it more efficiently." Nasdaq acquired the Inet electronic communications network in 2005, combining it a year later with the Brut ECN platform to produce one of the fastest execution systems worldwide.
Clearance at a Loss
Technology benefits aside, developing connectivity will be expensive for broker-dealers. Tabb Group's Sussman said that in his conversations with brokers he found little interest in connecting to Nasdaq's clearing facility unless the fees are "ridiculously" low, but that could present an opening. "Even though NSCC has very low costs, Nasdaq can potentially offer clearance at a loss, if it makes it up by gaining execution revenue," said Sussman.
However, Wedbush's Bell suggested that a successful Nasdaq clearing unit could ultimately raise fees for the industry, since drawing volume away from NSCC, which operates at cost, would reduce its economies of scale and likely require it to raise prices. In addition, he said, Nasdaq officials described fees that would undercut NSCC's by 40 percent, but Wedbush calculations show little difference after the utility's discounts and annual refund are included. But because those discounts and refunds are unpredictable--which is problematic for brokers trying to figure out future costs--a low fee without ad hoc reductions could make Nasdaq's offering attractive, added Bell.
NSCC responded to such concerns by providing aggregate fee cuts of $152 million last year. On Jan. 1 it introduced another reduction that is anticipated to save the industry $15 million to $20 million in 2009. Susan Cosgrove, NSCC's managing director of equity clearing and settlement, noted that the utility's fixed-cost model is designed to produce cheaper fees as trade volumes increase. "Volume has increased," said Cosgrove. "Rather than wait until the end of the year to provide a rebate--based on the NSCC's excess operating margin--we cut fees throughout the year."
Lower fees should generate a lower rebate. Cosgrove said NSCC is still calculating the rebate, which is paid in February, but has already told customers it will be very low. She noted that NSCC has also sought to smooth out monthly discounts, which arise when higher-than-expected volumes reduce the cost per trade, by no longer discounting conservatively early in the year and consequently offering no discount by year-end.
Interoperability Issues
Because many self-clearing firms will probably use both clearing systems, interoperability issues will also have to be resolved, said Craig Messinger, managing director at Pershing, the largest correspondent clearing firm by number of correspondents. Collateral will have to move back and forth and, for risk management purposes, broker-dealers will have to know where their positions lie.
Messinger, who said he spoke with Nasdaq executives about the initiative several months ago, noted that the project has appeared to "peak the interest" of broker-dealers that only trade equities, but Pershing will seriously consider any benefits it affords. Before they were integrated into the NSCC, interoperability once existed among the regional clearers, he added.
John Muehlhausen, CTO of Essex Radez, a Chicago-based self-clearing broker that specializes in algorithmic trading and caters to active traders, said existing brokers will find lower costs and more flexible capital requirements to be the biggest draws. For aspiring self-clearers, however, an easier-to-use system could prove attractive--"Nasdaq's clearer might attract customers who are not yet self-clearing by streamlining the process," said Muehlhausen.
Improving the process through technology may be Nasdaq's best route to success. "If it's not an economic play," said Bell, "then it has to be technology: innovative products and capabilities." Bell pointed to the development of real-time trade guarantees as an example. Because NSCC provides guarantees 24 hours after a trade, unexpected capital calls can arrive the next morning and take another 24 hours to be resolved. Real-time guarantees would give broker-dealers greater control over their capital and potentially quicker resolutions. "That would be a really important service now, because capital is hard to come by and firms are very protective of it," he said.
Nasdaq took an earlier step into the clearing space with the acquisition of 80 percent of New York-based International Derivatives Clearing Group (IDCG). Nasdaq announced the completion of that deal on Dec. 22, the same day the Commodity Futures Trading Commission approved IDCG to clear interest-rate swap futures and other fixed-income derivatives contracts. IDCG plans to act as a central counterparty, while using Nasdaq OMX Secur XT technology for clearing.
THE BANKER: New Kids on the Block - Trading GiantsBy Michelle Price January 2009The European cash-equities stage, inflamed as it has become by competition in the wake of Markets in Financial Instruments Directive (MiFID), is already a little overcrowded. During the past 18 months, a slew of new, frequently indistinguishable trading venues have entered the marketplace with fierce public commotion and variable success.These include Instinet-owned Chi-X Europe, widely regarded as runaway success, and NYFIX Euro Millennium, both of which have been operational for some time, while August 2008 brought the long-awaited take-off of bank-backed platform Turquoise. Nasdaq OMX Europe began operations in late September, and BATS Europe, whose US platform commands 10.6% of the market, launched on October 31. Waiting in the wings are Borse Berlin-owned Equiduct Trading and the Nordic contender Burgundy, while both the London Stock Exchange (LSE) and Knight Capital Group, a US-based agency broker, have unveiled plans to launch dark liquidity pools.But while the spotlight has been very firmly fixed on the arrival of these new publicity-hungry contenders, little public discussion has been devoted to the often-inscrutable entities that will ultimately decide their fate: liquidity providers. For the success of these trading venues will be determined by their ability not only to wrestle established liquidity away from the incumbent exchanges, but also by how successful they are in attracting new liquidity provided by trading firms, whose names and trading strategies are largely unfamiliar to the European market.Hailing principally from the US, these firms - comprising proprietary trading desks, hedge funds and brokerages - have played a quietly transformative role in their native markets, and are now eyeing Europe as their next destination. Many market-watchers believe that these firms, having fast gained a formidable presence in the US markets, will play a powerful role in determining not only who wins the battle for European liquidity, but the shape of European landscape in years to come.Revising the roll-callSo who are these invisible firms? In answering this question, it pays to look closely at the investors behind two of the most successful upstart trading platforms launched to date. Take Chi-X Europe, which has secured about a 14% market share of the FTSE 100 stocks and BATS Trading, the third largest market in the US, as key examples. Beside what was once upon a time the familiar roll-call of blue-blooded Wall Street brands, including Merrill Lynch, Morgan Stanley and Citigroup, are some less recognisable names including Global Electronic Trading Company (GETCO), Lime Brokerage, Optiver, Tradebot and Wedbush Morgan Securities (WMS).These firms and their publicity-shy peers and clients - which often hail from regions that would be described, at best, as peripheral to the world of global finance, including South Carolina, Kansas and Los Angeles - form part of a new wave of so-called 'high frequency' speed-sensitive traders that have come to dominate US equities in recent years. Frequently young, secretive, privately held and ambitious, the importance of these high-frequency trading firms, which may often number only six or seven people in size, is not to be underestimated. Rosenblatt Europe estimates that these firms collectively account for a staggering 50% to 60% of US equity trading volumes on an annual basis, according to Justin Schack, vice-president of the agency broker.Edward Wedbush, president and CEO of Los Angeles-based WMS, which is among the largest independent brokerage firms in the US, knows better than most just how "huge", as he puts it, such high frequency players have become in the US marketplace. WMS, which originally served as BATS Trading's chief clearing agent, provides transaction, trading and clearing services to a broad range of statistical arbitrage traders and automated market makers. "Through computer-assisted trading, these clients provide the liquidity that is fundamental to the market," he says. Few would anticipate that WMS, as a provider of execution services to these high-volume clients, has ranked as the number one liquidity provider to Nasdaq for the past three years.Founded in 2001, New York-based Lime Brokerage has also built a business catering to the demanding requirements of these ever-important trading houses. Among the original three backers of BATS, Lime Brokerage, which also has a minority stake in the Chicago Board Options Exchange's stock exchange, styles itself as a super high-tech agency broker. It caters to clients that, as the firm's newly appointed CEO Jeff Wecker puts it, "are uniquely sensitive to speed of execution". The firm executes hundreds of millions of shares a day on behalf of these clients, touching a sizeable 5% of all traded volumes in the US equities market daily.Impressive though this may be, such volumes are small change compared with those pumped out by high-frequency players trading on their own account - GETCO being the most notable example. The low-profile, high-frequency automated market maker, which was an early investor in BATS Trading and a backer of Chi-X Europe, uses automated electronic systems to trade more than one billion shares a month, according to a 2006 Securities and Exchange Commission (SEC) filing.Trading on such a vast scale, GETCO and its peers are believed to have played a fundamental role in reshaping the US equity market structures. But unlike many investment banks, the firm passionately eschews ego-driven, short-termist individualism of the sort that has traditionally been characteristic of City trading floors. "We believe that a low-ego, team-oriented culture fuels the kind of continuous innovation that is critical to our success," says Dan Tierney, co-founder GETCO. Nevertheless, its rumoured market value gives cause for some self-satisfaction. In April 2007, General Atlantic, a private equity firm, purchased a 20% stake in GETCO in a deal that valued the firm somewhere in the region of $1bn to $1.5bn, according to The Wall Street Journal.Maker taker modelFirms such as GETCO or leading Dutch market maker Optiver, another Chi-X backer, add liquidity to the markets by using high-speed algorithms to flood venues with bid and offer orders on particular stocks. Although such firms profit on the spread - which may often total a mere penny or less - the success of this strategy depends largely on the so-called 'maker taker' fee model which is increasingly being adopted by US and new European execution venues in order to attract liquidity. Under this fee structure, liquidity providers (that is firms that either post an order to buy or sell at a fixed price) are offered a rebate if their quotes are met. Chi-X Europe, for example, pays a 0.2 basis point (bp) rebate to firms that commit to posting quotes on its platform, while it charges takers of liquidity (firms that hit these orders) 0.3bp.High-frequency market makers collect this rebate hundreds of thousands of times a day. "The rebate is a big proportion of the profit and loss that they drive from that market activity," says Dmitri Galinov, a director at Credit Suisse Advanced Execution Services. Frequently, the daily value of the rebate will offset the profit and losses on the firm's trading account. "Overall they may have lost money trading but will make money due to the rebate," says Gary Wedbush, head of capital markets at WMS. For all parties concerned, profits are derived from wafer-thin margins ramped up to a colossal scale.Unlike automated market makers, however, statistical arbitrage players operate by analysing vast quantities of market data from which they identify and exploit inefficiencies in the pricing of securities. Typically, these firms take on very little leverage, carry little risk and finish the day flat. But the difference between the two strategies is becoming less perceptible, says Gary Wedbush. "There is definitely a blurring between these two strategies, as many statistical arbitrage strategies depend on receiving the rebate," he adds.Due to their growing scale, many statistical arbitrage players have become key liquidity providers to the markets that they operate in and, as such, play a similar role to their automated market making peers. Hedge funds including New York-based Tower Research Capital LLC, a close affiliate of Lime Brokerage, and global giant Citadel, which accounts for 16% of the European market according to one source, are both in this league. Other proprietary firms trading on their own account, such as Chicago-based Sun Trading and Kansas-based Tradebot, have become equally influential and compete head-on with the world's largest trading organisations. Both declined to comment.Beyond the speed of thoughtFounded in 1999 by technology enthusiast Dave Cummings, Tradebot is regarded as one of the original 'black-box' trading powerhouses. Mr Cummings, the company's CEO, also founded BATS Trading, of which he is former CEO and in which he owns a major stake. Like BATS, for which in the words of one source, outsourcing is regarded as "blasphemy", Tradebot designs and builds all its technology in house. The firm is an active liquidity provider on the major US exchanges and electronic crossing networks, including Nasdaq, NYSE Arca, BATS and Direct Edge, where it moves in and out of stocks at breakneck speed. For Tradebot, as with the above firms, the fundamentals of a stock are rarely, if ever, relevant.Instead, the key is low latency. For firms such as Optiver and Tradebot, speed is not just everything: it is the only thing. Take Nasdaq, one of the faster US markets. Every time the exchange receives an updated quote, explains Chris Concannon, executive vice-president, transaction services for Nasdaq OMX Group, more than five firms are able to receive that information and update their quotes accordingly in about half a millisecond. "They are now first in line for execution. So when the next incoming order comes in, the first of those five firms gets it first: they've just got priority over the entire market at that price," he says. By the time it gets to the fifth firm, the spread will have moved.Low latency is therefore about being at the front of the queue. Firms such as Tradebot are able to send and receive orders in less than one-thousandth of a second: put another way, they are able to trade about 200 times faster than the average speed of thought. In a bear market, these micro-fractions matter more than ever: the potential value of a millisecond was vividly demonstrated during a particularly bloody period on Black Friday, October 10, 2008, when the UK market plummeted at a hair-raising GBP250m ($370.5m) a second. When selling in such conditions, a millisecond matters. For some large firms, a one-millisecond advantage could even be worth up to $100m a year.At the firewallBut it is not enough for the firms themselves to be fast. Once they are at the exchange's firewall, they are dependent on the speed of the exchange or execution venue itself. Because the fastest trading firms can do the most business on the speediest exchanges, the latter are in a position to garner the most liquidity from this new wave of players. Hence the unseemly cat fight that has unfolded in Europe regarding low-latency statistics: for firms such as BATS and Chi-X Europe, technology capability has formed the central plank of their marketing campaigns as they hope to court this new breed of trader - a pursuit which, at least in the case of Chi-X, has so far proved successful.Meanwhile, incumbent platforms, such as the LSE, are trying to catch up. According to its own figures, BATS' statistical average latency - which it defines as the time from which an order hits its firewall until the time it goes back through its firewall - is 444 microseconds, that is 444 millionths of a second. Compare this to the LSE, whose latency is at just under five milliseconds, or five thousandths of a second. For the incumbents, however, there might yet be a saving grace. Trading at high speed and on a grand scale is a truly transformative exercise, which tends to incubate more overall volume. In the US, says Mr Schack, the volumes "exploded" when the high-frequency players pitched up.Transformation does not end here. Many of the new breed of traders, in particular GETCO, Optiver, Tradebot and Sun Trading, regard themselves as positive (albeit profitable) forces in the equities markets. By deepening liquidity, they serve to reduce the average spread between the bid and offer on the equities that they trade, thereby making the markets more efficient for retail and institutional investors. In its 2006 letter to the SEC, GETCO made this point quite explicitly. Between 2000 and 2006, the spread on Microsoft (a popular liquid stock for such firms) tightened from $0.03 to $0.01, a contraction that equates to a $300m saving in a trading year of 240 days, wrote Stephen Schuler, GETCO's co-founder and CEO. Indeed, GETCO's goal, says Mr Tierney, "is to constantly improve our processes, create greater efficiencies in the marketplace, and reduce the cost of risk transfer for all investors".But this also equates to decreased profitability on the spread. This would make Europe, as a far less efficient market, an ever-attractive prospect to such firms. Mark Hemsley, CEO of BATS Europe, says that the European landscape, in terms of technology capability, the move towards the 'maker taker' model, and the decreased cost of market access, has become more suited to their strategies. "Now these types of traders have got a natural place in which to trade," he adds.Furthermore, says Bradley Duke, director, head of institutional, electronic sales in Europe at Knight Capital Group, another major liquidity provider to the US market, the wideness of the European spreads presents a huge opportunity for these firms. "They are bringing to Europe a range of battle-tested algorithms and repurposing them for the European landscape," he adds.From Hi to LoLime Brokerage is one such player. Mr Wecker believes that the climate in Europe is "ripe" for its service offering and the firm is "looking quite seriously at the European marketplace", he continues. This interest stems, for the most part, from client demand. "We would not move into a marketplace if we didn't have significant customer interests to be active in that marketplace. The changes in the European market structure are so profound that it is creating new opportunities, particularly for smart electronic investors," he says.Several other firms are poised to make the jump, while others, including GETCO, Citadel and Sun Trading, are already making their presence felt. Steve Grob, director of strategy at trading connectivity provider Fidessa, which recently launched a fragmentation index in order to track the shifting behaviour of European liquidity, says there is evidence that the volumes appearing on new venues is a result of growing statistical arbitrage activity. Certainly the LSE, which has recently altered its tariff structure to attract more algorithmic traders, likes to declare that it has benefited from a growth in arbitrage trading. The beleaguered Deutsche Borse has reported a similar effect.For some, however, this looks like an expedient argument. As one source remarks: "If I were in their position, I would say the same too." Few could argue convincingly that the pressure on Europe's somewhat flabby incumbents is not growing. November, for example, brought what has widely been regarded as the first casualty of the trading platform battle, when SIX Group, operator of the Swiss exchange, announced that it is to shut down SWX Europe, its London-based blue-chip market, in order to consolidate its operations on its Zurich platform. Meanwhile, the untimely collapse of Lehman Brothers may have badly wounded the LSE's defensive move to launch Baikal, a European dark pool unveiled in June 2007, for which the late investment bank was to act as a key technology provider.The LSE's difficulties underline more broadly just how important the new breed of US-led traders may be to the ever-thirsty European landscape in the wake of the financial crisis. As the embattled investment banking community finds itself desperately short of capital, the once free-flowing broker extended leverage, which has served to bloat cash equities trading volumes over the past few years, grows ever-scarcer. This situation has not been helped by the reduced appetite for risk demonstrated by many bulge-bracket banks, a trend that reportedly led JPMorgan Chase to scrap its 80-strong global standalone prop desk in November. By contrast, many high-frequency firms, due to the nature and speed of their trading strategies, remain largely undeterred by extreme volatility of the type witnessed in recent months and, in some instances, have found it to their advantage, says Lime Brokerage's Mr Wecker.Mindful of this shifting power base, both the LSE and Euronext are reportedly making strenuous efforts to engage with a number of Chicago-based high-frequency market makers, in an attempt to bring their liquidity onto their markets. This strategy may yet prove successful. For a number of US players, Europe's exchanges certainly seem to hold some appeal, although firms such as WMS are looking further afield to Europe's emerging eastern contenders. WMS, which is not a member of the LSE, is in the process of joining the intensely ambitious Warsaw Stock Exchange. The US brokerage was drawn to the Polish trading venue by what Edward Wedbush describes as its "aggressive use of technology" and the expectation that high-frequency electronic trading is due to take off in the region in the near future.Research by Tony Kirby, co-chair of industry association Best Execution Working Group, indicates that this prediction is well placed: "The hedge fund market makers have a very strong appetite to interact with the new multilateral trading facilities - particularly those in which they maintain a stake." His findings also suggest that the ratio of this type of 'lo-touch' to 'hi-touch' trading in Europe will increase from a 30-70 split in 2008 to reach almost a 40-60 split by 2010, with just less than one-third of European liquidity supplied by high-frequency, 'lo-touch' trail-blazers.Uncertain survivalYet, the extent to which these US high-frequency firms can succeed in the tangled European market remains uncertain. Bob Fuller, former CEO of Equiduct and now CEO of Exchange Axis, a neutral virtual broker, warns that Europe's intricate clearing and settlement infrastructure may yet trip up US firms entering the European marketplace. Unlike in the US, where the Depository Trust and Clearing Corporation (DTCC) acts as the single central clearing counterparty (CCP) for all equities transactions on all trading venues, the pan-European market is littered with CCPs and 23 central securities depositories. Even in the best of times, this is widely regarded as an unsatisfactorily complex and inefficient post-trade infrastructure.In the worst of times, however, when credit has been short on quantity and high on cost, the complexity of the emerging European clearing and settlement infrastructure has become an even greater burden, says Mr Fuller. Because, on some of the new trading venues, the CCP does not take on the risk of the trade until end of day, trading firms may need to secure already-costly credit lines in order to cover the trading day risk with the original counterparty."Trading across multiple trading venues in the absence of a single CCP, such as the DTCC in the US, could multiply the cost of clearing services even though their overall positions are flat," adds Mr Fuller. In the current market conditions, those venues offering real-time or intra-day novation - the point at which the CCP intercepts the trade and takes on the transaction risk - may benefit, at least in the short-term, from higher trading volumes.Despite the hardly trivial post-trade challenges found in Europe - which may soon be resolved with the imminent arrival of the DTCC in Europe - many market watchers are optimistic that the new breed of high-frequency trader will be able to profitably make his mark nonetheless. "The statistical arbitrage community and high-frequency quant-fund community represents some of the most savvy electronic investors," says Mr Wecker. And, as such, adds another source: "They've done their sums."The Banker understands that some firms are still assessing which models will best suit their scale and technology capability, and it may be some months before they are ready to enter the market. Bashful as these organisations tend to be, however, the story of their future impact on Europe will be told by the very public rise and fall of their hopeful suitors.=====================FINANCIAL NEWS: Nomura EMEA Equities Team Aims for Lion’s Share of Business By Dawn Cowie 1/19/09January 12 was a grey Monday in a bleak month for most European equities teams, but it was a landmark date for Lehman Brothers’ former European equity traders.After the collapse of the US bank last September, its takeover by Japan’s Nomura in October and three months of strategising, integrating and waiting, their old trading platform was finally switched back on under the Nomura name.Now Rachid Bouzouba, head of equities for Europe, the Middle East and Africa at Nomura, has to show why the equities business was seen as the jewel in the crown of Lehman’s European operations. His first target is to rebuild the market share of Lehman’s equities business to the level it stood at before the bank collapsed with a combined equities team of almost 800.This “cruise altitude” should be reached by the end of March. This will be no mean feat as Lehman had the largest market share of trading on the London Stock Exchange at about 10%. Meanwhile, the European equities business had made more than $1bn (€755m) in revenues in the financial year up to the bank’s collapse, under Bouzouba’s leadership, despite worsening market conditions.Then he aims to build the combined business back into a top-five participant in the Emea region by the end of the 2010 fiscal year. Bouzouba said: “Clients have been putting us under huge pressure to get back up and running and there are opportunities to take market share due to reduced competition. The process would be much tougher in a bull market.”Nomura now has a unique offering with the legacy of Lehman technology as the foundation of its equities platform as well as access to electronic broker Instinet and multilateral trading facility Chi-X, both owned by the Japanese bank.Another positive for the bank is that traders want to deal with a more diversified group of US, European and Asian banks because of their increased sensitivity to counterparty risk. There is also rising demand from investors for instant access to Asian equities, something that many of Nomura’s rivals cannot offer.Research is going to be an important part of the business plan. Nomura covers about 400 stocks and plans to increase this to 500 by the end of this quarter and 700 by the end of September. The old Lehman target was to cover 600 stocks in Europe.Although the past three months have been frustrating for Nomura’s traders champing at the bit to do transactions, it has also provided breathing space to speak to clients, analyse what has been going on in the market and understand the weaknesses of the former business through dealing with the administrator, according to Bouzouba. “We have gained in credibility with our clients over this period,” he said.After several failed attempts to build a European equities business, this is Nomura’s big chance and Bouzouba is convinced that internal cultural problems will not stand in the way.He said: “We are in a healthy psychological position because we have nothing to lose – our team have been through the worst and they know what it takes to win in these markets.”=====================
Why do there banks collapse? : $1.2 Million Spent to Redecorate Thain's Office
From Clusterstock , Jan. 22, 2009:
Didn't someone go to jail for spending too much on a shower curtain?
Amidst everything else going on at Bank of America (BAC) and its boneheaded decision to buy dying Merrill Lynch, Charlie Gasparino reports, for the Daily Beast, that John Thain had a ridiculous amount spent on his own perks, including a redecorating of his office.
According to documents reviewed by The Daily Beast, Thain spent $1.22 million of company money to refurbish his office at Merrill Lynch headquarters in lower Manhattan. The biggest piece of the spending spree: $800,000 to hire famed celebrity designer Michael Smith, who is currently redesigning the White House for the Obama family for just $100,000.
The other big ticket items Thain purchased include: $87,000 for an area rug in Thain's conference room and another area rug for $44,000; a "mahogany pedestal table" for $25,000; a "19th Century Credenza" in Thain's office for $68,000; a sofa for $15,000; four pairs curtains for $28,000; a pair of guest chairs for $87,000; a "George IV Desk" for $18,000; 6 wall sconces for $2,700; six chairs in his private dining room for $37,000; a mirror in his private dining room for $5,000; a chandelier in the private dining room for $13,000; fabric for a "Roman Shade" for $11,000; a "custom coffee table" for $16,000; something called a "commode on legs" for $35,000; a "Regency Chairs" for $24,000; "40 yards of farbric for wall panels," for $5,000 and a "parchment waste can" for $1,400.
I hope one and all had a festive break.
Did I manage to do any holiday reading? Nah, not a bit.
I did however take my son to his first 20Twenty cricket matches (Qld V Sth Aust) and then (Aust v Sth Africa).
Anyway, back to the office and straight off the bat we have 29 pages (10 of content) on 18 recommendations from the good ‘folks’ at G30.
Within this there are 4 ‘Core’ recommendations:
Close regulatory supervisory gaps;
Improve prudential regulatory quality;
Institutional policies (risk, capital etc) to be improved; and
Increase transparency of products.
All common sense but we don’t want is to stifle the flow of capital (R1c). I strongly agree that even a modest system of regulation can result in a false impression (R4b). [more to follow]
G30 Financial Reform recommendations:
http://www.group30.org/
http://www.group30.org/pubs/recommendations.pdf
Good news from Reuters on a consolidated tape, but it not the final solution. The pricing lacks some transparency (i.e. I understand it is 10Euros plus the costs for whatever they consolidate). Anyway, plenty of other more expert people have commented on this. Try:
Call for evidence on the impact of MiFID on secondary markets functioning
http://www.cesr-eu.org/index.php?page=responses&id=125
Also of interest is:
Public review of CESR's preliminary draft advice on access and interoperability arrangements
http://www.cesr-eu.org/index.php?page=consultation_details&id=130
I noticed HK-CCASS (CPP) is preparing to take a hit from Lehman and joins the creditors line up. I thought all CCPs managed to get off the Lehman hook. Is anyone aware of other CCPs that experienced a default (and hence call on the mutual guarantee fund contribution?)
European Financial Integration Report 2008The report is an annual analysis of the integration in the EU financial sector and its effects on competition, efficiency, financial stability and competitiveness.
Good to see CCPs get a mention and Box 3.1 mentions the downward pressure on post trade fees.
Web site: http://ec.europa.eu/internal_market/finances/fim/index_en.htm
Full report:
http://ec.europa.eu/internal_market/finances/docs/cross-sector/fin-integration/efir_report_2008_en.pdf
I would be re-miss not to note the other big story of the week, the inauguration of Barack.
I can’t remember where I read it but one of the lasting impressions for me is that now a new generation will grow up knowing an African American in the White House. This will provide a new perspective to the youth of tomorrow, which I must say, I think is a great thing both for black and white. I’m also very impressed by his speech writer (I think a mere 28yrs old!)
Inauguration of Barack Obama
Addressing the Muslim world, he said that “we seek a new way forward, based on mutual interest and mutual respect.” Perhaps alluding to Iran, he said “we will extend our hand if you are willing to unclench your fist.”
http://www.economist.com/daily/news/displaystory.cfm?story_id=12964418&fsrc=nwl
From a Headhunter:
I am currently conducting a search in London for a sales / relationship specialist to sell clearing services for an international exchange – my client. Is there anyone in your network who you may be able to recommend
It is Australia Day here on Monday so will no doubt be at a Barbie somewhere. (No snow anticipated!)
The big event for me this week-end is the Big Swim.
Wish me luck!
http://www.thebigswim.org.au/
Welcome on board to Deutsche Bank offers post-trade services to Chi-X and Turquoise
Also below are a couple of good stories (at least in my opinion) on;
Nasdaq Clearing initiative;
The changing actors in the new capital markets; and
A cheeky story on 'why do these banks collapse' (ML).
Oh, and if you get a chance try and click through to:
http://clearingandsettlement.blogspot.com/
Any suggestions would be appreciated.
And so much more I didn’t read!
Great week-end all,
S
Euronext MTFs on track for launch in next few weeks
Equiduct aims for Q1 launch despite setbacks
Equiduct plans to offer access to three clearing houses, LCH.Clearnet Ltd, LCH.Clearnet SA and SIX X-Clear, upon its launch.
Euronext’s single order book to cut buy-side post-trade costs
8 years in the making and finally the single order book is here. In my view settlement is a natural monopoly, and should be commoditised and regulated as such. Trading, Clearing and Custody should all be open to market forces. Competition has arrived in the clearing space and the market has already enjoyed more price savings than any merger has delivered.
09-05 ASIC extends ban on covered short selling of financial securitiesWednesday 21 January 2009http://www.asic.gov.au/asic/asic.nsf/byheadline/09-05+ASIC+extends+ban+on+covered+short+selling+of+financial+securities?openDocument
19/01/2009 10:55:00
THOMSON REUTERS LAUNCHES CONSOLIDATED STOCK FEED
Thomson Reuters has launched a consolidated pan-European securities data feed in an initiative designed to combat the fragmentation of market data prices under the MiFID regulatory regime.
More on this story: http://www.finextra.com/fullstory.asp?id=19534
Another interpretation / explanation of this is available at:
http://fragmentation.fidessa.com/2009/01/22/turquoise-and-the-tale-of-tape/
Consolidated tape stifled by incumbent exchanges
It also observed the “vague” nature of MiFID’s approach to clearing and settling, arguing that a lack of harmony between member states has increased clearing costs. “It is clear that this approach seriously undermines the harmonisation efforts of MiFID and the Code of Conduct on clearing and settlement, as it considerably increases the cost for accessing non-domestic CCPs and/or the time required to obtain regulatory clearance for such access.”
http://www.thetradenews.com/operations-technology/market-data/2661
Whilst I agree with most of what Equiduct’s Artur Fischer says, I think his clearing comments need qualification. Equiduct plans to offer access to three clearing houses, LCH.Clearnet Ltd, LCH.Clearnet SA and SIX X-Clear, upon its launch rather than using one of the new entrants.
Equiduct is 53 per cent owned by Börse Berlin, with 23 per cent held by Jos Peeters, a Belgian venture capitalist and a former founder of the Easdaq exchange, with the rest held by Knight Capital and other investment banks, including Goldman Sachs through a former investment in Easdaq.
This effectively prohibited Lehman Brothers SA from settling any of its positions in HKSCC’s Central Clearing and Settlement System (CCASS) and completing settlements with its customers (excepting returning fully paid shares to customers). As a result, HKSCC had to fill a $2.5 billion funding gap in a very tight credit market to fulfil its settlement obligations as the central counterparty. It had to close out LBSA’s total outstanding positions of $3.5 billion created before the restriction notice, resulting in a loss of approximately $160 million for HKEx, which in turn will be an added claim in the LBSA insolvency.
http://www.hkex.com.hk/publication/newsltr/2009-01-07-e.pdf
Industry Mulls Potential of Nasdaq Clearing InitiativeWith Nasdaq OMX slated to launch a clearing service in the third quarter, exchange officials are pressing industry players for feedback on how to compete against the National Securities Clearing Corp.
DTCC Says It Will Support All Central CDS Clearing Initiatives
http://www.securitiesindustry.com/news/23119-1.html
16/01/2009 18:29:00
NEONET ABANDONS TAKEOVER TALKS
Swedish agency broker and systems supplier Neonet has pulled out of take-over talks with an un-named counterparty and says that no offer has been received for the company.
More on this story: http://www.finextra.com/fullstory.asp?id=19532
(Neonet, a Swedish-based agency brokerage and technology provider, has called off cooperation talks with a “counterparty”, widely believed to be German stock exchange group Deutsche Börse.)
http://www.thetradenews.com/trading/2665
Industry Mulls Potential of Nasdaq Clearing Initiative Does the NSCC utility need a competitor?
January 19, 2009By John Hintze
With Nasdaq OMX Group slated to launch a clearing service in the third quarter, exchange officials have been pressing industry players for feedback on how best to compete against the National Securities Clearing Corp. (NSCC) in the continuous net-settlement arena.
Self-clearing broker-dealers largely view the prospect of an NSCC rival favorably. "Conceptually, firms would be crazy not to be interested in creating competition and bringing innovation and additional value to the industry," said Jeff Bell, EVP of clearing and technology at Los Angeles-based Wedbush Morgan.
But Nasdaq will face major hurdles. In today's bear market, broker-dealers may prefer to devote their operational resources to more urgent tasks than developing connectivity to a new clearing service. And although Nasdaq points to price as its competitive focus, most brokerages view the charges from NSCC--a not-for-profit Depository Trust & Clearing Corp. subsidiary that returns excess fees to members--as reasonable, especially after a series of cuts last year.
"Nasdaq is doing this at a really challenging time, and it's going to put a lot of pressure on [broker-dealers] to have to change their systems around and interface with a second clearinghouse," said Bell, adding that he shared his views with both NSCC and Nasdaq early last week.
The clearing facility appears to be part of Nasdaq's long-term strategy to build market share. Brokerage executives contacted by Securities Industry News said Chris Concannon, Nasdaq's EVP of transaction services, told them that unlike NYSE Euronext, which has made pre-trade services a priority with the acquisitions of market data technology provider Wombat Financial Software and connectivity vendor TransactTools, Nasdaq is concentrating on post-trade processing.
Exchange operators are seeking to distinguish themselves with added services, said Adam Sussman, an analyst at New York-based Tabb Group, adding that the OMX part of the transatlantic company has been a major provider of matching and post-matching technology in Europe. "Nasdaq is looking to build its brand and attract more customers, and I think it can do that initially by making clearance a cost leader," said Sussman.
Although Nasdaq has publicly released few details about its gestating clearing unit, some information has been conveyed in one-on-one meetings with potential customers. Sources that have met with Concannon said he has focused on firms' traders rather than the back-office executives closer to the clearing function. "Concannon is not marketing the service to the head of clearance at a large broker," said Sussman, who pointed to Concannon's experience working not only at Nasdaq but at Instinet and Island ECN, where he has frequently dealt with traders. "He's trying to sell the value proposition to the traders and leverage them to sell it to the clearance guys. The clearance guys will never want to switch."
That reluctance may be warranted, given that NSCC and the other subsidiaries of DTCC have become the backbone of the securities industry. DTCC's various entities not only clear across asset classes, but also offer ancillary services such as processing of automated customer account transfers and institutional delivery services. "That's where NSCC has a strong product," said Sussman. "It offers cross margining, risk management--all the benefits of a central counterparty. Nasdaq's not doing all of that stuff. All they're saying right now is, 'we're going to clear equity trades.'"
Stuart Goldstein, managing director of corporate communications at DTCC, asserted that "at a time when the industry is facing the worst financial crisis in history, the one bright spot of certainty and stability has been the seamlessness in DTCC's post-trade clearing and settlement process, and the management of market volatility. Bifurcating clearing and settlement in the U.S. would introduce a new element of systemic risk, and we'll have to see if financial firms and regulators think that is a good idea."
Nasdaq obtained the clearing license in its August acquisition of the Boston Stock Exchange (BSE), which also brought an exchange license that was used Jan. 16 to launch a second platform--Nasdaq OMX BX. Establishing the continuous net settlement facility will likely prove far more challenging.
DTCC created the Depository Trust Corp. (DTC) and NSCC in the early 1970s, when brokerages were overwhelmed by the demands of paper stock certificates. DTC provided a central depository and book-entry accounting so that the certificates no longer had to change hands, while NSCC offered multilateral netting, allowing brokers to combine buy and sell orders into a single position, thereby reducing capital requirements. Other net settlement entities emerged over the years, including BSE's and another that cleared the trades of the Pacific Exchange, which through a series of mergers is now part of NYSE Euronext. Those market centers eventually integrated their clearing operations into NSCC.
Brian Hyndman, SVP of transaction services at Nasdaq, said the exchange has been crafting its proposal and intends to file it shortly with the Securities and Exchange Commission. NSCC has been a monopoly for about 20 years, he said, adding, "We're going to leverage Inet technology and compete on costs. We think we can do it more efficiently." Nasdaq acquired the Inet electronic communications network in 2005, combining it a year later with the Brut ECN platform to produce one of the fastest execution systems worldwide.
Clearance at a Loss
Technology benefits aside, developing connectivity will be expensive for broker-dealers. Tabb Group's Sussman said that in his conversations with brokers he found little interest in connecting to Nasdaq's clearing facility unless the fees are "ridiculously" low, but that could present an opening. "Even though NSCC has very low costs, Nasdaq can potentially offer clearance at a loss, if it makes it up by gaining execution revenue," said Sussman.
However, Wedbush's Bell suggested that a successful Nasdaq clearing unit could ultimately raise fees for the industry, since drawing volume away from NSCC, which operates at cost, would reduce its economies of scale and likely require it to raise prices. In addition, he said, Nasdaq officials described fees that would undercut NSCC's by 40 percent, but Wedbush calculations show little difference after the utility's discounts and annual refund are included. But because those discounts and refunds are unpredictable--which is problematic for brokers trying to figure out future costs--a low fee without ad hoc reductions could make Nasdaq's offering attractive, added Bell.
NSCC responded to such concerns by providing aggregate fee cuts of $152 million last year. On Jan. 1 it introduced another reduction that is anticipated to save the industry $15 million to $20 million in 2009. Susan Cosgrove, NSCC's managing director of equity clearing and settlement, noted that the utility's fixed-cost model is designed to produce cheaper fees as trade volumes increase. "Volume has increased," said Cosgrove. "Rather than wait until the end of the year to provide a rebate--based on the NSCC's excess operating margin--we cut fees throughout the year."
Lower fees should generate a lower rebate. Cosgrove said NSCC is still calculating the rebate, which is paid in February, but has already told customers it will be very low. She noted that NSCC has also sought to smooth out monthly discounts, which arise when higher-than-expected volumes reduce the cost per trade, by no longer discounting conservatively early in the year and consequently offering no discount by year-end.
Interoperability Issues
Because many self-clearing firms will probably use both clearing systems, interoperability issues will also have to be resolved, said Craig Messinger, managing director at Pershing, the largest correspondent clearing firm by number of correspondents. Collateral will have to move back and forth and, for risk management purposes, broker-dealers will have to know where their positions lie.
Messinger, who said he spoke with Nasdaq executives about the initiative several months ago, noted that the project has appeared to "peak the interest" of broker-dealers that only trade equities, but Pershing will seriously consider any benefits it affords. Before they were integrated into the NSCC, interoperability once existed among the regional clearers, he added.
John Muehlhausen, CTO of Essex Radez, a Chicago-based self-clearing broker that specializes in algorithmic trading and caters to active traders, said existing brokers will find lower costs and more flexible capital requirements to be the biggest draws. For aspiring self-clearers, however, an easier-to-use system could prove attractive--"Nasdaq's clearer might attract customers who are not yet self-clearing by streamlining the process," said Muehlhausen.
Improving the process through technology may be Nasdaq's best route to success. "If it's not an economic play," said Bell, "then it has to be technology: innovative products and capabilities." Bell pointed to the development of real-time trade guarantees as an example. Because NSCC provides guarantees 24 hours after a trade, unexpected capital calls can arrive the next morning and take another 24 hours to be resolved. Real-time guarantees would give broker-dealers greater control over their capital and potentially quicker resolutions. "That would be a really important service now, because capital is hard to come by and firms are very protective of it," he said.
Nasdaq took an earlier step into the clearing space with the acquisition of 80 percent of New York-based International Derivatives Clearing Group (IDCG). Nasdaq announced the completion of that deal on Dec. 22, the same day the Commodity Futures Trading Commission approved IDCG to clear interest-rate swap futures and other fixed-income derivatives contracts. IDCG plans to act as a central counterparty, while using Nasdaq OMX Secur XT technology for clearing.
THE BANKER: New Kids on the Block - Trading GiantsBy Michelle Price January 2009The European cash-equities stage, inflamed as it has become by competition in the wake of Markets in Financial Instruments Directive (MiFID), is already a little overcrowded. During the past 18 months, a slew of new, frequently indistinguishable trading venues have entered the marketplace with fierce public commotion and variable success.These include Instinet-owned Chi-X Europe, widely regarded as runaway success, and NYFIX Euro Millennium, both of which have been operational for some time, while August 2008 brought the long-awaited take-off of bank-backed platform Turquoise. Nasdaq OMX Europe began operations in late September, and BATS Europe, whose US platform commands 10.6% of the market, launched on October 31. Waiting in the wings are Borse Berlin-owned Equiduct Trading and the Nordic contender Burgundy, while both the London Stock Exchange (LSE) and Knight Capital Group, a US-based agency broker, have unveiled plans to launch dark liquidity pools.But while the spotlight has been very firmly fixed on the arrival of these new publicity-hungry contenders, little public discussion has been devoted to the often-inscrutable entities that will ultimately decide their fate: liquidity providers. For the success of these trading venues will be determined by their ability not only to wrestle established liquidity away from the incumbent exchanges, but also by how successful they are in attracting new liquidity provided by trading firms, whose names and trading strategies are largely unfamiliar to the European market.Hailing principally from the US, these firms - comprising proprietary trading desks, hedge funds and brokerages - have played a quietly transformative role in their native markets, and are now eyeing Europe as their next destination. Many market-watchers believe that these firms, having fast gained a formidable presence in the US markets, will play a powerful role in determining not only who wins the battle for European liquidity, but the shape of European landscape in years to come.Revising the roll-callSo who are these invisible firms? In answering this question, it pays to look closely at the investors behind two of the most successful upstart trading platforms launched to date. Take Chi-X Europe, which has secured about a 14% market share of the FTSE 100 stocks and BATS Trading, the third largest market in the US, as key examples. Beside what was once upon a time the familiar roll-call of blue-blooded Wall Street brands, including Merrill Lynch, Morgan Stanley and Citigroup, are some less recognisable names including Global Electronic Trading Company (GETCO), Lime Brokerage, Optiver, Tradebot and Wedbush Morgan Securities (WMS).These firms and their publicity-shy peers and clients - which often hail from regions that would be described, at best, as peripheral to the world of global finance, including South Carolina, Kansas and Los Angeles - form part of a new wave of so-called 'high frequency' speed-sensitive traders that have come to dominate US equities in recent years. Frequently young, secretive, privately held and ambitious, the importance of these high-frequency trading firms, which may often number only six or seven people in size, is not to be underestimated. Rosenblatt Europe estimates that these firms collectively account for a staggering 50% to 60% of US equity trading volumes on an annual basis, according to Justin Schack, vice-president of the agency broker.Edward Wedbush, president and CEO of Los Angeles-based WMS, which is among the largest independent brokerage firms in the US, knows better than most just how "huge", as he puts it, such high frequency players have become in the US marketplace. WMS, which originally served as BATS Trading's chief clearing agent, provides transaction, trading and clearing services to a broad range of statistical arbitrage traders and automated market makers. "Through computer-assisted trading, these clients provide the liquidity that is fundamental to the market," he says. Few would anticipate that WMS, as a provider of execution services to these high-volume clients, has ranked as the number one liquidity provider to Nasdaq for the past three years.Founded in 2001, New York-based Lime Brokerage has also built a business catering to the demanding requirements of these ever-important trading houses. Among the original three backers of BATS, Lime Brokerage, which also has a minority stake in the Chicago Board Options Exchange's stock exchange, styles itself as a super high-tech agency broker. It caters to clients that, as the firm's newly appointed CEO Jeff Wecker puts it, "are uniquely sensitive to speed of execution". The firm executes hundreds of millions of shares a day on behalf of these clients, touching a sizeable 5% of all traded volumes in the US equities market daily.Impressive though this may be, such volumes are small change compared with those pumped out by high-frequency players trading on their own account - GETCO being the most notable example. The low-profile, high-frequency automated market maker, which was an early investor in BATS Trading and a backer of Chi-X Europe, uses automated electronic systems to trade more than one billion shares a month, according to a 2006 Securities and Exchange Commission (SEC) filing.Trading on such a vast scale, GETCO and its peers are believed to have played a fundamental role in reshaping the US equity market structures. But unlike many investment banks, the firm passionately eschews ego-driven, short-termist individualism of the sort that has traditionally been characteristic of City trading floors. "We believe that a low-ego, team-oriented culture fuels the kind of continuous innovation that is critical to our success," says Dan Tierney, co-founder GETCO. Nevertheless, its rumoured market value gives cause for some self-satisfaction. In April 2007, General Atlantic, a private equity firm, purchased a 20% stake in GETCO in a deal that valued the firm somewhere in the region of $1bn to $1.5bn, according to The Wall Street Journal.Maker taker modelFirms such as GETCO or leading Dutch market maker Optiver, another Chi-X backer, add liquidity to the markets by using high-speed algorithms to flood venues with bid and offer orders on particular stocks. Although such firms profit on the spread - which may often total a mere penny or less - the success of this strategy depends largely on the so-called 'maker taker' fee model which is increasingly being adopted by US and new European execution venues in order to attract liquidity. Under this fee structure, liquidity providers (that is firms that either post an order to buy or sell at a fixed price) are offered a rebate if their quotes are met. Chi-X Europe, for example, pays a 0.2 basis point (bp) rebate to firms that commit to posting quotes on its platform, while it charges takers of liquidity (firms that hit these orders) 0.3bp.High-frequency market makers collect this rebate hundreds of thousands of times a day. "The rebate is a big proportion of the profit and loss that they drive from that market activity," says Dmitri Galinov, a director at Credit Suisse Advanced Execution Services. Frequently, the daily value of the rebate will offset the profit and losses on the firm's trading account. "Overall they may have lost money trading but will make money due to the rebate," says Gary Wedbush, head of capital markets at WMS. For all parties concerned, profits are derived from wafer-thin margins ramped up to a colossal scale.Unlike automated market makers, however, statistical arbitrage players operate by analysing vast quantities of market data from which they identify and exploit inefficiencies in the pricing of securities. Typically, these firms take on very little leverage, carry little risk and finish the day flat. But the difference between the two strategies is becoming less perceptible, says Gary Wedbush. "There is definitely a blurring between these two strategies, as many statistical arbitrage strategies depend on receiving the rebate," he adds.Due to their growing scale, many statistical arbitrage players have become key liquidity providers to the markets that they operate in and, as such, play a similar role to their automated market making peers. Hedge funds including New York-based Tower Research Capital LLC, a close affiliate of Lime Brokerage, and global giant Citadel, which accounts for 16% of the European market according to one source, are both in this league. Other proprietary firms trading on their own account, such as Chicago-based Sun Trading and Kansas-based Tradebot, have become equally influential and compete head-on with the world's largest trading organisations. Both declined to comment.Beyond the speed of thoughtFounded in 1999 by technology enthusiast Dave Cummings, Tradebot is regarded as one of the original 'black-box' trading powerhouses. Mr Cummings, the company's CEO, also founded BATS Trading, of which he is former CEO and in which he owns a major stake. Like BATS, for which in the words of one source, outsourcing is regarded as "blasphemy", Tradebot designs and builds all its technology in house. The firm is an active liquidity provider on the major US exchanges and electronic crossing networks, including Nasdaq, NYSE Arca, BATS and Direct Edge, where it moves in and out of stocks at breakneck speed. For Tradebot, as with the above firms, the fundamentals of a stock are rarely, if ever, relevant.Instead, the key is low latency. For firms such as Optiver and Tradebot, speed is not just everything: it is the only thing. Take Nasdaq, one of the faster US markets. Every time the exchange receives an updated quote, explains Chris Concannon, executive vice-president, transaction services for Nasdaq OMX Group, more than five firms are able to receive that information and update their quotes accordingly in about half a millisecond. "They are now first in line for execution. So when the next incoming order comes in, the first of those five firms gets it first: they've just got priority over the entire market at that price," he says. By the time it gets to the fifth firm, the spread will have moved.Low latency is therefore about being at the front of the queue. Firms such as Tradebot are able to send and receive orders in less than one-thousandth of a second: put another way, they are able to trade about 200 times faster than the average speed of thought. In a bear market, these micro-fractions matter more than ever: the potential value of a millisecond was vividly demonstrated during a particularly bloody period on Black Friday, October 10, 2008, when the UK market plummeted at a hair-raising GBP250m ($370.5m) a second. When selling in such conditions, a millisecond matters. For some large firms, a one-millisecond advantage could even be worth up to $100m a year.At the firewallBut it is not enough for the firms themselves to be fast. Once they are at the exchange's firewall, they are dependent on the speed of the exchange or execution venue itself. Because the fastest trading firms can do the most business on the speediest exchanges, the latter are in a position to garner the most liquidity from this new wave of players. Hence the unseemly cat fight that has unfolded in Europe regarding low-latency statistics: for firms such as BATS and Chi-X Europe, technology capability has formed the central plank of their marketing campaigns as they hope to court this new breed of trader - a pursuit which, at least in the case of Chi-X, has so far proved successful.Meanwhile, incumbent platforms, such as the LSE, are trying to catch up. According to its own figures, BATS' statistical average latency - which it defines as the time from which an order hits its firewall until the time it goes back through its firewall - is 444 microseconds, that is 444 millionths of a second. Compare this to the LSE, whose latency is at just under five milliseconds, or five thousandths of a second. For the incumbents, however, there might yet be a saving grace. Trading at high speed and on a grand scale is a truly transformative exercise, which tends to incubate more overall volume. In the US, says Mr Schack, the volumes "exploded" when the high-frequency players pitched up.Transformation does not end here. Many of the new breed of traders, in particular GETCO, Optiver, Tradebot and Sun Trading, regard themselves as positive (albeit profitable) forces in the equities markets. By deepening liquidity, they serve to reduce the average spread between the bid and offer on the equities that they trade, thereby making the markets more efficient for retail and institutional investors. In its 2006 letter to the SEC, GETCO made this point quite explicitly. Between 2000 and 2006, the spread on Microsoft (a popular liquid stock for such firms) tightened from $0.03 to $0.01, a contraction that equates to a $300m saving in a trading year of 240 days, wrote Stephen Schuler, GETCO's co-founder and CEO. Indeed, GETCO's goal, says Mr Tierney, "is to constantly improve our processes, create greater efficiencies in the marketplace, and reduce the cost of risk transfer for all investors".But this also equates to decreased profitability on the spread. This would make Europe, as a far less efficient market, an ever-attractive prospect to such firms. Mark Hemsley, CEO of BATS Europe, says that the European landscape, in terms of technology capability, the move towards the 'maker taker' model, and the decreased cost of market access, has become more suited to their strategies. "Now these types of traders have got a natural place in which to trade," he adds.Furthermore, says Bradley Duke, director, head of institutional, electronic sales in Europe at Knight Capital Group, another major liquidity provider to the US market, the wideness of the European spreads presents a huge opportunity for these firms. "They are bringing to Europe a range of battle-tested algorithms and repurposing them for the European landscape," he adds.From Hi to LoLime Brokerage is one such player. Mr Wecker believes that the climate in Europe is "ripe" for its service offering and the firm is "looking quite seriously at the European marketplace", he continues. This interest stems, for the most part, from client demand. "We would not move into a marketplace if we didn't have significant customer interests to be active in that marketplace. The changes in the European market structure are so profound that it is creating new opportunities, particularly for smart electronic investors," he says.Several other firms are poised to make the jump, while others, including GETCO, Citadel and Sun Trading, are already making their presence felt. Steve Grob, director of strategy at trading connectivity provider Fidessa, which recently launched a fragmentation index in order to track the shifting behaviour of European liquidity, says there is evidence that the volumes appearing on new venues is a result of growing statistical arbitrage activity. Certainly the LSE, which has recently altered its tariff structure to attract more algorithmic traders, likes to declare that it has benefited from a growth in arbitrage trading. The beleaguered Deutsche Borse has reported a similar effect.For some, however, this looks like an expedient argument. As one source remarks: "If I were in their position, I would say the same too." Few could argue convincingly that the pressure on Europe's somewhat flabby incumbents is not growing. November, for example, brought what has widely been regarded as the first casualty of the trading platform battle, when SIX Group, operator of the Swiss exchange, announced that it is to shut down SWX Europe, its London-based blue-chip market, in order to consolidate its operations on its Zurich platform. Meanwhile, the untimely collapse of Lehman Brothers may have badly wounded the LSE's defensive move to launch Baikal, a European dark pool unveiled in June 2007, for which the late investment bank was to act as a key technology provider.The LSE's difficulties underline more broadly just how important the new breed of US-led traders may be to the ever-thirsty European landscape in the wake of the financial crisis. As the embattled investment banking community finds itself desperately short of capital, the once free-flowing broker extended leverage, which has served to bloat cash equities trading volumes over the past few years, grows ever-scarcer. This situation has not been helped by the reduced appetite for risk demonstrated by many bulge-bracket banks, a trend that reportedly led JPMorgan Chase to scrap its 80-strong global standalone prop desk in November. By contrast, many high-frequency firms, due to the nature and speed of their trading strategies, remain largely undeterred by extreme volatility of the type witnessed in recent months and, in some instances, have found it to their advantage, says Lime Brokerage's Mr Wecker.Mindful of this shifting power base, both the LSE and Euronext are reportedly making strenuous efforts to engage with a number of Chicago-based high-frequency market makers, in an attempt to bring their liquidity onto their markets. This strategy may yet prove successful. For a number of US players, Europe's exchanges certainly seem to hold some appeal, although firms such as WMS are looking further afield to Europe's emerging eastern contenders. WMS, which is not a member of the LSE, is in the process of joining the intensely ambitious Warsaw Stock Exchange. The US brokerage was drawn to the Polish trading venue by what Edward Wedbush describes as its "aggressive use of technology" and the expectation that high-frequency electronic trading is due to take off in the region in the near future.Research by Tony Kirby, co-chair of industry association Best Execution Working Group, indicates that this prediction is well placed: "The hedge fund market makers have a very strong appetite to interact with the new multilateral trading facilities - particularly those in which they maintain a stake." His findings also suggest that the ratio of this type of 'lo-touch' to 'hi-touch' trading in Europe will increase from a 30-70 split in 2008 to reach almost a 40-60 split by 2010, with just less than one-third of European liquidity supplied by high-frequency, 'lo-touch' trail-blazers.Uncertain survivalYet, the extent to which these US high-frequency firms can succeed in the tangled European market remains uncertain. Bob Fuller, former CEO of Equiduct and now CEO of Exchange Axis, a neutral virtual broker, warns that Europe's intricate clearing and settlement infrastructure may yet trip up US firms entering the European marketplace. Unlike in the US, where the Depository Trust and Clearing Corporation (DTCC) acts as the single central clearing counterparty (CCP) for all equities transactions on all trading venues, the pan-European market is littered with CCPs and 23 central securities depositories. Even in the best of times, this is widely regarded as an unsatisfactorily complex and inefficient post-trade infrastructure.In the worst of times, however, when credit has been short on quantity and high on cost, the complexity of the emerging European clearing and settlement infrastructure has become an even greater burden, says Mr Fuller. Because, on some of the new trading venues, the CCP does not take on the risk of the trade until end of day, trading firms may need to secure already-costly credit lines in order to cover the trading day risk with the original counterparty."Trading across multiple trading venues in the absence of a single CCP, such as the DTCC in the US, could multiply the cost of clearing services even though their overall positions are flat," adds Mr Fuller. In the current market conditions, those venues offering real-time or intra-day novation - the point at which the CCP intercepts the trade and takes on the transaction risk - may benefit, at least in the short-term, from higher trading volumes.Despite the hardly trivial post-trade challenges found in Europe - which may soon be resolved with the imminent arrival of the DTCC in Europe - many market watchers are optimistic that the new breed of high-frequency trader will be able to profitably make his mark nonetheless. "The statistical arbitrage community and high-frequency quant-fund community represents some of the most savvy electronic investors," says Mr Wecker. And, as such, adds another source: "They've done their sums."The Banker understands that some firms are still assessing which models will best suit their scale and technology capability, and it may be some months before they are ready to enter the market. Bashful as these organisations tend to be, however, the story of their future impact on Europe will be told by the very public rise and fall of their hopeful suitors.=====================FINANCIAL NEWS: Nomura EMEA Equities Team Aims for Lion’s Share of Business By Dawn Cowie 1/19/09January 12 was a grey Monday in a bleak month for most European equities teams, but it was a landmark date for Lehman Brothers’ former European equity traders.After the collapse of the US bank last September, its takeover by Japan’s Nomura in October and three months of strategising, integrating and waiting, their old trading platform was finally switched back on under the Nomura name.Now Rachid Bouzouba, head of equities for Europe, the Middle East and Africa at Nomura, has to show why the equities business was seen as the jewel in the crown of Lehman’s European operations. His first target is to rebuild the market share of Lehman’s equities business to the level it stood at before the bank collapsed with a combined equities team of almost 800.This “cruise altitude” should be reached by the end of March. This will be no mean feat as Lehman had the largest market share of trading on the London Stock Exchange at about 10%. Meanwhile, the European equities business had made more than $1bn (€755m) in revenues in the financial year up to the bank’s collapse, under Bouzouba’s leadership, despite worsening market conditions.Then he aims to build the combined business back into a top-five participant in the Emea region by the end of the 2010 fiscal year. Bouzouba said: “Clients have been putting us under huge pressure to get back up and running and there are opportunities to take market share due to reduced competition. The process would be much tougher in a bull market.”Nomura now has a unique offering with the legacy of Lehman technology as the foundation of its equities platform as well as access to electronic broker Instinet and multilateral trading facility Chi-X, both owned by the Japanese bank.Another positive for the bank is that traders want to deal with a more diversified group of US, European and Asian banks because of their increased sensitivity to counterparty risk. There is also rising demand from investors for instant access to Asian equities, something that many of Nomura’s rivals cannot offer.Research is going to be an important part of the business plan. Nomura covers about 400 stocks and plans to increase this to 500 by the end of this quarter and 700 by the end of September. The old Lehman target was to cover 600 stocks in Europe.Although the past three months have been frustrating for Nomura’s traders champing at the bit to do transactions, it has also provided breathing space to speak to clients, analyse what has been going on in the market and understand the weaknesses of the former business through dealing with the administrator, according to Bouzouba. “We have gained in credibility with our clients over this period,” he said.After several failed attempts to build a European equities business, this is Nomura’s big chance and Bouzouba is convinced that internal cultural problems will not stand in the way.He said: “We are in a healthy psychological position because we have nothing to lose – our team have been through the worst and they know what it takes to win in these markets.”=====================
Why do there banks collapse? : $1.2 Million Spent to Redecorate Thain's Office
From Clusterstock , Jan. 22, 2009:
Didn't someone go to jail for spending too much on a shower curtain?
Amidst everything else going on at Bank of America (BAC) and its boneheaded decision to buy dying Merrill Lynch, Charlie Gasparino reports, for the Daily Beast, that John Thain had a ridiculous amount spent on his own perks, including a redecorating of his office.
According to documents reviewed by The Daily Beast, Thain spent $1.22 million of company money to refurbish his office at Merrill Lynch headquarters in lower Manhattan. The biggest piece of the spending spree: $800,000 to hire famed celebrity designer Michael Smith, who is currently redesigning the White House for the Obama family for just $100,000.
The other big ticket items Thain purchased include: $87,000 for an area rug in Thain's conference room and another area rug for $44,000; a "mahogany pedestal table" for $25,000; a "19th Century Credenza" in Thain's office for $68,000; a sofa for $15,000; four pairs curtains for $28,000; a pair of guest chairs for $87,000; a "George IV Desk" for $18,000; 6 wall sconces for $2,700; six chairs in his private dining room for $37,000; a mirror in his private dining room for $5,000; a chandelier in the private dining room for $13,000; fabric for a "Roman Shade" for $11,000; a "custom coffee table" for $16,000; something called a "commode on legs" for $35,000; a "Regency Chairs" for $24,000; "40 yards of farbric for wall panels," for $5,000 and a "parchment waste can" for $1,400.
Wednesday, January 21, 2009
Chi-X Turnover (Notional) to Dec 08
Chi-X Total Consideration Traded:
December 2008: EUR 39,285,868,350
November 2008: EUR 57,044,981,870
November 2008: EUR 57,044,981,870
October 2008: EUR 109,157,247,286
2008-08 67,971,488,272
2008-07 73,593,684,141
2008-06 52,978,483,099
2008-05 38,922,976,001
2008-04 40,667,003,585
2008-03 33,414,519,682
2008-02 19,492,816,559
2008-01 21,283,498,209
2007-12 8,032,415,496
2007-11 12,723,133,525
2007-10 13,858,603,849
2007-09 10,918,269,828
2007-08 4,779,588,106
2007-07 4,510,071,743
2007-06 1,049,510,120
2007-05 323,586,921
2007-04 162,225,106
2007-03 74,820,366
Friday, January 2, 2009
Happy New Year!
G’day All,
And a very Happy New Year to one and all.
Well, when I have not been enjoying the festive season I have been tapping away internally.
Meanwhile, I have put myself on a news embargo so I can focus on the tasks at hand – hence the silence.
A wrap of 2008? Forget it.
News stories forced to my attention?
Chi-X story on Capital raising: The Chi-X capital raising is just a result of the exercise of the 2008 jumpball warrants. This was a plan put in place in February of 2008, so to call this a fresh capital raising is a bit misleading. The Turquoise capital raising / diversification is a different issue.
Fortis: The fallout in Belgium continues with the PM falling on his sword. Though I’m lead to believe this is the 3rd strike you’re out rather than specifically relating to events around Fortis.
Regulation: After 2008, it is not surprising that we see a call for “smarter” (rather than better or more (cost of compliance)) regulation. I think this will be a recurring theme for 2009. How can market be regulated more ‘tightly’ whilst not constraining capital flows. Investors will always look for an upside. Retail investors are the first to complain when they are denied access to investment structures. I look at the markets and risk like one of those squidgy stress balls. As you apply pressure and control at one point, it just pops up somewhere else.
Liquidity: Dual listings are not all bad. (and European trading fragmentation has reached a plateau).
As for other recurring themes for 2009? Markets will move sideways. Financial services will consolidate. Balance sheets will improve. This will provide a platform for growth. Governments will learn to become bedfellows with the banks they now have a stake in. In some, this will result in a partial ‘public service’ mentality whilst in others it will be risk aversion. Either way, by 2010 the market will want to start to break free of these shackles, and in instalments the tax payer will start to get some of their money back by way of re-privatisation. Taxes will rise in 2010 (despite the re-privatisation proceeds). The excuse will be the Global Financial Crisis, but in honesty, what government has the discipline to act in the tax payers interest? As for us, we’ll all have to work for another 5 years to get back to where we were in paper terms pre sub prime. Just as well I enjoy working with the people I know in this industry. It could be so much worse.
On that note, I am heading off to Brisbane to see Mum! My first trip ‘home’ since I’ve been back in the land down under.
I’ll be back for ‘The Big Swim’ (Palm Beach to Whale Beach).
http://www.thebigswim.org.au/
Have a wonderful New Year All.
S
Chi-X braced for 2009 with £12m in fresh funds
By Jeremy Grant
Published: December 29 2008 02:00 Last updated: December 29 2008 02:00
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Chi-X, the equities trading platform, has raised £12m in fresh funding in the latest sign that rivals to Europe's incumbent stock exchanges are preparing for tougher trading conditions next year.
Chi-X is one of a handful of so-called "multilateral trading facilities" to have emerged as a result of reforms enacted by the European Commission a year ago that opened the way for competition with the region's stock exchanges.
Since its launch in April 2007, Chi-X, majority owned by Nomura of Japan, has captured roughly 13 per cent of trading volume in FTSE 100 stocks, according to the Fidessa Fragmentation Index, a measure of market share by Fidessa, a provider of technology that connects traders with trading venues. Turquoise, backed by nine investment banks, has taken more than 6 per cent.
However, a fall in overall trading volumes, competition from rival MTFs and a price war with exchanges on trading fees means that next year could be tough for some of the new entrants.
Turquoise has been in talks with "strategic investors" about fresh funding for at least a month.
Chi-X raised the new money this month under its so-called "jumpball" scheme that qualifies existing users to invest in the platform if their use of Chi-X reaches certain thresholds.
The move is likely to be taken as a sign that Chi-X, as the MTF with the longest track record, is among those most likely to survive toughening conditions.
Its other rivals are BATS Europe, a unit of a US-based BATS Trading, which has operated a US-style MTF for two years, and Nasdaq OMX Europe, backed by exchange group Nasdaq OMX.
A fifth MTF, Equiduct, majority-owned by Germany's Börse Berlin, is expected to launch in February. Further MTFs are believed to be in the pipeline.
Brad Hunt, managing director of equities and global co-head of algorithmic trading at Goldman Sachs, said that anticipated lower trading volumes next year "will challenge the newer entrants, shaking out the marginal players quicker".
In addition, there are signs that the MTFs may be taking market share from each other, rather than from the incumbent exchanges.
In a report into the state of liquidity across Europe, Citi said last month: "It seems that the balance of liquidity fragmentation among all EU incumbent exchanges and MTFs has reached an equilibrium."
What Australia needs is better market regulation
Adele Ferguson December 31, 2008
Article from: The Australian
IF two words can sum up 2008, they are regulatory failure.
Australians lost more than $140 billion in their superannuation savings, forcing many to delay their retirement, while some high-profile companies, bloated with debt, wiped out the fortunes and dreams of their unsuspecting shareholders.
But most horrible of all, investors lost confidence in the integrity of the market and the ability of regulators to regulate.
They also discovered that most of the action does not happen in the public eye but in the over-the-counter (OTC) market, or off-market, which is almost double the size of the ASX and is unregulated.
It is the stomping ground for derivatives, contracts for difference and other exotic and opaque financial instruments, which were almost unheard of a year ago but are now household names, as Australian charities, super funds and local councils lost a fortune.
Between the on-market exchanges and the OTC market, auditors, company directors, independent property valuers, the credit ratings agencies, financial planners, hedge funds and the regulators, investors have not been properly informed about what is going on.
Add to the mix market rumours, short selling, stock lending by our super funds and executive margin lending and the cocktail created an explosive instability that revealed inadequacies in the regulation and the way the market continues to be manipulated. It also bludgeoned home the fact that too many companies flout the ASX's listing rules, in particular its continuous disclosure regime. And it hammered home the contempt that too many directors have for corporate governance. This was best illustrated by the ASX's quarterly report of director trading. The September report revealed that more than 50 per cent of director share trades occurred during "blackout periods" -- the period just before companies release their financial results -- and more than 13 per cent potentially contravened company trading policies, which is higher than the last study. Put simply, more directors are doing suspect trading. This can mean one of two things: they are confident they will get away with it, or even if they do get caught, they are likely to get away with a rap on the knuckles. But it is the lack of continuous disclosure to the ASX that has caused many of the problems. Many examples exist where companies flout continuous disclosure rules. The latest in contention is the Commonwealth Bank in relation to its belated disclosure of a further expected blowout in its loan impairment provision. And OZ Minerals, which is the subject of a class action over alleged "misleading and deceptive conduct" and breaches of continuous disclosure obligations relating to its debt. Queensland developer FKP Property Group recently had a judgment in the Federal Court that found "undisputed evidence at trial showed that by the end of 2007 FKP was facing a time of financial hardship", despite the company saying it had a "sound" balance sheet at its half-year results briefing in February this year. IMF fund litigator Hugh McLernon says there are numerous examples of why the ASX should adopt the zero tolerance regime that worked so well for New York city when it started arresting people for breaking windows. McLernon says one area largely overlooked is the timing of companies reporting share sales. For example, Lehman Brothers became a substantial shareholder of QPSX (later called Ipernica) in January 2006, holding 7.7 per cent of the stock, and thereafter had a statutory obligation to keep the company and, more importantly, the market informed of every change in its shareholding. Documents dated and lodged on July 23 this year reveal that by April Lehman Brothers Australia had reduced its position by 4.66 million shares or 1.8 per cent and by May 16 it had ceased to be a substantial shareholder. It failed to inform the market of either change until July 23, which is a deliberate flouting of the law. As McLernon says: "If the biggies of the financial world are not required to comply with the statutory rules governing their procedures, then why should the little ones do so? More importantly, are these the only laws that Lehmans ignored?" Over the years, many have urged that the ASX be stripped of its supervisory powers to avoid any inherent conflicts of interest from operating a money-making business alongside its regulatory duties. On the ASX's watch, brokers have been allowed to introduce new and ever more complex products, conducting increasing amounts of off-market stock lending and short selling with little disclosure. The ASX also allowed such financial abominations as listed infrastructure trusts with external managers to spawn over the past few years, by granting certain listing rule waivers. A report written by RiskMetrics Group, a leading international provider of proxy voting and corporate governance services, drew attention to some serious corporate governance problems, including the difficulty of dislodging the manager of the infrastructure fund, even if the fund underperforms. Indeed, the recent troubles in the equities market, coupled with rumourmongering and short selling by hedge funds, have led to claims that the ASX was in some cases complicit, or failed to act quickly because it profited from market volatility. Whether this is right or wrong is largely irrelevant because perception is reality and, while the ASX continues to have these supervisory powers, it will continue to be a target of criticism. But that is the listed exchange market. In the OTC market, there is even less regulation, no clearing system, little transparency and virtually no understanding of what is going on. To put its size in perspective, the OTC market in Australia turned over $79.5 trillion in the year to June 30, according to the latest Australian Financial Markets Association data, almost double the size of the $42 trillion that went through the total exchange-traded markets, which includes the ASX and the Sydney Futures Exchange, also run by the ASX. It is the OTC market where the banks do most of their risk-taking and left themselves exposed to those very instruments that Warren Buffett described as weapons of mass destruction about six years ago. Last month, British Prime Minister Gordon Brown called for an end to the "age of irresponsibility" in the financial sector and warned of an urgent need for a global early warning system. The Rudd Government has promised to follow suit. In the past years, four brokers have collapsed or nearly collapsed, a large number of company directors have been trading in their companies' shares during blackout periods or pending important announcements, and some companies have made a mockery of the continuous disclosure regime -- which will prompt a surge in class actions. This should give the Rudd Government pause to consider whether it should take over the ASX's supervisory functions and powers, to ensure that regulation of the capital markets is not only just and effective, but seen to be so. It also needs to acknowledge the existence of the OTC market and do something fast about regulating it. That being the case, the Rudd Government needs to dust off a proposal it had before it came to power to create a super regulator to replace the Australian Prudential Regulatory Authority and ASIC and take on the supervisory role of the ASX. But that doesn't necessarily mean more regulation, just better regulation. The reality is this country is being crippled by too much red tape in some areas, and no regulation in others. If governments agreed to merge ASIC, APRA and the ASX's supervisory powers, and spun out the licensing side of the regulators into a separate entity, it would go a long way to reduce overlap, inconsistencies and buck-passing.
BRUSSELS: King Albert II has ended Belgium's dangerous period of political limbo by asking parliamentary Speaker Herman Van Rompuy to form a new government.
The move came 10 days after prime minister Yves Leterme stepped down in the so-called "Fortisgate" scandal, with his aides accused of trying to influence a court case leaked to the break-up of the major bank Fortis.
"The king has charged Mr Van Rompuy to form a government. He has accepted the mission," said a short statement, after the Speaker had held almost 90 minutes of talks with the monarch.
Mr Van Rompuy, like Mr Leterme a Flemish Christian Democrat, had affirmed as late as this weekend that he would never accept the post, but he now has to handle one of the kingdom's worst political crises.
"My name is being cited once again as the new prime minister, but I do not consider myself indispensable," the 61-year-old political veteran told Flemish daily De Standaard.
Fortis group was hastily dismantled in October as the global financial crisis bit, with the Dutch state taking over its Dutch banking and insurance assets and the Belgian government taking over its Belgian banking business.
In a bid to secure the long-term viability of Fortis and the Belgian banking system, the Government also orchestrated the sale of most of the group's Belgian assets to BNP Paribas. But in the case brought by Fortis's minority shareholders, a Brussels appeal court ruled on December 12 that they should have been consulted on the break-up.
A top Belgian judge said on December 19 that he had "strong indications", but no legal proof, that Mr Leterme's aides had tried to influence the court.
The five parties in the current coalition agreed on Friday to keep the same government, replacing only Mr Leterme and justice minister Jo Vandeurzen.
AFP
http://www.theaustralian.news.com.au/story/0,,24853985-26040,00.html
And a very Happy New Year to one and all.
Well, when I have not been enjoying the festive season I have been tapping away internally.
Meanwhile, I have put myself on a news embargo so I can focus on the tasks at hand – hence the silence.
A wrap of 2008? Forget it.
News stories forced to my attention?
Chi-X story on Capital raising: The Chi-X capital raising is just a result of the exercise of the 2008 jumpball warrants. This was a plan put in place in February of 2008, so to call this a fresh capital raising is a bit misleading. The Turquoise capital raising / diversification is a different issue.
Fortis: The fallout in Belgium continues with the PM falling on his sword. Though I’m lead to believe this is the 3rd strike you’re out rather than specifically relating to events around Fortis.
Regulation: After 2008, it is not surprising that we see a call for “smarter” (rather than better or more (cost of compliance)) regulation. I think this will be a recurring theme for 2009. How can market be regulated more ‘tightly’ whilst not constraining capital flows. Investors will always look for an upside. Retail investors are the first to complain when they are denied access to investment structures. I look at the markets and risk like one of those squidgy stress balls. As you apply pressure and control at one point, it just pops up somewhere else.
Liquidity: Dual listings are not all bad. (and European trading fragmentation has reached a plateau).
As for other recurring themes for 2009? Markets will move sideways. Financial services will consolidate. Balance sheets will improve. This will provide a platform for growth. Governments will learn to become bedfellows with the banks they now have a stake in. In some, this will result in a partial ‘public service’ mentality whilst in others it will be risk aversion. Either way, by 2010 the market will want to start to break free of these shackles, and in instalments the tax payer will start to get some of their money back by way of re-privatisation. Taxes will rise in 2010 (despite the re-privatisation proceeds). The excuse will be the Global Financial Crisis, but in honesty, what government has the discipline to act in the tax payers interest? As for us, we’ll all have to work for another 5 years to get back to where we were in paper terms pre sub prime. Just as well I enjoy working with the people I know in this industry. It could be so much worse.
On that note, I am heading off to Brisbane to see Mum! My first trip ‘home’ since I’ve been back in the land down under.
I’ll be back for ‘The Big Swim’ (Palm Beach to Whale Beach).
http://www.thebigswim.org.au/
Have a wonderful New Year All.
S
Chi-X braced for 2009 with £12m in fresh funds
By Jeremy Grant
Published: December 29 2008 02:00 Last updated: December 29 2008 02:00
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Chi-X, the equities trading platform, has raised £12m in fresh funding in the latest sign that rivals to Europe's incumbent stock exchanges are preparing for tougher trading conditions next year.
Chi-X is one of a handful of so-called "multilateral trading facilities" to have emerged as a result of reforms enacted by the European Commission a year ago that opened the way for competition with the region's stock exchanges.
Since its launch in April 2007, Chi-X, majority owned by Nomura of Japan, has captured roughly 13 per cent of trading volume in FTSE 100 stocks, according to the Fidessa Fragmentation Index, a measure of market share by Fidessa, a provider of technology that connects traders with trading venues. Turquoise, backed by nine investment banks, has taken more than 6 per cent.
However, a fall in overall trading volumes, competition from rival MTFs and a price war with exchanges on trading fees means that next year could be tough for some of the new entrants.
Turquoise has been in talks with "strategic investors" about fresh funding for at least a month.
Chi-X raised the new money this month under its so-called "jumpball" scheme that qualifies existing users to invest in the platform if their use of Chi-X reaches certain thresholds.
The move is likely to be taken as a sign that Chi-X, as the MTF with the longest track record, is among those most likely to survive toughening conditions.
Its other rivals are BATS Europe, a unit of a US-based BATS Trading, which has operated a US-style MTF for two years, and Nasdaq OMX Europe, backed by exchange group Nasdaq OMX.
A fifth MTF, Equiduct, majority-owned by Germany's Börse Berlin, is expected to launch in February. Further MTFs are believed to be in the pipeline.
Brad Hunt, managing director of equities and global co-head of algorithmic trading at Goldman Sachs, said that anticipated lower trading volumes next year "will challenge the newer entrants, shaking out the marginal players quicker".
In addition, there are signs that the MTFs may be taking market share from each other, rather than from the incumbent exchanges.
In a report into the state of liquidity across Europe, Citi said last month: "It seems that the balance of liquidity fragmentation among all EU incumbent exchanges and MTFs has reached an equilibrium."
What Australia needs is better market regulation
Adele Ferguson December 31, 2008
Article from: The Australian
IF two words can sum up 2008, they are regulatory failure.
Australians lost more than $140 billion in their superannuation savings, forcing many to delay their retirement, while some high-profile companies, bloated with debt, wiped out the fortunes and dreams of their unsuspecting shareholders.
But most horrible of all, investors lost confidence in the integrity of the market and the ability of regulators to regulate.
They also discovered that most of the action does not happen in the public eye but in the over-the-counter (OTC) market, or off-market, which is almost double the size of the ASX and is unregulated.
It is the stomping ground for derivatives, contracts for difference and other exotic and opaque financial instruments, which were almost unheard of a year ago but are now household names, as Australian charities, super funds and local councils lost a fortune.
Between the on-market exchanges and the OTC market, auditors, company directors, independent property valuers, the credit ratings agencies, financial planners, hedge funds and the regulators, investors have not been properly informed about what is going on.
Add to the mix market rumours, short selling, stock lending by our super funds and executive margin lending and the cocktail created an explosive instability that revealed inadequacies in the regulation and the way the market continues to be manipulated. It also bludgeoned home the fact that too many companies flout the ASX's listing rules, in particular its continuous disclosure regime. And it hammered home the contempt that too many directors have for corporate governance. This was best illustrated by the ASX's quarterly report of director trading. The September report revealed that more than 50 per cent of director share trades occurred during "blackout periods" -- the period just before companies release their financial results -- and more than 13 per cent potentially contravened company trading policies, which is higher than the last study. Put simply, more directors are doing suspect trading. This can mean one of two things: they are confident they will get away with it, or even if they do get caught, they are likely to get away with a rap on the knuckles. But it is the lack of continuous disclosure to the ASX that has caused many of the problems. Many examples exist where companies flout continuous disclosure rules. The latest in contention is the Commonwealth Bank in relation to its belated disclosure of a further expected blowout in its loan impairment provision. And OZ Minerals, which is the subject of a class action over alleged "misleading and deceptive conduct" and breaches of continuous disclosure obligations relating to its debt. Queensland developer FKP Property Group recently had a judgment in the Federal Court that found "undisputed evidence at trial showed that by the end of 2007 FKP was facing a time of financial hardship", despite the company saying it had a "sound" balance sheet at its half-year results briefing in February this year. IMF fund litigator Hugh McLernon says there are numerous examples of why the ASX should adopt the zero tolerance regime that worked so well for New York city when it started arresting people for breaking windows. McLernon says one area largely overlooked is the timing of companies reporting share sales. For example, Lehman Brothers became a substantial shareholder of QPSX (later called Ipernica) in January 2006, holding 7.7 per cent of the stock, and thereafter had a statutory obligation to keep the company and, more importantly, the market informed of every change in its shareholding. Documents dated and lodged on July 23 this year reveal that by April Lehman Brothers Australia had reduced its position by 4.66 million shares or 1.8 per cent and by May 16 it had ceased to be a substantial shareholder. It failed to inform the market of either change until July 23, which is a deliberate flouting of the law. As McLernon says: "If the biggies of the financial world are not required to comply with the statutory rules governing their procedures, then why should the little ones do so? More importantly, are these the only laws that Lehmans ignored?" Over the years, many have urged that the ASX be stripped of its supervisory powers to avoid any inherent conflicts of interest from operating a money-making business alongside its regulatory duties. On the ASX's watch, brokers have been allowed to introduce new and ever more complex products, conducting increasing amounts of off-market stock lending and short selling with little disclosure. The ASX also allowed such financial abominations as listed infrastructure trusts with external managers to spawn over the past few years, by granting certain listing rule waivers. A report written by RiskMetrics Group, a leading international provider of proxy voting and corporate governance services, drew attention to some serious corporate governance problems, including the difficulty of dislodging the manager of the infrastructure fund, even if the fund underperforms. Indeed, the recent troubles in the equities market, coupled with rumourmongering and short selling by hedge funds, have led to claims that the ASX was in some cases complicit, or failed to act quickly because it profited from market volatility. Whether this is right or wrong is largely irrelevant because perception is reality and, while the ASX continues to have these supervisory powers, it will continue to be a target of criticism. But that is the listed exchange market. In the OTC market, there is even less regulation, no clearing system, little transparency and virtually no understanding of what is going on. To put its size in perspective, the OTC market in Australia turned over $79.5 trillion in the year to June 30, according to the latest Australian Financial Markets Association data, almost double the size of the $42 trillion that went through the total exchange-traded markets, which includes the ASX and the Sydney Futures Exchange, also run by the ASX. It is the OTC market where the banks do most of their risk-taking and left themselves exposed to those very instruments that Warren Buffett described as weapons of mass destruction about six years ago. Last month, British Prime Minister Gordon Brown called for an end to the "age of irresponsibility" in the financial sector and warned of an urgent need for a global early warning system. The Rudd Government has promised to follow suit. In the past years, four brokers have collapsed or nearly collapsed, a large number of company directors have been trading in their companies' shares during blackout periods or pending important announcements, and some companies have made a mockery of the continuous disclosure regime -- which will prompt a surge in class actions. This should give the Rudd Government pause to consider whether it should take over the ASX's supervisory functions and powers, to ensure that regulation of the capital markets is not only just and effective, but seen to be so. It also needs to acknowledge the existence of the OTC market and do something fast about regulating it. That being the case, the Rudd Government needs to dust off a proposal it had before it came to power to create a super regulator to replace the Australian Prudential Regulatory Authority and ASIC and take on the supervisory role of the ASX. But that doesn't necessarily mean more regulation, just better regulation. The reality is this country is being crippled by too much red tape in some areas, and no regulation in others. If governments agreed to merge ASIC, APRA and the ASX's supervisory powers, and spun out the licensing side of the regulators into a separate entity, it would go a long way to reduce overlap, inconsistencies and buck-passing.
BRUSSELS: King Albert II has ended Belgium's dangerous period of political limbo by asking parliamentary Speaker Herman Van Rompuy to form a new government.
The move came 10 days after prime minister Yves Leterme stepped down in the so-called "Fortisgate" scandal, with his aides accused of trying to influence a court case leaked to the break-up of the major bank Fortis.
"The king has charged Mr Van Rompuy to form a government. He has accepted the mission," said a short statement, after the Speaker had held almost 90 minutes of talks with the monarch.
Mr Van Rompuy, like Mr Leterme a Flemish Christian Democrat, had affirmed as late as this weekend that he would never accept the post, but he now has to handle one of the kingdom's worst political crises.
"My name is being cited once again as the new prime minister, but I do not consider myself indispensable," the 61-year-old political veteran told Flemish daily De Standaard.
Fortis group was hastily dismantled in October as the global financial crisis bit, with the Dutch state taking over its Dutch banking and insurance assets and the Belgian government taking over its Belgian banking business.
In a bid to secure the long-term viability of Fortis and the Belgian banking system, the Government also orchestrated the sale of most of the group's Belgian assets to BNP Paribas. But in the case brought by Fortis's minority shareholders, a Brussels appeal court ruled on December 12 that they should have been consulted on the break-up.
A top Belgian judge said on December 19 that he had "strong indications", but no legal proof, that Mr Leterme's aides had tried to influence the court.
The five parties in the current coalition agreed on Friday to keep the same government, replacing only Mr Leterme and justice minister Jo Vandeurzen.
AFP
http://www.theaustralian.news.com.au/story/0,,24853985-26040,00.html
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