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.
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