G’day All,
Another week flies by.
Clearing landscape: I think the EC is right to call for a home grow solution for CDS. Forgive me for stating the obvious, but I think the reason for a competing bid to DTCC for LCH.CN is because people see value in clearing (all the more so after the events of the last 6mths). The value in clearing is mixed. Derivatives, last time I looked are around 3pence. That, given volumes, is maybe a bit high now, but given the nature of the contracts (tenure and leverage) I don’t think needs to be attacked. Equity clearing…different story. Fees were unsustainable and this has been evidenced by fee cuts. We still have a long way to go. Equities I believe will become highly commoditised. Blue chips, will cost far less, illiquids and others may cost more. There has been an inadvertent cross subsidy going on that has only been exposed with the advent of competition. This was never intentional. Freight, energy, metals all interesting. Now CDS, swapclear etc. There is some scale to go for. And with scale comes margin. And with margin comes renewed interest. On CDS I would say that the work is far from done. Clearing thrives on commoditised products and processes. Then we need to consider the all important default arrangements. The CDS world was not born with these restrictions. It is hard to discipline unruly children…but a common aligned industry through the vested interest of equity ownership I believe has a better chance.
Anyway, the land grab for clearing niche markets is on. I do not think all the value in the LCH.CN deal is in equities. It is certainly in scale.
MTFs: Welcome QuoteMTF – see also Canadian MTFs
Carnegie: Well, I thought the governments would dispose in 2010. Those Sweds are always fast movers when they want to be. (first to electronic trading etc.)
German SDRT: abolished in 1991…oh what a backward step to re-instate it. I understand the political drivers, but they are taxing the wrong source. As previously stated, we’ll know sub prime is over when we start to feel it as tax payers.
Aust Market: Good piece in the Australian.
JP Morgan: Liquidity fragmentation (I’m drawn to this report, especially the new graphs)
And the swimming bit….
Wow, last week someone (G’day Pierre) asked me about shark attacks during open water swims. I was a bit dismissive. This week a Navy diver was mauled in Sydney Harbour (you’ll find me at the harbour swim http://www.sydneyharbourswim.com/index.html on 1st March) and another got his arm nibbled at Bondi (as in last weeks North Bondi Classic and the earlier Bondi to Bronte).
SYDNEY, Feb 13 AAP - Life savers have urged beach-goers not to panic after a surfer nearly lost his hand in a shark attack at Sydney's famous Bondi Beach. The 33-year-old man was savaged on Thursday night, the day after a navy clearance diver was mauled by a shark in Sydney Harbour, within sight of the Sydney Opera House. The Bondi local was attacked after catching a wave about 7.30pm (AEDT), when the shark locked its jaws onto his left arm. Surf Life Saving Australia (SLSA) said despite the attack at Bondi, and the attack on the diver at Garden Island on Wednesday, shark attacks were still unlikely if people avoided swimming at dawn or dusk, or in murky water. It also urged people to swim between the flags - in close proximity to shark safety equipment - not to enter the water when bleeding, and not to swim near schools of fish. SLSA shark adviser, the CSIRO's Barry Bruce, said swimmers had a much bigger chance of drowning than being mauled by a shark. "It is important to recognise that there is always some inherent risk when using an environment inhabited by sharks," Mr Bruce said. "The risk of shark-related incidents varies according to the time of day, time of year, the geographic location and species of shark in the area." Mr Bruce said there was no evidence to suggest shark numbers or the number of attacks was on the increase. In response to the Bondi attack, the Westpac Life Saver Rescue Helicopter had increased its patrols along Sydney's beaches, the SLSA said. AAP ab/evt
For those that are interested more at: http://www.oceanswims.com/
Last weekend I did the North Bondi Classic.
This is a 2km’ish swim out and around bondi. Out to one headland (north) across to the next headland (south) and then turn around, head north and back to the beach.
Two things of note on this event. One, there was almost no surf but this was because the currents had changed during the week. The water was 16C. Now some people think 16C is OK, for me, I think it is very cold. For the first 300 meters I could not breath properly, ya know that feeling when the bitter cold takes your breath away? After about 500 meters I got that tingly feeling before you start going numb, which was good, because then you don’t feel the cold anymore. The other notable item in this event is the number of swimmers, 1,270. That is a lot of people to crash through, so although the surf was calm, the course was littered with bodies and hence lots of ‘bumps’. Anyway, I came in OK and boy, did it feel good to walk up the beach and feel the sun on my back. (Weird burying my toes in the sand and not feeling them). Anyway, for totally different reasons to the Big Swim, I’m also noting this as a hard swim simply due to the icy conditions.
I’ve also noticed there are some pretty fit and serious swimmers turn up at these things. I’m starting to feel not so bad about some of my times.
Results, Overall 510/1270. Males 377/887, Age group 53/128. Winner 25:52, Me: 37:15 (and just happy to be on dry land).
Also at:
http://www.northbondisurfclub.com/html/s02_article/article_view.asp?id=838&nav_top_id=-1&nav_cat_id=-1
This weekend, despite the sharks, warmer waters and bigger surf is predicted for the:
http://www.rainbowclubaust.com.au/oceanswim/
Looking forward to this one!
And….I’ll be following the SLSA advice, if I am bleeding from any limbs I won’t be entering the water during shark feeding hours of dawn and dusk.
Have a great week-end all,
S
The European Commission calls for a CDS clearinghouse
A regulatory approach is necessary for the clearing of CDS on a CCP, McCreevy said and called on the EP to support an amendment in the CRD . He also strongly opposed to any carve-out of all short term inter-bank exposures from any prudential rules.
http://online.wsj.com/article/SB123370034868545223.html?mod=todays_europe_money_and_investing
Consultation on CESR/ESCB draft recommendations for securities settlement systems, and draft recommendations for central counterparties
http://www.cesr-eu.org/index.php?page=responses&id=124
CEBS – Committee of European Banking Supervisors:
Consultation.
CEBS has committed to undertake further work to establish the materiality of custodian banks internalising settlement activities or carrying out CCP-like activities.
http://www.c-ebs.org/getdoc/954bfd48-9f42-445c-bc7c-0463afa92c10/CEBS-2009-07-Annex-1-(Questionnaire-to-market-part.aspx
Hungary-based equity MTF set to challenge European rivals Europe’s seemingly crowded equities trading landscape is set to have its fifth participant in June with the launch of Quote MTF, a platform majority-backed by Canadian entrepreneur Peter Beck, founder of SwiftTrade, a Canadian equities trading firm. (Financial Times)
Burgundy chooses EMCF, plans multi-clearer model
QUOTE MTF TO ENTER PAN-EUROPEAN TRADING MARKET
The crowded European market for stock exchange trading will welcome another new liquidity platform in the coming months with the summer launch of Quote MTF, an upstart independent venue operating out of Hungary.
More on this story: http://www.finextra.com/fullstory.asp?id=19620
New Hungarian MTF will have liquidity “from day one”
Bit more context:
CANADA STOCKWATCH: CNSX Alpha Trading Averages 16.9 Million Shares By Mike Caswell2/9/09Alpha Trading Systems was the most active of Canada's alternative trading systems in the week ended Feb. 6, 2009, with average daily volume of 16.9 million shares, down from 17.8 million the prior week. In second place was Pure Trading, which averaged 10.5 million shares, followed by Chi-X Canada, with 5.1 million shares. The least active ATS was Omega, which averaged 900,620 shares. Combining their volumes, the market share of Canada's ATSs was 6.67 per cent.
EMCF “ready to service LSE flow”
Consortium’s counterbid makes sense When news first emerged that the Depository Trust & Clearing Company was pondering a bid for LCH.Clearnet, the logic seemed impeccable. And when the deal was finally announced last year, it still seemed to make good sense. But now many of the same banks that once gave their support appear to have had an epiphany. Why?
Deutsche Bank wins mandate on LCH.Clearnet bid Deutsche Bank has emerged as an adviser to the consortium of eight banks and interdealer broker Icap that is preparing an €850m (€1.09bn) bid for clearer LCH.Clearnet, Financial News has learnt.
Brokers bidding against themselves in LCH battle
OMGEO DEBUTS COUNTERPARTY RISK MANAGEMENT OFFERING
http://www.finextra.com/fullpr.asp?id=25760
Celent Asia Interview
Buy-side use of electronic trading tools in Asia saw rapid growth between 2004 and 2007, according to a recent study of securities execution conducted by Celent, but barriers to further development remain.
Neil Katkov, managing director of the research and advisory firm’s Asia Research group, acknowledges that several markets have recently made progress, but explains that Asian markets lack the regulatory and structural forces that have pushed Europe and the US towards more advanced trading techniques.
Read the Interview
Nordic duo swoop on Sweden's Carnegie Two Nordic buyout firms have bought Sweden's Carnegie Investment Bank and affiliated insurer Max Matthiessen from state ownership for at least Skr2.2bn (€214m), in one of the first buyouts from government since the credit crunch began.
Election pledge threatens German traders with €15bn tax Investors in Germany could be forced to pay as much as €15bn ($19.4bn) in new trading fees if the country's finance minister presses ahead with plans to impose a tax on share trades.
Frontrunner 'in the frame' as LSE nears chief selection The London Stock Exchange is to name a candidate to replace chief executive Clara Furse before the end of this month, with one
candidate, the former chief executive of Lehman Brothers in France, reportedly emerging as the frontrunner.
Also: http://www.finextra.com/fullstory.asp?id=19611
TOP MANAGEMENT CHANGES AT TRAYPORT AS FOUNDER HOR STEPS ASIDE
http://www.finextra.com/fullpr.asp?id=25844
Barclays balance sheet balloons to over £2 trillion Barclays' balance sheet has now exceeded the gross domestic product of the entire UK economy after ballooning to more than £2 trillion (€2.3 trillion) last year, it disclosed on Monday. (The Guardian)
FSA STATEMENT RE: HBOS
http://www.finextra.com/fullpr.asp?id=25968
The World from Berlin: What Sweden's Nuclear About-Face Means for GermanySweden's government announced on Thursday it was reversing its pledge to phase out nuclear energy. The decision isolates Germany in Europe -- and commentators say it is high time for Berlin to take a new look at nuclear energy here too. mehr...
Tricom delay shows it's time to strip ASX as regulator
Adele Ferguson February 09, 2009
Article from: The Australian
AS the anniversary of Tricom Equities' delayed settlement on the ASX came and went on January 29 - with no signs of a fine or penalty from the ASX for the chaos it caused - work is going on behind the scenes to push the federal Government into handballing ASX's supervisory powers to ASIC.
The Rudd Government has had almost a year to decide whether to simultaneously depose the ASX as supervisor of the markets and bust open its monopoly by granting three new licences to operate rival exchanges. For ASX boss Robert Elstone, that clock is now ticking.
One of the licence applicants, Chi-X, has organised a meeting at the end of the month with Treasurer Wayne Swan, Corporate Law Minister Nick Sherry, Assistant Treasurer Chris Bowen and Finance Minister Lindsay Tanner, to try to speed up a decision.
A few well-placed fund managers are also believed to be looking at ways to get a decision before the end of June.
The global head of Chi-X, Tony Mackay, is currently in Australia to reignite interest and hurry an outcome. This is the first time Chi-X will meet with all the big hitters in the decision-making process.
"We are going to push harder now as we are concerned they are making it more complicated than it needs to be.
"It is understandable there was a delay given the global financial crisis and the Lehman collapse, but with the new short-selling legislation in place, there is nothing to stop them from making a decision," Mackay says.
Mackay, like many operators, believes ASIC is more suitable - and now able - to take over the role of supervising all exchanges, particularly since it reorganised itself last year and appointed two highly regarded operators - Mark Adams, to watch market exchange operators, and Greg Yanko as the regulator in charge of brokers and market participants.
Since the ASX demutualised and listed on its own exchange in 1998, there has been a growing concern in regulatory and investment circles that it should have been stripped of its supervisory powers to avoid any inherent conflicts of interest from operating a money-making business alongside its regulatory duties.
This concern manifested itself at its AGM last year when RiskMetrics, a company that advises big institutional investors on how to vote their share rights, organised a protest vote against one of the ASX's director's on the basis of its woeful performance as market supervisor.
RiskMetrics identified the following areas of concern with how the ASX discharged its role as market supervisor: insider trading, director trading, short-selling disclosure and the 2005 removal by the ASX of the requirement for listed companies to seek shareholder approval for equity to be granted to directors.
The ASX defended the criticism by pointing to ASIC's annual assessment of its supervisory powers, which gave it a clean bill of health.
In an era when regulation will be front and centre stage, following the collapse of capitalism as we know it, the Government will be cognisant that most other countries stripped their main stock exchange of their supervisory powers once they became a listed entity.
It will also be aware that the massive market manipulation that revealed all sorts of holes in the ASX's market rules, as companies were targeted and their share prices shredded, helped bolster the ASX's profits from the volatile trading.
Since the ban on short selling financial stocks was put in place, the ASX's trading activities have depleted markedly. Indeed, the ASX's shares have fallen almost 30 per cent to $24.20 since the first ban on short selling was announced on September 21.
The fact remains that there is an inherent conflict of interest with a listed entity policing its own customers. As one market watcher has often been quoted: "Having this dual role is like the police force being allowed by law to operate a money-making business alongside its regulatory duties. The obvious conflict of interest would undermine law enforcers' capacity to perform their duties efficiently."
In the case of Tricom, a spokesman for the ASX says its contact with Tricom continues and it continues to assist ASIC with its inquiries. "As you know, ASX will not comment on any specific supervisory activity," the spokesman says. "And any consideration of penalties, such as a fine, is for the independent Disciplinary Tribunal to determine. ASX's focus will always be on ensuring the market's stability and integrity -- the timing of a disciplinary outcome is less urgent."
Taking more than a year to penalise a broker for causing such disarray on the market symbolises what is wrong with the ASX and its arm's-length supervisory division. Delays of this kind send out a clear message that the ASX and its independent disciplinary tribunal are not on the ball.
If the ASX is stripped of all regulatory functions, it can be left to get on with what it really wants to do: make money.
==========
THE TRADE NEWS: MiFID Benefits ‘An Illusion,’ Despite Price Improvement By Staff2/6/09Instinet Europe’s chief executive has claimed that many of MiFID’s benefits “are illusory to the end-investor”, despite the agency broker reporting that it had achieved an average of 5.72 basis points of price improvement for clients in Q4 2008. “We pass all price improvement back to our customers,” asserted Instinet Europe’s Richard Balarkas. “But there are a whole host of models on the sell-side. There seems to be little appreciation on the buy-side of the opportunity cost of using a broker that internalises a large percentage of flow, compared to one that opens up to as many external venues as possible,” said. Price improvement is defined as the difference between execution price and the best quoted price on the primary exchange at a given time. Instinet Europe data is based only on executions that remove liquidity from MTFs over the time period. Instinet Europe said it routed nearly 28% of its European equity trades away from primary exchanges by value traded in Q4 2008 and was among the first brokers to connect to the multilateral trading facilities (MTFs) launched last year: BATS Europe, Nasdaq OMX Europe, Turquoise and dark pool NYFIX Euro Millennium. During 2008, the firm also executed the first trade on SWX’s Swiss Block dark pool, launched its own MTF, BlockMatch, and, along with Credit Suisse, became the first broker in Europe to offer reciprocal dark pool access. Instinet Europe executed 35.42% of its trades in French, German, Dutch and UK stocks on MTFs in the final quarter of 2008. Other brokers have also been using smart order routing capabilities to optimise electronic client order flow. According to its latest monthly European Liquidity Report, Citi routed 53% of its UK orders to MTFs in January as well as similar proportions of its Dutch (56%), French (52%) and German (48%) orders. Citi, which does not publish price improvement data, also reported that MTFs captured roughly 20% of market share in these four markets in January. Some sell-side institutions have pointed out that the quality of execution achieved via brokers’ smart order routing capabilities is near-impossible to boil down into headline figures. "Because routing orders in this increasingly fragmented environment is a very sophisticated and complicated process, headline numbers quoting price improvement can be overly simplistic and misleading without proper qualification." said Mike Seigne, co-head of sales, Europe, Goldman Sachs.Although price improvement comparisons can provide some insight into aggressive order execution quality, this is not the case for passive orders. "An SOR will typically route an aggressive order to the venue or venues with the best price, then take liquidity from those venues until the order is satisfied, with the price improvement being passed on to the client. But it gets more complicated to fairly measure the price improvement with passive orders because they inevitably give out information when posted to lit venues. It’s very difficult to measure the opportunity cost that is lost at a result of placing that order on any lit market," said Seigne. Seigne says Goldman Sachs has been encouraging clients to be proactive in responding to the execution data the firm provides. One approach is to consider the contribution to the parent order of the broker’s order routing logic. “On their own, price improvement figures from child orders routed to MTFs might look good,” he said, “but you also need to figure out how and why they contribute to the parent order execution quality. The portion of contribution from the passive order in any lit market needs to be analysed to better understand the opportunity cost associated with that benefit. Hence questions focusing on relative fill ratios of venues, and the prices of the other lit venues at the time of those fills, need to be understood." Brokers also argue that market participants must distinguish more clearly between trading on a traditional exchange and an MTF, where a higher proportion of participants use smart order routing and/or are engaged in high frequency strategies. “For someone to suggest that all their fills from MTFs are much better than from venues with a lower proportion of participants with SORs etc., clearly needs to be challenged more,” said one broker. “Firms are achieving beneficial fills from MTFs, but in venues where the spread is typically tighter, those demanding liquidity should do better than from demanding the same liquidity at a less favourable price elsewhere. However, those posting liquidity to less active venues – either at the same price or at a less favourable price than more active venues – carry a higher risk of a non-fill and/or get filled at a less favourable price. It’s hard to reflect these factors in data form.”Instinet’s Balarkas insists that many brokers have not fully availed their clients of the advantages of competition among trading venues, commonly cited as MiFID’s key achievement since the directive came into force in November 2007. A number of the buy-side firms complained of slow progress on reducing trading costs in their responses to the Committee of European Securities Regulators’ (CESR) recent call for evidence on MiFID’s impact on European securities markets. And at this week’s SIFMA European Market Liquidity conference in London, heads of trading questioned the benefits of more trading venues being introduced onto the European equities market. The principles-based regulatory framework established across Europe by MiFID does not exert sufficient pressure on brokers to deliver best execution to end-investors, said Balarkas. “Under MiFID, there’s no real obligation on brokers to link to MTFs. And the idea that all the brokers across Europe are busy updating their best execution policies is fanciful,” he said. “There’s nothing wrong with principles-based regulation, but at some point someone has to come along with a big stick to remind firms that it’s not a case of anything goes. MiFID relies on informed customers asking detailed questions about how asset managers and brokers execute trades. But none of this is transparent, at present.”
J.P.Morgan Europe Liquidity Fragmentation Index - Week 6
Summary · Liquidity fragmentation in Europe last week was 16.7% (a new high!), driven by the UK, Germany and Switzerland. At a stock level, British American Tobacco, Unilever and Siemens were the main contributors (see table 3). · Ireland (73.1%), UK (26.2%), Netherlands (22.0%), France (20.9%) and Germany (19.4%) were the most fragmented markets in percentage terms. · UK ($2.0bn), France ($1.1bn), Germany ($1.0bn), Netherlands ($0.4bn) and Switzerland ($0.3bn) were the most fragmented in terms of Displayed Liquidity traded away from the primary market. · Chi-X achieved average daily turnover (ADT) of $2.9bn, equivalent to 10.0% of flow in Chi-X names. Total ($101m, 17.7%), BP ($99m, 22.8%), and Royal Dutch Shell A ($75m, 19.0%) had the highest ADT on Chi-X. · ADT on the Turquoise Displayed Order Book was a new high at $1.9bn, equivalent to 6.1% of flow in Turquoise names. France Teleom ($46m, 13.2%), Royal Dutch Shell A ($43m, 11.0%), and Siemens ($42m, 9.1%) had the highest ADT on Turquoise. · BATS achieved ADT of $368.9m. Total ($15.6m, 2.7%), BP ($10.8m, 2.5%) and British American Tobacco ($10.3m, 4.4%) had the highest ADT on BATS. · Nasdaq OMX achieved ADT of $40.6m. · 7 stocks traded more than 20% ADV on Dark venues, including Paragon which traded almost 10x ADV on POSIT. See Figures 7 – 10 and Tables 8 - 9 for further details.
Further details of fragmentation:
http://fragmentation.fidessa.com/stats/
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