Well G’day All,
Important news and the lead article…
The nutters and friends of nutters are getting together again for the now 5th annual “I’m a banker…get me out of here” event.
This is just simply a great and compelling cause…a hospice for terminally ill kids.
The BD crew, and supporting city associations, do a great job in helping the hospice out and through their hard labour save major professional fees.
The conditions, under a marquee for the week-end are none too forgiving. (i.e. chilly).
Despite the humbling nature of the cause the camaraderie is great – I wish you all a great week-end.
For those that wish to support the cause….or just learn more about it…try:
http://www.justgiving.com/ibdevent5
I’ve been avoiding sub-prime these last few weeks, but I got sucked in again to a couple of stories.
In Australia we have a story of Pacific Brands. At the end of the day I think it all relates to inappropriate selling and firms circumventing the one regulatory rule that is already in place…KYC, know your customer.
Sub prime will be over when the tax payer starts picking up the tab. Makes me despair to see stories of stamp duty surfacing first in Germany, now in the US, and not going away in the UK.
GFC: Private equity, esp. leveraged buy-out. & then wrt cars, phones, loans, consumerism….KYC
Dividends: I can’t believe it. I’ve lost on ML & HBOS…and an investment I’d long ago written off, Eurotunnel announces a dividend. Sub prime wonders will never cease to amaze me. (mind you, I think I’m fully diluted to immateriality…I better hunt out that share cert.).
ASX: AGM and slow recognition of potential new entrants.
LCH: Investor buy-out option. Simply forget it.
CDS clearing: 140 million revenue by 2011? What? Show me the money, show me the report, show me the business plan, show me the commoditised contracts.
Data Fragmentation: good interview attached.
Well, I’m here for another week, so that means I didn’t get eaten.
Great write up on the Sydney Harbour swim at:
http://www.oceanswims.com/nsw89/090301.html
As for me, I came 22/54 in age, 137/347 in gender and 177/490 overall.
http://www.sydneyharbourswim.com/downloadables/2009%20Harbour%20Swim%20-2k%20results.pdf
One thing leaves a question in my mind about those sharks, they said about 880 people registered and competed…that’s about 400 results missing. Hmmm?
As for the swim. This was a beauty. Only a couple of jelly fish (Phah, who cares about little old jellies anymore?) and zero sharks. There is much talk about the harbour being cleaner, and I’m sure it is, but as I was swimming along I couldn’t see the bottom and the water looked pretty murky / brown to me (though I could see the jellies below and the swimmers ahead, basically I guess water gets churned up in an international shipping harbour, and our course was through deep water avoiding the nice little shore edge). Water tasted salty…but not unduly bad, certainly no diesel nor oil slicks. One thing that makes this a great swim is the surrounds. I’ve always wanted to swim in the harbour and it was great to have the opportunity to do so. To be bobbing about in the sea at the foot of the opera house, well, just great. I was surprised by the swell, I thought it would be an ‘easy’ swim, but there is much more movement in the harbour than you’d expect, wake from ferries, swells, etc. Anyway, once I finished I went back out into the water just to enjoy the moment, the view and the setting. This is certainly a swim to do again. This is a swim for participation and pleasure. And that it was, a real pleasure.
6 Nations: Oh Dear. Wales lost (oops) and Ireland won (yeah for the missus) last week. Of course Wales will ‘bounce back’ against Italy, Ireland will carry their winning form to Scotland and England will bring their losing form home against France.
Super14: Wow, the Reds win one game and leap 5 places up on the ladder. (It’s a squeeze to hold the table up).
Gotta go,
Have a great week-end all.
(Don’t think Mrs R is going to let me go ocean swimming this w/end…need to get some brownie points in the bag.)
Cheers,
S
http://clearingandsettlement.blogspot.com/
Vultures go hungry
Michael West 7:01AM
Private equity funds feasted on Pacific Brands while the going was good. Turns out most of their ventures since offer slim pickings for the vultures.
http://business.smh.com.au/business/vultures-go-hungry-20090302-8lly.html?sssdmh=dm16.363634
Credit Suisse Lending Bust With Resorts Widens From Beverly Hills to Idaho
To Jean-Pierre Boespflug, French- born developer of a ski resort in the Idaho outback, the $250 million loan from Credit Suisse Group AG was too good to pass up.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aT4PzNc1EgrU&refer=exclusive
*** CDO, CLO, Oh No.
Bernanke also provided intellectual fortification for the argument that one of our greatest vices—a tendency to debt-financed consumption—was actually something of a virtue.
http://www.newsweek.com/id/186296
Buffett, Tavakoli Flag Scheme Bigger Than Madoff’s
Interview by Yalman Onaran
March 5 (Bloomberg) -- Bernard Madoff could face 20 years in jail if convicted of what prosecutors are calling the biggest Ponzi scheme in history. But his $50 billion ploy pales next to the one created by Wall Street during the past decade: the securitization machine. In “Dear Mr. Buffett: What an Investor Learns 1,269 Miles From Wall Street,” Janet Tavakoli explains that securitization process, and how regulators, politicians and the government ignored all kinds of warnings from people who saw it for what it was.
http://www.bloomberg.com/apps/news?pid=20601088&sid=atUJQnE3IOqg
A debate raged about the merit of dividends during the present recession with many banks and companies either reducing or suspending their payouts: GE cut its quarterly dividend for the first time since 1938. Eurotunnel, however, announced that it would make its first ever payment to shareholders. The operator of the tunnel that links Britain and France turned a profit of €40m ($58m) last year, despite a drop in sales due to a fire that affected train services for months. See article
The Bank of England reduced interest rates by half a percentage point, to 0.5%. The central bank also announced the start of its unconventional policy of “quantitative easing”, ie, directly buying gilts as well as some private assets to boost the money supply. See article
Obama's flawed tax planThe president has not explained to Americans that if they want bigger government they will have to pay for it
De Larosière report on cross-border financial supervision released
http://ec.europa.eu/ireland/press_office/news_of_the_day/cross-border-financial-supervision-report_en.htm
Hedge fund slump and regulation could hit US prop shops
While US high-frequency traders enjoyed a bumper year in 2008 and now account for the majority of average daily trading volume in the US, declining hedge funds volumes and regulatory change could threaten future performance, according to Sang Lee, co-founder of research consultancy Aite Group.
http://www.thetradenews.com/asset-classes/equities/2861
ASX reappoints chief but its future role remains uncertain
When asked about the progress of the decision this week, Corporate Law Minister Nick Sherry repeated his stance that the Government had "reprioritised" in the wake of the financial crisis with unexpected issues such as short-selling requiring urgent government action.
http://business.theage.com.au/business/asx-reappoints-chief-but-its-future-role-remains-uncertain-20090304-8ok2.html
ASIC extends ban on covered short selling of financial securities
ASIC today said it would keep the ban on covered short selling of financial securities in place until 31 May 2009 but will keep this position under review.
http://www.asic.gov.au/ASIC/asic.nsf/byHeadline/MR09-36%20ASIC%20extends%20ban%20on%20covered%20short%20selling%20of%20financial%20securities?opendocument
Short sell ban extended
Jacob Saulwick 12:00AM ASIC has widened a split between Australia's banks and the rest of the finance sector after extending its ban on the short selling of financial stocks.
Instinet to donate brokerage commission to bushfire appeal
Instinet will donate its brokerage commissions from all ASX trades it conducts today to Victoria's bushfire victims.
UBS LAUNCHES REAL-TIME COST ANALYSIS FOR EUROPEAN CLIENTS Swiss bank UBS has launched a real-time transaction cost analysis tool enabling European clients to monitor how their trades are doing while there is still time to affect the order's outcome.
Full story: http://www.finextra.com/fullstory.asp?id=19722
CME in talks to launch derivatives clearer in London
By Jeremy Grant in London
CME Group, the Chicago-based futures exchange, plans to set up a clearing service for over-the-counter credit default swaps in Europe to complement its existing offering in the US, it said on Friday. Jeremy Hughes, the CME’s spokesman in Europe, said the group had started discussions with the UK Financial Services Authority over setting up a CDS clearer based in London. “We are looking at our clearing systems in Europe,” he said.
http://www.ft.com/cms/s/0/edb55b88-04c6-11de-8166-000077b07658.html
ICE wins approval to clear credit default swaps
By Joshua Boak
The IntercontinentalExchange received approval Wednesday from the Federal Reserve to clear credit default swaps, a form of insurance against bonds that are traded over-the-counter defaulting. Moving the multi-trillion dollar market for credit default swaps into exchange clearinghouses has been a priority of federal regulators. Without a central counterparty to manage these trades, it can be difficult to set a value for these financial instruments.
http://www.chicagotribune.com/business/chi-ice-credit-default-swaps-mar4%2C0%2C1677938.story
LCH.Clearnet Said to Plan Investor Buyout as Option to Takeover
By Nandini Sukumar
March 5 (Bloomberg) -- LCH.Clearnet Group Ltd. may offer to buy out its shareholders as an alternative to a takeover by Depository Trust and Clearing Corp. or a group of banks led by ICAP Plc, according to three people familiar with the situation.
http://www.bloomberg.com/apps/news?pid=20601084&sid=aYBDtmwGwy5M
All to play for in battle for LCH.Clearnet
By Jeremy Grant
When Lehman Brothers collapsed in September last year, most of the headlines were about the catastrophic effect the former investment bank's default was having on the global financial -system. What was missing was how the dull business of clearing rode to the rescue, working through the masses of open positions left by Lehman and its clients, closing them out and reducing the so-called "counterparty risk" associated with a default.
http://www.ft.com/cms/s/fcc1dd76-0927-11de-b8b0-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Ffcc1dd76-0927-11de-b8b0-0000779fd2ac.html&_i_referer=http%3A%2F%2Fsearch.ft.com%2Fsearch%3FqueryText%3Djeremy%2Bgrant
05/03/2009 11:25:00
ICE WINS FED APPROVAL FOR CDS CLEARING; EUREX TO CONCENTRATE ON EUROPE
IntercontinentalExchange (ICE) has received regulatory approval from the Federal Reserve to serve as a clearing house and central counterparty for credit default swap (CDS) transactions.
More on this story: http://www.finextra.com/fullstory.asp?id=19721
***Despite the concerns, a Tabb Group report issued Tuesday estimates annual revenues for central clearing of CDSs to reach nearly $140 million by 2011, assuming 55% of outstanding contracts are migrated to a central clearing house.
LEGACY CLEARING THREAT TO OTC DERIVATIVES WARNS STATE STREET Rising volumes of over-the-counter derivatives trades are threatening to swamp legacy clearing and settlement systems, warns State Street in a report that calls for a co-ordinated industry-wide effort to develop a new post-trade servicing regime for the industry.
Full story: http://www.finextra.com/fullstory.asp?id=19705
"The challenge lies in capturing and recording all of the relevant features and terms contained in a transaction," he says. "With increasing volumes and complexity, the range of procedures to confirm, process and otherwise manage the trade life-cycle of OTC derivatives needs to be automated. In addition, providers will need to keep pace with the increasingly sophisticated analytics needed for derivatives trades."
http://www.statestreet.com/knowledge/vision/2008v3i3_ds.pdf
BATS EXCHANGE ROLLS OUT SMARTS MARKET SURVEILLANCE TECHNOLOGY
http://www.finextra.com/fullpr.asp?id=26309
DEBATE OVER EQUITIES CLEARING FRAGMENTATION RAGES IN EUROPE The demise of Lehman Brothers, a significant counterparty in the over-the-counter derivatives market, in September last year, has brought to the fore the debate over whether increased fragmentation or consolidation would provide the solution for European equities clearing.
http://mail.efnmail.co.uk/r/44506306/MjU3MzA2OjIwNDE2/
==Alan Cameron – issue for CCPs to focus on taking risk out of mkt, that is what they are there for.
FIDESSA LATENTZERO INTEGRATES NOMURA MODELEX ALGO TRADING SUITE
http://www.finextra.com/fullpr.asp?id=26275
Fortis holding statement
Fortis holding, the Belgian State and BNP Paribas have agreed to extend the October Protocole d'Accord due to expire on 28 February until 6 March in view of the continued discussions between the parties.
http://hugin.info/134212/R/1294103/293441.pdf
Citi limits Citigroup is bailed out yet again by the American governmentFull article
Nomura sets price for planned €2.4bn share offering Nomura Holdings set a price of 417 yen ($4.24) per share for its proposed equities offering, putting the total value of the sale at 298.7bn yen (€2.4bn). (The Wall Street Journal)
NYFIX HIT BY FSA DARK POOL RULING
Loss-making Nyfix is likely to incur further costs in the development of its Euro Millennium dark pool after it was deemed non-compliant with the latest interpretations of the MiFID rulebook by the UK's Financial Services Authority.
Full story: http://www.finextra.com/fullstory.asp?id=19694
27/02/2009 15:20:00
CESR CALLS FOR EU-BASED DERIVATIVES INFORMATION REPOSITORY
The Committee of European Securities Regulators (CESR) is calling for the creation of a euro-centric repository of bilaterally-agreed credit derivatives, mirroring the DTCC's Trade Information Warehouse in the US.
More on this story: http://www.finextra.com/fullstory.asp?id=19693
FSA faces huge compensation claim over GFX collapse A group of investors has claimed a multimillion-pound compensation from the Financial Services Authority alleging that the UK watchdog failed to stop the activities of a suspected rogue trader. (The Times)
*** well, that’ll bump up the cost of compliance.
StatoilHydro Says CO2 Pumped into Well Under North Sea Is Not Leaking Out
StatoilHydro ASA, Norway’s largest oil and gas company, said carbon dioxide pumped into the Utsira formation in the Norwegian North Sea is spreading as expected.
http://www.bloomberg.com/apps/news?pid=20601130&sid=aLiYs.jOVH44&refer=environment
AUSTRALIAN FINANCIAL REVIEW: Steady as She Goes, with Elstone at the HelmBy Mathew Drummond3/5/09Robert Elstone will remain chief executive of ASX Ltd until at least 2011 after agreeing with the company’s board to extend his term.Securing an extension of Mr El-stone’s term has been a priority for the board, keen to retain his steady hand as the exchange faces tough operating conditions as well as the likely onset of competition.Wilson HTM analyst Andrew Hill said of the move: “It’s a positive but expected development.”Mr Elstone was unavailable for comment yesterday but at last month’s profit announcement he described himself as a “very engaged CEO”. The Australian Financial Review reported on February 16 that he was tipped to stay on.Mr Elstone will be retained on the same $1.5 million base salary and bonus arrangements as were struck when he assumed the top job in 2005. He took the role following a push from Sydney Futures Exchange investors to oust ASX chief Tony D’Aloisio when the two companies merged.Credited with pulling costs out of the merged firm, Mr Elstone’s record of year-on-year profit increases came to an end in the first half of fiscal 2009 when the exchange reported an interim net profit fall of 8.2 per cent to $171.9 million.Trading figures released yesterday showed that, despite Mr Elstone’s optimism that 2009 was showing signs of a recovery, market activity remained at historic lows.Compounding the ASX problems is a recent strategic win by Chi-X and AXE-ECN in their battle with the exchange. it is understood that the government has agreed to hold off on approving a series of “market enhancements’ proposed by the exchange until it decides on Chi-X and AXE-ECN’s licence applications.Both companies have been waiting for licences so that they trade in shares in direct competition with the ASX.They have complained that new services announced by ASX mimic their proposed offerings. ASX has told analysts the new services have been delayed to about June.It is understood the federal government has given the ASX a sign that it is sympathetic to Chi-X and AXE-ECN’s concerns.Mr Hill said the delay would increase the competitive threat from Chi-X and AXE-ECN should they obtain licences.“The threat of market licences will reduce substantially if they get these market enhancements going before licences are approved. The program effectively offers services [the competitors] hope to offer, so if people get onto the ASX’s services it’s going to be harder for them to move to the competitors’.”Trading figures for February released yesterday showed that daily equity turnover for the month was $3.4 billion, 46 per cent down on the figure for February 2008.The volume of total futures contracts was 4.3 million, down 39 per cent on the corresponding calendar period.The pipeline of companies looking to float remains a trickle; only four companies listed in February compared with 15 a year ago.As expected, capital raisings remain strong. Total capital of $10.3 billion was raised during the month, more than triple that of a year ago.ASX Ltd shares fell 25e yesterday to close at $25.83.
BANKING TECHNOLOGY: Dealing with Data Fragmentation By StaffMarch 2009In Europe the range of venues and time frames for reporting trades has led many firms to use the primary venue’s data to form prices. With significant trading occurring away from primaries, Banking Technology gathered experts to examine how realistic price formation could be achieved.Q: The whole thing starts with MiFID; what are the effects is it having?Guy Sears: I’m speaking today in a personal capacity and I see MiFID as a project that is not yet completed. It was a big step to break the concentration rule for exchanges in Europe – although it has certainly not done in it Spain – but we’re getting there.It’s revealed things that people were saying a year ago needed legislation, and that’s particularly because London has got such diversity of trading techniques that we’re showing stuff that has happened here but not elsewhere yet. Quick words are: uncompleted project, and it has led to significant fragmentation of trade reporting.I don’t think that everything should be trade reported through the LSE nor are monopolies good. My position is that as an uncompleted project we need to do the work to join things up.We need to think what was meant by certain terms, such as ‘closing price’, such as ‘depth of market’. Things like that need to be better defined. I’m certainly not in the camp that says “Let’s go back to the old days where every national exchange had everything.”Andrew Allwright: We’re in a phase of constant transition. Because MiFID is principles-based regulation and not dictatorial there is a period of testing, seeing what happens, identifying the deficiencies and then addressing them. I think it’s too early to say ‘I think there’s something fundamentally wrong with MiFID that needs to be resolved through increased regulation’. It’s too early for that, you have to allow the market and commercial forces to deliver what customers need.If one was to go back to November 2007 or even the following year, most consumers of data, didn’t know at that stage exactly what they needed. Since the market has developed, with greater fragmentation and the growth of MTFs such as Chi-X and Turquoise, people are becoming more aware of the limitations of what has been done. To jump in and say commercial forces haven’t been successful is incorrect.Herbie Skeete: It is a work in progress, that’s true. I think that unintended consequences of the regulation have become clear. It is totally true in that some of the flaws were obvious from the very start and in fact were commented upon by many people, in that there is a lack of detail in, for example, what’s a closing price?Those of us with long memories recall that when the LSE’s Sequence 5 [the information, news and reporting service in launched in 1995] came along, every single vendor was showing different closing prices from the LSE because there was no rule.I remember going to the LSE’s launch party for Sequence 5. I was working for Reuters and I was approached by three or four big vendors who said “We’re going to change our closing price to be the same as Reuters’” and I said “We’re changing ours, as of tomorrow morning, having consulted the market and the LSE”.When you have multiple platforms it becomes a much bigger issue.One of the things that was obvious from the start, but will become increasingly obvious in months to come is the cost. If you want to see the best price you have to pay exchange fees – every exchange has an exchange fee, and if you want to see the single price in real time you have to pay the fee. I know that most of them don’t charge fees but that will change because that is where the money is: always follow the money – if you look at the LSE, 40% of its revenues come from that data. So all of these venues are going to start charging at some point in the future. So someone has to work out a way for participants in the marketplace to have access to this data at a reasonable price, whether or not it’s one fee allocated across all platforms.Things like best execution, when you have equities traded in one currency it’s easy – but when you have trading taking places in more than one currency as is the case, how can you work out best execution? As far as I’m aware there isn’t a clear rule on how you do that.When you have trading taking place in multiple currencies which currency is the regulator going to use?Finally, I would say that the market should get together – it’s best for the industry itself to come up with a solution through market forces rather than have one dictated by some bureaucratic body. Such bodies, if they were ever market practitioners it was a long time ago.Hirander Misra: MiFID is an iterative process. I don’t think the regulators anticipated the impact of MiFID in generating the level of competition it did. If you take daily pan-European trading the top four MTFs represent 20-25 % of market daily trading.There has to be collaboration to create common standards. Thomson Reuters has made a start in terms of decoupling certain OTC data – BOAT for example – however other vendors may come up with a different way of displaying data. The data users should be able select what they want to use as part of a consistent framework.Equally, for any given instrument how do you define fungibility? What data should be part of a display and what shouldn’t be? How do you define data quality and what should be included as part of that? In order to lower the cost of entry, how do you design data standards as well? Do we need an industry body where the buy and sell side, the exchanges and MTFs come together with the vendors? It’s not only about data display, but the originators need to be involved to determine how the data is used and displayed. A lot of OTC data is being done on certain venues and there is a charge on that data way in excess of the order book. Data does not seem to be fair value: a generally accepted standard is that data provided free of charge is 15 minute delayed – in some cases it is two hours delayed, which is generally not acceptable.Here at least we can say it should have been done quicker on November 1 2007 but at least the vendors are responding, to decouple the different types of data so that each business model either falls or it stands on its own two feet.Going back to the point on fragmentation, yes there has been fragmentation in the OTC space, and the on-order book space, but what technology fragments, technology can also knit together. Technologically this problem has been solved in the US – albeit in a less complex market. But of course the US and European markets cannot be compared like-for-like. You cannot simply apply a model that works in the US to the European marketplace – each has a different reference pricing model. Each has its own regulatory structure. Each provides a framework within which we can work with some level of consistency. Although there have been announcements made in January about a consolidated tape what you could get is something like alphabet spaghetti or boxing organisations – the WBF, WBU, WBS etc. We almost need to manage that consistently through standards.Q: Is the pressure coming from the market to deliver a consolidated feed?Sears: It’s challenging for us, I think, to know what we mean by that word ‘market’.As shown by the Lehman’s collapse you sometimes get a ‘take it or leave it’ offer from the brokers. There is a place for mandated solutions when there is no equality and there is a market failure. So I’m very much in favour of non-centralised solutions if that means that there is one size fits all.However I’m quite attracted to something we have discussed – standards. There is a paucity of standards – standardisation should not be seen as impacting competition. Car manufacturers meet certain safety standards; people who produce computers produce them against certain radiation standards. That is the midpoint. I do see the role for one central body, it would be great if the industry could come together, although history has shown that the industry has not been brilliant at dealing standards: CrestCo would not have seen light of day if it had been left to the industry.Skeete: But what would the standard be? In the car industry it might be safety, but here would it be how you transmit the data? What the data would be?Sears: The notion of the consolidated tape has been discussed in the industry as ‘the ability to put things together much more easily’.Wherever the money in funds comes from, this is people’s money, and politically with everything going on it worth remembering that this is pension money, unit trust money and saver’s money: whether they are low or high net worth, there is no distinction.For me the discussion about the consolidated tape forgets that a lot of what goes on is a utility. A lot of buy side firms thought that they compared and contrasted brokers in terms of their skills. They are coming to realise that they compare and contrast in terms of their venues’ default rules, their terms of business, their own credit worthiness; I think firms just want to know this is a utility with certain minimum standards and good data: that’s all that people want. In the UK there is £3 trillion under management – slightly bigger than the world’s sovereign wealth funds and hedge funds put together – it’s people’s pensions, local government money and they really don’t want to or care about where the broker executes, whether its Chi-X or the LSE, you just want to execute it and be able to check afterward whether you got a good price.Russell Hart: In general, many of the smaller European brokers take the primary exchange as the source for best execution and do not go any further than that.Q: So who is responsible for finding the best price?Sears: Fair question: the responsibility for finding the best price – in the sense of finding the teams that are best at executing the nature of the order you have – should remain with the asset managers.Misra: I think that the buy side have an important role to play here. Their voice hasn’t necessarily been heard, which has resulted in sub-optimal solutions in some cases. Rather than having more availability of consolidated data, in some cases they have had less availability which can only be a bad thing as it reduces transparency and impacts the entire value chain. The fact this is changing is positive.When we talk about standards it can relate to three things: data standards, quality standards and technical standards. How do you put things together? You’ve got multiple sources trading multiple stocks – how do you amalgamate those? Which stocks constitute the same instrument and are therefore fungible? A thing like time stamping data is inconsistent across venues as we’ve got uploads from the MTFs in milliseconds and exchanges doing that in seconds. Even for vendors to amalgamate that is sub-optimal, because you don’t know which data really got generated first and which did not.Q: Is there a role for a market utility in making this work?Allwright: We should avoid utilities as a term; I tend to associate utilities with central large, slow, lumbering organisations such as London Underground.Skeete: Well, certain things should be a utility, others not. Take the consolidated tape in the US. It’s worked for a while, now you have something where you have no innovation, you have it being starved of funds. You need to let market forces prevail, let competition rule and it also means that things are priced keenly on quality with a fair price charged to customersMisra: I agree, but certain issues still remain. We have mentioned closing prices – what about volume weighted average price? This is based on primary data, but Reuters and Bloomberg each have had their own derived calculations and differ from time to time. Trading on MTFs should be taken into account with VWAP calculations.We’re regularly getting price improvement between the primary market spread. As the buy side are ever more mindful of best execution or best performance this is where pre-trade analytics becomes important by identifying what can be traded and where. There are many TCA products based on primary data but which ignore the other venues. If you measure against VWAP by calculating that on primary market data alone, you are disregarding, say, 25% of all trading activity away from the primary exchange. How can that be an accurate benchmark? Yet your broker could argue that they hit the benchmark and, worse still, you’d be imagining that you should be happy with it.Skeete: But they all end up different. Years ago in Reuters when we had a yield calculator we had lots of complaints because clients got what they thought were the wrong answers. So we got a mathematical wizard to try and sort it out and we discovered there was a bug in the AIBD calculator – so we had to go and put the same bug in our product! That shows the danger of everyone trying to aim for the same thing. You can end up dumbing down – it’s the same but is it right?Q: What have been the major drivers for change here?Misra: September 8 was an interesting date – the day the LSE experienced some technical difficulties. We went to our brokers, because in the market a lot of flow dried up, as some smart routers and automated market making machines were still set up to look at the primary market reference prices rather than a consolidated set of reference prices – so even though the MTFs were still trading, the spreads widened on the marketplace because there weren’t enough people subscribing to that consolidated benchmark. This is why common standards are important. In a world where the same stock can be traded in a number of venues, this reduces concentration risk. However liquidity hasn’t necessarily shifted to the extent that it should do. Why? Because some sell-side firms are looking to develop their data sourcing projects, but it’s buried in their priority lists. But the reality is that they are missing out on as much as 25% of the market.We see signs of change. On October 8 there was a unified cut in interest rates and a lot of volatility that week. What you typically saw prior to this, when you had lots of volatility, the liquidity providers would reduce their activity on Chi-X because the market was too volatile.Maybe they’d go back to primary because they were more comfortable following the herd. On that day the LSE had lots of circuit breakers on a per stock basis and the flow continued to be traded on us. We had a record day and we retained our market share of 20% of all FTSE trading, where on previous days, such as in September, when we had a record day, it was because more was being done and we were only doing about 12% of that. Since then we’ve seen it manifested as we’ve had more and more natural liquidity. Obviously we’d like even more.Allwright: You’d expect your volumes to go up in periods of volatility because high frequency traders would come to you, wouldn’t they?Misra: Yes and no, because our platform is so fast on the updates there’s an arbitrage opportunity against other trading platforms which are slower. When there’s excessive volatility so the primary market goes into backwardation, then there’s a big issue for newer platforms because you need a mix of balanced liquidity so you need that taker flow coming in – you know where the reference point is, and the fact is when that dries up the few liquidity providers that are active may not be comfortable making markets and therefore spreads widen. It’s almost what we see in any fledgling market – when we launched, you saw that at the start and it becomes less pronounced as you build up liquidity.Skeete: Going back to standards, what do you think is the best way to get this done? If you do it the UN way, with a thousand voices it would take forever. It’s going to take one or two prominent bodies to take the lead to start this off.Allwright: A clear case has just been made for a single source of market data – for the last two years there have been issues with the reliance on particular markets for data, but things are changing and people are changing their behaviour. Is there a specific failing that could be addressed by a centralised body dictating behaviour to business?Misra: Yes, in the US it’s been a regulatory driven solution and we’re all agreed that we don’t want that here. Equally, if you look at the indices, the S&P 500 which is based on NYSE flow, that hasn’t changed. So where you are talking about opening and closing prices generated in an auction – flow goes to primary – we see trading activity right up until 4.30 when the auction kicks in – and the MTFs will lose flow. So even though we end up with 25%, actually in continuous trading we’re a larger proportion of the market, and so you could argue that some level of standards are needed because you have a weighted average opening price and a weighted average closing price.Allwright: Any move to use non-primary markets to evaluate an index would have to be a result of the index providers moving to change their model.Misra: But the market isn’t delivering because you have incumbents – call me sceptical but you have some barriers to entry and some resistance to change as far as the index providers are concerned. We’ve seen this from the outset: when we launched, Chi-X was a very disruptive model and we were up against incumbents in all quarters: incumbents in the infrastructure space, in the data vendor space and the exchange space and on the back of some regulatory change, albeit broad, we had to work around that with partners or being more innovative or more responsive to change. That is one way of looking at it but, equally, bodies like the IMA have an important role to play as they can get the buy side on board as far as consolidated data is concerned.Allwright: I would be concerned about the idea that should there be some centralised body managing a consolidated tape.Sears: No, in a sense the obligations that we have on us asset managers under Article 45 are slightly wrong as well and in whose interest is it to disturb the current system – which I accept is changing and dynamic? Well the brokers can say back, we improved against best execution but that can be a nonsensical term. I just want to know the better price; if the better price is on Chi-X it’s not improving on best execution in the sense of the LSE price, they’ve just done their job.Skeete: I’d like to think that this is a good opportunity for vendors like Thomson Reuters. Vendors should be going out there, trying to lobby, trying to speak to users and decide how this thing is going to work. I think that the FTSE is quite aware that as the LSE becomes a less dominant force, as it were, than before MiFID, you can’t just take the price from the LSE, you have to take it off of other venues and vendors too. Otherwise the index becomes a joke – it isn’t a joke now but …Misra: It will be. September 8 will happen again, the brokers have now made changes, the MTFs continue to trade which we hope will be the case – not again the optimum case but at least an improvement on September 8. The FTSE isn’t updating, what happens to derived products on the back of that? Then it is a joke, it’s a big problem.Sears: I would like to go back to the point about the utility model as it raised some voices and that’s always a good thing – how you can suggest a market solution after the worst crisis in 20 years, I don’t know …Skeete: I’m dead against utilities, apart from certain situations, but with utilities corporate governance becomes a huge issue. Look at the DTCC in the US. That is a good model: innovative, works in partnership with users …Sears: When you sit back and look at utilities and note the lack of innovation it’s a fair point. The concern I have with any regulation – and how we solve this challenge – is something else that underlies everything that goes on from the micro to the macro, and that is correlation. The fact that everybody’s black boxes worked in the same way when the LSE outage occurred because they were using the same data, the fact is that we have huge amounts of trading that is herding, because of correlation and if uniformity goes too deep that is the real risk. We didn’t use to use the word competition in this sense – we used the term over-correlated and that’s where standardisation can be very, very dangerous.Misra: This goes back to the point that we really need competition in this space. A number of solutions are coming to market but we would argue that these solutions should have been there from the introduction of MiFID.The market is more than a year behind because none of the vendors really grabbed the bull by the horns. Bloomberg used to be the de facto standard for VWAP. The consolidated tape product offers a real opportunity yet none of them have responded in the best way possible.Skeete: Well, what happens is that the new becomes the old. Then you become big, you have the legacy that you didn’t have before and it becomes harder to do things.Misra: That’s the benefit of competition.Skeete: You do need to have the younger guys coming up but what happens is that the new kids on the street get absorbed by the old guys.Sears: I know that in the new world we are going to have a lot of regulation but is one part of this going to be that the competition authorities should be more important than financial services regulators?Skeete: I remember talking to CESR about the price of market data and I made a point about the charges being too much. I said surely, CESR can come up with a different pricing model and they said no, this should go to the competition authorities.Q: What does the future hold for venues themselves?Misra: We would fully anticipate some form of consolidation as was the case in the US.Which is the benefit of competition and equally that really does offer an opportunity but here at grass roots level we’ve got to look at what we’re trying to get right. The market can provide a solution – the question is does it need a prod?Allwright: It’s like VWAP – sometimes a market standard gets established even if it’s wrongly calculated. Standards need to be open so users can understand and critique them.Sears: The dynamic between pension trustees and managers reflects the incentives. In our area, basis points on price here or there are not going to get trustees saying they are going to sack you. Picking the wrong stocks could lose you a fortune. As a pension trustee our dealing costs aren’t as important because you’re not high frequency trading.Allwright: There is an opportunity for buy side firms to participate, to speak with venues and say what it is they want, so that we can come forward with a commercial solution. If we were to wait and decide regulation was the way forward, it would be another four years before the European Commission would come to a conclusion.Misra: This is why collaboration is important between vendors, exchanges, buy side and sell side parties. Some have expressed concerns about double reporting. It’s important to distinguish that this may have been the case on the OTC market but on electronic venues order book trading is disseminated in real time so there’s very little chance of that happening. But given that market data can account for 40-50% of the primary exchanges’ revenues and given they levy expensive terminal fees and that transaction and reporting fees are declining, of course they will try to protect their franchise.Our data is free, so the question is: is there value in the data? Flexibility is key and this goes back to best execution and best execution policies differ from broker to broker. Now Thomson Reuters have got round to decoupling their BOAT data from on book data, that’s great but there could be firms wanting to access the free MTF data and not the exchange data as well so there needs to be greater flexibility on what vendors can offer on the product side.You are seeing a data explosion and some systems on the broker side or the vendor side or the buy side aren’t set up to cope with that. Obviously you are in the direct feed space but there is an opportunity for new vendors to come in who haven’t got those constraints to deal with low latency delivery. What’s often forgotten is what the data is used for. If you have algorithms working off data with a 250 millisecond delay, then how useful is that data? It’s useless.Sears: The issue is that there are different uses of data. To lay my colours on the table, if this works we need to have a single European trading space. The variety of trading in London is such, that ought to be a good model for other European states. This is going to happen in other countries.Skeete: You’ve got Deutsche Börse – but you’ve still got Hannover, Bremen, Berlin and the other local bourses. It comes down to what is an exchange? It’s not just a place where you’re buying and selling, it’s also a place where you raise capital, even in this brave new world of consolidation we are seeing an exchange launch on Birmingham based on the need of SMEs – who are badly served at the moment – to raise capital.Q: Looking forward what does the future hold for the primary and secondary markets?Sears: The capital raising point is a very interesting point, because we at this lunch and many people focus on secondary trading but deep down in the economy what we need is the ability to capital raise. I hate to say this but people won’t be allowed to do that in the new world, some of that OTC business will not be allowedMisra: Everyone’s slugging it out on cash equities.Sears: I think most of the places people trade will be regulated.Skeete: How many MTFs will be around at the end of next year?Misra: Independently, excluding dark pools? Two distinguished players …Sears: How long will they have been there? I see the likelihood of 4-5 MTFs and every so often one of them will be replaced because the idea of lasting 200 years like the LSE has gone.Q: Is there likely to be pan-European Regulator appearing in the next five years?Misra: When you talk about Europe standing together that was the intention of CESR, and MiFID on the back of that, but there are local interpretations. Like short selling. Each regulator interpreted them in different ways, then the FSA publish a list of 36 UK bank and insurance docs, the French regulator their own – when you raise the issue that those are pan-European exchanges you’re regulating, they shrug.Hart: You’ll see combined regulators in Benelux and in Scandinavia, but not in Europe – you can’t see the bigger economies like the French and Germans ever taking part in that.Sponsor’s Viewpoint: Thomson ReutersThe trading of European equities has become increasingly fragmented over 2008 and into 2009, as can be seen from Thomson Reuters Equity Market Share reports (accessible from www.reuters.com/mifid). This has resulted in the demand for the consolidation of European equities data.Thomson Reuters has responded with various propositions including a customisable Consolidated Order Book Model in its flagship service Reuters 3000 Xtra, as well as a Global Transaction Cost Analysis service that applies configurable cross market benchmarks to establish execution quality.Our “.xbo” consolidated quote and tape data has addressed the technical and administrative challenges in providing the equivalent of the US “Consolidated Tape” in the most liquid and fragmented European equities.The response to the .xbo from our customers has been very positive. Users can see the best bid/offer price in a stock, where it is available and where trades have actually been executed. Our customers are also giving us great direction on how we can continue to improve the content of the .xbo. We believe that in working with our customers, the exchanges and the MTFs we can apply a simpler pricing model for the .xbo and our aim is to achieve this as quickly as we can in a competitive environment.It is too soon to conclude that intervention by the commission, CESR or the Regulators is needed. We and others are providing the solutions that are being called for. Intervention would actually halt the development of new and innovative solutions and apply commercial distortions to the way stocks are traded, as in the US where the allocation of tape revenues drives some trading decisions.Sponsor’s viewpoint: Chi-XHirander Misra, chief operating officer of Chi-X Europe argues the case for market collaboration – not regulatory prescription or vendor determination – when determining the requirements for a European consolidated tape.In a landscape where competition from new MTFs is shifting trading away from the primary exchanges, some have welcomed the new opportunities, performance improvement and savings competition has enabled. Others, however, have expressed concern about liquidity fragmentation.Misra sits firmly on the side of the competition and argues that where technology has enabled such new competition, so too can technology reconsolidate fragmented data in the form of a single market tape. Turning to recent US ECN history as evidence, Misra examines some of the lessons learned, warns of some potential pitfalls and sets out some of the key requirements he believes necessary.Speed is of the essence. Not only in terms of delivery, but also integral to the final outcome. Anticipating the continuing increase of market data messaging volumes, Misra strongly advises that latency will be of key importance and whatever the outcome ultra low data handling latency will be essential.
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