G’day All,
Fast week!
Carrying over from last week there appears to be some debate on tick sizes.
Some of this is just plain wrong.
I do think Hiranders remark is spot on:
“In some cases it makes sense to cut tick sizes and in some it may make sense for them to be even bigger,” Misra said in an interview. “If tick sizes are too granular, that can led to fragmentation in the order book and an explosion of data and clearing costs. An ideal scenario would be for one common table of tick sizes or for two tables for liquid and illiquid stocks. FESE will publish member feedback on June 30 and then hopefully we can all reach agreement.”
Tick sizes are contentious. If you think of market users spread across a spectrum you have demand for high touch and granularity to low touch and size. The tick size has to fit into this equation, hence the consultation approach is best, along with the context (liquidity dynamics) of the individual stock. Chi-X has been discussing, trialling and consulting on tick sizes since 2007. Have we / they got it right? Sort of. It’ll never be prefect, and being responsive and customer focussed is the best you can ask for.
As for the explosion in clearing costs…maybe with your incumbent CCP. But I would have thought opting for a per order clearing fee, a pricing innovation lead by EMCF, should mitigate the issue. Regardless, the data explosion is not a red herring. Let the topic run, but it still shows the lack of balanced and informed opinion there is in the market and amongst its reporters / observers. (and please, I recognise I’m no expert on tick sizes!)
Amazing to think of 6-8 more MTFs in Europe.
Big news on ESCB & CESR CCP recommendations. I’ll be looking closely at links between CCPs.
Profitability of OTC clearing comes up again.
Good to see the “back to basics” mantra is still coming through strong. I think there is still a lot of ‘uncomfortable’ leveraging that need to be worked or ‘wrung’ out of the system.
Lingo:
Ooooh…macro-prudential…that’s nice!
FSA taking responsibility for fiscal stability in UK…less nice.
Gotta run.
Will be at the wallaby game tomorrow, father and son / beer and Nintendo.
Have a great w/end all,
S
http://clearingandsettlement.blogspot.com/
Infrastructure: Europe
BATS EUROPE EXTENDS NYSE EURONEXT STOCK PRICING SPECIAL
http://www.finextra.com/fullpr.asp?id=28184
NYSE MTF struggles as Burgundy takes off A European trading system backed by NYSE Euronext is struggling to gain traction more than three months after launch, even as a new Nordic rival picks up speed in its first week, highlighting the difficulties that established stock markets face in competing with industry-backed markets.
22/06/2009 11:51:00
AVOX SETS UP WIKI FOR BUSINESS ENTITY IDENTIFIERS
Deutsche Börse reference data subsidiary Avox is to set up a wiki for business entity identifiers in an effort to create a common data standard.
More on this story: http://www.finextra.com/fullstory.asp?id=20162
LSE Cuts Tick Sizes in Battle With Turquoise, Bats (Update2 ...
17 Jun 2009 ... [bn:WBTKR=LSE:LN] London Stock Exchange Group Plc [] responded to rivals Turquoise and Bats Europe by cutting so- called tick sizes for 14 ...www.bloomberg.com/apps/news?pid=20601084&sid=aP7JD... - Similar
*** comment on this
FINANCIAL NEWS: As Many "6 or 8" MTF Applications With FSA By Luke Jeffs 6/23/09
*** wow, 6-8. Some of these must be ‘systematic internalisers’ that are just re-badgeing
THE ORDER MACHINE GETS GREEN LIGHT FOR BEST EXECUTION VENTURE Dutch market regulators have approved a broker license for The Order Machine - a 50/50 joint venture between BinckBank and Optiver set up to provide best execution and dark pool trading facilities for European equities.
Full story: http://www.finextra.com/fullstory.asp?id=20168
As liquidity fragmentation becomes more pronounced in Europe's equity markets, the industry's calls for a consolidated European-wide pre-trade data source have grown ever louder. But how would a single European best bid and offer (EBBO) impact the performance of smart order routers (SORs), which currently direct orders by using proprietary solutions that combine multiple data feeds, and will it raise more questions than it answers?
Read the article
New chief Rolet wields axe at LSE
By Jeremy Grant in London
The London Stock Exchange said on Thursday it would cut jobs, the first sign of a restructuring of the 208-year old bourse since Xavier Rolet took over as chief executive a month ago. The cuts are likely to result in around 60 staff losses in London and further cuts in Italy at the group’s Borsa Italiana unit. The LSE group employs a total of 1,135 staff, split between 570 in the UK and 565 in Italy.
http://tinyurl.com/no9uc4
QUOTE MTF JOINS COMMON STOCK SYMBOLOGY GROUP
http://www.finextra.com/fullpr.asp?id=28319
Clearing
23 June 2009 - ESCB and CESR issue recommendations to increase safety and soundness of the post-trading infrastructure
https://www.ecb.int/press/pr/date/2009/html/pr090623.en.html
Europe moves closer to clearing of credit default swapsInvestors and dealers in Europe are moving to meet demands from regulators for central clearinghouse for credit default swaps. Credit-derivatives dealers had agreed to terms that make reducing the number of outstanding contracts easier. The changes are efforts to boost transparency and decrease risk in the derivatives market. "It will be a change for the better, for sure," said Puneet Sharma, head of investment-grade credit strategy at Barclays Capital in London. "Risk will be more manageable, and volumes will be more manageable as well." Bloomberg (22 Jun.)
Europe adopts conventions for trading credit default swapsAs the credit default swaps market faces ongoing standardisation, Europe has updated conventions for trading in the market. "The consensus is that the switch to the new trading conventions went smoothly in the US, and it was business as usual," said John Cortese, head of European high-yield trading at Barclays Capital. "In Europe, we already have seen requests from clients to trade using the standard coupons [before Monday], so they are not left with 'off market' trades." The Wall Street Journal (23 Jun.)
GFI JOINS JAPAN OTC CLEARING WORKING GROUP
http://www.finextra.com/fullpr.asp?id=28223
Clearing of illiquid contracts concerns CME chiefThe Obama administration's proposal for over-the-counter derivatives oversight prompted concerns from CME Group CEO Craig Donohue. "We have to be careful to manage the risk profile of what we clear, and there will be a range of things that we would not be comfortable clearing," he said. "The devil is in the details." While CME is poised to benefit from the proposed changes, it is important that clearing is not mandated for all contracts, Donohue said. Reuters (6/22)
*** yeah, that devil in the detail is called “profitability”
CFTC's Gensler:Clearinghouses Will Determine OTC Standardization
By Jacob Bunge
WASHINGTON -(Dow Jones)- The chairman of the Commodity Futures Trading Commission said Wednesday that clearinghouses set up to handle over-the-counter derivatives will determine which products can be cleared. Gary Gensler, chairman of the U.S. futures regulator, said that financial authorities' responsibility lies in ensuring clearing entities meet "international standards" in risk management and liquidity.
http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=200906241204dowjonesdjonline000650&title=cftcs-genslerclearinghouses-will-determine-otc-standardization
Asia
SGX Issues Consultation Paper On Proposed Rule Amendments To Facilitate Clearing Arrangement Between SICOM And SGX
Singapore Exchange Limited (SGX) is inviting public comments on the proposed derivatives clearing rules amendments to cater for a clearing arrangement between SGX and Singapore Commodity Exchange (SICOM). The proposed clearing arrangement provides for members of SGX Derivatives Clearing Limited (SGX-DC Members) and their customers to use existing clearing and risk management facilities on SGX-DC in order to clear their trades executed on SICOM.
http://www.exchange-handbook.co.uk/index.cfm?section=news&action=detail&id=82901
The Rise of the Asian ATS Market: The Waiting Game
Despite numerous hurdles, Aite Group expects to see the adoption of ATSs in the Asia-Pacific region reach close to 20% by the end of 2012.
*** if anyone can, I’d be grateful for a sneaky copy of this!
23/06/2009 14:26:00
TD TAKES YIELDBROKER STAKE
The Toronto-Dominion Bank (TD) has acquired a stake in Sydney-based electronic trading outfit Yieldbroker. Financial terms were not disclosed.
More on this story: http://www.finextra.com/fullstory.asp?id=20172
**** The deal gives TD an equal stake in the online trading company alongside existing shareholders Citi, Deutsche Bank, JP Morgan, Macquarie Bank, RBC, RBS and UBS.
THE TRADE NEWS: Asian ATSs to Grab 20% Market Share by 2012, According to AiteBy Staff6/22/09Alternative trading systems (ATSs) will secure 20% of the total equities value traded across the Asia-Pacific region by the end of 2012, even though their combined share is currently much less than 5%, according to a new report from research and consulting firm Aite Group. The report, ‘The Rise of the Asian ATS Market: The Waiting Game’, predicts “steady growth and adoption of off-exchange trading venues” including brokers’ internal crossing networks as well as independent platforms, over the next three years. However, the report points out that alternative trading platforms in the region face an uphill struggle. While ATSs have thrived in the US, Canada and Europe in recent years, Aite said that unlike these markets, the Asia-Pacific region lacks a single set of regulations and standardised market practices, hampering the development of alternative platforms. Furthermore, the report noted that most markets feature a single, monopolistic exchange with close ties to regulators and clearing organisations, making it difficult for new entrants to compete directly against the incumbents. Alternative trading platforms hoping to break into Asia would also need to educate the buy-side about their benefits, according to Aite. “Demand for ATS adoption remains low — local buy-side clients are still not convinced that ATSs can add value to their overall workflow,” the report said. “While the prospect for cheaper executions is certainly appetising for clients, they are not thrilled about the potential trade-off for increased complexity in market structure and additional spending in their own IT infrastructure to compete.”Aite believes winning local support will be key for ATSs. “The introduction and adoption of ATSs is currently being driven by global brokers and the foreign investment community,” said James Kang, analyst with Aite Group and co-author of the report, in a statement. “The future success of ATSs cannot be rooted in foreign order flow alone; for long-term sustainability and growth, ATSs must succeed in capturing flow from local clients.”Aite views the biggest obstacle to ATS adoption as regulation. While some markets, such as Japan, already have ATS regulation and a range of alternative platforms in operation, the report points out that some countries are still in a state of regulatory limbo, in part because of the recent financial crisis. Despite the difficulties, Aite said much progress has already been made by brokers and aspiring ATSs to build a strong presence in Asia. A further positive sign is that most Asian exchanges appear to view the influx of ATSs into their markets as inevitable. Also, there are ongoing conversations among exchanges, ATSs, brokers and buy-side firms that aim to create an appropriate competitive environment in which all of the major market participants can benefit. “Aspiring ATSs are taking a ‘co-opetition’ approach in Asia, working closely with both regulators and exchanges to create a new market environment conducive for the adoption of ATSs,” added Sang Lee, managing partner with Aite Group and co-author of the report.
Infrastructure: RoW
22/06/2009 15:36:00
KUWAIT STOCK EXCHANGE SELECTS NASDAQ OMX FOR NEW PLATFORM - REPORT
Nasdaq OMX has beaten off competition from Deutsche Börse to win a contract with the Kuwait Stock Exchange (KSE) for the provision of a new electronic trading platform.
More on this story: http://www.finextra.com/fullstory.asp?id=20166
***
Meanwhile the Dubai International Financial Exchange went live with a platform supplied by Nasdaq OMX last year. Nasdaq OMX also holds a 33% stake in the DIFX.
NYSE EURONEXT PAYS $200M FOR 20% STAKE IN QATAR EXCHANGE Nyse Euronext is paying $200 million to take a 20% stake in the newly formed Qatar Exchange, in a deal that will also see the transatlantic bourse provide the new venture's technology platform.
Full story: http://www.finextra.com/fullstory.asp?id=20160
**** meanwhile, back in April….
30/04/2009 15:32:00
NYSE EURONEXT TO CUT STAKE IN QATAR VENTURE AS Q1 PROFIT SLUMPS
Nyse Euronext has restructured its planned investment in a Qatar exchange as turbulent markets and fierce pricing amid increasing competition contributed to a 55% slump in first quarter profits.
More on this story: http://www.finextra.com/fullstory.asp?id=19988
NORTH AMERICAN DERIVATIVES EXCHANGE ROLLS OUT NEW PLATFORM AND CONTRACTS
http://www.finextra.com/fullpr.asp?id=28217
NZX Withdraws Offer To Buy Stake In NSX
NZX has announced that it would withdraw its offer to buy a 50.1% stake in NSX of Australia, based on current indications that the purchase would be unlikely to receive the support of a sufficient number of NSX shareholders.
http://www.exchange-handbook.co.uk/index.cfm?section=news&action=detail&id=83420
SUNGARD LAUNCHES CROSSING NETWORK
Fintech giant SunGard has moved into the crowded dark pool market with the launch of its own alternative trading system, a crossing network for US equity order flow.
Full story: http://www.finextra.com/fullstory.asp?id=20167
Directory of Dark Pool ProvidersCheck out Advanced Trading's exclusive directory of dark liquidity pools. The directory is organized by five categories: Independently-owned, consortium-owned, broker-dealer-owned, exchange-owned and international pools. Information includes crossing schedules, types of orders accepted, linkages and future plans.
Mixed response greets SEC's short-selling plans The US market regulator’s comment period for its five proposals to combat short selling came to a close last week. Financial News has compiled a selection of responses from exchanges and fund managers that were left on the Securities and Exchange Commission’s website.
GFC:
Obama's plan calls for "plain vanilla" mortgagesPresident Barack Obama's plan for overhauling the financial regulatory system would result in "plain vanilla" home loans for consumers unless they opt for riskier mortgages. The government is striving to make the mortgage process as simple and as difficult to abuse as possible. Mortgage brokers, however, will likely see their fee income decline. BusinessWeek/The Associated Press (6/21)
*** surely this is a Homer Simson line. Why wouldn’t you have vanilla mortgages?
Madoff trading unit revived
By Anuj Gangahar in New York
The market-making portion of Bernard Madoff's business , which he ran for years alongside the Ponzi scheme for which he has been convicted of fraud, has been relaunched under the name Surge Trading.
http://www.ft.com/cms/s/0/0113fb3a-5c6a-11de-aea3-00144feabdc0.html
Last rites for Macquarie model
Stephen BartholomeuszMacquarie Infrastructure Group's decision to keep future distributions in line with cash flows is the death knell for the listed infrastructure fund model and the first step in larger changes to the fund.23 Jun 2009 1:24 PM read more
The original Macquarie model for listed infrastructure added asset sales and, more particularly, revaluations and associated refinancings, to boost distributions beyond the cash flows generated by the underlying assets.
*** so, an infrastructure fund, where dividends are greater than cash flows, based on bullish revaluations…and then we gasp when it falls over. With it now trading at 1.40 with a NAV (if you trust ‘em) of 3.30…that’s about right. Get the cash flow balance right, some trust in the equation and the NAV gap will close. It starts to look like an investment opportunity…based on metrics where the return is there for the investor…not the administrator…but that comes back to trust.
SCIENTIFIC AMERICAN MAGAZINEThe Science of Economic Bubbles and BustsThe worst economic crisis since the Great Depression has prompted a reassessment of how financial markets work and how people make decisions about money
Robert J. Shiller, a professor of economics at Yale University, contends that the faulty logic of money illusion contributed to the housing bubble: “Since people are likely to remember the price they paid for their house from many years ago but remember few other prices from then, they have the mistaken impression that home prices have gone up more than other prices, giving a mistakenly exaggerated impression of the investment potential of houses.”
SEC, CFTC agree to divvy up derivatives oversightSecurities and Exchange Commission Chairwoman Mary Schapiro and Commodity Futures Trading Commission Chairman Gary Gensler agreed to divide oversight of the derivatives market. Schapiro and Gensler told the Senate Banking Committee that the CFTC should oversee derivatives linked to commodities, while the SEC should regulate derivatives linked to equities and debt. Still, questions about derivatives oversight remain. The Wall Street Journal (6/22) , Financial Times (tiered subscription model) (6/23) , The Washington Post (6/23) , The Bond Buyer (6/23)
*** almost there. Take the E out of SEC and the F out of CFTC, start an E (exchange, ECN and other liquidity pool) Overseer, commission if you must…and you’re done…oh along with a splash of prudential supervision so you can enforce…. macro-prudential oversight.
BoE says banks should use equity rather than hybrid debtIn its Financial Stability Report, the Bank of England advised lenders to use equity capital to guard against future losses instead of hybrid debt. "Subordinated debt should not feature as part of banks' contingent capital plans," according to the central bank's report. "Capital needs to be permanently available to absorb losses", and "the only instrument reliably offering these characteristics is common equity". Bloomberg (25 Jun.)
*** now that’s a move back to common sense fundamentals.
Darling poised to give FSA new authority to police banksTension between UK Chancellor Alistair Darling and Bank of England Governor Mervyn King is expected to worsen as Darling prepares to provide the Financial Services Authority with greater authority to oversee the banking industry. Darling's Banking Act would give the FSA the responsibility of maintaining the financial system's stability. The Times (London) (26 Jun.)
**** I don’t like this, fiscal stability does not belong with the supervisor. And they lack the clout to put any bite with their bark…unless there going to build a contingency reserve and put the cost of compliance through the roof.
Junk
SCIENTIFIC AMERICAN MAGAZINE
NASA's mission to bomb the Moon
*** Great headline….who but the Americans would think to bomb the moon? An totally unfair representation, but funny.
UK BANKS SET TWO-YEAR DEADLINE TO STOP GUARANTEEING CHEQUES The UK Payments Council is moving to hasten the demise of paper cheques by setting a two-year deadline for the withdrawal of the Cheque Guarantee Card Scheme.
Full story: http://www.finextra.com/fullstory.asp?id=20188
After 16 months in immigration detention, Kasian was granted a temporary visa. Then he was hit with a $160,000 bill for his "accommodation" in Baxter Detention Centre. There are hundreds more like him - experiencing unimaginable trauma only to then be slugged with an enormous bill for the privilege.
The good news is the Senate is scheduled to vote this week on a bill to overturn this policy, but the vote is going to be very close.
This policy means those hit with 'detention debt' cannot get on with their lives: as long as the debt is unpaid, the Government may not grant permanent residency and their lives are left in limbo, causing untold mental anguish.
No other country has a similar policy of billing refugees for their time in detention. And considering only 3.3% of debts are finally collected, the cost of the policy often outweighs the amount received. It just doesn't make sense - financially or morally.
www.getup.org.au.
*** true story, for of those of you that wonder about Aussie foreign affairs.
*** the vote carried and hence the bill is overturned. Aust will no longer bill detainees for their “accommodation”.
Summary
· Liquidity fragmentation in Europe last week was 20.5%, 0.8% down on the previous week driven by increased primary market volume in Germany.
· Ireland (68.1%), UK (33.4%), France (25.0%), Netherlands (24.6%) and Germany (20.3%) were the most fragmented markets in percentage terms.
· UK ($3.2bn), France ($1.6bn), Germany ($1.4bn), Netherlands ($0.4bn) and Italy ($0.4bn) were the most fragmented in terms of Displayed Liquidity traded away from the primary market.
· Chi-X achieved average daily turnover (ADT) of $5.0bn, equivalent to 12.8% of flow in Chi-X names. Total ($112m, 19.3%), Rio Tinto ($109m, 17.7%) and ArcelorMittal ($96m, 15.4%) had the highest ADT.
· ADT on the Turquoise Displayed Order Book was $1.4bn. Market share in Turquoise names was 3.4%. Xstrata ($42m, 13.7%), HSBC ($40m, 8.6%) and Nestle ($32m, 7.9%) had the highest ADT.
· BATS achieved ADT of $1.4bn. Market share in BATS names was 3.9%. BHP Billiton ($47m, 9.5%), HSBC ($43m, 9.4%) and Rio Tinto ($41m, 6.7%) had the highest ADT.
· Nasdaq OMX achieved ADT of $192.9m.
· 12 stocks traded more than 20% ADV on Dark venues.
Articles
ADVANCED TRADING: High Frequency Trading -- Red Flags and Drug Addiction By Joe Saluzzi, Themis Trading6/18/09I attended a roundtable discussion yesterday morning produced by STANY titled "High Frequency Trading: The New World Order". In case you are not familiar with the subject, high frequency trading is the hottest thing in the equity market right now. Over 60% of equity volume comes from the high frequency traders (HFT). Basically, HFT's are computers that execute trades with extremely low latency. They live in a world of milliseconds. If your computer takes more than 50 milliseconds to execute, then you are a dinosaur in this business. The panel at this roundtable was comprised of 2 brokers that sponsor access to HFT's, one exchange rep that courts the HFT's and one option market representative. Here are my notes: 1) The high frequency trading business is extremely profitable. Based on the smugness and the smiles on the faces of the panel members, I could tell they were killing it. They reminded me of the "SOES Bandits" from the early '90's. But I sensed that they realized that their role in the market place was being squeezed and they were just trying to max out their profit before the game ended. 2) HFT's claim to be market makers and they claim that the liquidity they add to the market has lowered volatility and helped narrow spreads. But the problem here is unlike a traditional market maker, they have no requirements. No minimum size to display, no minimum time to display a quote and no capital commitment to a client. 3) There are very low barriers to entry to becoming a HFT. All you need to do is to become a client of a sponsoring broker. This will eventually cause market saturation and reduced HFT margins. Only the biggest, fastest computers will be making money consistently. 4) The HFT's tried to prove that they add value to the market by referencing the SEC's ban on short selling in 19 financial stocks last year. They noted studies that showed after this was enacted spreads widened by 40% and volumes decreased substantially. They said that since HFT's couldn't properly arbitrage the stocks, they simply did not participate. BIG RED FLAG should go up here. These HFT's can simply walk away from the market when the rules don't suit them. So what happens if the SEC enacts the uptick rule again or what happens if a major event causes turmoil in the market? Will these HFT's simply shut down their computers and walk away since their model has been corrupted. What happens to that 60% of the volume that they now control? Where will all that LIQUIDITY that they claim they provide go when the market doesn't suit them? A major vacuum will be formed in the market as multiple parties run for a much smaller than expected exit. 5) The exchanges actively court the HFT order flow since it is extremely profitable for them. They are like drug dealers trying to control their turf and the HFT's are the drug addicts. Making so much money with so little risk is extremely addicting. 6) I must commend the HFT's for one thing: they constantly were talking about risk to the system. They spoke of "naked access" (nice term) and how a rogue trader that comes unfettered through a brokers' system had potential to inflict major damage on the market. They spoke about the fact that the exchanges have no idea of who is on the other side of the trade since they are coming through sponsored brokers. They spoke of the lack of risk controls that are currently in place. Remind anybody of some recent market occurrences? Our equity market is being controlled by machines that are nothing more than two bit, SOES bandits. They cloak themselves under the mantra of liquidity providers but they are really just locusts and are feeding off the equity market until it doesn't suit them anymore. Once their profit margins are squeezed to almost zero, they are likely just to move on to a new market. But what damage would they have done? We will be left with a shell of a market that is used to being led around by computers. Real people and real capital are a scarce resource in today's market.
*** Wow, that’s one hell of a view. Like it not least for its conviction of opinion.
Scott Riley
EMCF Business Development
European Multilateral Clearing Facility
8th Floor 50 Bridge Street Sydney Australia 2000
((Off)+61 (0)2 8916 9634 È(Mob): +61 (0)418 117 627
* scott.riley@au.fortis.com
Friday, June 26, 2009
Friday, June 19, 2009
AMCF & News: CCP standards, ELX 10 Jly & pxing, EuroTicks, SGX clearing, BoE T2S, Dark probe
G’day All,
A quick rant….
EUROCCP CALLS FOR 'CONVENTION ON INTEROPERABILITY' FOR CLEARING COUNTERPARTIES
*** Of course we should.
For world trade we have the Doha talks. We should have mutual recognition and reciprocal access in post trade talks too. Absolutely we should have standards for CCP interoperability. The risk we run is forcing subsequent interoperable partners to be constrained by the shortsightedness of bi-lateral agreements. (Why should the 3rd CCP have to follow the landscape that was suited and bias to the first 2?). Standards provide certainty and level the playing field in development costs. To date, I don't think traditional regulated European exchanges have been quick to adopt reciprocal access. It should be taken out of their hands. If CCPs can agree to interoperate, the trade feed can be shared at the CCP level. All an exchange needs is an anonymous market with credit performance and multilateral netting. I have not so much faith in EACH.
http://www.eachorg.eu/each To me, they detail on the final page of their 2008 report reasons why they don't want to interoperate - not why they do.
http://www.eachorg.eu/digitalAssets/49/49417_EACH_Inter_CCP_Risk_Management_Standards_July_2008.pdf
The markets will get interoperability. With or without EACH. The opportunity is to work to an industry roadmap or to leave the pioneers to forge a path ahead. We want clearing FOR the market (i.e. the market users and Clearing Participants choose) not clearing BY the market (single trade feed nominated by liquidity platform).
A good wish to ELX….
ELX FUTURES SETS LAUNCH DATE
http://www.finextra.com/fullpr.asp?id=28158
***10th July (good to see the Friday launch strategy), pricing details below.
Some hi-jinks…
Tick sizes made me laugh. I’d said LSE was lacking timely…then they succumbed. How a week changes things. How competition is a useful force to agitate for change.
But competition still has more to do as we see DB reduce fees.
And LSE looking at its cost (1/4 billion bond impressive) and technology base.
Some interesting graphs….
The world economy is tracking or doing worse than during the Great Depression
http://www.voxeu.org/index.php?q=node/3421
and
Liquidity Mapping: Jump into the Dark Pool
The darkness is all around us…but I see some still double count in the dark (it scares me what goes on in the dark…I have a daughter).
This Global Financial Crisis is not really helping the dark cause…all these regulators are now armed with torches and search warrants.
CESR probe inevitable.
“A smile is a curve that sets everything straight.”
--Phyllis Diller, American comedienne
…BTW, I’ve not read all these stories. I keep them more as a book mark so I can find them if I need them. So if some are off message just read the headline. Like I’ve not read what Mr Soros said apart from outlaw ''toxic' credit default swaps. Outlawing anything is pretty silly out of context.
Have a great w/end all.
S
http://clearingandsettlement.blogspot.com/
20/06/2009
INT
New Zealand v France
Wellington
5.45pm
20/06/2009
INT
Australia v Italy
Melbourne
8.00pm
20/06/2009
LIONS
South Africa v British & Irish Lions
Durban
11.00pm
21/06/2009
BAR
Argentina v French Barbarians
Buenos Aires
TBA
http://www.rugbyheaven.com.au/calendar/
17/06/2009 11:35:00
EUROCCP CALLS FOR 'CONVENTION ON INTEROPERABILITY' FOR CLEARING COUNTERPARTIES
UK-registered clearing house EuroCCP has called for the adoption of a single standard 'Convention on Interoperability' that all central counterparties should sign, as the European clearing community struggles to implement a raft of bilateral agreements.
More on this story: http://www.finextra.com/fullstory.asp?id=20145
SecFinex sets launch dates for stock lending CCP
NYSE Euronext wins race to clear stock loans German exchange giant Deutsche Börse has had to concede defeat to its largest European rival NYSE Euronext in their race to launch clearing services for their respective stock lending systems.
Clearing gains steam around the worldA clearing venture announced this week by NYSE Euronext and The Depository Trust & Clearing Corp. is the latest in a wave of clearing efforts worldwide. Clearinghouses and exchanges are taking advantage of political and regulatory pressure for increased clearing to prevent financial meltdowns. "We are going to see more changes in the clearing space than we have seen in the last 10 years, and that's being driven by the [multilateral trading facilities]," said Mark Hemsley, CEO of BATS Europe. Financial Times (free registration) (18 Jun.)
Multilateral trading facilities (MTFs) and exchanges are on the verge of igniting a tick size war that could decrease market efficiency and prove detrimental to investors searching for liquidity in European stocks.
Read story
“Our preferred approach would be to introduce any changes in a coordinated and coherent manner in the near future,” said the LSE in a service announcement.
*** one word missing from this remark…”timely”
LSE slashes tick sizes amid trade war The London Stock Exchange on Wednesday succumbed to pressure to cut the increments by which share prices are allowed to move as a battle over “tick sizes” erupted over European equities. (Financial Times)
• Deutsche Borse announced on Tuesday that it will cut settlement fees for domestic German securities (which represent about 20% of the company’s total settlement revenue) to €0.475 per transaction,
from €0.625. We calculate this change will have only a very small impact on the bottom line (€0.01-€0.02 per annum).
Deutsche Börse adapts to ‘price-sensitive’ users
Deutsche Börse to cut fees after trading revamp Deutsche Börse has declared plans to slash its trading fees a week after completing an upgrade to its electronic platform, as the German exchange looks to lure algorithmic traders amid competition from new rivals.
LSE mulls new platform on TradElect's anniversary The London Stock Exchange has launched a review of its technology that might lead it to replace TradElect, the high-tech trading platform that celebrates its second anniversary, as the exchange looks to edge out a slew of new rivals and attract high-frequency traders.
LSE issued a £250m bond at 9.125% last week, which increases its financing cost by £8m
*** why does LSE need ¼ of a billion of debt? I’d be reigning that in.
SGX proposes to revise Central Depository Clearing Fund structure
SINGAPORE: Singapore Exchange (SGX) on Monday proposed to revise the Central Depository (CDP) Clearing Fund structure. The changes include restructuring Clearing Members' contribution to the Clearing Fund, raising the amount of the CDP's contribution to the first layer of the fund to S$30 million, from S$25 million currently.
http://www.channelnewsasia.com/stories/singaporebusinessnews/view/436118/1/.html
SGX LOOKS TO INTRODUCE LARGE EXPOSURE COLLATERALISATON FOR SECURITIES
http://www.finextra.com/fullpr.asp?id=28096
Singaporean exchange considers clearing OTC derivativesWith the Obama administration pushing for clearing of more financial instruments in the US, exchanges worldwide are taking advantage of the momentum. The Singaporean exchange plans to look into derivatives clearing. Gan Seow Ann, an executive at SGX, said there is not much opportunity for clearing of credit default swaps, but clearing of Asian currencies and interest-rate swaps are possibilities. Financial Times (free registration) (15 Jun.)
The Reserve Bank of Australia has released the Minutes of the June 2009 Monetary Policy Meeting of the Reserve Bank Board today.
http://www.rba.gov.au/MonetaryPolicy/RBABoardMinutes/2009/rba_board_min_02062009.html
BoE tells ECB it won't join euro-settlements systemA letter from the Bank of England explains why it is opting out of the European Central Bank's Target 2 Securities settlements system. The letter from Andrew Bailey, executive director of banking services, states that the BoE is content with settling sterling-denominated securities through Euroclear UK and Ireland. Also, the central bank says the T2S project has some issues that must be resolved. The Wall Street Journal (17 Jun.)
BANK OF ENGLAND RAISES T2S CONCERNS
The Bank of England has raised serious doubts over whether it will join the European Central Bank's Target2-Securities (TS2) integrated settlement system.
Full story: http://www.finextra.com/fullstory.asp?id=20152
*** and a link to the BoE letter.
Burgundy targets 25% of Nordic market A consortium of Nordic banks that launched Europe's sixth alternative trading system has pledged to take 25% of the market from arch-rival Nasdaq OMX, although the transatlantic exchange hit back with plans to offer cheap clearing for Nordic stocks.
CESR plans dark pool probe Europe's trade body for stock market regulators is set to review the rules that have encouraged the emergence of a slew of new dark pools, amid concerns on both sides of the Atlantic that anonymous trading systems might be reducing market transparency.
ELX, the startup futures exchange hoping to compete with CME’s Treasury markets, announced Monday that it will charge all in trading/clearing fees of 9c per contract for participants trading more than 400 contracts each day and 24c per contract for all other participants. These fees compare to a range of 11c to 44c at the CME. Additionally, ELX will not impose surcharges for EFPs, blocks, give-ups or errors.
Are OTC Options Over?
By STEVEN M. SEARS
An alternative trading system for big orders.
BALLISTA SECURITIES, AN ALTERNATIVE TRADING SYSTEM for large options orders, is on the cusp of disrupting the options markets. The start-up just raised $15 million to enhance its "liquidity pool," which lets big institutional investors match stock-volatility trades that might otherwise have traded in the over-the-counter market. The closely held firm received investments from Morgan Stanley (ticker: MS); the International Securities Exchange, a subsidiary of Deutsche Börse; Susquehanna Growth Equity, the private-equity group affiliated with the famed options market-making firm; and Knight Capital (NITE).
http://online.barrons.com/article/SB124484621544911137.html
**** OTC options are so last year.
**** actually, I disagree, predatory pricing in the derivatives markets is so last year, unit pricing of commoditised transactions is so this year.
Brazil and Hong Kong exchanges surge in global rankings Hong Kong Exchanges and Clearing and BM&F Bovespa have for the first time surpassed rivals in New York and London by market value, signalling a reshaping of the global exchange landscape amid the economic crisis and intense competition in mature markets. (Financial Times)
*** well what does that tell you?...intense competition?
CLEARING PROVIDERS FAIL TO GIVE CLEAR PICTURE The proliferation of central counterparties in Europe over the past few years has not delivered the simplicity, transparency and price benefits sought by users of clearing services. The uncertainty has been exacerbated by the lack of consensus among market participants about what it is they need from their clearing providers: a safe haven or a highly competitive environment.
http://mail.efnmail.co.uk/r/88557120/MjU3MzA2OjIxNTQy/
FUTURE OF EUROPE’S OTC CLEARING IS IN THE BALANCE The announcement this Wednesday of the European Commission’s plan to overhaul Europe’s derivatives industry could herald a row similar to that already raging in the US, where Treasury Secretary Timothy Geithner outlined a month ago his proposed reforms of the US markets.
http://mail.efnmail.co.uk/r/88557129/MjU3MzA2OjIxNTQy/
European CDS market poised for radical restructuringStarting Monday, credit default swaps on single corporate borrowers in Europe will be priced based on fixed coupons. The change is part of an effort to increase transparency and decrease counterparty risk in Europe's CDS market. "This new system ... will help new investors gain the confidence to enter the market. This is an opportunity to sort out the mess in the CDS market," said Willem Sels, a credit strategist at Dresdner Kleinwort. Financial Times (free registration) (18 Jun.)
BATS RAISES STAKES WITH MARKET CLOSE TRADING Equity market Bats Europe plans to increase the pressure on the region’s main stock exchanges by launching a service to challenge their monopolies over trading at the close of the market.
http://mail.efnmail.co.uk/r/88557101/MjU3MzA2OjIxNTQy/
TRADERS PUSH FOR SHARE DEALING TRANSPARENCY European market participants are becoming more supportive of adopting a US-style “consolidated tape” to publish details of all trades in one place, according to traders, who say such a move is needed to improve transparency.
http://mail.efnmail.co.uk/r/88557105/MjU3MzA2OjIxNTQy/
George Soros urges governments to outlaw ''toxic' credit default swaps
Credit default swaps are “instruments of destruction” that should be outlawed as the world looks to re-regulate the global financial system in the wake of last year’s credit crisis, the billionaire investor and philanthropist George Soros said on Friday.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5514341/George-Soros-urges-governments-to-outlaw-toxic-credit-default-swaps.html
*** ridiculous, there is a time and a place for everything. It is only excess that makes us ill.
ASX pricing inaccurate, court hears
By Blair Speedy
THE derivatives pricing facility used by the Australian Securities Exchange was inaccurate and could not provide reliable valuations for options trading, a Melbourne court was told yesterday.
http://www.news.com.au/dailytelegraph/story/0,22049,25624520-5001024,00.html?from=public_rss
OMGEO EXTENDS CENTRAL TRADE MANAGER FOR BROKER/DEALERS
http://www.finextra.com/fullpr.asp?id=28079
1 in 4 managers stop securities lending
One-quarter of money managers have stopped their securities lending programs this year, according to a new report by financial research consultant Finadium LLC. Managers that have ceased securities lending represent 6% of the $8.4 trillion managed by the 27 investment managers surveyed in April and May, said Josh Galper, managing principal of Finadium, based in Concord, Mass. Managers representing an additional 22% of assets said
http://www.pionline.com/apps/pbcs.dll/article?AID=/20090612/DAILYREG/906129979&nocache=1
**** Another good reason to trade single stock futures.
Liquidity Mapping: Jump into the Dark PoolWe may be witnessing the early stages of a sustainable and fundamental shift in the trading landscape as dark pools move from the periphery and take center stage.
19/06/2009 11:37:00
SEC BIDS TO SHED LIGHT ON DARK POOLS
Securities and Exchange Commission (SEC) chief Mary Schapiro says the agency is to step up its scrutiny of dark pools amid concerns about the risks posed to market transparency and integrity by the proliferation of off-exchange trading venues.
More on this story: http://www.finextra.com/fullstory.asp?id=20155
THE TRADE NEWS: EuroCCP Calls for Interoperability ConventionBy Staff6/17/09Pan-European clearing house EuroCCP has proposed the adoption of a single, standard European convention for interoperability between providers of central counterparty (CCP) clearing services. The clearer hopes CCPs will be able to reach an agreement on the convention by Q1 2010. “We would like to have the convention public, agreed and at a good stage by early next year,” said Diana Chan, CEO of EuroCCP, at a press briefing on Wednesday.EuroCCP envisages that the convention would replace the bilateral agreements that currently exist between interoperating CCPs, simplifying the web of contracts. To date, four pan-European CCPs – LCH.Clearnet Ltd, SIX x-clear, EuroCCP and EMCF – have agreed to interoperate, resulting in six bilateral agreements. “That is already too many,” said Chan.Were a fifth CCP to join the group, a further four bilateral agreements would be required, and the addition of a sixth would require a further five deals, bringing the total to 15. By proposing the convention, EuroCCP also hopes to standardise the way interoperating CCPs manage their exposure to each other, improving overall risk management. As the linking deals are all bilateral, details such as how much margin is held against a fellow CCP failing can vary, and those details will not be visible to all CCPs providing clearing for a particular trading platform. This means it is not always clear to all CCPs what their exposure is if one of their fellow clearers collapses or fails to fulfil its obligations. The convention, however, would require CCPs to agree on risk management arrangements that are transparent to all market users, trading platforms and regulators. “Although some progress has been made on interoperability, there is insufficient transparency in how new risks caused by interoperability are managed,” Chan said in a statement. “The arrangements between interoperating CCPs must be robust, and complete transparency in how CCPs manage their exposure to each other is important for systemic safety.”EuroCCP, a subsidiary of US post-trade utility the Depository Trust & Clearing Corporation, currently clears for pan-European multilateral trading facilities Turquoise, NYSE Arca Europe and SmartPool. It has also been appointed to provide CCP services to the European operation of US block trading platform Pipeline, and has teamed up with post-trade processing firm Omgeo to develop a CCP for hedge fund transactions.
Summary
J.P. Morgan Europe Liquidity Fragmentation Index - Week 24
· Liquidity fragmentation in Europe last week was 21.2%, flat versus the previous week.
· Ireland (69.8%), UK (33.0%), France (25.4%), Netherlands (24.3%) and Germany (24.2%) were the most fragmented markets in percentage terms.
· UK ($2.7bn), France ($1.4bn), Germany ($1.2bn), Netherlands ($0.4bn) and Italy ($0.4bn) were the most fragmented in terms of Displayed Liquidity traded away from the primary market.
· Chi-X achieved average daily turnover (ADT) of $4.4bn, equivalent to 13.8% of flow in Chi-X names (a new high). Rio Tinto ($113m, 23.2%), BP ($103m, 25.0%) and BHP Billiton ($101, 18.2%) had the highest ADT.
· ADT on the Turquoise Displayed Order Book was $1.1bn. Market share in Turquoise names was 3.3%. Barclays ($49m, 13.6%), Nestle ($35m, 10.1%) and BP ($30m, 7.3%) had the highest ADT.
· BATS achieved ADT of $1.2bn, exceeding Turquoise for the first time. Market share in BATS names was 3.9%. Rio Tinto ($42m, 8.8%), BHP Billiton ($37m, 6.7%) and Total ($31m, 7.5%) had the highest ADT.
· Nasdaq OMX achieved ADT of $115.5m.
· 8 stocks traded more than 20% ADV on Dark venues.
Source: J.P. Morgan TicDB
BANKING TECHNOLOGY: Market Evolution -- Brokers Become MTFs By Dan Barnes 6/16/09Inter-broker connectivity is creating a growing pool of liquidity that never sees a trading venue. Exchanges and MTFs should be worried. Increasing levels of trades are off-exchange, driven by cost according to everything brokers and Multi-lateral Trading Facilities have been saying. Reduction of trading costs was the main stated purpose behind broker-funded MTFs; it was one purpose of the Markets in Financial Instruments Directive. But where MTFs where touted as the venue of choice for large brokers, far more liquidity is moving to dark pools, often crossing networks, than to lit venues. According to the Thomson Reuters report on equity trading market share, dark trading in March 2009 - as reported on Markit BOAT - accounted for 23.35% of the market by turnover and 22.96% of the market by volume. That gives dark trading the greatest market share by turnover for the first time, and makes it second by volume only to the LSE which has 40.32% of the market.Venues have set up their own dark pools to compete with these crossing networks that are run independently or within brokers. However MiFID has made finding liquidity costly. Fragmentation across markets necessitates multiple connections, as does clearing and settlement, with multiple data feeds reporting trade price data. These add to the costs of trading, dis-incentivising brokers and buy side firms to use the full range of venues. In the words of Richard Balarkas, chief executive of Instinet Europe, "The last thing a bulge-bracket firm wants to do is to trade outside - the foremost objective is to hang on to all the liquidity you've got, including client orders, so that you can either match up client orders and double your revenue, or you have that liquidity pool there for you to have first call on." Exchange bypass Historically, brokers lobbied exchanges to reduce the costs of trading but this was a long and laborious process. Technology and regulation have enabled them to bypass the exchange in two ways. Firstly they backed numerous multi-lateral trading facilities that compete with the incumbents, driving down the cost of trading through competition. They signed an agreement with Turquoise (backed by Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS) to supply liquidity, in effect becoming market makers, although in practice market volatility left it impossible to fulfil. As a business Turquoise and other MTFs such as BATS Europe (backed by Citi, Credit Suisse, Deutsche Bank, JP Morgan, Lehman Brothers, Morgan Stanley, Merrill Lynch) - have still successfully driven exchange fees down. Miranda Mizen, principal at Tabb Group points out that this in itself gives a return on investment to their backers. "Brokers have been instrumental in MiFID, in bringing fees down. I think some of the investments they've made in the MTFs have been dwarfed by the savings they've made in exchange fees," she says. Competition has also certainly been surprisingly effective in moving liquidity says Stephane Loiseau deputy global head of execution services of Société Générale Investment Bank, "Normally when you have a sweeping change like MiFID there is a tendency to overestimate the effects of it - some people will be looking for the worst case scenario, others for the best case scenario, so either way you tend to see polarised predictions. The reality is that the movement of liquidity has actually been much more rapid than anyone thought, and this, despite the recent equity crisis." "Prior to MiFID people were predicting a move of 6-7% of trades shifting off exchange by this point in time. Actual estimates - and they are estimates because there is some disagreement over what constitutes a trade - put the volume of trading that has moved off exchange at 25-35%. I found one article from late 2007, three weeks after MiFID came into play in which the highest number they quoted with a timeframe going to 2011 was 15%," says Loiseau. Despite the drop in exchange fees, moving trades away from a central point has effectively led to the overall cost of trading increasing - partly because of market volatility - but partly because of the broader market created. These are significant increases according to Anthony Kirby director for regulatory and risk at Ernst & Young. "Last year we saw some extraordinary developments to the total cost of trading - commission plus spreads, plus market impact plus clearing and settlement began to total 100 basis points, where in 2007 it was around 60 basis points. That means if you're a fund manager you have to look at where capital commitment is helpful, and also be more careful about information leakage," he says. Brad Hunt managing director, co-head of global algorithmic trading of Goldman Sachs agrees: "The effect of average trade size reduction has been bad for investors from a cost perspective, but revenue enhancing for exchanges. For example, from the period of 2006 to 2009, for an investor trading French stocks on Euronext, costs have doubled." As price formation must take into account the prices from a huge range of venues, the costs of multiple sources are factored into trading costs. Hunt points out that while MTFs are giving their trading data away for free the incumbents are not playing ball. "MiFID has not yet fostered contestability in real-time market data and as a result European exchange data remains relatively expensive. Real time prices have not declined despite a loss of market share, which demonstrates pricing power. There are other more significant issues which prevent the efficient consolidation of data in Europe however (e.g. lack of common and independent symbology, consistent application of reporting rules) and it is in this context that we hear calls for a consolidated tape in Europe. A consolidated tape could mean many things, but one aspect that may be appealing is a more democratic distribution of data revenue, for example if distributed based on market share." As Giles Nelson, senior director of strategy at Progress Apama, says: "You have Turquoise and Chi-X unashamedly competing on price. They have low latency networks and so on but really their offering is about competing on price." Which begs the question; if costs are up and MTFs are cheap why aren't they getting a bigger share of the pie? Inside out There is a second route to bypassing exchanges. Brokers can process trades internally, by becoming ‘systematic internalisers'. This allows the broker to trade clients' orders against those of other clients or against its own book using crossing networks like Credit Suisse Crossfinder and Goldman Sachs' Sigma X. The business of crossing trades internally has always been done by brokers, however where before it was done by phone it is now done electronically. Increasingly people are expressing concerns about the growth in use of internal crossing networks, specifically questioning their regulatory status. External crossing networks, such as Liquidnet, are registered as MTFs and regulated. Because crossing networks do not display order prices they are considered to be ‘dark pools' of liquidity. The internal networks are also considered dark pools. Last year Dan Mathisson, managing director and head of Advanced Execution Services at Credit Suisse, said that "CrossFinder is now consistently one of the top three dark pools in the US ... [it] has become a fantastic tool to help our clients achieve high fill rates without displaying bids or offers." But they are not regulated as MTFs, and privately most senior practitioners in this area believe this will change. Loiseau says that there is a huge blurring of lines between businesses: "The situation in the market right now is that everyone is competing with everyone. The debate at first was whether the MTFs would threaten the exchanges. The debate has changed completely. There has been a vertical integration and now MTFs are offering dark pool capabilities, dark pools are offering MTF capabilities, and with the launch of projects like Baikal exchanges seem to be going further with services that could potentially compete with the broker dealers themselves." He continues, "You have 19-20 players all competing for the same thing - liquidity - using different products. The MTFs are launching dark pools to get a portion of the liquidity that they aren't getting through their lit pools. The definition of dark venues and dark orders has to be refined. Dark orders are already present on lit markets. If you place an iceberg order on an exchange it's a dark order - it's not visible and accessible to everyone. CESR and regulators are looking at not only dark venues but a new order type, the dark order." The key issue for regulators looking within the MiFID framework is whether or not any organised trading outside a regulated market falls within the definition of systematic internalisation or operation of a multilateral trading facility. Hunt acknowledges that with new business models growing "It's clear that regulators are concerned about the application of pre-trade transparency waivers for MTFs and exchanges. As the lit books become less relevant to institutional trading due to the proliferation of high frequency trading and the reduction of trade sizes, it's natural that demand for non-displayed trading would grow. Many models exist, from broker-dealer models to MTF and exchanged-based offerings, and we can expect more to come to market." MiFID defines a systematic internaliser as an investment firm which, "on an organised, frequent and systematic basis, deals on its own account by executing client orders outside a regulated market or MTF." (Article 4.8) Systematic internalisers are subject to the pre-trade transparency and dealing regulations set out in the MiFID Level 2 Regulation. CESR lists 11 EEA firms that have notified that they are systematic internalisers - most of whom have either made their notification to the FSA (as the home regulator) or operate much of their trading out of London. MiFID states that ‘Multilateral trading facility means a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments - in the system and in accordance with non-discretionary rules - in a way that results in a contract in accordance with the provisions of Title II.' (Article 4.15) Broker or MTF? Whether or not any individual system meets the full definition of MTF will depend on whether it can be regarded as multilateral, or operates on the basis of non-discretionary rules. This is reportedly being investigated by regulators. As internal networks become linked - such as the recent hook up by UBS, Goldman Sachs and Morgan Stanley, another by Credit Suisse and Instinet and venues such as Turquoise begin aggregating liquidity from internal crossing, the line is being blurred in the eyes of some. Where trades are matched with groups of internal networks through an algorithmic system, a loophole is effectively created, allowing the networks to take on volume that might otherwise go to a venue. "Interconnectivity is interesting," says Hirander Misra, Chief Operating Officer of Chi-X Europe. "Turquoise made a recent announcement about aggregating dark liquidity, equally Morgan Stanley, Goldman Sachs and UBS announced they were linking their systems together, Baikal is working on this and we're looking at this as a firm. There's no RegNMS in Europe but where it's viable you will definitely seeing greater interconnectivity between these venues." It is reasonable to observe that the European and US approach to the regulation of trading systems is rather different. MiFID applies the same regulations to all functionality falling with the MTF definition. Reg ATS in the US is often seen as capturing a rather broader range of functionality but as operating rules that have more gradation (e.g. in terms of pre-trade transparency, access requirements). The rigid EU interpretation means that brokers could effectively become venues, change the landscape dramatically and stock exchanges would become even more under threat. John Barker, managing director of Liquidnet Europe believes that their status will be defined in the next quarter, "The FSA is working hard with us and every investment house and MTF out there. They want to get firm rules and requirements on what should and shouldn't be an MTF - I think we'll see some clarity on this over the next three months." If Rainer Riess, managing director at Deutsche Bourse's hybrid dark pool Xetra, is right then a lack of change would be bad for investors: "The ‘dark' terminology has been misused, in executing orders away from the exchange without honouring the pre-trade obligations that MiFID places. You're seeing an increasing amount of orders matched on order management systems that are very often not regulated at all," he says. "Where there is a proportion of flow being traded without pre-trade transparency then you are entering into dangerous territory for the price formation process. I think we need clear guidance from regulators and look at some of the waivers that MiFID has established and ask ourselves ‘Are they detrimental to market quality?" The London Stock Exchange is targeting this internalised liquidity with its new dark pool Baikal, "We will attract flows that are internalised now." Said Xavier Rolet, chief executive of the LSE, "I would say on average internalised flows reached 10-15% of total trades, and I think we can take over a quarter of that business. So that would be up to 5% of the total market." The route of the problem To match a trade with best execution requirements at a workable pace across the many venues found in Europe requires automated matching via smart order routing systems. To do it manually would be impossible. These routing systems or SORs are provided by both technology vendors and brokers; however as brokers are able to bundle the technology in with other services they are providing the majority of these systems. Nelson sees them as a good counter to the threat of disintermediation by the buy side "Will people access the market themselves? Do they need to go through a broker? The brokers see these tools as a good route by which they can be seen adding value. The market is more complex, so smart order routing and total cost analysis tools can be invested in by the broker once and then distributed to clients. It's a clear differentiator." "You still have the situation where the primary broker controls the vast majority of the business that goes through," says Tony Whalley, investment director of Scottish Widows Investment Partnership. In his view this increases the competitiveness in the market as they strive for best execution for clients, "I think that brokers are using their smart order routing technology to control where that business goes to a greater extent, and in that they have a greater control over what's happening, however the crossing networks and MTFs still have to make sure they're up to speed or the brokers just won't put business there." And although the smart order routers may be reaching every venue to check prices, according to Mizen at Tabb Group there is always the chance that the crossing networks will stop them ever seeing that bit of the market, "If you look at Goldman Sachs, Morgan Stanley and UBS getting together, you don't necessarily triple the possibility of an execution occurring by putting three dark pools together, but you do potentially increase the chance of a trade occurring which means it wouldn't reach the open market. If you like the ‘dark cloud' before the order hits the ground is getting bigger and that is potentially threatening to those who are relying on the trade getting down into the mainstream." Barker thinks that having trades routed and matched by the broker is potentially a worry for the buy side. "One thing is trust. If you are routing through a firm with proprietary trading then that is a concern for a number of reasons. One is the issue of risk and another is the issue of what is happening to your flow. So I think trust is important for a number of reasons. Security of the order flow - whether it's going to a dark pool or a lit pool, there is concern on the buy side as to what is really happening with their flow. Security and anonymity are key," he says. "When this used to happen over the phone and the broker would phone twenty people to place your order, that was dissemination of information and now that's happening electronically so your order is routed to venues, other brokers, dark pools, and I would argue that that is also dissemination of information. The only question I would ask of the MTFs and the dark pools is whether that order is then being routed electronically within the venue or whether there is any human intervention. That would give a level of comfort that no-one knows who's buying and selling, or how large the order is." "The brokers get great flexibility from having the secondary markets to execute on, and we on our side are able to piggy back on that from DMA, algorithms etcetera but net, net, net, it is still the broker who effectively controls what is happening." However the sell side are aware of these concerns notes Misra. "Buy side firms want the best price, they want to their orders to check as many tangible venues as possible they don't just want all trades to be internalised. The brokers acknowledge that and that's why internalised volumes are around 10-15 %. That's where the lit markets - whether it's Chi-X or independent dark pools - also play an important part. The broker's algorithms will split large orders with one part being routed internally and the rest run through multiple other venues." Tape to the rescue? Systematic internalisation is not the greatest challenge to MTF liquidity. The lack of a consolidated tape of pricing data has been hitting MTFs hard says Whalley, "When the main exchanges go down you find two things happening. Firstly the brokers' smart order routers use the price from the primary market to determine what's going to happen, so they can't cope if the markets go down. The other thing is that the buy side say ‘If the primary market goes down we don't want to trade anymore because we can't be sure what the real price is." Mizen concurs that trade reporting needs to be fixed on a wider level, "There is uncertainty that the trade data is 100% accurate. There is a lack of faith in the buy side that that is so. There's a belief in double counting, reporting in different ways, and until you have standards to compare like for like - errors aside - this will be the perception." All this may be about to change. Regulators have made recent alterations to the rules that will allow sources other than the primary market to be used. Misra says that "CESR has acknowledged that for a reference pegged dark book you can use can now use a European best bid and offer, as long as you use primary and other tangible venues. And it's up to you to decide what makes a venue tangible." He continues: "The problem with a centralised consolidated tape would be that it would affect latency as the data has to go in and then go out again, and in the US people are reconstituting the tape to get around that issue. So this will not be a mandated, regulator-led initiative - we will go ahead as an industry and work on the development of the tape. Progress will be gradual but a lot of the work on developing standards has already been done. The tape will eradicate concentration risk. If the primary market goes down, pegging can continue in a dark book or elsewhere." Whalley believes that the development of the tape will definitely move liquidity to MTFs and internal networks, "I think it certainly would. Equiduct carried out a survey taking all of the trades, their prices and times, and they found it didn't matter which of the venues you were trading on, exchange or MTF, between 15-20% of the trades that took place took place at sub-optimal pricing." Primary market separation If the tape would result in further migration away for exchanges they will need to fight back. The LSE's Baikal and Xetra Midpoint are initiatives designed to regain and retain market share. Publically the exchanges do not seem worried by their smaller rivals. They do not believe that many of the MTFs will last long. Larry Leibowitz, head of US Markets & Global Technology at NYSE Euronext said recently: "Some of them may roll up with each other, some may throw in the towel. When MiFID was on the horizon it seemed like a great opportunity, everybody said we're getting into the game, a year and a half later not all of them have got traction so my guess is some will throw in the towel or consolidate first." He was also dismissive of the exchange buying an MTF: "What's the value of somebody who has 3% market share? BATS and Edge have 10% of the market in the US, but as Bob Greifeld said recently, why would I buy them - they could just go and do it again." This is a sentiment echoed by Clara Furse, outgoing chief executive of the London Stock Exchange as she held her farewell press conference: "The question is how much technology do they own? What exactly are you buying? They are losing a lot of money right now." However, thinking about MTFs as direct competitors to the exchanges' lit pools would be a mistake. Back in 2007, Phillip Hylander, global head of equity trading at Goldman Sachs - one of the backers of Turquoise - said that the project would create a hybrid market, with a public limit order book and a non-public book. "It won't just look like current exchanges," said Hylander, speaking at the 2007 Exchange Forum conference in London. "Turquoise, if structured right, will be an aggregator for dark pools - it doesn't need Turquoise for that to happen, but it's much easier to see how it would work [with Turquoise]." An alternative for the banks would be to set up webs of bilateral arrangements, he said. On both counts he has been proven right. Liquidity is moving to dark pools and they reside within brokers. If, as most suppose, the brokers do become MTFs and trading occurs not on Turquoise but through it, secondary markets could fundamentally change. At the Exchange Forum 2009, Mark Hemsley, chief executive of BATS Europe, asked whether the dual role of exchanges wasn't already an anachronism, "Just because they are the best place for primary issuance, doesn't mean they are the best place for secondary trading of those issued stocks." The future of the market rests on three key points: the creation of a consolidated tape, the hoarding of liquidity and technological innovation. The first two will continue to empower the sell side and their venues, and are both dependent upon regulatory decisions. The latter is the main weapon in the exchanges' arsenal for clawing back market share. One influential voice, so far muted, on all of these will be that of buy side. Riess for one believes that "MiFID started with buy side empowerment as an aim and has ended up empowering the sell side." Perhaps it is time for that voice to speak up.
DIFFERENT WAYS OF LOOKING AT THINGS Two guys were discussing popular family trends on sex, marriage, and family values. Bill said, 'I didn't sleep with my wife before we got married, did you?' Larry replied, 'I'm not sure, what was her maiden name?'
--------------------------------------------------------- A little boy went up to his father and asked: 'Dad, where did my intelligence come from?' The father replied. 'Well, son, you must have got it from your mother, cause I still have mine.' --------------------------------------------------------- 'Mr. Clark, I have reviewed this case very carefully,' the divorce Court Judge said, 'And I've decided to give your wife $775 a week,' 'That's very fair, your honor,' the husband said. 'And every now and then I'll try to send her a few bucks myself.' --------------------------------------------------------- A doctor examining a woman who had been rushed to the Emergency Room, took the husband aside, and said, 'I don't like the looks of your wife at all.' 'Me neither doc,' said the husband. 'But she's a great cook and really good with the kids.' ----------------------------------------------------------- An old man goes to the Wizard to ask him if he can remove a curse he has been living with for the last 40 years. The Wizard says, 'Maybe, but you will have to tell me the exact words that were used to put the curse on you.' The old man says without hesitation, 'I now pronounce you man and wife.' ---------------------------------------------------------- Two Reasons Why It's So Hard To Solve A Redneck Murder: 1. The DNA all matches. 2. There are no dental records. ---------------------------------------------------------- A blonde calls Delta Airlines and asks, 'Can you tell me how long it'll take to fly from San Francisco to New York City ?' The agent replies, 'Just a minute.' 'Thank you,' the blonde says, and hangs up. ---------------------------------------------------------- Two Mexican detectives were investigating the murder of Juan Gonzalez. 'How was he killed?' asked one detective. 'With a golf gun,' the other detective replied. 'A golf gun! What is a golf gun?' 'I don't know. But it sure made a hole in Juan.' ----------------------------------------------------------- Moe: 'My wife got me to believe in religion.' Joe: 'Really?' Moe: 'Yeah. Until I married her I didn't believe in Hell.' ---------------------------------------------------------- A man is recovering from surgery when the Surgical Nurse appears and asks him how he is feeling. 'I'm O. K. but I didn't like the four letter-words the doctor used in surgery,' he answered. 'What did he say,' asked the nurse. 'Oops!' ------------------------------------------------------------ While shopping for vacation clothes, my husband and I passed a display of bathing suits. It had been at least ten years and twenty pounds since I had even considered buying a bathing suit, so sought my husband's advice. 'What do you think?' I asked. 'Should I get a bikini or an all-in-one?' 'Better get a bikini,' he replied. 'You'd never get it all in one.' He's still in intensive care. .............................................................. The graveside service just barely finished, when there was massive clap of thunder, followed by a tremendous bolt of lightning,
accompanied by even more thunder rumbling in the distance. The little old man looked at the pastor and calmly said,
'Well, she's there.'
Scott Riley
EMCF Business Development
European Multilateral Clearing Facility
8th Floor 50 Bridge Street Sydney Australia 2000
((Off)+61 (0)2 8916 9634 È(Mob): +61 (0)418 117 627
* scott.riley@au.fortis.com
A quick rant….
EUROCCP CALLS FOR 'CONVENTION ON INTEROPERABILITY' FOR CLEARING COUNTERPARTIES
*** Of course we should.
For world trade we have the Doha talks. We should have mutual recognition and reciprocal access in post trade talks too. Absolutely we should have standards for CCP interoperability. The risk we run is forcing subsequent interoperable partners to be constrained by the shortsightedness of bi-lateral agreements. (Why should the 3rd CCP have to follow the landscape that was suited and bias to the first 2?). Standards provide certainty and level the playing field in development costs. To date, I don't think traditional regulated European exchanges have been quick to adopt reciprocal access. It should be taken out of their hands. If CCPs can agree to interoperate, the trade feed can be shared at the CCP level. All an exchange needs is an anonymous market with credit performance and multilateral netting. I have not so much faith in EACH.
http://www.eachorg.eu/each To me, they detail on the final page of their 2008 report reasons why they don't want to interoperate - not why they do.
http://www.eachorg.eu/digitalAssets/49/49417_EACH_Inter_CCP_Risk_Management_Standards_July_2008.pdf
The markets will get interoperability. With or without EACH. The opportunity is to work to an industry roadmap or to leave the pioneers to forge a path ahead. We want clearing FOR the market (i.e. the market users and Clearing Participants choose) not clearing BY the market (single trade feed nominated by liquidity platform).
A good wish to ELX….
ELX FUTURES SETS LAUNCH DATE
http://www.finextra.com/fullpr.asp?id=28158
***10th July (good to see the Friday launch strategy), pricing details below.
Some hi-jinks…
Tick sizes made me laugh. I’d said LSE was lacking timely…then they succumbed. How a week changes things. How competition is a useful force to agitate for change.
But competition still has more to do as we see DB reduce fees.
And LSE looking at its cost (1/4 billion bond impressive) and technology base.
Some interesting graphs….
The world economy is tracking or doing worse than during the Great Depression
http://www.voxeu.org/index.php?q=node/3421
and
Liquidity Mapping: Jump into the Dark Pool
The darkness is all around us…but I see some still double count in the dark (it scares me what goes on in the dark…I have a daughter).
This Global Financial Crisis is not really helping the dark cause…all these regulators are now armed with torches and search warrants.
CESR probe inevitable.
“A smile is a curve that sets everything straight.”
--Phyllis Diller, American comedienne
…BTW, I’ve not read all these stories. I keep them more as a book mark so I can find them if I need them. So if some are off message just read the headline. Like I’ve not read what Mr Soros said apart from outlaw ''toxic' credit default swaps. Outlawing anything is pretty silly out of context.
Have a great w/end all.
S
http://clearingandsettlement.blogspot.com/
20/06/2009
INT
New Zealand v France
Wellington
5.45pm
20/06/2009
INT
Australia v Italy
Melbourne
8.00pm
20/06/2009
LIONS
South Africa v British & Irish Lions
Durban
11.00pm
21/06/2009
BAR
Argentina v French Barbarians
Buenos Aires
TBA
http://www.rugbyheaven.com.au/calendar/
17/06/2009 11:35:00
EUROCCP CALLS FOR 'CONVENTION ON INTEROPERABILITY' FOR CLEARING COUNTERPARTIES
UK-registered clearing house EuroCCP has called for the adoption of a single standard 'Convention on Interoperability' that all central counterparties should sign, as the European clearing community struggles to implement a raft of bilateral agreements.
More on this story: http://www.finextra.com/fullstory.asp?id=20145
SecFinex sets launch dates for stock lending CCP
NYSE Euronext wins race to clear stock loans German exchange giant Deutsche Börse has had to concede defeat to its largest European rival NYSE Euronext in their race to launch clearing services for their respective stock lending systems.
Clearing gains steam around the worldA clearing venture announced this week by NYSE Euronext and The Depository Trust & Clearing Corp. is the latest in a wave of clearing efforts worldwide. Clearinghouses and exchanges are taking advantage of political and regulatory pressure for increased clearing to prevent financial meltdowns. "We are going to see more changes in the clearing space than we have seen in the last 10 years, and that's being driven by the [multilateral trading facilities]," said Mark Hemsley, CEO of BATS Europe. Financial Times (free registration) (18 Jun.)
Multilateral trading facilities (MTFs) and exchanges are on the verge of igniting a tick size war that could decrease market efficiency and prove detrimental to investors searching for liquidity in European stocks.
Read story
“Our preferred approach would be to introduce any changes in a coordinated and coherent manner in the near future,” said the LSE in a service announcement.
*** one word missing from this remark…”timely”
LSE slashes tick sizes amid trade war The London Stock Exchange on Wednesday succumbed to pressure to cut the increments by which share prices are allowed to move as a battle over “tick sizes” erupted over European equities. (Financial Times)
• Deutsche Borse announced on Tuesday that it will cut settlement fees for domestic German securities (which represent about 20% of the company’s total settlement revenue) to €0.475 per transaction,
from €0.625. We calculate this change will have only a very small impact on the bottom line (€0.01-€0.02 per annum).
Deutsche Börse adapts to ‘price-sensitive’ users
Deutsche Börse to cut fees after trading revamp Deutsche Börse has declared plans to slash its trading fees a week after completing an upgrade to its electronic platform, as the German exchange looks to lure algorithmic traders amid competition from new rivals.
LSE mulls new platform on TradElect's anniversary The London Stock Exchange has launched a review of its technology that might lead it to replace TradElect, the high-tech trading platform that celebrates its second anniversary, as the exchange looks to edge out a slew of new rivals and attract high-frequency traders.
LSE issued a £250m bond at 9.125% last week, which increases its financing cost by £8m
*** why does LSE need ¼ of a billion of debt? I’d be reigning that in.
SGX proposes to revise Central Depository Clearing Fund structure
SINGAPORE: Singapore Exchange (SGX) on Monday proposed to revise the Central Depository (CDP) Clearing Fund structure. The changes include restructuring Clearing Members' contribution to the Clearing Fund, raising the amount of the CDP's contribution to the first layer of the fund to S$30 million, from S$25 million currently.
http://www.channelnewsasia.com/stories/singaporebusinessnews/view/436118/1/.html
SGX LOOKS TO INTRODUCE LARGE EXPOSURE COLLATERALISATON FOR SECURITIES
http://www.finextra.com/fullpr.asp?id=28096
Singaporean exchange considers clearing OTC derivativesWith the Obama administration pushing for clearing of more financial instruments in the US, exchanges worldwide are taking advantage of the momentum. The Singaporean exchange plans to look into derivatives clearing. Gan Seow Ann, an executive at SGX, said there is not much opportunity for clearing of credit default swaps, but clearing of Asian currencies and interest-rate swaps are possibilities. Financial Times (free registration) (15 Jun.)
The Reserve Bank of Australia has released the Minutes of the June 2009 Monetary Policy Meeting of the Reserve Bank Board today.
http://www.rba.gov.au/MonetaryPolicy/RBABoardMinutes/2009/rba_board_min_02062009.html
BoE tells ECB it won't join euro-settlements systemA letter from the Bank of England explains why it is opting out of the European Central Bank's Target 2 Securities settlements system. The letter from Andrew Bailey, executive director of banking services, states that the BoE is content with settling sterling-denominated securities through Euroclear UK and Ireland. Also, the central bank says the T2S project has some issues that must be resolved. The Wall Street Journal (17 Jun.)
BANK OF ENGLAND RAISES T2S CONCERNS
The Bank of England has raised serious doubts over whether it will join the European Central Bank's Target2-Securities (TS2) integrated settlement system.
Full story: http://www.finextra.com/fullstory.asp?id=20152
*** and a link to the BoE letter.
Burgundy targets 25% of Nordic market A consortium of Nordic banks that launched Europe's sixth alternative trading system has pledged to take 25% of the market from arch-rival Nasdaq OMX, although the transatlantic exchange hit back with plans to offer cheap clearing for Nordic stocks.
CESR plans dark pool probe Europe's trade body for stock market regulators is set to review the rules that have encouraged the emergence of a slew of new dark pools, amid concerns on both sides of the Atlantic that anonymous trading systems might be reducing market transparency.
ELX, the startup futures exchange hoping to compete with CME’s Treasury markets, announced Monday that it will charge all in trading/clearing fees of 9c per contract for participants trading more than 400 contracts each day and 24c per contract for all other participants. These fees compare to a range of 11c to 44c at the CME. Additionally, ELX will not impose surcharges for EFPs, blocks, give-ups or errors.
Are OTC Options Over?
By STEVEN M. SEARS
An alternative trading system for big orders.
BALLISTA SECURITIES, AN ALTERNATIVE TRADING SYSTEM for large options orders, is on the cusp of disrupting the options markets. The start-up just raised $15 million to enhance its "liquidity pool," which lets big institutional investors match stock-volatility trades that might otherwise have traded in the over-the-counter market. The closely held firm received investments from Morgan Stanley (ticker: MS); the International Securities Exchange, a subsidiary of Deutsche Börse; Susquehanna Growth Equity, the private-equity group affiliated with the famed options market-making firm; and Knight Capital (NITE).
http://online.barrons.com/article/SB124484621544911137.html
**** OTC options are so last year.
**** actually, I disagree, predatory pricing in the derivatives markets is so last year, unit pricing of commoditised transactions is so this year.
Brazil and Hong Kong exchanges surge in global rankings Hong Kong Exchanges and Clearing and BM&F Bovespa have for the first time surpassed rivals in New York and London by market value, signalling a reshaping of the global exchange landscape amid the economic crisis and intense competition in mature markets. (Financial Times)
*** well what does that tell you?...intense competition?
CLEARING PROVIDERS FAIL TO GIVE CLEAR PICTURE The proliferation of central counterparties in Europe over the past few years has not delivered the simplicity, transparency and price benefits sought by users of clearing services. The uncertainty has been exacerbated by the lack of consensus among market participants about what it is they need from their clearing providers: a safe haven or a highly competitive environment.
http://mail.efnmail.co.uk/r/88557120/MjU3MzA2OjIxNTQy/
FUTURE OF EUROPE’S OTC CLEARING IS IN THE BALANCE The announcement this Wednesday of the European Commission’s plan to overhaul Europe’s derivatives industry could herald a row similar to that already raging in the US, where Treasury Secretary Timothy Geithner outlined a month ago his proposed reforms of the US markets.
http://mail.efnmail.co.uk/r/88557129/MjU3MzA2OjIxNTQy/
European CDS market poised for radical restructuringStarting Monday, credit default swaps on single corporate borrowers in Europe will be priced based on fixed coupons. The change is part of an effort to increase transparency and decrease counterparty risk in Europe's CDS market. "This new system ... will help new investors gain the confidence to enter the market. This is an opportunity to sort out the mess in the CDS market," said Willem Sels, a credit strategist at Dresdner Kleinwort. Financial Times (free registration) (18 Jun.)
BATS RAISES STAKES WITH MARKET CLOSE TRADING Equity market Bats Europe plans to increase the pressure on the region’s main stock exchanges by launching a service to challenge their monopolies over trading at the close of the market.
http://mail.efnmail.co.uk/r/88557101/MjU3MzA2OjIxNTQy/
TRADERS PUSH FOR SHARE DEALING TRANSPARENCY European market participants are becoming more supportive of adopting a US-style “consolidated tape” to publish details of all trades in one place, according to traders, who say such a move is needed to improve transparency.
http://mail.efnmail.co.uk/r/88557105/MjU3MzA2OjIxNTQy/
George Soros urges governments to outlaw ''toxic' credit default swaps
Credit default swaps are “instruments of destruction” that should be outlawed as the world looks to re-regulate the global financial system in the wake of last year’s credit crisis, the billionaire investor and philanthropist George Soros said on Friday.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5514341/George-Soros-urges-governments-to-outlaw-toxic-credit-default-swaps.html
*** ridiculous, there is a time and a place for everything. It is only excess that makes us ill.
ASX pricing inaccurate, court hears
By Blair Speedy
THE derivatives pricing facility used by the Australian Securities Exchange was inaccurate and could not provide reliable valuations for options trading, a Melbourne court was told yesterday.
http://www.news.com.au/dailytelegraph/story/0,22049,25624520-5001024,00.html?from=public_rss
OMGEO EXTENDS CENTRAL TRADE MANAGER FOR BROKER/DEALERS
http://www.finextra.com/fullpr.asp?id=28079
1 in 4 managers stop securities lending
One-quarter of money managers have stopped their securities lending programs this year, according to a new report by financial research consultant Finadium LLC. Managers that have ceased securities lending represent 6% of the $8.4 trillion managed by the 27 investment managers surveyed in April and May, said Josh Galper, managing principal of Finadium, based in Concord, Mass. Managers representing an additional 22% of assets said
http://www.pionline.com/apps/pbcs.dll/article?AID=/20090612/DAILYREG/906129979&nocache=1
**** Another good reason to trade single stock futures.
Liquidity Mapping: Jump into the Dark PoolWe may be witnessing the early stages of a sustainable and fundamental shift in the trading landscape as dark pools move from the periphery and take center stage.
19/06/2009 11:37:00
SEC BIDS TO SHED LIGHT ON DARK POOLS
Securities and Exchange Commission (SEC) chief Mary Schapiro says the agency is to step up its scrutiny of dark pools amid concerns about the risks posed to market transparency and integrity by the proliferation of off-exchange trading venues.
More on this story: http://www.finextra.com/fullstory.asp?id=20155
THE TRADE NEWS: EuroCCP Calls for Interoperability ConventionBy Staff6/17/09Pan-European clearing house EuroCCP has proposed the adoption of a single, standard European convention for interoperability between providers of central counterparty (CCP) clearing services. The clearer hopes CCPs will be able to reach an agreement on the convention by Q1 2010. “We would like to have the convention public, agreed and at a good stage by early next year,” said Diana Chan, CEO of EuroCCP, at a press briefing on Wednesday.EuroCCP envisages that the convention would replace the bilateral agreements that currently exist between interoperating CCPs, simplifying the web of contracts. To date, four pan-European CCPs – LCH.Clearnet Ltd, SIX x-clear, EuroCCP and EMCF – have agreed to interoperate, resulting in six bilateral agreements. “That is already too many,” said Chan.Were a fifth CCP to join the group, a further four bilateral agreements would be required, and the addition of a sixth would require a further five deals, bringing the total to 15. By proposing the convention, EuroCCP also hopes to standardise the way interoperating CCPs manage their exposure to each other, improving overall risk management. As the linking deals are all bilateral, details such as how much margin is held against a fellow CCP failing can vary, and those details will not be visible to all CCPs providing clearing for a particular trading platform. This means it is not always clear to all CCPs what their exposure is if one of their fellow clearers collapses or fails to fulfil its obligations. The convention, however, would require CCPs to agree on risk management arrangements that are transparent to all market users, trading platforms and regulators. “Although some progress has been made on interoperability, there is insufficient transparency in how new risks caused by interoperability are managed,” Chan said in a statement. “The arrangements between interoperating CCPs must be robust, and complete transparency in how CCPs manage their exposure to each other is important for systemic safety.”EuroCCP, a subsidiary of US post-trade utility the Depository Trust & Clearing Corporation, currently clears for pan-European multilateral trading facilities Turquoise, NYSE Arca Europe and SmartPool. It has also been appointed to provide CCP services to the European operation of US block trading platform Pipeline, and has teamed up with post-trade processing firm Omgeo to develop a CCP for hedge fund transactions.
Summary
J.P. Morgan Europe Liquidity Fragmentation Index - Week 24
· Liquidity fragmentation in Europe last week was 21.2%, flat versus the previous week.
· Ireland (69.8%), UK (33.0%), France (25.4%), Netherlands (24.3%) and Germany (24.2%) were the most fragmented markets in percentage terms.
· UK ($2.7bn), France ($1.4bn), Germany ($1.2bn), Netherlands ($0.4bn) and Italy ($0.4bn) were the most fragmented in terms of Displayed Liquidity traded away from the primary market.
· Chi-X achieved average daily turnover (ADT) of $4.4bn, equivalent to 13.8% of flow in Chi-X names (a new high). Rio Tinto ($113m, 23.2%), BP ($103m, 25.0%) and BHP Billiton ($101, 18.2%) had the highest ADT.
· ADT on the Turquoise Displayed Order Book was $1.1bn. Market share in Turquoise names was 3.3%. Barclays ($49m, 13.6%), Nestle ($35m, 10.1%) and BP ($30m, 7.3%) had the highest ADT.
· BATS achieved ADT of $1.2bn, exceeding Turquoise for the first time. Market share in BATS names was 3.9%. Rio Tinto ($42m, 8.8%), BHP Billiton ($37m, 6.7%) and Total ($31m, 7.5%) had the highest ADT.
· Nasdaq OMX achieved ADT of $115.5m.
· 8 stocks traded more than 20% ADV on Dark venues.
Source: J.P. Morgan TicDB
BANKING TECHNOLOGY: Market Evolution -- Brokers Become MTFs By Dan Barnes 6/16/09Inter-broker connectivity is creating a growing pool of liquidity that never sees a trading venue. Exchanges and MTFs should be worried. Increasing levels of trades are off-exchange, driven by cost according to everything brokers and Multi-lateral Trading Facilities have been saying. Reduction of trading costs was the main stated purpose behind broker-funded MTFs; it was one purpose of the Markets in Financial Instruments Directive. But where MTFs where touted as the venue of choice for large brokers, far more liquidity is moving to dark pools, often crossing networks, than to lit venues. According to the Thomson Reuters report on equity trading market share, dark trading in March 2009 - as reported on Markit BOAT - accounted for 23.35% of the market by turnover and 22.96% of the market by volume. That gives dark trading the greatest market share by turnover for the first time, and makes it second by volume only to the LSE which has 40.32% of the market.Venues have set up their own dark pools to compete with these crossing networks that are run independently or within brokers. However MiFID has made finding liquidity costly. Fragmentation across markets necessitates multiple connections, as does clearing and settlement, with multiple data feeds reporting trade price data. These add to the costs of trading, dis-incentivising brokers and buy side firms to use the full range of venues. In the words of Richard Balarkas, chief executive of Instinet Europe, "The last thing a bulge-bracket firm wants to do is to trade outside - the foremost objective is to hang on to all the liquidity you've got, including client orders, so that you can either match up client orders and double your revenue, or you have that liquidity pool there for you to have first call on." Exchange bypass Historically, brokers lobbied exchanges to reduce the costs of trading but this was a long and laborious process. Technology and regulation have enabled them to bypass the exchange in two ways. Firstly they backed numerous multi-lateral trading facilities that compete with the incumbents, driving down the cost of trading through competition. They signed an agreement with Turquoise (backed by Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS) to supply liquidity, in effect becoming market makers, although in practice market volatility left it impossible to fulfil. As a business Turquoise and other MTFs such as BATS Europe (backed by Citi, Credit Suisse, Deutsche Bank, JP Morgan, Lehman Brothers, Morgan Stanley, Merrill Lynch) - have still successfully driven exchange fees down. Miranda Mizen, principal at Tabb Group points out that this in itself gives a return on investment to their backers. "Brokers have been instrumental in MiFID, in bringing fees down. I think some of the investments they've made in the MTFs have been dwarfed by the savings they've made in exchange fees," she says. Competition has also certainly been surprisingly effective in moving liquidity says Stephane Loiseau deputy global head of execution services of Société Générale Investment Bank, "Normally when you have a sweeping change like MiFID there is a tendency to overestimate the effects of it - some people will be looking for the worst case scenario, others for the best case scenario, so either way you tend to see polarised predictions. The reality is that the movement of liquidity has actually been much more rapid than anyone thought, and this, despite the recent equity crisis." "Prior to MiFID people were predicting a move of 6-7% of trades shifting off exchange by this point in time. Actual estimates - and they are estimates because there is some disagreement over what constitutes a trade - put the volume of trading that has moved off exchange at 25-35%. I found one article from late 2007, three weeks after MiFID came into play in which the highest number they quoted with a timeframe going to 2011 was 15%," says Loiseau. Despite the drop in exchange fees, moving trades away from a central point has effectively led to the overall cost of trading increasing - partly because of market volatility - but partly because of the broader market created. These are significant increases according to Anthony Kirby director for regulatory and risk at Ernst & Young. "Last year we saw some extraordinary developments to the total cost of trading - commission plus spreads, plus market impact plus clearing and settlement began to total 100 basis points, where in 2007 it was around 60 basis points. That means if you're a fund manager you have to look at where capital commitment is helpful, and also be more careful about information leakage," he says. Brad Hunt managing director, co-head of global algorithmic trading of Goldman Sachs agrees: "The effect of average trade size reduction has been bad for investors from a cost perspective, but revenue enhancing for exchanges. For example, from the period of 2006 to 2009, for an investor trading French stocks on Euronext, costs have doubled." As price formation must take into account the prices from a huge range of venues, the costs of multiple sources are factored into trading costs. Hunt points out that while MTFs are giving their trading data away for free the incumbents are not playing ball. "MiFID has not yet fostered contestability in real-time market data and as a result European exchange data remains relatively expensive. Real time prices have not declined despite a loss of market share, which demonstrates pricing power. There are other more significant issues which prevent the efficient consolidation of data in Europe however (e.g. lack of common and independent symbology, consistent application of reporting rules) and it is in this context that we hear calls for a consolidated tape in Europe. A consolidated tape could mean many things, but one aspect that may be appealing is a more democratic distribution of data revenue, for example if distributed based on market share." As Giles Nelson, senior director of strategy at Progress Apama, says: "You have Turquoise and Chi-X unashamedly competing on price. They have low latency networks and so on but really their offering is about competing on price." Which begs the question; if costs are up and MTFs are cheap why aren't they getting a bigger share of the pie? Inside out There is a second route to bypassing exchanges. Brokers can process trades internally, by becoming ‘systematic internalisers'. This allows the broker to trade clients' orders against those of other clients or against its own book using crossing networks like Credit Suisse Crossfinder and Goldman Sachs' Sigma X. The business of crossing trades internally has always been done by brokers, however where before it was done by phone it is now done electronically. Increasingly people are expressing concerns about the growth in use of internal crossing networks, specifically questioning their regulatory status. External crossing networks, such as Liquidnet, are registered as MTFs and regulated. Because crossing networks do not display order prices they are considered to be ‘dark pools' of liquidity. The internal networks are also considered dark pools. Last year Dan Mathisson, managing director and head of Advanced Execution Services at Credit Suisse, said that "CrossFinder is now consistently one of the top three dark pools in the US ... [it] has become a fantastic tool to help our clients achieve high fill rates without displaying bids or offers." But they are not regulated as MTFs, and privately most senior practitioners in this area believe this will change. Loiseau says that there is a huge blurring of lines between businesses: "The situation in the market right now is that everyone is competing with everyone. The debate at first was whether the MTFs would threaten the exchanges. The debate has changed completely. There has been a vertical integration and now MTFs are offering dark pool capabilities, dark pools are offering MTF capabilities, and with the launch of projects like Baikal exchanges seem to be going further with services that could potentially compete with the broker dealers themselves." He continues, "You have 19-20 players all competing for the same thing - liquidity - using different products. The MTFs are launching dark pools to get a portion of the liquidity that they aren't getting through their lit pools. The definition of dark venues and dark orders has to be refined. Dark orders are already present on lit markets. If you place an iceberg order on an exchange it's a dark order - it's not visible and accessible to everyone. CESR and regulators are looking at not only dark venues but a new order type, the dark order." The key issue for regulators looking within the MiFID framework is whether or not any organised trading outside a regulated market falls within the definition of systematic internalisation or operation of a multilateral trading facility. Hunt acknowledges that with new business models growing "It's clear that regulators are concerned about the application of pre-trade transparency waivers for MTFs and exchanges. As the lit books become less relevant to institutional trading due to the proliferation of high frequency trading and the reduction of trade sizes, it's natural that demand for non-displayed trading would grow. Many models exist, from broker-dealer models to MTF and exchanged-based offerings, and we can expect more to come to market." MiFID defines a systematic internaliser as an investment firm which, "on an organised, frequent and systematic basis, deals on its own account by executing client orders outside a regulated market or MTF." (Article 4.8) Systematic internalisers are subject to the pre-trade transparency and dealing regulations set out in the MiFID Level 2 Regulation. CESR lists 11 EEA firms that have notified that they are systematic internalisers - most of whom have either made their notification to the FSA (as the home regulator) or operate much of their trading out of London. MiFID states that ‘Multilateral trading facility means a multilateral system, operated by an investment firm or a market operator, which brings together multiple third-party buying and selling interests in financial instruments - in the system and in accordance with non-discretionary rules - in a way that results in a contract in accordance with the provisions of Title II.' (Article 4.15) Broker or MTF? Whether or not any individual system meets the full definition of MTF will depend on whether it can be regarded as multilateral, or operates on the basis of non-discretionary rules. This is reportedly being investigated by regulators. As internal networks become linked - such as the recent hook up by UBS, Goldman Sachs and Morgan Stanley, another by Credit Suisse and Instinet and venues such as Turquoise begin aggregating liquidity from internal crossing, the line is being blurred in the eyes of some. Where trades are matched with groups of internal networks through an algorithmic system, a loophole is effectively created, allowing the networks to take on volume that might otherwise go to a venue. "Interconnectivity is interesting," says Hirander Misra, Chief Operating Officer of Chi-X Europe. "Turquoise made a recent announcement about aggregating dark liquidity, equally Morgan Stanley, Goldman Sachs and UBS announced they were linking their systems together, Baikal is working on this and we're looking at this as a firm. There's no RegNMS in Europe but where it's viable you will definitely seeing greater interconnectivity between these venues." It is reasonable to observe that the European and US approach to the regulation of trading systems is rather different. MiFID applies the same regulations to all functionality falling with the MTF definition. Reg ATS in the US is often seen as capturing a rather broader range of functionality but as operating rules that have more gradation (e.g. in terms of pre-trade transparency, access requirements). The rigid EU interpretation means that brokers could effectively become venues, change the landscape dramatically and stock exchanges would become even more under threat. John Barker, managing director of Liquidnet Europe believes that their status will be defined in the next quarter, "The FSA is working hard with us and every investment house and MTF out there. They want to get firm rules and requirements on what should and shouldn't be an MTF - I think we'll see some clarity on this over the next three months." If Rainer Riess, managing director at Deutsche Bourse's hybrid dark pool Xetra, is right then a lack of change would be bad for investors: "The ‘dark' terminology has been misused, in executing orders away from the exchange without honouring the pre-trade obligations that MiFID places. You're seeing an increasing amount of orders matched on order management systems that are very often not regulated at all," he says. "Where there is a proportion of flow being traded without pre-trade transparency then you are entering into dangerous territory for the price formation process. I think we need clear guidance from regulators and look at some of the waivers that MiFID has established and ask ourselves ‘Are they detrimental to market quality?" The London Stock Exchange is targeting this internalised liquidity with its new dark pool Baikal, "We will attract flows that are internalised now." Said Xavier Rolet, chief executive of the LSE, "I would say on average internalised flows reached 10-15% of total trades, and I think we can take over a quarter of that business. So that would be up to 5% of the total market." The route of the problem To match a trade with best execution requirements at a workable pace across the many venues found in Europe requires automated matching via smart order routing systems. To do it manually would be impossible. These routing systems or SORs are provided by both technology vendors and brokers; however as brokers are able to bundle the technology in with other services they are providing the majority of these systems. Nelson sees them as a good counter to the threat of disintermediation by the buy side "Will people access the market themselves? Do they need to go through a broker? The brokers see these tools as a good route by which they can be seen adding value. The market is more complex, so smart order routing and total cost analysis tools can be invested in by the broker once and then distributed to clients. It's a clear differentiator." "You still have the situation where the primary broker controls the vast majority of the business that goes through," says Tony Whalley, investment director of Scottish Widows Investment Partnership. In his view this increases the competitiveness in the market as they strive for best execution for clients, "I think that brokers are using their smart order routing technology to control where that business goes to a greater extent, and in that they have a greater control over what's happening, however the crossing networks and MTFs still have to make sure they're up to speed or the brokers just won't put business there." And although the smart order routers may be reaching every venue to check prices, according to Mizen at Tabb Group there is always the chance that the crossing networks will stop them ever seeing that bit of the market, "If you look at Goldman Sachs, Morgan Stanley and UBS getting together, you don't necessarily triple the possibility of an execution occurring by putting three dark pools together, but you do potentially increase the chance of a trade occurring which means it wouldn't reach the open market. If you like the ‘dark cloud' before the order hits the ground is getting bigger and that is potentially threatening to those who are relying on the trade getting down into the mainstream." Barker thinks that having trades routed and matched by the broker is potentially a worry for the buy side. "One thing is trust. If you are routing through a firm with proprietary trading then that is a concern for a number of reasons. One is the issue of risk and another is the issue of what is happening to your flow. So I think trust is important for a number of reasons. Security of the order flow - whether it's going to a dark pool or a lit pool, there is concern on the buy side as to what is really happening with their flow. Security and anonymity are key," he says. "When this used to happen over the phone and the broker would phone twenty people to place your order, that was dissemination of information and now that's happening electronically so your order is routed to venues, other brokers, dark pools, and I would argue that that is also dissemination of information. The only question I would ask of the MTFs and the dark pools is whether that order is then being routed electronically within the venue or whether there is any human intervention. That would give a level of comfort that no-one knows who's buying and selling, or how large the order is." "The brokers get great flexibility from having the secondary markets to execute on, and we on our side are able to piggy back on that from DMA, algorithms etcetera but net, net, net, it is still the broker who effectively controls what is happening." However the sell side are aware of these concerns notes Misra. "Buy side firms want the best price, they want to their orders to check as many tangible venues as possible they don't just want all trades to be internalised. The brokers acknowledge that and that's why internalised volumes are around 10-15 %. That's where the lit markets - whether it's Chi-X or independent dark pools - also play an important part. The broker's algorithms will split large orders with one part being routed internally and the rest run through multiple other venues." Tape to the rescue? Systematic internalisation is not the greatest challenge to MTF liquidity. The lack of a consolidated tape of pricing data has been hitting MTFs hard says Whalley, "When the main exchanges go down you find two things happening. Firstly the brokers' smart order routers use the price from the primary market to determine what's going to happen, so they can't cope if the markets go down. The other thing is that the buy side say ‘If the primary market goes down we don't want to trade anymore because we can't be sure what the real price is." Mizen concurs that trade reporting needs to be fixed on a wider level, "There is uncertainty that the trade data is 100% accurate. There is a lack of faith in the buy side that that is so. There's a belief in double counting, reporting in different ways, and until you have standards to compare like for like - errors aside - this will be the perception." All this may be about to change. Regulators have made recent alterations to the rules that will allow sources other than the primary market to be used. Misra says that "CESR has acknowledged that for a reference pegged dark book you can use can now use a European best bid and offer, as long as you use primary and other tangible venues. And it's up to you to decide what makes a venue tangible." He continues: "The problem with a centralised consolidated tape would be that it would affect latency as the data has to go in and then go out again, and in the US people are reconstituting the tape to get around that issue. So this will not be a mandated, regulator-led initiative - we will go ahead as an industry and work on the development of the tape. Progress will be gradual but a lot of the work on developing standards has already been done. The tape will eradicate concentration risk. If the primary market goes down, pegging can continue in a dark book or elsewhere." Whalley believes that the development of the tape will definitely move liquidity to MTFs and internal networks, "I think it certainly would. Equiduct carried out a survey taking all of the trades, their prices and times, and they found it didn't matter which of the venues you were trading on, exchange or MTF, between 15-20% of the trades that took place took place at sub-optimal pricing." Primary market separation If the tape would result in further migration away for exchanges they will need to fight back. The LSE's Baikal and Xetra Midpoint are initiatives designed to regain and retain market share. Publically the exchanges do not seem worried by their smaller rivals. They do not believe that many of the MTFs will last long. Larry Leibowitz, head of US Markets & Global Technology at NYSE Euronext said recently: "Some of them may roll up with each other, some may throw in the towel. When MiFID was on the horizon it seemed like a great opportunity, everybody said we're getting into the game, a year and a half later not all of them have got traction so my guess is some will throw in the towel or consolidate first." He was also dismissive of the exchange buying an MTF: "What's the value of somebody who has 3% market share? BATS and Edge have 10% of the market in the US, but as Bob Greifeld said recently, why would I buy them - they could just go and do it again." This is a sentiment echoed by Clara Furse, outgoing chief executive of the London Stock Exchange as she held her farewell press conference: "The question is how much technology do they own? What exactly are you buying? They are losing a lot of money right now." However, thinking about MTFs as direct competitors to the exchanges' lit pools would be a mistake. Back in 2007, Phillip Hylander, global head of equity trading at Goldman Sachs - one of the backers of Turquoise - said that the project would create a hybrid market, with a public limit order book and a non-public book. "It won't just look like current exchanges," said Hylander, speaking at the 2007 Exchange Forum conference in London. "Turquoise, if structured right, will be an aggregator for dark pools - it doesn't need Turquoise for that to happen, but it's much easier to see how it would work [with Turquoise]." An alternative for the banks would be to set up webs of bilateral arrangements, he said. On both counts he has been proven right. Liquidity is moving to dark pools and they reside within brokers. If, as most suppose, the brokers do become MTFs and trading occurs not on Turquoise but through it, secondary markets could fundamentally change. At the Exchange Forum 2009, Mark Hemsley, chief executive of BATS Europe, asked whether the dual role of exchanges wasn't already an anachronism, "Just because they are the best place for primary issuance, doesn't mean they are the best place for secondary trading of those issued stocks." The future of the market rests on three key points: the creation of a consolidated tape, the hoarding of liquidity and technological innovation. The first two will continue to empower the sell side and their venues, and are both dependent upon regulatory decisions. The latter is the main weapon in the exchanges' arsenal for clawing back market share. One influential voice, so far muted, on all of these will be that of buy side. Riess for one believes that "MiFID started with buy side empowerment as an aim and has ended up empowering the sell side." Perhaps it is time for that voice to speak up.
DIFFERENT WAYS OF LOOKING AT THINGS Two guys were discussing popular family trends on sex, marriage, and family values. Bill said, 'I didn't sleep with my wife before we got married, did you?' Larry replied, 'I'm not sure, what was her maiden name?'
--------------------------------------------------------- A little boy went up to his father and asked: 'Dad, where did my intelligence come from?' The father replied. 'Well, son, you must have got it from your mother, cause I still have mine.' --------------------------------------------------------- 'Mr. Clark, I have reviewed this case very carefully,' the divorce Court Judge said, 'And I've decided to give your wife $775 a week,' 'That's very fair, your honor,' the husband said. 'And every now and then I'll try to send her a few bucks myself.' --------------------------------------------------------- A doctor examining a woman who had been rushed to the Emergency Room, took the husband aside, and said, 'I don't like the looks of your wife at all.' 'Me neither doc,' said the husband. 'But she's a great cook and really good with the kids.' ----------------------------------------------------------- An old man goes to the Wizard to ask him if he can remove a curse he has been living with for the last 40 years. The Wizard says, 'Maybe, but you will have to tell me the exact words that were used to put the curse on you.' The old man says without hesitation, 'I now pronounce you man and wife.' ---------------------------------------------------------- Two Reasons Why It's So Hard To Solve A Redneck Murder: 1. The DNA all matches. 2. There are no dental records. ---------------------------------------------------------- A blonde calls Delta Airlines and asks, 'Can you tell me how long it'll take to fly from San Francisco to New York City ?' The agent replies, 'Just a minute.' 'Thank you,' the blonde says, and hangs up. ---------------------------------------------------------- Two Mexican detectives were investigating the murder of Juan Gonzalez. 'How was he killed?' asked one detective. 'With a golf gun,' the other detective replied. 'A golf gun! What is a golf gun?' 'I don't know. But it sure made a hole in Juan.' ----------------------------------------------------------- Moe: 'My wife got me to believe in religion.' Joe: 'Really?' Moe: 'Yeah. Until I married her I didn't believe in Hell.' ---------------------------------------------------------- A man is recovering from surgery when the Surgical Nurse appears and asks him how he is feeling. 'I'm O. K. but I didn't like the four letter-words the doctor used in surgery,' he answered. 'What did he say,' asked the nurse. 'Oops!' ------------------------------------------------------------ While shopping for vacation clothes, my husband and I passed a display of bathing suits. It had been at least ten years and twenty pounds since I had even considered buying a bathing suit, so sought my husband's advice. 'What do you think?' I asked. 'Should I get a bikini or an all-in-one?' 'Better get a bikini,' he replied. 'You'd never get it all in one.' He's still in intensive care. .............................................................. The graveside service just barely finished, when there was massive clap of thunder, followed by a tremendous bolt of lightning,
accompanied by even more thunder rumbling in the distance. The little old man looked at the pastor and calmly said,
'Well, she's there.'
Scott Riley
EMCF Business Development
European Multilateral Clearing Facility
8th Floor 50 Bridge Street Sydney Australia 2000
((Off)+61 (0)2 8916 9634 È(Mob): +61 (0)418 117 627
* scott.riley@au.fortis.com
Friday, June 12, 2009
AMCF & News: Chi-X Europe to No 3, EMCF Nordic Interoperability timetable, Order Types, CDS OTC Clearing, Aust OTC, Asian Competition, Omgeo clearing
First up,
Congratulations to Chi-X! (as the regions 3rd largest exchange).
Next up, congratulations to EMCF (3 way Nordic CCP interoperability announcement).
And if things must come in 3’s….I’m sure someone can find something to say about Australia in the Twenty20 format of the game.
MTF order types: Interesting. Once competition arrives, it is amazing how quickly transportable technological initiatives are. Todays US order type / market structure issues are also Europes. That said, C&S is always a ‘bit different’ or clear as mud.
Asian Investor story: Interesting point made in this story by Mark Wheatley of ML: in Europe, the buy-side never initiated these changes, even though it's the buy-side that primarily benefited. Then recall the comment made by Perpetual, they’ll pay for liquidity and ideas. I think competition will come to Asia – not because of any regulatory road map – rather the ‘thirst’ for liquidity. (I need an oasis pun here…now that’s a good name for a dark pool / book)
US Regulation: Merger of SEC & CFTC. Regulation by asset class is….sooo 20th Century. I think this is a lost opportunity. I’d like to see the SEC and CFTC folded together, but I’m not a proponent / supporter or super regulators. I’d like to see a split of supervisory activities more along whole sale / retail lines. Markets have different users and objectives. More should be done to regulate markets, products, users along functional rather than traditional lines. Certainly I’d merge SEC / CFTC but then I’d split them back out again on service lines.
Lingo: I love the term coined by Anthony Belchambers. “Regulatory Repair”.
Some feedback on the role of the ratings agencies:
Nothing new for me in the ratings agencies being judge and juror however what was surprising to me was the scale of feeding at the trough with no respect for investors who they are meant to be serving / protecting with ratings system. I knew it was going on but the proportional bias is staggering as I was thinking maybe 70% ratings and 30% products. Huh, we actually have 0.03% ratings and 99.97% products. Analogy is once every 3,000 games of football you turn up with your tennis kit but your meant to be a tennis player...... Based on about 30 games a year of footall or 60 in the English premier league you would need to be playing for 50 years non-stop before finally getting it right....
Materiality and Proportionality. Important catch cry’s in our industry. This web site is from a rather small school (sounds like one of their pupils just dropped out) so their down to….ha, guess…pupils. Hard to imagine a school of this size in many places of the world.
Give the web site a hit. They’ll puzzle at their international fame and acclaim.
http://eromangass.eq.edu.au/location.htm
Yet again another week has flown by.
I hope to catch some Rugby this week-end.
But the important games for me are U11’s School on Sat am and U11’s Club on Sunday where I’ll be running the line.
Have a great w/end all.
S
http://clearingandsettlement.blogspot.com/
Deutsche Börse upgrades to fend off Chi-X Deutsche Börse has increased the speed of its main trading system and taken an important step towards the launch of a new European platform for trading blue-chip stocks, as it looks to regain ground lost to hi-tech rivals after being usurped as the region’s third-largest exchange.
NASDAQ OMX Announces Timeline for Competitive Central Counterparty Clearing in Nordics
Please find below the text of a joint press release from EMCF, SIX X-clear, EUROCCP and Nasdaq OMX Nordics on interoperability.
To download the release, please click here.
BATS’ market share display page is at http://www.batstrading.co.uk/market_data/market_share/index/ and historical breakdowns by index and venue, including interactive graphs and charts, are available at http://www.batstrading.co.uk/market_data/venue/.
London Stock Exchange management said in an interview Tuesday that the company will likely sell about 50% of its startup dark pool MTF, Baikal, to four or five bank liquidity
providers by October.
*** I think this is too big an initial slug “out of the gate”.
Cracks are appearing in OTC trading regulations The increased momentum by regulators on both sides of the Atlantic to supervise over-the-counter derivatives markets more closely and impose more comprehensive trade reporting requirements are shared and understandable objectives. The drive to reduce the risk in this sector further by facilitating the clearing of standardised OTC trades through clearing houses is equally embraced. But the cracks are beginning to appear.
European clearing giants cross swords over CDS The two largest European clearing houses publicly clashed yesterday when Anglo-French firm LCH.Clearnet raised doubts about a credit default swap clearing service that German rival Eurex Clearing is planning to launch next month.
*** I have to say, I agree with Liddell / LCH. Just saying you clear single name CDS is not to say effective and robust risk management is in place.
Following the release today of a report on the Survey of the OTC Derivatives Market in Australia, the Australian Prudential Regulation Authority (APRA), the Australian Securities & Investments Commission (ASIC), and the Reserve Bank of Australia (RBA) propose to open a dialogue with industry participants to discuss next steps.
The report may be found at:
http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/REP158_SurveyOfTheDerivatives.pdf/$file/REP158_SurveyOfTheDerivatives.pdf
Duffie Zhu Single CCP paper
CDS clearing plans badly flawed say researchers
In a preliminary research paper, Darrell Duffie, professor of finance at GSB, and doctoral student Haoxiang Zhu, conclude that the central clearing houses founded to rationalize the $27 trillion market for credit default swaps will not remove nearly as much risk as regulators might hope.
http://www.finextra.com/fullstory.asp?id=19949
http://www.finextra.com/finextra-downloads/newsdocs/DuffieZhu.pdf
*** This is an aide memoire for me
LCH.Clearnet weighs options in takeover limbo LCH.Clearnet may look to block the bid by its largest clients to buy the European clearing house, according to sources close to the central counterparty.
LCH.CLEARNET SET TO CLEAR TRADES ON HKMEX
http://www.finextra.com/fullpr.asp?id=28009
German exchange group Deustche Börse is committed to the European Commission’s Code of Conduct for Clearing and Settlement and forging links between its clearing house, Eurex Clearing, and other central counterparties (CCPs), according to Marcus Zickwolff, head of trading and clearing system design at the group.
http://www.thetradenews.com/asset-classes/equities/3270
Effective Monday 6 July 2009, NASDAQ OMX Europe will discontinue the 2 Euro Cent per trade rebate.
Why is NASDAQ OMX Europe discontinuing the rebate?
NASDAQ OMX Europe introduced the rebate as a way to help firms offset clearing costs and promote competitive clearing pricing. EMCF's recent price change gives firms the choice of being charged on a per order or per execution basis thereby reducing overall clearing costs. NASDAQ OMX Europe is pleased with EMCF's unique, ompetitive pricing model and believe it will be a benefit to all market participants.
08/06/2009 11:20:00
OMGEO AND EUROCCP TO DEVELOP CENTRAL COUNTERPARTY FOR HEDGE FUND TRANSACTIONS
Post-trade utility Omgeo and clearing house EuroCCP have launched joint development of a pan-European equities central counterparty (CCP) service for hedge fund transactions.
More on this story: http://www.finextra.com/fullstory.asp?id=20109
Omgeo and EuroCCP plan hedge fund clearer
SWIFT SWITCHES ON CENTRAL MATCHING FOR BROKERS AND HEDGE FUNDS Banking co-operative Swift has adapted its Accord matching system to handle the pre-settlement processing of securities trade flows between prime and executing brokers and hedge funds.
Full story: http://www.finextra.com/fullstory.asp?id=20123
DTCC moves to calm fears over GM US clearing house the Depository Trust & Clearing Corporation has taken the unusual step of stating the global market exposure to bankrupt car giant General Motors, in a bid to allay investor fears after the havoc wrought in the markets for debt insurance following the collapse of Lehman Brothers last year.
Obama administration drops proposed merger of SEC, CFTCIn the next few weeks, the Obama administration plans to offer more details on the best way for Congress to overhaul the regulatory system of the financial industry. The proposal is expected to be controversial, but the administration already dropped the idea of merging the Securities and Exchange Commission and the Commodity Futures Trading Commission for political reasons. The move offers a bit of insight into compromises expected down the road. CNNMoney.com (6/8)
IOSCO positions itself for more active role after crisisAlthough some have viewed the International Organisation of Securities Commissions as the regulators' regulator with little influence, the group is preparing for a more active role in the financial industry. Officials are starting with a review of the group's role. "At the heart of the crisis were problems with prudential regulation, but a lot of the mischief took place in the capital markets, too -- that's where the bad loans traded," said Jane Diplock, head of IOSCO's executive committee. "Questions we need to look at include whether perhaps we need some sort of research capability to look at the impact of our standards." Financial Times (free registration) (11 Jun.)
*** Yes, they can have a more important role, but what they really need is to enforce what they already have.
$5.3 trillion in bank aid already approved by EU governmentsAn EU document shows that the region's governments have approved $5.3 trillion in assistance to the banking industry, a figure that far surpasses the GDP of its largest economy, Germany. Britain leads the 27-member EU with $1.1 trillion, according to the document prepared by European Commission officials, the European Central Bank and EU nations. "The operating environment for banks is likely to remain challenging, in particular in respect of credit losses linked to their loan portfolios," according to the document. Bloomberg (12 Jun.)
*** Put this in context with the few billions being repaid.
Bats service takes off in face of NYSE opposition US equities market Bats Exchange has reported strong investor interest in a new service that displays orders exclusively to one group of traders before showing them to the wider market, a week after rival NYSE Euronext tried to block its launch.
NASDAQ OMX Europe (NEURO) Announces Post Only Order Type, BLNK Routing Strategy and Liquidity Code Enhancement
What do you need to know?
NEURO is introducing a Post Only order type that gives firms the ability to guarantee their order will add liquidity to the order book.
NEURO is introducing a new routing strategy, BLNK, which offers participants the ability to have their primary exchange routed orders post on the NEURO book for 25 milliseconds before being routed to the European primary markets.
SIFMA voices concern about new order types at exchangesSIFMA and Getco, a proprietary trading company, separately sent letters to the Securities and Exchange Commission regarding new order types at Nasdaq OMX and BATS Trading that route trades through dark liquidity pools. SIFMA encouraged the SEC to implement a longer approval process. "As a group, we felt there was no orderly process for this," said Travis Larson, spokesman for SIFMA. "With rules that are complicated and technical, it's necessary to use the standard comment process to take into consideration some of the implementation issues." Getco voiced concerns that the practice could harm the competitiveness of equities pricing and investors. The Wall Street Journal/Dow Jones Newswires (6/5)
BALLISTA GETS FUNDING
Ballista Holdings, operator of an ATS for block options and delta neutral orders, has received funding from a group of investors including the International Securities Exchange, Knight Capital Group, Morgan Stanley and Susquehanna Growth Equity.
Full story: http://www.finextra.com/fullstory.asp?id=20116
10/06/2009 12:10:00
TURQUOISE SUSPENDS TRADING AFTER SYSTEM OUTAGE
A system outage this morning has forced bank-backed equity trading venue Turquoise to suspend trading.
More on this story: http://www.finextra.com/fullstory.asp?id=20118
*** Ouch, I always read these with trepidation….those in glass houses… Thoughts to those with hands on the pumps on the day.
How traders killed value investing Long before the June 1 negotiating deadline, it became quite clear that General Motors was headed for bankruptcy. Its debtholders were going to get crushed. The shareholders were wiped out. Except that they weren't. As the deadline neared, shares of GM did a funny thing: They kept trading at more than $1 each. They didn't disappear.
SMARTS GROUP LAUNCHES CROSS-MARKET DERIVATIVES COMPLIANCE MONITORING TOOL
http://www.finextra.com/fullpr.asp?id=28031
BlackRock to buy Barclays Global Investors...
BlackRock has signed a purchase agreement to buy Barclays Global Investors including its ETF platform, iShares, to create a $3.3 trillion (US$2.7 trillion) asset management giant.
*** Yeah, but isn’t some VC fund getting a termination payment in excess of a million per day???
Sherry SDIA speech:
http://minscl.treasurer.gov.au/DisplayDocs.aspx?doc=speeches/2009/017.htm&pageID=005&min=njs&Year=&DocType=
Superannuation wins in Cabinet reshuffle
For the first time, superannuation is now included in Federal Cabinet following a major ministerial reshuffle that saw Chris Bowen promoted to Minister for Financial Services, Superannuation and Corporate Law and Minister for Human Services.
Read more »
10/06/2009 15:32:00
EUROPE BRACES FOR MIFID II, AS REGULATORS ASSESS MARKET IMPACT
The Committee of European Securities Regulators says further regulations may be needed to address some of the unintended consequences arising from the introduction of the Markets in Financial Instruments Directive (MiFID) in 2007.
More on this story: http://www.finextra.com/fullstory.asp?id=20120
*** interesting report attached to this link.
Li aims to make Hong Kong "genuine international market"Charles Li takes over as head of the Hong Kong stock exchange in January and plans to make the city an international market on par with other financial hubs. Li discussed his goals, which include convincing Chinese officials that Hong Kong's successes would benefit China. The Wall Street Journal (10 Jun.)
GANG ARRESTED FOR BUYING OWN MUSIC ONLINE WITH STOLEN CARDS UK police have arrested nine people accused of using stolen credit cards to buy music they made themselves from iTunes and Amazon, fraudulently netting around $300,000 in royalties.
Full story: http://www.finextra.com/fullstory.asp?id=20121
*** I’ve not read the story. It’s not right, not smart, but I do like the sound (geddit) of it.
Summary
· Liquidity fragmentation in Europe last week was up 2.6% to 21.2%, a third consecutive new high. Excluding the UK, all major markets experienced sharp increases in fragmentation – see Table 7.
· Ireland (68.8%), UK (30.7%), France (27.0%), Netherlands (25.5%) and Germany (24.6%) were the most fragmented markets in percentage terms.
· UK ($2.9bn), France ($1.8bn), Germany ($1.4bn), Netherlands ($0.4bn) and Italy ($0.4bn) were the most fragmented in terms of Displayed Liquidity traded away from the primary market.
· Chi-X achieved average daily turnover (ADT) of $5.0bn, equivalent to 13.8% of flow in Chi-X names (a new high). Barclays ($144m, 17.9%), Total ($130m, 24.1%) and Rio Tinto ($1,163m, 18.1%) had the highest ADT.
· ADT on the Turquoise Displayed Order Book was $1.3bn. Market share in Turquoise names was 3.6%. Barclays ($43m, 5.3%), Rio Tinto ($32m, 5.1%) and HSBC ($31m, 6.1%) had the highest ADT.
· BATS achieved ADT of $1.2bn. Market share in BATS names was 3.8%, a third consecutive new high. Barclays ($44m, 5.5%), Rio Tinto ($42m, 6.6%) and BHP Billiton ($37m, 6.4%) had the highest ADT.
· Nasdaq OMX achieved ADT of $195.0m (a new high).
· 12 stocks traded more than 20% ADV on Dark venues.
(Source: JPM)
DEALING WITH TECHNOLOGY: MTFs to Knock Exchanges' Market Dominance, According to PanelBy Cecilia Bergamaschi6/8/09LONDON-The European market will eventually reach a tipping point where price formation will happen away from the incumbent exchanges and the multilateral trading facilities (MTFs) will grab a large slice of the market share, according to members of alternative trading venues who spoke during a panel discussion at a recent industry event. "There will be a tipping point and you are going to see the volumes start to move [to the MTFs] at a much higher rate," says John Lowrey, CEO of Chi-X Global. The panelists could not precisely say when the shift will occur, since most of the alternative platforms are still in early stages of their growth, according to Mark Hemsley, CEO of Bats Europe. The changes in Europe will happen in stages, similar to the way the market evolved in the U.S., says Charlotte Crosswell, president of Nasdaq OMX Europe. "When the market share moved away from the New York Stock Exchange, it followed fairly steady tracks down. ... I remember the London Stock Exchange (LSE) coming out and saying, ‘Our share is not going to be below 75 percent,' and now we're seeing 70 percent, so it will stay like that for quite a long time and move down again, we believe," she says. "We should get that 70 percent down to 60 percent," she adds.Although they are not seeing a profit at the moment, the emerging platforms are investing in long-term strategies. "We are building market share. Everybody wants to grow their business and see who the winners are in the future; 20 percent of the pan-European market share is worth waiting for and we will all get there sooner or later," says Crosswell, who adds that not many startups make money in the first 18 months of operation.Although Bats Europe does not generate cash, the firm, as a whole, maintains a sustainable model, says Hemsley. Bats' U.S. business subsidizes its European counterpart. "I think this is a battle that is going to go for a good two or three years," he says, emphasizing the importance of introducing new products over time. Bats Europe and Bats Exchange in the U.S. benefit from economies of scale, having, for example, the same development team, and 95 percent of the technology used by the trading venues is exactly the same, he says.Like Bats, Chi-X has opted for a global expansion, leveraging technology across Canada and Europe, says Lowrey. The MTF has plans to launch an alternative trading system (ATS) in Australia. "Building scalable technology is probably the right choice," he says. Turquoise, however, follows a more horizontal expansion focused on Europe, with plans to add functionalities that can be sold, says Eli Lederman, CEO of Turquoise.Independent of the growth strategies, it is important that new entrants introduce competitive technology and pricing models, as well as product innovation, say the panelists. "If you don't have low prices and good technology, don't even bother starting," says Crosswell.
WALL STREET LETTER: Chi-X Looks To New Investors By Stefanie Gordon6/8/09Chi-X Europe is hoping to increase the amount it has divested to external investors to 60% from the current 52% in order to boost capital and raise money for future investments. The multi-lateral trading facility is launching the third cycle of its “jump ball” program, which allows users who have contributed the most volume to the platform to buy shares in it. It plans to allow the top eight investors, from June to October, to buy 8% of its equity. The percentage amount that each of the eight will be allowed to buy will be proportional to their trading turnover. Hirander Misra, chief operating officer, said that the first two cycles of the program were very successful for the MTF, but declined to detail capital gained. The remaining 40% of the MTF’s equity will be remain with parent company Nomura Holdings.
Trading volume in Asia tiny compared with Europe, USStock exchanges in the Asian-Pacific region experienced $20 trillion in combined trading volume in 2007, a fraction of the volumes seen in the US and Europe. "We haven't seen the explosive growth in volumes in Asia because of a lack of competition," said Chi-X Global Chairman Tony Mackay. Trade groups are urging regulators to consider how competition and best-execution practices can help regional markets grow. AsianInvestor.net
ASIAN INVESTOR: Lack of Competition Hinders Asian Trading VolumesTrade groups implore regulators to look at the US and Europe to see how encouraging best execution and competing trading venues has helped their markets grow.By Jame DiBiasio6/8/09Two proponents of best execution for trading argue the reason why trading volumes in Asia remain relatively low is due to a lack of competition.In 2007, Asian stock exchanges including Japan and Australia experienced a combined $20 trillion in trading volume. That seems like an awful lot. But it's a fraction of the volumes experienced in the United States and Europe. "We haven't seen the explosive growth in volumes in Asia, because of a lack of competition," asserts Tony Mackay, chairman of Chi-X Global in Hong Kong.He spoke last week at a Fix Protocol conference in Hong Kong.In the US, exchanges by law must route orders to the venue with the best price. Brokers are required to pursue best execution. Although the American market has seen the proliferation of dozens of alternative trading venues and dark pools, the market is still dominated by four players: NYSE, Nasdaq, electronic venue Bats and, just in the past six months, another alternative electronic exchange, Edge ECN.In Europe, the London Stock Exchange is dominant, but there is plenty of competition, and Chi-X now ranks as the fourth largest exchange in Europe in terms of turnover, Mackay says. He says if brokers in Europe had to adhere to a fiduciary responsibility to seek best execution, the exchanges would fall behind. Even now, alternative trade facilities account for 30% of trading volume against the FTSE100, because they offer lower operation costs and superior technology, which translates into narrower bid/offer spreads.Can this sort of competition be introduced to Asia? Mark Wheatley, managing director and head of electronic trading at Merrill Lynch, says there is no regulatory initiative across the region that resembles US law or Europe's Mifid, which forced competition among its national exchanges and clearing houses.He also doubts the market will force much change on its own: in Europe, the buy-side never initiated these changes, even though it's the buy-side that primarily benefited. Mifid obliged sell-side brokers and banks to pursue best execution, but it placed the onus on the buy-side to understand banks' various best-execution policies and technologies.Wheatley argues that the scarcity of liquidity across Asian markets, rather than regulation, could drive change. Fund houses are generally less concerned about market impact than with getting a trade done. But the European and US examples show that best execution adds to liquidity, which means this is a topic that will remain prominent among Asian market participants, Wheatley says.Among the biggest obstacles in Asia is the lack of a consolidated tape showing prices across markets for a bid or offer. In the US, lit venues (as opposed to dark pools) place all their prices on the same data feed, and exchanges route trades to where the price is most competitive. In Europe, this hasn't happened, because the exchanges block any attempt to introduce a consolidated tape. In Asia, there's no equivalent to Mifid, so the notion of visible pricing across venues is a long way off.However, if dark pools become significant players (which they are definitely not right now, in terms of trading volume; they are less than 1% of total exchange trading activity regionally), or if something like a pan-Asian exchange is created, market forces could allow for something like a cross-border tape to emerge, Wheatley says. The creation of, say, a Greater China trading platform would benefit investors enormously, but vested interests in all three markets make this nothing more than a dream.Mackay says: "You need to encourage competition if you want to achieve best execution. I hope Asian regulators look at this," adding that best execution has made great strides in Europe without undermining domestic brokerage industries.Wheatley also criticises the industry for being lax, noting trading members of exchanges in Asia have failed to roll out the kind of technological platforms that would allow more sophisticated trading.The good news is that 2006 and 2007 saw the arrival of hedge funds with aggressive, high-volume trading strategies like statistical arbitrage. This motivated brokers to roll out the first dark pools and algorithms. Although these have been accused of fragmenting already thin pools of liquidity, Wheatley says having more alternatives increases overall trading volumes.
FINANCIAL TIMES: Euro CCP and Omgeo to Create Clearing SystemBy Jeremy Grant6/8/09Further evidence of rising demand for clearing following the financial crisis is emerging as two leading providers of post-trade services unveil a new clearing mechanism for asset managers and hedge funds.Euro CCP, a European clearer that clears for Turquoise, the equities trading platform, and Omgeo, which handles netting of trades, are to develop a pan-European equities clearing service for “buy-side” market participants.Euro CCP is owned by The Depository Trust & Clearing Corporation (DTCC), the US post-trade group. Omgeo is jointly owned by DTCC and Thomson Reuters.Until recently, hedge funds and asset managers felt that banks were creditworthy enough that they did not require their trades to be protected through clearing from the risk of default by counterparties they traded with. However, the collapse of Lehman Brothers shattered that confidence. Many buy-side players are seeking to reduce counterparty risk through clearing. A clearing house stands between two parties to a trade, stepping in to ensure the transaction is completed even if one party defaults.The Obama administration wants more financial instruments cleared to safeguard the financial system, insisting last month that all “standardised” over-the-counter derivatives be processed through a clearer.Many hedge fund and asset managers typically go through brokers to execute trades and have no clearing relationship with an exchange – as brokers do.Hedge funds carry out equities trades by using an “executing broker”. This broker hands the completed trade to a “prime broker”, which handles custodial arrangements and may lend the hedge fund funds to do the trade. The prime broker then arranges settlement of the trade, within a statutory three-day period. Both the hedge fund and its trading counterparty are exposed to counterparty risk, since the trade has not yet been finalised.Omgeo and Euro CCP will add clearing to the process, which they said would “mitigate the counterparty risks and reduce the inefficiencies that today characterise the hedge fund/prime broker/executing broker processing chain”. Marianne Brown, Omgeo chief executive, said: “Together we share the goal of greatly reducing post-trade and settlement risks and look forward to leveraging each other’s expertise to bring meaningful value to the prime broker world.” BNP Paribas last year developed a clearing service for buy-side participants that will be used for the London Stock Exchange’s planned equities “dark pool”, known as Baikal.Last month LCH.Clearnet, Europe’s largest independent clearing house, said it would launch a service for asset managers, pension and hedge funds wanting to clear over-the-counter interest rate swaps.
THE TRADE NEWS: UBS Launches PIN Crossing Network in AustraliaBy Staff6/11/09UBS Securities Australia, a subsidiary of global investment bank UBS, has become the first broker to launch its non-displayed internal crossing pool, UBS Price Improvement Network (PIN), in Australia.The new service will give the bank’s clients will have access to dark liquidity in stocks listed on the Australian Securities Exchange (ASX). UBS PIN allows client orders to cross with other UBS institutional and retail client agency order flow, before being routed on to the displayed ASX order book.“Launched originally in the US and Europe, and most recently in Hong Kong, UBS PIN delivers substantial benefits to clients providing the opportunity for price improvement with minimum impact on the stock price,” said Gary Head, managing director, UBS client trading execution, Australasia, in a statement. “PIN provides new signal-free liquidity to our clients. In an increasingly fragmented market that serves the important purpose of allowing clients to send large orders without the risks of price impact.”All orders in UBS PIN follow a price-time priority, so orders entered with the best prices and at the earliest times are crossed first. UBS algorithms will have the ability to automatically interact with PIN.Presently, regulatory restrictions mean buy-side only crossing network Liquidnet Australia and ITG POSIT are the only alternative trading venues allowed to operate in the country. Displayed alternative trading venues Chi-X and AXE-ECN are waiting in the wings ready to launch once they have been granted regulatory approval.
An Easily Understandable Explanation of Derivative Markets
Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).Word gets around about Heidi's "drink now, pay later "marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit.By providing her customers' freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.
Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.
Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers.Now, do you understand?
Scott Riley
EMCF Business Development
European Multilateral Clearing Facility
8th Floor 50 Bridge Street Sydney Australia 2000
((Off)+61 (0)2 8916 9634 È(Mob): +61 (0)418 117 627
* scott.riley@au.fortis.com
Congratulations to Chi-X! (as the regions 3rd largest exchange).
Next up, congratulations to EMCF (3 way Nordic CCP interoperability announcement).
And if things must come in 3’s….I’m sure someone can find something to say about Australia in the Twenty20 format of the game.
MTF order types: Interesting. Once competition arrives, it is amazing how quickly transportable technological initiatives are. Todays US order type / market structure issues are also Europes. That said, C&S is always a ‘bit different’ or clear as mud.
Asian Investor story: Interesting point made in this story by Mark Wheatley of ML: in Europe, the buy-side never initiated these changes, even though it's the buy-side that primarily benefited. Then recall the comment made by Perpetual, they’ll pay for liquidity and ideas. I think competition will come to Asia – not because of any regulatory road map – rather the ‘thirst’ for liquidity. (I need an oasis pun here…now that’s a good name for a dark pool / book)
US Regulation: Merger of SEC & CFTC. Regulation by asset class is….sooo 20th Century. I think this is a lost opportunity. I’d like to see the SEC and CFTC folded together, but I’m not a proponent / supporter or super regulators. I’d like to see a split of supervisory activities more along whole sale / retail lines. Markets have different users and objectives. More should be done to regulate markets, products, users along functional rather than traditional lines. Certainly I’d merge SEC / CFTC but then I’d split them back out again on service lines.
Lingo: I love the term coined by Anthony Belchambers. “Regulatory Repair”.
Some feedback on the role of the ratings agencies:
Nothing new for me in the ratings agencies being judge and juror however what was surprising to me was the scale of feeding at the trough with no respect for investors who they are meant to be serving / protecting with ratings system. I knew it was going on but the proportional bias is staggering as I was thinking maybe 70% ratings and 30% products. Huh, we actually have 0.03% ratings and 99.97% products. Analogy is once every 3,000 games of football you turn up with your tennis kit but your meant to be a tennis player...... Based on about 30 games a year of footall or 60 in the English premier league you would need to be playing for 50 years non-stop before finally getting it right....
Materiality and Proportionality. Important catch cry’s in our industry. This web site is from a rather small school (sounds like one of their pupils just dropped out) so their down to….ha, guess…pupils. Hard to imagine a school of this size in many places of the world.
Give the web site a hit. They’ll puzzle at their international fame and acclaim.
http://eromangass.eq.edu.au/location.htm
Yet again another week has flown by.
I hope to catch some Rugby this week-end.
But the important games for me are U11’s School on Sat am and U11’s Club on Sunday where I’ll be running the line.
Have a great w/end all.
S
http://clearingandsettlement.blogspot.com/
Deutsche Börse upgrades to fend off Chi-X Deutsche Börse has increased the speed of its main trading system and taken an important step towards the launch of a new European platform for trading blue-chip stocks, as it looks to regain ground lost to hi-tech rivals after being usurped as the region’s third-largest exchange.
NASDAQ OMX Announces Timeline for Competitive Central Counterparty Clearing in Nordics
Please find below the text of a joint press release from EMCF, SIX X-clear, EUROCCP and Nasdaq OMX Nordics on interoperability.
To download the release, please click here.
BATS’ market share display page is at http://www.batstrading.co.uk/market_data/market_share/index/ and historical breakdowns by index and venue, including interactive graphs and charts, are available at http://www.batstrading.co.uk/market_data/venue/.
London Stock Exchange management said in an interview Tuesday that the company will likely sell about 50% of its startup dark pool MTF, Baikal, to four or five bank liquidity
providers by October.
*** I think this is too big an initial slug “out of the gate”.
Cracks are appearing in OTC trading regulations The increased momentum by regulators on both sides of the Atlantic to supervise over-the-counter derivatives markets more closely and impose more comprehensive trade reporting requirements are shared and understandable objectives. The drive to reduce the risk in this sector further by facilitating the clearing of standardised OTC trades through clearing houses is equally embraced. But the cracks are beginning to appear.
European clearing giants cross swords over CDS The two largest European clearing houses publicly clashed yesterday when Anglo-French firm LCH.Clearnet raised doubts about a credit default swap clearing service that German rival Eurex Clearing is planning to launch next month.
*** I have to say, I agree with Liddell / LCH. Just saying you clear single name CDS is not to say effective and robust risk management is in place.
Following the release today of a report on the Survey of the OTC Derivatives Market in Australia, the Australian Prudential Regulation Authority (APRA), the Australian Securities & Investments Commission (ASIC), and the Reserve Bank of Australia (RBA) propose to open a dialogue with industry participants to discuss next steps.
The report may be found at:
http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/REP158_SurveyOfTheDerivatives.pdf/$file/REP158_SurveyOfTheDerivatives.pdf
Duffie Zhu Single CCP paper
CDS clearing plans badly flawed say researchers
In a preliminary research paper, Darrell Duffie, professor of finance at GSB, and doctoral student Haoxiang Zhu, conclude that the central clearing houses founded to rationalize the $27 trillion market for credit default swaps will not remove nearly as much risk as regulators might hope.
http://www.finextra.com/fullstory.asp?id=19949
http://www.finextra.com/finextra-downloads/newsdocs/DuffieZhu.pdf
*** This is an aide memoire for me
LCH.Clearnet weighs options in takeover limbo LCH.Clearnet may look to block the bid by its largest clients to buy the European clearing house, according to sources close to the central counterparty.
LCH.CLEARNET SET TO CLEAR TRADES ON HKMEX
http://www.finextra.com/fullpr.asp?id=28009
German exchange group Deustche Börse is committed to the European Commission’s Code of Conduct for Clearing and Settlement and forging links between its clearing house, Eurex Clearing, and other central counterparties (CCPs), according to Marcus Zickwolff, head of trading and clearing system design at the group.
http://www.thetradenews.com/asset-classes/equities/3270
Effective Monday 6 July 2009, NASDAQ OMX Europe will discontinue the 2 Euro Cent per trade rebate.
Why is NASDAQ OMX Europe discontinuing the rebate?
NASDAQ OMX Europe introduced the rebate as a way to help firms offset clearing costs and promote competitive clearing pricing. EMCF's recent price change gives firms the choice of being charged on a per order or per execution basis thereby reducing overall clearing costs. NASDAQ OMX Europe is pleased with EMCF's unique, ompetitive pricing model and believe it will be a benefit to all market participants.
08/06/2009 11:20:00
OMGEO AND EUROCCP TO DEVELOP CENTRAL COUNTERPARTY FOR HEDGE FUND TRANSACTIONS
Post-trade utility Omgeo and clearing house EuroCCP have launched joint development of a pan-European equities central counterparty (CCP) service for hedge fund transactions.
More on this story: http://www.finextra.com/fullstory.asp?id=20109
Omgeo and EuroCCP plan hedge fund clearer
SWIFT SWITCHES ON CENTRAL MATCHING FOR BROKERS AND HEDGE FUNDS Banking co-operative Swift has adapted its Accord matching system to handle the pre-settlement processing of securities trade flows between prime and executing brokers and hedge funds.
Full story: http://www.finextra.com/fullstory.asp?id=20123
DTCC moves to calm fears over GM US clearing house the Depository Trust & Clearing Corporation has taken the unusual step of stating the global market exposure to bankrupt car giant General Motors, in a bid to allay investor fears after the havoc wrought in the markets for debt insurance following the collapse of Lehman Brothers last year.
Obama administration drops proposed merger of SEC, CFTCIn the next few weeks, the Obama administration plans to offer more details on the best way for Congress to overhaul the regulatory system of the financial industry. The proposal is expected to be controversial, but the administration already dropped the idea of merging the Securities and Exchange Commission and the Commodity Futures Trading Commission for political reasons. The move offers a bit of insight into compromises expected down the road. CNNMoney.com (6/8)
IOSCO positions itself for more active role after crisisAlthough some have viewed the International Organisation of Securities Commissions as the regulators' regulator with little influence, the group is preparing for a more active role in the financial industry. Officials are starting with a review of the group's role. "At the heart of the crisis were problems with prudential regulation, but a lot of the mischief took place in the capital markets, too -- that's where the bad loans traded," said Jane Diplock, head of IOSCO's executive committee. "Questions we need to look at include whether perhaps we need some sort of research capability to look at the impact of our standards." Financial Times (free registration) (11 Jun.)
*** Yes, they can have a more important role, but what they really need is to enforce what they already have.
$5.3 trillion in bank aid already approved by EU governmentsAn EU document shows that the region's governments have approved $5.3 trillion in assistance to the banking industry, a figure that far surpasses the GDP of its largest economy, Germany. Britain leads the 27-member EU with $1.1 trillion, according to the document prepared by European Commission officials, the European Central Bank and EU nations. "The operating environment for banks is likely to remain challenging, in particular in respect of credit losses linked to their loan portfolios," according to the document. Bloomberg (12 Jun.)
*** Put this in context with the few billions being repaid.
Bats service takes off in face of NYSE opposition US equities market Bats Exchange has reported strong investor interest in a new service that displays orders exclusively to one group of traders before showing them to the wider market, a week after rival NYSE Euronext tried to block its launch.
NASDAQ OMX Europe (NEURO) Announces Post Only Order Type, BLNK Routing Strategy and Liquidity Code Enhancement
What do you need to know?
NEURO is introducing a Post Only order type that gives firms the ability to guarantee their order will add liquidity to the order book.
NEURO is introducing a new routing strategy, BLNK, which offers participants the ability to have their primary exchange routed orders post on the NEURO book for 25 milliseconds before being routed to the European primary markets.
SIFMA voices concern about new order types at exchangesSIFMA and Getco, a proprietary trading company, separately sent letters to the Securities and Exchange Commission regarding new order types at Nasdaq OMX and BATS Trading that route trades through dark liquidity pools. SIFMA encouraged the SEC to implement a longer approval process. "As a group, we felt there was no orderly process for this," said Travis Larson, spokesman for SIFMA. "With rules that are complicated and technical, it's necessary to use the standard comment process to take into consideration some of the implementation issues." Getco voiced concerns that the practice could harm the competitiveness of equities pricing and investors. The Wall Street Journal/Dow Jones Newswires (6/5)
BALLISTA GETS FUNDING
Ballista Holdings, operator of an ATS for block options and delta neutral orders, has received funding from a group of investors including the International Securities Exchange, Knight Capital Group, Morgan Stanley and Susquehanna Growth Equity.
Full story: http://www.finextra.com/fullstory.asp?id=20116
10/06/2009 12:10:00
TURQUOISE SUSPENDS TRADING AFTER SYSTEM OUTAGE
A system outage this morning has forced bank-backed equity trading venue Turquoise to suspend trading.
More on this story: http://www.finextra.com/fullstory.asp?id=20118
*** Ouch, I always read these with trepidation….those in glass houses… Thoughts to those with hands on the pumps on the day.
How traders killed value investing Long before the June 1 negotiating deadline, it became quite clear that General Motors was headed for bankruptcy. Its debtholders were going to get crushed. The shareholders were wiped out. Except that they weren't. As the deadline neared, shares of GM did a funny thing: They kept trading at more than $1 each. They didn't disappear.
SMARTS GROUP LAUNCHES CROSS-MARKET DERIVATIVES COMPLIANCE MONITORING TOOL
http://www.finextra.com/fullpr.asp?id=28031
BlackRock to buy Barclays Global Investors...
BlackRock has signed a purchase agreement to buy Barclays Global Investors including its ETF platform, iShares, to create a $3.3 trillion (US$2.7 trillion) asset management giant.
*** Yeah, but isn’t some VC fund getting a termination payment in excess of a million per day???
Sherry SDIA speech:
http://minscl.treasurer.gov.au/DisplayDocs.aspx?doc=speeches/2009/017.htm&pageID=005&min=njs&Year=&DocType=
Superannuation wins in Cabinet reshuffle
For the first time, superannuation is now included in Federal Cabinet following a major ministerial reshuffle that saw Chris Bowen promoted to Minister for Financial Services, Superannuation and Corporate Law and Minister for Human Services.
Read more »
10/06/2009 15:32:00
EUROPE BRACES FOR MIFID II, AS REGULATORS ASSESS MARKET IMPACT
The Committee of European Securities Regulators says further regulations may be needed to address some of the unintended consequences arising from the introduction of the Markets in Financial Instruments Directive (MiFID) in 2007.
More on this story: http://www.finextra.com/fullstory.asp?id=20120
*** interesting report attached to this link.
Li aims to make Hong Kong "genuine international market"Charles Li takes over as head of the Hong Kong stock exchange in January and plans to make the city an international market on par with other financial hubs. Li discussed his goals, which include convincing Chinese officials that Hong Kong's successes would benefit China. The Wall Street Journal (10 Jun.)
GANG ARRESTED FOR BUYING OWN MUSIC ONLINE WITH STOLEN CARDS UK police have arrested nine people accused of using stolen credit cards to buy music they made themselves from iTunes and Amazon, fraudulently netting around $300,000 in royalties.
Full story: http://www.finextra.com/fullstory.asp?id=20121
*** I’ve not read the story. It’s not right, not smart, but I do like the sound (geddit) of it.
Summary
· Liquidity fragmentation in Europe last week was up 2.6% to 21.2%, a third consecutive new high. Excluding the UK, all major markets experienced sharp increases in fragmentation – see Table 7.
· Ireland (68.8%), UK (30.7%), France (27.0%), Netherlands (25.5%) and Germany (24.6%) were the most fragmented markets in percentage terms.
· UK ($2.9bn), France ($1.8bn), Germany ($1.4bn), Netherlands ($0.4bn) and Italy ($0.4bn) were the most fragmented in terms of Displayed Liquidity traded away from the primary market.
· Chi-X achieved average daily turnover (ADT) of $5.0bn, equivalent to 13.8% of flow in Chi-X names (a new high). Barclays ($144m, 17.9%), Total ($130m, 24.1%) and Rio Tinto ($1,163m, 18.1%) had the highest ADT.
· ADT on the Turquoise Displayed Order Book was $1.3bn. Market share in Turquoise names was 3.6%. Barclays ($43m, 5.3%), Rio Tinto ($32m, 5.1%) and HSBC ($31m, 6.1%) had the highest ADT.
· BATS achieved ADT of $1.2bn. Market share in BATS names was 3.8%, a third consecutive new high. Barclays ($44m, 5.5%), Rio Tinto ($42m, 6.6%) and BHP Billiton ($37m, 6.4%) had the highest ADT.
· Nasdaq OMX achieved ADT of $195.0m (a new high).
· 12 stocks traded more than 20% ADV on Dark venues.
(Source: JPM)
DEALING WITH TECHNOLOGY: MTFs to Knock Exchanges' Market Dominance, According to PanelBy Cecilia Bergamaschi6/8/09LONDON-The European market will eventually reach a tipping point where price formation will happen away from the incumbent exchanges and the multilateral trading facilities (MTFs) will grab a large slice of the market share, according to members of alternative trading venues who spoke during a panel discussion at a recent industry event. "There will be a tipping point and you are going to see the volumes start to move [to the MTFs] at a much higher rate," says John Lowrey, CEO of Chi-X Global. The panelists could not precisely say when the shift will occur, since most of the alternative platforms are still in early stages of their growth, according to Mark Hemsley, CEO of Bats Europe. The changes in Europe will happen in stages, similar to the way the market evolved in the U.S., says Charlotte Crosswell, president of Nasdaq OMX Europe. "When the market share moved away from the New York Stock Exchange, it followed fairly steady tracks down. ... I remember the London Stock Exchange (LSE) coming out and saying, ‘Our share is not going to be below 75 percent,' and now we're seeing 70 percent, so it will stay like that for quite a long time and move down again, we believe," she says. "We should get that 70 percent down to 60 percent," she adds.Although they are not seeing a profit at the moment, the emerging platforms are investing in long-term strategies. "We are building market share. Everybody wants to grow their business and see who the winners are in the future; 20 percent of the pan-European market share is worth waiting for and we will all get there sooner or later," says Crosswell, who adds that not many startups make money in the first 18 months of operation.Although Bats Europe does not generate cash, the firm, as a whole, maintains a sustainable model, says Hemsley. Bats' U.S. business subsidizes its European counterpart. "I think this is a battle that is going to go for a good two or three years," he says, emphasizing the importance of introducing new products over time. Bats Europe and Bats Exchange in the U.S. benefit from economies of scale, having, for example, the same development team, and 95 percent of the technology used by the trading venues is exactly the same, he says.Like Bats, Chi-X has opted for a global expansion, leveraging technology across Canada and Europe, says Lowrey. The MTF has plans to launch an alternative trading system (ATS) in Australia. "Building scalable technology is probably the right choice," he says. Turquoise, however, follows a more horizontal expansion focused on Europe, with plans to add functionalities that can be sold, says Eli Lederman, CEO of Turquoise.Independent of the growth strategies, it is important that new entrants introduce competitive technology and pricing models, as well as product innovation, say the panelists. "If you don't have low prices and good technology, don't even bother starting," says Crosswell.
WALL STREET LETTER: Chi-X Looks To New Investors By Stefanie Gordon6/8/09Chi-X Europe is hoping to increase the amount it has divested to external investors to 60% from the current 52% in order to boost capital and raise money for future investments. The multi-lateral trading facility is launching the third cycle of its “jump ball” program, which allows users who have contributed the most volume to the platform to buy shares in it. It plans to allow the top eight investors, from June to October, to buy 8% of its equity. The percentage amount that each of the eight will be allowed to buy will be proportional to their trading turnover. Hirander Misra, chief operating officer, said that the first two cycles of the program were very successful for the MTF, but declined to detail capital gained. The remaining 40% of the MTF’s equity will be remain with parent company Nomura Holdings.
Trading volume in Asia tiny compared with Europe, USStock exchanges in the Asian-Pacific region experienced $20 trillion in combined trading volume in 2007, a fraction of the volumes seen in the US and Europe. "We haven't seen the explosive growth in volumes in Asia because of a lack of competition," said Chi-X Global Chairman Tony Mackay. Trade groups are urging regulators to consider how competition and best-execution practices can help regional markets grow. AsianInvestor.net
ASIAN INVESTOR: Lack of Competition Hinders Asian Trading VolumesTrade groups implore regulators to look at the US and Europe to see how encouraging best execution and competing trading venues has helped their markets grow.By Jame DiBiasio6/8/09Two proponents of best execution for trading argue the reason why trading volumes in Asia remain relatively low is due to a lack of competition.In 2007, Asian stock exchanges including Japan and Australia experienced a combined $20 trillion in trading volume. That seems like an awful lot. But it's a fraction of the volumes experienced in the United States and Europe. "We haven't seen the explosive growth in volumes in Asia, because of a lack of competition," asserts Tony Mackay, chairman of Chi-X Global in Hong Kong.He spoke last week at a Fix Protocol conference in Hong Kong.In the US, exchanges by law must route orders to the venue with the best price. Brokers are required to pursue best execution. Although the American market has seen the proliferation of dozens of alternative trading venues and dark pools, the market is still dominated by four players: NYSE, Nasdaq, electronic venue Bats and, just in the past six months, another alternative electronic exchange, Edge ECN.In Europe, the London Stock Exchange is dominant, but there is plenty of competition, and Chi-X now ranks as the fourth largest exchange in Europe in terms of turnover, Mackay says. He says if brokers in Europe had to adhere to a fiduciary responsibility to seek best execution, the exchanges would fall behind. Even now, alternative trade facilities account for 30% of trading volume against the FTSE100, because they offer lower operation costs and superior technology, which translates into narrower bid/offer spreads.Can this sort of competition be introduced to Asia? Mark Wheatley, managing director and head of electronic trading at Merrill Lynch, says there is no regulatory initiative across the region that resembles US law or Europe's Mifid, which forced competition among its national exchanges and clearing houses.He also doubts the market will force much change on its own: in Europe, the buy-side never initiated these changes, even though it's the buy-side that primarily benefited. Mifid obliged sell-side brokers and banks to pursue best execution, but it placed the onus on the buy-side to understand banks' various best-execution policies and technologies.Wheatley argues that the scarcity of liquidity across Asian markets, rather than regulation, could drive change. Fund houses are generally less concerned about market impact than with getting a trade done. But the European and US examples show that best execution adds to liquidity, which means this is a topic that will remain prominent among Asian market participants, Wheatley says.Among the biggest obstacles in Asia is the lack of a consolidated tape showing prices across markets for a bid or offer. In the US, lit venues (as opposed to dark pools) place all their prices on the same data feed, and exchanges route trades to where the price is most competitive. In Europe, this hasn't happened, because the exchanges block any attempt to introduce a consolidated tape. In Asia, there's no equivalent to Mifid, so the notion of visible pricing across venues is a long way off.However, if dark pools become significant players (which they are definitely not right now, in terms of trading volume; they are less than 1% of total exchange trading activity regionally), or if something like a pan-Asian exchange is created, market forces could allow for something like a cross-border tape to emerge, Wheatley says. The creation of, say, a Greater China trading platform would benefit investors enormously, but vested interests in all three markets make this nothing more than a dream.Mackay says: "You need to encourage competition if you want to achieve best execution. I hope Asian regulators look at this," adding that best execution has made great strides in Europe without undermining domestic brokerage industries.Wheatley also criticises the industry for being lax, noting trading members of exchanges in Asia have failed to roll out the kind of technological platforms that would allow more sophisticated trading.The good news is that 2006 and 2007 saw the arrival of hedge funds with aggressive, high-volume trading strategies like statistical arbitrage. This motivated brokers to roll out the first dark pools and algorithms. Although these have been accused of fragmenting already thin pools of liquidity, Wheatley says having more alternatives increases overall trading volumes.
FINANCIAL TIMES: Euro CCP and Omgeo to Create Clearing SystemBy Jeremy Grant6/8/09Further evidence of rising demand for clearing following the financial crisis is emerging as two leading providers of post-trade services unveil a new clearing mechanism for asset managers and hedge funds.Euro CCP, a European clearer that clears for Turquoise, the equities trading platform, and Omgeo, which handles netting of trades, are to develop a pan-European equities clearing service for “buy-side” market participants.Euro CCP is owned by The Depository Trust & Clearing Corporation (DTCC), the US post-trade group. Omgeo is jointly owned by DTCC and Thomson Reuters.Until recently, hedge funds and asset managers felt that banks were creditworthy enough that they did not require their trades to be protected through clearing from the risk of default by counterparties they traded with. However, the collapse of Lehman Brothers shattered that confidence. Many buy-side players are seeking to reduce counterparty risk through clearing. A clearing house stands between two parties to a trade, stepping in to ensure the transaction is completed even if one party defaults.The Obama administration wants more financial instruments cleared to safeguard the financial system, insisting last month that all “standardised” over-the-counter derivatives be processed through a clearer.Many hedge fund and asset managers typically go through brokers to execute trades and have no clearing relationship with an exchange – as brokers do.Hedge funds carry out equities trades by using an “executing broker”. This broker hands the completed trade to a “prime broker”, which handles custodial arrangements and may lend the hedge fund funds to do the trade. The prime broker then arranges settlement of the trade, within a statutory three-day period. Both the hedge fund and its trading counterparty are exposed to counterparty risk, since the trade has not yet been finalised.Omgeo and Euro CCP will add clearing to the process, which they said would “mitigate the counterparty risks and reduce the inefficiencies that today characterise the hedge fund/prime broker/executing broker processing chain”. Marianne Brown, Omgeo chief executive, said: “Together we share the goal of greatly reducing post-trade and settlement risks and look forward to leveraging each other’s expertise to bring meaningful value to the prime broker world.” BNP Paribas last year developed a clearing service for buy-side participants that will be used for the London Stock Exchange’s planned equities “dark pool”, known as Baikal.Last month LCH.Clearnet, Europe’s largest independent clearing house, said it would launch a service for asset managers, pension and hedge funds wanting to clear over-the-counter interest rate swaps.
THE TRADE NEWS: UBS Launches PIN Crossing Network in AustraliaBy Staff6/11/09UBS Securities Australia, a subsidiary of global investment bank UBS, has become the first broker to launch its non-displayed internal crossing pool, UBS Price Improvement Network (PIN), in Australia.The new service will give the bank’s clients will have access to dark liquidity in stocks listed on the Australian Securities Exchange (ASX). UBS PIN allows client orders to cross with other UBS institutional and retail client agency order flow, before being routed on to the displayed ASX order book.“Launched originally in the US and Europe, and most recently in Hong Kong, UBS PIN delivers substantial benefits to clients providing the opportunity for price improvement with minimum impact on the stock price,” said Gary Head, managing director, UBS client trading execution, Australasia, in a statement. “PIN provides new signal-free liquidity to our clients. In an increasingly fragmented market that serves the important purpose of allowing clients to send large orders without the risks of price impact.”All orders in UBS PIN follow a price-time priority, so orders entered with the best prices and at the earliest times are crossed first. UBS algorithms will have the ability to automatically interact with PIN.Presently, regulatory restrictions mean buy-side only crossing network Liquidnet Australia and ITG POSIT are the only alternative trading venues allowed to operate in the country. Displayed alternative trading venues Chi-X and AXE-ECN are waiting in the wings ready to launch once they have been granted regulatory approval.
An Easily Understandable Explanation of Derivative Markets
Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).Word gets around about Heidi's "drink now, pay later "marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit.By providing her customers' freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.
Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.
Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers.Now, do you understand?
Scott Riley
EMCF Business Development
European Multilateral Clearing Facility
8th Floor 50 Bridge Street Sydney Australia 2000
((Off)+61 (0)2 8916 9634 È(Mob): +61 (0)418 117 627
* scott.riley@au.fortis.com
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