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
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