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
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