G’day All,
Landscape still shifting in Europe. Competition continues to take a foothold. The observation of the liquidity shift(s) during the latest outages at the primary markets confirm this. Yet we also continue to see increases in the valuations of the primaries. Personally, I think water will always find its own level and a finger in the European dyke of primary markets ain’t gunna help much longer.
Recommend the Traders Magazine article on “What’s in a name” and Egyptians killing pigs (for those that like the dark).
I’m less keen on “rules” to prevent clearing house failures. A the moment we all have very clear procedures and guidelines. I think the important context is models can be different but the level playing field should be based on the assumptions used. How we calibrate risk defences can vary, but all should be providing the same integrity of defence.
LCH.Clearnet ownership changes I believe are just the start of a new journey. The user community, though now greater concentrated, still has a lot of “herding” of its own members interests to do.
Figures out on EuroCCP (10myn loss) and CME seeks to enter the fray.
Very perplexed at the Euroclear UK positioning. If they were talking about their efforts to add transparency to pricing, I’d be applauding them (e.g. stamp duty, netting fees, etc.), instead they focus on why they should not be expected to provide competitive pricing.
I’m a believer in securitisation. No doubt there will be some good deals out there now to reassure investors to return to those turbulent waters. I don’t think 5% is enough to eat of what you kill, but I also think holding capital for risks you’ve sold is not right. I don’t think the right balance has yet been struck.
Good Asian round up in The Banker.
An important week for dates.
Remembrance day on 11th Nov. Happy to see the main street of Sydney fall silent. Very visible profile “in the city” yet it becomes ever easier to “forget” those that sacrificed so much for what we have today.
Also staggered by the importance of 9th Nov. What an important date for Germany, not least because of the wall.
And sport, sorry, a Grand Slam tour in progress and I forgot to mention it.
Yes, a win against England. I was not optimistic at 9-Nil and Johnny kicking well. Anyway, we dragged ourselves through to the win and I thought we still look poor at closing (was I alone in thinking England could have been better defensively?). Anyway, we need well crafted tries just as much as we need soft ones.
This week Ireland at Croke Park. I’ll go for the Aussies to win. In fact, I’m calling an Aussie grand slam…but hey, I’m parochial.
*** overcome by events, this came out evens. A fair result I suspect. I’ve not seen the game yet. I wonder, does this mean they can still claim a Grand Slam? (is the definition “undefeated” or “all conquering”?)
It is the mark of an educated mind to be able to entertain a thought without accepting it."
--Aristotle,
Greek philosopher
Have a great week all,
S
http://clearingandsettlement.blogspot.com/
(Cartoon is KAL from economist)
Platforms
LSE to launch dark orders
The London Stock Exchange is attempting to reverse the tide that has seen its dominance of UK equity trading undermined this year, by introducing next month a new dark order type and changing its fee structure.
LSE sets new date for hidden orders, amends fees
http://www.thetradenews.com/asset-classes/equities/3844
SIX targets high-volume members with fee cuts
Chi-X Europe to cut dark fees until year-end
ConvergEx snaps up Millennium dark pool
LSE's grip on price formation weakened by latest outage
Trading on pan-European multilateral trading facility Chi-X Europe increased during the London Stock Exchange's partial outage on Monday afternoon, indicating that European traders' dependence on primary market prices is waning
http://www.thetradenews.com/asset-classes/equities/3881
London Bourse Delays Baikal Launch on Turquoise Talks, WSJ Says
By Patrick Rial and Jackie Cohen
Nov. 9 (Bloomberg) -- London Stock Exchange Group Plc has postponed the launch of its dark-pool trading system Baikal as it negotiates a possible purchase of rival Turquoise, the Wall Street Journal reported.
http://www.bloomberg.com/apps/news?pid=20601084&sid=aNnKuGiPRjk4
Deutsche Börse becomes the last of the major European exchanges to launch dedicated pan-European trading capabilities today with the launch of Xetra International Market.
Read the interview
(more worthwhile – contains XIM pricing)
[0.06bps = 6 euro cents per 10K]
09/11/2009 16:16:00
CONVERGEX TO ACQUIRE NYFIX US TRANSACTION SERVICES BUSINESS
Bank of New York-owned ConvergEx has agreed to acquire the US electronic agency execution business of Nyfix Transaction Services, comprising the Millennium Alternative Trading System (ATS) and its direct market access (DMA) and algorithmic products.
More on this story: http://www.finextra.com/fullstory.asp?id=20715
Listed Exchanges Grow 27 Per Cent Year-On-Year
The share values of the world's listed exchanges experienced year-on-year growth of 27.5 per cent, despite losing four per cent in value during October 2009, according to the Mondo Visione Exchanges Index.
http://www.exchange-handbook.co.uk/index.cfm?section=news&action=detail&id=86748
Clearing
ICE seeks rules to prevent clearing house failures
By Jane Baird
LONDON, Nov 12 (Reuters) - IntercontinentalExchange Inc. called on regulators to set standards for the margins that central clearing houses must set aside to guard against collapse in the more than $600 trillion derivatives market.
http://www.forbes.com/feeds/afx/2009/11/12/afx7116334.html
**** 'The models don't have to be the same, but they should be operated on the same assumption set. If you run a model based on the collapse of only one dealer and liquidation within two days, you get a very different result in orders of magnitude in the margins,' Sprecher said.
'Regulators need to broadly agree on some of these assumptions and require clearing houses to demonstrate they can meet these assumptions,' he added.
LCH.Clearnet streamlines ownership structure
LCH.Clearnet on Friday said it had finalised a shareholder streamlining scheme, bringing to an end a two-year saga over the ownership of one of the world's most prized derivatives post-trade assets.
http://www.ft.com/cms/s/9279e7fa-cac5-11de-97e0-00144feabdc0,s01=1.html
*** The total number of LCH.Clearnet shareholders is now 105, down from an earlier 120.
LCH.Clearnet successfully realigns shareholder base
LCH.Clearnet, the leading independent clearing house group, has successfully completed the voluntary share redemption announced on 29 September 2009. Large users, each of which contributes more than 1% towards Group clearing fees and which together represent, in aggregate, over 80% of Group clearing revenues, have increased their total shareholding to 63% from 37%.
http://www.lchclearnet.com/media_centre/press_releases/2009-11-06.asp
EuroCCP slips into a €10m loss
The challenge of setting up a European clearing house has been highlighted by EuroCCP, the firm owned by US clearing giant the Depository Trust & Clearing Corporation, which said last week that it lost almost €10m ($14.9m) in 2008.
CME aims for European clearing in next quarter
CME Group, the Chicago-based derivatives exchange operator, said it expects to launch European clearing services in the first quarter of next year after hiring the former head of London-based LCH.Clearnet in July.
*** Andrew Lamb targets Q1 2010.
SGX announces revised date to implement new settlement processes and penalty framework
http://www.sgx.com/wps/wcm/connect/cp_en/site/press_room/news_releases/sgx+announces+revised+date+to+implement+new+settlement+processes+and+penalty+framework?presentationtemplate=design_lib/PT_Printer_Friendly
Analysis: Clearinghouses might not be solution for derivatives
Regulators worldwide have been pushing to have most over-the-counter derivatives traded through clearinghouses as a move to control risk. But clearinghouses might not provide a valid solution, said Darrell Duffie, a professor of finance at Stanford University. That will work only if there are few clearinghouses, Duffie said. "Many clearinghouses could be very bad," he said. "You would have increased counterparty exposure and excessive use of collateral, with multiple points of failure. This could add systemic risk." Reuters (11/11)
Tim May, chairman of Euroclear UK and Ireland, explains why Europe's established post-trade infrastructure providers should not be compared simplistically with the new generation post-MiFID entrants.
Read the interview (on reflection, I wouldn’t bother)
1. the range of clearing and settlement services offered by incumbent central counterparties (CCPs) and central securities depositories (CSDs) help to justify the higher overall pricing
2.The introduction of MiFID has encouraged us to change our services and pricing models, but we are not going to reduce fees to the same levels as the new entrants because we offer a more comprehensive service.”
3. Incumbent post-trade providers, like ourselves and LCH.Clearnet, aren’t necessarily trying to match the pricing of new pan-European entrants,
4. "There is a risk of a new entrant, which may or may not be formally recognised as a CCP, not being able to fulfil its role, whereas we are covered with stringent Financial Services Authority capital requirements so the chances of us not being able to function are very remote.”
Ummm, 1) why? And 2) isn’t that called cross subsidy? And 3) why? And it sounds like Tim likes to dig himself a nice big hole…4)so the chances of not being able to function are only very remote. That’s reassuring. I’ll stick with my CPSS-IOSCO standards thanks. Some things are better left unread.
Policy
SEC official worried about "naked access"
NEW YORK (Reuters) - A top U.S. securities regulator said on Thursday that she was concerned about naked access, where brokers give high-frequency traders unfiltered access to public markets.
http://news.yahoo.com/s/nm/20091105/bs_nm/us_sec_walter
*** Nakedness is next to Godliness.
Winners and Losers in Financial Crisis Emerging in Europe
By CHRIS V. NICHOLSON
PARIS The earnings of two European banks, BNP Paribas and Commerzbank, painted a stark contrast between the winners and losers of the financial crisis a little over a year after Lehman Brothers fell. The largest French bank, BNP Paribas, said Thursday that profit was up nearly 45 percent in the third quarter, rising on investment banking and the contribution of Fortis Bank, acquired from the Belgian government this year.
http://www.nytimes.com/2009/11/06/business/global/06eurobank.html
04/11/2009 11:07:00
BLOOMBERG SMASHES PROPRIETARY IDENTIFIER MARKET
Market data vendor Bloomberg is looking to create an open standard for financial instrument identifiers by making its own proprietary symbology available for free to developers and market practitioners.
More on this story: http://www.finextra.com/fullstory.asp?id=20696
CEBS: Retention requirement not cure-all for securitisation
The Committee of European Banking Supervisors released a 60-page report that says the 5% retention requirement passed by the European Parliament is "not a panacea for previous issues that arose in securitisation". The CEBS did not recommend that the retention requirement be increased. The CEBS also recommended adding safeguards against market abuses. The suggestions are in line with an industry push for more disclosures in markets. For example, the Association for Financial Markets in Europe / European Securitisation Forum early this year issued best-practice guidelines for residential mortgage-backed securities disclosures. Risk.net (03 Nov.)
European groups move to boost securitisation deals
The European Financial Services Round Table is teaming up with AFME / ESF to revitalise the market for securities backed by pools of loans and other assets through the creation of a quality label. "We need to restore the economics of securitisation in Europe," said Rick Watson, managing director of AFME / ESF. "The challenge is how you bring confidence back in [asset-backed securities] and make sure it's clear in the mind of the buyer that the product they are buying matches their investment expectation." The Wall Street Journal (12 Nov.)
Securitization market faces fresh challenges
Changes to accounting rules will require banks and other issuers of asset-backed securities to retain a large stake in the deals. The rules are expected to make it more expensive to conduct securitization deals. Also, the rules force issuers to show assets on their balance sheet despite having sold the credit risk to investors. "Since the seller of the transaction has sold the risk, they shouldn't be required to hold additional capital to protect against losses they didn't incur," said Tom Deutsch, deputy executive director of the American Securitization Forum, an affiliate of SIFMA. The Wall Street Journal (11/11)
Regional
[ASX] Market Activity Report for October 2009
http://www.asx.com.au/about/pdf/ma_051109_monthly_activity_report2.pdf
SGX reschedules implementation of new settlement processes and penalty framework
5 November 2009 Singapore Exchange Limited (SGX) will be rescheduling the implementation of the new settlement processes and refined penalty framework from 6 November 2009 to a later date. The subsequent implementation of buy-in for failed securities due on T+3, which was scheduled for 30 November 2009, is also under review. The revised dates will be announced in due course after consultation with market participants.
http://bit.ly/2tO1kU
Settlement glitch delays SGX's post-trade revamp
Study Finds Overseas Listing Of Futures Contracts Benefits Home Exchanges
A study by the Capital Markets Cooperative Research Centre has found that trading in overseas-listed futures contracts benefits both the index futures as well as its component stocks in the home exchanges.
http://www.exchange-handbook.co.uk/index.cfm?section=news&action=detail&id=86613
*** liquidity begets liquidity
12/11/2009 11:33:00
DOW JONES TO SELL STOXX STAKE TO DEUTSCHE BÖRSE AND SIX GROUP
Dow Jones has agreed to sell its 33.3% stake in Swiss index provider Stoxx to Deutsche Börse and Six Group for EUR206.1 million in cash.
More on this story: http://www.finextra.com/fullstory.asp?id=20731
THE TRADE NEWS: Chan Succeeds Phillips at BlocSec
By Staff
11/13/09
HSBC sells Canary Wharf headquarters
HSBC has agreed the sale of its London headquarters at 8 Canada Square, Canary Wharf, to the National Pension Service of Korea (NPS) for £772.5 million in cash.
The sale-and-leaseback agreement will provide the group with a gain of approximately £350 million.
http://www.bankingtimes.co.uk/15112009-hsbc-sells-canary-wharf-headquarters/
The Berlin Wall:
1) 1918: It was 71 years before the fall of the Berlin Wall when November 9 first attained significance in German history. It was on that day in 1918 that the monarchy came to an end in Berlin.
2) 1923: Hitler made plans to pre-empt the presumed revolution, and on the evening of Nov. 8, had the beer hall surrounded with hundreds of armed SA men. Hitler stormed into the packed beer hall, fired his revolver into the roof and proclaimed a putsch against the Weimar Republic, ultimately planning to march on Berlin and overthrow the government.
3) 1938: The event has gone down in history as "The Night of the Broken Glass," or Kristallnacht in German -- a name that is shorthand for one of Germany's darkest, most horrifying nights. On Nov. 9, 1938, Nazi henchmen perpetrated a far-reaching pogrom, an orgy of violence directed against the country's Jewish population that resulted in tens of thousands of arrests, over 2,000 deaths, dozens of synagogues destroyed and hundreds of Jewish shops demolished, the shattered shop windows giving the event its name.
4) 1989: Unforgettable, the Berlin Wall falls.
What an important date for German history. Nov 9 runs deep. Amazing.
http://www.spiegel.de/international/germany/0,1518,660206-4,00.html
Analysis: 20 years after fall of Berlin Wall, economic freedom leads way
Destruction of the Iron Curtain on Nov. 9, 1989, is a reminder of the importance of economic liberalism, right when the financial crisis has made people doubt it, according to The Economist. The move to take 500 million people out of poverty and into the middle class will be much more remembered in the future than the recent financial crisis. Political freedom has advanced at a varied pace in the past two decades, while economic freedom has flourished., The Economist (11/5)
TRADERS MAGAZINE: Commentary -- What's in a Name?
What Egyptian pigs and dark pools have in common.
By Dan Mathisson
11/10/09
The poor pigs. Last April 29, the government of Egypt ordered the immediate slaughter of every pig in the nation. The order was carried out with a ruthless efficiency, as an estimated 300,000 porcine souls were led to an untimely meeting with their maker. The reason for such a brutal campaign? An unfortunate name.
A newly discovered virus, dubbed "swine flu," was spreading rapidly in Mexico at the time. And just as the Ayds appetite suppressant demonstrated some 20 years ago, an association with a deadly disease doesn't enhance your brand. And so, after what must've been quite a messy few days, the pigs of Egypt were soon but a memory.
Is there a lesson in this story for Wall Street's latest product to come under public fire, the unfortunately named "dark pools"? Barron's said in a July article, "Dark pools of liquidity sound as though they belong in a Gothic novel, not on Wall Street." The Economist said the name "sounds ominous." A November article about dark pools in The New York Observer was accompanied by a picture of a corpse-like hand protruding from a dark lake, either desperately beckoning for help, or possibly threatening to pull you in. The underlying message was clear: Something spooky is going on here.
The truth is much less romantic: They are not spooky at all. Dark pools are computerized trading systems that match buyers and sellers without publicly displaying bids and offers. They are only dark before the trade. After the trade, just like exchanges, they must report to the tape immediately for the whole world to see. The first one was created in 1987, although the name "dark pool" only became popular within the past 10 years.
Now swept up in the same regulatory vortex that is whirling around short selling and high-frequency trading, these obscure trading systems have suddenly begun drawing rants from bloggers, tirades from editorial writers, proposals from regulators and even inquiries from U.S. senators. It all begs the question: Is it time to rename the damn things?
Shortly after Egypt's mass pig-ocide, the World Health Organization announced its own giant renaming effort to avoid a further pandemic of pig panic: From here on out, the flu formerly known as swine would be called by a name only a bureaucrat could love: "H1N1." Although governments around the world dutifully picked up the nom-de-PR, everyone else continues to call it "swine flu." With a vaccine now being aggressively distributed, the disease will likely be eradicated before the name "swine flu" is. The H1N1 experience demonstrates why renaming "dark pools" is unlikely to work. Once a name sticks with the public, unsticking it is close to impossible. Since the name can't easily be changed, are dark pools as doomed as the pigs? Not if we learn anything from our Egyptian friends. A few weeks ago, The New York Times ran an article titled "Belatedly, Egypt Spots Flaws in Wiping Out Pigs." As the story described, "The pigs used to eat tons of organic waste. Now the pigs are gone and the rotting food piles up on the streets ... What started out as an impulsive response to the swine flu threat has turned into a social, environmental and political problem for the Arab world's most populous nation." Though pigs had been considered pariahs, it turned out they were a valuable part of the ecosystem, providing a service that few understood or appreciated.
If dark pools were suddenly forced by a confused public to lose their darkness, what would the consequences be? Well, it would be much the same as in Cairo. Instead of food rotting in our streets, we'd have illiquid positions rotting in our portfolios. Dark pools play an important and underappreciated role in the trading ecosystem: They allow buyers and sellers to find each other without signaling to the entire world that a new player has entered the marketplace. Big long-term investors, like mutual funds and pension funds, rely on dark pools to trade some of their most sensitive orders.
Dark pools represent about 8 percent of U.S. volume, admittedly just a small niche, but enough to draw the ire of the major for-profit exchanges. The exchanges have been aggressively fighting the pools in Washington by creatively pushing the need for "transparency." In an article on Nov. 6, The Wall Street Journal quoted the CEO of a major exchange referring to dark pools on his quarterly earnings call: "We're comfortable that the regulatory discussions going on [in Washington] will be a significant net positive [for us]."
"Transparency" in dark pools is a "significant net positive" for exchanges because it strikes at the very heart of what the pools do. The whole point of dark pools is to hide sensitive order information, so that short-term traders can't sniff out big orders and trade ahead of them. It's hard to argue against increasing transparency on a delayed basis, say by disclosing dark pool volumes at the day's end, but doing it in real-time? Ask yourself who would be more likely to benefit from millions of new real-time trading data points: short-term quantitative traders, or long-term fundamental investors?
While relatively clean already, the rules under Regulation ATS do allow dark pool operators a little room to roll around in the mud by allowing dark pools to create private networks of traders. Dark pools sometimes shut off access to other broker-dealers for competitive reasons. Mandating fair access to all dark pools could clean out this last pigpen of exclusiveness.
But fair access doesn't have to mean open access. Restaurants can refuse to serve patrons based on their behaviors, for example by requiring shoes, but they can't refuse patrons for arbitrary reasons, like the color of their hair. Similarly, there is nothing wrong with dark pools excluding based on behaviors-for example, requiring that clients maintain a certain average order size, or a low frequency of order placement, or mandated average holding periods. But excluding clients for arbitrary reasons is unfair. By determining access to their pools based on objective behavioral criteria, the pools can do something much better than cleaning up their name--they can clean up their only significant flaw, leaving no remaining logical arguments for opponents.
Would the lack of logical arguments from opponents save the dark pools? Before the pig-killing decree, the Egyptian health authorities did not do much homework. A United Nations health organization called the slaughter "scientifically unjustified," which is an understatement. Had the authorities done the slightest bit of reading, they would have learned that pigs have nothing to do with the virus. But most likely, the authorities deliberately failed to check, because pigs were unloved by most Egyptians for religious reasons, and the swine flu panic served as a convenient excuse to sweep them away.
So this is where the analogy breaks down, and we can breathe a sigh of relief. Because in America, we don't have to worry about public prejudice against traders, right? In America, traders have always been allowed to freely trade dark or light, long or short. As the old Wall Street expression goes, "Bulls and bears make money. Pigs get slaughtered." Oh, wait--maybe the dark pools are screwed after all.
THE BANKER: Sowing the Seeds of Competitive Trading in Asia
By Michelle Price
November 2009
Asia has long-been regarded as a competition-averse, exchange-dominated marketplace. But this summer offered the first hints that small structural changes are afoot in the region, with the creation of a competition-friendly supervisory structure in Australia and, perhaps more significantly, the long-awaited regional entry of Chi-X, the hyper-fast and super-successful alternative trading venue.
The ambitious up-start is launching a full-scale attack on the region, with its first stop - it was revealed in August - to be the Singapore market. But there is an interesting twist to the latest installment of the Chi-X story: while in other markets the alternative trading platform has presented itself as a challenger to the incumbent exchange, in the Singapore market Chi-X has announced that it will be forming a joint venture (JV) with the Singapore Exchange (SGX) to launch the first exchange-led non-displayed or so-called 'dark' pool in the Asia-Pacific region.
Even more eye-catching, however, is the JV's intention to offer block crossing not only for equities listed on the SGX, but for those listed on the Australia, Hong Kong and Japan exchanges - albeit on an offshore basis - making it a pan-Asian proposition. This was a key draw for Chi-X, says John Lowrey, CEO of Chi-X Global. "SGX was the perfect partner because its ambitions are aligned with our ambitions in that it is interested in the development of the pan-Asian market," he says.
The deal, in which Chi-X's subsidiary technology company will provide the technology platform for the crossing network, marks a departure from the historical Chi-X model under which the company entered Canada and Europe not only as an alternative contender, but, at least initially, as a fully lit platform. "We're in the business of creating market centres that match the need for a variety of liquidity aggregation. Lit markets are one of those key places, but dark pools are just as valuable," says Mr Lowrey. In Singapore, he says, entering as a dark venue seemed the right strategy because it filled a need in the market.
That Chi-X has had to take a different approach in Asia reflects the challenges in the young Asian marketplace, where exchanges dominate not merely from a regulatory and structural perspective, but from a philosophical perspective too: for many Asian exchanges - which are often as much political as financial institutions - competition of the sort represented by the emboldened Chi-X is very unwelcome. But this is not a function of ignorance, says Lee Porter, managing director of Liquidnet Asia, the successful US-headquartered buy-side crossing network. "Exchanges in Asia are very cognisant of what happened in other markets by allowing other players in: they saw what happened to the market share."
According to Mr Lowrey, SGX also made the perfect partner because it welcomes competition in its own market. But by going dark and providing the requisite technology and technical expertise, Chi-X is able to offer the SGX a tantalising opportunity to expand its local and regional presence while securing for itself a long-sought-after entry into the region. In the view of one trader, the association with SGX, a well-established, if smaller south-east Asian exchange, is a "smart move" for Chi-X as it confers a strong degree of legitimacy on the brand which has yet to establish itself in the region.
In this respect, the deal is less about competition than it is about innovation. As such, it offers a key lesson for alternative venues sitting on the Asia sidelines: if competitors want to enter certain Asian markets, they will have to be creative. Attempting to attack the exchanges head on may prove - in some instances - the least strategic means of entry.
Post-trade troubles
It may be premature, however, to conclude much else. The JV is still in the process of applying for a licence for the Singapore market, although a spokesperson for Chi-X said the company anticipates no difficulties in this process and expects the JV to go live in 2010 as outlined in August.
The Banker understands that more details on the technical specifics of the deal are to follow in mid-November. These will be hotly anticipated by many market-watchers, who believe that there will be several wrinkles to iron out, not least the issue of clearing and settling across what the JV hopes will become a pan-Asian platform. According to the August announcement, SGX-listed stocks will be cleared and settled through SGX's securities clearing house and depository. But the JV will have to appoint a pan-Asian central counterparty (CCP) to clear any other trades. Jean-Pierre Baron, managing director for Asia-Pacific at Fidessa, a trading and connectivity software provider, says the realisation of a pan-Asian trading venue will be challenged by these back-end complications. "They will have to go downstream to the clearing level and that is very complex if you take a pan-Asian view. Equities are very localised markets and there are a lot of country-specific issues."
But the SGX-Chi-X JV is not the only trading venture proposing to span several Asian markets. In February, the Association of South-east Nations unveiled its plans to create a pan-Asian trading linkage which would allow, for example, a broker sitting in Thailand to trade stocks listed in the Philippines. Francis Lim, CEO of the Philippine Stock Exchange, a strong advocate of pan-Asian initiatives whose own exchange is part of the link-up, says it will eventually be progressed to the clearing and settlement level - but the details remain unclear.
What is clear, however, is that for any such pan-Asian utility to be a success, the post-trade process will have to be as seamless as possible, with each participating country's CCP able to clear cross-border on multiple venues. More importantly, it will have to be cost efficient. "If they can figure out a way to make the clearing work, then it has a really strong chance of being a success," says Glenn Lesko, CEO of Instinet Asia, an agency broker of which Chi-X is also a subsidiary. As such, it is clear that the SGX-Chi-X platform, if a success, will be important for the whole of the Asia region, offering a precedent for other ventures to follow. This is not lost on Mr Lowrey. "This announcement is not just around trading, but around the creation of infrastructure that is going to help the development of the Asian markets in general," he says.
Supervisory shake-up
Elsewhere in Asia, other developments are afoot, the most notable of which has taken place in Australia where a number of European upstarts have sought to shake up the status quo and compete with the Australian Stock Exchange (ASX). Chi-X, Liquidnet and AXE, a JV between the New Zealand Stock Exchange and five other banks, filed applications for trading licences more than two years ago to, what looked like until recently, no avail. But then in August, news came that a long-awaited shake-up of the unusual prevailing Australian supervisory structure - under which ASX would in theory have supervised its own competitors - would likely usher in a much-anticipated era of competition.
The ASX, which will be stripped of its real-time market trading supervisory powers, has accepted the development with little protest. ASX declined to comment on the implications of the development for the Australian marketplace. However, in the exchange's annual results briefing for 2009, chairman David Gonski made his feelings on the subject perfectly clear when he suggested that competition would not necessarily bring the cost savings to the comparatively small Australian marketplace that onlookers have been led to expect.
He also told the assembled shareholders that it is not a foregone conclusion that the Australian government will issue new licences as a result of the regulatory overhaul. A total failure to grant new licences, however, would seem a perverse outcome. Mr Porter believes this is unlikely. "The government would not have made the structural change if it had not intended to grant licences." But this is not to say, however, that the road to competition will be entirely smooth, he adds. "As for when it happens, or what other hurdles have to be jumped over, it will be interesting to see, but it is not going to be easy," he says.
Meanwhile, Chi-X has not given up its ambitions in Australia. Although it has not committed to a formal timeline, the company is likely to enter the Australian market in Q4 next year to coincide with the completion of the supervisory transition, says Mr Lowrey. "Both the regulator and the reserve bank are getting fully organised to allow for competition." And, although many market watchers are under the impression that AXE has shut up shop, Heather Kirkham, a spokesperson for AXE, said in an e-mail: "The recent announcement by the Australian Securities and Investments Commission is very formative, and the New Zealand Stock Exchange and the other AXE shareholders are watching developments with interest" - as are many in the US and Europe who believe the summer's events signal the first seeds of true competition in Asia.
Scott Riley
Business Development
[Please note my new email address: scott.riley@au.fortisclearing.com]
Fortis Global Clearing
8th Floor 50 Bridge Street Sydney Australia 2000
(Off)+61 (0)2 8916 9634 (Mob): +61 (0)418 117 627
scott.riley@au.fortisclearing.com
Landscape still shifting in Europe. Competition continues to take a foothold. The observation of the liquidity shift(s) during the latest outages at the primary markets confirm this. Yet we also continue to see increases in the valuations of the primaries. Personally, I think water will always find its own level and a finger in the European dyke of primary markets ain’t gunna help much longer.
Recommend the Traders Magazine article on “What’s in a name” and Egyptians killing pigs (for those that like the dark).
I’m less keen on “rules” to prevent clearing house failures. A the moment we all have very clear procedures and guidelines. I think the important context is models can be different but the level playing field should be based on the assumptions used. How we calibrate risk defences can vary, but all should be providing the same integrity of defence.
LCH.Clearnet ownership changes I believe are just the start of a new journey. The user community, though now greater concentrated, still has a lot of “herding” of its own members interests to do.
Figures out on EuroCCP (10myn loss) and CME seeks to enter the fray.
Very perplexed at the Euroclear UK positioning. If they were talking about their efforts to add transparency to pricing, I’d be applauding them (e.g. stamp duty, netting fees, etc.), instead they focus on why they should not be expected to provide competitive pricing.
I’m a believer in securitisation. No doubt there will be some good deals out there now to reassure investors to return to those turbulent waters. I don’t think 5% is enough to eat of what you kill, but I also think holding capital for risks you’ve sold is not right. I don’t think the right balance has yet been struck.
Good Asian round up in The Banker.
An important week for dates.
Remembrance day on 11th Nov. Happy to see the main street of Sydney fall silent. Very visible profile “in the city” yet it becomes ever easier to “forget” those that sacrificed so much for what we have today.
Also staggered by the importance of 9th Nov. What an important date for Germany, not least because of the wall.
And sport, sorry, a Grand Slam tour in progress and I forgot to mention it.
Yes, a win against England. I was not optimistic at 9-Nil and Johnny kicking well. Anyway, we dragged ourselves through to the win and I thought we still look poor at closing (was I alone in thinking England could have been better defensively?). Anyway, we need well crafted tries just as much as we need soft ones.
This week Ireland at Croke Park. I’ll go for the Aussies to win. In fact, I’m calling an Aussie grand slam…but hey, I’m parochial.
*** overcome by events, this came out evens. A fair result I suspect. I’ve not seen the game yet. I wonder, does this mean they can still claim a Grand Slam? (is the definition “undefeated” or “all conquering”?)
It is the mark of an educated mind to be able to entertain a thought without accepting it."
--Aristotle,
Greek philosopher
Have a great week all,
S
http://clearingandsettlement.blogspot.com/
(Cartoon is KAL from economist)
Platforms
LSE to launch dark orders
The London Stock Exchange is attempting to reverse the tide that has seen its dominance of UK equity trading undermined this year, by introducing next month a new dark order type and changing its fee structure.
LSE sets new date for hidden orders, amends fees
http://www.thetradenews.com/asset-classes/equities/3844
SIX targets high-volume members with fee cuts
Chi-X Europe to cut dark fees until year-end
ConvergEx snaps up Millennium dark pool
LSE's grip on price formation weakened by latest outage
Trading on pan-European multilateral trading facility Chi-X Europe increased during the London Stock Exchange's partial outage on Monday afternoon, indicating that European traders' dependence on primary market prices is waning
http://www.thetradenews.com/asset-classes/equities/3881
London Bourse Delays Baikal Launch on Turquoise Talks, WSJ Says
By Patrick Rial and Jackie Cohen
Nov. 9 (Bloomberg) -- London Stock Exchange Group Plc has postponed the launch of its dark-pool trading system Baikal as it negotiates a possible purchase of rival Turquoise, the Wall Street Journal reported.
http://www.bloomberg.com/apps/news?pid=20601084&sid=aNnKuGiPRjk4
Deutsche Börse becomes the last of the major European exchanges to launch dedicated pan-European trading capabilities today with the launch of Xetra International Market.
Read the interview
(more worthwhile – contains XIM pricing)
[0.06bps = 6 euro cents per 10K]
09/11/2009 16:16:00
CONVERGEX TO ACQUIRE NYFIX US TRANSACTION SERVICES BUSINESS
Bank of New York-owned ConvergEx has agreed to acquire the US electronic agency execution business of Nyfix Transaction Services, comprising the Millennium Alternative Trading System (ATS) and its direct market access (DMA) and algorithmic products.
More on this story: http://www.finextra.com/fullstory.asp?id=20715
Listed Exchanges Grow 27 Per Cent Year-On-Year
The share values of the world's listed exchanges experienced year-on-year growth of 27.5 per cent, despite losing four per cent in value during October 2009, according to the Mondo Visione Exchanges Index.
http://www.exchange-handbook.co.uk/index.cfm?section=news&action=detail&id=86748
Clearing
ICE seeks rules to prevent clearing house failures
By Jane Baird
LONDON, Nov 12 (Reuters) - IntercontinentalExchange Inc. called on regulators to set standards for the margins that central clearing houses must set aside to guard against collapse in the more than $600 trillion derivatives market.
http://www.forbes.com/feeds/afx/2009/11/12/afx7116334.html
**** 'The models don't have to be the same, but they should be operated on the same assumption set. If you run a model based on the collapse of only one dealer and liquidation within two days, you get a very different result in orders of magnitude in the margins,' Sprecher said.
'Regulators need to broadly agree on some of these assumptions and require clearing houses to demonstrate they can meet these assumptions,' he added.
LCH.Clearnet streamlines ownership structure
LCH.Clearnet on Friday said it had finalised a shareholder streamlining scheme, bringing to an end a two-year saga over the ownership of one of the world's most prized derivatives post-trade assets.
http://www.ft.com/cms/s/9279e7fa-cac5-11de-97e0-00144feabdc0,s01=1.html
*** The total number of LCH.Clearnet shareholders is now 105, down from an earlier 120.
LCH.Clearnet successfully realigns shareholder base
LCH.Clearnet, the leading independent clearing house group, has successfully completed the voluntary share redemption announced on 29 September 2009. Large users, each of which contributes more than 1% towards Group clearing fees and which together represent, in aggregate, over 80% of Group clearing revenues, have increased their total shareholding to 63% from 37%.
http://www.lchclearnet.com/media_centre/press_releases/2009-11-06.asp
EuroCCP slips into a €10m loss
The challenge of setting up a European clearing house has been highlighted by EuroCCP, the firm owned by US clearing giant the Depository Trust & Clearing Corporation, which said last week that it lost almost €10m ($14.9m) in 2008.
CME aims for European clearing in next quarter
CME Group, the Chicago-based derivatives exchange operator, said it expects to launch European clearing services in the first quarter of next year after hiring the former head of London-based LCH.Clearnet in July.
*** Andrew Lamb targets Q1 2010.
SGX announces revised date to implement new settlement processes and penalty framework
http://www.sgx.com/wps/wcm/connect/cp_en/site/press_room/news_releases/sgx+announces+revised+date+to+implement+new+settlement+processes+and+penalty+framework?presentationtemplate=design_lib/PT_Printer_Friendly
Analysis: Clearinghouses might not be solution for derivatives
Regulators worldwide have been pushing to have most over-the-counter derivatives traded through clearinghouses as a move to control risk. But clearinghouses might not provide a valid solution, said Darrell Duffie, a professor of finance at Stanford University. That will work only if there are few clearinghouses, Duffie said. "Many clearinghouses could be very bad," he said. "You would have increased counterparty exposure and excessive use of collateral, with multiple points of failure. This could add systemic risk." Reuters (11/11)
Tim May, chairman of Euroclear UK and Ireland, explains why Europe's established post-trade infrastructure providers should not be compared simplistically with the new generation post-MiFID entrants.
Read the interview (on reflection, I wouldn’t bother)
1. the range of clearing and settlement services offered by incumbent central counterparties (CCPs) and central securities depositories (CSDs) help to justify the higher overall pricing
2.The introduction of MiFID has encouraged us to change our services and pricing models, but we are not going to reduce fees to the same levels as the new entrants because we offer a more comprehensive service.”
3. Incumbent post-trade providers, like ourselves and LCH.Clearnet, aren’t necessarily trying to match the pricing of new pan-European entrants,
4. "There is a risk of a new entrant, which may or may not be formally recognised as a CCP, not being able to fulfil its role, whereas we are covered with stringent Financial Services Authority capital requirements so the chances of us not being able to function are very remote.”
Ummm, 1) why? And 2) isn’t that called cross subsidy? And 3) why? And it sounds like Tim likes to dig himself a nice big hole…4)so the chances of not being able to function are only very remote. That’s reassuring. I’ll stick with my CPSS-IOSCO standards thanks. Some things are better left unread.
Policy
SEC official worried about "naked access"
NEW YORK (Reuters) - A top U.S. securities regulator said on Thursday that she was concerned about naked access, where brokers give high-frequency traders unfiltered access to public markets.
http://news.yahoo.com/s/nm/20091105/bs_nm/us_sec_walter
*** Nakedness is next to Godliness.
Winners and Losers in Financial Crisis Emerging in Europe
By CHRIS V. NICHOLSON
PARIS The earnings of two European banks, BNP Paribas and Commerzbank, painted a stark contrast between the winners and losers of the financial crisis a little over a year after Lehman Brothers fell. The largest French bank, BNP Paribas, said Thursday that profit was up nearly 45 percent in the third quarter, rising on investment banking and the contribution of Fortis Bank, acquired from the Belgian government this year.
http://www.nytimes.com/2009/11/06/business/global/06eurobank.html
04/11/2009 11:07:00
BLOOMBERG SMASHES PROPRIETARY IDENTIFIER MARKET
Market data vendor Bloomberg is looking to create an open standard for financial instrument identifiers by making its own proprietary symbology available for free to developers and market practitioners.
More on this story: http://www.finextra.com/fullstory.asp?id=20696
CEBS: Retention requirement not cure-all for securitisation
The Committee of European Banking Supervisors released a 60-page report that says the 5% retention requirement passed by the European Parliament is "not a panacea for previous issues that arose in securitisation". The CEBS did not recommend that the retention requirement be increased. The CEBS also recommended adding safeguards against market abuses. The suggestions are in line with an industry push for more disclosures in markets. For example, the Association for Financial Markets in Europe / European Securitisation Forum early this year issued best-practice guidelines for residential mortgage-backed securities disclosures. Risk.net (03 Nov.)
European groups move to boost securitisation deals
The European Financial Services Round Table is teaming up with AFME / ESF to revitalise the market for securities backed by pools of loans and other assets through the creation of a quality label. "We need to restore the economics of securitisation in Europe," said Rick Watson, managing director of AFME / ESF. "The challenge is how you bring confidence back in [asset-backed securities] and make sure it's clear in the mind of the buyer that the product they are buying matches their investment expectation." The Wall Street Journal (12 Nov.)
Securitization market faces fresh challenges
Changes to accounting rules will require banks and other issuers of asset-backed securities to retain a large stake in the deals. The rules are expected to make it more expensive to conduct securitization deals. Also, the rules force issuers to show assets on their balance sheet despite having sold the credit risk to investors. "Since the seller of the transaction has sold the risk, they shouldn't be required to hold additional capital to protect against losses they didn't incur," said Tom Deutsch, deputy executive director of the American Securitization Forum, an affiliate of SIFMA. The Wall Street Journal (11/11)
Regional
[ASX] Market Activity Report for October 2009
http://www.asx.com.au/about/pdf/ma_051109_monthly_activity_report2.pdf
SGX reschedules implementation of new settlement processes and penalty framework
5 November 2009 Singapore Exchange Limited (SGX) will be rescheduling the implementation of the new settlement processes and refined penalty framework from 6 November 2009 to a later date. The subsequent implementation of buy-in for failed securities due on T+3, which was scheduled for 30 November 2009, is also under review. The revised dates will be announced in due course after consultation with market participants.
http://bit.ly/2tO1kU
Settlement glitch delays SGX's post-trade revamp
Study Finds Overseas Listing Of Futures Contracts Benefits Home Exchanges
A study by the Capital Markets Cooperative Research Centre has found that trading in overseas-listed futures contracts benefits both the index futures as well as its component stocks in the home exchanges.
http://www.exchange-handbook.co.uk/index.cfm?section=news&action=detail&id=86613
*** liquidity begets liquidity
12/11/2009 11:33:00
DOW JONES TO SELL STOXX STAKE TO DEUTSCHE BÖRSE AND SIX GROUP
Dow Jones has agreed to sell its 33.3% stake in Swiss index provider Stoxx to Deutsche Börse and Six Group for EUR206.1 million in cash.
More on this story: http://www.finextra.com/fullstory.asp?id=20731
THE TRADE NEWS: Chan Succeeds Phillips at BlocSec
By Staff
11/13/09
HSBC sells Canary Wharf headquarters
HSBC has agreed the sale of its London headquarters at 8 Canada Square, Canary Wharf, to the National Pension Service of Korea (NPS) for £772.5 million in cash.
The sale-and-leaseback agreement will provide the group with a gain of approximately £350 million.
http://www.bankingtimes.co.uk/15112009-hsbc-sells-canary-wharf-headquarters/
The Berlin Wall:
1) 1918: It was 71 years before the fall of the Berlin Wall when November 9 first attained significance in German history. It was on that day in 1918 that the monarchy came to an end in Berlin.
2) 1923: Hitler made plans to pre-empt the presumed revolution, and on the evening of Nov. 8, had the beer hall surrounded with hundreds of armed SA men. Hitler stormed into the packed beer hall, fired his revolver into the roof and proclaimed a putsch against the Weimar Republic, ultimately planning to march on Berlin and overthrow the government.
3) 1938: The event has gone down in history as "The Night of the Broken Glass," or Kristallnacht in German -- a name that is shorthand for one of Germany's darkest, most horrifying nights. On Nov. 9, 1938, Nazi henchmen perpetrated a far-reaching pogrom, an orgy of violence directed against the country's Jewish population that resulted in tens of thousands of arrests, over 2,000 deaths, dozens of synagogues destroyed and hundreds of Jewish shops demolished, the shattered shop windows giving the event its name.
4) 1989: Unforgettable, the Berlin Wall falls.
What an important date for German history. Nov 9 runs deep. Amazing.
http://www.spiegel.de/international/germany/0,1518,660206-4,00.html
Analysis: 20 years after fall of Berlin Wall, economic freedom leads way
Destruction of the Iron Curtain on Nov. 9, 1989, is a reminder of the importance of economic liberalism, right when the financial crisis has made people doubt it, according to The Economist. The move to take 500 million people out of poverty and into the middle class will be much more remembered in the future than the recent financial crisis. Political freedom has advanced at a varied pace in the past two decades, while economic freedom has flourished., The Economist (11/5)
TRADERS MAGAZINE: Commentary -- What's in a Name?
What Egyptian pigs and dark pools have in common.
By Dan Mathisson
11/10/09
The poor pigs. Last April 29, the government of Egypt ordered the immediate slaughter of every pig in the nation. The order was carried out with a ruthless efficiency, as an estimated 300,000 porcine souls were led to an untimely meeting with their maker. The reason for such a brutal campaign? An unfortunate name.
A newly discovered virus, dubbed "swine flu," was spreading rapidly in Mexico at the time. And just as the Ayds appetite suppressant demonstrated some 20 years ago, an association with a deadly disease doesn't enhance your brand. And so, after what must've been quite a messy few days, the pigs of Egypt were soon but a memory.
Is there a lesson in this story for Wall Street's latest product to come under public fire, the unfortunately named "dark pools"? Barron's said in a July article, "Dark pools of liquidity sound as though they belong in a Gothic novel, not on Wall Street." The Economist said the name "sounds ominous." A November article about dark pools in The New York Observer was accompanied by a picture of a corpse-like hand protruding from a dark lake, either desperately beckoning for help, or possibly threatening to pull you in. The underlying message was clear: Something spooky is going on here.
The truth is much less romantic: They are not spooky at all. Dark pools are computerized trading systems that match buyers and sellers without publicly displaying bids and offers. They are only dark before the trade. After the trade, just like exchanges, they must report to the tape immediately for the whole world to see. The first one was created in 1987, although the name "dark pool" only became popular within the past 10 years.
Now swept up in the same regulatory vortex that is whirling around short selling and high-frequency trading, these obscure trading systems have suddenly begun drawing rants from bloggers, tirades from editorial writers, proposals from regulators and even inquiries from U.S. senators. It all begs the question: Is it time to rename the damn things?
Shortly after Egypt's mass pig-ocide, the World Health Organization announced its own giant renaming effort to avoid a further pandemic of pig panic: From here on out, the flu formerly known as swine would be called by a name only a bureaucrat could love: "H1N1." Although governments around the world dutifully picked up the nom-de-PR, everyone else continues to call it "swine flu." With a vaccine now being aggressively distributed, the disease will likely be eradicated before the name "swine flu" is. The H1N1 experience demonstrates why renaming "dark pools" is unlikely to work. Once a name sticks with the public, unsticking it is close to impossible. Since the name can't easily be changed, are dark pools as doomed as the pigs? Not if we learn anything from our Egyptian friends. A few weeks ago, The New York Times ran an article titled "Belatedly, Egypt Spots Flaws in Wiping Out Pigs." As the story described, "The pigs used to eat tons of organic waste. Now the pigs are gone and the rotting food piles up on the streets ... What started out as an impulsive response to the swine flu threat has turned into a social, environmental and political problem for the Arab world's most populous nation." Though pigs had been considered pariahs, it turned out they were a valuable part of the ecosystem, providing a service that few understood or appreciated.
If dark pools were suddenly forced by a confused public to lose their darkness, what would the consequences be? Well, it would be much the same as in Cairo. Instead of food rotting in our streets, we'd have illiquid positions rotting in our portfolios. Dark pools play an important and underappreciated role in the trading ecosystem: They allow buyers and sellers to find each other without signaling to the entire world that a new player has entered the marketplace. Big long-term investors, like mutual funds and pension funds, rely on dark pools to trade some of their most sensitive orders.
Dark pools represent about 8 percent of U.S. volume, admittedly just a small niche, but enough to draw the ire of the major for-profit exchanges. The exchanges have been aggressively fighting the pools in Washington by creatively pushing the need for "transparency." In an article on Nov. 6, The Wall Street Journal quoted the CEO of a major exchange referring to dark pools on his quarterly earnings call: "We're comfortable that the regulatory discussions going on [in Washington] will be a significant net positive [for us]."
"Transparency" in dark pools is a "significant net positive" for exchanges because it strikes at the very heart of what the pools do. The whole point of dark pools is to hide sensitive order information, so that short-term traders can't sniff out big orders and trade ahead of them. It's hard to argue against increasing transparency on a delayed basis, say by disclosing dark pool volumes at the day's end, but doing it in real-time? Ask yourself who would be more likely to benefit from millions of new real-time trading data points: short-term quantitative traders, or long-term fundamental investors?
While relatively clean already, the rules under Regulation ATS do allow dark pool operators a little room to roll around in the mud by allowing dark pools to create private networks of traders. Dark pools sometimes shut off access to other broker-dealers for competitive reasons. Mandating fair access to all dark pools could clean out this last pigpen of exclusiveness.
But fair access doesn't have to mean open access. Restaurants can refuse to serve patrons based on their behaviors, for example by requiring shoes, but they can't refuse patrons for arbitrary reasons, like the color of their hair. Similarly, there is nothing wrong with dark pools excluding based on behaviors-for example, requiring that clients maintain a certain average order size, or a low frequency of order placement, or mandated average holding periods. But excluding clients for arbitrary reasons is unfair. By determining access to their pools based on objective behavioral criteria, the pools can do something much better than cleaning up their name--they can clean up their only significant flaw, leaving no remaining logical arguments for opponents.
Would the lack of logical arguments from opponents save the dark pools? Before the pig-killing decree, the Egyptian health authorities did not do much homework. A United Nations health organization called the slaughter "scientifically unjustified," which is an understatement. Had the authorities done the slightest bit of reading, they would have learned that pigs have nothing to do with the virus. But most likely, the authorities deliberately failed to check, because pigs were unloved by most Egyptians for religious reasons, and the swine flu panic served as a convenient excuse to sweep them away.
So this is where the analogy breaks down, and we can breathe a sigh of relief. Because in America, we don't have to worry about public prejudice against traders, right? In America, traders have always been allowed to freely trade dark or light, long or short. As the old Wall Street expression goes, "Bulls and bears make money. Pigs get slaughtered." Oh, wait--maybe the dark pools are screwed after all.
THE BANKER: Sowing the Seeds of Competitive Trading in Asia
By Michelle Price
November 2009
Asia has long-been regarded as a competition-averse, exchange-dominated marketplace. But this summer offered the first hints that small structural changes are afoot in the region, with the creation of a competition-friendly supervisory structure in Australia and, perhaps more significantly, the long-awaited regional entry of Chi-X, the hyper-fast and super-successful alternative trading venue.
The ambitious up-start is launching a full-scale attack on the region, with its first stop - it was revealed in August - to be the Singapore market. But there is an interesting twist to the latest installment of the Chi-X story: while in other markets the alternative trading platform has presented itself as a challenger to the incumbent exchange, in the Singapore market Chi-X has announced that it will be forming a joint venture (JV) with the Singapore Exchange (SGX) to launch the first exchange-led non-displayed or so-called 'dark' pool in the Asia-Pacific region.
Even more eye-catching, however, is the JV's intention to offer block crossing not only for equities listed on the SGX, but for those listed on the Australia, Hong Kong and Japan exchanges - albeit on an offshore basis - making it a pan-Asian proposition. This was a key draw for Chi-X, says John Lowrey, CEO of Chi-X Global. "SGX was the perfect partner because its ambitions are aligned with our ambitions in that it is interested in the development of the pan-Asian market," he says.
The deal, in which Chi-X's subsidiary technology company will provide the technology platform for the crossing network, marks a departure from the historical Chi-X model under which the company entered Canada and Europe not only as an alternative contender, but, at least initially, as a fully lit platform. "We're in the business of creating market centres that match the need for a variety of liquidity aggregation. Lit markets are one of those key places, but dark pools are just as valuable," says Mr Lowrey. In Singapore, he says, entering as a dark venue seemed the right strategy because it filled a need in the market.
That Chi-X has had to take a different approach in Asia reflects the challenges in the young Asian marketplace, where exchanges dominate not merely from a regulatory and structural perspective, but from a philosophical perspective too: for many Asian exchanges - which are often as much political as financial institutions - competition of the sort represented by the emboldened Chi-X is very unwelcome. But this is not a function of ignorance, says Lee Porter, managing director of Liquidnet Asia, the successful US-headquartered buy-side crossing network. "Exchanges in Asia are very cognisant of what happened in other markets by allowing other players in: they saw what happened to the market share."
According to Mr Lowrey, SGX also made the perfect partner because it welcomes competition in its own market. But by going dark and providing the requisite technology and technical expertise, Chi-X is able to offer the SGX a tantalising opportunity to expand its local and regional presence while securing for itself a long-sought-after entry into the region. In the view of one trader, the association with SGX, a well-established, if smaller south-east Asian exchange, is a "smart move" for Chi-X as it confers a strong degree of legitimacy on the brand which has yet to establish itself in the region.
In this respect, the deal is less about competition than it is about innovation. As such, it offers a key lesson for alternative venues sitting on the Asia sidelines: if competitors want to enter certain Asian markets, they will have to be creative. Attempting to attack the exchanges head on may prove - in some instances - the least strategic means of entry.
Post-trade troubles
It may be premature, however, to conclude much else. The JV is still in the process of applying for a licence for the Singapore market, although a spokesperson for Chi-X said the company anticipates no difficulties in this process and expects the JV to go live in 2010 as outlined in August.
The Banker understands that more details on the technical specifics of the deal are to follow in mid-November. These will be hotly anticipated by many market-watchers, who believe that there will be several wrinkles to iron out, not least the issue of clearing and settling across what the JV hopes will become a pan-Asian platform. According to the August announcement, SGX-listed stocks will be cleared and settled through SGX's securities clearing house and depository. But the JV will have to appoint a pan-Asian central counterparty (CCP) to clear any other trades. Jean-Pierre Baron, managing director for Asia-Pacific at Fidessa, a trading and connectivity software provider, says the realisation of a pan-Asian trading venue will be challenged by these back-end complications. "They will have to go downstream to the clearing level and that is very complex if you take a pan-Asian view. Equities are very localised markets and there are a lot of country-specific issues."
But the SGX-Chi-X JV is not the only trading venture proposing to span several Asian markets. In February, the Association of South-east Nations unveiled its plans to create a pan-Asian trading linkage which would allow, for example, a broker sitting in Thailand to trade stocks listed in the Philippines. Francis Lim, CEO of the Philippine Stock Exchange, a strong advocate of pan-Asian initiatives whose own exchange is part of the link-up, says it will eventually be progressed to the clearing and settlement level - but the details remain unclear.
What is clear, however, is that for any such pan-Asian utility to be a success, the post-trade process will have to be as seamless as possible, with each participating country's CCP able to clear cross-border on multiple venues. More importantly, it will have to be cost efficient. "If they can figure out a way to make the clearing work, then it has a really strong chance of being a success," says Glenn Lesko, CEO of Instinet Asia, an agency broker of which Chi-X is also a subsidiary. As such, it is clear that the SGX-Chi-X platform, if a success, will be important for the whole of the Asia region, offering a precedent for other ventures to follow. This is not lost on Mr Lowrey. "This announcement is not just around trading, but around the creation of infrastructure that is going to help the development of the Asian markets in general," he says.
Supervisory shake-up
Elsewhere in Asia, other developments are afoot, the most notable of which has taken place in Australia where a number of European upstarts have sought to shake up the status quo and compete with the Australian Stock Exchange (ASX). Chi-X, Liquidnet and AXE, a JV between the New Zealand Stock Exchange and five other banks, filed applications for trading licences more than two years ago to, what looked like until recently, no avail. But then in August, news came that a long-awaited shake-up of the unusual prevailing Australian supervisory structure - under which ASX would in theory have supervised its own competitors - would likely usher in a much-anticipated era of competition.
The ASX, which will be stripped of its real-time market trading supervisory powers, has accepted the development with little protest. ASX declined to comment on the implications of the development for the Australian marketplace. However, in the exchange's annual results briefing for 2009, chairman David Gonski made his feelings on the subject perfectly clear when he suggested that competition would not necessarily bring the cost savings to the comparatively small Australian marketplace that onlookers have been led to expect.
He also told the assembled shareholders that it is not a foregone conclusion that the Australian government will issue new licences as a result of the regulatory overhaul. A total failure to grant new licences, however, would seem a perverse outcome. Mr Porter believes this is unlikely. "The government would not have made the structural change if it had not intended to grant licences." But this is not to say, however, that the road to competition will be entirely smooth, he adds. "As for when it happens, or what other hurdles have to be jumped over, it will be interesting to see, but it is not going to be easy," he says.
Meanwhile, Chi-X has not given up its ambitions in Australia. Although it has not committed to a formal timeline, the company is likely to enter the Australian market in Q4 next year to coincide with the completion of the supervisory transition, says Mr Lowrey. "Both the regulator and the reserve bank are getting fully organised to allow for competition." And, although many market watchers are under the impression that AXE has shut up shop, Heather Kirkham, a spokesperson for AXE, said in an e-mail: "The recent announcement by the Australian Securities and Investments Commission is very formative, and the New Zealand Stock Exchange and the other AXE shareholders are watching developments with interest" - as are many in the US and Europe who believe the summer's events signal the first seeds of true competition in Asia.
Scott Riley
Business Development
[Please note my new email address: scott.riley@au.fortisclearing.com]
Fortis Global Clearing
8th Floor 50 Bridge Street Sydney Australia 2000
(Off)+61 (0)2 8916 9634 (Mob): +61 (0)418 117 627
scott.riley@au.fortisclearing.com
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