Friday, February 12, 2010

News 100212: Interoperability thoughts, Spreads, Short Selling, HFT, STUPID

Chinese New Year begins: Happy New Year!
恭喜发财 or 恭喜發財

This snap from the b/berry overlooking Sydney Harbour from a customers meeting rooms. The bay in the foreground is Farm Cove (part of the Harbour Swim). The bay behind it (where you see the crane) is where a shark attacked a navy seal (diver).

Some thoughts on Interoperability, or access and interoperability (A&I)

It is time however to organise some of my thoughts and blog posts.
(One reason I do the blog is so that I can search it to pull together the different threads).
(There is a google search bar on

I commend both the EMCF and EuroCCP papers.

I like the EMCF paper and it aligns itself with minimum disruption of participants and respect of domestic market practice. A key issue is the existing CCP market practice of rehypothecation of collateral.
I also like the EuroCCP paper. The primary difference to me is the concept of pushing back the margin requirements of interoperability onto the users (as they are the ones who commercially benefit from competition).
Both EMCF and EuroCCP call for transparency. (As I have done since 2008, but at least documented in the blog (search “Doha”) in Jun last year).
LCH / X-Clear have responded to that this week with their one page outline of the MCLA terms (I think the industry was looking for the full agreement, but hey, from small acorns…)

I do not think the answer is immediately with the CCPs. It is out there with the customers and users of the CCPs.

So, I’m pro interoperability and I think it will happen. The best model to make it happen I think will evolve through industry consultation (and being transparent on who, what and where the risks are). Once we can measure it, we can price it. Once we price it, then we know the impact it will have on market participants who can in turn inform their clients.

There is significant work that has already been undertaken on A&I. There are some precedents that have been set. Not always in equities. Test cases include derivatives (non material) and fixed income (Clearnet and CC&G). The annex of the final paper from this ECB meeting details some of the links.

Europe is an excellent test case.
Always worth occasionally checking the EU site on the monitoring group of the code of conduct on C&S.

And then we have several important actors and positions:
The main conclusions are:
��Interoperability is vital to make European securities markets more efficient
��EMCF is a proponent of interoperability
��Interoperability requires inter-CCP risk management that mitigates risk transfer between CCPs
��Existing interoperability models employ collateralisation and source collateral from participants’ margins
��In short term EMCF will implement a framework replicating the existing link for UK and Swiss equities
��EMCF is supportive of EU legislation to harmonise CCP standards
��EU legislation should introduce a single public model for interoperability that recognises the specific nature of a CCP

EuroCCP concludes the following:
1. Use an augmented default fund to cover interoperability
2. An Interoperability Convention should be quickly implemented.
3 Commercial barriers to interoperability should be removed.
4 An inter-CCP netting process should be considered as a long-term approach to the need to minimise inter-CCP obligations.

This week LCH / X-Clear responded to the transparency question on Master Clearing Link Agreement (MCLA) with:

And the importance is not lost on international regulators. IOSCO will have an update of their guidelines available in early 2011.
REGULATORS FAST-TRACK GLOBAL REVIEW OF OTC DERIVATIVES CLEARING Global banking and securities regulators have fast-tracked a review of clearing arrangements for over-the-counter derivatives as part of a far-reaching re-appraisal of existing standards for payments, clearing and settlement systems.
Full story:

Europe's post-trade dilemma
By Jeremy Grant
Competition between trading venues in Europe is so brutal that the fees charged by exchanges and their smaller rivals - such as Chi-X Europe - are at rock-bottom levels.
*** I do like Jeremy…but
“lack of competition has kept trading costs high”…I get what you mean, but trading costs are not so high (thx Chi-X), post trade costs require greater understanding. (I think we’re getting there with transparency).
“guidelines on how interoperability should work between LCH.Clearnet, EMCF (a small Dutch clearer) and X-clear of Switzerland.”…ummm, check your numbers Jeremy, EMCF is actually the largest equity CCP.
“Xavier Rolet, says, a way must be found to harmonise standards across Europe when it comes to clearing houses' regulatory capital and risk management policies.” Well, well. An intelligent opinion if I don’t say so myself.

Other bits:
Chi-X to no2 (by any measure)….but that just means there are still Europeans not getting best exec.
Short selling back in the news
HFT not all evil
Why is Getco blue and not green on the NYSE floor?
I do worry about Greece….and then Goldman profiting from that…yet UBS gets the bonus claw back.
As much as I worry about Greece, STUPID is as stupid does.

…and as for the w/end. Well, this week’s Valentines ocean special is:
North Bondi SLSC Classic Ocean Swim 2010

...and the 6 Nations, (sorry, overlooked this last week).
Overall, I’d like to back Ireland to win, just not sure if their form will pull them through.
Wales whump Scotland at home (easy).
Next a tester, I’ll go for French flair to win at home to topple the Irish, Heineken Cup experience won’t be enough for the boys in green today.
Italy V England. I wonder? Wooden spoon again for the Azzurri I’m afraid.

…and can you believe it is the first round of the Super14!
My good old reds will yet again valiantly hold up the rest of the table.
So, Sat night, I fear I’ll watch the Reds lose at home to the Wooftas oops, Waratahs

Gunfight Tip: Faster to Draw Second
Reacting to a movement, such as being drawn on in a gunfight, is faster than initiating the movement
*** I enjoyed this tale: Sometimes accuracy (strategy) is more important than a millisecond (and the relatives points in where we measure latency).

Have a great weekend all.
I know mine looks like flying by, pretty much like this week.




Chi-X becomes second largest European bourse
By Jeremy Grant
Chi-X Europe has overtaken Deutsche Börse, the London Stock Exchange's UK markets and the Spanish exchange to become the second largest European bourse by turnover less than three years after it was launched.
*** Strap line says it all, Best Execution? Best check Chi-X. Looks like there are still some customers not getting best ex.

Chi-X passes exchange giants en route to number two spot
Chi-X Europe, one of the new breed of alternative trading platforms, became the second largest European equities market by value traded in January, leapfrogging incumbent exchanges including the London Stock Exchange and Deutsche Börse for the first time.

MiFID narrows European blue-chip spreads – TABB
*** The study found that average spreads declined in 92% of the equities measured, with spreads in some stocks reduced by half.

Tokyo's Arrowhead system slashes trading costs – Nomura
*** spreads again.

ASEAN EXCHANGES SELECT NYSE TECHNOLOGIES TO BUILD TRADING NETWORK A group of Asean stock exchanges have appointed Nyse Technologies to build a direct market access electronic trading link.
Full story:

NYSE Euronext, Nasdaq: The Profits Are Back
NYSE Euronext reported its third straight quarter of growth in revenue and earnings per share. For all of 2009, Nasdaq OMX Group, though, reported higher profits.
Beginning with first quarter 2010 results, NYSE Euronext will change how it reports results for different segments of its business. The new reporting segments will be: Derivatives, Cash Equities & Listings and Technology and Information Solutions.
*** i.e. derivs is a growth business (watch ELX), 2ndry equities trading is commoditised (and a basket case), listing is seasonal, IT is bread & butter.


Theret takes helm of PLUS amid board reshuffle
*** In September 2009, a group of investors from the Gulf Cooperation Council (GCC) countries bought a 19% stake in PLUS for £5.5 million via a special-purpose vehicle, Amara Dhari Investments.

Citadel Tries to Make a Market in Berlin
Citadel already owns 19.9 percent of Direct Edge, a Jersey City-based trading network which matched 11.8 percent of US trades in September.
Citadel has about 175 retail brokerage clients, including Charles Schwab and TD Ameritrade; and now handles an estimated 9 percent of daily US stock trades and 30 percent of trades in US equity options.

10/02/2010 16:13:00
US trading systems supplier Pragma Securities is to launch a dark crossing network designed to capture liquidity before the open and close of US markets.
More on this story:

CME GROUP TO TAKE CONTROL OF DOW JONES INDEX BUSINESS THROUGH JV CME Group has struck a deal to take control of the Dow Jones stock index business through a joint venture with current owner News Corp that values the business at $675 million.
Full story:



ICE CEO: Linking Clearinghouses May Repeat 2008 Bank Turmoil
The top executive of IntercontinentalExchange Inc. (ICE) warned Wednesday that linking up derivatives clearinghouses could create systemic risk issues similar to those that pushed the global banking system to the edge in 2008. Spreading contract positions across several clearing facilities could make it harder to value a firm's positions if it defaults, raising the threat to other investors, according to ICE CEO Jeffrey Sprecher.
*** given ICEs vested interest in the clearing space, these remarks are just that, vested interest. Wasted opportunity to make a meaningful contribution to the debate.

DTCC Receives Fed Approval for Warehouse to Be Member of Federal Reserve System
NEW YORK--(BUSINESS WIRE)--The Depository Trust & Clearing Corporation (DTCC) announced today that the Federal Reserve Board had approved its application to establish a DTCC subsidiary that is a member of the Federal Reserve System to operate the Trade Information Warehouse (Warehouse) for over the-counter (OTC) credit derivatives.


Sants resignation leaves confusion at FSA
Hector Sants has resigned as head of the City watchdog, in a dramatic move that throws the direction of financial regulation into question
The Tories let it be known they would be interested in recruiting Mr Sants for another job if they win the election. “As far as George is concerned, this is not the end of [Mr Sants’] public sector career,” said an aide. Speculation centred on a post at the Bank or a minister’s role relating to financial services or negotiating with the European Union in Brussels.

Financial risk: Our special report

The effects of short-selling public disclosure regimes on equity markets
As short-selling liquidity decreases there are material impacts to the markets for the affected securities:
..Trading volumes decrease
..Bid-ask spreads widen
..Price discovery becomes less efficient
..Intraday volatility increases

the Reserve Bank's 50th Anniversary Symposium on 9 February 2010 have been published on the Bank’s website.
Symposium Papers
• Fifty Years of Monetary Policy: What Have We Learned? [PDF 183K]
Glenn Stevens, Adam Cagliarini and Christopher Kent, Reserve Bank of Australia
Panellist Comments [PDF 99K]
Jean-Claude Trichet
• Financial Stability: 10 Questions and About Seven Answers [PDF 109K]
Jaime Caruana, Bank for International Settlements
• What Have We Learned in the Past Fifty Years About the International
Financial Architecture? [PDF 100K]
Andrew Crockett, JPMorgan Chase International
• Increased Understanding of Supply Side Economics [PDF 164K]
Anne O. Krueger, Johns Hopkins University

High-frequency trading, which uses state-of-the-art software to spot patterns and benefit from tiny price movements, has attracted plenty of attention from regulators in the past few months. But there is growing evidence in Europe and the US that asset managers are not overly concerned about its impact.

Board to Investigate Compensation of FINRA Executives
Pressured by a brokerage firm, the board of governors of the Financial Information Regulatory Authority (FINRA) will meet Wednesday (Feb. 10) to determine whether Securities and Exchange Commission Chairman Mary Schapiro and other former FINRA executives were overcompensated in 2008.
*** Former chairman and CEO Schapiro received about $3.25 million in compensation.
*** Douglas Schulman, now commissioner of the Internal Revenue Service, was paid compensation, severance and accumulated benefits valued at $4.43 million in 2008 while vice chairman at FINRA
*** Choice. CVs to Washington DC, (can you afford not to?)

Thinking the unthinkable
Stephanie Flanders
All eyes are on Brussels, as we await more details of the "co-ordinated measures" on offer to help Greece. There's just one problem. Even a bail-out - if that is what it turns out to be - won't solve the basic problem facing Greece, or the eurozone.


NYSE to Add Global Market Maker GETCO as NYSE Designated Market Maker
New York City and Chicago, IL, Feb. 11, 2010 NYSE Euronext and GETCO LLC, a global electronic trading and technology firm, today announced that GETCO is expected to become a New York Stock Exchange ("NYSE") designated market maker ("DMM"), and that GETCO has purchased approximately 350 NYSE DMM assignments from Barclays Capital. Financial terms of the transaction were not disclosed.

Quick View: Getco goes back to the floor
Many high-frequency trading firms prefer to describe themselves as "market-making" firms or, in the jargon that increasingly pervades the trading world, "liquidity providers".
*** I assume green was already taken?

Penson Australia Announces D2MX Signs Long-Term Clearing Agreement
Penson Worldwide, Inc. (NASDAQ: PNSN) announced today that its Australian subsidiary, Penson Financial Services Australia Pty, Ltd (PFSA), has signed a 5-year exclusive agreement to provide clearing services for equities and ... Read More Here

Fidelity reduced its commissions for US equity trades from a tiered plan – ranging from $8 to $19.95 – to a flat $7.95. The company will also offer no commission trading on 25 BlackRock ETF funds for at least three years. TD Ameritrade has offered flat pricing at $9.99 since 2006, while Schwab made the move – at $8.95 – last month.
*** This is why the MTFs job is not finished in Europe.

09/02/2010 16:44:00
Merrill Lynch Japan Securities (MLJS) has unveiled the country's first third-party co-located service for low-latency electronic trading and direct market access to multiple execution venues.
More on this story:

How Goldman Sachs Helped Greece to Mask its True Debt,1518,676634,00.html
…Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.

UBS Claws Back $282 Million of Bonuses After Posting 2009 Loss
By Elena Logutenkova
Feb. 10 (Bloomberg) -- UBS AG's loss in 2009 will trigger the bank's bonus claw back mechanism for the first time, depriving senior bankers of 300 million Swiss francs ($282 million) of deferred pay they were due to receive this year.

Fortis market access unit links to Sol-3 trading platform
The Trade News
Fortis Bank Global Clearing (FBGC), a provider of post-trade and market access services, has connected its low-latency trading network to Sol-3 Trader, an execution management system offered by German IT firm Sol-3.

NEWSPAPERS love a good acronym - it saves precious space - so it's no surprise that many seized an easy label when several economies in southern Europe fell on hard times.
The embattled countries were Portugal, Italy, Greece and Spain, and the acronym spelt PIGS, which encouraged London's Financial Times to publish the rather questionable headline ''PIGS in muck''.
How the mighty have fallen. More recently, the acronym has been spelt PIIGGS, after Great Britain and Ireland joined the slide into recession.
Now even that tag is obsolete.
Charlie Aitken, of Southern Cross Equities, points out in his latest note to clients it's now Spain, Turkey, the United Kingdom, Portugal, Ireland and Dubai that are worrying global commentators.
As Aitken says, welcome to the STUPID Index.

Scott Riley
Business Development

[Please note my new email address:]

Fortis Global Clearing
8th Floor | 50 Bridge Street | Sydney | Australia | 2000
((Off)+61 (0)2 8916 9634 È(Mob): +61 (0)418 117 627

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