Wednesday, May 4, 2011
Asian Markets, changing markets, CCP RFP, Mexican Hat Dance (swaps one foot in, one foot out), Weddings
Some old news to post before we get into this weeks stories. More on the Chi-X Australia market licence on Friday.
I totally agree with this report and its conclusions.
Instinet Report On Microstructure Impact Of Extending Trading Hours
Lunch breaks on several Asia-Pacific exchanges are getting shorter or going away altogether, resulting in a longer overall trading day in Japan, Hong Kong and Singapore...
I think other important factors are:
• Wallet Size (Commercial opportunity).
• Regionalisation (Irrespective of common market ‘conditions’ Asia is made up of vast distances, e.g. a ‘local hop’ like s’pore to HK is 3hrs).
• Regulatory reticence (if it’s not broken, why fix it?)
• Sovereignty (there is still an air of national interest mentality)
• Legislative framework (legal framework to recognise and enable competition)
• Market advocacy (practitioner engagement and commitment)
Factors impacting Asia’s 4 main markets: Japan, Hong Kong, Australia and Singapore:
That said, constraints to the continued growth of trading in Japan include:
• Rigorous PTS license requirements, which impede the growth of competition.
• Little on shore trading due to onerous regulatory requirements.
• Reluctance of domestic investment to supporting alternative liquidity venues.
• Lack of recognition of Commission Sharing Agreements (CSAs) by the Japan FSA. As a result, execution cannot be rewarded to the same extent it is in other markets, thereby constraining the penetration of electronic trading.
• Under the Tender Offer Bid rules, a person or entity using an “off market” venue to acquire more than five percent of a listed company’s voting shares from more than 10 shareholders within a period of 60 days must submit a formal takeover or tender offer to the company’s shareholders. If the trade is done on the TSE, the aquiring entity only needs to file a major shareholding report. This effectively limits the trading of stocks by PTSes to less than five percent of a company’s outstanding shares over a 60 day period.
Factors Impacting Volume Growth on the Hong Kong Exchange:
• Lack of Competition: Most of the constraints listed below follow from this point. Without true competition – for both execution and clearing – the HKEx is not incentivized to build a low latency infrastructure, lower fees or create an efficient market structure.
• High Clearing Costs: At 12 basis points (10 bps stamp duty plus 2 bps HKEx clearing fee), total clearing costs are much higher in Hong Kong than in other markets, generally making short-term trading difficult if not prohibitive. With only a single central clearing counterparty in Hong Kong, there is no competition for clearing and thus no downward pressure on fees. Additionally, unlike in the UK, there is no stamp duty exemption for market makers.
• Infrastructure: Compared to other exchanges of its size, the HKEx has low capacity, high latency and a slow market data feed.
• Fees: Monthly fees charged by the exchange are based on incremental order throughput over a standard throttle rate, thereby providing a disincentive to placing orders and trades.
• Retail Heavy: Retail investors – who tend to have longer time horizons and trade in lower volumes than institutions – comprise a larger portion of the overall participant base in Hong Kong than in most other markets.
• Inefficient: For example, opening auction market orders only match if there are two or more corresponding matched orders. A single order will not match.
• No Closing Auction: The HKEx eliminated its closing auction in March 2009. The closing price is now determined based on the median of five nominal prices in last minute of trading. As a result, the close can be chaotic and illiquid.
• Lack of Anonymity: Orders and trades on the HKEx are identified by broker.
Factors Impacting Volume Growth on the Australia Securities Exchange
While Australia already has a continuous trading day, the ASX has recently added new order types, announced a new infrastructure build and plans to launch a new market – PureMatch – later this year. All of these moves are generally intended to attract new trading participants and support electronic and high frequency trading, with Chi-X Australia* set to launch by the end of the year. Australia is a prime example of the prospect of competition spurring the development of trading infrastructure.
Factors Impacting Volume Growth on the Singapore Exchange
• Lack of Competition: Similar to Hong Kong, there is little reason for the SGX to build a low latency infrastructure when they are the only game in town.
• High Clearing Costs: Clearing costs of four basis points, with a maximum charge of SGD600 (approximately USD475) per trade, are paid by the investor, not the broker. This is extremely expensive relative to other developed markets; for example, the cost of clearing in Japan is JPY75 per trade (less than 1USD). It should be noted that the SGX has lobbied the Monetary Authority to lower these costs.
• Infrastructure: In June 2010, SGX announced that it had partnered with Nasdaq OMX to develop a new trading platform – SGX Reach – powered by NASDAQ OMX’s Genium INET. The release is scheduled for 2011. Given Genium’s position as one of the fastest trading engines globally, this release will obviously greatly improve the latency, capacity and scalability of the SGX platform. That being said, the ASX rolled out this technology late last year and has had recent stability issues.
From Beijing to (flight time) …..
Singapore: 5 hours 30 minutes
Mumbai: 5 hours, 55 minutes
Dubai: 7 hours, 16 minutes
London: 10 hours, 8 minutes
Sydney: 11 hours, 5 minutes
Los Angeles: 12 hours, 32 minutes
New York: 13 hours, 41 minutes
ASEAN ALGOS A DIFFERENT GAME
The gradual adoption of electronic trading by exchanges in Malaysia, Indonesia, Thailand and the Philippines presents specific challenges for brokers in the construction of algorithmic trading platforms suited to the four ASEAN markets.
Bali, 8 April 2011 – A collaboration of seven stock exchanges in ASEAN was today formalised with the launch of ASEAN Brand Identity, ASEAN Exchanges website and ASEAN Stars, as part of the collaboration of ASEAN Exchanges – a catalyst to promote the growth of the ASEAN capital market with the intent of bringing more ASEAN investment opportunities to more people. The ASEAN Exchanges collaboration members are Bursa Malaysia, Hanoi Stock Exchange, Hochiminh Stock Exchange, Indonesia Stock Exchange, The Philippine Stock Exchange Inc., Singapore Exchange and The Stock Exchange of Thailand.
5 April 2011 – Singapore Exchange (SGX) today said its derivatives daily average volume reached an all-time high in March while securities and clearing activities grew from a year earlier.
LCH.CLEARNET SET TO CLEAR FOR FEX
INSTINET REPORT ON MICROSTRUCTURE IMPACT OF EXTENDING TRADING HOURS
Lunch breaks on several Asia-Pacific exchanges are getting shorter or going away altogether, resulting in a longer overall trading day in Japan, Hong Kong and Singapore...
TSE TO EXPLORE OVERSEAS ALLIANCES AS IT PLANS THREE-YEAR Y25.9 BILLION TECH SPEND The Tokyo Stock Exchange plans to spend Y25.9 billion on its overall systems infrastructure over the next three years, as it bids to build its user base and attract liquidity in the face of increasing domestic and overseas competition.
Full story: http://www.finextra.com/news/fullstory.aspx?newsitemid=22404
LSE CONTINUES TO LOSE MARKET SHARE DESPITE IMPROVEMENTS
For the first time in its 210 years, the London Stock Exchange is on the verge of handling less than half of UK share trading, according to data from Thomson Reuters. In February, the LSE's main UK order book, Sets, migrated to faster technology, in part to attract high-frequency traders. Sets' UK market share was slightly more than 50% in recent months but dropped to 49% this month. Reuters (27 Apr.)
*** The LSE noted trading on Turquoise was not reflected in the data.
"These figures compare just our lit service with other operators' lit and dark markets. On a like for like basis, over 60 percent of lit trading in UK equities takes place on our Sets order book," a spokesman said.
UK share trading netted the LSE 101.8 million pounds in the year to the end of March 2010, accounting for 16.2 percent of total income
EX-CEO REPORTEDLY PLANS TO SUE TURQUOISE IN ADDITION TO LSE
Financial News Online (U.K.) (subscription required) (26 Apr.)
NASDAQ OMX TALKING TO FIRMS OVER LOSSES CAUSED BY SOFTWARE GLITCH - WSJ
Nasdaq OMX is negotiating with trading firms over payouts for losses incurred by a glitch with one of the bourse's algorithms earlier this week, according to the Wall Street Journal.
More on this story: http://www.finextra.com/news/fullstory.aspx?newsitemid=22502
NASDAQ OMX AND ICE SEND LETTER TO NYSE EURONEXT SHAREHOLDERS
IN SLOWING MARKET, E-TRADING SYSTEMS CAPTURE FX TRADING SHARE
Tuesday, April 19, 2011 Stamford, CT USA — For nearly a decade, trends in electronic foreign exchange have been consistent: increasing use, growing trading volumes and an expanding electronic share of the global FX pie.
FARNHAM TAKES OVER AS TURQUOISE CEO
LSE majority-owned Turquoise has shuffled its management team, with chief executive David Lester becoming chairman, replaced by chief operating officer Adrian Farnham.
Full story: http://www.finextra.com/news/fullstory.aspx?newsitemid=22451
INTERNATIONAL SECURITIES EXCHANGE LAUNCHES NEW TRADING SYSTEM
The new system relies on Deutsche Börse Group's Optimise trading architecture. That is the core, proprietary global trading architecture of Deutsche Börse Group, which is in the midst of attempting to merge with NYSE Euronext.
QATAR EXCHANGE CHOOSES CINNOBER FOR MARKET SURVEILLANCE
BATS TO BECOME LISTINGS VENUE, CHALLENGING NYSE AND NASDAQ
FINANCIAL TIMES: CHI-X EUROPE TO USE RUSSELL FOR DERIVATIVES PUSH
By Philip Stafford 03/28/11
Chi-X Europe, Europe’s second largest share trading venue by volume, has signed a deal to create new regional indices with Russell Investments, owner of the Russell market indices, as part of its move into the derivatives market.
The methodology provided by Russell and market data from Chi-X will form the basis of Chi-X’s move into derivatives and focus on the most liquid and largest stocks in Europe. Ownership of an index allows exchanges to spin off new derivatives contracts based on them - as Eurex does with the Stoxx index run by a company it owns. Chi-X will list futures and options at a later date.
The venture will also act as a springboard to the European market for Seattle-based Russell, which is better known in the US and accounts for $3,900bn in assets.
CFTC PROPOSES RULE TO PROTECT MARGIN OF SWAPS USERS
The Commodity Futures Trading Commission proposed a rule under which clearinghouses "would have recourse against the collateral of defaulting customers, but not against the collateral of non-defaulting customers" should a futures broker and its customers collapse. BlackRock has supported the approach, as it would protect swaps users from "fellow customer risk." Bloomberg (4/27)
LCH.CLEARNET WORKS WITH TRADING PLATFORM GALAXY
LCH.Clearnet Group said it will start clearing European corporate-bond trades on Galaxy, a multilateral trading facility from TradingScreen. "We have worked closely with Galaxy to enhance transparency and certainty in the euro-denominated bonds markets, in line with regulators' aims to reduce systemic risk by bringing more over-the-counter products into clearing," said Christophe Hemon, CEO of LCH.Clearnet Securities Technology Monitor (27 Apr.)
EUROPEAN COMMISSION SAYS ITS TIME TO ADAPT TO T+2
It’s not when but if and how. The subject: Two-day settlement of transactions in a fund portfolio. The place: Europe. If the European Commission has its way, countries in the European Union could be forced to meet a two-day settlement cycle by 2013 at the latest.
SOR PUTS CLEARING INTEROPERABILITY ON SEBI AGENDA
Buy-side customers have told Deutsche Bank, one of less than a dozen brokers so far approved to offer SOR, that their post-trade fees may be as high as US$150 per single-stock transaction. “If they smart order route any trade worth less than around US$1 million, it’s likely they will negate any improvement from smart order routing with the increase in clearing costs,”
Both the NSE and BSE are vertically integrated exchanges that own stakes in both clearing and settlement facilities. Competition and interoperability already exists between Central Depository Services (India), the central securities depository partly owned by the BSE, and National Securities Depository, in which NSE has a stake, but there are no similar arrangements between the BSE's Bank of India Shareholding and the NSE's National Securities Clearing Corporation.
PLATFORM LAUNCHED FOR MONITORING MARGIN CALLS
AcadiaSoft, which developed a platform which electronically monitors margin calls in over-the-counter derivatives, made its launch official on Monday, listing Barclays Capital, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley and State Street as users.
MACHINE-READABLE OTC DERIVATIVES CONTRACTS MOVE A STEP CLOSER
Regulatory efforts to introduce more automation in manually-driven over-the-counter derivatives trading have been advanced by the publication of new research into the feasibility of rendering OTC documentation in machine-readable format.
More on this story: http://www.finextra.com/news/fullstory.aspx?newsitemid=22457
29 page report available here:
CENTRAL CLEARING FOR OTC DERIVATIVES 'UNLIKELY TO REDUCE SYSTEMIC RISK' - IMF PAPER Regulatory moves to force OTC derivative trades to go through central counterparties could just shift systemic risks to these CCPs and lead to more tax payer bailouts, according to a working paper published by the IMF.
Full story: http://www.finextra.com/news/fullstory.aspx?newsitemid=22421
23 page report available here:
ISDA ISSUES RFP FOR COMMODITY DERIVATIVES TRADE REPOSITORY The International Swaps and Derivatives Association (ISDA) is calling for the creation of a commodity OTC derivatives trade repository by January.
Full story: http://www.finextra.com/news/fullstory.aspx?newsitemid=22405
RFP available at:
US REGULATORS DEFINE SWAPS: WHAT'S IN, WHAT'S OUT?
Transactions that are swaps include foreign exchange swaps and forwards, foreign currency options, commodity options, cross-currency swaps, and forward rate agreements, among others.
The SEC voted unanimously to put the definitions out for public comment. The CFTC was still holding its meeting.
FLASH CRASHES, SACRED COWS AND DOING THE RIGHT THING
By Larry Tabb
Industry pressures to forgo preferencing restrictions and trade-at rules will be intense, even if the new rules are the right prescription for staving off another flash crash.
FSA STAFFERS LEAVE IN DROVES AS CHANGES LOOM
The UK Financial Services Authority lost 352 employees in the past 12 months, up from 181 the previous year. The exodus comes as the regulator prepares to split. By 2013, a supervisory division of the FSA will move to the Bank of England, and a separate agency focused on consumers will be developed. The departures raise concerns about the agency's ability to make a smooth transition. The Independent (London) (25 Apr.)
*** The transition won’t be smooth. With or without these people.
EUROPEAN EXCHANGES HIT OUT AT BROKER NETWORKS Europe's exchanges have hit out at plans to create a new type of trading venue category as part of MiFID's overhaul, warning the proposal will cause an "irreversible race to the bottom" for regulation.
Full story: http://www.finextra.com/news/fullstory.aspx?newsitemid=22453
FSB RELEASES UPDATE FOLLOWING APRIL MEETING
The Financial Stability Board (FSB) met in Rome to discuss its work agenda ahead of the April 14 Finance Ministers meeting in Washington, D.C. The FSB emphasized the need to decisively press ahead with the “repair and strengthening” of weak banking systems, using the forthcoming rounds of stress tests to address any weak points identified. They also agreed to an accelerated “timetable and processes, including public consultation,” to deliver the G-SIFI recommendations to the G20 Summit in November. With regard to the OTC derivatives markets, the FSB welcomed recent International Organization of Securities Commissions’ (IOSCO) reports, requested further analysis on the current market use of multi- or single-dealer platforms, and announced it will take “next steps” on commodities markets in September.
IMF WORLD ECONOMIC OUTLOOK
Real GDP in advanced economies and emerging and developing economies is expected to expand by about 2½ percent and 6½ percent, respectively
SEC CONFIRMS CIRCUIT BREAKER EXTENSION WITH LIMIT UP/LIMIT DOWN PROPOSAL
If approved by the SEC, the new limit up/limit down mechanism would replace the existing single stock circuit breakers, which were approved 16 June 2010 on a pilot basis shortly after the ‘flash crash’ of 6 May.
SPEECH BY SEC CHAIRMAN: REMARKS AT SIFMA’S COMPLIANCE AND LEGAL SOCIETY ANNUAL SEMINAR
CHAIRMAN MARY L. SCHAPIRO
Right now, one of the biggest items on our agenda is translating our portion of the Dodd-Frank Act into more than 100 individual rules.
A comprehensive approach to enterprise risk management is important for several reasons. For example, inattention to risk management can lead to seemingly minor corner-cutting on compliance issues which eventually snowballs into a serious problem for management and investors.
And, without a commitment to good governance and risk management, silos can form and the interdependence between risk categories can be overlooked. What seems to be a manageable credit risk and a separate manageable liquidity risk may combine to do real damage.
Going forward, our examiners intend to focus on understanding how risk management is embedded in key business processes and decision-making at a number of levels.
Dodd-Frank may ruin us all
The Dodd-Frank Act risks creating the largest regulatory-induced market distortion since 1971 by failing to grasp the rise of global interconnectedness of the financial system.
ISDA: SEF RULES SHOULD PROVIDE GREATER CHOICE, ACCESS AND LIQUIDITY TO OTC DERIVATIVES MARKET PARTICIPANTS
This paper discusses important issues associated with mandating the use of swap execution facilities (SEFs) for executing certain OTC derivatives products. It asserts that such mandates should be structured in a way that preserves the OTC derivatives market's strengths while addressing its weaknesses, presents a set of desirable SEF characteristics to meet this objective and identifies relatively modest infrastructure and transparency benefits that SEFs might bring. The paper also analyzes the proposed rules of the CFTC and the SEC required by the Dodd-Frank Act (DFA) and makes recommendations to improve, in particular, the CFTC
proposals in a manner consistent with a reasonable reading of DFA.
BNP PARIBAS OPENS INDIAN CLEARING AND CUSTODY SERVICE
Clearing fees in the country have been the source of some debate. The primary market in India, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are vertically integrated exchanges that own stakes in both clearing and settlement facilities.
Although competition and interoperability has been arranged between the central securities depositories the Central Depository Services (India), which is partly owned by the BSE, and National Securities Depository, which the NSE has a stake in, there are no similar arrangements between the BSE's Bank of India Shareholding and the NSE's National Securities Clearing Corporation.
TIBRA TARGETS DERIVATIVES MISPRICING POST-TAX
Trading firm Tibra Capital has provided a new twist on the tax-aware Australian equity fund as the first product for its relaunched investment management division.
Tibra Investment Management has drawn on its parent’s experience in derivatives trading and risk-management to launch a fund – simply the Tibra Australian Equity Fund - it claimed can exploit a glaring inefficiency in the way equity derivatives were priced.
NORTHERN TRUST TO BUY OMNIUM
Northern Trust has agreed to buy Omnium LLC, the fund administration business of Citadel
US TREASURY PREPARES TO RETIRE CHEQUES
The US Treasury is embarking on a publicity campaign ahead of its upcoming move to switch off paper cheques as a payment method for social security and other federal benefits in favour of electronic methods.
Full story: http://www.finextra.com/news/fullstory.aspx?newsitemid=22497
*** People currently receiving their federal benefits by cheque will have to switch to direct deposit by 1 March, 2013.
NEW ZEALAND TO SELL USED FIGHTER JETS
The government of New Zealand is hoping to raise some cash by auctioning off eight decommissioned fighter jets. The aircraft, which date from the 1960s, have been in storage since the country shut down its air force in 2001. The highest bidders will also receive spare parts and ground equipment for their planes. The Wall Street Journal (tiered subscription model)/Scene Asia blog (4/25)
THE ANTI-PREDICTOR: A CHAT WITH MATHEMATICAL SOCIOLOGIST DUNCAN WATTS
The Yahoo! Labs scientist and author explains why the "law of the few" is bunk, why history is full of failed hedgehogs, and why we can't make good predictions about just those things we most want to predict
McKenzie does know something about culture. A positive winning culture. Twenty-four hours after the Rebels' Rod Macqueen described his team as a ''coach's nightmare'' when they lost their way against the Highlanders, the Reds were having the time of their lives making fun of the Bulls. The happiness of the Australian conference leaders was infectious. It is so clear they are unified and playing for each other.
And which Australian province has the lowest salary bill? The Reds
Given the emergence of rich talent under Robbie Deans over the past few years the Reds' win in itself shouldn't come as a complete surprise, but its methodical nature will give Wallabies fans justified reason to believe that this is their year
*** I’m still a Deans believer.
CLIMATE SPECTATOR: All set to catch the next energy wave
Giles ParkinsonAustralia's first commercial size wave energy machine has been deployed off the coast of Perth. And its developers have some surprising cost predictions. 20 Apr 2011 10:16 AM
Schoolchildren in Tokyo wear headgear on their way to school on Monday to help protect them from possible falling debris during earthquakes. Some schools in Tokyo have asked students to wear the headgear when walking to and from school since the deadly earthquake and tsunami on March 11
Australia gets into the royal wedding spirit. A new sausage...the “Little Willie” will grace Aussie BBQ’s...