Flash crasher not a flash boy

After a 5 year investigation, the CFTC finally has found someone they can tie to the infamous flash crash of of May 6, 2010. 

UK resident Navinder Sarao, a relatively small futures trader has been charged with wire fraud, 10 counts of commodities manipulation and 1 count of spoofing.

Sceptics, like Zerohedge see a 'patsy', an Oswaldesq scapegoat found to deflect blame for HFT and a failing controlling body like the CFTC. Regular media meanwhile call Sarao an HFT trader, while industry professionals are quick to point out that someone trading off a spreadsheet, using 'off the shelf' trading software from a residential house in London suburbia can by no means be considered HFT.

Perhaps Sarao was just innocently 'at the wrong place, in the wrong time', perhaps he was a petty market manipulator caught in the 'perfect storm', or even perhaps he was the perfect scapegoat working at the book depository. All these scenario's are better than the idea that a single 'nobody' can crash the market. If that's really the case, there is a serious problem with the way the market operates.

EU think tanks speaks out against FTT

Bruegel is a EU think tank based in Brussels. According to this article in Reuters they have now spoken out against a number of issues that the industry have been rallying against for quite some time. These arguments are now picked up by the Latvian presidency of the EU and quoted in papers for the EU finance ministers.

Bruegel states that an FTT as wanted by 11 EU countries may be detrimental to economic development. They also suggest that the EU should wait with further legislation to have banks isolate their trading activities (market making).

According to Bruegel, the EU needs to set a clear list of priorities to create a true Capital Markets Union (CMU). A CMU can stimulate growth in the EU.

Tradetech Paris

Last week the wise men of the financial world gathered in Paris to discuss the future of the equity markets in the Tradetech conference. A very good blog was written by Tim Cave summarizing the key takeways from the conference. So, for all that were not there, catch up by reading this article.

Is Bitcoin the Myspace of currency?

Being first to market, is not all what it's cracked up to be. Yahoo search was out there way before Google, Myspace explored senseless blabber way before Facebook and Blackberry was making phones smart before other made them even smarter and more functional.

 Found an interesting slideshow from a tech angel investor underlining this point:

First mover disadvantage from Eric Tachibana

In that perspective it is interesting to look at Bitcoin. Hyped, feared, misunderstood and abused but all in all, a potential game changer. 

Question though is, will it change the game and become  the world's new currency, or will it simply pave the way for a model that is better. David Mazieres, a Stanford professor definetely seems to think so. He has developed a new digital currency that relies less on 'mining', is more secure and processes the transactions faster. Read the full article (also a link to the white paper) here .

OTC trading is sometimes better!

The OCC is reporting a drop in on exchange trading in options on the US markets. At the same time OTC volumes are up! This is certainly strange in view of the increased emphasis on counterparty risk.

However, it looks like other factors are at play. High exchange fees, ease of execution and fear of being picked of by HFT seem to be the main drivers behind the shift in volume. Some arguments do make sense. Having your order executed in 20 tiny exchange trade is not always that convenient.

CBOE seems to be in the centre of the discussion as the have a monopoly on some of the listed derivatives.

Read the full article here (Reuters). The OCC report can be found here.

Should clearing be treated as a utilty?

More/Less regulation, the threat or virtue of HFT, the 'Dr. Evilness' of banks, there is no ultimate truth. Truth comes in many forms and is, amongst others, dependent on ideological framework, cultural background, experience, a vested interest or simply the hand that feeds you.

With that in mind, it is interesting to read this research article by the Heritage Foundation, a conservative US think thank. One of its missions, to repeal Dodd-Frank. 

In this article, the author points us to article VIII of Dodd-Frank, which provides the opportunity to designate PCS (Payment, Clearing, Settlement) companies as Financial Market Utility. Which basically means that they can be considered to be of systemic importance and therefore "too big to fail".

To the conservative mind, this is an outrage. In their view it, again, crosses a border between government and private enterprises, It would be anti-competitive, raises prices and concentrates risk.

Biased, of course but nonetheless an interesting read. I wonder if European Regulation also has this ‘utility’ designation for European Institution. Click here for the full article.

IMF sees systemic risk everywhere now

Maslov, the famous psychologist already said it in 1966: "I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail."

Today the IMF published a survey they conducted on plain vanilla asset management world wide.

The industry grows rapidly (AUM already exceeds  total GDP world wide), which forces funds to buy less liquid products. Pair that with an unwillingness on the banking side to be market makers and the fact that in advanced economies, the funds have chosen similar directions and the result is clear. If a large scale event occurs, liquidity dries up  and investors cause a 'run'  on certain products.  And that could be a potential systemic risk.  

Here is the nail part. The IMF calls for more oversight, better risk management etc, etc. That sounds like the same thing that is causing this potential drying up of liquidity. The creation of more and more restrictions and regulation is causing the unwillingness of banks to be market makers. Moreover, since the mantra in the investment world is 'risk aversion' you can expect that overall investment companies are moving in the same direction and the same products. Risk aversion is killing diversity and now seems to create its own new risks.

In addition to more oversight, the IMF argues that funds should also look at making redemption more difficult. In other words, making it more difficult for investors to exit. Which will probably create its own new set of additonal risk.

Read the full article here

Why bankers should be scared of fintech startups!→

Paul Dowling from Dreamscape wrote an interesting blog providing some food for thought on the different ways fintech is changing banking. The full story is available here.

Virtu IPO... food for thought

A lot has been written and said about the IPO of Virtu and Flow Traders. In his latest post on Mechanical Markets, Kipp Rogers points to some risks topics people often forget when talking about HFT. He hits the nail on the head with his "Expansion in wholly new markets" comment. Interesting read for Monday morning.

Read the full story here.

Dutch newspaper De Telegraaf also published an article about the Flow Traders IPO. You can find it here.

Is the arms race ending as HFT firms merge technologies?

Last month KCG Holdings (the Knight/Getco combination) announced a joint venture with World Class Wireless, a technology company closely related to Jump Trading, to pool their array of microwave towers worldwide and jointly operate them.

Microwave towers are used by HFT firms to be faster than fiberoptic networks to connect them to the various exchanges.

According to the article in Traders Magazine, it signals a shift in the way HFT firms operate and compete. Over the years, these firms were involved in a technology race to be the fasted firm out there. Huge efforts and huge costs were made. Now  the end of this race appears in sight and the costs have come under scrutiny. 

According to the magazine it is a sign of a maturing market. Perhaps the local (and more modest) Dutch players can take a page from this scenario and see where they can save costs by combining their technologies. Click here for the full article.

Euronext to launch dairy derivatives

Euronext is set to expand their commodities offering by launching dairy derivatives in milk, butter and whey. As of 31 March, the milk quotas are no longer in force in the EU and the exchange expects demand from users to hedge their risks and anticipate price movements. The dairy complex (futures only) is set to go live on 13 April 2015. No word yet on when options will be launched. The new contract on skimmed powdered milk replaces the old contract that failed to take off.  The new dairy complex competes with the offering by competitor Eurex that offers futures on whey, butter and powdered skimmed milk.

 Euronext instituted fee waivers for all three contracts untill 30 June 2015. 

The full Euronext commodities offering can be found here. 

EU's Economic Committee accepts benchmark rules

The European Parliamant's  Economic Affairs Committee has voted in favor of new legislation protecting European benchmarks such as LIBOR and EURIBOR and other benchmarks from manipulation.

The vote was overwhelmingly in favor of the draft legislation and will now proceed to the full EP for final adoptation.

Read the draft legislation here

Flash vs Flash

The IB times reported a law suit today of Chicago HFT firm HTG Capital Partners. They are sueing another HFT firm for 'spoofing' activities in T-Bonds.

The most interesting thing is that consensus among HFT firms is that 'spoofing' does not happen. The name of the other HFT firm is not mentioned.

read the full article here

Not too big to fail

More pushback from the industry against further regulation. Trafigura, one of the largest commodities traders world wide has issued a white paper in cooperation with Craig Pirrong of the University of Houston. In the paper, titled Not too big to fail, Pirrong argues that even stricter capital requirements on commodity traders are not necessary (as the crash in oil has proven that they can withstand major fluctuations) and can lead to deleveraging and wider prices.

The argument is only made for commodity firms as they do not pose a systemic risk like a major bank.  So, it looks like we continue into a new phase of Mifid busting. "Pick on them, not us". 

Read the full white paper here. 

Regulators have a hard time catching up according to ESMA

In a statement released on 18 march, ESMA indicated that national regulators have taken big steps in improving the level supervision of HFT. 

ESMA correctly stated as well that there is still room for improvement. The trading community is coming up with new technology and software on an almost daily basis and regulators are having a hard time catching up. The skills required to understand the data, the algorithms, the IT, etc do not come cheap and probably you will find the best in HFT.

Innovation is not limited to the trading community. Developments in market infrastructure, new products and international co-operation stress the available resources at national regulators even more. 

Spending taxpayers money on financial markets is probably not very popular. However, the alternative is worse.

Read the full ESMA review here.

Time-stamps

Bloomberg published an article on synchronizing the exchange clocks. Not a big deal you might think but then you're wrong. A lot of infrastructure is worthless without having an accurate idea of when something was traded. 

ESMA is taking this a step further: they want to see nanosecond accuracy on time stamps. You can read the article here.

EDIT: Interesting post from some professionals on time recording. What the ESMA is looking for, is extremely difficult to deliver outside of a lab setting. Read their blog post here

Mifid requirements 'naïve' & 'terrifying'

As the regulators mull over feedback on Mifid II and work on further details for the technical implementation of the regulations, participants are left to use the media to get their message across to either other participants or the law makers. And then, slowly the gloves come off.

According to Banking Technology, speakers at the FIX trading community named the measurments that participants needed to make terifying and the CEO of Chi-X Europe went as far as saying that the regulators have shown a level of naïvety.

The full article can be found here

CFTC's keynote address @ Boca Raton conference

Timothy massad @boca2015

On Wednesday 11 March, Timothy Massad, Chairman of the CFTC addressed the gathered masses in a keynote speech. The full speech can be found here but here is a quick overview of his talking points:

• Regulation should be set up in a manner that avoids excessive risk build-up but also enables a proper foundation for the derivatives industry to thrive
• The CFTC is finishing the rule writing on IRS moving towards the CCP implementing different requests from the community such as exemptions in reporting for certain users or packages
• The final Dodd/Frank implementations mostly around the uncleared business and the margin requirements
• The CFTC is working together with the European and Asian peers to get regulation in line as much as possible, but emphasizes that it will not be identical
• Automated Trading Strategies will be an increased focus for the CFTC going forward, as well as cyber security
• 75% of standardized swaps are now cleared via clearing houses. This means that the CFTC has to increase its focus on ensuring their stability
• All measures that are taken have one thing in common, it should enable the CFTC to  be proactive in esuring the integrity of the system
• Further discussions are being held on looking at risks other than the extremely rare defaults, such as operational stucture, security and the viability of recovery plans
• The CFTC would like to do more examinations but lacks the resources to do so
• The CFTC believes that rigorous ongoing oversight and a broad range of policies and procedures are instrumental in ensuring the longevity of this industry and that central clearing is fundemental  to the health of the markets

FIA's Mark Spanbroek pens article on MIFID II

It's Boca Raton week this week, the annual Florida outing for executives in the financial industry. So, plenty of industry news to report. 

Next week, it's the annual FOW Amsterdam in the Hilton. A usual guest speaker there is Mark Spanbroek. After a big career at Getco, Mark now represents the interests of Trading Firms as Vice Chairman of the FIA European Principal Traders Association. In this capacity, Mark wrote an article venting concern about upcoming Mifid II regulation. In short, only a colloquial Dutch phrase sums it up: "Bezint eer gij begint". Or, if we have to make an effort to sum it up, Mark states that we should really consider what we're doing right now in order for us not to regret these decisions in a couple of years from now.

It's a good read and will provide plenty of discussion points for next weeks FOW. Click here for the full article.

A new exchange is trying to change the world of derivatives trading in the US

trueEX Group LLC, a fairly new exchange in the US, gained considerable market share in Interest Rate Swaps without support of the big US investment banking community.

Read the full story here.