Are data centers utilities?

Another good post from Mechanical Markets. This time the question is raised if data centers are utilities or not. Given the latency driven compitition, being in the same DC as the exchange can be very profitable. However, it comes at a cost. And one can question to what extend exchanges and data centers are willing and able to provide space to all participants.

And this is exactly what happened in the Nordics between Verizon, Burgundy and Nasdaq OMX. The exchange abused its position in the market and forced Verizon to deny Burgundy acces to the DC in which Nasdaq OMX was providing co-lo services and hosting its matching engines. 

All in all, there are very good and compelling arguments to start seeing DC as utilities! 

You can read the blog here.

LME looking to improve liquidity

Interested in trading metals? The LME launched a month-long consultation on proposals designed to broaden access to its electronic trading platform. 

According to LME the proposals are crucial to  maximize liquidity and participation. CEO Garry Jones believes that opening up access to trading on LMEselect is beneficial to everyone  active on all LME's venues. 

More flexible application criteria for LME membership may lead to some prospective members benefiting from exemptions from the UK Financial Conduct Authority (FCA).

The effort is an important step in  LME’s liquidity roadmap.

Join Inside ETFs Europe on June 8

From Monday 8 june till Wednesday 10 June a large ETF conference is held at the Okura in Amsterdam.

More than 500 industry professionals will gather to learn more about ETF's and have in-depth discussions on latest trends in the ETF market at the 6th annual Inside ETF's Europe.

We will cover the event at Brokerdealer.eu and summarize the proceedings but do consider joining the event yourself. It looks to be a great event.

The event will kick off on Monday with some ETF basics such as understanding what ETF's are, how to trade them and how to choose the best ETF's for different asset classes. In the afternoon, focus will shift towards Smart Beta ETF's, Fixed Income ETF's, commodity ETF's and currency ETF's. The session is closed with a keynote adress by Professor Jeremy Siegel providing his outlook on Global equity markets and interest rates and a coctail drink session.

On Tuesday the session proceeds with keynote addresses on how ETF's are changing the investment world, a macro economic discussion on finding investment opportunities and the future of ETF's. During the lunch a Q&A session with Dutch football legend Ruud Gullit is held. In the afternoon 6 'track-sessions' will be held with panels consisting of different industry professionals detailing the usage of ETF's for different markets and purposes. After the closing keynote of former White House advisor Pippa Malmgren, a reception is held at the famous van Gogh Museum.

On Wednesday, the conference is closed with a recap, a panel discussion on platforms and Smart Beta, a live trading demonstration on finding liquidity and regulation topics. The final word for the conference is given to Nick Leeson, perhaps one of the most famous 'trader turned big house resident' ever. Leeson now gives speeches on risk and corporate responsibilty using his vast practical experience in that area.

All in all a very worth-while conference to learn about one of the fastest growing sections of our industry and a great place to meet interesting industry peers.

Check out the conference website for more information and registration.

Collateral damage?

Transaction cost shocks in financial markets are known to affect asset prices that banks use to collateralize borrowings in monetary policy operations. 

The ECB published an interesting paper presenting a micro-simulation of the impact by transaction cost shocks on asset prices. The conclusion is that banks will on average suffer small collateral losses while selected institutions may face considerably larger collateral decreases. 

The simulation shows that, when disregarding effects on turnover, a 0.1 percentage point increase in transactions cost causes a decrease of -0.30% in collateral value. When taking the effects on the turnover of debt instruments into account in the order of 25% or 75% the collateral value is shown to decrease by -0.22% and -0.07% respectively. 

The study also shows that different assets are impacted differently. Uncovered bank bonds, central government assets and corporate bonds are affected the most with decreases by -0.96%, -0.91% and -0.34% respectively. 

The fight over FTT continues

Yesterday the EU stated that the EU commission is close on reaching a compromise on the discussed Financial Transaction Tax (FTT). The full Bloomberg article can be found here

It is interesting to note that the EU members remain divided over introducing an FTT, the possible compromise would still be without the UK and the Netherlands participating. The European Banking Union rightfully noted that an introduction of FTT in only some countries of the EU would be inconsistent with the EU efforts to build a capital markets union.

In the States meanwhile, Presidential hopefull Bernie Sanders made FTT a part of his campaign, stating that he would tax 50 cents on every 100 USD traded in equity value to provide better education and shrink trading (effectively killing HFT). According to him, both moves would improve and stabilize the economy. Realistically, it will be a cold day in hell when he gets elected but it does show that FTT is still far from dead and still a great tool for politicians to rally the masses.

Meanwhile it would be good to step away from the rhetoric and look at some studies conducted on the effects of FTT. In our studies collection there is a very interesting study from the University of Duisburg. They looked at Italy where FTT was already introduced and measured its effect. They saw an increase in volatilty and a widening of spreads. Read the article here.

Another interesting document is a study done by the City of London Corporation (perhaps not completely unbiassed). They used another angle and researched how an FTT would affect household savings. That is one of the things that usually gets lost in all the rhetoric of the FTT proponents, at the bottom line it will be the end-client that pays the bill.

NYSE to launch bitcoin index

The NYSE today announced the NYSE Bitcoin Index (NYXBT), the first exchange-calculated and disseminated bitcoin index. 

NYXBT will utilize a unique methodology relying on rules-based logic to analyze a dataset of matched transactions and verify the integrity of the data to produce an objective and fair daily value for one bitcoin in USD.

The NYSE Bitcoin Index will initially feature data from transactions from Coinbase Exchange, the leading U.S.-based bitcoin exchange in which the NYSE has a minority investment.

Read the full press release here.

Top US Federal researcher discovers the obvious

Not so long ago, when the industry was in full auto destruct mode, governments and regulators stepped for the big bail-out. Naturally that came at a price. The internet might just be too small to list all the measurements, fees and regulations that followed but one thing stood out; risk associated with the financial industry had to become more visible and had to be contained.

Centralized clearing for those pesky OTC transactions became an essential part of this. It would enhance transparency, deal with counterparty risk and it seemed like the best solution to prevent a domino effect. Instead of lining the domino blocks next to each other, you'd stack them on top of each other.

With that imagery in mind, a top US federal researcher identified the next problem. The stack at the CCP might get too high at a certain point (concentration risk). No, who could have foreseen that?

Read the full article here

Fix security group established

FIX is the standard messaging protocol used by trading platforms, banks and brokers to communicate trade information. Traditionally the FIX protocol only offers very basic security options. In the past the opinion of the FIX organisation has been that security is not part of the core expertise of the FIX organization. The FIX organisation did provide some help and guidelines.

Now a working group has been formed to research the need and possibility for hardening the technology used for transactions around the world.  Because the threat of financial institutions being breached is very real, its a topic worth following.

Tullet Prebon launches matching engine for alternative investments

Tullet Prebon is one of the largest interdealer broker worldwide. It has now launched a matching engine for alternative investments called TP-AIME. The enigine will also serve as an auction facility for secondary investments in hedge funds, private equity and real estate funds.

The matching engine is the first of its kind and Tullet Prebon believes it will increase transparency and simplify transactions in a relatively opaque market.

Users of the plaform will be 'LP's' (Limited Partners) such as the funds to buy or sell illiquid interests and 'GP's' (General Partners) such as private equity firms looking to run auction events.

Read the full press release here

The Economist Special on Fintech

If you ever wondered what all the Fintech fuzz is about and how it may or may not affect your business, read the special written by the Economist.

It gives a very clear overview of what Fintech is general is and how it can gradually bite bits and pieces away from the traditional industry untill there is not much left.

There is not much protecting the financial industry. Regulation is basically the only hurdle most fintech companies have to cross. Other than that, everything seems to fall in their favor:

• There is not a whole lot of love for the financial industry (putting it mildy)
• Millenials will be the new big spenders and tech is engrained in their system
• With no legacy systems, fintech can operate more smoothly and efficiently
• Venture Capital has money to burn and not afraid to take risk

Read the full article here

HFT don't spoof markets, people spoof markets

A debate on HFT was held at the CFA Institute conference in Frankfurt in April. Panelist included Haim Bodek, in the Netherlands best known for his contributions to VPRO's Tegenlicht documentary on HFT and James Freiss, former white collar crime fighter at the US Treasury.

While the opinions on the matter differed, there were a number of things the panelist could agree on.  

First, it is important to understand that HFT in itself is not a strategy, it is a technology. It is nothing more than a tool. HFT as a tool can add liquidity to the markets but it can also be used to for illegal or unethical activities. So, just like with any other tool, it is a question of how to regulate and monitor the people operating the tool and not just condemn the tool itself.

Read the full article here

Putting the Flash Crash in perspective

Mechanical Markets often hits the nail on the head when writing about the trading industry. In his most recent blog he put the flash crash in perspective as well as underlining the fact that exchanges do require additional safety checks. 

You can find the blog here. Check out the other topics as well. It's well worth the read!

An objective look at HFT and dark pools

Sometimes it takes a knowledgeable outsider to bring some perspective and simplicity to a complex environment. That is especially handy when you only need to learn the essentials without becoming an expert.

Enter, PWC. They wrote a clear and concise position paper on dark pools and HFT. A clear explanation of what these phenomenons are and a list of their advantages and disadvantages. 

Read the position paper here

Exchanges crack down on market manipulation

Regardless of the true effect that Sarao had on the 2010 flash crash, one thing seems to be certain. He was manipulating the market and the CME was widely critizized for letting him get away with it for so long.

So, not hard to imagine that in different board rooms at exchanges and regulators, market supervision was a hot topic. The outcome is predictable as well. Read the full article here

"MIFID II, more draconian than regulators realize"

In the continuous rally against MIFID II, there was another opinion voiced yesterday in an article in Pensions & Investments Online,

Tom Conigliario, the MD of Markit, a large US based financial services data provider states that ESMA is taking things too far and that the measurements are more draconian ans troublesome than they realize.

According to Conigliario, trading costs will rise, fund performance may be hindered and further consolidation between funds might take place as the smaller funds will be incorporated with the larger funds. He can also imagine that some asset owners like pension funds may choose to do more internal management.

An associate of Conigliario goes as far as predicting the death of OTC markets. Other experts consulted in the article disagree but do share the opinion that there is a lot of trouble ahead.

Read the ful article here

Brokerdealer.nl/eu, created. Now what?

“Another site with financial industry news”

Is it really necessary to create another website dedicated to the financial industry? The answer is ‘yes’ and let me explain why.

There is an overcapacity of information and opinions on the Internet and if we take a look off the virtual route, we see there are plenty of seminars, coaches and workshops. How can Broker/Dealer make a difference and be relevant to business needs?

First, there is a lot of misinformation surrounding the financial industry. It’s not easy to sift through all the commercial messages, rhetoric and lobbying efforts to find the actual useful bits. There are already some good examples out there for filtering and summarizing this information. To name a few, there’s the Lothian newsletter, Smartbriefs, and Tabb’s Forum. They however vary from the US centric to the sector specific.

From the start, Broker/Dealer positions itself in the market as a filter for a variety of information with a Eurocentric focus (which also means reporting on the US and Asia when it is relevant for Europeans). And, regardless what your direct line of business is, getting a glimpse of what’s relevant to a pension fund manager, a HFT trader, a risk manager, an exchange official, a systems engineer or a regulator can be useful to you as well. Sometimes a trend can be derived and translated to your business, and sometimes you just need to display some general knowledge at a networking event talking to someone in a completely different line of business.

Second, you need to know which opinions to discard. There are a lot of professional lobbyists, special interest groups, activists and (anonymous) forum participants. They are all defending their own little and big interests. You need to apply a filter. Above all, you will need a BS filter and a strict policy on restricting anonymous postings and the duration of discussions. If left unchecked, there will be trolling and nasty back and forth quibbles. All of which is counterproductive.

Broker/Dealer wants to lift the level of the discussion. It does so by channeling opinions and discussions for constructive thinking. This industry is too important to conduct business like we’re competing in the Hunger Games. In addition to providing the livelihood for millions, the industry is also the catalyst or damper of the global economy. There is a lot of good out there, a lot of bad and a lot that can be improved. Instead of disagreeing, finger pointing, and criticizing, we want to be the conduit to a constructive conversation. Find the middle ground and be realistic. Make the market a more inclusive place instead of trying to eliminate each other.

Third, working in this industry, you need to invest in yourself by joining seminars & workshops. This off line bit is essential to bringing the industry together and enhancing knowledge. The problem is that a lot of the content presented at seminars lacks quality. Sponsors or special interest groups dominate the content. Sponsors end up pitching their ideas to a large crowd of uninterested faces and paying for their drinks and lunch. Instead of it being a conduit to business ideas or personal growth, seminars are mostly networking opportunities. This deteriorates the quality of the participants, which in turn, ultimately deteriorates the opportunities for the sponsors.

Broker/Dealer wants to organize small events presented by high quality speakers, thought leaders and educators, who actually get paid to speak instead of paying to speak. Raise standards, improve the quality and help build a better industry. Offer a better product and venue so the sponsor can network with a select group of participants to build his business. The key is to keep it small, structured and targeted towards a constructive collaboration between businesses. We also aim to forge better connections by organizing social events with no other purpose than just the social aspect of the business.

In addition, Broker/Dealer recognizes an invaluable source of information that is relatively difficult to find on the Internet today. Broker/Dealer wants to categorize and eventually rate links to academic research and white papers conducted on the industry.The market needs a site like Broker/Dealer where you can easily find and filter the mass of material universities produce and publish annually.

Finally, we look at where we are today. We believe Broker/Dealer fills a void in today’s market and we will work hard to make it earn its place. The site has been successfully launched. The first articles have been posted and the first papers have been sorted. Currently, the first suggestions for upcoming seminars are being considered. Meanwhile, we call upon everyone whose ideas, opinions, topics, papers, links and suggestions fit Broker/Dealer’s concept to reach out to us. We’d love to connect. We welcome your thoughts and input. Also, please don’t hesitate to contact us to discuss sponsorship opportunities.

How tech startups will become major competitors to HFT trading

It used to be relatively easy for the financial industry to attract the smartest people in the workforce. High salaries, big bonusses and the aura of succes when you'd be working for a major investment bank on Wall Street or the City. Prop trading firms were the first companies to offer more than just a desk and a big paycheck to keep the traders happy. In-house chair massages, play rooms with a bar and football tables, luxurious company outings, design offices, name it and they had it. The mantra was, work hard, play harder.

Tech companies took a page from that playbook, combining a good environment to work in, then work your butt off and reap the benefits from a sky high valuation of the stocks everyone was given. 

The financial industry has rapidly lost its appeal. The outside world identifies the industry with greed, and overpayed risk takers gambling away money and screwing the economy. It will take years (if ever) before the image of the industry will be restored. Tight regulation also does not add to the appeal as it curbs opportunities.

So, the best and the brightest are increasingly looking for opportunities outside the industry and for those with a quant background, Silicon Valley is the way to go. 

Quants, the people that lifted this industry from a gut instinct trading community to a data mining technology driven trading bot are now more popular than ever in Silicon Valley. After all, it is all about data science and optimizing the data. Wheter it be Google, Uber, Amazon, or Goldman, it is all about making sense of the data that drives business.

Working in 'Silicon Valley' is the new sexy. Hard work, long hours, fun offices, chair masages, and huge financial opportunities much like working for an HFT firm. But, witout the negative stigma. And, if trading does not pan out, the experience in working for a tech company can easily be applied anywhere else in the Valley.

In this article, the author signals this trend and foresees that tech companies will not just be the drain of good work force but also become the major competitor to the the industry as they will have the technology, the data and now also the knowledge.

ETP Assets To Beat Hedge Funds In Q2

The ETP industry is growing and growing and... Read about it here.  The sky is the limit! Is it really?

The ETP industry is going through some serious growing pains. Problems around liquidity, replication, BO-costs, fragmentation, etc only see a partial solution at its best. Not every ETP is a succes and certainly selecting the right ETP has become more complicated. (Just try to find the right ETF for you with Euro Stoxx 50 exposure. Good luck!)

From 8 to 10 June the annual Inside ETF Europe conference will be held at the Okura (link). Apart from being a good networking and marketing event for the industry, it does also provide some real content.

Getting the most out of yourself or your people

"“Until you make the unconscious conscious, it will direct your life and you will call it fate.” Carl Jung

Being successful in this financial industry means you've not only invested successfully in the market, but also successfully invested in yourself. Years of studying and hard work has gotten you where you are now. 

But, there's more to be gained, more from yourself and more from the people you employ. Once you understand what propels you forward or, holds you back, you can get the most out of the qualities you possess.

Psychology helps to understand what makes people 'tick'. And for the financial industry there is an expert out there with his feet firmly planted in both the world of finance and psychology. Brett Steenbarger has been working as a trading coach for several funds and is also an associate professor at SUNY in Syracuse.

If you want to self-develop your skills as a trader, it is recommended to read his books or follow his columns on Forbes or his . It's easy to read and directly applicable to our business.

Pension funds caught between a rock and a hard place

Today Jean Frijns and Rene Maatman penned an opinion piece in the Dutch financial paper "Financieel Dagblad". Jean Frijns was the former CIO of pension giant APG and currently a professor at the Vrije Universiteit of Amsterdam. Rene Maatman is a lawyer at de Brauw Blackstone Westbroek and professor at the Radboud University. As the article is in Dutch, we took the liberty of proving a translation of the piece.

In the piece, Frijns en Maatman call upon policy makers to change the directive that pension funds need to invest in 'risk-free' assets such as government bonds as these have now have a negative yield:

Liberate the pension fund from the 'risk free' straight jacket

A pension fund must invest in accordance with the prudent person principle. This principle leans on the efficient market hypothesis: investors are rational people. An essential element of the prudent person principle is diversification of investments. With regards to government bonds however, this diversification is not necessary according to law makers. They are declared 'risk free' by decree.

Pension funds and Insures now face the question whether they should invest in debt securities with a negative interest rate. The English call this "burning cash": destruction of money. It takes effort to explain that this befits a rational investor. Can we still say that a government bond is 'risk free'? The government should not determine whether an investment is safe.
The flight forward is tempting: Get out of bonds with negative interest rates and fully go for shares and listed property. They show very desirable positive cash returns and value increases. But to a large extent this is due to the actions of the European Central Bank (ECB). Those returns are unlikely to be sustainable, though the downside risk less than 'safe' government bonds.

Pension funds are becoming underfunded as they have to value their liabilities at artificially low interest rates. And because they are in a state of underfunding, they may not increase their allocation to equities and real estate, "as that would increase their risk". Therefore even more assets flow to the  so-called 'risk-free' assets, bonds with a negative interest rate. Could it then be prudent to keep money stashed in an old sock?

The financial assessment framework in force since January 1, 2015, opted for a long-term investment horizon. The hypothesis is that a rolling recovery time frame of 10 years would result in an acceptable result. However, is this still the case when the investment portfolio has been concentrated in 'risk-free' government bonds from the start? When interest rates return to normal levels in the medium term, large capital losses are incurred. The effect on the funding ratio of pension funds possibly remains limited by the simultaneous reduction of the pension liability, but the result is a poverty trap: assets vaporize. Moreover, there are systemic risks. We live in a highly uncertain world. Negative interest rates increase this uncertainty.

Reasoned from the prudent person principle, one should look at investment strategies that generate a reasonable result, regardless of market scenarios. Those are certainly not strategies where the investments are concentrated in negative-yielding bonds. What does that mean for the supervisory framework? A first step would be to repeal the decree that certain assets are risk free. Immediately followed by releasing differentiated solvency buffers in asset classes. Such customization is based on faux science. The reality is that yesterday's risk-free investment can be a systemic risk tomorrow. Instead, a fixed risk buffer can be introduced. This sets pension funds and insurers free from the straitjacket of the existing solvency framework. This liberation undoubtedly has implications for investments in government bonds of "safe" countries, as investing at a negative interest rate can not reasonably comply with the prudent person principle.

This would be beneficial  to the effectiveness of ECB policy as it contributes to directing assets towards other sections of the capital markets. Adhering to the current solvency framework seems like reckless behavior from our point of view. This matter is urgent.