The FinanSer

Exchanges fight over speeds and feeds misses the point

It is fascinating to watch the fight that is going on between the traditional exchanges – Deutsche Bourse, Euronext and London Stock Exchange (LSE) – and the new guys – Chi-x, BAT, virt-x, PLUSMarkets, Boat, Turquoise, NYFix Millennium, NASDAQ OMX, Equiduct …

The fight is over liquidity, trading, order execution, pricing, clearing and settlement.

In fact, on that note, we should throw in LCH.Clearnet, Clearstream and Euroclear in their battles with EuroCCP, Rainbow and friends.

There is no doubt that MiFID has been a trigger for change, although the resulting changes are yet to be seen. In other words, we are seeing change, but just do not know the long-term landscape, winners and losers as yet.

The reason for mentioning this today is two-fold.

First, LSE came out yesterday saying that the new guys had to fight on some other ground than latency. Second, Turquoise’s leadership – Eli Lederman, CEO and Adrian Farnham, COO – are addressing the Financial Services Club next Thursday with their views of what it takes to win in the future.

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MiFID's new MTF's start to bite

LSE reported a 52% rise in annual operating profits today, primarily related to trading which, thanks to bulk discounting to market makers, has doubled in the past year. Combine this with their acquisition of the Milan Borsa Italiana and LSE’s Earnings Before Interest and Tax (EBIT) reached £265.2m ($520 million) for the year to March 31st, up from £174.2 million ($340 million) a year ago.

These results might be even better if the LSE had their own integrated clearer rather than using LCH.Clearnet, as margins should improve.  This is one thing they may change this year, through the acquisition of Borsa Italiana which gives them a clearing operation as part of the deal.

Meanwhile, LSE's shares are trading on a price/earnings ratio of 17.9, which is slightly behind Deutsche Bourse at 19 and way behind the Chicago Mercantile Exchange (CME) at 33.4.

However, the good times are going bad and, if I were them, I would be worried.

Read more ...

Post-MiFID, the challenge is Clearing and Settlement

Today's Financial Times has a report on algo trading, with the following line in the middle: "Last week Chi-X, an upstart platform majority-owned by Instinet Europe, marked its first anniversary by capturing almost 15 per cent of total trading in LSE-listed shares at one point during the day. A trade executed on its system takes a mere two milliseconds."

The article goes on to point out that the Chi-x example is a realisation of the MiFID dream.

Equally, I spoke on a panel the other day about the impact of MiFID six months on, and realised that as well as Chi-x we now have MarkitBOAT, Turquoise, Rainbow, SmartPool, Virt-x, PLUSMarkets, Liquidnet, Millennium, BATS Trading, Equiduct ... the list goes on and gets longer by the day.  And this is all thanks to the changes inspired by MiFID opening the markets and removing the concentration rules.

So yes, MiFID is here, transposed, implemented and up and running.  That sorts out pre-trade and trading but, as the FT article points out,the issue is now clearing and settlement.

Clearing and settlement is still aligned with national operations: Euroclear, Clearstream, LCH.Clearnet and all that stuff, along with Central Securities Depositories (CSDs) and their Central Counterparty (CCP) mates, all clogging up the process. 

This is where the Commission is now focused with David Wright, Director of Financial Services Policy and Financial Markets at the European Commission, telling me last year that "there have been a large number of requests – 40 or more from one organisation – for interoperability.  It’s now critical to the EC that this results in flows of business to increase competition and to drive down prices and commission.  The Commission will monitor this space carefully, and we have made it plain that we will not tolerate any anti-competitive blocking of any form."

In fact, he's adamant that this is a critical priority for the Commission.

Equally, the ECB now has an open forum to debate Target2 for Securities which will force the issue.  Then there are the agreements amongst clearers, announced this week.  Then there's the LSE, who gained a clearer through the acquisition of Borse Italiana, and now there's the DTCC who gained approval for their EuroCCP this week from the FSA.  Their clearing operation has already been selected by Turquoise.

This hopefully means that we are rapidly moving from a world where pre-trade now guarantees best execution and transparency with low latency thanks to MiFID, through to streamlined, transparent and competitive CSDs and CCPs which also guarantee free and open choices.

With all of these changes of execution and trading venues, and now clearing and settlement, whoever thinks that MiFID is yesterday's news is missing the point.

MiFID starts to bite as US ECN BATS launches in Europe

BATS Trading has announced plans to launch in Europe, putting further pressure on traditional exchanges. Their aim is to capitalise on the opening of the European markets to new execution and trading venues, such as Chi-x, Smartpool, Turquoise, Virt-x, MarkitBOAT, Rainbow and more.  Something that has been actively promoted by the implementation of Europe's Markets in Financial Instruments Directive, MiFID, in November 2007.

BATS announcement should strike a little bit of fear into some of the traditional and new players.

By way of example, some traditional US players dismissed BATS as a 'few servers in a trailer park' and yet they are now competing head-to-head with NASDAQ and the NYSE.

According to BATS, they now claim that they trade 8% to 10% of all US equities, which is phenomenal considering that they only launched two years ago.  Maybe their success is due to the fact that their trailer park servers are designed to handle high-speed, high-volume and anonymous algorithmic trading, and that's what everyone wants these days isn't it?

Equally, being backed by Deutsche Bank, JPMorgan Chase, Credit Suisse, Lehman Brothers, Merrill Lynch and Morgan Stanley should stand them in good stead. Maybe this is why they are likley to be granted full exchange status from the SEC.If they do the same in Europe, then whoever thought MiFID was a damp squib will have to think again.

LSE's 86 percent rise in SETS trading raises questions

Further to the mention of Iraq’s electronic trading exchange going live this week, the LSE has been running electronic trading since 1986, when the Big Bang moved the Exchange from open outcry to electronic trading.

This led to the introduction of SEAQ, the Stock Exchange Automated Quotation System, in October 1987.  SEAQ was supplanted in October 1997 with SETS, Stock Exchange Electronic Trading, for highly liquid share trading.   

Yesterday, the LSE announced their latest trading results, which showed an 86% rise in average daily trading on SETS for the last eleven months.  This is down to a mixture of market volatility, combined with algo trading and heavy discounting for volume trading. 

The average number of trades per day is now 629,000, compared with 338,000 a year ago, with the average daily value traded up 43% to £9 billion per day.      

Interestingly, with MarkitBOAT, Turquoise and Chi-x all breathing down their necks, the fact that LSE is still growing the number of professional terminals receiving LSE real time data (up 15,000 since February 2007 and 4,000 since December 2007 to 111,000 terminals) must be of particular cheer for them.

On the downside though, is the fact that the amount of money they earn for each trade, based upon trading fees, is falling fast.  The figures are now 89 pence earned per trade, compared to £1.34 last year.  This demonstrates how the LSE are being forced to offer bulk discounts to keep up with these new execution venues. 

Such discounting will, of course, increase volumes as it gets cheaper the more you do.  However, long-term, bulk volume could just as easily shift as it gets into a rate war and if volume shifts, in light of this charging policy, it will be high volume movement.

This discount for bulk policy could place LSE's future profitability in serious jeopardy therefore; or it could actually make them supercompetitive to beat off these alternative platforms.  It's all about volume, speed and value in our search for liquidity with best execution.

Hey ho, the merry-o ... or is that hey-ho the MiFID-oh!

Meanwhile, securitised derivatives trading reduced slightly to 4 million trades from 4.3 million ... I wonder why that would be?  Oh yes, a credit crisis!

 

The end of the EU, euro, SEPA and MiFID is nigh?

There’s been a recent storm of controversy over the ECB’s decision to accept mortgage backed bonds from Spain.  In effect, Spain has had a disastrous subprime mortgage collapse and has been bailed out by the ECB.       

This Investment Markets note of last week explains the process well, saying that Spanish banks have been forced to “increase their provisioning of liquidity auctions held weekly by the ECB, using mortgage-backed bonds as collateral".  This would be all well and good, except that Spain publishes its figures for their reliance on these funds and, so far, they are taking “around 10% of ECB’s total, which is up from 5% not too long ago, this is a raising of nearly €24bn ($34.8bn) in Spanish lending."

In other words, Spain has been bailed out by the ECB in a rescue of similar size to the rescue and nationalisation of Northern Rock in Britain.  The Daily Telegraph reports that “Moody's said the total issuance of securities by Spanish banks last year reached €143bn, up 55% on the 2006. Over €62bn were mortgage securities."   

This has raised the question amongst many as to whether the British, German, French and Italian citizens will be happy that their funding has rescued Spain’s mortgage market, when the rest of us are left to suffer the slings and arrows of outrageous misfortune.   

The reason I pick on the British, German, French and Italian citizens is that we run Europe apparently, according to Portuguese national paper Correio da Manhã (the Morning Mail).  In an opinion piece written by columnist Armando Esteves Pereira, there is major objection to the fact that London hosted a European summit a couple of weeks ago, but forgot to invite 23 countries.

This was a meeting hosted by the UK Prime Minister Gordon Brown on January 29th, where he hosted German Chancellor Angela Merkel, French president Nicholas Sarkozy and the resigned Italian Prime Minister Romano Prodi for a mini-summit about the world's financial crisis in Downing Street.

According to Sr. Pereira, the meeting "sets a dangerous precedent for the EU by imposing the false authority of four giants on the fate of the 27 member states.  And Barroso, the Commission's president, is approving this controversial division of power with his presence ... The United Kingdom is not part of the eurozone and the decisions made by the European Central Bank have little impact on the lives of Britons, as opposed to those from countries that do belong to this zone.  Thus all European citizens are equal, only, as in George Orwell's Animal Farm, some are more equal than others."   

Funnily enough, this is a sentiment I’ve heard many times around Europe.  For example, there is a quote I use in presentations regularly which came from the main newspaper of the European Commission in Brussels, New Europe.  There is an opinion column on the back page of New Europe called Kassandra’s Notebook. 

This Notebook had a killer column a while ago that ended: “It is ridiculous for Europe and its leader to tolerate a situation in which a country, not participating in the Euro, is the one dictating policies in the Eurozone.”   

The column was actually a rant about the fact that Charlie McCreevy had replaced Alexander Schaub with David Wright as a Director General of the European Commission in the Internal Markets. The rest of the column went something like:   

“Alexander Schaub is leaving his post as he reached the retirement age and Commission President Barroso did not extend his mandate”, which is because “Charlie McCreevy is serving the British view for Europe” and also “explains why President Jose Manuel Barroso, rather susceptible to the wishes of Anglophile Commissioners and of Downing Street, did not have the political courage to offer a two year extension to Alex Schaub.” 

The bit I liked the best is the fact that David Wright, who oversaw the introduction of MiFID, had "introduced the Financial Service Action Plan, by coincidence tailor-made to satisfy the needs of the City of London.”   

Well, London is the financial centre of the European Universe isn’t it?  I mean we have more people working in financial services here than the population of many large cities, including Frankfurt.   

However, all this tension does raise the question: what would happen if the EU fell apart or, more importantly, EMU.  What would it mean if the euro disappeared?   

This was a question raised when the French and Dutch rejected the EU constitution referendum in the summer of 2005.  The result of these rejections led to reports that German finance ministers and the Bundesbank were planning scenarios for the collapse of monetary union and returning to the Deutschemark. 

Meanwhile, there are regular reports of Italian politicians pleading to break away and return to the lira.   

All in all, we live in times where we think that SEPA and MiFID, along with the Market Abuse Directive, Capital Adequacy Directive, Solvency II and all that other stuff is here, now and stable ... but it’s not.   

I’m not proposing that the EU will fall apart, but with Spain being propped up by the rest of us, Portugal whinging about being one of 23 countries being controlled by the other four and the euro still only six years old as a currency and nine years old as a trading instrument, should we be betting the farm on PEACHs, TARGETs and STEPs?

Actually, for those in the Finanser community supplying the banks, it doesn't matter as it would be good news if it did all fall apart.  I mean think of how much more revenue consultants and vendors could create by breaking up SEPA and MiFID now they've been implemented, and it would secure our IT jobs for another decade too. 

Hmmmmm ....

Credit Default Swaps doom and gloom

Wolfgang Munchau writes in the Financial Times today that the issues we faced in subprime in 2007 are just a mere drop in the ocean, and that this is more than just a subprime crisis:

“If this had been a mere subprime crisis, it would now be over. But it is not, and nor will it be over soon. The reason is that several other pockets of the credit market are also vulnerable. Credit cards are one such segment, similar in size to the subprime market. Another is credit default swaps, relatively modern financial instruments that allow bondholders to insure against default.”

Let’s take the credit card area first.  According to The Guardian, “America's card debt is around $900bn compared with a relatively modest £56bn in Britain.”  However, the UK actually has similar levels of exposure per capita.  As I blogged about Peter Farley, Managing Director of Financial Insights Europe, last year when he presented at the Financial Services Club and said “we have reached a position where personal debt in the UK has risen to a total of £1,291 billion at the end of 2006, more than 10% higher than a year earlier and nearly triple the level it stood at 10 years ago.”

So, we should be worried about the personal credit market collapsing although the real concern, according to Mr. Munchau, is the total risk exposure in Credit Default Swap (CDS) derivatives.   

A year ago, I stated a little around this issue in discussing the quest for alpha and noting that “hedge funds account for 32% of credit-default swap sellers and 28% of buyers, up from 15% and 16% in2004".  But the real base of this concern goes back to trading strategies, which I discussed back in April 2006.  That discussion was focused upon trading strategies and algo systems and, since then, we’ve seen several market movements to create additional market risk. 

Back then, I stated that Credit Default Swap (CDS) derivatives were a $12 trillion market.  Today, Mr. Munchau estimates that the CDS derivatives market is worth about $45 trillion.  This isn’t far off, as hedge funds have exacerbated this market as mentioned and CDS derivatives were up 107% in the first nine months of 2007 according to Tim Keaney, Co-CEO, BNY Mellon Asset Servicing.

So, what’s the problem with CDS? 

Well, the way these systems work is like an insurance policy for a bank’s credit risk.  For example, the bank takes a basket of loans that mix $1 billion to Panama, $5 billion to Mexico and $2.5 billion to Columbia, and then offers the option on these loans defaulting as a credit derivative.  The investor only has to pay on the derivative if the borrower defaults.  Meanwhile, if the loans are paid off, then the investor has made a packet of cash from the premiums the banks pays to offset their credit risk.  That is why, in simplistic terms, credit derivative are an insurance policy for a bank’s loan book and is one of the major reasons contributing to the acceleration in lending over the past decade.

This is fine in times of a boom, as there are virtually no insolvencies.  However, during a recessionary period, insolvencies rise and KAAABOOOOOMMMMMMM ...

... bang goes CDS derivatives and we have a major market explosion.

Now we all recognise that there is market and credit risks in the financial world, but we manage them.  What Mr. Muchau's column raises in my mind is the question of whether there is a systemic risk in the markets?

Have all of our debt-based tools and instruments created a systemic market risk which could bring down the financial markets worldwide?

Certainly, our debt instruments are untested.  That is why Warren Buffett calls derivatives "weapons of financial destruction".  Certainly, subprime has been a problem and, if CDS derivatives explode too, then we do have a major issue.

Mr. Munchau's contention is that these instruments have not been tested during a major recession and, if the USA enters a recession, then the markets could implode.

Let's have a think about this then.

America has enoyed a boom period for the past half century, much of it fuelled by manufacturing and technological innovations.  As a result, the dollar has been the world’s globally trusted currency and America has used this strength to leverage debt.  However, this has changed as, in more recent times, some of the American economy has been fuelled by consumer demand and government borrowing, based upon a strong dollar and driven by debt.

This is all fine in periods of boom where America has strength but, with the dollar weak, inflation on the horizon and a recession looming, Mr. Munchau’s contention is that we should be worried.  Especially if this recession is a deep and long one – of the sort not seen since the mid-1970’s – as this would test the financial markets like they’ve never been tested before.  After all, thirty years ago we did not have the multitrillion exposures created by debt-based derivatives and credit-based products.  As a result, the fact these products will be tested for the first time in 2008 should be cause for concern.

Mr. Munchau also cites a report produced last week by Bill Gross of Pimco, which roughly calculates loss exposures in CDS derivatives to be around $250 billion.  Add that to the $400 billion plus in subprime losses, along with a tasty little credit card crisis, and you can see why he’s worried.

However, one thing he fails to mention is the strength of Sovereign Wealth Funds (SWF) in China, India and the Middle East and elsewhere.  Therefore, maybe we are actually seeing a balance shift in capital ownership, which is why I predicted a US bank will be majority owned by a foreigner last week.

In addition, you always have two sides of the coin, a little like Alan Greenspan’s  gloomy view of the world versus Steve Forbes.

Anyway, I’m sitting here on a Monday morning in a rainy London that has dark grey clouds and no sunshine, so maybe that’s the reason why Mr. Munchau wrote such a dark and gloomy report.

Are the doomsayers being far too pessimistic?

We shall see. 

 

Five firm predictions for 2008

Welcome to 2008 folks, and I hope you all had a wonderful holiday break. I did ... but what goes on at Xmas, stays in Xmas as they say (hic!).

Anyways, a year ago, I made a bunch of forecasts for the year 2007.  This year, I'll go a step further and make some concrete predictions.  However, before doing that, I was looking back at last year's forecasts and they weren’t far off, although I tend to over-estimate the speed of change and under-estimate the impact.  For example, I hoped that 2007 would be the year of Web 2.0 for retail banks. A year later, I hope that 2008 will be the year of Web 2.0 for retail banks.  It didn’t happen last year.  2007, as mentioned before Christmas, was the year some banks woke up to Web 2.0, but most were still fixating upon branch transformations.  Nothing wrong with that, but things are moving at such a pace in our socially networked world that many are going to miss a trick.

So, here’s a bit of wishy-washy forecasting for 2008 and then five firm predictions that will definitely happen before 31st December 2008.

First to the wishy-washy. 

2008 will be the year of the customer. 

Wow!  What a surprise.  Did we forget the customer in 2007?  Nope, not really.  However, 2008 will be the year of the customer because the banks will start to deliver what the customer really wants.

In investment banking, this means best execution and transparency.  That is what MiFID, RegNMS and a host of other global regulations is trying to force into the market but it doesn’t need regulation to make this happen.  It just needs customers – fund and asset managers in the institutional investment firms in this instance – to demand it.  And they have been and are making those demands.  Those demands, combined with the regulatory regime, will mean that the bankers who try and duck the customers’ scrutiny will get caught out.  So yes, there will be an investment bank that gets hauled over the coals for failing to deliver best execution in 2008.

In payments, delivering what the customer wants is all about the dialogue banks were having through 2007 around supply chains.  Supply chain management is the bankers’ focal point for turning around their internal scrutiny on bankers processes and trying to understand their customer’s processes.  Why is this important?  Because banks want to demonstrate their true value to their customers before their customers chuck them out.  Therefore, 2008 will be all about how to create real-time, value-adding, corporate information services into the financial processes that support the supply chains of bank’s customers.  That will be a critical dialogue.

And, as mentioned already, for retail banks it will be a rush back to the internet to focus upon social networking.  2007 was all about branch transformation strategies being delivered.  2007 was all about creating branch experiences and turning tellers into sellers.  2008 will now be around how to leverage the branch experience with a consistent and complementary electronic experience using social networking as the underpinning.  Again, it will be about giving the customer what they want face-to-face locally and electronically remotely.

So, as can be seen, all aspects of banking will be focusing upon giving the customer what they want, whether that is best execution and transparency in investment operations, real-time information services in supply chains, or experiences that exceed expectations locally or remotely, online or offline.

In other word, 2008 will be the year of the customer.

OK, that’s the wishy-washy stuff out of the way.  Now to the real meat of 2008 – what’s really going to happen?

Here are five predictions  … and yes, I am playing safe but you would not expect a wild and wacky view here would you?  OK you might, but as you’ll pick these up in January 2009 I think it’s better to be safe.  Also, these predictions are all about banking, as predicting that Barrack or Hilary would be in the White House in a year, or I love Huckabee is not part of this ritual.

So here we go.

 

Prediction #1: A Top 10 US Bank will be majority-owned by a foreigner

It was interesting over the winter break that the business editors at The Times commented on Warren Buffet’s investments, and how he’s totally avoided supporting US domestic banks during the credit crunch crisis.  In fact, he’s gone into low-tech industrial services instead with a major investment in Marmon, who make railway tankers, plumbing materials and household wiring.  Meanwhile, the dollar-bleeding subprime casualties of Bear Stearns, Countrywide Financial, Citigroup, Morgan Stanley, UBS and Merrill Lynch have all been ignored by Warren.   Instead they’re being propped up by saviours from Asia and the Middle East in the form of Sovereign Wealth Funds.

Therefore, I reckon there will be a major storm mid-2008 as a Sovereign Wealth Fund from China, India or the United Arab Emirates – what?! – gains a 51% or higher stake in a major US bank.  This will then form the source of a major debate in the middle of the presidential battle, with the likes of Michael Bloomberg and Steve Forbes jumping to support the Obama and Huckabee campaigns.  The fight will be wonderful to watch as quiet diplomatic support meets hell and brimstone outrage, and presidential candidates fight over the loss of American leadership in the financial markets.

Why is this prediction likely?  Well there were already forays into American banking from China last year with Blackstone, the leading US private equity manager, is now 10% owned by the Chinese, as is Bear Stearns.  Over the course of 2008, Sovereign Wealth Funds will stretch their muscles even further and, with the dollar weak and the economy teetering into a recession, American financial firms will look like a cheap target throughout the year.

 

Prediction #2: A bank will be fined over $1 million for non-compliance with MiFID 

We all know that MiFID has been implemented in a fairly roundabout fashion, with some countries still to transpose. However, certain markets have been very proactive and vigorous in getting MiFID in place to demonstrate best practice, with the FSA in the UK being the first to get their teeth into the implementation.  As a result, the FSA will also be the first to find and set an example of a bank that is undermining the spirit of MiFID’s best execution policies. 

The test case will occur towards the end of 2008, by which time they will believe that most banks have had more than enough time to get used to MiFID’s requirements, nuances and policies and hence will be viewing any non-compliance as flagrant disregard.  The worst offender will be picked out and heavily wrist-slapped with a fine that will be viewed as one of the highest of 2008 but, in comparison to earnings and profitability, will actually mean diddly-squat in practice. 

Why is this prediction likely?  Because it will demonstrate to the European Union that the London markets are once again at the forefront of leading the charge towards transparency and a level playing field, whilst maintaining London’s and the FSA’s integrity, and pushing the markets to view the City as one of the world’s best trading grounds therefore.

 

Prediction #3: PayPal reaches 200 million users, Facebook 100 million and a major bank launches a social network for consumers

In November 2007, PayPal claimed 164 million user accounts in almost 200 markets and 17 currencies worldwide.  PayPal’s rise and continued rise staggers.  In March 2007, for example, they had 133 million accounts in 103 countries, 100 million in February 2006 in 55 countries, and only 16 million back in May 2002.

Facebook’s rise is equally dramatic, claiming 2 million new users each week and over 50 million users worldwide in December 2007, of which 10 million are in the UK.  Compare that with 7.5 million users in July 2006 rising to 18 million in February 2007 and you can see the phenomena in action.

The network is in action and dramatic social interaction at that.  The power of the network is such that each time someone is added to it, they multiply the number of people communicating and hence fuel the rapid rise of communication.  This is why “If 100,000 people join my group, my wife will call our second child Spiderpig” gained 100,000 members on Facebook during the summer ... in days.  This is why “Stop the HSBC Graduate Rip-Off” stopped the HSBC graduate rip-off by gathering over 6,000 members on Facebook in a fortnight.

This is also why Zopa, Propser, Boober, Smava and many other social finance sites are starting to build new models of investing and borrowing.  Therefore, 2008 will be the year that banks start experimenting with social lending and social finance.

Why is this prediction likely?  The idea is already on the rise, with Fortis and Bank Of America building business community sites, but no bank has really got into trialling these ideas in a retail context.  Why would they as it undermines their business model?  The Zopa style low margin platform is totally at odds with a bank’s credit-debit offset model.  But I feel a bank will try to bring in more social connections in their retail operations, even if it’s just a bit of blogging around your bank statement online.  Watch this space closely in 2008.  After all, banks cannot ignore markets that grow from nothing to 100 million or more users in under two years.

 

Prediction #4: There will be another major European merger of banking goliaths

You thought the Royal Bank of Scotland, Fortis, Santander fight with Barclays for ABN AMRO was a humdinger in 2007?  Think again.  There will be another one in 2008.   In fact, there will be lots of little sparks of merger as demonstrated by the fact that Santander has already been trying to woo Alliance & Leicester, but this one will be a major ding-dong in mainland Europe.  No names mentioned, but it wouldn’t surprise me if there may even be a non-European bank playing an instrumental role in the battle.

Why is this prediction likely?  Well, what the hell is the point of what Charlie McCreevy is doing with SEPA and MiFID and the rest, if it’s not meant to move Europe towards a more harmonised, rationalised and efficient market.  And right now, Europe is far from that as 9,500 banks is an awful lot for a territory that can only sustain about 3,000 long-term.

 

Prediction #5: Green Computing becomes a hot topic

It’s funny that I spoke about green computing over a year ago and was met by blank stares.  Then a couple of banks, Dutch ones being at the forefront, started telling me that they were willing to refresh their technology on a three-year cycle rather than four years, if it could demonstrably reduce carbon emissions and power outage.  In 2008, I reckon a lot of other banks will get this message if, for no other reason, than to look good.  Many banks this year will therefore start talking about their green credentials and will ask technology providers to do the same, as demonstrated by the most recent Finextra headlines.

Why is this prediction likely?  Come on, everyone wants to be green these days, especially after Al Gore won a goddam Peace Prize for harping on about it.  So you gotta show you’ve got a green finger or greensleeves these days haven’t you?  Thing is though, most of us don’t actually give a stuff.  I mean, I’m all for green but cancel my holiday to Barbados?  Get outta here. 

This is the view of most of the investment banks I talk to: green is of zero interest.  Their only focus is on power and latency and their issue is being hampered by space.  They cannot actually get all the processing power they want into the office space that’s available. However, what you will see this year, is lots of processing power going into banks, and core technology refreshment to exploit speed, power, mips ... all under the label of green.  This looks good from a marketing viewpoint and you never know, it just might win us the FT’s Sustainable Banking Award in 2009! 

 

So there you go folks, five predictions for 2008:

1. A Top 10 US Bank will be majority-owned by a foreigner
2. A bank will be fined over $1 million for non-compliance with MiFID 
3. PayPal reaches 200 million users, Facebook 100 million and a major bank launches      a social network for consumers
4. There will be another major European merger of banking goliaths
5. Green Computing becomes a hot topic

These are all safe bets, and there are many more I could cover but I thought they were too obvious.  For example, a bank will have a payments problem due to SEPA or a bank will find fraudulent activities rise rapidly due to their trials with mobile and contactless payments. These are valid but I wanted to stick to the top five that were slightly off radar, which are above.  And a top six or top seven doesn't sound as good as five.

Meantime, my forecast of Microsoft's demise has been followed up with Bill Gates crashing and burning at CES this week. Sorry guys. This is not a campaign, just a lament.

My other predictions?  Well, I had a few wilder ones such as a bank implodes due to their technology exploding, but decided to stick with safe and sound.  However, just in case, here’s ten more for those who wanted the weird and wacky:

#1: Britney Spears will enter rehab

#2: Britney Spears will leave rehab

#3: Britney Spears and Lindsay Lohan will enter and leave rehab together

#4: Paris Hilton will marry Kevin Federline, with Britney and Lindsay as bridesmaids

#5: Celebrity Big Brother will merge formats with I’m a Celebrity … get me out of here and Strictly Come Dancing to form I’m a Dancing Celebrity’s Brother

#6: The Doors will reform to cash in on the latest mega-group band reunions wave, with Jim Morrison’s vocals performed by Robbie Williams

#7: Hilary Clinton will be found in the Oval Office with Barrack Obama

#8: José Manuel Barossa will be found in The Hague with Angela Merkel

#9: David Cameron will be found in the Houses of Parliament with Michael Portillo

#10: This year’s Christmas #1 download will be the YouTube clip of Chris Skinner being arrested for spreading false rumours.

Here’s to a great 2008 and a Happy New Year to all of you.

 

'Clearing and settlement barriers removed in 2008'

On Monday, David Wright, Director, Financial Services Policy and Financial Markets at the European Commission, made an interesting statement of policy work around European Clearing & Settlement in the Securities markets. Here's his words as I captured them (e.g. not 100% accurate but the essence):

"What we are trying to do is increase competition in the market, encourage rationalisation and improve competition across the board, so that cross-border Clearing & Settlement Mechanisms (CSMs) costs are the same as domestic. 

"On clearing and settlement, everyone here should recognise that our policy is made up of four different pillars:

1. the industry code of conduct,
2. our support for TARGET2 for Securities,
3. removing the legal and fiscal and technical Giovannini barriers, and
4. ensuring that standards are in place for CSMs in the EU from the European Central Bank and CESR. 

"The code of conduct is a three-part code that will be signed by everyone in this space in the EU:

1. the first part relates to price transparency;
2. interoperability is the second part of the code; and
3. third is unbundling and accounting standards. 

"There have been a large number of requests – 40 or more from one organisation – for interoperability.  It’s now critical to the EC that this results in flows of business to increase competition and to drive down prices and commission. 

"The Commission will monitor this space carefully, and we have made it plain that we will not tolerate any anti-competitive blocking of any form.  You can also expect that the Commission will push for interoperability agreements where we receive these requests. 

"Even with all of these discussions, there are lots of players in this space.  So there will be rationalisation and consolidation, and that’s for the market to determine.  The key is that these agreements take hold.  We also want our market participants to choose where they clear and settle – that’s at the heart of MiFID – and so these agreements are critical to this.

"The other aspects are just as important.  We are removing the legal and fiscal barriers and are now being asked for a timeframe for the removal of those barriers.  The commission in the New Year will come forward with a timeframe, a tight timeframe, to genuinely move forward to remove these barriers.

"On the standards for securities clearing and settlement, one or two member states and regulators have been slow on this, but the Council of Ministers has now appointed a group to look into this and ensure the standards are put into place.

"So we have a four-pronged strategy and will use all the equipment we have to ensure aspiration turns into delivery ...

"Our urgent priority is to get the code of conduct to work in practice in the marketplace, not just on paper.  We create conditions for markets to function, but not the markets.  Therefore, when we went down the non-regulatory route, we put the ball into play with the industry. It’s in their court, not ours.

"This is a real test on both sides to see if they can work it out and, if we can help them to work it out, we will.   We’ve had an open and inclusive policymaking approach.  We’ve tried to build a system and a model that is inclusive and takes the best from third party jurisdictions.  This is an open and transparent working method which has helped us well over the past few years. 

"This is also why I get jumpy about reciprocity and all that stuff.  We need to be attractive to capital from all over the world.  The priority is for the industry to deliver this code.  Success or failure falls for the industry ...

"Giovannini is with the governments to resolve.  We are going to work on this in the Spring with those government offices, to set a timeframe that is realistic but short-tem, to remove those fiscal and legal barriers."

I was pleased to hear that Giovannini's barriers is a priority for the Commission.  After all, an October Banker magazine feature started with this paragraph:

"More than a year after the Giovannini Group’s original deadline for removal of all 15 barriers to the creation of an integrated clearing and settlement system for European securities trades, only one barrier has been fully removed."

and concluded with:

"Although the European Commission is keen for these barriers to be removed, it agreed to a five-year implementation period for the Swift Protocol in March 2006. But if the proposed Target2 for Securities gets the green light, the implementation date is slated for 2013. It will be then – more than 10 years after the Giovannini barriers were first identified – that the industry could become unstuck if removal work is not fully completed."

I mentioned this to David who was a bit unhappy with the idea that only one - the interoperability standards - had been removed through SWIFT's Giovannini Protocol. 

The real issue is national fiscal and tax laws that cocoon and protect the national CCP's (Central Counterparties), CSDs (Central Securities Depositories) and SSPs (Securities Settlement Providers).  The challenge for Mr. Wright and his team is to get face-to-face with these national governments and get them to change these monetary policies. 

It sounds like he's going to give it a go but, if the track record of MiFID transposition is anything to go by, he's got a tough task and, seeing as Mr. Wright is going to be the Lone Ranger, then he'll need a very good Tonto ... any volunteers?

EU love-in between politicians, bankers and regulators

After eighteen months, the European Parliament once again opened their doors to a dialogue about the state of European financial services.  With a series of presentations and top-notch speakers, we review:

• “The implications for EU integration of globalised financial services”
• “Can the EU legislative framework cope with cross-border developments, worldwide competition and market strains?”
• “Perspectives and Priorities for the EU Banking and Financial Services Industry”
• “What focus for EU securities infrastructure in today’s globalised financial markets?”
• “What are the key challenges and trends for Europe’s retail payment systems?”
• “SEPA: for a sustainable and balanced business case”

and so on. 

Strangely enough, SEPA does not spell “Sustainable And Balanced Business Case” (SABBS?), so maybe that last session should have been called “SEPA: for a Single Euro Payment Already” as it is about to start in less than a month.   On that subject, I’ve just finished editing 35 chapters all about Europe after SEPA for a book coming out in March 2008 … watch this space.

Anyways, back to the European Parliamentary debate.  Speakers included:

• Charlie McCreevy, European Commissioner for the Internal Market and Services
• Neelie Kross, European Commissioner for Competition
• David Wright, Director, DG Internal Market and Services, European Commission
• David Vegara, Spanish Secretary of State for Economic Affairs
• Fernando Teixeira dos Santos, Portuguese Minster of Finance
• Tommaso Padoa-Schioppa, Italian Minister of Economy and Finance
• Henri de Castries, Chairman and CEO of AXA Group
• Elizabeth Corley, CEO, Allianz Global Investors Europe
• Georges Pauget, CEO, Credit Agricole
• Jean-Claude Trichet, President of the ECB
• William Cruger, Managing Director, JPMorgan
• Jean-Francois Theodore, Deputy CEO, NYSE Euronext

… you get the idea.

It is pretty heavy duty stuff and will form the basis of this week's blogging so - for those who have no interest in Basel II, Solvency II, the PSD and SEPA, MiFID, Multilateral Interchange Fees and such like - I'm sorry.  This week's blog will be pretty dull, although I'm sure I'll be able to find ways to liven it up.  For example, the question from the Italian consultant to the French politician: " 'Ow coma, yua never implementeded alla of zee laws of competition? " to which the French politician replied, "Qu'est-ce vous direz?  Je ne comprend pas."  (loosely translates to "Stop talking rubbish and get lost").

So I was pleased to see they included a repeat of the session: “Should Europe have a single regulator”. 

This year, they increased the panel from six speakers to eleven.  It just shows what a critical question this is.  So the panel comprised keynotes from Tommaso Padoa-Schioppa, Italian Minister of Economy and Finance, and Jean-Claude Trichet, President of the ECB. 

This was followed by a debate with:

• Edmond Alphandery, Chairman, CNP Assurances;
• Jorgen Homquist, Director General, DG Internal Market and Services, European Commission;
• Sir Callum McCarthy, Chairman, the Financial Services Authority (FSA);
• Daniele Nouy, Chairwoman, Committee of European Banking Supervisors (CEBS);
• Michel Pebereau, Chairman, BNP Paribas;
• Thomas Steffen, Chairman, Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS); and last, but not least,
• Eddy Wymeersch, Chairman, Committee of European Securities Regulators (CESR).

Three of the key Lamfalussy European supervisory bodies in attendance: CEBS, CESR and CEIOPS, meant that this would be a strong debate … or so I thought.

Instead, what came about was more of a love-in than a punch-up.  I guess the shell-shocked markets of Europe, recovering from the US sub-prime credit crisis, feel more inclined towards stronger regulation than ever before, although that was not what was being called for.

In fact, it was more to do with convergence of regulatory and supervisory bodies through cooperation and coordination.

For example, the first keynote from the Italian Minster of Economy and Finance, Tommaso, began with the opening lines:

 

“Tomorrow, I join the committee looking at the effectiveness of the Lamfalussy process for better regulation, as it has been seven years since its launch in 2000.   Our conclusion should be a simple one.  I am going to recommend the European Commission to instruct the relevant committees to deliver over a short-term horizon, as in during 2008’s French presidency), two results:

1. to reach the point of having a single manual of rules applicable to all supervised institutions in the EU; and
2. to have an integrated supervision for institutions that are in more than one EU member state.

“This is the spirit of Lamfalussy, although it does require some changes to EU national laws.  We need these two results urgently because multinational European institutions are subject to a very heavy regulatory burden, which is far heavier than if there were a single manual of rules.  Also, this manual of rules regarding transparency and investor protection has failed, because of the fragmentation and diversity across countries. 

 

“The result is that we have paid a very high price for a very poor outcome.”

Tommaso was followed by Jean-Claude Trichet of the ECB who had two basic messages and three recommendations for the future. 

His two basic messages were:

1.   The EU regulatory and supervisory framework needs to promote more movement to a single market whilst ensuring stability of the core system.  The Eurosystem is convinced the EU framework will meet these challenges only if the requirements for local practices are reduced to the minimum, in other words nothing.
2. There needs to be an adequate institution to manage greater integration of regulation and implementation and this needs cross-border coordination at a centralised level for convergence to occur.

And Jean-Claude’s three recommendations were:

 

1. Reinforce the role and operating mechanisms of the Committee of European Banking Supervisors (CEBS).  The current regime of a consortium of national supervisors does not work, and CEBS needs to be bolstered to be a full part of the L3 committees (the Committee of European Insurance and Occupational Pensions Supervisors, CEIOPS, and the Committee of European Securities Regulators, CESR) to create greater EU cross-border convergence and cooperation.
2. Improve the level of regulatory convergence as progress is a key issue, especially in the banking sector where most EU rules, apart from the Capital Requirements Directive (CRD), were adopted before the Lamfalussy process started.  Even then, the CRD has a lot of differences in each member state and progress needs to be made towards more consistent EU banking rules.   Regulatory convergence should be further enhanced through supervisory convergence via CEBS.
3. The arrangements for cross-border information sharing and cooperation for banks in the EU should be further enhanced.  The cross-border cooperation between supervisors and National Central Banks (NCBs) should be further strengthened in preparedness for any further financial crisis. 

After these two keynotes was a long-ranging two and a half hour discussion amongst the other panellists.  I think Callum McCarthy gave the most succinct summary of this debate:

“Here are the things upon which I think all the speakers can agree.  First, regulation imposes costs on firms in the financial industry, so the regulation should be properly targeted, effectively administrated and that avoids duplication.  We don’t currently achieve that.  Second, supervisors managing cross-border institutions need to collaborate as much as possible to control risk and avoid costs.  Third, we need regulatory structures that support convergence.  Fourth, the Lamfalussy process today does need improvement.”

 

On the last point, this is why there’s a Lamfalussy in-depth review taking place right now ... this is the one that Tommaso referred to in his opening words.

 

What became clear during the discussions is that there are still very conflicting views as to what is required, with three different sorts of European regulatory regime envisaged.

First, there is a view of a central policymaker at European Commission level with national regulators acting as administrators and policing the policies.  This is the one that liaises with the SEC in the USA, as well as Japan, China, India and others.  This is the one name-checked in the EC presentation last week, where the Commission made it clear that they are working with the G7 and SEC to allow mutual recognition for firms to passport operations into each other’s geographies under the host regulator acting at a regional operational level.  For example, Bank of America’s investment operations may be managed under a home regulator, the SEC, with host supervision through the European Commission’s CESR or other body.  However, this does not work because some countries have more at stake than others.  For example, 80% of European UCITS are sold through Luxembourg and Ireland; equities are primarily traded through three exchanges; and so forth.  Therefore, you should naturally turn to the regulator with the most experience and knowledge of the financial market.

Therefore, a second view is that there should be lead regulators, who are the lead regulator of the operators’ home state. This is the approach being taken by CESR for MiFID but, as Callum McCarthy pointed out, you can then end up with 27 lead regulators and equally, some nations do not like the idea of being secondary to a lead.  So what do you do?   Well you go for the third view, and this is the one that everyone seems to have agreed to follow.   

The third view says that you work together in a consensual fashion, with lots of convergence through committee based upon majority voting. Where a nation’s regulator wants to follow a different course of action to that agreed by the majority they have to publicly explain why.  If their explanation is not solid or justified, then they are publicly named and shamed. 

This final example is the one that CEBS, CESR and CEIOPS appear to agree upon, as does the ECB and EC, so this is the one they are going to follow.

It basically says there’s central rule-making but local application.  The focus is on the principles-based spirit of what is trying to be achieved, with a focus upon the outcomes – the market practices and operations – rather than the detail and the application.  In other words, you can have local market differences but only to the extent that they do not materially alter the spirit of what is being required.

On that note, the best question of the day had to be from the audience member from the Bank of Italy (the Italians win for me every time), who asked: “Could the panel please tell me what they are converging towards, how they define moral hazard in this context and how their efforts will ensure we manage moral hazard out of the markets?”

This was the best question because (a) it cuts to the heart of why committee-based consensus does not work, (b) no-one on the panel wanted to answer it, and (c) everyone gets nervous when an Italian starts talking about moral hazards.

A month after MiFID and 'nothing happened' - who says?

OK so it's not quite a month since MiFID came into force on 1st November, and I got a flurry of emails over a statement made by one of the research firms* that, "It's been remarkably quiet. I don't think there've been any big issues ... I think everyone can be pleased that they've complied." 

Now, to be honest and fair, I think this firm is trying to indicate that the big explosion, the big bang, the major revolution has not happened.  So I'll agree with that.  Most of us refer to MiFID as the long moan rather than the big bang.

As a long moan though, a lot has happened. 

We have many new market players in trading (Chi-x, Equiduct, Smartpool, PlusMarkets, Turquoise …) and trade reporting (Omgeo, Boat, ICMA’s TRAX2, as well as new systems from LSE, Deutsche Bourse and Reuters).

We have had issues with LSE's new systems reached breaking point shortly after MiFID's launch.  That was a shock and, in part, relates to the fact that trade reporting issues, which were never fully resolved, are creating duplicate reports and false flags.  The result is that there is confusion about what was traded with whom and where. As is the fact that there are now over 190 execution venues trading across Europe creating a data bubble.

We also had the Property Investment Market suspending business because they could not get a license from the FSA as an MTF, as reported by John Cant the other day.

I don't think "everyone can be pleased that they've complied" is quite true however, as I hear lots of firms are non-compliant, including some of those involved in the big projects. 

For example, the fact that the firms publish their “best price” but that those prices aren’t firm is, in my view, non-compliance.  These prices are not firm as, by the time the retail investor tries to get in there, the price has changed.  This price change happens to be due to delays between pre- and post- trade reporting systems.  The delay allows the directly connected professional investor to get best price, but retail investors connected to retail service providers do not. 

Now these delays may be purposefully built into those systems of course, and I am told that this is ok because the FSA has ruled that such prices are allowed to pass through as the “negotiated price”, so that’s ok.

To me, this is non-compliance.

Equally, the fact that no-one has been taken to task yet is primarily because no-one has been tested for compliance yet.  The FSA and European Commission are instead watching very carefully to see how firms are behaving and which are misbehaving.  Those caught in flagrant disregard, watch out.  Around April 1st, you will be made to look like fools for your in flagrante delicto disregard.

For example, I just attended a nice presentation this morning from the European Commission giving an update on MiFID.  Their comments included:

“We have continued infringement proceedings against those who have failed to transpose which currently focuses upon four member states: Czech Republic, Spain, Hungary and Poland.  Spain is voting today to transpose level 1 of MiFID by mid-December, and Hungary did so last week.  But we will be naming and shaming those countries that fail to implement and the Commissioner is regularly on the telephone to their finance ministers as a result.”

In this update, they also mentioned that in Q1 2008 the Commission will make rulings around bond markets and other non-equities markets and their coverage under MiFID, and Q4 2008 a statement on commodities markets.

Equally, they will be updating transparency rules to cover delay tables and the availability of execution data quality, as well as bringing back telephone recording as a requirement of reconstituting trades.

Watch this space.  MiFID is by far and away unfinished.  More to come later.

 

* one of my friends has it in for this firm so I promised not to mention that it was Gartner again.

Viewing the MiFID community in the raw

Welcome to MiFID day.  Congratulations.  I'm sure this day will be remembered for a long time as the day that Heather Mills, the ex-Mrs. Paul McCartney, went insane.

To be honest, it's all a bit quiet today.  Maybe everyone is waiting for the systems to explode with pan-European trading ... nope.  Nothing happening.

Project Turquoise has now been branded "Project Tortoise", although any group which represents two-thirds of off-exchange trading in Europe should be taken seriously.

The traditional exchanges are still in business and their share prices and liquidity seem surprisingly robust.  In fact, LSE's newly luanched TradElect platform claims to be one of Europe's fastest with the ability to process 4,200 trades a second with six millisecond processing.

Chi-x is nibbling away in Holland and Germany, and claimed 10% of the trading in BP last week during a particularly exciting day of trading. 

Other than that, nothing.

Give it five years ...

There will be 2, maybe 3, pan-European exchanges trading across Europe.  And these will have expanded into multi-asset trading venues rather than being equities Exchanges.

The few other exchanges that exist will be specialised around complex instruments or commodities.

There will less than ten investment banks who, combined, will manage 80% of European trading. The rest will be focused around research, connectivity, analytics or other capabilities such as the provision of outsourced execution services for boutique buy-side institutions.

Hedge funds will still dominate most trading using complex news algo strategies that move markets in seconds.  Livelihoods will be made and broken in milliseconds.

All of the institutions will have light-speed connectivity globally and will look at Europe as a trading pool in a global asset allocation strategy ... rather than as a region.

Sure, MiFID will have an impact.  But let's not forget there's an awful lot else - technology, BATS, NYSE, Mumbai, Shanghai, private equity, hedge funds, news algorithmics - happening at the same time.

Meanwhile, I went off and had a sniff around another place this morning. 

Facebook. 

Apparently, 233 million working hours are lost in Britain boon-doggling social newtorking sites each day, and I must donating a good few myself.  But hey, it's fun so butt out buddy.

Interestingly there's a Facebook community dedicated to MiFID called "MiFID is taking over my life ... argh!"  It's only got 43 members, of which I'm one, and was started by Justin Laur of Reuters.  That may explain why so many of the members are from Reuters, although there's also guys from HSBC, JPMC and Macquarie, as well as folks from as far afield as Luxembourg, Italy and Philadelphia, USA. 

Comments include:

Rebecca wrote: "Oh my God!! It seems like things might have actually gone ok this weekend - or have I just jinxed it by saying that...???"

Graham  wrote on October 2nd, 2007: "From our Intranet - MiFID: The next big challenge is  29 days away! Ooo." 

Peter wrote on October 27th,  2007: "Less than a week now. Hands up all those who are beyond  excitement."

and Chris (not me) wrote: "MiFID was on Working Lunch today, although the 'expert' had no idea what he was on about! They even spelt it Mifid without the annoying CamelCase." 

Best comment from Christophe: "I'm waiting for November 2nd".

So am I.

November 2nd 2012 that is when all this will be done and dusted and the future of European markets is far clearer than the muddle of today.

Hallow MiFID's Eve: Trick or Treat?

‘Twas the nightmare before Christmas and Halloween Jack realised that MiFID was upon us and he had not budgeted nearly enough to make it happen. So he stole $35 million and plugged the regulatory hole through one massive computer upgrade that made all of the consultants and computer suppliers happy Christmas bunnies. 

That's the story we seem to be hearing anyway.  According to Accenture, the average large firm spent $35 million on MiFID.   That's about a third more than my original estimate of $22 million, but less that the $100 million I heard from one major market-maker.

Equally, it only seems to be here in London that they're forking out this moolah as most other countries have been confused about MiFID's implementation, as mentioned yesterday.  Many believe the transposition and implementation by Czech Republic, Estonia, Finland, Hungary and the Netherlands all in a whirlwind flash for November is baloney.  Meanwhile, Spain's Finance Ministry is saying they'll get it pushed through in December whilst Poland is being honest and stating that it is "impossible to estimate" when MiFID will be transposed. 

Maybe this is why 93% of UK companies believe that MiFID will not be "consistently implemented", according to a study by EA Consulting Group released last week.

The survey covered 85 of the UK’s largest investment and financial services providers, and other key results included:

• When asked "What is the biggest threat that MiFID poses for your business?", 40% answered a lack of certainty, 29% a distraction from ‘business as usual’ activities, and 6% the cost of implementation;
• When asked "What is the biggest headache that MiFID causes your business?", 29% said the costs of converting legacy systems, 25% the lack of awareness among management, and 6% the costs (seems like the same 6% as last time to me!);
• 65% see MiFID as an opportunity and 18% as a threat (former must be banks and latter Exchanges);
• 44% say management’s awareness is good whilst 8% think it's "very poor" (bet the latter's not an Exchange!);
• 34% think compliance will be the biggest cost (really!), 28% IT & systems, and 13% data capture and retention;
• 33% think investment banks will benefit most whilst 11% believe technology providers will (latter must be Accenture, SunGard ...);
• 25% reckon that a level playing field will be MiFID's biggest benefit, 20% think that it is passporting across borders, and 11% that Europe will be a more attractive marketplace for investing.

There's no real surprises here for me, as it's just another way of finding out whose cup is half-full and whose is half-empty.  To be honest, most will find their cup half-full if they really understood MiFID well early on and planned appropriately by either reducing tariffs and fees if they are an Exchange or deploying and delivering enhanced services to investors if they are a Broker.  The half-empty brigade are the Spanish and Polish who still don't seem to have much of a clue how MiFID will impact their businesses because their regulators have taken so long to transpose.

Meanwhile, there are those who thought their glasses would be brimming over but are yet to find a few drops of refreshment.  These are the multiplicity of vultures and hyenas who have been beating the MiFID drum loudly for a couple of years riding on the Fear, Uncertainty and Doubt (FUD) it was meant to create.  These FUD-feeders hoped that they would just get consulting, software and integration work through the very mention of MiFID. 

Oh, the day of the MiFID’s.  It’s going to cost you.  You should be worried. And guess what, we have a solution!  Come and get it.  Roll up, roll up.

Now some of them have earned their crust by being sober, rational and strategic.  Yes, you guessed it: the lawyers.  With all these new contracts for retail and professional investing clients, they’ve had a bonanza.  For the IT guys, there’s been some success too.  For example, I was reading with interest that a small wee firm from New Zealand – New Zealand? – has been making a mint.

The firm in question is Endace and they provide tech that measures the performance and security of telecom networks.  According to their latest half-year figures, profits and revenues surged as banks prepared for MiFID by investing in their new NinjaProbe product.  This box analyses network traffic at 10Gbps and generated over 20% of the firm’s revenues for the period, $1.7 million, which is pretty impressive for a product only launched in March.

Ah well, I could go on and on with the nuances of MiFID this week but back to the real world and again, feel free to read earlier MiFID blogs or the Book if you haven’t got to grips with it yet.

Meanwhile, ‘twas the nightmare before Christmas and Halloween Jack went trick or treating.  He treated those that had been planning for All Hallows Eve for over a year with the riches of Europe’s new pan-European investment markets riches ... but for those who only just woke up to his deadline, he tricked them of all their profits and gave them a darn good spanking.  And no, they did not enjoy it!

MiFID week is finally here

There’s lots being written on MiFID this week as it’s MiFID implementation week – hurrah! – so I thought I’d try to summarise some of the key things being reported during the week.  Today, I thought it worth a very brief recap of the key MiFID milestones    

February 1992: Maastricht Treaty signed by European Union’s Member States to create a Economic and Monetary Union (EMU)

May 1993: The Investment Services Directive (ISD) introduced, with the concentration rules for focusing trading through national exchanges which proves to be unsuccessful (hence the reason for MiFID).
January 1999: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain adopt the Euro as a trading currency.
March 2000: The Lisbon meeting of the European Council creates the Financial Services Action Plan (FSAP) to create a Single European Financial Market for banking and insurance which leads to some of the reasoning behind MiFID.
March 2001: The Lamfalussy Process named after Alexandre Lamfalussy, the chair advisory committee that created it, is created to ensure better regulation processes within the European Union for developing financial services directives.  MiFID is the first Directive to really test this process - it is not the first directive to use the process however, as the Prospectus Directive, the Market Abuse Directive and the Transparency Directive have also been through Lamfalussy structures.
April 2004: MiFID adopted by the European Parliament and Council (Lamfalussy Level 1), beginning a two year consultation process with original implementation date intended for April 2006.   As we now know, this was pushed back to November 2007.

May 2005: Introduction of the MiFID Joint Working Group in London, UK, joining SIIA’s FISD, the Reference Data User Group, the FIX Protocol Ltd and ISITC Europe, in a collaboration to influence the wordings of MiFID and reduce the impact upon technology structures.

November 2005: Introduction of MiFID-Connect, a collaboration of many groups including the Association of British Insurers (ABI), the Association of Private Client Investment Managers and Stockbrokers (APCIMS), the Association of Foreign Banks (AFB), the Bond Market Association, the British Bankers’ Association (BBA), Building Societies Association (BSA), the Futures and Options Association (FOA), the International Capital Market Association (ICMA), Investment Management Association (IMA), the International Swaps and Derivatives Association (ISDA) and the London Investment Banking Association (LIBA), to reduce the legal risks and to simplify the implementation of MiFID.

September 2006: After extensive consultations and changes to wordings, MiFID is adopted and ratified by the European Parliament (Lamfalussy Level 2) and now needs to be transposed into national implementation.

31st January 2007: Deadline for countries to transpose MiFID into national laws (Lamfalussy Level 3).  Only the UK achieves this on time.  Although many people say Romania and Ireland were also on time, they followed the UK in February and March respectively.

1st November 2007: Deadline for countries to implement MiFID as national law (Lamfalussy Level 4).  According to the European Commission’s September survey of member states, all countries will achieve this except for Spain and Poland who are yet to advise when Level 3 will be implemented.  The Czech Republic, Estonia, Finland, Hungary and the Netherlands are the last countries to achieve Level 3 in November 2007.

As many of you know, I pulled together a book on Europe after MiFID a few months ago, with contributions from most of the leading figures in the industry.  If you want to know more about MiFID’s background and implications then feel free to have a look at it as it gives you over 20 views of what MiFID means other than my own.

Meanwhile, I see the Financial Times is writing extensively about MiFID this week and thought the leader column from Jennifer Hughes yesterday entitled “Financial Services brace for confusion” was spot on.  As you’ll see from the link, it’s for FT subscribers only, but here’s a few choice lines:

“The UK financial services industry is braced for months of uncertainty and confusion as ... MiFID is due to become law throughout Europe on Thursday, but in spite of years of planning, many countries and companies are still far from fully implementing it.  This has left both business and regulators unsure about the scale of problems that could be thrown up by the directive.”

Old McCreevy had a Plan,  EU, EU, Oh!
   

Turquoise announce technology and CEO

After the disappointing outcome over Plus Markets, various factions are coming out and poking fun at Turquoise.  Unlike BOAT, Turquoise has little to show for its efforts so far, and are still looking for a Chief Executive.  What happened?

The big difference for me is that BOAT has strong partners led by the Markit team, who were selected way back in January.  As a result, they're ready for launch.

Meanwhile, Turquoise has been delayed and delayed, with launch pushed back  to summer 2008 (about the same time as Project Smartpool announced today) because they haven't been able to select the core platform.  Actually, not quite true.  They did select the core technology platform, OMX, in June but couldn't get it delivered in time due to contractual negotiations.

To circumvent all of this, Turquoise then made the bid for Plus Markets earlier this month, which would gain them not only OMX but a Chief Executive, Simon Brickles.

According to the reports, the reverse takeover fell apart because of an argument over whether the choice should be OMX or Cinnober.  Alternatively, it's because Simon didn't want to have the title "CEO of the failed Turquoise Exchange" on his CV (and who does?).  Alternatively, it's because one of the US banks in the syndicate didn't like the cut of his cloth and wanted their own man to lead the team.

Either way, it's about as interesting as whether England scored a try against South Africa in the Rugby World Cup or not (they did, but the video referee wasn't wearing his glasses fyi), as in the discussion is over and the decision was made whether it's the right or the wrong one.

The real winners are the survivors ready for next week's launch of MiFID. And they are ... the London Stock Exchange, Euronext and the Deutsche Bourse ... oh yes, and Chi-x.

Well done folks, you're MiFID-ready.  That doesn't mean you're MiFID-compliant or MiFID-preferred by the way, but at least you're in production, available and I can trade with you.

Meanwhile, should Project Turquoise be renamed Project Red, as in Red with embarrassment?

Don't bet on it, as last week the consortia seemed to be saying that they would shortly announce both a technology provider and a Chief Executive.   I'll be watching that space with interest ...

... funnily enough, later the same day and meantime, in another part of the city ...

Turquoise announced later on today that Eli Lederman of Morgan Stanley will be CEO.  Checkout my future of trading transcript for more on Eli.  And, shock-horror, Cinnober will be the technology rather than OMX.  Funnily enough, Cinnober is the same technology platform that BOAT uses.  Small world isn't it?

 

The future of trading

I recently chaired a breakfast meeting on the future of trading with three key figures from the industry: John Serocold, Director, London Investment Banking Association; Wolfgang Eholzer, Head of Trading Systems Design, Eurex; and Eli Lederman, Managing Director, Electronic and Agency Trading Services, Morgan Stanley.  I thought you might be interested in their views, so here's the opening salvo from each speaker. A complete transcript is available if anyone wants one.  Just mail me.

CHRIS SKINNER:      The debate is on the future of trading and will there be any traders around in 15 years, or 10 years, or 5 years?  A report came out last year about algorithmic trading and latency, which said that nine out of ten dealers would be out of their jobs by 2015.  I have readily asked people that question, “Do you believe that nine out of ten dealers will be redundant within seven or eight years?” and everyone in the market tells me, “No, no, more like four out of ten, three out of ten, five out of ten” depending on what sort of company you work for so.  We will get into some of that discussion this morning by asking John to pick up on the theme.

JOHN SEROCOLD:  Thanks very much, Chris.  I should preface my remarks by reminding everybody that making predictions is dangerous, especially about the future.  It seems to me that the future of trading is going to be bound up with a number of existing themes some of which Chris touched on in his introduction and most of which will play out in either a major or a minor key over the next few years. The laundry list of themes includes security, end to end authentication and all of the issues around that.  I was interested to read this morning that the people who are trying to crack the system from the outside are now turning their attention to Facebook and Bebo as a way in to identify theft.

           My second theme is constant refreshment of the infrastructure and you only have to look out of the window of this room to see the physical manifestations of that.  That green glass building was built as the London Stock Exchange in the 1960s and it is just being refreshed as another landmark for the city of London.  All those cranes are contributing to the constant refreshment of the infrastructure just to accommodate the human beings.  What you can’t see from here that is equally important is the investment that is going in - invisibly, silently - all the time into hardware, software, communications and capacity.

           When buildings in London started to get taller the market leaders at the time thought they were going to be running with hydraulically powered lifts so an enormous network of relatively large tunnels was quickly built under the city of London to provide high pressure water to power the hydraulically powered lifts.  This was at a time when electricity was in its infancy and thought to present a fire risk.  Those hydraulic tunnels quickly fell out of use but then had a new lease of life in the 1990s when it was a very convenient place through which to throw large quantities of high capacity fibre optic cable to take advantage of the next turn in the technological progress.

           That leads me to my next theme.  Constant refreshment of the infrastructure costs money and the end to end cost of trading still needs to fill.  This is a major theme of LIBA’s work over the last few years and for now, in my introductory remarks, I will just divide those costs into two buckets.  There is the cost that the investment banks pay away externally to infrastructure providers which continue to be too high, and the second set of costs are costs about which the investment banks would dearly love to do more but they cannot, which is the cost of complexity - the cost of a broken Europe, the cost of the absence of a single approach to regulation, market microstructure issues, conduct of businesses issues.  The potential for a significant win in that area as a result of the Financial Services action plan is very much in the yet to be delivered box as far as the industry is concerned.

           Fourthly, I should mention attention to detail.  I think attention to detail as a theme will continue to be very important over the next few years and attention to detail not just in capturing business requirements in order to code them but attention to detail in terms of the details of the application of the laws of physics will be important.  We will come later on to the services that some of the major exchanges are offering called co location which is an attempt to work around the fact that there is a thing called the speed of light by allowing people to put very resource hungry applications very, very close to the exchange’s trading engines rather than have the tiny extra latency of sending large quantities of messages from the bank’s trading engine to the exchange’s trading engine.

           Along with attention to detail goes constant attention to the changing needs of the client.  The automation story, more or less all my life and for some time before that, has been a story which is fundamentally about simplification.  If you go back to Ford’s insight into the production line, if you look at robotisation of production, if you look at the prefabrication of buildings - and again you can see that out of the window - deskilling jobs, making them easier, making them easily replicable, making them easily exportable doesn’t necessarily fit very well with the changing needs of the client.  Clients’ needs have always been and will continue to be very, very heterogeneous.  I am sure that with 20 of you in the room we will have at least 25 opinions about the future direction of the financial market.  You are all at different stages in your lives; you all have individually different financial needs - scale that up across the population of Europe, scale that up across the population of the world.  The clients are always going to be heterogeneous and the challenge for bankers and investment bankers is to find ways of meeting those needs efficiently.

           So I think that is probably enough from me but that’s just to set the scene and give you an idea of some of themes which are going to influence the future of trading over the next few years.

CHRIS SKINNER:     Wolfgang from Eurex, give us a little bit more insight into where the markets are going and how technology in the markets and global integration of markets are coming together.

WOLFGANG EHOLZER: Yes, from my side we have heard a lot of, I would say, general principles which for sure will lead the way into the future.  From my side, looking a little bit more on the technology side of things, I can see for any place where trading really occurs, whether it is an exchange or trading venue, ECN or whatever, at least five criteria which will determine whether they will be successful.

           These days, obviously latency is one of those; that is an issue.  I think one has to be careful in talking about latency because there are different definitions and I think up front it is one of the important things, talking about things to try to define them.  So at least, in my high level and naïve point of view, when somebody enters his order to buy or sell whatever it might be until he gets the response, what really has happened to that order?  You send, “Buy me 100” and I get back, “Bought 50, 50 in the book”.  That is one part of latency which I think is important.

           More importantly, I think that achieving low latency is definitely not enough because I think what we’re seeing in the market situation at the end of February, beginning of March and also in August, is that a very high consistency is extremely important for the market.  So even in situations when there is a lot happening, all the people who trade whatever it is want to see the same behaviour of all the IT infrastructure; whether it’s from outside providers, exchanges, ECNs, they behave exactly in the same way which is a challenge for all the guys who are doing the technology side of things because volumes are up by a factor of three, four, five or ten maybe, and in a peak situation that is a challenge.  So I think consistency is extremely important.

           I think the third thing on my list is obviously high speed market data, so it’s not only knowing what your order has been doing - whether it has been matched or you’re in the book - but it’s also to know where is