Tuesday, April 28, 2009

Incumbent Exchanges


There were two more great discussions during TradeTech that compared and contrasted the incumbents with the new MTFs. The first focused upon attracting liquidity and what that means; the second on the likely view for the future of trading venues.

The first discussion was a debate amongst a panel comprising:

  • Hirander Misra, COO, Chi-X Europe;
  • John Wilson, Chief Executive, Baikal;
  • Rainer Riess, Managing Director, Cash Market Business Development, Deutsche Boerse;
  • Mark Hemsley, CEO, BATS Trading Europe; and
  • Simon Brickles, CEO, Plus Markets Group;

chaired by Andrew Silverman, Managing Director Electronic Trading, Morgan Stanley.

There was a little of the usual spikey stuff about “our exchange is better / cheaper / faster than your one” especially when Hirander of Chi-x mentioned how their order execution was 1.6 basis points better than Xetra’s, to which Rainer of Deutsche Bourse responded that: “Chi-x can claim a 1.6 bps improvement over Xetra but Xetra could claim a 10 bps improvement over Chi-x dependent upon how you measure it.”

Herr Riess was quite fired up in fact and continued: “you must not confuse reality with marketing. It reminds me of the bargain airlines for example, where you advertise very cheap seats but when you try to book, the seats are not there. Ignoring the depth of book is not useful.”

Ah yes, the old apples and pears difficulties of comparing the full execution, clearing and settlement cycle, although there has to be some truth in Hirander’s claims or why would Chi-x have picked up so much market share off the incumbents over the last two years?

There were also some key notes of substance during this panel as well, such as Rainer’s closing comment that you cannot ignore the depth of the book when comparing execution venues.

Mark Hemsley counteracted that liquidity flows to BATS because they have “tighter prices, a diversified customers base and no dependence upon a single order flow”; whilst Hirander talked the fact that regulations mandate Best Bid-Offer (BBO) reference pricing which, without a consolidated tape for a European BBO (EBBO) style service – which Equiduct offers if anyone’s interested – then you cannot achieve this BBO capability.

Equally, Hirander stated that you need EBBO with Volume Weighted Average Pricing (VWAP) to make it really work.


John Wilson agreed, but clarified that a mandated tape would be a bad thing because it would create latency issues and challenges in determining where to take the prices from.

In fact, the entire panel felt a consolidated reference pricing on a single tape would be great, but that is should not be a regulatory requirement. The Chairman Andrew of Morgan Stanley then made the most telling comment: “fix it or we will be regulated”.

Also true.

There was also a clear view that the clearing and settlement area is a problem, with Mark Hemsley of BATS saying it was “a joke” due the log jam of requests for change. “We will go out of our way to support those clearers who create interoperability”, and that there was room for three pan-European CCPs maximum.

John Wilson of Baikal agreed, saying that interoperability of CCPs is critical which is why CCP intermediation is increasing. With intermediation increasing, CCPs are now concerned about disintermediation, which is why interoperability and risk models are being opened up for discussion between the Clearing & Settlement Mechanisms (CSMs).

Charlotte Crosswell, CEO of NASDAQ OMX, speaking in the next session added a nice little sound bite to this debate, when she said that it didn’t matter if they were 0.1 or more basis points better on price discovery if “the elephant in the room – clearing and settlement – was not solved.”

Implication: EuroCCP and EMCF are going to get the full support to lean on Eurex Clearing and Euroclear to make change happen.

Rainer Riess then countered with a view that the Code of Conduct had created transparency and debate, and that there is competition so we do not need more regulation. Equally, in the clearing space, you have to remember the issues of risk and that interoperability between two CCPs is hard to control. “An integrated vertical silo is needed and we can do that in that we can marginalise across asset classes”. Rainer finished with the view that you “must balance competition against market integrity”.

Implication: Deutsche Bourse with Xetra, Eurex and Eurex Clearing has the straight-through processing under a single umbrella for end-to-end trading clearing and settlement … if you want to avoid risk and / or prefer a more single provider (competitors call ‘monopoly’) approach.

All in all, a great panel session.

Monday, April 27, 2009

Turner and Compliance


It will be different in the future though, and there are some firm dates such as June 2009 when the new collegiate of supervisory boards that comprise the Financial Stability Board start their work.

The Financial Stability Board (FSB) itself is there as an early warning system rather than as an actual decision-maker. In fact, it has no decision making powers and so each national and regional regulator can make their own choices. This means that there is no global regulator and there is unlikely to be one.

Equally, there is unlikely to be a regional regulator for Europe, which is why the De Larosière Group recommended strengthening CEBS, CESR and CIOPS but not to make them the EU regulatory power. That power still lies with the FSA, AMF, BAFIN and other national regulators.

So the FSB is the alarm bell and standard setting organisation between nations and regions, but not a powerbase.

The real meat of the G20 pronouncements however had more to do with liquidity – a word that had not appeared on any risk radars or regulatory agendas just two years ago – and capital adequacy. As a result Basel II will be amended to address pro-cyclicality through minimum levels of capital although, as this short clip illustrates,

Friday, April 24, 2009

are Order routers has providing Best Execution?

Chi-x began trading two years ago, soon to be followed by Turquoise, BATS, NASDAQ OMX and Equiduct. And there will be more. According to the dialogue so far, there are 125 or so MTFs registered with CESR across Europe.

Admittedly, many of these are broker-dealer based systems and services, but there are at least 10 pan-European MTFs registered, with Burgundy the next to launch.

So it’s obvious that not all of them can succeed, but having three or four in each area of service from dark pools to liquid stocks to all markets and eventually to derivatives, bonds, fixed income and other markets certainly seems to be on the cards according to the discussions here so far.

I’ll talk more about the other MTFs tomorrow but right now Chi-x is the one that shouts loudest, probably because it’s been around for longest and has first mover advantage. In fact, unlike BATS, NASDAQ OMX and Equiduct, it also had the advantage of launching well before September r2008 when the credit crisis hit, which is a definite advantage.

So Mark Howarth, the new CEO of Chi-x Europe – my friend Peter Randall left on the day I last blogged about this stuff in depth – stands up and presents some interesting slides.

For example, gross consideration for Chi-x rose steadily through to September 2008 and then dipped away as follows:

Gross Consideration (€ billions)

Q2 07 €1.5
Q3 07 €20.2
Q4 07 €34.6
Q1 08 €74.2
Q2 08 €132.5
Q3 08 €246.3
Q4 08 €205.5
Q1 09 €148.9

Now you may look at those numbers diving since Q3 2008 and think Chi-x should be worried, but that’s not the whole story in that, by the end of Q1 2009, Chi-x proudly claim fifth spot in the European pecking order of exchanges, closely followed by NASDAQ OMX Nordic and Turquoise:

Value of Equity trading, March 2009

Exchange / MTF Order Book Trades Order Book T/Over (EUR m)

1 London Stock Exchange 17,279,867 123,650.0

2 Euronext 15,365,479 116,839.0

3 Deutsche Borse 8,118,311 95,835.8

4 Spanish Exchange (BME) 2,832,093 60,682.8

5 Chi-X Europe 10,554,888 57,168.5

6 Borsa Italiana 6,227,802 45,937.2

7 SWX Europe 2,875,388 45,495.4

8 NASDAQ OMX Nordic 4,802,676 43,150.6

9 Turquoise 3,309,508 22,567.8

10 Oslo Bors 1,240,279 11,397.7

11 BATS Europe 1,760,985 8,277.7

12 SIX Swiss Exchange 462,090 2,802.3

Equally, market share of all the new Exchanges has been steadily rising. For example, the three new MTFs – Chi-x, BATS and Turquoise – are averaging around 20% of the DAX30 daily volume. That’s a wee dent in the Deutsche Bourse’s pie I suspect.

In fact, Mark claims that Chi-x’s research shows that there would be a significant shift in liquidity and market share to Chi-X and the other MTFs from the incumbent exchanges if best price routing were in play. This would be in the order of 17% of all orders for November 2008, 15% in December, 13% in January 2009 and 12% in February. The reason for the decreasing numbers is the decreased volume of trading during these months, rather than any uncompetitive aspects of the new MTF models.

In other words, and I’ve heard this from the other MTFs too, the fact that order routers aren’t smart enough to seek out best price in Europe right now is the reason why the liquidity sticks with the incumbents.

Not sure if true, but Chi-x claim their market share would have been 10.6% higher between November and February if the full price improvement transparency and best execution rules were enforced.

Thursday, April 23, 2009

job hunters rejected

Another year, another TradeTech, Europe’s largest technology exhibition and conference focused upon the investment markets for the buy and sell side.

I love TradeTech. The smell of money, the buzz of aggressive trading strategies, the master of the universe swagger as you walk round the exhibit hall, the sound of ‘buy, buy, buy’.

More like the sound of bye, bye, bye this year it seems, as lots of workers have been laid off, bonuses cancelled or delayed and a generally sombre atmosphere around the markets.

Or that's the impression my colleague gave me as I arrived here at lunchtime.

Not sure if true, as there’s a good size exhibit hall and attendance list ... but yes, there is something missing.

What could it be?

Wednesday, April 22, 2009

Why regulators find it so hard to regulate


The theme was around how to make the G20 supervisory framework work with regulators, compliance heads, bank directors and a CIO in attendnace. All in all a nice crowd, and a convivial conversation.

However, I did note a few comments such as:

“Europe is run by the Council of ministers”
“European regulations are overly prescriptive”
“Greed is the biggest desire and how do you regulate that?”
“I’m amazed by the financial regulator’s lack of teeth”
“The French make the laws as complex as possible and then don’t follow them” …

and more.

Oh yes, nothing like being a London-based European is there?

Now this may sound like a disaffected group, but it isn’t. It is more a case that you can create as many rules and laws as you like but if they are unclear, unworkable or inappropriate, then you cannot enforce them.

This is the frustration of the regulators as much as the regulated, and there is no simple answer.

We then talked about principles- versus rules- based regulation, with three-quarters of the room saying that principles-based regulation is still far more appropriate than rules-based. Although rules are easier to follow, they can be too constraining.

Then the conversation was pulled up by the statement that principles-based regulation no longer works and we should focus upon outcomes-based regulation.

Interesting, especially as we have a lengthy process of new outcomes-based regulation coming through, such as the FSA’s Consultation Paper entitled 'Strengthening liquidity standards 2: Liquidity reporting' (CP09/13) released yesterday.

I haven’t had time to read the document but PJ Di Giammarino, who chairs the Financial Services Club’s Capital Markets Chamber**, posted a commentary as follows:

“After a rapid review of the 174-page CP09/13 response on liquidity reporting, we think the FSA is essentially saying ‘We appreciate it is going to be hard but get on with it, because we are serious’.

“Despite many of the 98 respondents to the 15 questions in CP 08/22 (the first consultation paper released last December) highlighting the practical issues associated in delivering new reports, the FSA has decided that liquidity problems need to be monitored daily. And for banks this means exactly what it says on the tin.

“The FSA recognises that reporting requirements may be costly to implement but believes the data concerned would normally be utilised by most firms during the normal course of business.

“In an important nod to the recent G20 meeting, it is also clear that the FSA is engaged in international efforts to align other regulators to its data-intensive approach – and then use this as the basis of cross-border benchmarks.

“Firms should expect the new rules and guidance to be in effect in the fourth quarter of this year with new FSA reporting arrangements going live in Q1 2010. It goes without saying that there’s a huge amount of work to be done across the industry to get this right.

“Our discussions with practitioners in banks lead us to conclude that, whilst much of this makes good business sense, it has the consequence of asking banks to rethink their infrastructures from the bottom up. The good news is that investment firms now have a clear and certain regulatory target to aim at.”

This also builds on the De Larosière report and other rulings as discussed previously, and my take on PJ’s comments is that the FSA has placed stringent rules in play which will force banks to report daily based upon strong liquidity data analysis.

Sounds like a prescriptive regulation if you ask me, and promotes the idea that outcomes-based regulation is not going to be based on principles but will be based upon strong controls, enforceable through prescriptive data reporting structures.

A-ha … and hopefully with teeth and co-ordination for a consistent approach across geographies.

But even if it isn’t, it does not matter as the key here is to have a transparent regulatory environment which ensures a robust marketplace, and the more robust the marketplace the more market players.

It honestly doesn’t matter what the UK, France, Germany, Spain, Italy or others implement in their interpretation of EU Directives, it just matters that each creates a strong and robust marketplace which attracts liquidity and has some form of consistency, even if not quite 100% the same.

This is why the FSA always jumps in first, because they want the UK market to be the most robust and well regulated, to encourage participation in that market over others.

And there's the rub. Who can create the market that has great regulations, which are easy to work with and robust, whilst avoiding constraints and rules which might deter business and liquidity.

And one, of course, that averts a disaster anything like the one we’ve just experienced in this crisis, e.g. from Paul Kedrosky’s Infectious Greed yesterday:


Anyways, back to the dinner and the comment that resonated the loudest around the room was the one that asked: “where’s the customer’s voice?”

In all the dialogue about regulations and regulating, the focus appears to have been to lock the horse back in the barn after its bolted whilst the fact is that the farm still needs looking after.

In other words, are we focusing too much upon the crisis and its issues, or should we be focusing back on what is good for corporations and citizens, and then apply this to the banks?

I guess we’re trying to do both: to plug the holes in our existing legislation that allowed the credit bubble to balloon and burst, whilst protecting corporations and customers from past, current and potential future misdemeanours.

No wonder the regulators have such a hard time.

Wednesday, April 15, 2009

about Bank CEO


The Banker magazine hit the mark again this month with a research report on CEOs views.

During February and March, they surveyed 87 bank CEOs across Western (6.5%) and Eastern (15.6%) Europe, North (5.2%) and South (14.3%) America, Africa (20.8%) and Asia (23.4%).

The figures in brackets are the percentage of CEOs from each region responding, and here’s a summary of key results:

Will business be better or worse in 2009 compared to 2008?

28.7% expect business to be better;
31% expect business to be a little worse; and
11.5% expect business to be a lot worse.

Comment: if 1 CEO was Canadian, then Western European and the USA would equal around 11.5%, about the same number that expect things to be a 'lot worse'!

When will we recover?

Q2 2009 25.3%,
Q3 9.2%
Q4 23.0%
1H 2010 17.2%
2H 2010 19.5%
2011+ 5.7%

That means approximately 57.5% of CEOs expect recovery this year … interesting that South America, Africa and Asian CEOs equal 57.7% of respondents, which means American and European CEOs may be looking to next year.

The main causes of the crisis were:

  1. Exotic financial structures
  2. Excessive leverage
  3. Global macroeconomic imbalances creating excessive liquidity
  4. Poor regulation
  5. Poor management

48.2% described their capital levels as higher than regulatory requirements, whist only 3.5% thought theirs was too low (Citi? BoA? RBS?).

50.6% expect their balance sheet structure to stay the same, whilst 15% thought a significant restructuring would be needed … woohoo!

A key note for those in my community is where do you see investment areas in 2009:

71.3% IT Systems
64.4% Core Banking Systems
63.2% The Bank's Retail Network
56.3% Compliance
36.8% Customers Surveys
29.9% New Staff
25.3% Environmentally Friendly Technology
24.1% CSR Projects

In other words, bugger the planet … we’re more interested in survival and prosperity!

Some other interesting notes include:

  • 40% of CEOs reported retail savings and deposits are the most active business are for the bank and 25.3% said that corporate lending is the most active area; less than 5% said that mortgage lending would be the most active area; and
  • Asked how governments can help banks, less than a third answered through quantitative easing … is that why the Treasury is having second thoughts about more quantitative easing

Tuesday, April 14, 2009

status of the G20


So the G20 meeting is over and has an agreement to spend over $1 trillion through the IMF on nations that are worthy. The other key agreements include:

  • a lockdown on the tax regimes of countries where people hide place their wealth. The age of bank ‘secrecy’ is over they say, although I’m not sure that Switzerland, the Caymans and other nations will appreciate that very much. Mind you, the OECD has just listed the tax havens they views as uncooperative, with Costa Rica, Malaysia (Labuan), the Philippines and Uruguay singled out as “jurisdictions that have not committed to the internationally agreed tax standard”;
  • a crackdown on light touch regulation and particularly on hedge funds, credit rating agencies and the operations of banks in the Over-the-Counter, or ‘shadow’ banking markets;
  • the creation of a new Financial Stability Board, which will focus upon financial stability across all major economies; and
  • measures to address the issues in the banking system by preventing excessive leverage and forcing banks to have higher reserve policies so that we avoid being left under-capitalised in a downturn again.

There’s a lot more to it, but I guess the key implications for banks are that there will be a fundamental rethinking of core products and services as:

  • all systemically important financial institutions will be covered by the rules, including hedge funds;
  • capital requirements will change provisioning, and this may lead to a new Basel III;
  • the current Financial Stability Forum becomes the Financial Stability Board and will embrace all G20 countries, the European Commission and Spain;
  • the new Board will have a much wider mandate to promote financial stability, set financial guidelines and monitor supervisors for the major cross-border institutions; and
  • challenges in using cross-border tax loopholes for profits and products.

On the last one, I just realised something. One of my bank friends works in London two to three days a week, but lives in a tax haven called Monaco to escape tax here. Surely now, he'll move to Costa Rica. Nice weather, and no pressure from the G20 on his tax.

Maybe they should register the bank's head office there too?

Anyway, the G20 Summit was a useful step forward as it gathered clarity from the world's largest nations in stemming this crisis and moving forward. It was useful, even though all of the agreements were made beforehand by the civil servants. It was managed well, as the predicted riots were quelled through strong police action and control (if you didn't notice, the riots in Strasbourg at the NATO meeting have been far worse).

Meanwhile, if you’re interested in learning more from a real expert, then come to the next Financial Services Club meeting on Thursday 16th April 2009 in the London.

David Bagley, Global Head of Compliance for HSBC will discuss his view of the implications of a new G20 Supervisory Framework.

Thursday, April 9, 2009

for the multichannel myth purpose


For years, I’ve dealt with banks talking about multichannel integration and adding new capabilities to the core traditional channel of branch operations.

In the 1970’s we added ATMs, the 1980’s added call centres, the 1990’s the internet, and now mobile.

For all those years, we merrily added these techno-capabilities as the world revolved around us because we felt we had to and because, in some cases, they saved us money.

We added ATMs because they reduced costs; we added call centres because new competitors were eating our lunch; we added the internet because we thought we could close branches; and we’re adding mobile because it’s the latest fad for customer service.

For all those years, we did the best we could to keep up … but we failed.

You see, I had a realisation this week.

One of those eureka moments.

The realisation that multichannel does not work.

It was something that we’ve been doing in our sleep, but it’s wrong.

What we actually created is mixichannel. Mixi stands for mixed up.

We added ATMs and they’ve grown massively in the UK, from 10,000 in 1986 to over 60,000 today.

These were typically stuck on the outside of branches and are now in car parks, pubs, casinos and anywhere else you might need cash (there are many around Soho, which I’m informed need refilling far more frequently than most ATMs!).

The ATM saved cash by increasing transactional services without the human hand involved, or not the bank's hand anyway.

The ATM however is not really a channel.

It’s an adjunct to the bank’s reach. It’s a cost reduction mechanism. It’s a method of getting rid of a branch or adding a remote branch, but it's a transaction engine.

It’s not a channel.

A channel is one where you can sell stuff and provide advice.

Anyone lingering at an ATM talking about a pension would either be (a) mad or (b) annoying, as the 100 people standing behind them wanting cash will be out with the daggers.

So the ATM is not a channel as such, but call centre, internet and mobile are channels.

And the thing about the call centre, internet and mobile is that the banks have typically added these channels onto existing operations after another player has proven their success.

In the case of the call centre, First Direct were one of the first movers to make this channel work, and are the UK’s leader in this area.

First Direct built their bank around a remote telephone based centre, rather than adding call centre to branch operations. Therefore, the difference is that First Direct have processes designed for remote customer reach, rather than a process designed for administering customer service when the branch is closed.

In the case of the internet, Britain’s leading internet bank is Smile. Smile is a bank designed for exploiting internet self-servicing, rather than adding traditional bank processes to a home-based self-service channel.

And in the case of mobile, we now have a new dedicated mobile bank, Mobank, which is soon to launch in the UK.

What’s the point?

Well, my eureka moment is that the banks of the 1970’s are still the banks of the 1970’s.

The reason why their call centre operations ask for name and account number, and focus upon balance and transaction statements, is because they view the branch as the key contact point.

The reasons their internet services are dull and boring is because they are just automating statements online, rather than leveraging and using broadband-based social media.

And their mobile services will be the same.

This is because the technology is being added to the bank focused around branch operations, rather than using the technology to design a new bank specifically for that technology.

However, when a bank is designed around the technology, it wipes the floor of the competition.

First Direct is not only Britain’s largest call centre based bank, but it’s one of Britain’s favourite banks.

Smile is not only an internet designed bank for internet access, but also Britain’s favourite bank.

According to a BBC survey last year of 13,000 UK viewers, these are the top banks for customer satisfaction and service in the UK.

They are banks without branches designed for the channels of today, rather than banks with branches who added these channels onto their traditional structures.

In Japan, I recently talked about Jibun Bank and eBank. eBank has half of the internet banking market in Japan, as a bank designed for the internet. Jibun Bank has already stormed up the bank charts, as a bank designed for the mobile.

What this tells me is that it’s not about banks closing down and being eaten by new competition, as all of these banks other than eBank are owned by traditional branch-based banks.

What it says is that a bank is far more likely to be successful with a new channel if they design a bank for that channel, rather than tagging on the technology as another on top of their branch operations.

Just a thought as, if true, it says that banks should really be launching new banks designed for new channels under separate brands as their future strategy, whilst making the absolute minimum investment in the new channel with their older channel brands.

Some banks do the latter anyway, but I’m not sure whether it’s by design or lethargy.

Final thought: if my business can run today for 80% of the costs it did a decade ago, thanks to broadband access and low cost technology, why hasn’t a bank passed on these savings to their customers?

UK bank branch numbers declined 11% between 2002 and 2007, and broadband means that UK banks have most customers looking after their own needs these days through self-service. Call centres have been outsourced and offshored, and ATMs have extended to cheque deposits and more.

how much user today?

A website created in 2004 reached 200 million users today.

That's the size of America near enough!

A website has built an America in just five years.

Not bad going is it and, even though it's not a bank, this is as important to banking as the internet as it has become the home page for almost 200 million people.

The site is Facebook, as if you didn't know, and here's Mark Zuckenberg's note explaining what it means to them (a lot of share options I would have thought):

We will welcome our 200 millionth user to Facebook some time today, and I want to take this opportunity to describe what this means to us and what we hope it can mean for everyone using Facebook.

When we built Facebook in 2004, our goal was to create a richer, faster way for people to share information about what was happening around them. We thought that giving people better tools to communicate would help them better understand the world, which would then give them even greater power to change the world.

Creating channels between people who want to work together towards change has always been one of the ways that social movements push the world forward and make it better. Both U.S. President Barack Obama and French President Nicholas Sarkozy have used Facebook as a way to organize their supporters. From the protests against the Colombian FARC, a 40-year old terrorist organization, to fighting oppressive, fringe groups in India, people use Facebook as a platform to build connections and organize action.

More broadly, technology has made it easier and faster for people across the world to share more and more -- from the daily activities of their lives to events that impact their communities. At Facebook, we want to build the best service in the world for people to connect with and share everything that is important to them, whether day-to-day or world-changing. A heat map of our growth since 2004 shows how quickly people across the world are connecting on Facebook.

Growing rapidly to 200 million users is a really good start, but we've always known that in order for Facebook to help people represent everything that is happening in their world, everyone needs to have a voice. This is why we are working hard to build a service that everyone, everywhere can use, whether they are a person, a company, a president or an organization working for change.

To celebrate and support all of these voices and their potential to improve the world, we are creating a space on Facebook where people can share their stories about how Facebook has helped them give back to their communities, effect change or connect with a distant relative. We've also worked with 16 charitable and advocacy organizations to create gifts that are now available in our gift shop. The organization the gift represents will receive between 90 percent to 95 percent of the cost of the gift, after administrative expenses for the transaction, so we encourage you to share your passion for a cause with your friends and in doing so, support the cause. Facebook will not keep any part of your contribution.

There are still many more people and groups in the world whose voices we want to connect with everyone who wants to hear them. So even as we celebrate the 200 millionth person and all of you using Facebook today, we are working to bring the power of sharing to everyone in the world.

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