Speculative Trading

A Tobin tax is now threatened by Lord Turner, FSA Chairman, to stop ‘excessive’ bonus payments, by reducing opportunities in speculative trading.

Assuming this is intended to be a tax levied on every single fx trade from every participant in the fx market (to penalise speculators from punters through to tier1 banks), and one cant net out any liability (well that would miss the point wouldn’t it), then everybody will need to report every fx trade done in order for this to be fully policed. Whether that reporting is ‘just’ an extension to FSA transaction reporting, or an interesting project for exchanges and trade reporters, it certainly doesn’t sound like its cheap, easy, or quick to implement ..or indeed to police – here presumably needing to audit OTC trades reported against payments in/out of bank accounts; taking into account all nets and splits along the way.

I wonder if the real threat is not a tax on every fx transaction, rather it’s that there would be a dumbed down version that would emerge; something that could be agreed by all states involved, and then implemented within a time frame of a couple of years. Still, think MiFID, with change comes opportunity, and just think of all of the hitherto-unforeseen knock-on effects that could be monetized.

Cockney Bankers

Finextra tells us a cash machine operator has introduced Cockney rhyming slang prompts and options to five of its ATMs in east London. Customers choosing the cockney option will be asked to enter their Huckleberry Flynn (PIN) and will then be able to select sausage and mash (cash) amounts such as a speckled hen (£10).

What a lot of old pony … though well be translating the etrading site just in case it catches on. Guvnor.

Live the dream

Ah … i see that WSJ says etrading is defining the activity at NYSE…. so all of the humans on the floor there are having “big lunch” between the electronic activity around the open and close. Crikey – isn’t this getting to be like a pilots job? Alert, sober, and on the case for take off and landing, but otherwise on autopilot for the rest of the journey?

Client-client trading

Ah … MarketAxess also looking to get client to client (bidlist) orderflow then …with give up to bank standing as clearer. How much is the execution though …even with some natural crossing the cost could kill it.

Traditionally, MarketAxess allows investors to electronically signal to certain banks they want to execute a trade in any of a range of agency and corporate bonds. In October, however, the platform introduced a facility, known as Market Lists, to allow investors in the U.S. to also signal that interest to each other. MarketAxess’ European customers can already use Market Lists to trade U.S. high-grade corporate bonds with U.S. investors. The company now expects to allow European investors to trade sterling-denominated bonds with each other in late April and floating-rate notes and euro-denominated issues by midyear. Banks aren’t being completely left out of these trades between investors, however, because they have to be routed through banks which then charge a fee for processing the trades.

Executable Bid Lists, eh

Is that MarketAxess “Inquiry lists for financial products’” anything like executable bid lists or something like the iois stuff here as previously posted?

What lies ahead for e-trading?

Well, I liked the sentiment of the headline from Icubic “talking their book” (and indeed mine too) via “Electronic Trading: Visibility and Agility in a Fragmented Market”, stating-

With liquidity continuing to decrease, as the financial crisis unfolds further in 2009, it is widely accepted that electronic trading will play a pivotal role in ensuring banks can stay abreast of market developments, capitalise on fleeting opportunities and ultimately retain an advantage in a highly competitive landscape.

…but the Aite group report“The Next Challenge in FX – Creating a New Post-Trade Paradigm in an Electronic Reality” struck a particular chord with me. Yes, this is partly because I’ve been blinkers-on in the end-to-end FX space for the past couple of months and realise how painfully manual everything still is, but it’s also because I’ve always felt the spotlight was always on the execution-related bells-and-whistles arms race, at the expense of the far more more mundane requirements of actually sorting out the operational side of the dramatically increasing levels of trading being done [because the front ends got so much better to use].

We’ve all done plenty to exploit those “fleeting” singledealer opportunities, but perhaps our opportunity now really is to build real STP; the collective, cooperative processing that will move us from the (all Aite quoted) FX ticket price for non-top-100-banks of $10-25, to something that compares far better to per-ticket costs of fixed income $12, futures $1.25, equity options $0.75, and equity $0.05 (… though a question on these; are you really only paying 5c per trade for equity processing? ..processing not including clearing?).

Electronic trading in FX has become the norm, and the emergence of high-frequency trading shops and the burgeoning retail market have driven trading volumes into uncharted territories. However, beyond the front office, where most of the innovations have taken place over the last decade, cracks are appearing that might derail the growth of the FX market in the long run. Growing trading volume has had a negative impact on the back-office, post-trade infrastructure of most active FX firms. Today, FX has one of the highest processing cost structures when compared to other popular financial instruments. Industry-wide efforts aimed at easing the post-trade challenge have been met with limited success due to the lack of both coordination and an overarching strategy.

Sure, old habits will die hard – banks still obviously seeking competitive edge will continue to focus on helping their customers trade with them rather than their competitors, full stop. But perhaps the bigger picture is to build those collaborative foundations that will help enable more of your customers to trade more, and do so more frequently, in turn gaining even more value from those wonderful tools you’re offering? .. So shouldn’t we all collectively create the wave first, then we can have the competitive surfing competition once buyside and sellside are at the beach and ready to enjoy it?

Million Dollar Traders

I watched, heck even enjoyed the Million Dollar Traders programme on BBC. And yes, this IS a timely post, it’s lined up for the inevitable repeat

Eight ordinary people are given a million dollars, a fortnight of intensive training and two months to run their own hedge fund. Can they make a killing?

….a killing, er, not in terms of the whole firm with “one m-e-e-e-l-y-o-n dollars” between eight and (apparent) constraints being small stock trades (eg 400 british gas, 100 nike?) with voice broking and a ticket stamp machine for dramatic effect. Think even while keeping setup costs to a min though they could have been given etrading and order routing via their Bloombergs though; gaining all sorts of potential for fat fingers and “click – pause – ahaaaa – wheres undo?”

Reuters/Bloomberg IM

Finextra tells us that Reuters have launched cross platform Instant Messaging, linking their RM community with/into the big wide world. (I should have said finally in that sentence – we were talking to them in some detail about this sort of thing over 3 years ago).

Reuters Messaging (RM) Interchange is being billed as a global instant messaging hub, connecting Thomson Reuters RM with Cisco’s Jabber XCP, IBM Lotus’ Sametime and Microsoft’s LCS/OCS. Users connected to the hub will be listed on an inter-company community directory.

Does an inter-company community directory that (somewhat) validates each user @ their particular firm is who they claim now present a credible challenge Bloomberg messaging? … and given the more open nature of this offering, should we expect quicker development of conversational e-trading functionality?

Working from home?

Given the logistics problems the snow is bringing I thought I’d pose a question; how many of your traders are a) allowed to, and b) able to , work from home? Previously there have always been problems with the regulated roles doing their regulated work out of the [watchful eye of the] office, but I wondered if any firms were activly removing these hurdles in particular clever ways in order to support this. And does that give them an advantage on days like these?

Behavioural/Operational Data

As quoted here

UK credit card issuers have agreed a framework for sharing ‘behavioural data’ on their customers’ accounts as part of an initiative to meet political demands for responsible lending practices.

Is anyone yet extending this sort of analysis onto operational flows – to record and use the institutional behavioural data (STP rates, blame attributed fails, etc) in establishing a true(r) transactional cost of trading with the client in question for the product in question? …. then using that contextual info as one of the inputs to their pricing engine / SOR ?

Get Those Humans Back!

EFN tells us that humans are back in vogue…

Wild swings in global stock markets and unprecedented volatility are luring buyside and sellside traders back to the personal touch broking model, where they can find an experienced broker on the end of the phone. Electronic trading remains a high priority, but the human element may be the key to brokers gaining business.

Do you think this is indicative that e-trading technology still isn’t “good enough” to merit the trust of the customers wishing to trade? In which case what function is missing? Based on that article, it’s some sort of reassurance screen/popup; “yes that looks like a very sound trade, pretty much in-keeping with what were seeing, so please click OK to invest wisely”. Ok, that’s an exaggerated thought, but surely a colour/context check could be part of an automated negotiation/orderflow?

Tradeweb Changing Shape

Tradeweb’s vision – where markets meet;

To be the first network to offer insitutional clients trading from ONE platform, with ONE ticket, in ANY asset class, in ANY currency, anywhere in the world.

A great aim – but clearly not enough to keep them busy. Today we hear that Tradeweb also plans to launch an electronic inter-dealer platform (for pass-through mortgage-backed securities in early 2009 ..as part of their purchase of Hilliard Farber’s interdealer business). I wonder how much appetite (within TW & the dealer shareholders) there is to extend the interdealer product set?

Well, even though Tradeweb clearly has many irons in many fires, and shipping (/cargo) is something ICAP have mentioned with a degree of excitement, I don’t think this Tradeweb trademarked product will actually be related (odd about the trademark though) …

Tradeweb ™ streamlines the cargo declaration process by enabling users to send declarations to the Singapore Customs, IE Singapore, and other controlling agencies directly from the computer

…unless you know different?

Clearing is the new black – but nobody cares

Finextra reports the latest exchange looking at the OTC markets – lch.clearnet eyeing up the FX market to work out how they can get clearing involvement.

This is just days after the news confirming fxmarketspace is being closed down (by CME and Reuters) because there was not enough activity on the platform.

Given everyone’s fear of counterparty risk at this point, you’d think the timing cannot get much better for offering centralised clearing for OTC products. So why is it so difficult to onboard clients to these offerings? I can’t believe its just a documentation hurdle – sure the lawyers are probably quite busy with one thing or another at this point, but surely any business/risk manager looking to be a hero would have legal review and signing way up their todo list.

So what’s missing from the pitch?

More venues than banks..

A crap week for those in the investment banking space, but should we expect a wave of closure of liquidity venues to hit the headlines shortly? If a third of banks need to dissappear in order to cleanse and rejuvenate the market, surely we are at risk of ending up with more venues than there are liquidity providers to adequately support them? …albeit you could argue were in that space now given a lack of liquidity already.

What do I do with this?

Picture the scene…

 

You are a high level exec at Sungard.  The GLTrade boys have agreed to sell up and you soon get control.

 

What do you do with it?

The Future of OMS

TowerGroup says Spending on OMS will grow in dollar terms and compare favourably with other buyside spending in terms of (apparent) priority. In terms of product, the research indicates that growth in the OMS sector is being driven by three key areas, and in addition to Weallth Management functionality there is;

– Emerging Markets – With both the US and UK OMS markets saturated, international markets – specifically continental Europe, the Middle East, Asia including China and India, and South America – represent the strongest growth opportunities for OMS providers.

With FPL also putting a flashlight onto Emerging Markets too (here) – I’d hope that any drive made by the OMS/EMS vendors will include electronic trading from the off, building the e-trading workflows for the local markets at the same time as the functions to cope with the internal order management and regulatory nuances for the region/market in question. We shall see.

– Derivatives – Supporting derivatives is a critical requirement for an OMS. Derivatives represent a unique opportunity for OMS vendors to extend their franchise beyond traditional OMS functions and into new territory, including valuation, pricing, and risk management.

Here Charles River and Tradeweb are in the news announcing the launch of a fully-integrated, end-to-end solution for post-trade processing of OTC Derivatives; IRS (U.S. Dollar, Euro, and Sterling), CDS (CDX, iTraxx, single names, and tranches), which is clearly really well timed and with definite potential as a workflow enhancer (and while the press release understandably does not mention trades executed in non-Tradeweb electronic venues – I presume these would be fed in the same way as voice trades so this proposition could cope with all of the client’s trades in these products?)

One thing that the TW/CRD press release did also mention, is about point-to-point broker connections…

In addition, a new Direct Dealer Inventory feed in Version 8.2 enables buy-side traders to establish electronic point-to-point broker connections and receive available fixed income inventory directly into Charles River IMS – electronically matching orders and helping traders successfully execute on inventory opportunities.

…which doesn’t specifically mention electronic execution via these connections, but does put another foundation in place for a single platform.

Fidessa on sellside, Charles River buyside

For those of you going shopping…. Bobsguide tells us that Fidessa is voted the best sellside OMS for 2008 (overtaking Sungard BRASS). We already knew that Charles River was voted best buyside OMS.

Liquidnet for Fixed Income

Another one from John Greenan

While talking to a few senior folks in the buy-side about Fixed Income dealing they raised an interesting point. Why is there no such thing as Liquidnet for the corporate bond market?

Human sales/trading in an increasingly electronic world

EFN tells us that TABB reckon e-trading use will grow rapidly in European fund managers and investment banks over the next two years – causing the number of sales traders to drop by 9% a year for the next two years, with human traders executing 50% of flow in 2010 (down from 82% in 2005).

The point that new opportunities for the sellside trader are arising thanks to increasing fragmentation – in providing clarity to the buyside on where to execute (“navigating the markets”) – appears underlined by Traders Magazine suggesting that buyside traders do not have a coherent and considered strategy regarding the use of dark pools (for example 18% of the buyside traders unsure what they think their potential usage would be of a dark pool that was able to send out indications based on order flow that resides in that pool).

Isnt the uncertainty just because the landscape is not particularly well charted because it is still changing (and perhaps dramatically so) – eg more execution venue launches later this year. So while sellside need to help buyside clients understand whats out there, surely once the dust settles and the landscape is charted, more buyside will want to execute based on the proprietary rules that they have, in their systems/processes, with regard to when where and why.

French Govvies on MTS

I see French govvy traders’ electronic market making obligations can now be fulfilled away from MTS – here – joining Holland and Belgium in doing this, we must be approaching the tipping point for the rest of the Eurozone Debt Management Offices to similarly open up obligations in terms of venue?? … and this is all happeing at the time the covered bonds guys are seeking their own platform?

Previous post with ICAPs article about the Eurozone restrictions is here

Tradeweb RFS

I see Tradeweb is in the news – with 4 new dealers (Citi, Deutsche, Goldmans, UBS) on Euro IRS, and also introducing a Request for Stream (RFS) trading model for Euro and Sterling IRS.

Covered Bond Platform

Finextra tells us that Six companies – Icap, TradeWeb, Eurex, MTS, BGC Partners and Bloomberg – are bidding to provide a new electronic trading platform for European covered bonds. Of course the devils in the detail with regard to the winners mandate, but if the punchline is a single platform, with no bridging connectivity to/from other execution venues/platforms, then aren’t the losing bidders going to argue same argument as was put against MTS being the single EGB venue?

Charles River rules … ok?

Bobsguide says that TradeTech 2008 Names Charles River IMS Best Buy-Side OMS for Second Consecutive Year … Of course thats equity tradetech .. or at the very least now there isnt a FI one, “primarily-equity” TradeTech, though surely nowadays that’s academic; there is a single cross-asset-class buyside opinion on what the best OMS is?

Time for CCP in FI Markets?

At the same time the exchange markets are moving into a much more OTC shaped model with fragmentation and dark liquidity .. Tabb is suggesting that the Fixed Income industry may need to migrate from a traditional OTC market without a central venue to a more traditional exchange model in which there are not only liquidity providers making two-sided markets but a vibrant agency model as well.   Full article here

With development resource more scarce given current market conditions I think all roads lead to Rome – with Rome being whatever the target client wants it to be. This definitely isnt a one-size-fits-all sort of Rome though. Instead we’ll see continued fragmentation of the existing etrading landscape leading to multiple venues happily co-existing, but each operating with a model specifically aiming at the type of customer they are targeting.  As each trading model brings a different proposition value for each different tiers on client and also on dealer side, it will be interesting to see how many of the existing venues have appetite for revolution to extend their footprint into dramatically new and unproven models (and new target clients), rather than reinforcing what they do by continuing on an enhancement-based evolutionary path – allowing new venues to enter the picture.

Institutional Buyside FI etrading

Another post from John Greenan…

What’s the future for Institutional buy-side Fixed Income trading?

Within the e-trading world a lot of the emphasis has been on the sell side with different firms and strategies (Liquidity Hub, project fusion and so on).  One aspect that does not seem to get as much attention is the buy-side.  Typically a big institutional buy-side will have an OMS like Charles River, LatentZero, MacGregor etc.  On top of that will sit one or more of MarketAxess, Tradeweb, BondVision and so on.  The model that these firms impose is one of FIX connectivity into the EMS but no option of end-to-end FIX connectivity from OMS to brokers.

As this market place matures it’s difficult to see what the future direction will be.

I’d like to propose one model.

Buy-side EMS connects via pure FIX 4.4 to a limited number of brokers.  A RFS process starts to request two way quotes in size for a list of instruments that the firm is interested in.  These quotes are combined into a synthetic order book – such that the buy-side can see ‘market-depth’ for instruments of interest.

The strength of this solution is that there is no longer a need to look at proprietary systems, the streamed quotes can be used for monitoring, it’s pure FIX, brokers can be plugged in or dropped without much fanfare.

The weakness is that the first buy-side to implement this may have to build the system.  Potentially it’s a very resource intensive system, depending on the number of quotes, brokers and instruments.

What are buy-sides doing in this space?