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December 2010

Monday, December 13, 2010

Calming 'Regulation Anxiety'

Posted by Dan Hubscher

There is a new kind of emotional disorder going around the financial markets - the previously unnamed fear of something ominous now that new financial rules have been laid down. Let's call it regulation anxiety.

Regulation anxiety has led to all sorts of new types of behavior in banks such as laying off proprietary trading staff, hiring ex-SEC lawyers, and laying on extra lobbyists to besiege Capitol Hill. The syndrome is so widespread that it has finally attacked the foreign exchange market - the market that performed the best during the financial crisis despite a lack of almost any regulation. And although the FX market 'ain't broke' it will undoubtedly get 'fixed' under new rules. It is these fixes that are causing panic attacks in the FX industry.

A survey of FX professionals at the Bloomberg FX10 conference in October showed marked anxiety over the impact of regulation and also possible changes to market structure.  More than 80 percent of those polled said they were concerned about the impact of recent regulations on their businesses.  They were also against structural reform and at odds as to which industry model is best for the future.  According to Bloomberg, the majority of the respondents were opposed to an exchange-traded model or a clearing house model, with only 19% believing the FX markets should have both clearing houses and exchange-traded requirements.

FX is a unique asset class in many respects; being (to date) almost totally free from regulation and benefiting from high liquidity on a global scale. Traders - wholesale, institutional and retail - are attracted by the ease and convenience of online currency buying and trading. The statistics bear this out with an average turnover of around $1.5 trillion per day – a clear indication of the strength of the market.

FX liquidity and volatility is growing day by day and trading foreign exchange in fast-moving, highly volatile times carries a high level of risk. As such it may not be suitable for all types of investors, institutions and buy-side firms. As a result, sell-side organizations that are serving the quickly-growing needs of hedge funds, proprietary traders, and other firms that take on these risks take on their own additional risk. There is a need to manage their own increased risk intelligently without erasing their competitive advantages.  

At the same time increased automated order volumes from the buy-side represent revenue opportunities for sell-side firms. But attracting that order flow away from competitors requires unique services, aggressive pricing and the ability to find the best prices in a highly fragmented market - not to mention the speed and scale needed to keep up in a high-risk environment.

There are solutions available which enable sell side institutions worldwide to rebuild their FX eCommerce platforms in line with the requirements of the most challenging customers and prospects. This is with a view to automate and customize their trading operations to become more competitive. There are now technologies that combine FX trading venue connectivity with a bird’s eye view of the market in real time; aggregating fragmented liquidity and including smart order routing algorithms, enabling every element of an eCommerce platform to automatically find and leverage the best prices.  

And, a very few include a rich development framework for both business users and IT. The flexibility for the business user allows traders to create and rapidly deploy proprietary FX and cross-asset trading strategies that help them competitively engage with clients.

There have been numerous recent examples of banks looking to take advantage of these solutions. For example, Royal Bank of Canada (RBC) recently deployed a new FX Aggregation solution to support its foreign exchange dealing operations. The Progress Apama FX Aggregation Solution Accelerator  is completely customizable and has been modified for RBC to meet its specific requirements. RBC's new system has significantly increased the efficiency in which its traders obtain the best FX prices for their clients.

RBC is the latest in a growing list of global and regional banks, which have deployed this type of platform as a foundation for eCommerce. Other organizations that have deployed FX solutions driven by technologies from Progress Software (namely its Apama product) recently include BBVA, UniCredit and ANZ, who can now access multiple sources of liquidity and dramatically improve their ability to handle increased trade volume.

The best way to deal with anxiety is to address the root cause. In this case, regulation. Regulation is coming, change is coming. Since the FX world is now facing looming regulations with dramatic impact, you’re going to need to adapt your business models and supporting applications quickly in order to survive – for instance by building flexible rules within your FX trading systems to identify and manage risks, whatever they may turn out to be.  If you do, you’ll be ahead of the pack and will be able to create competitive advantage.


Friday, December 10, 2010

CEP in 2011 and Beyond....

Posted by John Bates

As we approach the end of 2010 and we begin to see a tiny crack of light at the end of the financial crisis tunnel, there are many theories as to which technologies will lead us into the next phase of advancement in financial markets. Stubborn issues with latency, high frequency trading, real-time risk management, and market gaming/fraud continue to dog the industry and provide fertile ground in which new and existing technologies can innovate. In fact, technology consultancy Ovum said in its 2011 Trends to Watch report for financial markets (http://tinyurl.com/2vv42sh) noted that Complex Event Processing is one technology to watch. 

CEP will be the lifeblood for financial services as regulation increases, markets further fragment, and algorithmic trading becomes engrained in all asset classes. A recent Progress Software survey across industries showed that only eight per cent of enterprises globally are able to report business information in real-time. Without instant visibility into business activity organisations cannot possibly determine what is or is not working and then set the right course of action.

In financial markets, in particular, a lack of visibility between exchanges, ECNs, dark pools, brokers, banks, buyside and trading firms is causing breakdowns in the system. When you see increasingly frequent events setting markets on their ear such as the May 6th flash crash, insider trading activity, fat fingered errors and rogue algorithms, it becomes crystal clear that something needs to be done. 

Progress, with its Apama products, is committed to financial markets along with other, newer markets such as aviation and telecommunications that are opening up to CEP. If you would like further information about the future of CEP and would like to speak to one of the two founders of Progress Apama— yours truly or my colleague Dr. Giles Nelson—then please contact us.