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July 2012

Tuesday, July 24, 2012

John Bates Recognized as Financial Technology Leader by Institutional Investor

Posted by Richard Bentley

Institutional Investor Tech 50
Today we’d like to congratulate our own CTO John Bates on his recognition as one of Institutional Investor’s top Tech 50: The Difference Makers. This is the second year that John’s work with Progress Apama and Complex Event Processing has been recognized by Institutional Investor as a top financial technology leader. This is an especially exciting award, given that Progress was the highest-ranking technology provider on this year’s list.

Institutional Investor recognizes each leader for their vision and agility in translating innovation into operational and competitive advantage. They recognize John’s membership on the U.S. Commodity Futures Trading Commission's technology advisory committee and Progress’s contribution to performance gains. Due to economic outlook, technologists today have to “do more with less”, says Institutional Investor, and John’s work with Progress Apama and Complex Event Processing contributes to that process.

They also recognize Progress’s work in two geographical hot spots, China and Brazil, which has been a hot topic in the capital markets world lately. They quote Bates saying, "Countries like China and Brazil are starting to accelerate their adoption of algo trading.”

Congratulations John, we’re proud to have you on our team!

John Bates Video Institutional Investor


Thursday, July 19, 2012

Scooping FX Bubbles Out of a Boiling Pot

Posted by Ben Ernest-Jones

Foreign exchange trading appears to be moving from a beneath-the-radar, bank-dominated activity into the international trading limelight. There has been an explosion of new trading platforms and a wave of newer participants lately, partly thanks to new transparency afforded by Dodd-Frank and partly because of the relentless hunt for alpha. Increasingly automated, FX is also becoming the next go-to asset class for high frequency and algorithmic trading.

It wasn't always that way. As TABB Group's Larry Tabb said in an article in Wall Street & Technology: "FX has always been different. Be it that currency is a bank’s core product, be it that banks control the payments infrastructure, or be it that banks are critical in implementing Central Banks’ monetary policy, the banks have historically dominated FX."

Because FX is mainly traded via single dealer platforms, multi-dealer platforms such as FXall, and interdealer marketplaces, it is fragmented in a different way from equities.  Traditional trading platforms along with a couple of the sturdier newcomers like multi-dealer platforms FXall (which Thomson Reuters is buying) andCurrenex have been the dominant destinations for electronic trading of FX.

But now that the SEC and CFTC have clarified that forex contracts will be determined to be swaps, they will become part of the centrally cleared instrument pool. This means a whole new layer of banks, brokers, and venues are already popping their heads up. FX will soon emulate the expansion, consolidation, and then contraction of destinations experienced by the equities markets. 

There will be more opportunities for market participants to trade, hedge, arbitrage and manage risk. Algorithmic strategies will dominate, attracting more and more destination venues - and then fragmentation will be the mantra. So how are traders going to position themselves to scoop the profitable FX bubbles out? It is not as easy as you would think. In many cases, what appears to be an increase in liquidity is actually an increase in “phantom” orders, as institutions advertise the same underlying liquidity across an increasing number of locations. Trading algorithms will need to be smarter, and tuned over time to counteract this as the landscape changes.

Bank traders are looking for ways to handle the new world order of FX. Because their clients want to be able to trade forwards, swaps, spot and even options on the same system, banks are having to do the once-unthinkable: merge their forwards desks with their spot desks.

In the old days of voice trading, forwards and spot traders ran completely separate books and dealt with (mostly) different customers. Today clients are asking to hedge forwards and spot on the same system at the same time. Some want to trade using forward-to-spot conversions against aggregated spot prices from several platforms and some want to use aggregated forward rates directly. Some want a blending of both. The opportunities for banks are plentiful, if they can harmonize FX products, trading and hedging across trading systems successfully.

Many bank clients have seen what has happened in the equities markets; with high frequency trading and algorithmic strategies becoming problematic and largely vilified. When the world’s largest interdealer brokersaid recently that it would tackle “disruptive” practices by high-frequency traders on its foreign exchange platform it became clear that some of the lesser-loved equities issues were already creeping into FX markets.

The Wall Street Journal says that there are already fears of an FX "boom" reminiscent of the equities venue explosion in 2001. "Some market insiders fear the trend for highly specialized new systems aimed at separate pockets of clients could end up splitting the liquidity that underpins this $4 trillion-a-day market, making it harder to trade," said the paper. Pigeon-holing traders, whether it be by class of trader, asset class or by delivery date, only creates more fragmentation. This could equate to lower volumes (like equities), more volatility (like equities) and an increase in manipulative practices (like equities). Regulators will no doubt be watching, and new rules will be implemented even faster than has happened in equities.

In a discussion at the FX Week USA event in NYC recently one FX trading platform provider said that you need a full market ecology to provide proper efficiency. This means having all market participants operate in the same liquidity pool.  In the end the unique self-regulating properties of the FX markets mean that the market will shift towards what is best for the market - because it can. Preparation for this inevitability will determine who survives. 

Regulation: who’s in charge?

Posted by Richard Bentley

Exactly how can you enforce rules when there’s nobody in charge? This was a question that reared its head at the recent International Derivatives Expo (IDX) in London after a statement from David Lawton, Acting Director of Markets at the Financial Services Authority (FSA), who concluded his keynote address by imploring industry to ‘step up’ and take responsibility.

Traffic copThe clear inference from Mr. Lawton’s speech was that it’s the role of regulatory bodies such as the FSA to provide, in some cases, very detailed guidance, but the responsibility of those within the industry to implement it. To my mind this raises a number of questions – not least around how this should happen and, perhaps more importantly, whether or not these guidelines are actually enforceable without a regulatory body policing market activity?

If the onus is indeed placed on the industry to self-regulate, the first barrier that will need clearing is for all market participants to agree that it’s in their best interests to ensure the regulations are adhered to. Only then can we focus our attention on how guidelines such as those announced by The European Securities and Markets Authority (ESMA) regarding the systems and controls required in automated trading environments are followed.

That some form of self-regulation and enforcement is required is however not in doubt. Would you drive a car without brakes and then blame the traffic cops for not slowing you down when the inevitable crash occurs? Participants need to take responsibility for policing their own activities, by deploying the same kinds of real-time controls and surveillance capabilities as venues and the regulators themselves. Brokers and banks often have more visibility of their clients’ trading activities and positions than any one venue or indeed national regulator. (The recently announced plans for a Consolidated Audit Trail in the US will do nothing to change this, given the identity of the beneficiary end-point of each trade is not identifiable from the CAT.)

Increased use of pre- and post-trade surveillance tools will not only help the industry to, as Mr. Lawton suggests, ‘step up’, but could also restore some of the faith in the markets that has been lost in recent months and years. In the absence of any single authority capable of enforcing the rules, it is in the industry’s best interests that market participants fill the gap.

Monday, July 02, 2012

Turning Metals into a Goldmine

Posted by Ben Ernest-Jones

"Every man now worships gold, all other reverence being done away," said Roman poet Sextus Propertius sometime around 15 BC.

Metals are hot. The Hong Kong Exchange's extravagant £1.39 billion bid to win the London Metal Exchange (LME) shows just how hot. HKE bought LME, which accounts for 80% of trade in nonferrous metals such as copper and aluminum, in a bidding frenzy against NYSE Euronext, CME and ICE.

From gold and silver to copper and nickel, it seems everyone is interested in buying and trading metals. Once the domain of producers and specialty traders such as Glencore and Marc Rich, investors globally are clamouring for access to this non-traditional asset class.

There is a natural cyclicality to asset classes; they wax and wane in popularity depending upon the opportunities to make money by trading them. Lately, investors have lost heart in stock markets and volumes are plummeting. Commodities such as oil and agriculturals lost their shine when demand in China and other emerging nations dwindled.

With returns shrinking in equities and fixed income market plays, it is no wonder that investors are interested in asset classes outside the traditional. Foreign exchange markets have been extremely active in recent years, for example, and with the current uncertainty over European debt problems demand for "safe haven" currencies is high. Precious metals often fall under that safe haven umbrella, which is presumably why interest has soared of late.

The correlation between gold and currencies such as the US dollar and the Japan yen is well documented, as gold and other metals are often used as a hedge against inflation or against a weak currency. There is also a strong correlation between gold and oil prices, and gold and the stock market historically. So there are plenty of opportunities to use metals for cross-asset-class trading, particularly in high frequency or black box strategies which monitor for anomalies in these correlations.

Luckily, pressure from investors is giving banks and brokers the incentive to break down the barriers to trading metals. Some brokers are adding metals to their foreign exchange trading platforms. We’re seeing an increase in the number of banks that are converting metals futures -  from CME, NYMEX, LME, etc. - into spot prices to stream to clients for trading. It looks like the beginning of a trend.

It is only a matter of time before banks and brokers are aggregating FX, metals, oil, stocks and bond markets for their clients - all onto one trading platform. Then we may finally see true cross-asset class and cross-geography trading. In the meantime metals trading may be the next goldmine for banks.