Brokerdealer.nl/eu, created. Now what?

“Another site with financial industry news”

Is it really necessary to create another website dedicated to the financial industry? The answer is ‘yes’ and let me explain why.

There is an overcapacity of information and opinions on the Internet and if we take a look off the virtual route, we see there are plenty of seminars, coaches and workshops. How can Broker/Dealer make a difference and be relevant to business needs?

First, there is a lot of misinformation surrounding the financial industry. It’s not easy to sift through all the commercial messages, rhetoric and lobbying efforts to find the actual useful bits. There are already some good examples out there for filtering and summarizing this information. To name a few, there’s the Lothian newsletter, Smartbriefs, and Tabb’s Forum. They however vary from the US centric to the sector specific.

From the start, Broker/Dealer positions itself in the market as a filter for a variety of information with a Eurocentric focus (which also means reporting on the US and Asia when it is relevant for Europeans). And, regardless what your direct line of business is, getting a glimpse of what’s relevant to a pension fund manager, a HFT trader, a risk manager, an exchange official, a systems engineer or a regulator can be useful to you as well. Sometimes a trend can be derived and translated to your business, and sometimes you just need to display some general knowledge at a networking event talking to someone in a completely different line of business.

Second, you need to know which opinions to discard. There are a lot of professional lobbyists, special interest groups, activists and (anonymous) forum participants. They are all defending their own little and big interests. You need to apply a filter. Above all, you will need a BS filter and a strict policy on restricting anonymous postings and the duration of discussions. If left unchecked, there will be trolling and nasty back and forth quibbles. All of which is counterproductive.

Broker/Dealer wants to lift the level of the discussion. It does so by channeling opinions and discussions for constructive thinking. This industry is too important to conduct business like we’re competing in the Hunger Games. In addition to providing the livelihood for millions, the industry is also the catalyst or damper of the global economy. There is a lot of good out there, a lot of bad and a lot that can be improved. Instead of disagreeing, finger pointing, and criticizing, we want to be the conduit to a constructive conversation. Find the middle ground and be realistic. Make the market a more inclusive place instead of trying to eliminate each other.

Third, working in this industry, you need to invest in yourself by joining seminars & workshops. This off line bit is essential to bringing the industry together and enhancing knowledge. The problem is that a lot of the content presented at seminars lacks quality. Sponsors or special interest groups dominate the content. Sponsors end up pitching their ideas to a large crowd of uninterested faces and paying for their drinks and lunch. Instead of it being a conduit to business ideas or personal growth, seminars are mostly networking opportunities. This deteriorates the quality of the participants, which in turn, ultimately deteriorates the opportunities for the sponsors.

Broker/Dealer wants to organize small events presented by high quality speakers, thought leaders and educators, who actually get paid to speak instead of paying to speak. Raise standards, improve the quality and help build a better industry. Offer a better product and venue so the sponsor can network with a select group of participants to build his business. The key is to keep it small, structured and targeted towards a constructive collaboration between businesses. We also aim to forge better connections by organizing social events with no other purpose than just the social aspect of the business.

In addition, Broker/Dealer recognizes an invaluable source of information that is relatively difficult to find on the Internet today. Broker/Dealer wants to categorize and eventually rate links to academic research and white papers conducted on the industry.The market needs a site like Broker/Dealer where you can easily find and filter the mass of material universities produce and publish annually.

Finally, we look at where we are today. We believe Broker/Dealer fills a void in today’s market and we will work hard to make it earn its place. The site has been successfully launched. The first articles have been posted and the first papers have been sorted. Currently, the first suggestions for upcoming seminars are being considered. Meanwhile, we call upon everyone whose ideas, opinions, topics, papers, links and suggestions fit Broker/Dealer’s concept to reach out to us. We’d love to connect. We welcome your thoughts and input. Also, please don’t hesitate to contact us to discuss sponsorship opportunities.

How tech startups will become major competitors to HFT trading

It used to be relatively easy for the financial industry to attract the smartest people in the workforce. High salaries, big bonusses and the aura of succes when you'd be working for a major investment bank on Wall Street or the City. Prop trading firms were the first companies to offer more than just a desk and a big paycheck to keep the traders happy. In-house chair massages, play rooms with a bar and football tables, luxurious company outings, design offices, name it and they had it. The mantra was, work hard, play harder.

Tech companies took a page from that playbook, combining a good environment to work in, then work your butt off and reap the benefits from a sky high valuation of the stocks everyone was given. 

The financial industry has rapidly lost its appeal. The outside world identifies the industry with greed, and overpayed risk takers gambling away money and screwing the economy. It will take years (if ever) before the image of the industry will be restored. Tight regulation also does not add to the appeal as it curbs opportunities.

So, the best and the brightest are increasingly looking for opportunities outside the industry and for those with a quant background, Silicon Valley is the way to go. 

Quants, the people that lifted this industry from a gut instinct trading community to a data mining technology driven trading bot are now more popular than ever in Silicon Valley. After all, it is all about data science and optimizing the data. Wheter it be Google, Uber, Amazon, or Goldman, it is all about making sense of the data that drives business.

Working in 'Silicon Valley' is the new sexy. Hard work, long hours, fun offices, chair masages, and huge financial opportunities much like working for an HFT firm. But, witout the negative stigma. And, if trading does not pan out, the experience in working for a tech company can easily be applied anywhere else in the Valley.

In this article, the author signals this trend and foresees that tech companies will not just be the drain of good work force but also become the major competitor to the the industry as they will have the technology, the data and now also the knowledge.

Getting the most out of yourself or your people

"“Until you make the unconscious conscious, it will direct your life and you will call it fate.” Carl Jung

Being successful in this financial industry means you've not only invested successfully in the market, but also successfully invested in yourself. Years of studying and hard work has gotten you where you are now. 

But, there's more to be gained, more from yourself and more from the people you employ. Once you understand what propels you forward or, holds you back, you can get the most out of the qualities you possess.

Psychology helps to understand what makes people 'tick'. And for the financial industry there is an expert out there with his feet firmly planted in both the world of finance and psychology. Brett Steenbarger has been working as a trading coach for several funds and is also an associate professor at SUNY in Syracuse.

If you want to self-develop your skills as a trader, it is recommended to read his books or follow his columns on Forbes or his . It's easy to read and directly applicable to our business.

Pension funds caught between a rock and a hard place

Today Jean Frijns and Rene Maatman penned an opinion piece in the Dutch financial paper "Financieel Dagblad". Jean Frijns was the former CIO of pension giant APG and currently a professor at the Vrije Universiteit of Amsterdam. Rene Maatman is a lawyer at de Brauw Blackstone Westbroek and professor at the Radboud University. As the article is in Dutch, we took the liberty of proving a translation of the piece.

In the piece, Frijns en Maatman call upon policy makers to change the directive that pension funds need to invest in 'risk-free' assets such as government bonds as these have now have a negative yield:

Liberate the pension fund from the 'risk free' straight jacket

A pension fund must invest in accordance with the prudent person principle. This principle leans on the efficient market hypothesis: investors are rational people. An essential element of the prudent person principle is diversification of investments. With regards to government bonds however, this diversification is not necessary according to law makers. They are declared 'risk free' by decree.

Pension funds and Insures now face the question whether they should invest in debt securities with a negative interest rate. The English call this "burning cash": destruction of money. It takes effort to explain that this befits a rational investor. Can we still say that a government bond is 'risk free'? The government should not determine whether an investment is safe.
The flight forward is tempting: Get out of bonds with negative interest rates and fully go for shares and listed property. They show very desirable positive cash returns and value increases. But to a large extent this is due to the actions of the European Central Bank (ECB). Those returns are unlikely to be sustainable, though the downside risk less than 'safe' government bonds.

Pension funds are becoming underfunded as they have to value their liabilities at artificially low interest rates. And because they are in a state of underfunding, they may not increase their allocation to equities and real estate, "as that would increase their risk". Therefore even more assets flow to the  so-called 'risk-free' assets, bonds with a negative interest rate. Could it then be prudent to keep money stashed in an old sock?

The financial assessment framework in force since January 1, 2015, opted for a long-term investment horizon. The hypothesis is that a rolling recovery time frame of 10 years would result in an acceptable result. However, is this still the case when the investment portfolio has been concentrated in 'risk-free' government bonds from the start? When interest rates return to normal levels in the medium term, large capital losses are incurred. The effect on the funding ratio of pension funds possibly remains limited by the simultaneous reduction of the pension liability, but the result is a poverty trap: assets vaporize. Moreover, there are systemic risks. We live in a highly uncertain world. Negative interest rates increase this uncertainty.

Reasoned from the prudent person principle, one should look at investment strategies that generate a reasonable result, regardless of market scenarios. Those are certainly not strategies where the investments are concentrated in negative-yielding bonds. What does that mean for the supervisory framework? A first step would be to repeal the decree that certain assets are risk free. Immediately followed by releasing differentiated solvency buffers in asset classes. Such customization is based on faux science. The reality is that yesterday's risk-free investment can be a systemic risk tomorrow. Instead, a fixed risk buffer can be introduced. This sets pension funds and insurers free from the straitjacket of the existing solvency framework. This liberation undoubtedly has implications for investments in government bonds of "safe" countries, as investing at a negative interest rate can not reasonably comply with the prudent person principle.

This would be beneficial  to the effectiveness of ECB policy as it contributes to directing assets towards other sections of the capital markets. Adhering to the current solvency framework seems like reckless behavior from our point of view. This matter is urgent.

Flash crasher not a flash boy

After a 5 year investigation, the CFTC finally has found someone they can tie to the infamous flash crash of of May 6, 2010. 

UK resident Navinder Sarao, a relatively small futures trader has been charged with wire fraud, 10 counts of commodities manipulation and 1 count of spoofing.

Sceptics, like Zerohedge see a 'patsy', an Oswaldesq scapegoat found to deflect blame for HFT and a failing controlling body like the CFTC. Regular media meanwhile call Sarao an HFT trader, while industry professionals are quick to point out that someone trading off a spreadsheet, using 'off the shelf' trading software from a residential house in London suburbia can by no means be considered HFT.

Perhaps Sarao was just innocently 'at the wrong place, in the wrong time', perhaps he was a petty market manipulator caught in the 'perfect storm', or even perhaps he was the perfect scapegoat working at the book depository. All these scenario's are better than the idea that a single 'nobody' can crash the market. If that's really the case, there is a serious problem with the way the market operates.

EU think tanks speaks out against FTT

Bruegel is a EU think tank based in Brussels. According to this article in Reuters they have now spoken out against a number of issues that the industry have been rallying against for quite some time. These arguments are now picked up by the Latvian presidency of the EU and quoted in papers for the EU finance ministers.

Bruegel states that an FTT as wanted by 11 EU countries may be detrimental to economic development. They also suggest that the EU should wait with further legislation to have banks isolate their trading activities (market making).

According to Bruegel, the EU needs to set a clear list of priorities to create a true Capital Markets Union (CMU). A CMU can stimulate growth in the EU.

Tradetech Paris

Last week the wise men of the financial world gathered in Paris to discuss the future of the equity markets in the Tradetech conference. A very good blog was written by Tim Cave summarizing the key takeways from the conference. So, for all that were not there, catch up by reading this article.

Is Bitcoin the Myspace of currency?

Being first to market, is not all what it's cracked up to be. Yahoo search was out there way before Google, Myspace explored senseless blabber way before Facebook and Blackberry was making phones smart before other made them even smarter and more functional.

 Found an interesting slideshow from a tech angel investor underlining this point:

First mover disadvantage from Eric Tachibana

In that perspective it is interesting to look at Bitcoin. Hyped, feared, misunderstood and abused but all in all, a potential game changer. 

Question though is, will it change the game and become  the world's new currency, or will it simply pave the way for a model that is better. David Mazieres, a Stanford professor definetely seems to think so. He has developed a new digital currency that relies less on 'mining', is more secure and processes the transactions faster. Read the full article (also a link to the white paper) here .

OTC trading is sometimes better!

The OCC is reporting a drop in on exchange trading in options on the US markets. At the same time OTC volumes are up! This is certainly strange in view of the increased emphasis on counterparty risk.

However, it looks like other factors are at play. High exchange fees, ease of execution and fear of being picked of by HFT seem to be the main drivers behind the shift in volume. Some arguments do make sense. Having your order executed in 20 tiny exchange trade is not always that convenient.

CBOE seems to be in the centre of the discussion as the have a monopoly on some of the listed derivatives.

Read the full article here (Reuters). The OCC report can be found here.

Should clearing be treated as a utilty?

More/Less regulation, the threat or virtue of HFT, the 'Dr. Evilness' of banks, there is no ultimate truth. Truth comes in many forms and is, amongst others, dependent on ideological framework, cultural background, experience, a vested interest or simply the hand that feeds you.

With that in mind, it is interesting to read this research article by the Heritage Foundation, a conservative US think thank. One of its missions, to repeal Dodd-Frank. 

In this article, the author points us to article VIII of Dodd-Frank, which provides the opportunity to designate PCS (Payment, Clearing, Settlement) companies as Financial Market Utility. Which basically means that they can be considered to be of systemic importance and therefore "too big to fail".

To the conservative mind, this is an outrage. In their view it, again, crosses a border between government and private enterprises, It would be anti-competitive, raises prices and concentrates risk.

Biased, of course but nonetheless an interesting read. I wonder if European Regulation also has this ‘utility’ designation for European Institution. Click here for the full article.

IMF sees systemic risk everywhere now

Maslov, the famous psychologist already said it in 1966: "I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail."

Today the IMF published a survey they conducted on plain vanilla asset management world wide.

The industry grows rapidly (AUM already exceeds  total GDP world wide), which forces funds to buy less liquid products. Pair that with an unwillingness on the banking side to be market makers and the fact that in advanced economies, the funds have chosen similar directions and the result is clear. If a large scale event occurs, liquidity dries up  and investors cause a 'run'  on certain products.  And that could be a potential systemic risk.  

Here is the nail part. The IMF calls for more oversight, better risk management etc, etc. That sounds like the same thing that is causing this potential drying up of liquidity. The creation of more and more restrictions and regulation is causing the unwillingness of banks to be market makers. Moreover, since the mantra in the investment world is 'risk aversion' you can expect that overall investment companies are moving in the same direction and the same products. Risk aversion is killing diversity and now seems to create its own new risks.

In addition to more oversight, the IMF argues that funds should also look at making redemption more difficult. In other words, making it more difficult for investors to exit. Which will probably create its own new set of additonal risk.

Read the full article here

Why bankers should be scared of fintech startups!→

Paul Dowling from Dreamscape wrote an interesting blog providing some food for thought on the different ways fintech is changing banking. The full story is available here.

Virtu IPO... food for thought

A lot has been written and said about the IPO of Virtu and Flow Traders. In his latest post on Mechanical Markets, Kipp Rogers points to some risks topics people often forget when talking about HFT. He hits the nail on the head with his "Expansion in wholly new markets" comment. Interesting read for Monday morning.

Read the full story here.

Dutch newspaper De Telegraaf also published an article about the Flow Traders IPO. You can find it here.

Is the arms race ending as HFT firms merge technologies?

Last month KCG Holdings (the Knight/Getco combination) announced a joint venture with World Class Wireless, a technology company closely related to Jump Trading, to pool their array of microwave towers worldwide and jointly operate them.

Microwave towers are used by HFT firms to be faster than fiberoptic networks to connect them to the various exchanges.

According to the article in Traders Magazine, it signals a shift in the way HFT firms operate and compete. Over the years, these firms were involved in a technology race to be the fasted firm out there. Huge efforts and huge costs were made. Now  the end of this race appears in sight and the costs have come under scrutiny. 

According to the magazine it is a sign of a maturing market. Perhaps the local (and more modest) Dutch players can take a page from this scenario and see where they can save costs by combining their technologies. Click here for the full article.

EU's Economic Committee accepts benchmark rules

The European Parliamant's  Economic Affairs Committee has voted in favor of new legislation protecting European benchmarks such as LIBOR and EURIBOR and other benchmarks from manipulation.

The vote was overwhelmingly in favor of the draft legislation and will now proceed to the full EP for final adoptation.

Read the draft legislation here

Flash vs Flash

The IB times reported a law suit today of Chicago HFT firm HTG Capital Partners. They are sueing another HFT firm for 'spoofing' activities in T-Bonds.

The most interesting thing is that consensus among HFT firms is that 'spoofing' does not happen. The name of the other HFT firm is not mentioned.

read the full article here

Not too big to fail

More pushback from the industry against further regulation. Trafigura, one of the largest commodities traders world wide has issued a white paper in cooperation with Craig Pirrong of the University of Houston. In the paper, titled Not too big to fail, Pirrong argues that even stricter capital requirements on commodity traders are not necessary (as the crash in oil has proven that they can withstand major fluctuations) and can lead to deleveraging and wider prices.

The argument is only made for commodity firms as they do not pose a systemic risk like a major bank.  So, it looks like we continue into a new phase of Mifid busting. "Pick on them, not us". 

Read the full white paper here. 

Regulators have a hard time catching up according to ESMA

In a statement released on 18 march, ESMA indicated that national regulators have taken big steps in improving the level supervision of HFT. 

ESMA correctly stated as well that there is still room for improvement. The trading community is coming up with new technology and software on an almost daily basis and regulators are having a hard time catching up. The skills required to understand the data, the algorithms, the IT, etc do not come cheap and probably you will find the best in HFT.

Innovation is not limited to the trading community. Developments in market infrastructure, new products and international co-operation stress the available resources at national regulators even more. 

Spending taxpayers money on financial markets is probably not very popular. However, the alternative is worse.

Read the full ESMA review here.

Time-stamps

Bloomberg published an article on synchronizing the exchange clocks. Not a big deal you might think but then you're wrong. A lot of infrastructure is worthless without having an accurate idea of when something was traded. 

ESMA is taking this a step further: they want to see nanosecond accuracy on time stamps. You can read the article here.

EDIT: Interesting post from some professionals on time recording. What the ESMA is looking for, is extremely difficult to deliver outside of a lab setting. Read their blog post here

Mifid requirements 'naïve' & 'terrifying'

As the regulators mull over feedback on Mifid II and work on further details for the technical implementation of the regulations, participants are left to use the media to get their message across to either other participants or the law makers. And then, slowly the gloves come off.

According to Banking Technology, speakers at the FIX trading community named the measurments that participants needed to make terifying and the CEO of Chi-X Europe went as far as saying that the regulators have shown a level of naïvety.

The full article can be found here