Home Blog Page 490

Data Is Changing The Buy-Side Landscape

By
Creating Digital
-
Phil DeFrancesco

And it is changing the way the buy-side trades, according to Phil DeFrancesco, Global Head of Trading Desktop, Refinitiv.

Historically, it has been research written by humans and delivered by the sell-side that has driven the equity trading bus. That research has been derived, for the most part, from market color. And it still is. According to a recent Traders Magazine poll, approximately 70 percent of traders get their market color in some part from the sell-side. But 30 percent get their color from an entirely different source – think purely numerical data.

This data comes at the buy-side like a firehose trying to fill a teacup. So, the buy-side is increasingly relying on its sell-side counterparts to deliver the highest quality, pertinent and alpha generating data in the quickest and most efficient way possible. Like an offensive lineman in US rules football, the sell-side is running blocker for the buy-side.

Phil DeFrancesco
Phil DeFrancesco, Refinitiv

So, what exactly constitutes data? It used to be just raw numbers. But now, according to Phil DeFrancesco, Global Head of Trading Desktop, Refinitiv, data is much more than just numbers.

“Data is every single piece of information that comes across a trader’s desk– news, real-time securities pricing, social media posts, corporate access, economic data and previous trade information,” DeFrancesco said. “And the buy-side trader, portfolio manager and/or analysts are getting inundated by it all day long.”

Data is the lifeblood of trading, DeFrancesco added, noting that how sell-side technology vendors process and present it is akin to delivering the Holy Grail to the buy-side.

Nanette Buziak, Managing Director and Head of Equities Trading at Voya Investment Management, agreed. As she put it, data is everywhere, everything, and is always coming at the buy-side more now than ever before. Its impact from a trading role perspective is how does she interpret it and know what to do with it as she trades?

“How quickly do we know to alter our course of trading and why? I would also add that at times I feel as though we are at a point of data overload,” Buziak said. “From a trading perspective, I think the most value-added data is on the heat maps alerting us to breaking news as well as the historical TCA data on expected costs.”

Nanette Buziak
Nanette Buziak, Voya

So, how does the sell-side deliver what’s needed, given its own human, technology and cost constraints?

That’s something firms like Refinitiv and others are contending with. To hear Refinitiv’s DeFrancesco tell it, the sell-side is becoming an extension of the buy-side trading desk as they are more involved than ever before in generating alpha and ensuring best execution.

DeFrancesco adds, “Similarly, the buy-side trader role is also expanding as desks have gotten smaller in size with fewer staff. A lot of times, the buy-side trader is also acting as portfolio manager/analyst/risk manager/COO, etc. Our job is to help buy- and sell-side traders manage their different roles and responsibilities more efficiently, with technology and analytics that simplify workflow and present data in a way that is actionable and digestible.”

Are AI and ML the Answer?

In the 21st century, one might be apt to say that the usage of artificial intelligence and/or machine learning would be the first response. The electronification of the equities market, such as algorithms, smart order routing and dynamic venue analysis have all helped make trading faster, more efficient and liquid. Perhaps.

“There’s a lot of concern about AI and computers taking over the world,” DeFrancesco began. “But in today’s investment/trading world, humans are largely still running the show. However, technology plays an increasingly critical role in enhancing human capabilities. At Refinitiv, that’s where we’re focused – on the critical—even transformative—role that technology and data can play.”

“For example, creating simplified workflow solutions powered by augmented intelligence brings alpha generating ideas to the user in an actionable format. Being notified of outsized price movements, understanding why the stock is moving, and then knowing who to tell and what to do with this information is an example of how technology can play a critical part in the investment process,” DeFrancesco added.

For Buziak, she prefers that her team “goes with their gut” when it comes to a trade. She still sees the buy-side trader’s role as an interpreting data and information and then filtering it to their portfolio managers. But others, such as Wayne Miller, Head Trader at Bessemer Trust, who also goes with his gut more than not, conceded those who use AI and/or ML can be incrementally more profitable.

“By the time you read news or data the machines have already acted on it,” Miller said.

The smart desktop

Refinitiv and DeFrancesco are trying to bridge the gap between AI and the human buy-side trader by developing “Smart Desktop” workflows that amalgamate human and artificial (augmented) intelligence. DeFrancesco notes that the human and computer become a lot more powerful when they work together.

Refinitiv is focusing resources and investment on its AI solutions. “We believe that arming our users with AI-powered workflow solutions will help them make quicker, better and more informed decisions,” he said. “Beyond the trading desktop, we’re also making these solutions available as a microservice or API. This lets users pull data into their own infrastructure, giving them even more flexibility over how and where they capture information.”

Flexibility will be the key to the Smart Desktop initiative’s success. To that end, Refinitiv is looking to let users access not just its own data but data from third parties and alternative data sets.

Better, easier access to richer and augmented data would be good news for the buy-side, who are constantly faced with mountains of data to filter and absorb.

“Data today makes it much more different to trade than what it was 10 years ago,” Buziak said. “A good question we give a lot of thought to what type of data would we like to see that we don’t have readily available today? Venue analysis has led to the RTI initiative (Routing Transparency Initiative) which Enrico Cacciatore on my team has, in particular, been very involved with. Also, using FIX protocol, we would love to be able to see the routing logic of not only where our executions occurred but the path to get to those executions.”

Video: Trailblazer, Carrie Cheung

By
GlobalTrading
-


The Trailblazer Award Winner is: Carrie Cheung of BNP Paribas.

TRADER Q&A: Arca’s Dorman Explains Digital Realm

By
Creating Digital
-

Digital assets are the latest craze hitting Wall Street.

But what exactly are they? Aren’t they an offshoot of crypto? And how does one trade them and where?

Jeff Dorman, Arca

That’s something Jeff Dorman, Partner and Chief Investment Officer at Arca specializes in. Dorman leads his firm’s investment committee and is responsible for portfolio sizing and risk management. A veteran with over 17 years of trading and asset management experience at leading firms including Merrill Lynch and Citadel Securities, has now turned his attention to this infant asset class.

According to Techopedia, a digital asset is any text or media that is formatted into a binary source and includes the right to use it; digital files that do not include this right are not considered digital assets. Digital assets are categorized into images and multimedia, called media assets, and textual content.

Traders Magazine editor John D’Antona Jr. recently caught up Dorman and discussed his firm, how he transferred his expertise to the digital domain and the state of the market.

Traders Magazine: Tell us about your firm and business model.

Jeff Dorman: Arca is a full-service investment management firm building and managing institutional-caliber digital assets products. Our vision is to become the “BlackRock of Digital Assets” that aims to offer a full investment product suite enabling any investor to find the right product(s) to gain exposure to digital assets. Arca is working towards this through two divisions: An Asset Management arm where we invest in crypto as an asset class on behalf of our GP and LPs via a variety of different strategies; and a Product Innovation arm where we leverage blockchain technology as a wrapper to create new investment products (owning debt, equities and/or hard assets via tokens).

All of Arca’s products meet the highest regulatory standards globally set by the SEC and have institutional-caliber operations including but not limited to strict risk management, comprehensive compliance procedures, top service providers, and diligent reporting.

TM: Tell us about yourself.

Dorman: I am the Chief Investment Officer at Arca. Prior to Arca, I was an investment banker at Lehman Brothers, a High Yield/Distressed bond trader at Merrill Lynch, and a trader/Portfolio Manager at a variety of hedge funds including Citadel. I left the traditional asset management world in 2013 to help build a fintech company, Harvest Exchange, which caters to asset managers. It was during this time, working with developers every day, that I found Bitcoin and other digital assets. Crypto is the perfect marriage of asset management and technology, the two things that have pretty much defined my whole career.

TM: How have you taken your experience at leading trading firms and used it in the crypto and digital asset space?

Dorman: Every asset class and sector can be learned, and I’ve traded and invested in them all. It took me 12 months to learn how to analyze companies, two years to learn how to trade, and 20 years and counting to learn how to manage risk. There are no substitutes for experience. While I applaud many of the young crypto fund managers who are trying to build companies and learn on the fly, many of them would be better off having an apprenticeship under senior, experienced risk managers to learn. There are a lot of parallels between traditional markets and crypto. Many assets in this space are illiquid and trade OTC, so I draw on my experience trading assets such as distressed bonds and reorg equities. Event-driven investing in equities and debt is quite similar to that of digital assets, as you can identify hard catalysts and conduct scenario analysis. And we even use traditional valuation and modeling techniques for specific coins and tokens to value our investments.

TM: What is the difference, if any, between crypto and digital assets?

Dorman: The nomenclature in crypto is a bit confusing and inconsistent. We consider digital assets to be any asset that you can buy via a digital representation (coin or token). Crypto is often used interchangeably, but the word “crypto” itself typically describes those digital assets that are meant to be currencies. This is a small subset of the digital asset universe.

TM: What is the state of crypto and digital assets? Can it go higher given the discussions surrounding false trading volume and security?

Dorman: Sure. This is a young, immature market and as such, there will be bad actors. That said, false trading volume isn’t as big of a deal as many make it out to be. The $7 trillion US high yield debt market is riddled with dealers who fake volume in order to drum up business, but investors learn to trust those dealers that are consistent and transparent, and shun those who aren’t. The same will happen in crypto as bad exchanges will lose clients while good exchanges take more market share. Security is a bigger issue, but this is not a problem that investors in this space need to be exposed to. This industry has matured tremendously in the past few years, and there are now plenty of ways to protect yourself against these cyber crimes. Arca employs several of these tactics including the use of air-gapped devices and third-party custodians.

TM: What does the future of digital assets look like?

Dorman: Everyone who has dedicated his/her career to crypto is extremely bullish long-term, and I’m no different. I’m 100% confident that the overall size of the crypto market ($300 billion including equity in blockchain companies) is tiny relative to the future prospects of the technology. I’m uncertain where this growth in value will ultimately accrue. Thus far, the value has largely been captured by service providers (lawyers, exchanges, OTC dealers, software systems), but that is not sustainable. In order for the pick and shovel companies to continue to flourish, the digital asset ecosystem itself must grow. The good news is that better digital assets are on the way, with tighter governance features, more favorable tokenomics, increased asset protection and better investor/user alignment. This new breed of digital assets should achieve sustainable growth.

TM: Discuss your stable coin backed by Treasuries. Who is the target investor for this? Why?

Dorman: While Bitcoin is the leading digital asset today, Bitcoin itself may never be “money.” Instead, a handful of asset-backed tokens that are backed by real, hard, stable assets will become the true medium of exchange, and Bitcoin is likely to become a store of value like gold. The Arca US Treasury Coin solves many of the problems that are not solved by Bitcoin and other stabletokens. First, it is backed by the highest rated and most liquid asset on the planet, AAA-rated US Treasuries. Second, Arca itself is not the counterparty; we are simply the investment manager. The assets themselves sit in a trust, and can be easily audited unlike USD-backed stable-tokens that require trust in the rehypothecation of the banking system. We believe corporate treasury departments, crypto asset managers, other stabletokens and crypto companies will utilize this token as it solves many of their challenges — no need for banks, no need for multiple checking, savings and money market accounts, reduced fees on transfer of assets, 24/7 liquidity, and reduced counterparty risk.

Whither Blockchain?

By
Terry Flanagan
-

Sceptics are legion, but development activity continues.

What’s the deal with blockchain?

That’s a question on the minds of a lot of Wall Street market participants, who wonder whether the once-ballyhooed technology will ever be a disruptive and transformative force, or just a curiosity whose only lasting impact will be in academic case studies of tech failures.

The issue is that blockchain seems to be in a perpetual proof-of-concept (PoC) holding pattern — always on the drawing board but never actually being used. (See Whither Blockchain? 2018 version here.)

Richard Johnson, Greenwich Associates

But in a recent blog post entitled “Surviving the Blockchain Winter”, Greenwich Associates Senior Analyst Richard Johnson noted that reports of blockchain’s death are greatly exaggerated.

“Delays, failures and pivots are an essential part of entrepreneurship and innovative technological development,” Johnson wrote. “Only by coming up against obstacles and dead ends do we realize the limits of the technology and the most productive paths to follow.”

“The changes we are seeing in the space should be seen as a positive evolution and not a blight,” Johnson added.

In his blog, Johnson cited the famous Gartner ‘hype cycle’ graph, which shows visibility of a new technology sharply increase at first, then decline almost as sharply, before rising again to a plateau. Blockchain is currently in the stage of declining visibility, or the ‘Trough of Disillusionment’.

“While there have been numerous successful PoCs across equity, fixed income, FX and derivative markets, none have achieved the radical transformation that was expected,” Johnson wrote.

One group that is decidedly apathetic towards blockchain is public-market investors. In January 2018, four blockchain exchange-traded funds launched within days of each other. The two largest, Apply Transformational Data Sharing ETF (BLOK) and Reality Shares Nasdaq NexGen Economy ETF (BLCN), have seen their combined net assets decline 35% since inception, from $266 million to $173 million.

Yet blockchain development continues to churn ahead. In early June, the Wall Street Journal reported that 14 financial firms including UBS, Barclays, Nasdaq, and Credit Suisse joined forces to launch Fnality, an enterprise that aims to create a network of decentralised Financial Market Infrastructures to deliver the means of payment-on-chain in wholesale banking.

Greenwich recently polled financial services executives and found that on balance, there was more optimism about blockchain than there had been one year prior.

It is important to remember that after the Trough of Disillusionment comes the Slope of Enlightenment followed by the Plateau of Productivity, Johnson noted.

Rep Waters Looks To Block Reg BI Funding

By
Creating Digital
-
Kenneth E. Bentsen, Jr. President and CEO

Regulation Best Interest might not get the best enforcement – if it gets enforcement at all.

U.S. representative Rep. Waters, if she gets her way, placed an amendment onto the financial services bill that will block funds that would provide enforcement of the controversial and recently passed regulation. The amendment placed on the Financial Services and General Government Appropriations Act of 2020, H.R. 3351, passed committee two weeks ago and passed a simple floor vote last week.

Reg BI was approved by the SEC on June 5.

Her amendment, No. 78, to the bill, prohibits the SEC from “implementing, administering, enforcing or publicizing the final rules and interpretations” of Reg BI, “The Broker-Dealer Standard of Conduct.”

As reported by Think Advisor, the Insured Retirement Institute said it opposes Waters’ amendment, stating that Reg BI “should move forward and be given time to work. The just-approved regulation will offer a substantial enhancement to investor protections over current law.”

IRI argued that the new requirements on the broker-dealer industry “are considerable and the existing enforcement mechanisms applicable to Reg BI are rigorous.” Reg BI, the annuity group said, “and parallel efforts at the National Association of Insurance Commissioners offer an opportunity for regulatory harmonization. This is particularly important as a number of states pursue standard of conduct regulations that threaten to impose a patchwork of confusing, conflicting requirements that may harm consumers’ ability to obtain services to help them reach their financial goals.”

Waters, along with several other Democrats have been open in their disdain for Reg BI. Upon passage of Reg BI, she said the Securities and Exchange Commission regulation package (of which Reg BI was included) fell short by failing to require all financial advisors to adhere to “a strong, uniform fiduciary standard of care when providing investors with investment advice. She then called on the SEC to rescind Reg BI.

Kenneth E. Bentsen, Jr. President and CEO
Kenneth E. Bentsen, Jr.
President and CEO
In a written response, SIFMA said the so-called “Waters Amendment” to defund Reg BI would undermine investor protection. Kenneth Bentsen, Jr., SIFMA president and CEO, expressing strong opposition to Waters Amendment #78.

“Reg BI is the most comprehensive enhancement of standard of conduct rules governing broker-dealers since the enactment of the Securities Exchange Act of 1934,” Bensten began. “The rule materially and unalterably raises that standard consistent with Section 913 of the Dodd Frank Act. As promulgated, brokers must be compliant by June 30, 2020. It makes no sense to halt the orderly implementation of this important new set of regulations that would provide strong investor and consumer protections for forty-three million households.”

SIFMA sent a letter urging Members of Congress to vote ‘no’ on the amendment, which can be found in its entirety here.

FIA Recommends Changes To Exchange Traded Derivatives Reporting

By
Creating Digital
-

FIA suggests alternative solutions which will assist regulators to monitor systemic risks in the ETD market.

The Futures Industry Association (FIA) recently published a new position paper that highlights the concerns of market participants with the current reporting framework for exchange traded derivatives (ETDs). Further, and more importantly, FIA suggests alternative solutions which will assist regulators to monitor systemic risks in the ETD market, improve data quality and reduce existing inconsistencies with European Market Infrastructure Regulation (EMIR) reporting obligations.

walt_ds“Trade reporting is extremely important and needed, and it is one of the more significant changes that came out of the G20 Pittsburgh accords for the monitoring of systemic risks,” said FIA President and CEO Walt Lukken. “Today we are making several recommendations to help regulators get the information to monitor risks in a way that is efficient for market participants.”

This paper has been prepared to assist ongoing discussions about the efficiency of regulatory reporting in the EU and the possible streamlining of reporting obligations in the derivatives markets. The paper briefly summarizes the material issues and potential solutions, with a view to generating further debate and discussion with, and within, the legislative and regulatory communities. FIA makes the following recommendations:

  • Modifying the legislative text in order to grant EU regulators the authority to allow reporting firms to satisfy the EMIR reporting requirements by submitting ETD position reports and removing the obligation to report transaction-level details.
  • Adopting a position-level reporting regime to more accurately reflect the nature of ETDs, which are standardized contracts that are “compressed” into a net position at the end of each day. A position-level reporting regime would also provide a more accurate representation of ETD lifecycle events and margin/collateral changes given that these take place at position level and cannot be reported at transaction level.
  • Discontinuing EMIR transaction-level reports, which can occur without loss of regulatory oversight for systemic risk purposes because it is the end-of-day position that is the most relevant and not the individual transactions.
  • Position-level pairing and matching should only be required if the transaction-level reporting, and thus reconciliation of transaction-level reports, is removed.
  • Transactions and positions entered prior to January 2018 should not be subject to back-reporting requirements.

    • FIA encourages policymakers to acknowledge the recommendations set out within this paper and support the modifications of the EMIR Reporting regime for ETDs, which remains under review, as envisaged in the recently published text of EMIR Refit. FIA stands ready to assist policy makers and legislators as required.

    Blog : Facebook’s Libra project : Sehra and Patchay 2/2

    By
    Ian Rycott
    -

    LIBRA IS ALMOST CERTAINLY NOT WHAT YOU THINK IT IS.

    Dr. Avtar Sehra, Chief Executive Officer at Nivaura.
    Jannah Patchay, Director, Regulatory & Market Structure SME at Markets Evolution

    [Part Two of Two] for Part One – click here.

    In part 2 of a two-part analysis, Dr Avtar Sehra, Chief Executive Officer at Nivaura, and Jannah Patchay of Best Execution examine the proposed usage of Libra as a medium of exchange, and the associated economic repercussions.

    At this point, readers may well be asking themselves the question, “If Libra is a security, how can it be used as a currency?” Let us assume that the challenges created by Libra’s underlying fund structure have been solved, and that the coin itself can be considered as a medium of exchange / exchange token (which is problematic in itself, as unless there is an international regulatory consensus that, when used to effect payments, it is no longer treated as a security, then it’s not really a means of payment but rather a form of barter in which a security is exchanged for goods and services).

    As a medium of exchange, the intent behind Libra is that it should be utilised by end users (who will on the whole be retail clients) as a cross-border payment mechanism for goods and services. The complication for end users will be in understanding the value of Libra at any given time, and having confidence in the ability to price goods and services  in Libra. Although the stated goal of the Libra Association is to ensure a stable value for the coin itself through active management of the underlying basket, this is somewhat at odds with the notion that Libra’s pricing will be determined on the open market. Irrespective of the challenges to the Libra Reserve that are associated with keeping the Libra coin’s underlying basket stable, times of high demand for the coin will also create volatility in the market.

    Suppose there is a national currency crisis (e.g. Venezuela or Zimbabwe) that creates a high demand for Libra as end users seek to convert their local currency holdings into the perceived “safe” currency (as has happened with Bitcoin in the past). Market makers have two options: they can factor this demand into their pricing, and they can turn to the Libra Reserve to mint new coins. However, minting new coins is unlikely to be an immediate process; the underlying deposits and notes must be sourced and procured before a coin can be minted, in order to ensure the supply of  Libra coins is always fully asset-backed. This creates a latency between the demand for new coins to be minted and the actual minting of the coin. Therefore, in the interim period, the market maker is likely to adjust their pricing of Libra to reflect the sudden scarcity – meaning Libra prices go up. For Libra end users, this means that their use of Libra as a means of exchange is now directly affected by a localised political and currency crisis that would otherwise have no bearing on their daily lives whatsoever. Suppliers of goods and services that are priced in Libra would need to rapidly change their pricing, which has a cost in itself.

    Interestingly, perhaps the closest thing to Libra, in terms of a precedent, was the European Currency Unit (ECU). Prior to the genesis of the EU as a political construct (and the Euro as its currency), its precursor, the European Economic Community (EEC), had as its primary objective the ensuring of economic (and thus social) stability across Member States. As a part of this effort, the European Monetary System (EMS) was introduced, which consisted of a set of policies and procedures designed to minimise currency exchange rate fluctuations between individual Member States. The EMS defined narrow bands within which the bilateral exchange rates of the member countries could fluctuate. If the exchange rate of a currency pair hit a particular threshold, the associated central banks were required to step in and manage their currencies through open market operations, such as buying weakened ones and selling strong ones. In order to make EMS operations easier, the European Currency Unit (ECU) was introduced, which consisted of a basket of fixed amounts of EEC currencies. The ECU had two key objectives: to act an indicator of divergence between the currencies, and be used as a Unit of Account for the Member States.

    The ECU was never intended to be an actual currency – or a medium of exchange – for settlement of transactions involving goods and services. When the Euro was introduced, in 1999, it replaced the ECU at par. The ECU is therefore a historical example in which a basket of currencies was used as a means to manage the complexities of international monetary policy, and was ultimately a precursor to a single European currency.

    The International Monetary Fund’s (IMF’s) Special Drawing Rights (SDR) provides another example in which a basket of underlying currencies is used as a means of replicating certain functions of a currency. As with the ECU, the SDR is only defined as a Unit of Account for the IMF’s monetary operations, and is not classified as a currency. However, while the SDR is not itself a Medium of Exchange, it is intended to be held as a reserve currency by the participating central banks, and can be exchanged into fiat currency before use by participating institutions.

    Which brings us neatly to our conclusion – where is Libra going? If one were to consider the hypothetical introduction of a new global currency designed to supplant fiat, arguably the way to do it would be to first peg it and have it fully backed by to an existing basket of stable assets in order to build trust and confidence whilst the user base adopts it – a gold standard, if you will. Facebook’s clear advantage in this respect, once again, is the size of its user base and the reach of its services and platform, which instantly overcome the barriers to mass access and adoption faced by any other cryptocurrency.

    Over time, as the currency gains in popular usage, systemic integration and trust, it develops a value of in its own right, and one that is arguably independent of its underliers. The next step would be to leave the gold standard and put the currency into free float – et voila, we have a free floating global currency! This, ultimately, is the conclusion to which many central bankers must already have arrived, and their response to Libra’s perceived strategic designs may ultimately prove the most decisive in whether or not it ever gets off the ground. Additionally, should the prospect of Libra sufficiently incentivise central banks to create their own competing, centrally managed and controlled cryptocurrency, then the SDR (or a possible offshoot) is arguably the most likely candidate to take that role.

    ©BestExecution 2019

    [divider_to_top]

    Blog : Facebook’s Libra project : Sehra and Patchay 1/2

    By
    Ian Rycott
    -

    LIBRA IS ALMOST CERTAINLY NOT WHAT YOU THINK IT IS.


    Dr. Avtar Sehra, Chief Executive Officer at Nivaura.
    Jannah Patchay, Director, Regulatory & Market Structure SME at Markets Evolution

    [Part One of Two]
     
    In Part One of a two-part analysis, Dr Avtar Sehra, Chief Executive Officer at Nivaura, and Jannah Patchay of Best Execution take an in-depth look at the market structure and regulatory challenges around Facebook’s proposed Libra cryptocurrency.

    Facebook’s announcement of its new Libra coin project, on the 18th June 2019, was greeted with much fevered excitement and speculation from all quarters. Bitcoin’s value soared in light of the perceived vote of confidence this bestowed on cryptocurrency as an asset class. There was much discussion of the potential benefits to the unbanked, who would now be able to make and receive payments as easily as sending an instant message.

    The founding members of the Libra Association include an illustrious set of the big names in payments – Visa, MasterCard, Paypal – plus luminaries of the tech world such as Uber, Lyft, Spotify and eBay. Most of all, Libra’s single biggest advantage is perceived to be Facebook’s 2.4 billion-strong user base, combined with the social media giant’s well-known ability to burrow into every aspect of their lives. In the intervening weeks, the noise has certainly not died down; however, as lawyers, regulators, economists and central bankers have subjected the Libra White Paper to greater scrutiny, a number of questions arise. What exactly is Libra, when you look at its structure up close? How should it be regulated? What systemic risks will it pose? And where is it going?

    First of all, Libra is, in almost every major financial jurisdiction, a security of some description. Libra is backed by a basket of fiat currency deposits and short term government debt. Each Libra coin represents a unit of value of the underlying assets, held in the Libra Reserve. To this extent, Libra most closely resembles a collective investment scheme in the EU and UK, or a mutual fund in the US. These structures are typically regulated in jurisdictions globally, particularly when distributed to retail investors (i.e. the Libra user base).

    Given the ultimate intention is that Libra will be exchange-traded, it’s clear that the Libra coin operating model has been designed to replicate a currency basket ETF structure, which is a security. In this instance, the structure is even more complex than a standard ETF, as it seems in the case of Libra it will more closely resemble an “actively-managed” fund. Active management will be necessary in order to drive its objectives of managing the funds in a relatively liquid manner, to generate returns for its Investment Token holders (the Validators), but more importantly to provide a capital preservation strategy for the Libra Coin holders i.e. minimise volatility and potentially provide the retail Coin holders access to the underlying basket of funds at any time on redemption of their Libra Coin.
    The Libra market structure is rather complex, and in order to understand the potential regulatory and economic treatment and challenges, it’s necessary not only to examine the Libra coin as a construct but also each activity taking place in the Libra marketplace.

    These can be broken down as:
    1.     Minting new Libra coins – subscription and redemption processes – and the role of the Libra Reserve and the Authorized Resellers (distributors) in this process.
    2.     The initial sale of Libra coins to end users, by Authorized Resellers, in exchange for fiat or crypto currency.
    3.     The on-going market making capability provided by Authorized Resellers to end users, on the secondary market.
    4.     Trading of Libra coins on exchanges and trading venues.
    5.     The use of Libra as a medium of exchange by end users, and the payments service provided by the Calibra wallet system in facilitating this.
    6.     The role of the Libra Reserve in managing Libra as an actively managed fund structure, in undertaking regular valuations and in rebalancing the underlying basket’s composition so that it remains extremely stable in value (at its face value at least).

    All of these activities and services, were they considered in the context of traditional financial markets, would be captured within the regulatory perimeter of the overwhelming majority (if not all) of the jurisdictions in which the Libra Association seeks to provide services (certainly for the EU, US, Singapore, Hong Kong and Japan). It is quite clear, therefore, that the expected regulatory treatment of Libra as a security creates a number of challenges for its proposed usage.

    Typically, shares in ETFs /mutual funds / unit trusts are valued by an independent fund administrator on a regular basis, with the valuation methodology and net asset value being fairly transparent (as demanded by both regulators and investors). Holders of the fund units are also entitled to the profits attached to and generated by the underlying basket of assets. Market makers in ETFs also apply a spread when making two-way prices (this is how they derive their profit from the transaction), and this means that the bid and offer prices are primarily dependent on the value of the underlying assets, plus the spread applied. Libra, however, is different.

    The White Paper envisages Libra’s value being purely driven by market forces. The assets underpinning Libra (fiat deposits and short term notes) will still generate an income, but this income will effectively be stripped from Libra coins and attributed, instead, to the investment token that is held by the members of the Libra Association. The Authorized Resellers and end users will also be exposed to all the credit and market risk associated with the underlying basket, but will gain none of the upside. This is quite unlike any other asset, to say the least.

    So, then, Libra is worth whatever the market determines it to be worth. Which may be the same as the value of its underlying assets, or may deviate – the authors of the White Paper do not appear to be too concerned as to the extent to which deviation may occur. In the case of Libra, its pricing and volatility is derived from two factors – the value of the underliers and their own volatility in the market, and the value attributed to Libra itself by the market and by demand for Libra coins by their end users as a means of exchange for goods and services, or by speculators (and there will be plenty of speculative trading).

    Going back to traditional markets, typically where the value of an ETF or a derivative contract starts to deviate significantly from the value of the underlying assets, certain market participants will see opportunities for arbitrage, and the prices of both will naturally start to come back into alignment again as those opportunities are exploited. Nobody is using ETFs as a means of exchange, so there is no additional concern around the speculative value of an ETF outside of the inherent value created by the underlying assets. Libra, on the other hand, is intended for use as a currency.

    Part two will be published, Tuesday 9th July, 2019 – CLICK HERE

    ————————————————————————————————————————–

    ©BestExecution 2019

    [divider_to_top]

     

    Analysis : Equity markets in Europe : Summer 2019

    By
    Ian Rycott
    -

    LiquidMetrix analyses consolidated performance figures for equities and ETFs traded in Europe in the previous quarter.

    The charts and figures below are based upon LiquidMetrix’s unique benchmarking methodology that provides accurate measurements of trends in market movements. We have seen many changes in market microstructure over the last year, and here we present statistics based on the first two quarters of 2019 as a guide on the current trends

    To give an overall indication of the market in the first half of 2019, we again compare the value traded in Europe against the % traded LIS. We can see in H1 a levelling off in % LIS, and a slight decline into May and June.

    One criterion to assess venue quality is the % of times the venue has a best price in the market. This is a measure of how competitive the lit markets are as it’s based upon the major index constituents of each market, and includes both price ties and unique best price.

    The lit markets have altered characteristics compared against the previous quarter, with significant increases in best price ties across venues (most increases were above 20%). Aquis gained a 2nd ranking on the CAC, but has moved back to 3rd rank on OMX-S during the quarter.

    The market liquidity picture has reversed the trend from the previous quarter, with an increase in liquidity being made available on lit venues in the second quarter of 2019.

    Taking a 10 basis point measure from the mid price, we can see that liquidity has returned, but not to the levels seen in Q4 2018.

    In venue liquidity ranking, Turquoise moved up to 3rd rank on the CAC and SMI.

    The tables below give one method of how to assess performance of dark pools in Europe. For trades in each major index constituent stock we review the value traded during the period, the average trade size and the relative impact on the lit market using as a measure the % of times there is a corresponding movement on the lit market. We can observe that there are different characteristics across the various market centres.

    The value traded on FTSE increased in Q2 2019 when compared with the previous quarter, but reduced on all the other markets. For Q2 2019, we observed that XUBS increased its share of the dark flow in the CAC and Liquidnet increased its trading and ranking on SMI and MIB. CHID reduced market share on the CAC. BLOX and XUBS also went down a rank on the SMI.

    Using the same methodology we assess performance of periodic auction venues together. Ranking by value traded, the clear leader over the period is Bats Periodic Pool, BATP.

    AQXA moved to third rank on FTSE with XPAC and TRQA reducing FTSE market share. TRQA, SGMY and XPAC all increase market share on the SMI at the expense of AQXA.

    On OMX-S, AQXA had an increased in market share, and TRQA reduced in Q2 2019.

    ISS LiquidMetrix are pioneers in the measurement of European Fragmented markets, and provide research,TCA best execution and Surveillance for financial market participants and regulators – www.liquidmetrix.com

    ©BestExecution 2019

    [divider_to_top]

     

    Profile : Stuart Williams : ICE Futures Europe

    By
    Ian Rycott
    -
    Stuart Williams, President, ICE Futures Europe
    Stuart Williams, President of ICE Futures Europe

    STAYING ONE STEP AHEAD.

    Stuart Williams, President of ICE Futures Europe explains how ICE is navigating the twists and turns of the markets.

    Stuart Williams is the President of ICE Futures Europe, Intercontinental Exchange Inc.’s London-based, global futures and options exchange, which hosts a variety of energy, interest rate, equity derivative and commodity markets. Previously, Williams served as chief operating officer of ICE Futures Europe and before that as director of corporate development. Prior to that, he was at LIFFE and played a key role in the transition of LIFFE’s clearing and trading to ICE’s clearing and trading platforms, and the Exchange’s integration into ICE. Before joining LIFFE, Stuart spent 10 years consulting with Protiviti and Accenture, working on a broad range of initiatives with exchanges, clearing houses and other financial sector clients. Williams holds a bachelor of engineering degree from the University of Pretoria.

    How have things changed over the past two years since you took over as president?

    In policy terms, we’ve seen the introduction of one of the most ambitious and complex pieces of financial regulation in the form of MiFID II, benchmark reform initiatives including the transition of LIBOR to a waterfall methodology and the introduction of risk free rates by the official sector. Brexit contingency planning across the industry has also featured prominently, as have discussions between major jurisdictions regarding how local regulators work together to oversee a global industry without fragmenting those very same markets that provide the necessary risk management tools that power growth and innovation in the real economy.

     

    Geopolitical themes driving markets have also changed with ongoing trade tensions between China and the US acting as a significant backdrop, alongside shifting expectations of a change in central bank monetary policy.

    Energy transition is another key theme that has and will continue to develop – the global challenge of meeting increasing demand for energy while at the same time reducing carbon and sulphur emissions. The shale revolution in the US has moved the country into pole position as the world’s largest producer of oil and gas while the centre of gravity of demand continues to shift towards Asia.

    How has ICE responded to this shifting landscape?

    Uncertainty and the changing dynamics of the markets we serve, whether as a result of geopolitical risks, shifts in the supply-demand dynamic or changes in regulatory and public sector policy increase demand for new and innovative products, risk management and data. As such, we continue to develop new products and services across our network of 12 exchanges and 6 clearing houses and expand our data offering to provide the necessary tools for our customers to trade, invest and manage risk.

    Key to all of this is staying close to our customers and understanding all of the issues that touch them. For example, recent changes in regulation have a big impact on how our customers do business and that influences how we develop our business to ensure we can continue to meet our customers’ needs in terms of products, risk management techniques, hedging tools and data. The most effective way to develop new products is to do it alongside your customers.

    What type of products have been developed?

    Benchmark reform remains one of the big themes in interest rate markets. Last year we launched one month and three month futures contracts based on the Secured Overnight Financing Rate (SOFR) following on from the successful launch of ICE one month and three-month SONIA futures in December 2017 and June 2018 respectively. Together, they provide a global offering to trade and hedge alternative risk-free rates alongside Euribor, Short Sterling, Euroswiss, Gilts and other interest rate benchmarks. Our range of interest rate futures and options contracts continues to grow as we continue to build on our multi-benchmark, multi-currency offering.

    In energy, we launched a new physically delivered Permian WTI futures contract bringing a light sweet US crude to the global market, with a delivery point in Houston. In addition, we’ve developed a range of new low sulphur fuel oil contracts to support the transition to the International Maritime Organisations sulphur cap that comes into force in January 2020. This alongside the ongoing development of our global gas markets with new LNG hedging instruments.

    How do you see the landscape changing as LIBOR is being phased out? How are the SONIA and SOFR contracts faring?

    We have seen growing interest as an increasing range of financial institutions have started trading the products. As of the end of May, £2.95tn in notional volume had traded in our SONIA futures contracts since launch with £426bn of that in May 2019 equating to around 64% of SONIA futures volume. In our SOFR futures markets, we’ve seen $3.31tn in notional volume trade since launch with $697bn of that in May 2019 – around 32% of SOFR futures volume. It is still early days, though with significant development still needed in the alternative benchmark markets.

    As for LIBOR itself, the Financial Conduct Authority (FCA) has made it clear that it wants the industry to plan for a transition away from LIBOR by the end of 2021.

    What are your plans for your equity derivative products?

    We continue to build on our leading MSCI and UK equity franchises. In April we launched eight new regional and country-specific MSCI index futures on ICE Futures US including MSCI World NTR and MSCI Europe NTR. At the same time, we launched 11 new MSCI EMU sector index futures on ICE Futures Europe to complement our existing offering covering the MSCI World Sectors and MSCI Europe Sectors. Across the MSCI complex, May 2019 month-end open interest stood at $2.4bn in notional with YTD volumes up 36% on last year. Our MSCI Emerging Market Index Futures market, which has seen average daily volume increase from 1,000 lots to over 175,000 lots in 10 years, currently has open interest of over 1.28m contracts ($65bn in notional). The US/China trade tensions, coupled with the increased weighting of Chinese stocks in the MSCI Emerging Market Index, has seen market participants turn to ICE MSCI Index futures to manage their Emerging Markets exposure. It is an exciting market for us.

    We also offer futures and options on various FTSE Indices, namely the FTSE 100 Index, FTSE 250 Index and the FTSE Dividend Indices. YTD ADV in the FTSE 250 Index Futures and the FTSE Dividend Index futures were up 34% and 37% respectively. Together with the FTSE Index products, the UK single stock future and options products and the Sterling rates products, ICE offers the most comprehensive suite of products to manage UK risk exposure.

    In terms of product development, we are in the process of improving our FTSE 250 Index futures and options contracts.

    We are also looking at the opportunities in the ETF space because of the increased flows in these and other passive products. We are developing an ETF hub in fixed income to strengthen and simplify the existing ETF creation and redemption process for fixed income ETFs. The platform will utilise continuous evaluated bond prices from ICE Data Services, and connect to BondPoint, our electronic corporate bond trading platform, and TMC Bonds, the municipal bond trading platform we acquired last year, as well as to third party venues. ETF Hub leverages expertise from across our company and provides a unique solution to a range of challenges faced by the ETF industry.

    What challenges do you foresee – political like Brexit but also liquidity, market infrastructure, etc?

    The ever-increasing cost and complexity of regulation as well as the detail and prescriptiveness of regulatory policies that go beyond the remit to ensure the safety and efficacy of the market. They all increase the risk of market fragmentation which will ultimately weaken the efficacy of the market and stifle the necessary investment and innovation required going forward.

    Stock exchanges are now described as technology companies. How has ICE changed in that regard and what technology is driving the company forward?

    ICE started out in 2000 with the idea of transforming energy markets by creating an electronic marketplace that removed barriers and drove transparency and access. In 2005, ICE transformed ICE Futures Europe (previously the IPE) into the first fully electronic energy futures exchange, closing the trading floor. Technology and innovation have always been a core part of our DNA. When you look at all the acquisitions we have done over time, it has been about positioning ourselves at the forefront of the analogue to digital conversion in a range of different markets.

    However, there is still a long way to go and for us we will continue to build upon what we see as the virtuous circle of execution, clearing and data. Data will play a key part, whether as an important input into trading decisions, being used to measure best execution, for compliance with regulations or as part of the portfolio manager’s investment management processes. To that end, we will continue to develop content offered via the ICE Global Network which already offers a broad range of proprietary and third-party data. In a world where cyber security is front and centre, ICE Global Network provides a very secure and resilient access route to the global market community.

    Where are the opportunities?

    We are always looking for more opportunities. The analog to digital conversion is not done yet. Data is playing a big part, as is the opportunity in digitising the US mortgage space which we have begun with the acquisitions of MERS and Simplifile. On the exchange side, there will be a constant evolution of new products and services as the market continues to evolve and innovate.

     

    ©Best Execution 2019
    [divider_to_top]

     

    1...489490491...676Page 490 of 676

    Global Trading is an industry-leading news service for the global equities capital markets: providing information, education, insights and analysis for senior professionals working within trading and execution across Europe, the UK, North America, APAC and other emerging markets. With a focus on the intersection between the buy and sell-sides, Global Trading covers all industry elements from technology and trading strategies to regulation, best execution, market structure and liquidity.

    Copyright © 2024 Markets Media Europe Ltd.

    We're Enhancing Your Experience with Smart Technology

    We've updated our Terms & Conditions and Privacy Policy to introduce AI tools that will personalize your content, improve our market analysis, and deliver more relevant insights.These changes take effect on Aug 25, 2025.
    Your data remains protected—we're simply using smart technology to serve you better. [Review Full Terms] |[Review Privacy Policy] By continuing to use our services after Aug 25, 2025, you agree to these updates.

    Close the CTA