The Perennial Profit Challenge: 2013 Roadmap for World Exchanges

Posted on December 16, 2012. Filed under: Exchanges, Practitioners, Regulations, Securities and Exchange Commission, Technology | Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , |

Edgar Perez and Sir Richard Branson

Edgar Perez and Sir Richard Branson

Financial exchanges play a vital role in economic development as one of the primary tools for the allocation of capital in both developed economies and emerging ones. The indices created using the platforms provided by global exchanges are used by the financial services industry and the government as barometers of economic health and a predictor of national financial well-being.

However, the exchanges model has changed dramatically over the past decade starting with demutualization. The first wave began with the Stockholm Stock Exchange (STO) in 1993 and included the Bombay Stock Exchange (BSE) in 1995 and Borsa Italiana (BVME) in 1997. Demutualization was followed by a second stage in which a number of exchanges became publicly traded and profit-seeking companies listed on their own platform, with the Australian Securities Exchange (ASX) being the first to follow this model in 1998. Such restructurings are still taking place in exchanges all over the world.

Exchanges have come under increasing regulatory attention. In the US, for instance, the Securities and Exchange Commission is expanding an enforcement probe into a broader look at how exchanges develop new products, communicate with investors and provide incentives to trade; this was sparked partly by an SEC probe into trading order types apparently benefiting high-speed traders, whose activity comprises more than half of all stock-trading volume.

As companies exercise more flexibility in seeking to raise capital outside their national boundaries, the environment has become even more competitive for exchanges. Furthermore, they are hugely capital intensive (mostly due to the IT infrastructure required for increasingly high frequency trading), reason why some exchanges are looking to grow through acquisitions in order to enjoy greater economies of scale.

While these challenges are common to exchanges worldwide, the impact on their bottom lines has been rather diverse. For instance, the Philippines Stock Exchange (PSE) doubled its profit in the first nine months of 2012 compared to last year. While the exchange benefited tremendously from the favorable economic environment and sky-high optimism in the country, there were a number of reforms implemented by the PSE, including the rollout of a new trading system, extension of trading hours and implementation of multiple regulatory and governance enhancements.

London Stock Exchange (LSE) reported a profit for the first half of the year nearly unchanged from last year as strong performance in information services helped offset weak capital markets. The exchange highlighted the benefits of its increasingly diversified international group and the growth from its Information, Post Trade and Technology businesses; the exchange reported a 66 percent increase in Information Services revenue, while Capital Markets revenue dropped 19 percent.

On the other side of the spectrum, NYSE Euronext, the operator of the New York Stock Exchange and other stock exchanges, announced that its third-quarter profit fell 46 percent, which the company attributed to reduced average daily trading volumes, primarily related to its derivatives business. It said its results last year were helped by the extreme volatility of the markets in Europe and the United States due to debt concerns. Certainly, volatility has declined considerably since then, reaching multi-year lows in August 2012.

Exchanges are responding to this increasing competition in a number of ways. Negotiating mergers has been the first option considered by a number of companies, only to be derailed in some cases by regulators or rebuffed by targets. NYSE Euronext face resistance from European regulators on its proposed combination with Deutsche Boerse; ASX’s agreement with Singapore Exchange (SGX) fell through as well; LSE dropped its bid for Toronto Stock Exchange (TSX) after its owners spurned them in favor of the bid from a group of Canadian banks and pensions. However, that doesn’t mean that exchanges will not attempt to find combinations that don’t run afoul of regulations, just because mergers almost in all cases strive to provide an avenue to widen their business model and to exploit economies of scale, economies of network, cross selling opportunities and trading hours; for instance in Asia, Tokyo and Hong Kong shortened their midday halt to one hour last year, while Singapore scrapped its lunch break altogether, joining Australia, South Korea and India on the list of exchanges that have uninterrupted trading days.

Second, developing cutting edge-edge technology and its further commercialization is paving the way to extract additional profits from investments already paid. For instance, LSE leveraged its IT investments with the adoption of an outsourced managed services model that allowed the exchange to run other exchanges, such as the Johannesburg Stock Exchange, using its own platform. Building a major technology franchise through outsourcing was vital for the LSE if it was to continue to compete with the likes of NYSE Euronext and Nasdaq OMX, which had extended their brand and influence in several emerging markets through major technology deals.

Finally, exchanges are standing up to the challenge of diversifying their business model. Exchanges that were primarily focused on cash trading decided to integrate services such as the trading of derivative financial instruments markets. As it was the case for LSE, information services delivered in machine-readable format are providing growth opportunities for exchanges worldwide; RapiData, company acquired by Nasdaq OMX, enabled the company to deliver U.S. government and other economic news directly from the source to customers interested in receiving information in an electronic feed, giving them instant access to events that are incorporated into algorithmic trading systems. The perennial appetite of high-frequency and algorithmic trading firms for faster access to trading data is also encouraging exchanges to provide colocation services that bring all participants equal access to their matching engines. Ultimately, exchanges will be forced to explore all upstream and downstream opportunities in the production chain of the exchange industry, from the above mentioned information services upstream to the integration of clearing and settlement services downstream.

Revenues at exchanges will need to evolve from its reliance on volume-dependent fees and commissions for a range of activities (including trading, listing, clearing, settlement, depository, custody and nominee services) to uncorrelated income sources that might not have existed just a few years ago; the infrastructure they have, the data they manage and proximity to their matching engine are all key assets that need to be fully exploited if exchanges are to succeed in 2013 and beyond.

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Edgar Perez, The Speed Traders Workshop 2012 Sao Paulo, Quoted by CNBC on Can ‘Trading on Tweets’ Really Make Money?

Posted on January 24, 2012. Filed under: Exchanges, Flash Crash, Practitioners, Strategies, Technology | Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , |

Edgar Perez, Adjunct Professor at the Polytechnic Institute of New York University and presenter at The Speed Traders Workshop 2012 Sao Paulo: How High Frequency Traders Leverage Profitable Strategies to Find Alpha in Equities, Options, Futures and FX

Edgar Perez, Adjunct Professor at the Polytechnic Institute of New York University

Edgar Perez, Adjunct Professor at the Polytechnic Institute of New York University and presenter at The Speed Traders Workshop 2012 Sao Paulo: How High Frequency Traders Leverage Profitable Strategies to Find Alpha in Equities, Options, Futures and FX, February 8th, BM&FBovespa, was quoted by CNBC.com on the note “Can ‘Trading on Tweets’ Really Make Money?“.

CNBC’s Antonya Allen pointed out that social media websites like Twitter and Facebook have become increasingly important to high frequency traders looking to anticipate market moves before they happen; however, she asked, could they eventually become as significant as traditional business news providers in the world of high speed trading?

Edgar Perez, author of The Speed Traders: An Insider’s Look at the New High-Frequency Trading Phenomenon That Is Transforming the Investing World, said he has not come across a trader who had made money from information supplied on social networking sites. In his book, Edgar Perez follows six high speed traders and examines how ultra fast trading could develop in the future.

“I would be very interested in seeing cases where people actually made money using information from Twitter. Remember there’s a lag there of time and with high frequency trading you want to make sure you connect directly and don’t have any third party providers for information,” Perez explained.

Mr. Perez is widely regarded as the preeminent speaker and networker in the specialized area of high-frequency trading. He has been featured on CNBC Cash Flow (with Oriel Morrison), CNBC Squawk Box (with Geoff Cutmore), BNN Business Day (with Kim Parlee), TheStreet.com (with Gregg Greenberg), Channel NewsAsia Asia Business Tonight and Cents & Sensibilities (with Lin Xue Ling), NHK World, iMoney Hong Kong, Hedge Fund Brief, The Wall Street Journal, The New York Times, Dallas Morning News, Los Angeles Times, TODAY Online, Oriental Daily News and Business Times. He has been engaged as speaker at Harvard Business School’s 17th Annual Venture Capital & Private Equity Conference, High-Frequency Trading Leaders Forum 2011 (New York, Chicago, Hong Kong, Sao Paulo, Singapore), CFA Singapore, Hong Kong Securities Institute, Courant Institute of Mathematical Sciences at New York University (New York), Global Growth Markets Forum (London), Technical Analysis Society (Singapore), TradeTech Asia (Singapore), FIXGlobal Face2Face (Seoul), and 2nd Private Equity Convention Russia, CIS & Eurasia (London), among other global forums.

The Speed Traders Workshop 2012 Sao Paulo will reveal how high-frequency trading players are succeeding in the global markets and driving the development of algorithmic trading at breakneck speeds from the U.S. and Europe to India, Singapore and Brazil. The Speed Traders Workshop 2012 Sao Paulo kicks off a series of presentations in the world’s most important financial centers: Dubai, January 25; Seoul, South Korea, March 28; Kuala Lumpur, Malaysia, April 11; Warsaw, Poland, May 11; Kiev, Ukraine, May 18; Singapore, May 26; Shanghai, China, June 6; Jakarta, Indonesia, June 13; Mexico City, Mexico, July 27; Hong Kong, August 4, and Moscow, Russia, August 10.

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High Frequency Trading in Brazil, Mirage or Miracle? Find out at The Speed Traders Workshop 2012 Sao Paulo, February 8th

Posted on January 20, 2012. Filed under: Event Announcements, Exchanges, Flash Crash, Practitioners, Strategies, Technology | Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , |

The Speed Traders Workshop 2012 Sao Paulo: How High Frequency Traders Leverage Profitable Strategies to Find Alpha in Equities, Options, Futures and FX

The Speed Traders Workshop 2012 Sao Paulo

Christian Zimmer, Head of Quantitative Trading and Research, and Hellinton Hatsuo Takada, Quantitative Trader, of Itaú Asset Management, compare the term high-frequency trading (HFT) to ‘Cleopatra’– sexy and mysterious and everyone is keen to know more about it. But the term HFT speaks for itself, so is it wasting time to go over it again? Probably not for the attendees to The Speed Traders Workshop 2012 Sao Paulo: How High Frequency Traders Leverage Profitable Strategies to Find Alpha in Equities, Options, Futures and FX, February 8th, BM&FBovespa, to be led by Mr. Edgar Perez, Adjunct Professor at the Polytechnic Institute of New York University.

Zimmer and Hatsuo suggest at FIX GLOBAL TRADING to look at the underlying trading strategies. The incentives an exchange should create to attract flow must be adjusted to the strategies that are really needed. Each strategy deserves a different set of policies and this will help the diversification of the traders’ strategies.

A trader using a market maker strategy can live with exchange fees as long as the bid-ask spread is sufficiently high. If the spread narrows, the costs become crucial and the exchange must lower the fees in order to keep this client in the market. On the other hand, a directional trader has different issues; if the fees are high, a trader must wait longer for a relevant price move so that they can capitalize on their position. Contrary to the market maker, the directional trader loves to see narrow bid-ask spreads. There would be no need to lower fees when the spread is close. The same is true for the statistical arbitrage traders.

When looking at the third party analyses of HFT in the international markets, Zimmer and Hatsuo see that the most common strategy is the market maker approach. This fact is strongly influenced by market fragmentation, which they do not have in Brazil. Fragmentation creates new intermarket trades, which could qualify as arbitrage trades, but not necessarily as market maker trades. Fragmentation also makes exchanges and other venues compete for the customers that provide liquidity and, as a result, give incentives to market makers. As mentioned above, Brazil does not have a fragmented market and BM&FBOVESPA does not see it necessary to ask for more liquidity. At least not as long as international capital flows are strong and increasing. Liquidity is needed in second tier shares and below.

The Speed Traders Workshop 2012 Sao Paulo, led by Edgar Perez, author, The Speed Traders,  will reveal how high-frequency trading players are succeeding in the global markets and driving the development of algorithmic trading at breakneck speeds from the U.S. and Europe to India, Singapore and Brazil. The Speed Traders Workshop 2012 Sao Paulo kicks off a series of presentations in the world’s most important financial centers: Dubai, January 25; Seoul, South Korea, March 28; Kuala Lumpur, Malaysia, April 11; Warsaw, Poland, May 11; Kiev, Ukraine, May 18; Singapore, May 26; Shanghai, China, June 6; Jakarta, Indonesia, June 13; Mexico City, Mexico, July 27; Hong Kong, August 4, and Moscow, Russia, August 10.

Mr. Perez is one of the great business networkers and motivators on the lecture circuit; he is available worldwide for the following speaking engagements: Present and Future of High-Frequency Trading, The Real Story behind the “Flash Crash”, Networking for Financial Executives, and Business Networking for Success.

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