Marketcetera Platform Blog

A plague of locusts, a river of blood, maybe some boils?

Hello everyone, my name is Roy Agostino and I am the newest member of the Marketcetera team. I joined just as the latest market gyrations began and I am very curious on the community’s thoughts on how we will emerge from this turbulent period. From my perspective, even as we watch the latest daily storm buffet the industry, it helps me to step back and begin thinking through how current market forces will reshape the financial services industry.

Pauline Skypala, writing in the Financial Times,  muses that even the term “hedge fund” will lose meaning as they converge with the traditional asset management industry. Hedge fund managers actively manage risk (and focus on absolute return), while their more traditional counterparts focus on risk relative to a benchmark (and relative returns). Read more »

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Let’s not debate the merits of the enormous regulatory changes from the SEC today, but take it as a given that we all need to deal with it.  Today’s unheralded announcement, as well as the 2 week expiration date, represent lightning-fast time frames in an industry that is typically given years to prepare for such large  structural changes.

The software you use should be able to adapt – quickly.  It touches every part of your trading business from regulatory (obviously), to trading strategy formulation, to risk management. When even extra-loud value investor Jim Cramer is suggesting short-term trading strategies because of these changes, you know this represents a fundamental shift.

So how are your systems faring?  What would you like to see them do better? And, what would you like to be able to change right now?

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It’s been an eventful week in the capital markets, as four fairly large dislocations sent traders scrambling.
I’m not going to comment on the Fannie/Freddie bailout, or on the glitch at the LSE that halted trading for much of Monday.  And I’ll leave it to Paul Kedrosky at “Infectious Greed” to draw a connection between the Lehman announcement and the first test of the Large Hadron Collider.

But let’s look at the darkly comical story of the United Airlines stock plunge at 11am Monday. The catalyst was when a reporter at Income Securities Advisor re-posted a 2002 United bankruptcy filing, feeding a wire service published on thousands of Bloomberg terminals worldwide and flagged as “new” news.

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A few weeks ago we blogged about how block trades have been melting into streams. Buy side, and sell side institutions have already, for the most part, incorporated the new paradigm into their business models.  This week we get news that another exchange has figured it out.  The Deutsche Börse made an announcement that they are cutting the fees for small orders on their Xetra electronic trading platform.

Seeing an increasingly important portion of their revenue stream–that derived from small orders–end up in the hands of alternative trading venues, they took the fairly drastic step of altogether abolishing the €0.60 minimum fee for executed orders. Naysayers point out the €35m in “lost revenue” this will cause based on their current order-flow statistics, but we believe–clearly as does the Deutsche Börse–that this  will lead to dramatically increased streams of smaller orders.

So automate at will; break your blocks into streams, and be confident that the exchanges of the world are moving along with you.

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As the heat rises in global securities markets, blocks have melted into streams:  trades that were previously executed as one big block of shares are being broken up into a series of smaller trades and reported to a customer at an average price.  Among the most visible evidence of this trend are the precipitous drops in share quantities per trade, down from 2300 to around 300 on the NYSE.

Of course one of the drivers behind this trend is the increased use of algorithmic trading systems for tactical execution.  Many brokers offer to “rent” their algorithms for use by their institutional customers (and, increasingly, their retail customers), which presents a crucially important question: what constitutes “best execution” in the world of streams?

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