The Capital Markets’ Industrial Revolution

Interesting comparison from GreySpark in their latest research report. Comparing the digital transformation of investment banking to the automation of manufacturing processes in industries such as motor and aircraft manufacturers.

Their report draws analogies, between investment banking, and the motor and aircraft industries, which also experienced heavy regulatory burden, regular government interference, ever evolving demand patterns, regular bouts of over-capacity and a critical requirement to pool resources in order to innovate.

In their opinion, banks will reinvent their operating models on three pillars:

  1. A fully-automated manufacturing plant for the creation, assembly and packaging of financial products and services.
  2. A multi-channel distribution franchise that provides a consistent user experience for all interactions between the bank and its clients.
  3. Data managed as an asset across the entire supply chain.

The adoption of this new operating model has significant implications:

  • Investment banks’ supply and value chains will invariably extend beyond the enterprise and incorporate suppliers, partners, market infrastructure and shared utilities.
  • The number of joint-ventures and strategic alliances between complementary institutions will multiply as banks focus on their core expertise, client franchises and geographies.
  • As value creation will be effectively distributed across functions, the manner in which it is accounted for will also change – determining where key decisions are made and how individual contributions are rewarded.

Link to report here (behind paywall):

Electronic trading in fixed income markets: report by BIS (Bank of intl settlements) – worth reading!

An interesting report (well worth reading), published in January by The BIS (Bank of international settlements), looks at the impact of ‘electronification’ of the fixed income markets. The report was based on structured interviews with market participants,  and a survey of electronic trading platforms.

It argues that advances in technology and regulatory changes have significantly affected the economics of intermediation in fixed income markets and that electronification is changing the behaviour of investors. The rise of electronic trading is creating efficiencies for many market participants, improving market quality in normal times, lowering transaction costs and reducing market segmentation, while at the same time Continue reading

Future of Single-Dealer Platforms: SIs, MTFs or OTFs?

An excellent article in covered also in FXWeek, looks at the future of Single-Dealer Platforms under MiFID II and discusses the options for bank platforms.

Should they register as:

  • Systematic Internalisers (SIs), which enables them to utlilise their own risk capital and trade on bilateral basis with customers
  • Organised Trading Facilities (OTFs), in which case they cannot use their own capital, and would in effect be running an agency business, but cannot run both an SI adn OTF under the same legal entity
  • Multilateral Trading Facility (MTF), which offers all to all trading

Initially, the SI regime seems obvious, as they can deploy their own capital, and trade with clients on a bilateral basis, which is what most SDPs currently do.

The test for an SI is that it Continue reading

BofE study finds mandatory swaps trading on SEFs increases liquidity and lowers costs!

Some interesting findings from a paper from the Bank of England, which looked at the impact of mandatory trading on swap execution facilities (SEF), for interest rate swaps (IRS) as required under Dodd Frank Act.

The paper looked at transactional data from the USD and EUR segments of the plain vanilla IRS market. The findings showed that as a result of SEF trading:

  • Activity increases
  • Liquidity improves across the swap market
  • Improvement being largest for USD mandated contracts which are most affected by the mandate
  • The reduction in execution costs is economically significant
  • Execution costs in USD mandated contracts, drop for market end-users alone, by $3 million–$4 million daily relative to EUR mandated contracts and in total by about $7 million–$13 million daily
  • Inter-dealer activity drops concurrently with the improvement in liquidity suggesting that execution costs may have fallen because dealer intermediation chains became shorter

Overall, the results suggest that:

“The improvements in transparency brought about by the Dodd-Frank trading mandate have substantially improved interest rate swap market liquidity.

Finally, the report finds that the Dodd-Frank mandate caused the activity of the EUR segment of the market to geographically fragment. However, this does not appear to have compromised liquidity.


Full report here

Reuters announce FX Options vols increased 166% in 2015 (seems far higher than official BofE survey data suggests)

A Reuters press release on FX Options caught my eye today. The announcement states that:

Thomson Reuters FX dealer-to-client venue saw a surge in options trading volumes of 166 percent in 2015 compared with the previous year. In particular the fourth quarter of 2015 saw record-high monthly, weekly and daily volumes with over 36 global and local active options price-makers and more than 225 active options price-takers now on Thomson Reuters FX platform.

Thomson Reuters FX Trading provides both relationship trading (bank-to-client) and bi-lateral trading (interbank) for vanilla and exotic FX options. In recent months the company has introduced electronic FX options callouts to streamline how banks can access options liquidity in the interbank market. By providing one single point of access to options liquidity via electronic callouts or via Thomson Reuters FXall dealer-to-client request-for-quote service, FX Trading helps market participants to efficiently manage their trading risk.

According to Phil Weisberg, Global Head of FX at Reuters: Continue reading

The continual rise of non-bank market-makers.

I have covered the rise of ‘non-bank’ or ‘alternative’ market-makers a few times recently, notably here, here and here.

Looking at how, armed with market leading technology, talented etrading techies from sell-side firms and teams of razor-sharp quants, these firms are now providing deep consistent liquidity to the market in a capacity previously the preserve of the top-tier ‘flow’ monster’ banks.

The perception of non-bank market makers has traditionally been Continue reading

Interesting Celent report on future of Spot FX trading technology & platforms

Just finished reviewing an interesting Celent report by Brad Bailey, on evolving spot FX market structure and technology trends in light of changes in global regulation, a blurring of traditional liquidity pools and the ongoing competitive landscape.

Brad touches on a number of the themes we have covered here over the year, but it’s always good to have someone else’s perspective on them.

The themes covered being: Continue reading