The fifth annual FIX Protocol Ltd (FPL) trading conference for financial market participants in Europe, Middle-East and Asia (EMEA) got underway in the City of London today at the Old Billingsgate market. The growth in multi-asset trading, spread in connectivity and technology, need to serve the buy-side, and the challenge of complying with regulations such as Dodd-Frank and the European Market Infrastructure Regulation (EMIR), were all front and centre. There was also a warning from the opening speaker, Andrew Neil, ex-editor of ‘The Sunday Times’ and a renowned journalist and broadcaster with the BBC, that it could be dangerous to loosen UK inflation targets still further or allow negative interest rates to become entrenched.
In his opening speech at the FPL EMEA Trading Conference on 28 February, Neil outlined the UK and European economic and political situation for the audience of traders, investors, technologists and financial market participants, warning that loose monetary policy in the UK has the potential to incubate a low wage, high inflation economy. In recent years, wage rises have not kept pace with the cost of living in the UK, depressing demand and creating a downward economic cycle in the country.
The sluggish performance of the UK economy was down to four factors theorised Neil, with the fall in consumer demand as median wages in the UK have fallen back to 2003 levels one of the primary causes. Other contributors to the “stalled engines of demand” that simultaneously failed after the 2008 crash and continue to ensure the UK bumps along the bottom include:
• Public spending cuts due to the necessary austerity measures to get government debt under control (the situation is the same in Europe added Neil).
• No export-led engine of growth in the UK, due to its ossified manufacturing sector.
• A lack of a business investment engine, even though businesses have got “massive amounts of cash [reserves]”.
According to Neil all these four potential engines of growth are stalled – what the Americans would call a "slam dunk" – and that is why the UK is underperforming. The same reasoning applies to much of the rest of the European economy of course. The loss of the UK’s triple-A rating was also referenced and how this would further devalue the pound (GBP versus the dollar (USD) even though the markets had largely already priced in the move.
The threat that the recent Italian election stalemate might reopen the Eurozone crisis again and the Financial Transaction Tax (FTT) was also much discussed at the fifth annual FPL EMEA Trading Conference in London. The delegates from banks, asset managers, trading venues, technology vendors and representatives of the FPL industry standard organisation that put on the show were all conscious of the imminent Italian FTT, the existing French measures and the impending wider European FTT after much of the Eurozone adopted the proposal on 14 February. As one of the panellists at the 11-11.45am session entitled ‘Are Regulators Demands Realistic’ put it, some financial market participants may avoid Italy now because the planned introduction of the FTT there has not been smooth, which ultimately damages liquidity.
In response to the session title ‘Are Regulators Demands Realistic’ another panel member, which included Nikki Beattie, MD of Market Structure Partners, Valerie Bannert-Thurner, a sales VP at NasdaqOMX and Mark Hemsley, CEO of BATS Chi-X Europe, amusingly commented that “regulatory demands are always realistic as you have to comply with them”.
The panel, which had two FPL EMA representatives on it in Stephen McGoldrick, co-chair of the regulatory subcommittee and a director for market structure at Deutsche Bank and Chris Sims, co-chair of the business practices subcommittee and a consultant at Ignis Asset Management, went on to detail some of the huge regulatory – and consequent technological – challenges facing financial market participants. The impending German law constraining cross-border high frequency trading (HFT) was discussed, alongside the EU’s second Markets in Financial Instruments Directive (MiFID II), which will lead to Organised Trading Facilities (OTFs) – essentially anything they missed the first time around when designing multilateral trading facilities (MTFs) under MiFID I. Each of these will have profound impacts on the future shape of financial markets: and this is only a small fragment of the avalanche of regulatory and market changes on the way following the 2008 financial crash.
The technological infrastructure needed to support all these fragmented multiple markets and the cost of connectivity are major issues facing financial institutions (FIs). Other market drivers, such as the Eurosystem’s Target2Securities (T2S) single securities settlement engine, may aid consolation, but again this costs money to set up and it changes the established business models in Europe to the detriment of some. The session at 9.50-10.30am at the Conference entitled ‘Delivering Value Through Multi-Asset Trading’ attempted to detail all the regulatory changes that threaten to destabilise some financial market players and empower others: the US Dodd-Frank and European Market Infrastructure Regulation (EMIR) were obviously front and centre here. However, also mentioned by the panel, which included Wolfgang Eholzer, executive director of trading system design at Eurex and Angela Fenwick, co-head of retail hub at Banca IMI, was the Basel III capital adequacy regime – not to mention new regulatory bodies themselves such as the European Securities and Markets Authority (ESMA) and the Financial Services Authority (FSA) replacement bodies in the UK. Other panel members included Jim Bennett, a partner at Sapient Global Markets and Carl Weir, co-chair of the FPL global cross-asset committee, and head of cross-asset FIX connectivity for EMEA at HSBC. All agreed the significant changes in the over-the-counter (OTC) derivatives market, which is being forced ‘on exchange’ after the 2008 crash, was also significant.
As to the session title referencing the rise of multi-asset trading, all agreed that this was a key facet of the new post-crash environment on the global financial markets. As one of the panellists commented “trading different asset classes or currencies is vital in future if you want to find growth”, adding that he’d target emerging markets too like Asian commodities futures. The infrastructure has to be in place to allow this, however, so that for instance Korean Won could be cleared or connectivity to trade Asian futures was in place and this is the technological challenge that the IT infrastructure architects and other technologists in the room face. It also means that standardisation bodies providing common shared messaging and protocols, like the show organisers FIX, increasingly move to the centre of the financial markets ecosystem.
“Multi-asset trading is the story of globalisation,” concluded one panellist, before going on to add that the cost of connectivity was “vast” however and the only way to alleviate it was via standardisation, common protocols and the adoption of technologies such as cloud computing or so-called ‘big data’ analytics and reporting mechanisms.
Other Market-changing Drivers and Technological Impacts
The post-trade move towards centralised counterparty clearing (CCP) usage for over-the-counter (OTC) derivatives and the need for more transparency post-crash was also discussed at the FPL EMEA Trading Conference 2013, alongside the promised EU-wide consolidated tape, which according to one panellist was “nowhere” as it wasn’t in the interests of market data providers. “It only happened in the US because of the Regulation National Market System (RegNMS) stipulations” – an example, if any where needed, that sometimes regulation can help the market.
The afternoon sessions at the 2013 FPL EMEA Trading Conference split into business and technical streams on ‘Managing Risk: A Standardised Approach’ and ones on ‘Transaction Cost Analysis (TCA)’ and execution quality measurement, not to mention the ‘Tectonic Shifts in FX Trading’ and the push for a common global ‘Legal Entity Identifier (LEI)’. The day ended with a presentation about ‘Understanding the Needs of the European Buy-Side Community’ and a fun address from the Australian rugby world cup winner and sporting celebrity David Campese, before the conference delegates enjoyed a well-earned drink at the concluding cocktail reception.