As with other areas of finance, technological transformation and structural change is happening in the trading market. However, innovation has to take a step back in this sector as regulation is still an obstacle that many legacy players are struggling with, let alone new companies. Let’s take a look at what happened in the trading space this week.
The start of this week saw another deal for Swedish trading technology supplier Cinnober, in an attempt to reform the company after a loss of key customers and a decline in profit last year. Cinnober won the contract to upgrade Japan Exchange’s derivatives clearing systems that are traded on the Osaka Securities Exchange and CEO Veronica Augustsson sees this move as progressive. “The positive signals in the market have grown increasingly evident over the past year. IT investments are increasing in the financial sector and are being stimulated by evolving regulations and demands for increased efficiency,” according to the Financial Times.
Regulation inhibited trading companies last year but 2016 could be the year that the financial institutions fight back. On Monday, it was reported that the UK would not comply with EU rules that apply a bonus cap on more than 1,000 smaller financial institutions in London, in the same way that it is on larger banks. Alongside this, the Bank of England and Financial Conduct Authority (FCA) do not agree with the version of the law that would extend to others that would limit bonuses to 100% of salary, or 200% with shareholder approval.
“The PRA (Prudential Regulation Authority) and the FAC believe that the shift to fixed remuneration makes it more difficult for firms to adjust variable remuneration to reflect their financial health, and limits deferral arrangements that put remuneration at risk should financial or conduct risks come to light,” the FT reported. The Netherlands, Luxembourg, Ireland and France are also against the implementation of the bonus cap on smaller players in finance.
The futures sector has gained a lot of interest of late as investors and traders are buying and selling options on this type of contract in order to manage their portfolio, rather than spending precious cash reserves. Options are cheaper and flexible for changing portfolio exposure to different asset classes. Tabb Group partner and global head of research Andy Nybo believed that “for the most part, regulatory reserve requirements for options on futures contracts are lower than for regular futures contracts.”
“For example, asset managers seeking to effect rebalancing programs will have greater costs when purchasing a basket of underlying equities or bonds in terms of fees and market slippage,” Nybo said. In other news, IEX, the startup trading venue, who describe themselves as the “cure for unequal US markets”, announced that it is looking to become a stock exchange. IEX is where traders can buy data feeds from exchanges and exploit market movements, but criticism has emerged over this news as the router has a 350 microsecond delay that orders would pass through when entering the exchange.
IEX are planning to remedy this problem and John Ramsay, chief market policy officer, said that this would not be a problem. “We have been firm from the beginning that we did not want to make any change that would undermine our ability to protect investors. This change does not compromise that principle one iota.”
There was a development in the Libor rigging cases as Mike Curtler, a former trader at Deutsche Bank was banned by the FCA after pleading guilty in October for manipulating the dollar-denominated benchmark rate. At present, Curtler awaits prosecution and the maximum sentence is to be a 30 year jail term and a $1 million fine.
The FCA’s findings against Curtler in October read that Curtler had taken part in a “serious and sustained course of improper conduct. His actions were dishonest because he knew that taking trading positions into account when making USD Libor submissions was not permitted and that what he was doing was wrong.”
In order to settle allegations, Deutsche Bank paid authorities in the US and UK $2.5 billion and the German regulator, BaFin said that it would stop its probe into Libor – one of three investigations that it currently has ongoing in the bank. This is welcomed as the bank has been under a lot of pressure as a result of low share value and hybrid debt.
Thursday also saw Deutsche Bank involved in scandal, as a former managing director, Martyn Dodgson admitted to deliberately misleading the FCA in his testimony during the UK’s most high-profile insider trading trial. Southwark Crown Court heard Dodgson admit to not giving a full or accurate representation to his trading when the regulator arrested him.
Alongside this, he admitted to a passive agreement with Andrew Hind, his brother’s friend, to keep quiet about his actions as it would contravene Dodgson’s employment contract with the banks, where personal dealing is not permitted. Under cross examination of his first interview, Dodgson said: “By omission I misled. I think I was asked a question of an open nature, like: “Is there anything you want to tell me?” In response, I said no. I ducked and dived,” according to the FT.
The FT also said that Thursday “marked the first day of cross-examination of Mr Dodgson in the eighth week of the trial known as Tabernula – Latin for “little pub” – after the code name of the eight-year probe mounted by the Financial Conduct Authority.”
In other news, Intercontinental Exchange’s (ICE) confirmed considering a bid for the London Stock Exchange, but the deal could include spinning off Borsa Italiana, the UK company’s Italian business and French clearing arm. This move would strengthen their derivatives trading business in London, which is already one of the world’s biggest hubs for off-exchange hubs.
Corporate regulator, the Australian Securities and Investments Commission, is suing ANZ Banking Group for manipulated of the benchmark interbank borrowing rate and in turn, boosting its profits in a test case.
The Commission are in possession of many recorded conversations between traders, which include ANZ’s former head of Balance Sheet Trading Australia, Jason Pritchard, saying that he wants “the rate set as high as f*****g possible,” according to the FT.
The Australian bank said it would be “vigorously defending legal action brought by the commission.”