The thing about useful stuff is

A dream that was realised Monday, December 15, 2008

LSE foyer, Image via WikipediaBack in 2003 when I joined Man Financial [MF Global], the firm was one of the most active equity CFD [contract for difference] providers in the UK by volume. These derivative instruments are almost perfect economic substitutes for equities, albeit without voting rights.

As a firm, we typically hedged every CFD order received from customers by executing an order on the London Stock Exchange [LSE]. More significantly, we were almost indifferent between whether customers sent underlying equity orders to us or CFD orders. . This prompted me to question why CFD orders couldn't simply be traded on Exchange like an underlying equity. Indeed, why shouldn't the order book treat equities and CFDs fungibly, and leave the mechanics of how the trade is settled to downstream processes.

I pitched this notion to the LSE and to LCH.Clearnet, with the intention being that Man Financial would act as a matching counterparty to all CFD orders for the purposes of managing the cash funding requirements or stock borrowing arising from such trades. This proposal was favourably received by the other parties and efforts began to implement the necessary consultations and infrastructure changes.

Sadly, I left MF before the vision became a reality and Man Financial subsequently withdrew from the consortium for reasons that never became clear. Thereafter the initiative was held back by issues at LSE and LCH but I was delighted to read today that the initiative is now close to going live.

Aside from the benefits cited in the news report, one important feature I saw early on was that making equity CFDs exchange-traded removed the regulatory restrictions on the use of CFDs by mutual funds which existed in their OTC form. I felt that this would widen and deepen the use of CFDs to the benefit of all.

By coincidence, I met with Roger Liddell, CEO of LCH.Clearnet the other week whom I'd also known at Goldman Sachs and was pleased to hear my involvement hadn't been forgotten.

Labels: Contract for difference, London Stock Exchange, LSE

posted by John Wilson @ 1:08 PM Permanent Link ,

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UBS switch their LSE clearing to X-Clear Wednesday, December 03, 2008

Image via WikipediaIt wasn't a huge surprise to see that UBS was going to switch its' clearing for its' London Stock Exchange ["LSE"] traded equity business to the Swiss based X-Clear from LCH.Clearnet. After all,

they are both Swiss and you should never under-estimate the power of relationships e.g. inevitably, UBS personnel will be on advisory boards at X-Clear and will be one of the largest X-Clear users in Switzerland
they will probably enjoy margin netting benefits by combining their their Swiss and UK equity business at a single clearer, which will be financially beneficially
they may enjoy cheaper tariffs or better margin rates

It was possible for UBS to do this after the LSE decided to allow X-Clear to offer clearing services in competition with its long-standing clearer, LCH.Clearnet. Unlike a number of its' rival exchanges including the Swiss Exchange which is part of the same group that owns X-Clear, LSE doesn't own and operate its' own clearer, with the consequence it doesn't face losing revenue from opening up this element of the trade lifecycle to competition.

However, I chuckled when reading the comment made by Robert Barnes, managing director, equities at UBS who said "that by deciding to switch to X-Clear, UBS believed that it would help accelerate a “market-driven” solution to interoperability, rather than waiting for regulators to apply further pressure to get the process moving."

Firstly, it was the LSE's decision to enable competition that allowed this to happen, albeit evidence of client support for this must have existed. Secondly, UBS are doing this for financial reasons rather than on altruisic grounds for the "good of the market". Perhaps UBS should now be using its' market clout to insist that other markets, including Switzerland and Germany, follow suit.

Labels: Depository Trust and Clearing Corporation, LCH, London Stock Exchange, LSE, UBS

posted by John Wilson @ 10:34 AM Permanent Link ,

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The end of SWX Europe Wednesday, November 12, 2008

Many years ago, I was involved during the early stages of a fledgling Recognised Investment Exchange in the UK called Tradepoint. The model it operated was revolutionary and addressed many of the flaws in the LSE operated model of the day.

They introduced the notion of clearing and a central counterparty to the UK equity market, using LCH as the operator of the arrangements. This was quite radical, monetising for the first time the inherent counterparty and market risks that went with current trading and settlement practices. Pre and post trade anonymity were side-effects of this structure and its' operation was underpinned by a reliance on electronic trading. Unfortunately, things that are now taken for granted were shunned by a market participants of the day who were happier with the status quo, prefering to ignore the risks, as well as remain inefficient.

Tradepoint had been launched with the backing of several banks, but who significantly avoided having to commit flow/liquidity to the new Exchange. As a consequence, despite being cost efficient thanks to its' technology, trading volumes were pitifully low and so it struggled in financial and credibility terms. In 1999, the business was re-financed and re-launched by a new consortium including Instinet. However, in 2000, amidst a backdrop of European Exchanges mergers & acquisitions, the Swiss Exchange bought Tradepoint and subsequently renamed it Virt-X.

In 2003, the business was finally forced to re-focuss its' efforts on the Group's key offering around Swiss stocks. Sadly, the Swiss Group this week announced the closure of SWX Europe, as the business became known.

Interesting there are many parallels between Laker Airways and today's low-cost airlines, and the link between Tradepoint and today's Multilateral Trading Facilities ["MTF"] such as Chi-X, Turquoise and BATS. Both were ahead of their time and sadly neither benefited from the revolution they foresaw.

I shall fondly remember "Tradepoint" and the contribution it made.

Labels: Chi-X, London Stock Exchange, LSE, MTF, Stock exchange

posted by John Wilson @ 11:53 AM Permanent Link ,

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I haven't fallen into a dark pool [of shares] Thursday, October 30, 2008

It was an easy mistake for those kind enough to send me congratulations to make - but sadly I'm not the John Wilson that has just been appointed to be the CEO of Baikal, the London Stock Exchange venture which plans to launch a dark pool for pan-European equities trading.

The future of the Baikal project has been in doubt following the collapse of the LSE's former joint venture partner Lehman Brothers. Planned to launch in early 2009, Baikal was going to utilise Lehman Brothers technology.

Apparently my namesake had previously served on the executive committees for both equities and fixed income and as head of equity and fixed income research at Lehman Brothers.

Good luck John Wilson.

Labels: Baikal, dark pool, Lehman Brothers, London Stock Exchange, LSE

posted by John Wilson @ 6:56 PM Permanent Link ,

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LSE outage demonstrates its' importance Tuesday, September 09, 2008

Image via Wikipedia Yesterday's connectivity outage at the London Stock Exchange appears to have demonstrated the parasitical nature of some of the "competing" execution venues. Despite being "off-air" for most of the day, trading did not apparently switch to the other venues and some were left floundering in the absence of a price formation mechanism normally supplied by the "primary market" [LSE].

Measured by the value traded, Chi-X looks to have been down by a third on the previous business day [Friday]. Turquoise and ITG were similarly affected.

There are several possible reasons for this failure
- Too few firms were signed-up as customers of the alternates to enable the market to switch entirely. However, business levels weren't even maintained on the alternates.
- Some business on alternates may be as a result of artibrage trades between the primary and alternate markets, but the closure of one of these meant these opportunities weren't available. However, it is unlikely to represent a significant chunk of volume.
- Investors/Dealers were nervous to trade anywhere in the absence of the primary market, concerned that they had imperfect information on which to trade. Likewise without clarity over where liquidity would migrate to [missing herd instinct] traders stayed put and waited. Hence volumes everywhere dipped.

Of course, this outage should encourage firms to implement the means to trade on alternate venues in order to mitigate against similar problems in the future. However, I think the execution venues will need to do some self-scrutiny to understand why they failed to capitalise on the opportunity and initiate plans that will seek to address the issues. Most importantly, they have to persuade the "herd" that grazing on their turf is the perfect substitute.

Meanwhile, the Daily Mash has an excellent spoof report on how the market reacted yesterday, which was reproduced in the Daily Telegraph.

Labels: Chi-X, London Stock Exchange, LSE, Stock market

posted by John Wilson @ 11:39 AM Permanent Link ,

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LSE does Chi-X a favour Monday, September 08, 2008

Image via Wikipedia The London Market picked up 3.5% in early trading, off the back of the Freddie Mac announcement and then The London Stock Exchange suspended trading after being hit by a connectivity outage. It apparently suspended connections at around 9.15 am, meaning no orders could be entered or deleted.

Music to the ears of other execution venues like Chi-X, who were no doubt able to benefit from the market looking to find somewhere else to join in the [temporary] exuberance.