While US and European politicians talk about how to curb it, trading based on algorithms is not going away. In fact, it is spreading faster than ever, as emerging markets like Brazil, India , Russia and China, are now catching on to its potential. Ordinary traders are being replaced by coordinators of algorithms. But that’s just half the story.
“If you have the fastest network, you’re the sexiest girl in the class, you’re the top boy. It’s as simple as that.”
Fraser Bell
As pointed out in earlier post; there is a very clear parallel here to what happened between 2000 and 2005 with the rapid build-up of the more or less unknown market of financial derivatives. Only this time it’s more technical…
In the financial centres of Europe and the US, where the practice began, the people responsible for policing the markets are getting worried about their ability to cope.
But while they talk about how to curb it, trading based on algorithms is not going away. In fact, it is spreading faster than ever, as emerging markets catch on to its potential, BBC News reports.
“The Bric (Brazil, Russia, India and China) countries are where it’s at right now,” says Dr John Bates, executive vice-president and chief technology officer of Progress Software, a company that has pioneered new techniques in what are known as quantitative trading programs.
“We’ve seen it grow very quickly in Brazil. It’s done what happened in London and New York much more quickly. Now we’re seeing the same trend in India and China and even, embryonically, in Russia.”
According to Dr Bates, in the past two to three years, Brazil has already run through a cycle of development that took far longer in London and New York, with algorithm-based trading now available in equities, futures and foreign exchange markets.
Brazil’s Bovespa stock exchange has invested in new technology, boosting the proportion of algorithm-based equity trades from 4% to 12% in the past year.
“The adaptation is faster and they can leapfrog the mistakes that have been made in other places,” he says.
Dr Bates says India is already following suit and will see even more automated trade in the next few years: “The market’s gone very electronic there.”
Indian analysts reckon that as many as a quarter of all trades in the country now involve algorithms, still mainly in equities, whereas up to half of all transactions in Europe and nearly two-thirds of US transactions are estimated to come from high-frequency and algorithmic trading.
Taxing, Limits and Supervision
France is the first of the worlds major economies to impose special taxes on High-frequency Trading (HFT).
And according to head of France’s AMF watchdog, Jean-Pierre Jouyet, the French are also considering speed limits and some kind of supervision.
As Dr. Bates told the Asian Financial Forum in Hong Kong in January:
“As there is a rush towards reducing transaction time in the name of high-frequency trading, the question we need to ask is what purpose are we serving by reducing trading time to eight microseconds or even two microseconds. Is this justified?”.
Well, I guess that depends on who you ask?
The Sexiest Girl
It is kinda obvious that the financial industry would not be upgrading its technology by 90 billion dollar this year if they didn’t think it was worth it.
“If you have the fastest network, you’re the sexiest girl in the class, you’re the top boy,” says Fraser Bell, managing director of BSO Network Solutions. “It’s as simple as that.”
BSO operates its own international network covering the UK, the US and 16 other countries, including the main European financial markets, Hong Kong, Singapore, Brazil and Russia.
It prides itself on being able to send data from London to Hong Kong and back in just 174 milliseconds.
“There’s a massive global drive for speed,” says Mr Bell, who sees himself as locked in a “race to zero” with rival network operators.
Read the full article at BBC News here.
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Credit; Cras Credemus
The investor sentiment in the European credit market suddenly changed on Monday afternoon. Whether it’s just another dead cat bouncing, or investors really see the situation improving, we will find out tomorrow as Greek Prime Minister George Papandreou face a vote of no confidence.
“The catalyst for the change in sentiment seemed to be the announcement that the potential lending capacity of the European Financial Stability Facility (EFSF) will be raised to EUR440 billion. “
Gavan Nolan
The markets expectations for the Eurogroup meeting culminating Monday was never particularly high, but it still proved a disappointment to many. Spreads opened this week wider when it became clear that the euro zone’s finance ministers would not be signing off on the next EUR 12 billion tranche of Greek aid. However, something changed during the trading session.
The Eurogroup confirmed that they would not disburse the funds until the Greek parliament had passed the latest austerity programme proposed by the government.
This wasn’t a surprise to many market participants – noises from the IMF and EU last week suggested this was likely to be the case.
“Nonetheless, the lack of movement and the immense pressure on the Greek government to deliver – prime minister George Papandreou face a no confidence vote tomorrow – was always going to weigh on risk assets,” credit analyst Gavan Nolan at Markit Credit Research writes in today’s Intraday Alert.
Sovereigns were still underperforming but at the close the Markit iTraxx SovX Western Europe index was just 1 basis point wider at 223,5 bp’s.
The catalyst for the change in sentiment seemed to be the announcement that the potential lending capacity of the European Financial Stability Facility (EFSF) will be raised to EUR 440 billion, according to Markit Financial Information.
This will be achieved by increasing the amount of guarantees from euro zone member states to EUR 780 billion.
“The restricted lending capacity of the EFSF – due to the AAA rating requirement and the consequent overcollaterisation – has been an issue for the markets, and the fact that the authorities are at least putting measures in place for further bailouts will ease some near-term concerns,” Gavan Nolan writes.
Adding: “Also of importance was the related announcement that the European Stability Mechanism, which is to succeed the EFSF in 2013, will not enjoy preferred creditor status.”
Many though that the preferred status would make it more difficult for countries that tapped the facility to return to the private capital markets.
There was also uncertainty in the market over whether the legal subordination of existing bonds could trigger a credit event.
“Clarification on this issue is therefore to be welcomed,” Nolan comments.
Italy’s spreads were under pressure today after Moody’s placed the country’s Aa2 rating on review for downgrade late on Friday.
In contrast, Moody’s today upgraded Brazil’s rating one notch to Baa2, citing the government’s conservative fiscal policies.
The credit markets have reflected Brazil’s prudence for some time.
“Indeed, the Latin American sovereign has traded tighter than higher rated Italy for over a year,” Gavan Nolan at Markit concludes.
On the personal account, an old latin expression comes to mind;
Cras Credemus, Hodie Nihil – Tomorrow We Believe, But Not Today.
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