Tag Archives: High Frequency Trading

Financial Industry To Spend $90 Billion on New Technology

Between 2001 and 2005 the financial industry spent billions on developing new derivatives and other complex financial instruments. Nobody really understood what was going on until it all came tumbling down in 2007/2008. Now, something similar is happening; the financial engineering is swapped with pure engineering. The industry is expected to spend $90 billion on new superfast computer systems equipped with artificial intelligence and advanced algorithms that no one – except for the engineers who made them – really knows how works.

“Investors seeking the high returns it can once again provide have come back, and IT investment is slowly growing as a result. By 2012, we expect the market to reach pre-recession levels.”

Daniel Mayo

The financials markets industry’s spending on information technology will hit almost $90 billion by 2015, driven by strong growth in the Asia-Pacific region, and a bounce-back in the hedge funds sector, according to an analysis by the independent technology analysis firm, Ovum.

The analysts find that the Asia-Pacific region will see some of the strongest growth in financial markets IT spend, as global companies continue to transfer power to the region due to its growing economic strength, advancedtrading.com reports.

In China, IT spending will grow by a compound annual growth rate (CAGR), of 8.8 per cent from 2011 to 2015. Meanwhile, Hong Kong will experience a CAGR of 8.1 per cent for the same period and Singapore 7.1 per cent.

Although the amounts invested will be lower, growth in all three will outstrip the US and the UK and Ireland, which will hit CAGRs of 6 per cent and 5.8 per cent respectively.

Daniel Mayo, financial markets technology analyst at Ovum, comments:

“While there will be growth in nearly every major market, the Asia-Pacific countries will be at the forefront. This is mainly due to global companies shifting their decision-making power from New York and London to cities such as Beijing, because of their growing economic influence.”

Meanwhile, global spending on IT in the hedge funds sector will grow a CAGR of 11.1 per cent from 2011 to 2015.

This is the strongest growth of all the lines of business and is being driven by a resurgence in the hedge funds market as investors seeking high returns forgive the woes of 2008/09.

Mayo adds: “The hedge funds market was badly affected by the financial crash, with investors staying away due to its disastrous performance. As a result, investment in IT fell significantly in 2008 and 2009. However, investors seeking the high returns it can once again provide have come back, and IT investment is slowly growing as a result. By 2012, we expect the market to reach pre-recession levels.”

According to Mayo, much of the investment in all regions and lines of business will be made in risk management systems, as well as reporting systems that allow financial markets companies to provide greater transparency and comply with new industry regulations such as Basel III.

Let’s see how long it takes for the law makers and regulators to catch on this time…

More from advancedtrading.com:

Meanwhile, the extreme volatility we’ve experienced over the last few days, are still puzzling many experts.

There’s an interesting article at NorthJersy.com well worth reading.

Here’s some of it:

Wall Street’s wild ride Tuesday may be due less to rational decisions and more to computers automatically trading stocks at lightning speeds.

Large institutional investors like mutual funds often employ strategies to buy and sell stocks or funds at certain pre-programmed prices.

Other traders, meanwhile, employ high-frequency strategies and offload or buy huge blocks of shares in minutes or seconds, depending on how markets move.

“Volatility begets volatility,” says John Longo, a professor at Rutgers Business School.

“No doubt about it, whenever you have these dramatic moves in a short period of time, programmed trading is largely behind it.”

Much of that trading takes place not on trading floors but within vast rows of computer services inside North Jersey data centers.

Years ago, when humans conducted the vast majority of trades on Wall Street, Monday’s roughly 6 percent market plunge and Tuesday’s roller-coaster ride that ended with major indexes recouping much of their Monday losses might have been less dramatic, experts said.

The markets would not have gyrated so quickly, and the ups and downs might have taken place over days, not minutes and hours, experts says.

Some electronic trading strategies involve chasing momentum — automatically buying stocks on their way up or selling as they lose value. And swings in the marketplace will always be driven by economic events — such as Standard & Poor’s downgrade of United States bonds, Europe’s debt crisis and the Federal Reserve’s announcement Tuesday that it would keep interest rates low through 2013.

“Definitely, there will be some events that move markets,” says Frank Zhang, a professor at Yale University’s School of Management who has studied computerized trading, which he estimated accounted for 80 percent of trading volumes (other estimates have pegged it closer to 50 percent.)

Adding: “But I think computer trading exaggerates such events.”

Adam Sussman, a partner at The TABB Group LLC, a Wall Street research and advisory firm, says the high-frequency trading firms feed off Wall Street volatility, which is often fueled by investors’ fear.

“When humans are panicking, the computers do better,” Sussman said.

He didn’t see high-frequency trading as necessarily being responsibility for recent volatility.

“They’re not really causing it, because they’re responding to market conditions,” he says.

I assume some might argue with that statement.

Related by the EconoTwist’s:

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Hedge Funds Pull in USD 73 Billion in First Half of 2011

Yes, someone is always making money – even if the markets are dropping like dead pigs from the sky. Hedge Funds Pull in $3.8 Billion in June, the sixth straight month of inflow, and increased the value of their portfoilios by $ 73,0 billion in first half of 2011. The hedgde funds bearish multi-strategy is certainly paying off these days.

“But we wonder if strong inflows will persist through the remainder of the year in light of the recent bloodbath in equities.”

Sol Waksman

In addition, fixed income hedge funds reports of 13 months of inflow in the past 14,  and turn in the second-best performance of all hedge fund strategies in the first half of this year. Macro funds also posts solid inflows. but are still underperforming, according to the latest reasearch by BarclayHedge and TrimTabs.

The hedge fund industry took in $3.8 billion (0.2% of assets) in June, the sixth straight inflow as well as the eleventh in 12 months, report BarclayHedge and TrimTabs Investment Research.

Industry assets decreased to $1.806 trillion from $1.822 trillion in May because performance was poor.

The Barclay Hedge Fund Index decreased 1.0% in June.

“Investors were very kind to hedge funds in the first half of the year,” says Sol Waksman, founder and President of BarclayHedge.

Adding: “The industry raked in $73.0 billion (4.0% of assets), which goes down as the heaviest first-half inflow since 2007.  But we wonder if strong inflows will persist through the remainder of the year in light of the recent bloodbath in equities.”

Fixed Income hedge funds hauled in $15.1 billion (7.9% of assets) in the first half of 2011, the second-heaviest inflow of all hedge fund strategies.  These funds took in money in 13 of the past 14 months and returned 4.9% in the first half of the year, the second-best performance of all strategies.

“Fixed Income funds are on fire,” notes Minyi Chen, Vice President of Quantitative Research at TrimTabs.

“Keep in mind that hedge fund managers, alongside most other segments of the market population, have been bearish on the long end of the curve all year.  Nevertheless, the yield on the 10-year Treasury has plunged to 2.36% from 3.75% in February,” Chen point out.

Multi-Strategy hedge funds raked in $15.2 billion (7.2% of assets) in the first half of 2011, the heaviest inflow of all hedge fund strategies, even though they posted a mediocre return.

Similarly, Macro funds and Emerging Markets funds posted two of the heaviest inflows despite turning in the two worst performances of all hedge fund strategies.

“We see lopsidedness between performance and flows regularly in not only our hedge fund flow data but also our retail and institutional flow data,” Chen notes.

“These imbalances are predictive more often than not.  We believe investors should consider investment candidates that are performing well but not attracting heavy inflows.  Similarly, we fear any asset class into which investors keep flocking despite poor returns,” he says in a press release.

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Nordic Reactions on US Downgrade

As expected, the worlds financial markets has been thrown into chaos after the US downgrade friday night. Most stock indicies continue to slide Monday morning as the dollar and treasuries drops and investors are trying to make some kind of sense of the latetst developments – in both the US and the EU. Here’s what the main Nordic banks writes to their clients this morning.

“The downgrade is likely to affect markets negatively over the coming days; however it is uncertain how large the effects will be.”

DnB NOR Markets


“It is reasonable to expect further stock market declines today after it was known Friday evening that the rating agency S&P had downgraded the US credit rating, from AAA to AA+. S&P say the downgrade reflects their opinion that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than they had envisioned. It is clear that they are not impressed with the way the US politicians handled the raising of the US debt ceiling. This may get US policy makers to tighten fiscal policy further which again will be negative for US growth and further raise fears of a new recession in the US,” Norway’s leading bank, DNB NOR writes. 

Analyst Camilla Viland at DnB NOR Markets continues:

“After several disappointing US data released lately, the labour market figures released on Friday came as a pleasant surprise. US payrolls increased by 117′ persons in June. Consensus had expected an outcome of 85′. Furthermore the payroll figures from May and June were in total revised up by 56′. The unemployment rate fell, from 9.2 to 9.1 per cent. Despite of better than expected figures on Friday, the labour market is still undoubtedly very weak. Still the figures may dampen fears that the US economy is heading into a new recession. The initial market response to the figures was positive. Stock markets rose, treasury prices fell and the oil price climbed. The figures were however not enough to calm markets, which later turned negative again. International stock markets ended yet another day down.”

“It is reasonable to expect further stock market declines today after it was known Friday evening that the rating agency S&P had downgraded the US credit rating, from AAA to AA+. S& P say the downgrade reflects their opinion that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than they had envisioned. It is clear that they are not impressed with the way the US politicians handled the raising of the US debt ceiling. This may get US policy makers to tighten fiscal policy further which again will be negative for US growth and further raise fears of a new recession in the US.”

“The downgrade is likely to affect markets negatively over the coming days; however it is uncertain how large the effects will be. A downgrade from S&P was more or less anticipated and at the same time the US still has the top rating at the two other leading rating agencies, Moody’s and Fitch. The effect on US Treasury yields may go in both directions. On the one had a credit rating downgrade normally would give higher interest rates. On the other hand US treasuries are still likely to be perceived as relatively “safe” and there are few other good alternatives. Thus continued market turmoil may keep the demand for US Treasuries high, and thus the yields low. Another possible effect may be increased demand for Norwegian government bonds, which is perceived as one of the safest assets one may own,” DnB NOR writes in today’s morning report.

Here’s the full report: DnB NOR Markets. Morning Report. US Downgrade.

MORE from DnB NOR Markets:

Danske Markets:

Here’s what Denmarks main bank writes:

“Downgrade adds to uncertainty – will weigh more on equities The downgrade of US debt comes at a very critical time for financial markets. The market tensions are already very high following last week‟s disappointment that ECB would not buy Spanish and Italian bonds to help reining in recent sharp rises in bond yields of these countries.”

“Last night ECB released a statement that indicates that ECB might start buying Italian and maybe also Spanish bonds. “It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme. This programme has been designed to help restoring a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in the euro are.”.This statement was released following a conference call last night for the euro area central bank governors. Neither Italy nor Spain are mentioned specifically when referring to the SMP, but that would also break with the ECB tradition. As we wrote last week (see Markets in turmoil – expect strong policy reaction soon), we expect the ECB will begin purchasing Italian and Spanish bonds if the pressure increases further. It is our expectation that this will happen today. Given the reaction we saw in May 2010, we should be in for a significant spread compression between the periphery and core-EU.”

“Given the risk of increased financial turmoil as markets open today, there has been a number of emergency conference calls among G20 and G7 finance ministers as well as ECB. The French President Sarkozy and German Chancellor Merkel issued a statement to their parliaments to speed up the process of implementing the expansion of the EFSF.”

Here’s the full report from Danske Markets: Danske Markets. Flash Comment. US Downgrade.

MORE:

Danske Markets. Flash Comment. ECB expected to start buying Italy today.

Sweden’s SEB writes:

“The austerity package amounting to 2400$ was not enough and late on Friday S&P lowered the rating for US long term debt. According to S&P it is especially increased political uncertainty that motivate the downgrade as it will make it extremely difficult to agree on the measures needed to stabilize debt. The lower rating is firstly a message to the US politicians that they have to put party politics aside and agree on a program for medium term measures to prevent debt from running out of control. Due to the recent financial market turbulence the G7 countries agreed to closely monitor developments and take appropriate measure to ensure stability. This means that interventions in FX markets to prevent some currencies from appreciating to far are probable and possibly also concerted central bank actions. In a press release ECB says that it is possible it will buy more bonds, which most likely will include Spanish and Italian bonds.”

 

“S&P’s decision to lower the US credit rating is unlikely to have any dramatic short or medium term effects on long US bond yields. Despite negative reactions from especially China, there still are few alternatives to US Treasuries at the moment. Still, US woes are likely to render investors more actively seeking diversifying opportunities. Over longer term, US borrowing cost may be expected to increase if the US doesn’t succeed in stabilising its debt situation. The lower rating may be expected to have spill-over effects on GSE’s like Fannie Mae and Freddie Mac with higher financing cost and mortgage rates as a result. Regarding the dollar, while the lowered credit rating is negative for the dollar, it also depresses risk appetite, which in turn tends to be dollar positive. Therefore, we don’t expect any major near term dollar effects. Given the situation in EMU, investors are likely to seek diversifying opportunities in CHF and JPY and several commodity currencies, Scandies and Asian currencies.”

Full report here: SEB. Nordic Alert.

MORE from SEB:

SEB. Emerging Alert.

SEB: Speculative Positions.

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