Category: Analyses

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BATS Looks To Mifid Europe As a New MTF Playground

Summary

BATS went rapidly from zero to hero in the crowded US MTF marketplace. Now it is seeking to replicate this success within the european Mifid marketplace.

Analysis

When BATS emerged from Kansas City, it was difficult to see how the “wild west” could take on Wall Street but conquer it did and BATS has in many respects made a huge legacy impact on the exchange world, perhaps most notably by popularising “market maker” and “market taker”pricing tiers.

Nevertheless, arriving relatively late to the field in Europe means that BATS may yet have some difficulty making an impact. True, it has sound low-latency technology and it has partnered with a strong fibre-optic network to make the most of any speed advantages it can eke out. Equally, BAST’ European CEO Mark Hemsley has a strong pedigree in IT and markets with his former employers, perhaps most notably LIFFE.

However, in a marketplace where the likes of Turquoise still seem to be struggling to really achieve viable traction, it will be a difficult task for BATS to succeed. That said the London arm of the Kansas City parent has already proven once before it can make inroads into highly competitive markets in a remarkably short period of time.

 

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NYSE Arca Europe Joins A Crowded Field Fighting For Less Volume

Summary

NYSE Arca Europe may have gallopped into the market at just the wrong moment to see a major breakthrough as volumes decline in European equities.

Analysis

The arrival of NYSE Arca Europe is probably not the best timed arrival in the post-Mifid maretplace and it will be interesting to see just what traction the platform can achieve. After all Turquoise has not really made a significant impact and the only real success story of the newcomers has been Chi-X but then again that now looks like almost a veteran in this relatively nascent field!

Niche players such as Liquidnet and ITG have continued to operate successfully within their fields but for the large “conglomerate” MTFs the outlook is very challenging. Volume in equities is declining as the bear market bites and there is already considerable competition from the likes of NASDAQ OMX as well as those already mentioned.

It will be interesting to see how this plays out and whether the exchanges can make money in the short term or are going to try to win a battle of the deepest pockets. At present the marketplace is certainly against many of them being profitable until volume increases overall.

 

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Sprecher’s ICE opens the way to A “Closed” Clearing of CDS

Summary

Intercontinental Exchange (ICE) has muscled its way to the forefront of the CDS clearing issue as a result of their classic opportunistic streak. Their solution may have the dge over other competitors not just as a result of early regulatory permission but also thanks to its more exclusive business model.

Analysis

Finally a CDS clearing venue in the USA has been launched after much discussion and it seems that ICE has the backing of the marketplace itself. However, this is no flat democratic futuress/options style clearing house but rather via the auspices of the Clearing Corporation (nee BOTCC) and ICE Clear itself, this is a club only for entities with a 5 billion dollar balance sheet and at least an “A” rating.

That lack of flat “open plan” trading ought to appeal to the banks who don’t want to see a cash cow being milked through commoditisation by the “great unwashed” of all and sundry traders throughout the world.

ICE is leveraging its own beginnings as an investment bank backed platform to create an exclusive venue where transparency is available for regulators but the CDS market can continue to function with bank profit margins largely unhindered.

It is an intriguing venture and once again a good example of Jeff Sprecher’s innate opportunism. His purchase of Creditex last year gave him a foothold in the more sophisticated OTC money market products markets, then his successful bid for the Clearing Corp provided a solid base for the clearing of CDS in an exclusive environment. The established exchanges by comparison so far have failed to really see a measurable interest in their product offerings for CDS whether already trading (NYSE LIFFE, EUREX) or not (CME).

 

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TMX: Bertrand Departs – another Shock departure of a Successful Manager

Summary

Luc Bertrand standing down as the head of M-X and deputy at Toronto SE is a shock move given that it was Bertrand’s success at M-X that helped rejuvenate the Canadian exchanges in the first place!

Analysis

A decade ago the directors of the Toronto Stock Exchange thought they had pulled a smart move by trading the rights for derivatives trading in all of Canada against the stock trading activity of the Montreal Exchange. They even paid a 40 million CAD bounty for the privilege. There would be a ten year period during which neither party could transgress into the products of the other.

With the money and the rights to trade all listed Canadian derivatives, Montreal’s new CEO Luc Bertrand set about closing his floor and making the Bourse de Montreal a copy book example of exchange transition during the Capital Market Revolution. From a minor provincial outpost, he managed to transform the volumes and profitability of the Montreal Exchange so that by December 2007 theresultant merger of both markets was a 1.3 billion CAD deal.

Bertrand had not only revoutionised the exchange and created his own IT subsidiary during this time, he had also helped found the Boston Options Exchange (BOX) which has become a successful niche player in the US equity options market.

Nevertheless, the Toronto board remained hostile to having the visionary Bertrand as CEO of the entire group. Certainly, it must have been embarrassing paying hundreds of millions of dollars for an asset that the TSE board had deemed less then worthless 8 years earlier!

Even when CEO Richard Nesbitt resigned in 2008, the Toronto board still could not stomach Luc Bertrand as CEO and thus they brought in ex-Singapore Exchange CEO Tom Kloet from Chicago to run the company instead.

After what has been a rather stormy period for internal management, Bertrand has clearly decided to take his leave. This is all the more interesting as Luc himself remains the largest individual shareholder in the business with more than 1.5% of the shares.

While Tom Kloet is a safe pair of hands for the group, it has to be said that Luc Bertrand’s departure from TMX is an sad moment for not just the exchange but also a man with a strong reputation as not merely a visionary but also one who could make his visionary plans succeed.

Hopefully it will not be long before an exchange seeking a new direction will seek to utilise this most amiable Canadian as their new CEO.

 

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UBS: Villiger and Grubel To Sweep Away the Kurer/Rohner/Ospel Legacy

Summary

The appointment of Kaspar Villiger as Chairman of UBS marks a clear intention of “Switzerland Inc” to assert control over the bank & future banking regulatory changes.

Analysis

The arrival of Kaspar Villiger as UBS Chairman marks the second “shock” C-suite shuffle within a week. The Swiss government and the EBK will be relieved that UBS has a sensible, statesmanlike, highly experienced ex-finance minister of the Helvetic Confederation in the Chairman’s office just when UBS will be a leader in the attempts to salvage banking privacy and fight off other supranational regualtory initiatives that may harm the Swiss banking model.

It is remarkable to reflect that already Marcel Ospel is almost forgotten in the global media despite dominating UBS for so many years. His replacement as Chairman, Peter Kurer, never really got to grips with the bank which was already spinning out of control. The explosion in the private banking business (particularly the US investigation) has cost both him and CEO Marcel Rohner their positions.

With Villiger clearly taking a brief to represent UBS (and therefore effectively head a lot of Swiss banking efforts) to assuage regulatory change overseas, the position of new CEO Ossie Grubel is effectively made all the more significant. Operational control and the entire corporate vision will now be clearly under the suzereinty of the former Credit Suisse CEO.

This is a very interesting executive combination. It is a slightly unorthodox approach (by conservative Swiss standards, even risky) but one which has the potential to succeed. Nevertheless, both men will need to be at the top of their game to ensure UBS can replenish its coffers and revamp its reputation.

Of course, the downside is considerable. While largely forgotten outside the country, within Switzerland,  Marcel Ospel, the architect of the “modern” UBS, has gone from the nation’s most popular businessman in 2007 to its most reviled citizen. Interestingly, in 2001, then Finance Minister Villiger argued publicly with Ospel that flagship airline Swissair had collapsed because Ospel had refused to advance money to save the group. The former Finance Minister has considerable motivation on all levels to lead the team to ensure UBS has a safe and secure future!

 

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Ossie Grubel – A Man For All Seasons & All Swiss Banks?

Summary

Oswald Grubel is a fascinating pair of safe hands for UBS at a time of turmoil. Yet the move represents a risk to Grubel whose reputation upon retirement as Credit Suisse CEO was simply outstanding.

Analysis

Capital market love their conspiracy theories and it is difficult not to see one (or many) at work here. However, the truth may indeed be rather dull. With the UBS C-suite still in disarray after the departure of Chairman Marcel Ospel (et al) and a ream of bad publicity concerning toothpaste tubes, diamonds and private banking services as a whole, UBS has opted to make a significant change and appoint a bedrock in management.

Ossie Gruble is regarded as something of a saint in Swiss banking circles. He manages to enjoy a popularity within the trading constituency that borders upon the fanatical while equally he is at home in the upper echelons of Swiss financial politics and global banking as a whole.

His pedigree is simple: he turned around Credit Suisse, now he has the chance to become the only person to turn around both of Switzerland’s global 500lb gorillas of banking.

Certainly it is difficult not to think that the EBK (Swiss Central Bank) will be more relaxed at the sight of UBS being steered through very stormy waters by a Swiss citizen who can both manage those tricky complex trading operations as well as operate a global bank. Switzerland sits on the precipice of banking secrecy being eroded and Switzerland Inc needs a competent CEO with gravitas to run its top banks.

Talk of conflicts of interest may abound given Grubel’s Credit Suisse stock and pension but really Swiss banking for the top 2 is largely a “win win” scenario. They may compete head to head in many markets but essntially the global marketplace is their playground and that means a huge opportunity to profit without having to cut each other’s throats. Moreover, any methods by which the Swiss can maintain their lead in private banking is a vital issue currently where all Swiss banks are in precisely the same position – threatened by an end to banking secrecy. This isn’t just about UBS and its 60,000 employees, this is about the future of Switzerland Inc.

UBS needs right now to find its own stablity in a highly volatile marketplace and that has neccessitated the sacrfice of its 43 year old CEO Marcel Rohner in place of a man from an older generation with a proven reputation for reform and all the attributes of a senior, statesmanlike Swiss banking chief. Watch out for intriguing reforms with UBS under the watch of “Saint Ossi!”

 

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Eastern Europe: A Mecca for Retail Property Investment?

Summary

The Central and Eastern European property market remains  unsophisticated compared to the west with ample opportunities for eager investors. However, current economic events provide both high risks and potentially high rewards…

Analysis

The retail explosion in Eastern Europe during the past two decades has been considerable but there remain significant opportunities for judicious investment.

Judicious is of course the key factor. Simply piling into capitals whether it is Budapest, Moscow, Riga, Warsaw or any point thereabouts has proven an expensive option in recent years. Nevertheless, yields are rising as capital values have fallen, so opportunities will re-emerge.

However, the biggest opportunities currently can be found in second and third tier cities. Road infrastructure is improving in many countries. For instance, the expansion of the Polish motorway system joining north and south and east and west by 2012/2013 will revolutionise traffic movement. This will have a huge impact on logistics, permitting much cheaper and easier transportation across not merely Poland but in fact all the way through much of CEE and farther east from the EU (and vice versa). Moreover, the opportunity to drive intercity distances of 100-300 kms much more easily will be a huge fillip to the retail emporia themselves.

In that respect, investment in retail property in secondary or tertiary cities will be an interesting option – particularly if property prices continue to sag in much of eastern Europe.

Outside the EU, even in major cities, retail opportunities can be highly significant in coutnries such as Belarus or Serbia for instance. However, often retailers are nervous about supply chains and existing product distribution arrangements which they feel may be anti-competitive to their expansion into these countries. This may impact upon investment decisions although in many of these countries, property prices are relatively low and indeed existing retail operations make the market ripe for new entrants.

At yields around 15% developers/buyers are probably interested, presuming they can find the finance…Another difficulty right now is the instability in currency rates and the general panic in western markets about an eastern European domino effect. Ultimately, the western media love the “wild east” tag but right now the opportunity to find great deals is coming closer in many parts of the CEE/SEE retail market.

 

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Sorting The Wheat From the Chaff

Summary

The marketplace is sufficiently spooked that we are at the point where facts are routinely mistaken or misrepresented to demonstrate just how desperate problems are…

Analysis

There are some good pointers in this article. Certainly some European banks are over-extended in Eastern Europe and Austria may face some issues in its banking sector as a result (to name but one nation).

The Austrian issue is of course chilling as the failure of CreditAnstalt in 1931 was a significant event prolonging the Great Depression.

Nevertheless, by cherry picking debt figures it is easy enough to come up with a horrific picture. However, leverage in Poland is not remotely so significant as in the likes of Hungary. Similarly, Polish property has increased but outside of Warsaw the valuations are pretty sensible – certainly a lot more so than the highly leveraged property hedge fund better known as the UK.

There are significant problems brewing throughout Eastern Europe but the region (like Asia in 1997) is in a much much better position to rebound than the rather tired over-leveraged Western European economies.

 

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Now What About the Structure?

Summary

The industry looks to have “blinked” under pressure from their governments (or sponsors depending on how one views the situation) amidst a threat of EU legislation.

Analysis

Aided and abetted by pressur from governments, Commissioner McCreevy’s threat of legislative action has cowed two key players ISDA (the OTC derivatives trade body) and the European Banking Federation (EBF).

That is a big result for the EU but now the process moves on to how to build the silo and the big question of who to operate it? The elbow sharpening at LIFFE, LCH.Clearnet, EUREX and ICE will be enormous right now.

At this stage it is difficult to tell just who will win but in the meantime, there will be a massive amount of work going into convincing the banks that the exchange derived platforms can work according to the banks’ definition of “customer centric”…

Oh, and of course there is also the issue of that possible spoiler bid for LCH.Clearnet – could an “industry” bid buy the CDS CCP that the industry prefers?

Whichever way one looks at it, the industry as demonstrated by actions in the USA is not about to sacrifice its CDS cash cow to the wiles of commoditised low cost exchanges without a big fight and that may leave both LIFFE and EUREX with issues in trying to win the beauty pageant.

CCP may be coming but that is still a long way from exchange trading…

 

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The Third Way

Summary

The greatest misunderstanding in markets currently is that CDS will suddenly be traded on an open CCP platform.

Analysis

There is a very common misconception that ccp clearing also means open trading. The CDS community have banded together in what might call a typically opaque fashion to avoid at all costs their cash cows being commoditised and left open – horrors! – to the prospects of being traded as cheap commoditised instruments on exchanges. Who frankly can blame them for acting in their best interests?

That is not to fault EUREX or LIFFE or any exchange from trying to create an exchange-based solution. However, the evidence is that a relatively opaque “adults only” clearing situation from the likes of ICE will be the solution that prevails unless or until the regulators force the opening up of the OTC CDS market into a transparent xchange product.

The Creditex acquisition was indeed an inspired one as this move from ICE demonstrates…