Tuesday, September 21, 2010

Organizational Transformation in the Financial Sector Due to HFT

"The rapid-fire growth of high-frequency trading, HFT, has spawned a new breed of market mavens whose backgrounds are far different than the traditional suit-clad Wall Street titans.  Their resumes are rich in rocket science and other non-financial fields and they may never have traded a stock, read an earnings report or scrutinized a balance sheet.  They are engineers, mathematicians and computer scientists—armed with cutting-edge technology and often located hundreds of miles from New York City."

Mr. Dharm Kapadia forwards an excellent article on a trend that is rapidly becoming mainstream in the financial sector holistically, see "Man Vs. Machine: The New Kings Of Wall Street" at CNBC here.  Please see my previous post on high frequency trading "Dis-ruptive Innovations - Technology in Retail Investment Sector" here.

Thursday, September 9, 2010

Dis-ruptive Innovations - Technology in Retail Investment Sector

The Financial Times published a well thought through analysis on high-frequency trading and its impact on traditional and retail investors here... William Gibson's quote could be used to summarize the essence of HFT: "the future is already here, it's just not very evenly distributed".

Wikipedia defines HFT as - "High-frequency trading is the execution of computerized trading strategies characterized by extremely short position-holding periods".  Computerized strategies implies simple to complex algorithms and extremely short positions can mean micro seconds to ones that are never executed but are noise generators.

A quote from Kevin Cronin, Head of Equity Trading at Invesco stated: "Because of the predatory nature of some participants we have no incentive to post liquidity,” ... “There are 40 places where stocks are transacted and none of us has clarity of supply and demand on most [equity] issues. These are fundamental issues as to what the value of a securities market is".

Mr. Dharm Kapadia, who has advised The RBR Group (my company) on technology in the financial sector explained that:

"Inexpensive co-location has facilitated the growth of high-frequency trading (HFT) and will continue to support it in the future as computers and networks will only get faster. The individuals participating in HFT not only take on, and beat the big players, but also evade the regulatory agencies. All you can see is their "vapor trails" in the historical trade and quote data. The retail investor is miles behind the HFT participant; they're not normally going to get the best execution in this type of environment. Ubiquitous technology will allow the HFT trader to be faster, more nimble, and hard to trace."

Of course, within this macro-trend of explosive growth of HFT - the democratization of technology, and its power and speed will enable the astute fund management companies in retail investments to begin constructing a premier service that will become consumer grade in this coming decade.  And the first one of these services to market will generate aggressive premiums prior to the arrival of competition.

Interestingly today the Financial Times front page includes the article "High-frequency trades earn fine" here.  Excerpt from the article:

"US regulators are to fine a high-frequency trading firm, signalling sharper scrutiny of this type of activity, amid a broader crackdown on market abuse following the May 6 “flash crash”.

The enforcement action, brought against a small New York firm for “layering”, will be settled on Monday with the payment of about $2.3m in fines and disgorgement penalties, according to people familiar with the situation.

Layering involves traders entering multiple fictitious orders, which are then cancelled within seconds. The strategy is used to drive a stock price up or down, before using a real order to profit from the artificially inflated or depressed price.

It is one of the high-frequency trading techniques – alongside “spoofing”, in which traders feign interest in stocks to drive the price up or down – that some believe may have played a part in the 20-minute period of wild price gyrations on May 6 known as the “flash crash”.

Thursday, September 2, 2010

China Update

Good friend Mr. Tony Tsai, CEO – BHG Retail Innovation Institute and EVP Operations – The BJ Hualian Hypermarket Co. forwards key China updates:

"Five future development trends of China's foreign trade. Five future development trends of China's foreign trade are analyzed by Liu Jingdong, a researcher at the International Law Research Institute at the China Academy of Social Sciences. The five trends are as follows: 1) China will maintain its leading position in worldwide foreign trade for a long period of time; 2) the structure of China's imports and exports will change and energy and resources trade will play important roles in China's foreign trade; 3) legislation and policies regarding the environment will have a significant affect on China's foreign trade; 4) the renminbi will become the main currency for China's foreign trade settlement; and 5) trade protectionism against China will exist for a long period of time and trade friction between China and its major trade partners will increase."

"Three big mountains" for Chinese economy: housing vacancies, the trade surplus and foreign exchange reserves. Chinese decision-makers will lie awake all night thinking of three numbers. The first is 65.4m, the number of vacant houses in China. Second is $28.7b, the estimated value of China's trade surplus in July. The third is $2.45tr, China's foreign exchange reserves. The three numbers reflect the distorted part of the Chinese economy. China is encouraging investment by suppressing the cost of capital and other factors. The cost to get this investment is the sacrifice of the interests of consumers. Low salaries and low deposit interest rates have suppressed the purchasing ability of consumers."

"Vice governor of People's Bank of China: China to gradually deregulate restrictions on cross-border use of renminbi. Aug. 31, Hu Xiaolian, vice governor of the People's Bank of China, says in an interview with foreign media that China will gradually deregulate restrictions on cross-border use of the renminbi. However, variation in the exchange rate will not solve the China-US trade imbalance. China is also considering allowing enterprises to invest in overseas markets with the renminbi."

"China expands scope of property tax pilot program; evaluation technologies become mature. The Ministry of Finance and State Administration of Taxation has expanded the property tax pilot program across the country. Each province can select one city to take part in the pilot program. In addition, the State Administration of Taxation has accelerated technical training of local tax officials in property tax evaluation."

"China creates new regional economic structure; breaking regional economic development imbalance problems. From May to Dec. 2009, nine plans for regional development were upgraded and made strategic national plans. This indicates China is trying to reverse the imbalance in regional economic development across the country and transforming its export-oriented economic development model, which depends excessively on external demand, as well as exploring an overall way to combine energy-conservation, environmental protection, ecology and civilization."

"China to accelerate construction of credit system in rural areas. Du Jinfu, deputy governor of the People's Bank of China, says China will accelerate the construction of the credit system in rural areas, further supporting agriculture through financial measures."

Pakistan - Flood Donation

A large number of folks have asked me to suggest a trusted source where they can donate for the Pakistan flood relief efforts.

I am an Advisor to Ms. Sarah Hashwani, Chariman of Board of Directors of the Hashoo Foundation and the Foundation itself, a family philanthropic organization that has been working in Pakistan for quite a few years, see website here. The foundation has UK and USA (501c3) offices and conducts philanthropic efforts in the two countries as well.

I have worked with the organization and have been impressed with the excellent recipient services the foundation offers. I have met many individuals whose lives have been transformed through the foundation's work. One of the breakthrough recipient service innovations the foundation delivered "Plan Bee" won the BBC World Challenge Award, see detail here.

As you review the Foundation's site, you will notice that it has both a current support focus and long-term rehabilitation plan as well. Rehabilitation will be key to the recovery of the country.

Thank you for choosing to donate whether through the Hashoo Foundation or another source.

Pakistan Flood Relief Donation - here.
Note that you can send a check to the US based organization along with being able to donate through PayPal.