It is quite troubling and perplexing to witness the technology mishaps that have occurred recently in the world of capital markets. For more than two decades, technology has shaped and continues to define the architecture of capital markets globally; hence, it is imperative at this stage in the evolution of the markets to come to certain realizations about the inherent risk that lies in this dependency on information technology for the industry overall.
In addition to major market events that have been blamed on technology such as the Flash Crash in May 2010, news organizations have reported many technology related snafus over the last couple of months:
The Greek elections, the Spanish economy, and the viability of the euro have, understandably, become the financial stories of the summer. But here in the US, another debate about the future of domestic markets is quietly underway: Can investors count on US financial markets to remain the most open and transparent in the world?
It’s not an academic question. Investors have withdrawn billions of dollars from US equity markets in recent years, at least in part due to a lack of confidence in market integrity. Last month, the House Financial Services Committee held a hearing on whether the transparency that traditionally characterised US equity markets is rapidly being replaced by opaque trading platforms operating outside public scrutiny.
Liquidity refers to the speed and cost of buying and selling (ie. liquidating) securities in the market. A liquid market is one in which a security can be bought or sold quickly and at a low transaction cost. There are at least 2 theories which predict the impact of the operation of competing execution venues such as dark pools on market liquidity. Interestingly, they provide conflicting predictions. On the one hand, there is the so-called “competition” hypothesis which implies that dark pools have a competitive effect on liquidity providers in lit markets. The hypothesis implies that dark pools provide competition for lit markets and put pressure on liquidity providers such as dealers to reduce their bid-ask spreads in order to attract order flow. In reducing bid-ask spreads they reduce the cost of trading and therefore increase liquidity. Competing with this view is the “fragmentation” hypothesis which implies that dark pools merely fragment liquidity in the lit market. The fragmentation view implies that because order flow is split across more than one trading venue, that the amount of trading in the lit market declines. This in turn implies that the amount of time that a limit order or quote is ‘alive’ in the lit market increases and the associated increase in the holding cost or risk faced by a limit order or quote provider increases. In order to obtain economic compensation for this increase in cost, the limit order or quote provider increases their bid ask spread. Hence the cost of trading increases, and the market is less liquid.
The majority of southern African retirement funds will soon be well equipped to integrate environmental, social and corporate governance (ESG) factors into their investment decisions and ownership activities. An industry-led initiative, Sustainable Returns for Pensions and Society, responds to new regulations and aligns with efforts by the Johannesburg Stock Exchange (JSE).
The United Nations Conference on Sustainable Development in Rio de Janeiro this month underlines why responsible investment is becoming an important strategic issue for a growing number of exchanges, and provides a timely opportunity to take stock and contemplate the where we may be heading next.
WFE today announced the appointment of Mr. Hüseyin Erkan to the position of Secretary General. Until recently Mr. Erkan served as Chairman and Chief Executive Officer of the Istanbul Stock Exchange, a post he was appointed to by the Turkish Government. Mr. Erkan has approximately 23 years of experience in the financial sector of which 16 years have been with the Istanbul Stock Exchange. Mr. Erkan was a member of the WFE Board of Directors between 2008 - 2011.
What kind of financial oversight system is now developing in Europe? In June 2009, the Heads of EU Member States and governments called for a move towards more harmonised regulation and integrated European supervision in order to ensure a true level playing field for all actors at the EU level. This call reflected not only the repercussions of the financial crisis, which has deeply affected, and continues to affect, Europe, but it also responded to failings in the areas of cooperation, coordination, consistent application of Union law and trust between national supervisors.
After more than a decade of hesitation, the EU is now finally moving on to put in place a proper regulatory architecture for clearing and settlement. Following the agreement on EMIR, the EU Commission has proposed harmonized rules for CSD’s, while the ECB is moving on with its plans for a central euro-zone settlement entity. After the unfortunate bypass of the 2006 Code of Conduct, the EU will now have rules to ensure cross border provision of services, (interoperability) and competition between clearing and settlement entities in the EU. This will bring sea change in the sector, and could lead to further concentration in the sector to respond to tighter margins, as we have seen in the area of trading platforms.
Under the backdrop of the current post-crisis climate, the global economy has become significantly more complex as China itself has also witnessed an increasing number of uncertainties in the domestic macro-economy. In response to these challenges, China’s capital markets have shown their commitment to bringing further reform, innovation and opening up under the guideline of scientific outlook on development, achieving sound, stable and rapid growth through strengthened market regulation.
I. The Developments of China’s Capital Markets in Recent Years
China has seen an 9.3% average annual growth in GDP since 2008, laying solid economic ground work for the steady development of capital markets. In recent years, China’s capital markets have been experiencing rapid expansion in terms of financing scale, number of listed companies, investors and new investment products.
To all the superlatives that have been lavished on China one more deserves to be added: The unprecedented ascendancy of the country’s futures markets, which went from being a wild but obscure corner of the derivatives world to join the ranks of the world’s most actively traded futures. Last year the three most active agricultural futures in the world by contract volume were Chinese—the ZCE cotton and sugar contracts and SHFE rubber futures, which traded over 139 million, 128 million, and 104 million, respectively. Out of the top 10 agricultural contracts by volume, 7 were Chinese. The stock index futures contract, launched only two years ago, is second in the world by notional value after CME’s e-mini S&P 500 contract. From 2000 to 2010 contract volume on China’s three futures markets grew at slightly more than 50% annually, from 27 million in 2000 to 1,566 million in 2010. Last year saw the first decline in over a decade as a weak stock market plus measures by the authorities to discourage excessive speculation caused a painful 32.7% contraction in volume. Still, even allowing for the smaller size of Chinese contracts, the performance of China’s futures markets over the past decade has been stunning. But the story has just begun.