credit crisis

In man vs. machine battle, man seeks upper hand

Jim Kim — Mon, 18 Aug 2008 08:58:02 -0400

There has been lots of talk about how human traders are being disintermediated by electronic trading services. Working as a cash equities trader hasn't carried a lot of cachet on Wall Street for years now, but the credit crisis has bumped up trading volume and presented an opportunity for humans to reassert themselves, notes Financial News Online. Algorithms did fare well in the face of great upheaval, and while not giving up on the idea, more buy-siders are willing to re-involve human traders who can provide a soft intuitive touch. This, however, will only dent the profound trend toward electronic services. According to the Tabb Group, the buy-side expects it will execute about 50 percent of orders using sales traders by 2010. That's down from 82 percent in 2005. The traders that will survive are those that come up with really good ideas and services. It's all about value add now. Hedging strategies is one area ripe with potential. Anything that crosses asset classes is another.

For more:
- here's the Financial News Online article

The answer to the OTC derivatives problem?

Jim Kim — Fri, 25 Jul 2008 10:53:57 -0400

Truth be told, the lack of an automated OTC derivatives execution and clearing platform was an issue even before the credit crisis hit. Now, after the global carnage, regulators have all but mandated a solution. Seizing the opportunity, the DTCC and London-based Markit announced they will combine Markit's front- and middle-office trade processing services with DTCC post-trade confirmation and matching services. Finance Tech suggests the result on paper will be an end-to-end processing and confirmation solution that reaches across asset classes. TowerGroup analysts call it a turning point in the march to get a grip on OTC trades. This vests a lot of power and influence in one company, but the skills they bring are not garden variety. The mainstream exchanges never really leapt into this area, so the industry will have to live with a single provider, unless others jump in. That is not out of the question.

For more:
- here's the article in Finance Tech
- in the realm of credit derivatives, we're seeing a lot of clearing activity. Eurex has entered the market in Europe. Article

CDS back office still a looming nightmare?

Mon, 28 Apr 2008 06:59:59 -0400

It's hard to believe that the credit default swap (CDS) market is now about twice the size of the U.S. stock market. But it's true. The market has been growing phenomenally and, despite a lot of nervousness over the past year, it looks like it is here to stay, though growth might moderate.

All that said, it is a very immature market, and if a wave of defaults ever hits, or if bond insurer (they are huge players in this market) anxiety soars, the market could well stop functioning. The fact is, the market's clearing and settlement processes are roughly akin to the 1960s methods of settling stock trades. Recall the classic John Brooks book, The Go-GO Years, which revealed the Wall Street back office as a purgatory of paper and stoned processors. It's shocking in this era of rampant technological progress that top banks are settling trades with faxes and spreadsheets. The Fed has been onto this problem for some time, and progress is being made.

But one could argue that now is the time for a Wall Street equivalent of a Manhattan Project, and before it's too late. Some believe that the market, despite its low-tech foundation, has withstood the worst. Others think that the worst is yet to come. I say, why wait around? The issue needs to be put back on the front burner. We're looking at some thorny issues that directly effect valuations and earnings if back office shuts down, which is more than conceivable in a market panic.

So technology and automation is the answer. But somehow, it has to be made a priority. Resources will be necessary and frankly, it strikes me as an area that a start-up might want to tackle, creating an ECN sort of system. In any case, someone's got to do something. - Jim

ALSO NOTED: Are you ready for voice biometrics for online banking; and much more...

Mon, 21 Apr 2008 06:59:50 -0400

Company News:
> Thomson Reuters ramps up at a tough time. Article
> BATS vs. NYSE on fees. Article
> Sales to financial services powers IBM's 1Q results. Article
> Bidders lining up for Dell Financial Services. Article

Industry News:
> Massive growth in electronic bond trading. Article
> Are you ready for voice biometrics for online banking? Article
> Sellside's server refresh rate accelerates. Article
> In Europe, credit crisis hits financial services IT vendors hard. Article

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