Equities
“We’ve had a phenomenal bull market
since 2008,” he said. “People may not
have realised it at the time, but it’s
true and it’s stayed a bull market ever
since. Sooner or later, we will get a bear
market. And when that happens, as
stocks move down, the active guys will
be able to outperform again as they
can react more effectively, whereas
the passive traders are just tracking an
index.”
Market close
One of the other factors linked to all of the
above is the shift towards greater trading
activity at the market close. Among other
signs of this, K&KGC discovered in our
algorithmic research earlier this year
that one of the most popular strategies
is market on close. At the same time,
sources on both the buy side and the sell
side report greater activity in the close,
while liquidity is thinning out in the intraday period. For more detail on this, see
the Credit Suisse article on page 26.
According to Fitzpatrick, traders like to
trade at the close because there’s no
information leakage, and because the
HFTs don’t play there. A similar factor lies
behind the popularity of new platforms
such as IEX in the US, which uses speed
bumps to ensure that there is no
advantage to be had from lower latency.
It also may be a factor in the plans at
Bats Global Markets to launch an auction
separately from the traditional one
operated by the London Stock Exchange
and other national exchanges, such as
Hong Kong Exchanges and Clearing,
which recently introduced its own closing
auction.
Biased lobbying power
Regulation has been a major impact on
the industry for a number of years, and in
Europe MiFID II has been a central point
of debate ever since it first began to be
discussed in 2009/10. While the three
main elements in the market may be the
buy side, the sell side and the trading
venues, the influence of the three groups
is not equal. On the buy side, it is often felt
that despite the European Commission’s
ostensible aim of helping the investor, it
is the asset management community that
holds the least influence – while other
vested interests seem to hold much more
sway with regulators.
24
“It’s very true that the lobbying is
unbalanced,” said Fitzpatrick. “If I were to
go down to Brussels, I’d be lucky to get a
meeting to see anyone. If an investment
bank went down there, they’d have a
much better chance because they’ve
got more clout. But the exchanges are
literally based in the next room, and
they’ve got the regulators’ ear. They can
influence the regulation and they have
done and that’s a problem. They want a
market that suits them, not necessarily
one that is in the interests of investors.”
Recent political events will also play
into the debate. The election of Donald
Trump as president in November 2016
was a surprise to many. But from a
financial services perspective, Trump has
indicated that he intends to deregulate
the US banks, including watering down
or reversing parts of the Dodd-Frank
legislation. The end result of such a
move would likely be a boost to the US
banks, which would then be well-placed
to increase their profits and potentially
become acquisitive. At the same time,
there is little to no prospect of European
regulators following such a route, despite
the struggling situation of many of the
major EU economies.
“The EU banks are really going to
struggle, because they will be tied down
by the burden of EU regulation and
MiFID II. If the US banks surge ahead,
they won’t be able to compete and
that’s going to be bad for the outlook
for Europe. It could be that it’s the US
and Asia that are going to be leading
the way in the future and Europe will
fall behind. My question to the industry
would be, should the market be driven
by regulation? Is that really the sort of
market we want to have?”
The relatively severe European regulatory
approach can also be highlighted by
actions designed to make bank executives
personally liable for mistakes and failures.
Regulators in Europe have systematically
targeted the top executives and made
them terrified of draconian punishments
including bonus clawbacks, fines and
even jail time. But there is (and has been
for a long time) a sentiment that the
regulatory changes may be going too
far. This editor recalls a conversation
with Anthony Belchambers, at the time
president of the Futures and Options
Association, back in circa 2012 when he
www.buysideintel.com
mentioned that the regulatory train may
be running away out of control. It is a
sentiment shared by Fitzpatrick.
“Would you encourage your kids to
go into this industry? Knowing that
salaries are getting cut, bonuses are
being capped, and if you make a
mistake you could end up in jail? It’s
good that people are accountable but
this goes too far,” he said. “The result
is that banks are struggling to get the
talent they need. No one wants to be
on a bank board. They don’t want
to be hung drawn and quartered if
something goes wrong. I think the
government will realise eventually the
damage all this regulation is doing.”
THE DEMISE OF GLOBALISATION?
Fitzpatrick on Trump:
“Globalisation is a huge factor. Trump
is Isolationist. He says he’s going
to make America great again, that
he’s going to re-open the factories
in Pennsylvania. The only way
he’s going to do that is to stop US
companies from going abroad. Has
globalisation gone too far? It’s a
valid question to ask. Most people
inevitably go to the cheapest price
possible, and that’s always in India
and China because they have a large
surfeit of population willing to work
at very low cost.”
Fitzpatrick on Brexit:
“I think the UK has set the ball rolling
in a way that may force the EU to
take a look at itself and move away
from the globalisation that they’ve
been doing and the federal state. The
Dutch prime minister and others are
not happy, they probably agree with
the UK they just haven’t gone as far as
leaving the Union. They might use the
UK as a reason. If you think Greece,
Spain, Italy, they’ve got huge issues
and those issues aren’t going away.
They are stuck in an organisation
they have no control of. Maybe it’s
time to rein it back in again.”
December 2016