November 14, 2013

1. Views on Safeguarding the Markets

Panelists and attendees voiced split opinions at the event on this issue. Some market participants thought a prescriptive approach to regulation is unrealistic, since the prescriptions don’t necessarily apply across different products, business models, markets and asset classes. Additionally, people talked about a danger that prescriptive regulations could become quickly outdated as the market evolves. But as others pointed out, some of the more principles-based regulations are ambiguous, resulting in continual calls for clarification. What do you think? Should regulators’ rules be more principles-based or prescriptive?

2. Low Latency is SO Yesterday

While in years past having fast-performing trading technology may have been a key differentiator, this is now changing. Technology suppliers and market participants spoke at the event about how low latency systems are necessary but not sufficient to competing in the markets. Truth is, high speed trading technology is accessible to large and small firms alike. So firms that want to be successful in today’s environment need to worry less about speed and more about having a solid trading strategy in place. As was said on one of the panels, there’s little value in being the fastest person to reach the wrong answer. Which do you think is more valuable today, speed or strategy?

3. The Effects of New Competition on Exchanges

Regulators say that introducing new competition is beneficial to the markets, saying it helps drive innovation and cuts trade execution costs. But many exchanges have conflicting opinions about this topic. Some established exchanges spoke up to embrace competition that doesn’t directly affect their game. Other exchanges claimed that additional competition would only fragment liquidity and may lead to a higher cost burden for buy-sides. Upstarts claimed that competition and fragmentation will increase overall market liquidity and choice. What are your thoughts? Would increased competition improve liquidity or only serve to fragment the marketplace?

4. Considering Cost Efficiency vs. Capital Efficiency

While clearing futures may have once revolved around cost efficiency, clearers observed that this is changing. Some of the new regulations may have an unintended consequence on capital efficiency. If buysides are unable to manage their capital efficiently and have to dilute their margin in too many places, compliance with the regs may have the consequence of stifling liquidity. For this reason, sell-sides that were once concerned with reducing overhead costs in order to attract buy-sides are now realizing that helping clients allocate capital more efficiently is much more valuable. Do you think that capital efficiency is now becoming more important than cost efficiency?

5. Being a Clearing Member May Become Uneconomical

Many industry experts think that regulations are beginning to create barriers to entry that make it difficult for smaller FCMs to compete in the marketplace. Speakers pointed to the possibility that these regulations may eventually make it financially impossible for smaller FCMs to even survive. This phenomenon could result in consolidating global risk among just a few of the largest clearing firms. What do you think? Is squeezing out smaller clearing members what regulators intended? 6. Triggering the Kill Switch

The kill switches in use or proposed at some exchanges tend to be inconsistent and too abrupt. Some simply shut down a connection on a moment’s notice. The problem with this approach is that there’s a risk of the kill happening either too quickly, leaving open positions, or not quickly enough. Kill switches could have business rules that allow for position reduction or evaluating positions on a case-by-case basis. Market players talked about a need to come together to standardize these kill switch controls and normalize the approach across the markets. What’s your take? Do you think that holding exchanges to the same standard when it comes to kill switches is important? Do you think there will ever be an industry-wide consistent approach?

7. A Lack of Disruptive Technology Breakthroughs

Most of the technology being used in trading today has been around for years, according to a number of the speakers, even those from technology firms. Consider FPGA’s, which have been in use for decades. Discussion at the Expo seemed to be less about the science of inventing new technology and more about engineering what we have, meaning practically applying innovative ideas to getting real work done and doing so more efficiently. Do you think that current technology is enough? Or, is the industry lacking solutions that would make our lives easier?

8. Looking Forward

If you were expecting any ground-breaking innovations to be entering the scene any time soon, you may be disappointed. In fact, we didn’t learn about any major new advancements during the innovation panel. In the current marketplace, firms are focused on technology-assisted rather than technology-led innovation. Today there’s more emphasis on going back to the basics. Market participants increasingly value reliable products over sexy ones with a lot of bells and whistles. The demand today is for stability, integration and simplification. What do you think? Do you see any technology out there that is truly disruptive?

9. CFTC Concept Release Needs Industry Responses

Another important topic addressed at the event was the CFTC concept release . In the face of rapid technological change, the regulator is looking to introduce new risk controls and safeguards for automated trading environments. This concept release document is intended to open up communication with the industry at large to find a suitable solution for achieving these goals. Problem is that at 137 pages and 124 questions, the document is quite lengthy, so market participants will find it challenging to contribute to this process by the December 11, 2013 deadline. But, as was eloquently said on one of the panels, the CFTC has asked questions – we must not let that opportunity pass, lest the industry be changed due to lack of response.

10.FIA Expo Hasn’t Lost Its Mojo

Overall, we felt that FIA put on a great event. The lunchtime address given by renowned columnist and Pulitzer Prize winner George F. Will was a huge hit. Following his speech, we heard a tremendous amount of positive buzz from attendees.

Record attendance and positive tweets streaming across the wire showed how excited attendees were with the event. We think it’s fair to say that while market volumes may not be the best, the FIA Expo hasn’t lost its mojo!