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TRADING PLATFORM PERFORMANCE: A RACE AGAINST TIME

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By Timothy Wiffen, head of Calypso practice and  Alistair Milne, product manager,  Formicary

Although rare, there does seem to have been a spate of IT problems hitting trading floors in recent years, resulting in suspended trading and trading losses, as reported in the Wall Street Journal.

In April 2014, a technical glitch at CME Group Inc. halted electronic trading in corn and other commodities, and saw the world’s largest futures exchange operator using shouting floor traders to fill orders instead of the computers that have largely replaced them.  The problem was rectified after two hours but its impact was widely felt as futures and options trading in 31 different markets ranging from corn to wheat to live cattle to rainfall futures were halted.

More recently, in June 2014, NYSE Liffe said a technical glitch halted trading in billions of euros of futures contracts tied to European money-market rates, leaving some traders frustrated for several hours.

When an exchange is impacted it is a very public affair but every financial institution knows that problems with their internal trading platforms can be just as damaging. Any slowdown in transaction processing – whether it’s over a few minutes or several hours – can have dramatic consequences, particularly as the move towards superfast high volume trading continues at a pace.

Put simply, the quicker a problem can be identified and addressed, the less the financial impact.

It’s vital therefore that IT teams address technical issues, however minor, as soon as possible, before they escalate and go on to potentially impacting business performance.

Ideally, this means being aware of problems the precise moment they occur, not after the event when the causes of the issue may be harder to identify and there’ll be an ever growing number of log files to trawl through.

Easier said than done for many financial IT departments however.  Their resources are often already stretched as they try to strike a balance between accommodating evolving regulations such as EMIR or Dodds Frank and addressing traders’unrelenting push for reliability and speed.

This pressure means that even the most diligent systems manager often finds themselves firefighting one problem before moving on to the next. There is little time for any post mortem into why a problem occurred so that the necessary proactive measures can be put in place to avoid a similar instance occurring again.

Monitoring the monitoring

Of course, most firms will have some form of platform monitoring in place, often requiring a sizable team to manage the process it on a daily basis.

While such tools advise when a major problem – such as a complete outage – has occurred, by the time the error message has eventually reached the team or individual who can address it, more often than not, the damage has already been done and the business impacted.  This puts the IT team on the back foot once again as they strive to investigate what’s happened and pull in the appropriate technical experts to address the problem.

Instead, having an early warning trigger that can spot minor issues as they build up can keep  systems managers one step ahead of a potential problem before it becomes a reality.

Generic vs Bespoke

Just as trading platforms such as Calypso, Murex, Misys Summit FT or Front Arena become more sophisticated, so too are the tools required to manage them for optimum performance.

It’s only by having a deep visibility into the inner workings of a platform that a systems manager stands a chance of being able to identify a higher number of technical glitches.  For example, if a system has stopped processing trades, a system manager would want to know when exactly the problem happened and what else is or isn’t working elsewhere in order to help pinpoint the root of the problem and stop a domino effect of downtime occurring.

One option is to have a number of different generic systems in place to cover, for example, log processing, machine and system monitoring.  Although supported with a strong cross industry user base, albeit from beyond the financial services space, seeing a bigger integrated picture can be a challenge.

Investigating problems using out of the box monitoring systems can be a considerable effort however as data from disparate systems and the platforms themselves need to be manually correlated to identify the cause of a problem.As such, many firms underestimate the effort and the associated time needed to manage issues, and in turn, are shocked when they calculate the total cost of ownership for a platform.

Alternatively, bespoke, platform specific monitoring tools can be designed specifically to infiltrate the intricate aspects of a trading system and provide a single, cohesive overview of activity.

They can passively monitor platform performance on a continual basis and automatically notify the support team should a problem arise.  This proactivity can even go a stage further, with different alerts being directed to appropriate teams or individuals for even faster response.

By knowing the domain space well, there is even a potential for such tools to include an element of intelligence, enabling them to not only predict when a problem is potentially pending but suggest what could have caused it.

Additionally, automating platform monitoring in this way can free up those individuals who were previously tasked investigation, enabling them to be redirected to more proactive activities.

Fit for the future

Having great visibility into how a platform is being used can support the broader business beyond trouble shooting, such as providing data on system use and capacity planning for business expansion.   For example, assessing how the number of users logging on may have increased over time or how database use has grown can help with support IT infrastructure investment decisions.

As the reliance on technology and the number of people accessing systems within an organisation continues to expand, the pressure facing IT teams is set to get more intense, particularly as greater interaction and more complex systems bring with them an increased risk of things going wrong.

Being able to predict when a platform is at risk and keeping downtime to a minimum will ultimately create time to focus on running the business, embark on innovative initiatives and move not just the IT department but the entire business forward.

About the authors:

This article is written by Timothy Wiffen and Alistair Milne of Formicary Ltd, an IT consultancy specialising in system integration for the financial services sector. Formicary is a Calypso Business & Service Partner, Murex Business Partner and LCH.CLearnetSwapClear CCP² Certified Partner. Formicary has developed CalMon, a bespoke system monitoring tool for Calypso which centrally monitors the trading platform environments and proactively respond to issues with real-time assessment, helping to reduce system failure and system downtime.

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Cryptocurrencies: the new gold?

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Cryptocurrencies: the new gold? 1

By Gerald Moser, Chief Market Strategist, Barclays Private Bank

Time to add to a portfolio?

There has been a lot of talk about bitcoin, and cryptocurrencies in general, being a “digital” gold. Similar to gold, there is a finite amount, it is not backed by any sovereign and no single-entity controls its production. But for bitcoin to be considered in a portfolio and to become an investable asset, similar to gold, the asset would need to improve the risk/return profile of that portfolio. This seems a tall order.

While it is nigh on impossible to forecast an expected return for bitcoin, its volatility makes the asset almost “uninvestable” from a portfolio perspective. With spikes in volatility that are multiples of that typically experienced by risk assets such as equities or oil, many would probably throw the cryptocurrency out of any portfolio in a typical mean-variance optimisation.

Cryptocurrencies: the new gold? 2

Poor diversifier

And while bitcoin’s correlation measures are relatively supportive, it seems to falter when diversification is most needed, such as during sharp downturns in financial markets. Looking at weekly return correlations since 2016 shows that bitcoin is not strongly correlated with any assets (see below). It is however only second to US high yield in its correlation with equities. US Treasuries, gold and US investment grade were better diversifiers than bitcoin when it comes to equities.

Source: Bloomberg, Barclays Private Bank

Source: Bloomberg, Barclays Private Bank

Furthermore, looking at global equity corrections since 2015 (see below), it is noticeable that bitcoin has performed even worse than equities over the last three corrections. And while gold and fixed income provided some relief during those corrections, bitcoin compounded the loss that investors would have incurred from equities exposure.

Source: Bloomberg, Barclays Private Bank

Source: Bloomberg, Barclays Private Bank

The fact that cryptocurrencies also fluctuate alongside equities suggests that investment in bitcoin is more akin to a bubble phenomenon rather than a rational, long-term investment decision. The performance of the cryptocurrency has been mostly driven by retail investors joining a seemingly unsustainable rally rather than institutional money investing on a long-term basis.

Several studies around market structure have shown that emerging markets with high retail/low institutional participation are more unstable and more likely subject to financial bubbles than mature markets with institutional participation. And while more leading financial houses seem to be taking an interest in cryptocurrencies, the market’s behaviour suggests that the level of institutional involvement is still limited. Another issue is around its concentration: about 2% of bitcoin accounts control 95% of all bitcoins.

In summary, difficulty to forecast return, lack of diversification and high volatility makes it hard to consider bitcoin as a standalone asset in a diversified portfolio for long-term investors.

An inflation hedge?

Another point widely quoted in favour of cryptocurrencies is that they provide an inflation hedge. This might be a valid point, if inflation stems from fiat currency debasement. As mentioned above, a currency’s worth comes from the trust economic agents have in it. If unsustainable amounts of debt and large money creation shatter belief in sovereign-backed currencies through spiralling inflation, cryptocurrencies could be seen as an alternative.

Regardless of its price, bitcoin’s production is set on a precise schedule and cannot be changed. If oil or copper prices go up, there is an incentive to produce more. This is not the case for cryptocurrencies. In a very specific and highly hypothetical scenario of all fiat currency collapsing, this could be positive. But other real assets such as precious metals, inflation-linked bonds or real estate usually provide a hedge against inflation.

Other considerations

Bitcoin’s technology should theoretically make it extremely secure. As there is no intermediary, each transaction is reviewed by a large number of participants which can all certify the transaction. However, there have been frauds and thefts from exchanges. Another point to consider is the risk of “losing” bitcoins. According to the cryptocurrency data firm Chainanalysis, around 20% of the existing 18.5m bitcoins are lost or stranded in wallets, with no mean of being recovered. As there is no intermediary, there is no backup for a lost bitcoin.

From a sustainability point of view, adding cryptocurrencies to a portfolio will make it less green. Mining and exchanging them is highly energy intensive. According to estimates published by Alex de Vries, data scientist at the Dutch Central Bank, the bitcoin mining network possibly consumed as much in 2018 as the electricity consumed by a country like Switzerland. This translates to an average carbon footprint per transaction in the range of 230-360kg of CO2. In comparison, the average carbon footprint of a VISA transaction is 0.4g of CO2.

Beyond energy use, the mining process generates a large amount of electronic waste (e-waste). As mining requires a growing amount of computational power, the study estimates that mining equipment becomes obsolete every 18 months. The study suggests that the bitcoin industry generates an annual amount of e-waste similar to a country like Luxembourg.

Cryptocurrencies are here to stay

Innovation in digital assets continues rapidly and will likely drive increased participation, both from retail and institutional investors. The underlying blockchain technology behind bitcoin was meant to disrupt a few different industries. While results have not lived up to the initial hype, more sectors are investigating the use of the technology.

And with Facebook announcing a stablecoin, or a cryptocurrency pegged to a basket of different fiat currencies, central banks have accelerated the movement towards central bank digital currencies. Those could improve payment systems resilience and facilitate cross-border payments.

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Energy stocks drag down FTSE 100, IG Group slides

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Energy stocks drag down FTSE 100, IG Group slides 3

By Shivani Kumaresan

(Reuters) – London’s FTSE 100 slipped on Thursday, weighed down by falls in energy stocks as oil prices slid after a surprise increase in U.S. crude inventories, while IG Group tumbled on plans to buy U.S. trading platform tastytrade for $1 billion.

The blue-chip FTSE 100 index lost 0.4%, while the domestically focussed mid-cap FTSE 250 index also slid 0.4%.

Energy majors BP and Royal Dutch Shell fell 3.2% and 2.5%, respectively, and were the biggest drags on the FTSE-100 index. [O/R]

“What is holding back the UK is a lack of tech stocks to capture the ‘rotation’ back into tech seen since Netflix results,” said Chris Beauchamp, chief market analyst at IG.

“Stock markets overall are much quieter today, looking so far in vain for a new catalyst for further upside.”

The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy and led to mass layoffs.

British Prime Minister Boris Johnson said it was too early to say when the national coronavirus lockdown in England would end, as daily deaths from COVID-19 reach new highs and hospitals become increasingly stretched.

IG Group tumbled 8.5% after announcing plans to buy tastytrade, venturing into North America after a stellar year for the new breed of retail investment brokerages.

Ibstock jumped 7.3% to the top of the FTSE 250 after the company said fourth-quarter activity benefited from better-than-expected demand for new houses and repairs.

Pets at Home Group Plc rose 2.2% after reporting an 18% jump in third-quarter revenue, boosted by higher demand for its accessories and veterinary services as more people adopted pets during lockdowns.

(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V and Mark Potter)

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Wall Street bounce, upbeat earnings lift European stocks

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Wall Street bounce, upbeat earnings lift European stocks 4

By Amal S and Sruthi Shankar

(Reuters) – European stocks rose on Wednesday after Dutch chip equipment maker ASML and Swiss luxury group Richemont gave encouraging earnings updates, while investors hoped for a large U.S. stimulus plan as Joe Biden was sworn in as president.

The pan-European STOXX 600 index closed 0.7% higher, getting an extra boost as Wall Street marked record highs.

All eyes were on Biden’s inauguration as the 46th U.S. President, with traders betting on a bigger pandemic relief plan and higher infrastructure spending under the new administration to boost the pandemic-stricken economy.

Tech stocks rallied to a two-decade peak in Europe after ASML Holding NV rose 3.0% to all-time highs on better-than-expected quarterly sales and a strong order intake for 2021.

Meanwhile, Richemont rose 2.8%, after posting a 5% increase in quarterly sales as Chinese splashed out on Cartier, its flagship jewellery brand.

Britain’s Burberry jumped 3.9% after it stuck to its full-year goals, saying higher full-price sales would boost annual margins, while Asian demand remained strong.

The pair boosted European luxury goods makers that are heavily reliant on China, with LVMH and Kering gaining between 1% and 3%.

“Any sign that retail spending is picking up in China is going to be a boost to the Western markets and those heavily exposed to it,” said Connor Campbell, financial analyst at SpreadEx.

The European Central Bank is set to meet on Thursday. While no policy changes are expected, the bank could face more questions about an increasingly challenging outlook only a month after it unleashed fresh stimulus to bolster the euro zone economy.

“With the new round of easing measures fully in place and no new forecasts to be presented tomorrow, it should be a fairly uneventful day for the euro,” ING analysts said in a note.

Italy’s FTSE MIB gained 0.9% and lenders rose 1.6% after Prime Minister Giuseppe Conte won a confidence vote in the upper house Senate and averted a government collapse.

Conte narrowly secured the vote on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.

Daimler AG jumped 4.2% after its Mercedes-Benz brand unveiled a new electric compact SUV, the EQA, as part of plans to take on rival Tesla Inc.

Germany’s Hugo Boss added 4.4% after Mike Ashley-led Frasers said it boosted its stake in the company.

(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur and Kirsten Donovan)

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