FT SPECIAL REPORT

FT Trading Room
Tuesday September 16 2014

www.ft.com/reports | @ftreports

Inside

Filling gaps
in the market
Asian institutions
are expanding into
global futures
PAGE 3

Probing the
shadows
Increasing use of
dark pools is
causing concern

Illustrator: James Fryer

Page 4

Exchanges need makeover

to vie with alternative venues
As more trading leaves traditional platforms, regulators are reviewing their strategies, Page 2

March of the
algorithm
Artificial intelligence
techniques threaten
to transform trading
Page 4

Bourses
on the backfoot
Companies are
finding better places
to raise money
Page 7

FT Trading Room

FT Trading Room

Futures look rosy as Asian

banks fill gaps in the market

Fight for transparency Trading equities in the US and to a lesser

extent in Europe is becoming more opaque, writes Philip Stafford

Sense of urgency
underpins fresh
scrutiny of markets

or the past five years, global

policy makers have sought,
with varying degrees of success,toreformtheover-thecounter derivatives market
that they believed had exacerbated
the events of 2008.
Their aim was to make the opaque
$700tn swaps market more transparent, turning it from something that
was largely bilateral and telephonebased into an anonymous, electronic
market.
Yet, in that same period, some
argue trading equities in the US, and
to a lesser extent Europe, has been
steadily becoming less transparent.
Regulation finalised a decade ago
introduced competition and trading
volumes have leaked away from traditional exchanges to rivals or alternative trading venues and so-called
dark pools often run by banks all of
which match buyers and sellers
directly.
Digitisation encouraged more automatic trading by computers and the
speed of deals was soon measured in
milliseconds.
Investors may have had a competitivepricefortheirtradesbutmarkets,
whose cornerstones have been accessibility and transparency of information, could not always easily explain
sudden share movements or runs.
This debate has dominated talk in
the structure industry, an all-encompassing term for the operators of
the worlds markets plumbing and
the users charged with understanding
it to obtain the best deal for their clients.
Even so, few were prepared for the
reaction when Michael Lewis, one of
Americas best-known chroniclers of
financial markets, turned his attention to this world in his latest book,
Flash Boys, published this year.
Mr Lewis depicted a world of highfrequency trading featuring large
investment funds that were unaware
of the revolution taking place around
them. Critics said that Mr Lewiss
book was incomplete and one-sided
but nevertheless, it shot to the top of
the reading charts and brought the

Feeling the pain

Interdealer brokers
Perhaps no sector has felt the
effect of recent changes more
than interdealer brokers.
These middlemen had been
beneficiaries of globalisation, as
banks and large corporations
speculated and hedged risks
with derivatives. Interdealer
brokers were able to shift
illiquid over-the-counter (OTC)
assets such as interest rate,
commodities and foreign
exchange swaps between
buyers and sellers.
The job was tough a
testosterone-fuelled culture
with punishing hours glued to
telephones but brought
handsome rewards.
However, the global
regulatory clean-up of the OTC
market they inhabit has had a
profound effect. Authorities
have sought to make the
process more transparent and
electronic, cutting the need for
brokers and biting into profit
margins.
Interdealer brokers main
customers, the broker-dealers,
are required to deleverage their
balance sheets to meet tougher
capital requirements. Years of
low global interest rates have
curbed investor appetite for
trading and market volatility,
the industrys lifeblood, has
dried up.
These structural challenges
have been supplemented by
scandal. ICAP and RP Martin
have both been fined by UK and
US authorities in the
investigation into rigging Libor.
All this means that tough
decisions are being taken on
jobs and assets and few predict
the upheaval is over yet.
PS

issues to a wider audience. Coincidence or not, within three months,

the SEC had started an in-depth
review of market structure and Eric
Schneiderman, the New York Attorney General, had launched a suit
against Barclays, alleging it had misled investors about the level of highfrequency trading activity in its dark
pool, an allegation that Barclays has
rejected. More banks have since been
drawn into the investigation.
Given the role that regulation
played in creating the situation, regulators are reviewing what sort of market they want and how they want
achieve it.
Our regulatory changes must be
informed by clear-eyed, unbiased,
and fact-based assessments of the
likely impacts positive and negative
on market quality for investors and
issuers, says Mary Jo White, chairwoman of the SEC.
The regulatory review is extensive.
US and UK authorities are also looking at the incentives that brokers and
exchanges use to attract custom, such
aspaymentfororderflow.Yet,regulators and executives are equally aware
that the more prescriptive the regulation, the less relevance it will have to
the public.
Christian Katz, chairman of the
Federation of European Securities
Exchanges, says: Given the challenges that Europe has on many
frontstoday,Ibelievethepolicyissues
that we have to talk about are so complex that it is difficult to discuss them
at length.
Nevertheless, he would welcome
more explicit statements on markets
policy.Forthepersonwhotakesover
from Michel Barnier [head of the
European Commissions markets
division] . . . its a chance to do that. It
makes it clear where were going,
whether the public sign up to that
vision, he adds.
Others are pursuing their own
paths to force change. Upon purchasing the New York Stock Exchange last
November, IntercontinentalExchange announced it would be
slimming down the number of order

Derivatives

Post-crisis regulation has

seen western players focus
on larger global clients,
writes Jeremy Grant

New York Stock Exchange: its

owner plans to slim down the
number of order types Getty

The policy issues we

have to talk about are so
complex it is difficult to
discuss them at length.

types on the Big Board. At the other

end of the scale, IEX Group an innovative start-up that plays a major role
in Mr Lewiss account is about to
apply to become the USs latest
exchange.
The sense of urgency that now
accompanies overseeing the equities
market has thrown the reform of
derivatives markets into sharp focus.
Trading of OTC derivatives in the US
via venues known as swap execution
facilities (Sefs) has begun, but few
have noticed much difference as yet.
Europe is finalising its own rules,
which are not due until 2017. The final
step remains knitting together the
legislation that offers differing
interpretations of the same broad
principles.
The US and Europe remain bogged

down arguing about the fine details

that will allow Europe to recognise
overseas clearing houses as equivalent.
The discussions have been slow and
sometimes tense, but the stakes are
high. Market participants have
warned that the global market could
be broken up.
But hanging over the industry, both
for exchanges and many of their
users, has been a lack of volatility,
which has curbed profits. Banks are
being forced into making tough decisions
Exchanges have been looking
for growth beyond their traditional
role as centres for capital formation
and trading. Some have moved into
risk and balance sheet management
for OTC markets via clearing and

settlement services. For others, it

remains a race to buy unique assets.
In the highest-profile move this
year, the London Stock Exchange
Group agreed to buy Frank Russell,
the US index compiler, in a deal worth
$2.7bn.
Combining it with its FTSE International brand will make the LSE one of
the worlds largest index providers,
especially in the fast-growing
exchange traded funds market.
Exchanges are also eyeing Barclays
Index, Portfolio and Risk Solutions
business, which is up for sale and
could fetch up to $1bn. Billions of dollars of assets in derivatives, structured products and listed funds are
tied to Barclays indices, making them
among the best-known benchmarks
in fixed income markets.

At UOB Plaza, a public space at the

headquarters of Singapores United
Overseas Bank, trading screens were
displayed last month promoting the
ability of the banks bullion and
futures division to offer clients trading on big western derivatives
exchanges.
An executive from the Singapore
office of Eurex, the derivatives arm of
Germanys Deutsche Brse, took to a
podium to explain the benefits of
trading on his exchange. Passers-by
paused to listen and pick up the free
UOB coffee mugs on offer.
So far, so normal for a financial
services company promoting its services to the public. Except UOB has not
been known as a player on the global
futures markets, traditionally dominated by the likes of Deutsche Bank,
Citi, JPMorgan and UBS.
UOB, the Asian city-states thirdlargestbankbyassets,hasbeenramping up its futures business.
In May, it became the first bank in
Asia to obtain membership with
Eurex Clearing, the Frankfurt-based
clearing house operated by Deutsche
Brse. A few days later, UOB joined
CME Groups clearing house, giving it
access for clients to clearing services
on the CMEs benchmark US futures
products in Chicago. That connection
goes live at the end of the year.
The moves are a sign of a wider
trend: Asias regional banks and brokers are expanding into the regional
and global futures business.
Steve Grob, director of strategy
at Fidessa, a UK-listed trading technologycompanythatopenedanoffice
in Singapore this year, says: As the
global banks grapple with tides of

regulation, fines and myriad other

post-crisis issues, local Asian institutions are tooling up and stepping in to
fill the gaps.
UOBs case shows how Singaporean
banks are starting to expand their
derivatives services beyond local currency-denominated products into US
dollar- and euro-denominated derivatives offered on global bourses based
in US and Europe.
By obtaining membership of
Eurexs clearing house, UOB can offer
clearingservicesfortradinginEurexs
flagship Euro Stoxx futures, and in
Bund, Bobl and Schatz German government bond futures. The contracts
are among the most widely traded
futures in the world, along with eurodollar futures on the Chicago Mercantile Exchange.
The Monetary Authority of Singapore, the city-states market regulator, helped get the process moving on
Divingin
Whileglobalbanks
tacklepost-crisis
issues,Asian
institutionsare
busyexpanding

the regulatory front when it decided

in 2012 to allow banks in Singapore to
offer clearing services on Eurex.
But one of the main drivers of the
trend has been western banks pulling
back from servicing medium-sized
clients and local proprietary traders
to focus on global clients. These banks
are dealing with tougher, post-crisis
regulationsuchastheUSDodd-Frank
act, which mandates more transparency and risk management in derivatives markets.
Southeast Asian banks such as
UOBs rivals DBS, Oversea-Chinese
Banking Corporation, CIMB, Maybank and RHB Capital, are also stepping in to provide margin financing as
western banks pull back, in part
becauseofthecostofimpendingBasel
III capital requirements.

That space historically has been

owned by the western players and
now these Asian players are able to
offer their clients good clearing rates
on western exchanges, says Russell
Toop, managing director for Singapore and Hong Kong at Trading Technologies, a US-based rival of Fidessa.
Hepointsoutthatsuchbanksaregenerally well-capitalised.
About 20 per cent of Trading Technologies trading screens have been
sold to clients in Asia, up from almost
none in 2007, when the company
opened its Singapore office.
That mirrors the growth of futures
trading in Asia. According to the USbased Futures Industry Association,
from 2008 to 2013 the trading volume
of derivatives in Asia grew at a compound annual growth rate of 7.8 per
cent to 7.3bn contracts. The region
also accounted for 33.7 per cent of
derivatives contracts traded globally
in 2013.
As Asian banks increased activity,
exchanges in Asia have been upgrading their trading systems, strengthening risk management and clearing
systems, as well as educating local
populations in derivatives trading.
In July, the Philippine Stock
Exchange, one of the fastest growing
bourses in southeast Asia, agreed to
buy a new trading system from Nasdaq OMX as part of an overhaul to
expand into derivatives and allow the
widespread use of short selling.
Two months earlier, the Stock
Exchange of Thailands futures platform launched a derivatives trading
and clearing system allowing multiasset trading, provided by Swedens
Cinnober and KRX, the South Korean
exchange.
Such moves have started to attract
the attention of western exchanges,
including Deutsche Brse, which in
April signed a memorandum of
understanding to facilitate the
development of the securities and
derivatives markets between Thailand and Germany.

Contributors
Vincent Boland
Ireland correspondent
Nicole Bullock
US equities correspondent
Gina Chon
US regulatory correspondent

and former editor of FT Trading Room

Michael Mackenzie
US markets editor
Philip Stafford
Editor, FT Trading Room

Sally Davies
Technology reporter

Emma Boyde
Commissioning editor

Jeremy Grant
Singapore correspondent

Steven Bird
Designer

Andy Mears
Picture editor
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FT Trading Room

Regulators probe shadows

Dark pools Alternative trading systems are causing concern around the world, says Nicole Bullock

ark pools are squarely in

the spotlight. Following
the publication of Flash
,
Boys which claims that
the US equity market is
rigged, scrutiny has intensified.
The fallout from Michael Lewiss
book comes on top of a string of technical snafus in recent years, including
the Flash Crash of 2010. In June, Eric
Schneiderman, the New York State
attorney-general, brought a lawsuit
against Barclays alleging the UK bank
fraudulently misled customers of its
dark pool about the extent of highfrequency trading.
His is the most high-profile stance
yet taken but around the world regulatorshavebeensteadilygrowingconcernedthatthefragmentationofmarkets and move to electronic trading
has created a system they can no
longer adequately oversee.
Alternative Trading System [ATS]
volumes have increased dramatically
to between 35 and 40 per cent of the
[US]market.Thatisraisingquestions
about liquidity and transparency,
especially following the financial crisis, which has caused regulators, market participants and others to be worried about shadowy types of markets, says Charles Whitehead, a law
professor at Cornell Law School.
While the Securities and Exchange
Commission has kicked off a broad
examination of US equity market
structure, it is facing the same issues
that other regulators around the
world have confronted.
Some countries have either introduced or are developing rules that are
both highly prescriptive and more
nuanced to curtail dark pool trading.
The question is to what extent the US,
the worlds largest equity market, will
follow suit.
Hong Kong has proposed restricting access to dark pools to institutional investors and banning retail
investors. Australia and Canada have
taken a more qualitative approach.
They back a system that relies on socalled price improvement, which
means that the dark pool must offer a
better price than on an exchange in
order for the trade to be routed there.
Europes regulators have gone further, agreeing to cap volumes on trading securities in dark pools. They
want to limit dark pool trading to 4
per cent per venue and 8 per cent
across the region per month.
But the incoming rules are controversial. Critics worry how regulators
will collect the data from approximately a dozen platforms and argue
that caps will raise costs for investors
by preventing them from getting the
best prices for their trades.

Eric Schneiderman, New York State attorney-general, is suing Barclays over its stock-trading business AP

Proliferation
Venues have
strayed from
original
purpose

Dark pools are menacingsounding places where

trades are executed away
from an exchange. They
bring both benefits and,
increasingly, risks.
These venues were
founded with the idea of
providing institutional
investors with a way to
trade large blocks of
shares without disrupting
the overall market and, in
turn, achieving less

Dark pools
Market share (%)
Off-Exchange Dark
Market Share

40
30
20
10

Dark Pools as % of
Consolidated Volume

2008 09 10 11 12 13 14
Source: Rosenblatt Securities

In Europe, the restrictions are

pretty significant. There is nothing
else like that in major western markets, says Justin Schack, managing
director at Rosenblatt Securities. US
regulators are focused more broadly
on the conflicts of interest embedded

favourable execution.
Prices are posted only
after the trade has been
done.
Many big investment
banks, such as Credit
Suisse, Barclays and
Goldman Sachs, operate
dark pools.
In the US in July, more
than a third of equity
volume occurred offexchange with about 16
per cent in dark pools,

in what has become a complex market structure over the past two decades. There are 11 exchanges and two
dozen major off-exchange destinations and each has a different rule set
and fee structure.
The Financial Industry Regulatory
Authority in the US this year began
publishing aggregate information on
trading volumes for ATSs. Some dark
venues have also begun to voluntarily
publish details about how they work.
Nevertheless, they represent only
part of the total volume since some
dark pools are unregistered. The SEC
supports expanding the trading volume disclosure to off-exchange market makers and other broker dealers,
as well as making more information
about how dark pools work publicly
available.
But the US regulator has bigger
plans. Dark pools are a big part . . .
but it is also the lit markets, says Mr
Schack. The complexity gives brokers opportunities to route orders

according to Rosenblatt
Securities.
Regulators, market
participants and observers
fear dark pool
proliferation means that
public markets may no
longer show a true picture
of prices. The size of
trades in dark pools has
also dropped, indicating
that in practice, they have
ventured far from their
original purpose.

according to their own economic

interests rather than their clients.
The [SEC] appears to be prioritising
transparency and giving institutional
investors the tools they need to identify and manage these conflicts.
One consequence of the Australian
and Canadian rules is that trading
flow has leaked away from dark pools
to the incumbent exchange. In Canada, only 3 per cent of equity volume
wasexecutedbydarkpoolscompared
with nearly 6 per cent in September
2012, the month before the rules were
introduced. Executives expect a similar outcome when the rules in Europe
are introduced in 2017.
You must balance dark and lit
liquidity, said Larry Tabb, chief executive of Tabb Group. If the markets
become too dark, the price discovery
breaks down and you wind up with a
less efficient marketplace.
Additional reporting by Philip Stafford
in London

TechBeat March of the

algorithms raises issues
Smart, self-teaching algorithms are
taking over from people in homes,
cars and hospitals. Are they going to
do the same to the capital markets?
To an extent the machines have
already won. High-frequency trading
(HFT) has accounted for the majority
of trading on US markets for several
years. But there is a qualitative
difference between statistical
modelling software that is primed to
pick up on market cues to obtain an
edge over rivals, and genuine
machine learning algorithms that
teach themselves tactics.
So-called black-box artificial
intelligence techniques have found
favour in recent years in ecommerce
and recommendation engines. While
they seem to work, the precise
mechanism by which they arrive at
answers is often opaque to human
observers. This could pose a problem
for regulators, experts say, as they
need to be able to pinpoint how a
decision was made and who made it
to apportion legal responsibility.
The question is, are you happy to
have your systems trade on
something you dont understand?
says Donald MacKenzie, a sociologist
at the University of Edinburgh who
studies financial markets. To prove
market manipulation requires
demonstration of intent.
Martin Wheatley, chief executive of
the UKs Financial Conduct Authority
recently acknowledged that this world
of self-improving artificial intelligence
is perhaps closer than we think.
Indeed, profit-constrained HFT,
hedge funds and asset managers are
eyeing smart approaches to gain a
competitive advantage. German
financial technology group GFT, which
works with big global investment
banks, has partnered with Massive
Analytic, a big data start-up, to
develop trading software based on
artificial precognition.
We are looking to build algorithms
that tell you when the next black swan
event will take place, says George
Frangou, Massive Analytics chief
executive. Its about understanding
not just whats likely to happen, but
what could happen.
That approach rests on huge
amounts of data, and global
regulators are preparing to oversee
this brave new world.
Meanwhile, only half the 22 capital
markets firms that responded to a
survey by Aite Group said they had a
so-called big data strategy in place.
Much of the reluctance to talk is
simply competitive caginess, but an
even more fundamental problem,
especially for banks, is that they
cannot use smart algorithms until
they have visibility across all their
trades and exposures.
Sally Davies

FT Trading Room

FT Trading Room

Swaps traders
resist moves to
increase use of
platforms

Shifting global demand for

equities raises concern
Competition

Bourses role as capital

distributors is under
threat, write Nicole Bullock
and Philip Stafford

OTC Investors and brokers still favour voice

method of trading, writes Michael Mackenzie

eforming over-the-counter derivatives remains a

wo r k i n p ro g re s s, a s
investors, banks and
trading venues in the US
come to grips with a new era of transacting swaps.
From a regulatory perspective, the
clearing and reporting of US OTC
derivatives largely meets the G20
objectives established in the wake of
the financial crisis. The US remains
wellaheadofEuropeintermsofwriting swap rules.
Clearing the credit of individual
swap market participants addresses
concerns about systemic risk that
were acutely highlighted by the collapse of Lehman Brothers in 2008
and the rescue of AIG, the US insurer
that had underwritten massive
credit derivative trades that backfired. Allied with the regular reporting of swap trades, regulators now
have a better idea of market risk.
Kevin McPartland, head of market
structure research at Greenwich
Associates, says: We know a great
deal more about what is trading and

at what price, than before. That represents an enormous change for the
swaps market.
In contrast with clearing and
reporting, trading of swaps has
altered little since Swap Execution
Facilities, the new transaction venues, began operating this year.
Instead of one large OTC market
comprising dealers and their clients
transacting across electronic platforms, the structure of trading in the
US remains largely intact. Trading
remains largely voice-based and split
between two sectors;onewheredealers trade with their clients and a separate market where dealers transact
with each other in order to offset
their client business.
This partly reflects the unique

We know a great deal

more about what is
trading and at what
price, than before

nature of OTC swaps and also aggressivelobbyingbytheindustry,asrules

governing the trading of swaps were
fleshed out by the Commodity
Futures Trading Commission in
recent years.
The swaps industry resisted efforts
to make derivatives trading operate
as a single all to all electronic market on a Sef, stressing how a choice of
electronic and voice methods helps
maintain optimal liquidity in OTC
products.
Tod Skarecky, senior vice-president at Clarus Financial Technology,
says the majority of Sef trades
are being done via voice and the
request-for-quote protocol, rather
than using an electronic order book.
Under the Dodd-Frank Act, such
trading protocols are allowed, but
their dominant role means the OTC
swap market has not become more
electronic.
WhileRFQandvoicearemeansof
interstate commerce and hence
allowed, this is certainly not the electronic order book that was envisioned, says Mr Skarecky.

In contrast with expectations that

institutional investors would look at
electronic trading across a range
of new Sefs, the reality so far is that
they prefer asking dealers for quotes
over Bloomberg and Tradeweb,
whose platforms dominate volume.
This reflects a number of factors,
namely how electronic venues tend
to transact small sizes, while big
investors prefer executing large
notional swap trades and maintain-

In touch: big investors

prefer executing large notional
swap trades and maintaining
old relationships, with their
favourite dealers Dreamstime

Interest rate derivatives traded on SEFs

Market share of total notional value from Jul 14-Aug 29 ($bn)
Tullett Prebon

770

Icap
1188

715

Others 110
GFI 100
Tradeweb

439
574

Source: Clarus Financial Technology

BGC

625
Tradition

Bloomberg

ing old relationships with their

favourite dealers.
Keith Bailey, managing director at
Barclays, says trading volumes on
Sefs will grow, as more swap categories become subject to the trading
mandate. But broadly, he says the
introduction of Sefs has not attracted
many new players to the swap market. Some entrants are focused on
electronic execution in order books,
but,asexpected,essentiallythesame
entities trade swaps as did before,
and for the same reasons.
This means that a number of
start-up Sefs face a tough future as
theywaitforinvestorstolookattrading swaps via an electronic order
book.Themorelikelyscenarioisthat
the number of Sefs consolidates.
We will probably see the bigger
venues only look at the new entrants
that have unique technology, says
Mr McPartland.
Since Sef trading officially began
this year, volume and activity data
have revealed the unique nature of
the OTC market in that, unlike
futures, trade sizes are generally

There are signs of cracks developing in the system

Interview
Walt Lukken
Futures Industry Association

The former regulator

tells Gina Chon that
regulations need a
few adjustments

Walt Lukken, president and

chief executive of the
Washington DC-based Futures
Industry Association trade
organisation, is leading the
group at a time of enormous
change in the derivatives
markets. Global regulators have
implemented radical reforms
aimed at boosting transparency
and diminishing risks in the
financial system.
As acting chairman of the US
Commodity Futures Trading
Commission during the 2008

financial crisis, Mr Lukken has

the advantage of being able to
see both the industry and
regulators sides of the
argument.
The Financial Times talked to
Mr Lukken about how the FIA
sees the new world order.
FT: With all the changes that
have come online in just the
past year, what is the state of
play in the industry?
WL: We are at the five-year
mark of the G20

communiqu that suggested

nations should implement
clearing for derivatives and
that ultimately led to DoddFrank [the financial reform
act in the US] and Emir
[European Market
Infrastructure Regulation],
so I think we are at a tipping
point. The question is
whether the cost of clearing is
ultimately going to lead to
fewer clearing members, less
trading in the market place,
so that it becomes less stable.

We saw two clearing firms

decide to throw up their
hands and get out of the
business. Are there going to
be more? My guess is
probably.
FT: Are you worried the
changes may reduce
competition?
WL: You could end up with
fewer firms, fewer exchanges,
more risk going through
fewer pipes. We want a
system that is as diversified
and as mutualised as

possible, so that if an event

happens, it is spread
throughout the system and
the system is safer as a result.
Its too early to tell, but there
are signs that cracks are
developing.
FT: CFTC chairman
Timothy Massad recently
mentioned the need for
tweaks of regulations. Are
there certain things you have
in mind already, or ideas to
help make the rule writing
process more consistent?

Walt Lukken:
battles could
fracture the
markets

larger and sporadic among a smaller

universe of participants.
Interdealer brokers, such as Icap
and BGC, remain the main participants in swaps executed between
dealers, based on weekly volume
data from Clarus.
Under Sef rules, IDBs have to open
their platforms to all types of swap
users, including the traditional clients of dealers. The expansion of IDB
customershaslargelybeenlimitedto
specialised companies, known as
high-frequency traders.
As a result, electronic order book
volume is picking up for standardised swaps in the interdealer market,
which is also very global in nature,
and waiting for derivatives reform
across Europe and Asia.
Alex McDonald, chief executive
officer of the Wholesale Markets
Brokers Association for IDBs in
Europe, says: Our members focus
has been on rolling out Sefs in the
US, and now they are looking at making sure new platforms in regions
suchasEurope,helppoolglobalswap
liquidity.

WL: We are at a juncture

when we can now look at the
rules and find out where
there can be
adjustments.
Lets involve the
industry as a partner
to find out how to
make this work, so
regulators get what
they want but the
system also works
for the participants.
The truth is that the
futures model is not
a perfect

Talkofacrisisinequitiesmayseem
fanciful as Alibaba prepares to
undertake one of the largest initial
public offerings in history.
However, the impending debut of
the Chinese ecommerce company in
New York serves as a reminder that
the financial crisis and its aftermath
have dented the traditional role of
exchanges as a venue for companies
to raise capital and for ordinary savers and investors to participate.
In spite of the S&P 500 reaching
record levels and a sharp rebound of
listings in the US, initial public offerings worldwide have not returned to
pre-crisis peak levels. According to
Dealogic, from January through to
the end of August, there were 795
IPOs worldwide raising $152.5bn.
That marks a notable increase
from the low of 600 IPOs for $115bn
in full year 2009, but remains well
below the nearly 2,000 companies
that listed in 2007, raising more than
$300bn.
Nevertheless, the figures come
with caveats. While the number of
IPOs has picked up, that has been
accompaniedbyariseinsharerepurchases by listed companies, reducing
the overall volumes being created.
What is more, many of the companiesthatarelistingareinthetechnology sector. This is asset-lite compared with industrials that need to
raisemoundsofcapitaltofundplants
and other capital projects.
And while big companies such as

overlay of the swaps model.

Thats where we have run
into problems.
FT: Global co-ordination is
a big source of tensions and
the deadline for the EU to
recognise equivalence for
overseas clearing house rules
is December 15. What are
your biggest worries in terms
of the differences between
the US, the EU and Asia?
WL: The worry is that as
these battles go on between
Europe and the US, it could
somehow fracture the
markets and youll have silos
in each of these
marketplaces. December is
not the real deadline for

Alibaba and Twitter have little problem finding investor support,

exchangeexecutivesandpolicymakers around the world are increasingly
devoting attention to the prospects
for small and medium-sized companies that account for the bulk of listings and economic growth.
The number of domestic companies listed on US exchanges has
halved from the highs of more than
7,000 in the 1990s, according to the
Securities and Exchange Commission.
The decline of new public companies is reducing the growth opportunities for US investors. If the downward trend continues, the strength of
the US equity markets could be compromised, Mary Jo White, chair of
the SEC, noted over the summer.
Declines
Thestrengthof
theUSequity
marketscouldbe
compromised
MaryJoWhite

Exchanges are finding that the role

of capital distributor is under threat
from a host of rivals including banks
offering cheap loans and venture
capital supplying eager investors. In
addition, trends such as crowdsourcing and peer-to-peer lending aim to
harness the internet to bring
together businesses and providers of
capital.
The McKinsey Global Institute has
argued that ageing populations,
growth in alternative investments
andthemovetodefinedcontribution
retirementplansallpointtoashrinking appetite for stocks in developed
countries. At the same time, financial assets are growing more quickly
in emerging economies than in the
developed world, but investors in the

these firms. They are going to

have to start making
significant decisions in the
[autumn] in order to shut off
or reorganise their
businesses. If were deemed
not equivalent in the US, the
capital implications for
European banks are going to
go up exponentially.
FT: Do you see relations
improving among global
regulators since there are
new personalities involved?
WL: I think there is a desire
to improve relations on both
sides. The practical reality is
that nobody can police the
whole global marketplace, so
you have to rely on your

former do not yet have a real taste for

equities. McKinsey has predicted
that the share of global financial
assets in publicly traded equities
could fall from 28 per cent to 22 per
cent by 2020, leaving an equity gap
between investors demands and
companies growth needs.
The desire of retail investors to
hold equities is limited to a number
of Anglo-Saxon countries, says
Susan Lund, a partner at McKinsey
Global Institute. In Europe and the
rest of the world, people do not see
equities as a good investment, but
consider them rather risky. And the
financialcrisis,ifanything, hasmade
people more wary.
The current fashion for funding
may also be fuelled by central banks
monetary policies. Low rates have
meant a very friendly corporate
bond market, allowing companies to
tap cash without having to sell
chunks of equity or going through a
costly registration process.
Hseyin Erkan, chief executive
officer of the World Federation of
Exchanges, comments: While interest rates remain so low, it is easy for
companies to finance themselves
through bank loans, but that is not
sustainable. As countries come out of
recession and inflation starts rising,
that will send companies to the capitalmarkets.Butthereneedtobepolicies tax incentives for institutional
investors to invest in SMEs and
incentives for companies to raise
capital.
Observers are encouraged, for
example, by the US Jobs Act, a law
meant to spur funding for small businesses by easing certain regulations.
The Jobs Act has played a role in the
US markets recovering faster, Mr
Erkan says.
I wish the Europeans would come
up with something like that.

counterparts overseas and

you have to build trust in that
relationship.
FT: How is the Asian
market developing, given all
these changes?
WL: Asia is interesting.
We get obsessed with the
US and Europe, but there
are fascinating things
happening in China and the
rest of Asia.
You have this clearing link
for securities between Hong
Kong and Shanghai. The next
logical step would be
derivatives, so there are great
growth possibilities in Asia.
FT: What are the biggest
things you have on your

agenda for the rest of the

year?
WL: We are looking at
clearing house risk and how
clearing houses are
structured around the world.
Different clearing houses
have different levels of
capital that they put in their
waterfall during a crisis.
There may be ways of
standardising that to make
sure they are incentivised to
manage the clearing house,
just as the clearing members
are on the hook in case of a
default and are incentivised
to ensure their risk
management processes are
sound.

FT Trading Room

Independence crucial to future of ISE

Ireland

The bourse has

shunned alliances
during the wave of
consolidation,
says Vincent Boland

eirdre Somers
likes to keep
things in perspect ive . T h e c h i e f
executive of the
Irish Stock Exchange has been
delving into the 216-year-old
institutions archives and is
struck by the upheaval of the
decade from 1913 to 1923.
It coincided with the first
world war, the Easter Rising of
1916, Irelands war of independence from Britain, the
subsequent civil war, and the
establishment of the Irish Free
State.
Compared with those
storms, she believes, the difficulties the ISE faces today
how to recover from the collapse of the property and
financial sectors in 2008, and
the flight of primary listings by
Irelands biggest companies to
London can be overcome
without too much fuss. Its all
about perseverance, says Ms
Somers, who has been at the
ISE for 19 years and chief executive since 2007.
The ISE is a curious thing
an independent stock market
that shunned alliances during
the wave of consolidation in
the exchange world over the
past15years.Althoughasfaras
the Irish public is concerned it
is an equity market, it is also
the third-biggest European exchange for
debt listings,
behind Luxembourg and Deutsche Brse. Of its
3 1 ,0 0 0 l i s t e d
securities, only
53 are companies.

And it has never been a

monopoly in the Irish market.
We have always had to compete with the London Stock
Exchange, she says.
That need to retain a distinctive profile and product helps
to explain why it remains independent. In 1995, before consolidation began among Europ ean exchange s, the ISE
demerged from London to
become a mutually owned
institution. That arrangement
ended only this year, when it
became a public company
owned by seven shareholders
local brokers.
If there had been a compelling case to demutualise earlier, we would have done so.
But our members did not see it
like that, Ms Somers says.
They may well be right. Brokers in Dublin point to the
emasculation of smaller European exchanges such as Lisbon
and Brussels that became part
of bigger groups.
Independence does not
guarantee the ISEs future.
Despiteitssuccessinbecoming
a hub for bond and fund listing
and trading 70 per cent of its
revenue comes from there it
needs to re-establish itself as
the place Irish companies go to
for equity.
The decline of equity trading
has been stark. In 2007, the
value of shares traded on the
Dublin exchange reached
nearly 200bn. By 2010, it had
sunk to 45bn.
The collapse of the financial
sector hit some of the ISEs biggest companies, including
Allied Irish Banks and Anglo
Irish Bank. It meant the ISEQ
index of Irish shares did not
have a banking component
large enough to attract
investors to the market.
In 2011, building
materials group CRH
shifted its primary listing to London, followed
by Greencore (foods),
UDG Healthcare, Grafton
(building materials)
andDCC(adistribution conglomerate).
Brokers in
Dublin insist the
loss is more symbolic than real.
Much of the trading in those stocks is
still done in Dublin,

Deirdre Somers:
Its all about
perseverance

they say, and the share of the

Irish equity market owned by
global investors has risen
sharply in the past few years.
They insist a recovery is in
sight. Share trading volumes
rebounded in 2013 to 57bn; in

the first half of this year they

reached 32bn. There have
been eight initial public offerings since the start of last year,
compared with none in 2010.
And the banking sector has
been stabilised, with govern-

ment ministers keen to reprivatise Allied Irish Banks.

Ms Somers says that staying
independent is crucial to the
ISEs future.
When the history of European consolidation is written,

it will show the consequences

for small economies have not
been favourable, she says.
Our incentive is to keep the
brand of the Irish market alive.
If you lose the ISE, you lose that
incentive.