Our mates acquire a sponge

There has been lots of childish humour in the MPI office today (okay mostly from me) with the news that our long time mates at Kurtosys have acquired a Sponge (more precisely a company called GetSponge) but the more serious message is that our smart chums from Wimbledon have spotted the convergence in financial services of information and access with social media. The days when clients just expected a one way flow of rigidly pre-packed information are fast disappearing. There is increasing emphasis on interaction and flexibility as a way of both providing better customer service and improving brand image in an increasingly web and digitally driven age.

Efficient but not necessarily effective

It was entertaining to listen to a less than serious conversation between two ‘lean efficiency’ experts at a client the other day, discussing how more efficient their bank call centre could be if they could only enrol customers with short names. By only having short names, this allowed the opening conversations between caller and operator to be shorter and would require fewer key strokes, and shorter calls means more efficient and cheaper call centres.

They came up with some inventive ways of imposing this short name policy such as offering only 10 character long fields for entering the clients name when setting up an account. However, they did not come up with a solution for the commercial issue that customer profitability is in no way related to the length of someones name. However, this conversation playfully illustrated that true business effectiveness and pure technical efficiency do not always work together, and that the use of the clipboard, stopwatch and generic process consulting without a strong understanding of the underlying business is unlikely to yield the right results.

Anti Gun Jumping

This has become my favourite regulatory term this month, as it conjours up images of a bizarre game of chance popular with pirates in a particular part of the Caribean, or some antipodean niche extreme sport, rather than its more mundane actual meaning which can be found here.

Required holiday reading

The European summer holiday season is fast approaching, and I thought it might be interesting to playfully speculate on the holiday reading that our hard pressed, and often misunderstood financial regulators might take with them to the beach. For example, I suspect that at least one will be taking a copy of the Vickers report with recommendations for the breakup of the major UK banks, but wittily concealed in the cover of the Star Wars script for the Empire Strikes Back; or potentially they may select the outline text for MiFID II – aka Second Time Lucky – a personal favourite of mine having devoted 8 months of my life to implementing its predecessor. Well no, I think this summer’s regulatory blockbuster has to be Basel III, building on the success of its previous incarnations and bringing back that favourite Capital Tiers family of characters, but this time even bigger and better. For its tag line, we might paraphrase a recent film series to give “Basel – not very fast, but definitely furious !”

A Quiet Revolution?

Despite being an increasingly virtual world, we are not totally isolated from information in a physical rather than digital format. These physical sources can often be connected to significant opportunities, and consequently we all still value the ubiquitous business card, insightful magazine article and omnipresent printed web address.  However, to use this information we typically need to translate it to digital form which can be a surprisingly significant hurdle with a mis-remembered phone number, badly noted web address or lost business card leading to a missed connection or a lost contact. There is more than enough to do in our increasingly pressured business lives so the information needs to be captured quickly and there are fewer and fewer quiet times to allow us to catch up. Digital advocates will point to the smartphone as the solution but the small keyboards and screens are not suited to accurate data entry.

So enter the QR code – our Quiet Revolutionary of the title (ok, so QR is actually an abbreviation for Quick Response but lets not dwell on its technical rather marketing origins. There is also the DataMatrix standard used in the US) which is a square, graphical, machine readable codes that allows the storage of up to 4,000 characters more than enough for a website address (the code displayed here is a link to my website), business card details or indeed an appointment or event details. These QR codes are gradually gaining traction and increased usage and can now be read into our desired digital form by many smartphones.

So by putting both the human and standard machine readable version of key information on your collateral (can be done quickly and simply e.g. by putting a sticker with the QR or DataMatrix version of your contact details on the back of your business card or include a relevant website address on the cover of your next document – say the link to a more detailed or more regularly updated web page) you can join the quiet revolution and also benefit from being easier to do business with, in an increasingly competitive age.

The Dance of the Exchanges continues

Competition hots up to find the perfect partner in the global Dance of the Exchanges, but just as in many parts of life the path is never totally smooth, as the London Stock Exchange (LSE) found out this month with the intervention of national Canadian interests opposing their proposed takeover of the Toronto and Montreal Stock Exchanges (TMX). Other exchange have seen similar problems for example, Singapore’s SGX was prevented from taking Australia’s ASX exchange due to national interests, and the Deutsche Boerse – NYSE Euronext deal will face a rigorous European competition review before it can progress, even though it appears to have dodged a break up bid from other rival exchanges. So will we see true super-regional combinations of the more traditional exchanges or will they founder due to entrenched nationalistic and political interests? If so, it is unlikely to stop the formation of wider exchange capabilities to better support global trading but it will leave this field open to the newer types of exchanges such as BATS who are less constrained by geographic ties.

My Pet Dog can live on a Cloud, but my Bank cannot – discuss

It may sound like one of those tricky university exam questions, but it is an attempt to highlight the issues that financial services have in using the latest technology trend of Cloud Computing. With industry commentators calling 2011 the year of the Cloud this approach to computing is taking over many aspects of our technology life, but it appears that banking is not currently making full use of these techniques.

For example, whilst I may be happy to store some pictures of my pet dog on a cloud service that I have never heard of before, neither I, nor any regulator, would expect my bank to use the same service to store my bank statements. It is not just because of security concerns. It is possible to build tighter security into Cloud systems, and indeed banks have already had to tackle similar issues with their Internet Banking offerings. No rather one of the key advantages of Cloud is ability of a third party to offer the service and this is one of the key issues for banks. These emerging third parties are often start-up technology companies who do not have the track record that banks (and their regulators) require. Some third party Cloud offerings do exist and have banks using them (e.g. MPI partner firms Cogent for commission management, and Kurtosys for client reporting), but these are still relatively niche. What is required, I believe, is a set of third party providers for wider financial Cloud services, who have a sufficiently market wide presence and profile, plus a dependable track record and an ability to offer not just a niche but a wider mix of services for banks.

Pecking Order of Exchanges

We talked in last month’s FS Bulletin about the several major exchange mergers underway. Well despite the breaking of the monopoly of national stock exchanges under MiFID some years ago and the resulting creation of competing Multilateral Trading Facilities (MTFs), there is still apparently a pecking order for exchanges/MTFs serving the same geography. This was illustrated by the impact of the recent trading systems glitch at the London Stock Exchange (LSE) and that MTFs such as Chi-X and BATS Europe were not able to fully capitalise on their competitors problems. The LSE had a technical malfunction which closed it for all of the morning of Friday 25th February (see Bloomberg for more details) but despite their volumes being slightly increased, the competing MTFs did not see the full volume that would have been expected on the LSE to trade on their alternative platforms. Some commentators suggested that it was the timing of the failure at the beginning of the day that meant that the lack of an opening reference LSE price for stocks led to the low level of additional alternative platform trading. Whatever the specific explanation, it is clear that despite the major gains made by Chi-X and BATS in recent years they are still not full replacements for the LSE as yet.

The growing role and importance of High Frequency Trading

Regular readers of this blog or the companion Bulletin will remember that I have touched on the topic of High Frequency Trading and its importance to capital markets several times over recent months. High Frequency Traders look to trade more efficiently and profitably by employing techniques that depend on the ability for frequent trading through rapid market links. To perform this function the larger traders make extensive use of complex algorithms to calculate what, and when, to buy or sell, and employ the latest technology to shave a few microseconds off the time it takes them to trade. HFT has been controversial with some commentators and regulators who cite it as an unhealthy market practice. However, the evidence is that the role of HFT is more complex. For example as we reported in October last year the reports on May’s US market ‘Flash Crash’ highlight the complex interactions and different roles of the market players, from stock exchanges to trading firms. For example, the US federal regulators report gave mixed messages for high-frequency/algorithmic traders who seemed to have initially had a positive or stabilising impact in absorbing the selling pressure, but then came in for criticism when several chose to withdraw from the market as it became obvious as to the seriousness of the ‘Flash Crash’.

Whatever the exact role of HFT, its importance is now unmissable. A TABB Research study amongst US buy side equity managers that highlighted HFT as the main market structure and regulatory issue. In the UK, TABB found that 77% of the flow in lit markets and order books can be categorised as HFT and according to TABB “this highlights why investors seek alternative execution strategies to achieve best execution.”

So it is no great surprise then that the UK government launched a study into HFT this month, although the appointment of Dame Clara Furse, the former CEO of the London Stock Exchange (LSE) to lead it, may lead some to think it may have some bias towards established exchanges.

The changing face of UK personal finance regulation

At the same time as the FSA is facing its own significant organisational change by being split, it is looking to introduce a radical change in personal finance regulation known as the Retail Distribution Review (RDR). In their own explanation of what RDR is all about, the FSA state “We have used the RDR to address the root causes of some long-term problems with how the market operates, and at the same time to prepare the market for the future.” However, the specific measures proposed to achieve this laudable objective have not drawn universal agreement, with less than half of authorised firms saying they welcome the initiative. The RDR changes are due to involve a move away from product commissions to direct fees as well as changes to training and accreditation and an onerous CPD requirement.

Whilst there is still time (implementation of RDR is due by January 2013) for potential changes to the regulation and for firms to prepare for this major shift in regulation, the high cost of qualifying together with higher payments to the industry compensation scheme suggests that it is likely that smaller independent financial advisers (IFA’s) may be disproportionately impacted and that as many as 3,000 IFAs will give up altogether. Even Barclays are axing 1,000 jobs in retail branches where financial planning services will no longer be offered due the high cost of RDR implementation. There are also concerns about the interaction in the increasingly complex regulatory landscape between this UK regulation and EU measures such as “passporting” and MiFID, so it may take the FSA a little longer than it expects to prepare the market for the future.