Measuring Butterfly Effects

Actually living through events makes it difficult to adequately analyze their impact, though. With the financial crisis, we're still figuring out exactly what the after effects have been, years later (although some may argue that we are, in fact, still going through it). While banner milestones such as the Dodd-Frank Act, queues at Northern Rock, and the collapse of various banks are easy to point at, in terms of market structure, the reform is still ongoing, and it touches a lot of subtle strands of market infrastructure.

Holding Breath
For the next issue of Waters, I spoke to a fair few senior executives on the sell side about technology reform at their institutions. All of the conversations were interesting, and some of them startling in their scope and ambition, but some of the more nuanced points came from the exchanges, particularly around clearing capabilities.

Look, there are definite reasons why a lot of exchanges are either acquiring or building out their own clearing operations, and many of them come with a dollar value. Diversification of the revenue stream is so important these days, and so critical, given the vulnerability of traditional business models, that it's no surprise that huge amounts of money are spent just to get hold of particular clearing houses. But classing the trend purely as a money move belies the deeper context behind it, and that context is risk.

Put simply, given regulatory reform and the cost of capital, as well as continued wariness in the market generally, trading is predicated to a large extent on associated risk. That can come from the charges, the collateral, and often, particularly with emerging markets, how assured settlement is. Some institutions, like the Johannesburg Stock Exchange, which I've had a number of conversations with over the last few months, are taking this aspect very seriously, by exploring their clearing options, moving to T+3 and looking at accepting dollar collateral as well as rand. Look for a longer story on this, over the next few days.

Public Perception
Indeed, risk permeates everything now, to the point where it often becomes a primary driver of trading. I'm not saying that risk was discounted before, of course it wasn't. But people seemed to be open to taking risks before, whereas currently, it's about controlling risks. All you need to do is look at the investments in counterparty technologies and methodologies, the expanded use of analytics, the emphasis on collateral management and the ongoing cost of compliance to see what I mean.

I'm not saying that risk was discounted before, of course it wasn't. But people seemed to be open to taking risks before, whereas currently, it's about controlling risks.

It's something that irritates me, when I see newspaper articles that brashly proclaim nothing has changed since the financial crisis. Hasn't it? I'm personally of the opinion that a lot has changed, to the point where comparing the market in terms of structure, operation and regulation─as well as general outlook─today, to what it was six years ago, will give you an unrecognizable reflection. The focus on risk, certainly, is a major contributor to that.

It comes back to what I was saying, originally, about the true effect of historical events being almost impossible to examine as they're unfolding, despite the proclivity of the commentariat to do so (it is, after all, our job). I'm not saying that enough has changed in light of the financial crisis, it probably hasn't. I'm not saying that the long-suffering markets have reacted responsibly in every instance, and they're being harangued despite their best efforts. That's just as immature as saying nothing has changed. But we probably won't see the real outcome of this for a good few years yet, either in terms of an end to the cost that this is bringing, or a realization of the benefits that a new market landscape will bring.

On the subject of historical events, I thought I should probably talk to someone who was actually at Woodstock, as an admittedly lazy form of research. Turns out my father in law was there, but is it deserving of the mythologized status it now has in modern culture?

Apparently not.

As a final aside, too, the nominations period for the American Financial Technology Awards closes on Friday. I know some people hold off because we have the occasional habit of extending these deadlines, but I'm reliably informed that won't be the case here. If you want to enter, you should get them in soon.