Shining light on the thinking at BlackRock

It’s clear that there’s more than a little chutzpah behind BlackRock’s demand for tougher regulatory oversight of robo advisors. This post probes the thinking behind it.

Does BlackRock, with FutureAdvisor in hand, want to shut the door on new robo entrants? A desire to forestall such competition would suggest a level of fear that I do not think exists. (Among other things, the robo narrative has moved past the independent or 1.0 stage). BlackRock’s main concern seems to be that the sloppy hands of existing competitors might result in regulatory sanction on everyone, and so put the hegemony enjoyed by BlackRock and its asset manager competitors at risk.

Neither faster, nor better, nor cheaper

While BlackRock may have paid $150 million for FutureAdvisor, I don’t think the firm believes it owns a better mousetrap. FutureAdvisor may have an innovative glide path feature (which may explain why FutureAdvisor has an older clientele than its robo competitors), but tax loss harvesting, 401(k) advice, “try before you buy” functionality and other core capabilities have become table stakes in robo world. If anything, BlackRock may believe that its proprietary ETFs (characterized by low tracking error and a broad product base, e.g., Japanese fixed income) outshine the plain vanilla offerings of Schwab and Vanguard, although this argument is undercut somewhat by the firm’s recent decision to drop fees.

Asset managers in the catbird seat  

Like the ETF business, robo advisory services have become increasingly commoditized, even as the DoL conflict of interest rule presents a massive tailwind for both. It’s a tricky time for asset managers seeking to shift their offer from manufactured product to advice based solutions.  BlackRock appears to feel it is in the catbird seat, and is perfectly happy to secure its hand and that of its asset manager competitors, all of whom have done well by automating their investments platforms. I’m not saying there’s collusion here, just a noteworthy confluence of interests.  

I’ll talk about the motivations behind the launch of another asset manager-backed robo in my next post.

MiFID II, multi-asset trading among key themes at Fixed Income Leaders Summit

Several key themes emerged from the sessions at the Fixed Income Leaders Summit last week in Barcelona. Below are the two of the major themes: Regulation – MiFIR/MiFID II dominated the agenda Following last month’s RTS release, most people wanted details on the impact to their business, likelihood of changes to the ESMA document and if there will be a push back to the January 2017 start.
  • While European sell side and large buy side have been engaged in varying degrees with the process, US firms and smaller European buy side firms are still not clear that Europe is boiling the ocean with MiFIR/MiFID II.
  • It was clear that buy side preparation for engaging with the evolving execution space OTF/MTS/RM and SI is extremely low. And of course, the reasons are clear—there is a fundamental lack of clarity on expectations to operate in the new regime as well as the actual timing when these requirements will be manifest.
  • While the debate to finalize and accept the RTS proposal from ESMA occurs, there is tremendous confusion on final requirements. Without a delay to the January 2017 implementation, the longer the debate, potentially the less time firms will have to prepare and implement to the final required state.
  • The top concern that the buy side had was the fear that their traditional market making liquidity providers will exit the credit and rates markets and the liquidity from alternative providers,and in platforms, will not be sufficient to satisfy their trading needs.
Multi-Asset Trading Most buy side firms are looking to leverage the best tools that exist from other asset classes into their daily workflows in fixed income products. While all were cognizant of the deep differences between equities, FX and the fixed income universe, the buy side was engaged in discussions on the details of the regulatory, market structure, liquidity, and technology challenges; and clearly were looking for multi-asset solutions for fixed income connectivity, analysis and TCA.
  • Firms were deeply engaged in discussions that shed light on the process that other asset classes went through, and how that process played out. There is a great deal of trying to understand the context of the MiFIR/MiFID II change with lessons from other recent regulatory changes. There was a strong desire to understand the implications of Regulation NMS on US equities and the respective market structure, fragmentation and technology implications. Likewise, MiFID I and the SEF rules in the US and the move to centrally cleared swaps and derivatives in the US was another area that was discussed to glean lessons for changes that might come to Europe.
  • Europe is boiling the ocean in fixed income with MiFID II and firms are trying to understand the myriad changes, the timing of change, and the many complicated means of judging the type of rules that will apply in government and corporate bonds.

MiFID II on the minds of fixed income leaders

I am getting excited about participating and speaking at the Fixed Income Leaders Summit in Barcelona, Spain this week.  The timing could not be better; the fixed income world is grappling  with the challenges of an evolving market structure, innovation and technology, all within the context of a recently delivered regulatory MiFID II/MiFIR proposal. I am looking forward to hashing out the most pressing challenges facing the market, with the best and brightest leaders from all corners of the fixed income world. In advance of the conference, the European Fixed Income Industry Benchmarking Survey 2015, surveyed 50 senior buy side leaders to get a sense of their focus. The primary challenges  identified, include: the evolving center of gravity in the relationship between the buy side and sell side; digesting and understanding the regulatory framework and MiFID II guidelines: and, engaging with the changing landscape of sourcing data and electronic trading. Celent is very focused on the evolution of the fixed income business within the context of evolving market models, data aggregation/analysis and regulation.  We continue to discuss these topics in our ongoing research. I am especially eager to participate in discussions  around requirements for quoting and new reporting requirements that will impact the buy side. I will also be discussing the evolution of trading tools and electronic trading-looking at the landscape of trading platforms, new analytical tools for accessing liquidity access, and creating a holistic approach with engaging with the market across products. I look forward to catching up on all these topics. Please come by and see my session on market structure and electronic trading tools at 11:45 on Thursday in lovely Barcelona.

MiFID II and you – here before you know it

A brief review indicates that ESMA has given more clarity on its view of fixed income trading in the post-MiFID II world. We are now one step closer to a new world of secondary trading in European bonds. In the context of the heated debate around liquidity in fixed income recently ESMA has moved to an approach that looks at each bond to determine the liquidity thresholds and hence the exact nature of the required pre- and post-trading transparency. ESMA will be looking at 100,000 Euro thresholds with at least two trades occurring daily in at least 80% of trading sessions. Hence, a certain proportion of European bonds will become subject to a wholly new regime of trading-scheduled for January 2017 if there are not additional delays to the start of MiFID II. Bringing a new level of transparency to the pre- and post-trading of fixed income products, in conjunction with the myriad other touch points of MiFID II, will stretch the resources of most financial market participants. While firms have been preparing for some time, there are different degrees of readiness.  For most firms,  the next year will be huge effort, to get ready for this new trading regime.

Celent roundtable in Zurich: Swiss banking plus a dash of fintech

Audience Swiss banking may be at a crossroads, but the Celent Swiss Banking 2025 roundtable in Zurich revealed decided optimism among participants. The 15 attendees ranged from senior representatives of global and Swiss banks to the heads of advisory firms and leaders of the Swiss and German stock exchanges. A consensus view was that the increased use of digital technology will help Swiss banking reconcile traditional values of stability and discretion with the need for transparency and scale. While the industry faces ongoing regulatory and compliance demands as well as overcapacity issues, automation offers a way to counteract the inevitable compression of fee structures. Several robo advisory vehicles are already up and running in Switzerland, with even the most traditional firms seeking to rationalize their service models. The private, invitation-only event was part of a series of targeted roundtables offered by Celent’s Securities & Investments Practice, such as a session delivered last year in London. The success of the inaugural Zurich event speaks to future sessions in Switzerland and elsewhere in Europe designed to provide thought leadership and engage senior level audiences around key issues. “Events like these offer a forum for thought leadership that seldom can be replicated elsewhere,” said Research Director Brad Bailey, who led a lively discussion around liquidity in capital markets.

Swiss Banking 2025: getting to tomorrow

What will the Swiss Capital Markets look like in a decade from now-in 2025? As private banking and wealth management digest the many changes in the post-crisis financial world what will be the implications on sourcing financial products and liquidity? We have already seen new business models reacting to these new pressures. At our next client roundtable this September 22 in Zurich, the Celent wealth management and capital markets teams will look at opportunities for innovation in the face of regulatory and economic pressures, including the pressures on flow businesses that support a variety of clients, operational forces driving automation and the hunt for liquidity in capital markets. Topics such as competition from emerging offshore hubs such as Singapore will be discussed as well. Joining us for a lively and interactive discussion will be strategy, technology and innovation leaders from European banks, brokerages and other financial institutions. This will be a great opportunity to hear the views of numerous financial service leaders in a private setting. While space for the roundtable is limited, I’d welcome hearing from individuals interested in the topics above and/or potentially attending.

Swiss Banking 2025: The Mountains Are Not Moving, but the Walls Are Coming Down

What will Swiss Private Banking look like 10 years from now? As the business reorients itself from secrecy toward transparency, can it remain true to core principles of discretion and personalized service? At our next client roundtable this September 22 in Zurich, Celent will look at opportunities for innovation in the face of regulatory and economic pressures, including competition from emerging offshore hubs such as Singapore. Operational forces driving automation and the hunt for liquidity in capital markets will be discussed as well. Joining us for a lively and interactive discussion will be strategy, technology and innovation leaders from European banks, brokerages and other financial institutions. While space for the roundtable is limited, I’d welcome hearing from individuals interested in the topics above and/or potentially attending.

Fixed income markets and ‘self-trading’

The interesting insights from a recent regulatory report into the operation of the US fixed income market on October 15 2014 continue to intrigue observers and raise important questions about how the market trades. A remarkable point referred to the high proportion of ‘self-trading’ between mainly prop traders’ own automated systems. This was 14.9% for the 10-year cash Treasuries and 11.5% for the futures equivalent. While this might not have been the leading reason for the high levels of volatility on that day, it is certainly an attribute that requires careful attention. Logically speaking, such self-trading can lead to artificial market levels and prices that are quite different from what they would be without high levels of self-trading. Price volatility can also be affected by high proportion of self-trading. Prop traders often have several independent algorithms running in the market and therefore are more liable to be affected by this phenomenon. The regulators’ report also noted how other participants such as banks and hedge funds did not have much self-trading. While the jury is still out on the undesirable effects of self-trading, and how responsible it was for any price swings, we can agree that it cannot really be desirable for the markets. Some exchanges and trading firms have already taken steps to curb such trading, but it is important that the firms that are more susceptible to undertake such trades try to stamp them out on their own, even if it means slowing their trading a little for the sake of reducing lower systemic risk overall.

Regulating HFT in US Fixed Income markets

The recent report by the US regulators on the high levels of volatility in US treasury market on October 15 last year has raised almost as many questions as it has answered, not necessarily because it is controversial, but because this is an area that required greater attention from both regulators and market participants. This report can be seen as a part of an on-going process in the industry to improve its capabilities to handle the advanced technology being used for trading today. One of the recommendations of the report was to have new registration requirements for automated traders. In a market where most leading participants and new tech-savvy entrants are using advanced high frequency trading technology, mere registration would not deter or suffice. The emphasis should be on revamping the risk management protocols and the regulators’ risk management and surveillance systems. The regulators also touch upon these issues in their report when they stress that there were a number of factors at play in the wild swing on October 15. Hence, it is important to focus on this aspect than create deterrents for new or innovative market participants.

Looking beyond ‘Bondification’

There has been an interesting article in the Financial Times by John Authers on the ‘bondification” of the equity markets, namely the tendency for fund managers to invest in good dividends, low debt and high return on equity. Some of the causes of this phenomenon include the low interest rate regime in many of the mature markets such as the US and the tendency for high risk aversion after the financial crisis. Authers also quotes a move away from traditional finance theory as comparing returns with the risk-free rate does not always work given the issues in defining what a risk-free rate is in the current fixed income market landscape. He also mentions issues fund managers have with risk diversification since it did not seem to work in the financial crisis for commodities or emerging market equities. The author concludes by saying that the bondification of risk might not necessarily be desirable in the long run. I agree broadly with the conclusions of the author but would also like to point out some relevant issues in this context. The first is that the low interest rate environment will not stay forever, hence the market is going to move away from the tendency for bondification and this would benefit both fixed income and equity markets. The fixed income markets would see more activity and the equity markets would be able to get out of the constraints that bondification places on it, including investment into mainly blue chip stocks which would be popular anyway and away from less established or riskier stocks of smaller firms. The second issue is regarding the falling relevance of the investment models, namely the use of the risk-free rate and falling tendency for risk diversification. Just because there was a financial crisis does not mean that financial theory or models become less relevant. The issue was less with the models and more with the practice and issues in the economic, business and political environment. The use of a risk-free rate might still be of relevance, it might just have to be calculated more carefully and using a set of return indicators instead of certain benchmark bonds. Similarly, risk diversification is still as relevant as it was before the crisis. With the lessons from the crisis, our approach can become more sophisticated and complex, but we cannot stop using diversification just because it might have failed in the financial crisis, which was (hopefully) a once in a lifetime phenomenon. It should work as long as there is no crisis of similar proportions.