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Industry Trends – Larry Tabb at Sifma NY

Main points from a good talk given by Larry Tabb of the Tabb Group last week in New York:

  • The total loss so far from the sub-prime/credit crisis world-wide is around the USD 280 Billion mark – although the final figure could be as high as USD 400 Billion as in some cases the dust has not fully settled.
  • With a few notable exceptions, the majority of these losses have been incurred by the major US banks rather than their European counterparts.
  • The effect of the situation has hit a number of asset classes, the worst by far is fixed income where trading is down by 80% at the moment but it’s coming back. Equities – particularly US – has also been hit pretty hard but again it’s showing resilience and starting to improve
  • In terms of what is going to happen, IT spend is going to decrease from previous levels for a year or to by 10% or so, but is expected to rise after 2010.
  • The only areas where IT spend is expected to rise are communications and risk management.
  • Communications because there is much more activity in emerging markets, particularly Asia (excluding Japan – mainly India, China and HK) and also Latin America. Connectivity is needed to the exchanges within these markets so there will be IT spend to make this happen. Also, there is going to be more algorithmic trading as people try to get more from ever-tighter markets and reduce costs through lower trader headcount and paying less in broker commissions.
  • As manual trading decreases due to algo increases, brokerages may increase their commission rates to compensate and some of them are also going to introduce caps so that clients have to put so much trade traffic through them or else they won’t be interested – thus reducing numbers of clients and streamlining the process. This will force smaller firms to use smaller brokerages, thus splintering the market more.
  • Risk management spend is going to increase because firms want to understand why their models failed w.r.t sub-prime situation and why they didn’t see these huge losses coming earlier. They don’t want it to happen again so they want tighter and better tools as a result.
  • The breakdown by asset class in algo trading is expected to change. At the moment it is largely Equity, but the biggest increases are expected to be derivatives, futures, fixed income (particularly credit), FX and a lot more OTC to make this automated rather than manual to get these exposures off the balance sheets. This obviously means that the exchanges and banks/funds etc. need the software and equipment necessary to do algo trading in these spaces which currently are quite embryonic so there will be a lot of development in this area. Of course, this means algo engines and risk management/portfolio software will need to be much more adept at handling mixed assets and not just equities.
  • All firms, banks and hedge funds, are going to place a lot more of their investments overseas, due to higher expected return and less risk, rather than the US, so all of their systems will need global capability in terms of data acquisition and trading activities, with consolidation and risk management
  • Larry also mentioned that he had been to TradeTech and also one in Asia, both of which he had been involved in panel discussions with all of the Exchange Heads (e.g. LSE) – and when asked what the biggest headaches were they all said that clearing was a massive problem with the process being splintered and disparate and if the trading levels are going to increase this process must be a lot more streamlined.

Last point is very topical in news at the moment given LSE assessing whether to get involved in doing its own clearing, plus also the regulators desire to get some form of clearing in place for major classes of OTC derivatives. 

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https://www.xenomorph.com/wp-content/uploads/2019/07/logo-xeno.png 0 0 Brian Sentance https://www.xenomorph.com/wp-content/uploads/2019/07/logo-xeno.png Brian Sentance2008-06-19 10:25:582019-07-03 10:23:40Industry Trends – Larry Tabb at Sifma NY

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