Month: September 2015

Mobile banking goes from strength to strength

Posted on by Ashton Wenborn

The American public was introduced to the idea of all-hours banking when in the late 1960s pioneers from across the Atlantic brought the concept of the ATM to US shores. Put forward as a remedy to the issue of after-hours trading, or lack thereof, the automation of certain processes boosted productivity for early adopters and rendered certain posts redundant. For the first time, customers could conduct their financial dealings at any hour of their choosing in places apart from their local branch, and it was from here onwards that banking became accessible even to the farthest reaches of the US.

If ATMs changed banking for the better, then the internet has transformed it for good, bringing with it new and novel new ways of engaging with customers. All encompassing, multi-functional channels have altered the landscape, and developments in the years since mean that almost the entire spectrum of financial services is never more than a few clicks away. Long gone are the days when any person wanting to make a transaction had to abide by branch opening times, and mobile technology is today the latest technological innovation to revolutionise the American banking and payments industry.

Long gone are the days when any person wanting to make a transaction had to abide by branch
opening times

Mobile banking comes good
One study conducted by the Federal Reserve last December showed that in 2014, 91 percent of the adult US population used a mobile phone for mobile banking and payments (see Fig. 1 and 2). The penetration of mobile banking applications, meanwhile, has reached never seen before heights, and, going by Statistica figures, reached upwards of 42 percent in 2014, with 13.5 percent of Americans testament to having ‘often’ used mobile banking apps.

Experts have dubbed each of the last five years the ‘year of the mobile’, and those at the sharp end of financial services have been quick to make good on a mobile money revolution. Whether it be shopping, budgeting or banking, the ubiquity of mobile technology means that each of these activities is within easy reach. Demand for mobile payments is projected to tip $214bn within three years, according to PwC, and although American consumers are often slow to switch accounts, mobile banking is a key point of differentiation in what remains a hyper competitive market.

No matter the specifics, what’s true is that the way Americans make purchasing decisions has changed immeasurably. While much of the focus so far has fallen on mobile growth in developing nations, in a period where convenience is of the essence, American banks can ill afford to let the mobile opportunity pass them by. Research on the subject proves that m-banking has come a long way of late, although the reasons that keep the remaining 57.2 percent of the population from mobile banking – according to Statistica – must now take centre stage in order to realise its potential.

“The threat to banks from disintermediation or being disenfranchised is real as other players experiment with and create new channel distribution opportunities”, said Alastair Lukies, CEO and co-founder of Monetise in a Bank Performance Advisors report titled Perspectives and Research on Mobile Banking. “Previously, the branch, online bank, ATM or call centre were an easily controlled portfolio of supply chains managed by a bank as it connected directly to its consumer. This is no longer the case – at its core, banking is in flux.”

M-banking outside of banking
Sources at Gartner say that the global market for mobile payments will rack up $720bn in transactions by the time 2017 is up, from $235bn in 2013, and the US reigns currently as the choice destination for the sector’s leading names. American start-up Square, alongside the likes of Google, PayPal and Visa, have each devised their own mobile payment solutions, with a view to clawing a sizeable share of the market early on. Yet doing so is not without its challenges, and initial signs show that millions of consumers are still unwilling to use their mobile in place of plastic.

The emergence of Apple Pay late last year proves that those in industries apart from banking are intent on conquering the mobile payments space. Less than a year into its lifespan, the mobile payment system has been talked up time-and-again by Apple execs, and despite problems with regards to adoption, the digital wallet is fast gaining momentum.

All this serves as a timely reminder for banks that their hold over mobile payments is far from watertight, and for as long as they fail to address commonly held concerns or push the envelope, competitors – much like Apple – will pick up the slack. The issue is not that banking has been slow to muscle in on mobile, but rather that competitors have more clearly identified the issues troubling consumers.

Whereas competing services such as TransferWise, Simple and Square are singularly committed to mobile payments, mobile banking is only one part of a much wider spectrum of services. As a result, where the aforementioned have taken pains to put security front and centre, banks have by-and-large failed to address these same concerns with quite the same clarity – yet they should.

“Since significantly more data is easily accessible to a compromised mobile device, social engineering is becoming an increasingly sharp tool for cybercriminals to take control of mobile devices. As a result, financial institutions risk increased fraud in their mobile channel, and mobile users risk identity theft”, said Ken Jacobi, Senior Product Marketing Manager at security firm Webroot.

According to a recent study conducted by cognitive biometrics firm BioCatch, 61 percent of a 600-person sample indicated that hacking was their number one concern when it came to online and mobile banking. Likewise, 66 percent of respondents in a Capital One survey cited security challenges as the number one issue standing in the way of increased adoption, whereas the Federal Reserve showed that 59 percent of Americans shared concerns about security.

Irrespective of which study is most accurate, what’s clear is that the issue of security is standing in the way of adoption, and for as long as those in the banking community refuse to take further steps to arrest these fears, m-banking will stop short of its potential. With 93 percent of the unbanked population with access to a mobile phone, and almost three quarters of those internet-enabled, the profits lost – should banks decide not to act – could well number in the billions of dollars.

One IOActive study shows that of 40 banking apps taken from the world’s leading 60 banks, nine out of 10 had serious security vulnerabilities. The firm’s Senior Security Consultant Ariel Sanchez also found that, of the sample, 70 percent were without alternative authentication solutions and half used iOS’ UIWebView in an insecure manner.

“In general terms, I think the biggest security threats are related with ‘transport security’ of the mobile banking apps”, said Sanchez. “Vulnerabilities like plain text connections [non-SSL links], lack of SSL pinning protection and poor security of authentication processes are the biggest problems, since these allow an attacker to perform different kind of attacks like MiTM [Man in The Middle], phishing and client side injects that could potentially compromise the contents of user sessions including passwords, session identifiers, and any information exchanged between the server and its clients.”

All this means there are real and growing opportunities for technology firms, as banks look to partner with the best names in the business to bring innovations such as fingerprint and voice recognition technology to market. As far back as 2004, Bank of America trialled biometric security systems in select branches, and the introduction of similar such technologies to mobile represents something of logical next step for an industry in the midst of revolutionary change.

How to put it right
Mobile malware, susceptible Wi-Fi connections, third-party apps and unscrupulous user behaviour each threaten to compromise security, yet the scale of the issues are often misunderstood or misstated by consumers. The real problem for banks is not inadequate security in itself, but the perception that m-banking apps are without the requisite defences to keep private information confidential.

True, security is a concern for the banking public, though no more so than usability. Biometric technologies are as much about improving convenience as they are security, and it is for the former reason rather than the latter that many in the banking sector are looking to introduce measures that make mobile banking both safer and more immediately accessible.

“I think that there should be more discussion on usability vs security. And banks should also try to find a good balance between both”, said Sanchez. “The key is understanding that security is a business issue rather than an IT issue, because the risk of launching new mobile apps and services without very good security standards could result in a huge data security breach, which directly impacts the financial sector.”

Jacobi added: “Realistically, there is always going to be a balance between usability of mobile apps and security. Financial institutions have tended not to restrict account holder access, even from infected devices, to benefit from the satisfaction and loyalty that mobile banking fosters.”

The aim for those in the US banking sector, after all, is to bring more users to the fold. Security certainly factors into the equation when it comes to engaging with mobile banking, yet it is usability not safety that brings users to select one mobile app over another. With interpretations on the issue already skewed by a lopsided debate on the subject, the sector’s focus will continue to fall first on convenience and second on keeping confidential information secure.

Italy’s economy finally on the up thanks to EU deal

Posted on by Ashton Wenborn

Prime Minister Matteo Renzi has declared that “Italy is on the mend,” following a win with the EU Commission on more flexible deficit rules. The deal has secured an additional €17bn from the EU, which will contribute to spending and tax cuts that are planned for 2016.

“I say it without any problem and based on the figures: Italy has turned the corner. Full stop.” Renzi told daily newspaper, Il Foglio. “The economy is taking off and spending is growing. Something is changing.”

So far this year, Italy’s economy has shown indications that it is indeed on the path to recovery

Having greater tractability with the deficit rules will allow Italy manoeuvrability of approximately one percent of its GDP. Around €4bn of this will be spent on abolishing the widely unpopular tax on primary residences in 2016, which has already won the incumbent government greater popularity, according to recent polls.

In the second quarter of this year, Italy’s economy grew by 0.3 percent, greater than previous forecasts of 0.2 percent. Experts attribute this faster growth to a significant jump in industrial output, which had increased by 2.7 percent in comparison to the same period for 2014.  There has also been an increase in mortgage applications in 2015, as well as a decline in unemployment, a significant factor in Italy’s stagnating economy, which has the third highest level of youth unemployment in Europe, after Greece and Spain.

So far this year, Italy’s economy has shown indications that it is indeed on the path to recovery, with greater growth to be expected in the coming year if Renzi’s 2016 budget succeeds in encouraging more investment and spending. That being said, it is still too early to assess that Italy’s growth can continue at the current rate, particularly as its 44 percent youth unemployment rate is a formidable obstacle that has yet to be overcome.

Viva the printer! Why traditional publishing isn’t going anywhere

Posted on by Ashton Wenborn

For centuries, the printing industry flourished as consumers had increasingly more disposable income to spend on goods such as books and magazines. It was no coincidence that marketing became an integral aspect of business models, resulting in the proliferation of posters, leaflets, brochures, billboards and the like. While this was the case for the greater part of the 20th century, a throng of new challenges is permeating the print industry’s latest chapter.

Following the onset of the financial crisis and its subsequent long-term repercussions, advertising budgets were in many cases the first to face a trim. Magazines and newspapers, both large and small, have since contended with drastically reduced profit margins, while book publishers face their own myriad obstacles.

When the digital revolution first began making waves across the globe, the phrase ‘print is dead’ swept through the industry like a death sentence. Fresh content and breaking news became available at the touch of a button and if popular, reached the screens of millions within a matter of minutes. And as if the macroeconomic nuances were not enough to shake the industry (see Fig. 1), the internet has transformed consumer expectations, as well as the market itself. Nowadays, even with no training, anyone can conduct an effective marketing campaign. There are now countless possibilities for businesses to promote themselves at low or even zero cost, meaning that traditional platforms face considerable pressure to evolve, adapt or die.

Top five circulation of us dailies with paid tablet editions

115,890

Wall Street Journal

65,083

New York Times

38,502

New York Post

17,829

Wall Street Journal

115,890

San Francisco Chronicle

14,914

Houston Chronicle

Source: Alliance for audited media

Notes: Circulation average for six months to Sep 2014

Modern-day challenges
The printing industry plays a supporting role to every sector and market; all businesses, governmental bodies and educational enterprises require printed materials. As such, amid economic decline interlinked industries face proportionally bigger consequences than
their counterparts.

The result is far greater competition between printing firms, which is heightened further through globalised networks that can quickly locate the most cost-effective source.

“Companies are being forced to look at digital channels which can offer low unit cost communications. However, often these are not as effective and so a balance needs to be struck. More and more companies are realising the benefit of adapting multi-channel strategies, using a combination of traditional and digital print and e-delivery”, said Linda Bosch, Managing Director at MBA Group, a printing company that has evolved into a multi-channel communication business.

While the technology has developed, most notably from traditional press to inkjet printing that has enabled faster and cheaper production, the rate of global competition is too fierce to allow persistent price undercutting. Many have buckled, while others have compromised on quality. “It has put pressure on printers to be in tune with the world of IT and data management, and continuously keep abreast of new advancements”, Bosch told World Finance.

“This is not a small challenge for an industry that is multiple decades old. The investment in new technology and the ability to adapt to an ever-changing and challenged market has resulted in fewer traditional printers being available. It is practically unheard of for someone to set up business as a printer in today’s world.”

The primary function of printers has always been, and always will be, communication. Whether a message, story, a campaign, or an idea. Whereas historically this has been done via the printed word – the internet has brought forth new platforms for communication. As such, successful industry players are broadening their product offerings and portfolios considerably; not only do they provide the service of printing brochures, posters and books, they now offer creative solutions, consultancy services, project management and digital development. From website design to data management, traditional printers have placed themselves at the forefront of the communications industry.

They have become the one-stop shop for organisations, thereby allowing a multi-faceted, omni-channel communications approach. “Today, the various digital channels have brought the print industry opportunities, as opposed to threats. Printed communications are being integrated with digital mediums to provide a consistent brand experience centred on individual customers. It is like a partnership – you need both physical print and electronic communications to work together for them to be the most effective”, Bosch told World Finance.

The evolution of print
People are more in tune with marketing and advertising than ever before, and have a deeper understanding of what can be done, of what is already out there and the importance of standing out from the crowd. “Customers are a lot wiser nowadays, they are more aware of marketing techniques and increasingly expect their documents and communications to be unique to them as individuals”, said Jon Barratt, Marketing Manager at MBA Group.

This has made it necessary for printing firms to transition from a customer-driven to a customer-centric approach, meaning that not only must they provide for their clients’ communications needs, they have to know what these are before the customer knows themselves. As communication specialists, these firms have to stay ahead of the game in terms of the on going development of the digital world.

Most organisations are choosing to incorporate digital marketing in their strategies and are taking strides to broaden their online presence as they should – they would be foolish not to. The digital age is not a passing phase; it will continue to infiltrate more aspects of our lives and areas of business (see side bar). That being said, there is still a place for print – it has qualities that online counterparts can never have, by their very nature. “There is the tactility of print – one thing that digital has never really succeeded in replicating is the sensory experience, either replicating or providing an equally good alternative”, said Rob Orchard, Director of The Slow Journalism Company and Editorial Director of Delayed Gratification magazine.

Then there is permanence. Nowadays, content on the internet vanishes as fast as it appears. A swift scroll and its gone. Among the endless barrage of posts – in any format they happen to come in – it is increasingly difficult to see the wood from the trees, namely the valuable, interesting and informative from the time-wasters. Managing to catch consumer attention in a split second and then keeping it fixed is an unenviable task for marketing managers and individuals alike.

“If you want to stay on top of what’s happening, you could very easily spend every working hour of every day because there are live blogs updating from 10 different cities across the world at any one point. There are updates coming through from your favourite news resources straight to your phone, on Twitter, Facebook and RSS feeds. There’s a feeling of unmanageability, a feeling of this white noise of news media coming at you. And I think that print is a fantastic antidote for that because it is self contained, it’s limited and there is something quite comforting and calming about that”, said Orchard.

A book or a magazine has the lure of time. It’s content is unchanging and always accessible (unless physically discarded). It can sit on a shelf or in a study for months or years, tirelessly waiting to be devoured for the first or 100th time. “There is a permanence to print that digital doesn’t readily offer. I was told by a college student that ‘digital means impatient’, which I think refers to the impermanence of digital; once it’s off the screen, it’s out of sight in their minds”, said Gerald Richards, CEO of 826 National, a writing and publishing NGO based in the US. Consumers naturally spend more time reading the printed word than they do with digital content – taking their time to digest and understand, returning to the piece when necessary – simply, it holds their attention and is considered worthy of more time.

Publishers understand this crucial difference all too well and have adapted to it. As such, many publications now provide much more complex and involved offerings – writers have the opportunity to deeply explore a topic, rather than rapidly assimilate information about an event for online, while also catering to the SEO beast.

“Our slogan, which is on the spine of every magazine is, ‘last to breaking news’. It’s this idea of we’re not going to bring you the breaking story from Athens right now, but in three months time we are going to return to it with the benefit of hindsight and we’re going to give you an in depth look of how the situation has evolved over that period, which is going to give you a perspective that nobody else is in a beautiful print product”, added Orchard. And for writers, there is still something exciting about producing for print, for the same reasons as there have always been and even more so now because anyone can post online and publish their work to an audience.

US NEWSPAPER AD REVENUE

 

Co-habitation possible
“The print industry is going through a continuous transformation. There is no end destination – it is a never ending journey that requires continuous energy to embrace new technology and ensure that we keep in tune with our client’s needs and their customer’s wants”, Bosch explained. There is so much that print can offer, both to those who produce it and those who consume it, and it is still a vital tool in advertising.

In the practical sense, it offers information that is permanent and finite, and does not need electricity to be read. While the aesthetic value of printed materials means that they can decorate a home, an office or even a city. “There’s actually loads of ways that print is superior to digital and I think that the pendulum has really swung back a lot”, said Orchard.

Digital media on the other hand offers something very exciting – something that was never before possible. It gives every individual and organisation, no matter who they are, where they are, or how influential they are, a voice – one that can captivate millions and spread like wildfire across the entire world. It allows information and news to travel faster than ever before, enabling people to share and learn more than they could ever dream of prior to the internet. It’s a tool that can save lives and has changed the world.

The two worlds can live together symbiotically. Consumers enjoy, benefit and learn from both, while organisations can employ each for different reasons. Print and digital mediums can complement one another – technology doesn’t have to be a threat, but an opportunity. Each medium has its own merits and benefits, as well as its flaws; but where one fails, the other has in abundance.

Controlling high-frequency traders: can it be done?

Posted on by Ashton Wenborn

Black box trading, or high-frequency trading (HFT) as it is also known, is a divisive topic. Some see these automated systems as the future of the financial markets. Others, like Joe Saluzzi, an expert on algorithmic trading, sees the machines and the people behind them as parasites, which are not only destroying the stability of global financial markets from within, but also themselves.

“There is a host-parasite relationship”, he argued during an interview on the Peak Prosperity Podcast. “The host is the traditional order or the retail or institutional order. They will always lose. There is no doubt about it. The parasites are circling around that host all day long trying to find where they are going to take advantage of them – whether it is a VWAP order [Volume-Weighted Average Price] or something like that.”

The rhetoric might make these systems sound sinister, but they do possess a number of attributes that render the average investor a mere pawn in the market. One is their sheer scale, with HFT controlling a mammoth share of the market. In the US alone, it is estimated that HFT accounts for anywhere in the region of 50 to 70 percent of all equities volumes. Another is speed, with modern algorithmic trading systems capable of sending order executions in 740 nanoseconds (0.00074 milliseconds), which when compared to the average human reaction time of 0.30 seconds, it becomes clear that regular investors simply don’t stand a chance.

Many would argue that HFT is simply the new edge and that may be true. One industry insider, however, claims to have extensive experience with these black boxes and argues that for all the power it wields, HFT is extremely partial to ‘blowing up’. The real question, therefore, is: if HFT is inherently unstable, why are regulators not doing more to reign it in and why are investment managers like Leda Braga so bullish about the algorithmic trading strategies?

2007

China
Chinese collapse
Chinese stocks lost $140bn of value in the country’s biggest fall for a decade

2008

US
Failed bailout
The rejection of a $700bn government bailout saw the Dow drop 429 points in 6 minutes

2010

US
Flash crash
The Dow fell nearly 1,000 points in 30 mins, only to partially recover by the end of the day

Source: Reuters, Government of Canada, Globe and Mail Archives

Explaining the explosions
The author of Black Box Trading: Why They All ‘Blow-Up’ goes under the alias Dominique Dassault, and claims to have 26 years of institutional capital markets experience. Her blog post provides a fascinating insight into what is really going on inside these black boxes, and seemingly under the nose of regulators.

In the post, Dassault recalls a conversation that she had with a leading quantitative portfolio manager, who explained how despite their “obvious attributes”, speculative algo-trading systems are very difficult to control. He asserted that, while these algos may work effectively for a time, eventually, and seemingly inexplicably, they eventually ‘blow-up’. Meaning the most important part of HFT is not the stability of the model, but knowing when the model was about to fail, so you can pull the plug in time.

If this is true it seems strange that hedge funds and investment banks are even interested in HFT considering its tendency to tank. But when Dassault asked why money managers use HFT, he gave a rather candid response: “We are all doing this because we can all make a lot of money before they ‘blow-up’. And after they do ‘blow-up’ nobody can take the money back from us.”

He then informed her why these models eventually implode. “Because despite what we all want to believe about our own intellectual unique-ness, at its core, we are all doing the same thing. And when that occurs a lot of trades get too crowded… and when we all want to liquidate [these similar trades] at the same time… that’s when it gets very ugly.” Dassault noted that she was naïve to think otherwise. The key thing to take from all this is that the fallibility of humans will inevitably be incorporated into the algorithms they design and this poses a serious problem for regulators, as it is extremely hard to mitigate the risk that HFT presents.

In the past, when markets got a little too hectic, traders could always stop and take stock, giving the market time to self-correct and find its footing. Investors could always just stop buying or selling and just wait for the market to settle down a little.

But nowadays, with so much of the volume provided by machines, when markets get a little too chaotic, they tend to stay that way for longer, because HFT doesn’t tend to take a time out. When there are big swings in the market, this is where black box systems come into their own, adding to the unpredictability of financial markets in the process.

It is for this reason that a number of participants argue that a adequate level of human interaction in the market must be maintained, as without it the investing public would lose confidence that the market was a true representation of value. Instead, viewing it as a game of chance similar to a slot machine at a casino. In the world of black box trading, the only thing its designers can do when things go wrong is to pull the plug. “Pulling the plug, to me, was a tacit admission that the black box designers did not truly believe in their systems”, said Dassault. “If they did, then why pull the plug?”

In a highly volatile market, if HFT is left to run, the results can be tremendously varied and unpredictable. And while it may not always disrupt the market in a negative manner, it does have the power to cause flash crashes, which impacts overall investor confidence in the market and could even play a role in the next crash.

“When markets are dominated by algos, there is scope for positive feedback because they tend to copy one another – like humans but on a larger and faster timescale”, said David Orrell, an applied mathematician and author of Economyths. “This is especially dangerous when the firms employ a lot of leverage. But the problem isn’t just things like flash crashes, it is also a public perception that the markets are gamed.”

Crash course
In order to maintain investor confidence and market stability, regulators in the US and globally have investigated HFT to ensure that it isn’t abusing the market. Sadly, much of the action taken by regulator is reactive rather than preemptive.

“Sorry to say this, but I view the SEC as generally unimpressive”, said Dassault. “They are similar to the police. Typically, they show up after an event to clean up the mess. They seem to be very slow in their movements… they’ll [spend] five years trying to ‘figure out’ the flash crash, but they’ll never have a complete answer.” The event Dassault is referring to is of course the May 2010 flash crash, which saw the Dow Jones Index fall by 1,000 points in a matter of seconds. Many market participants and commentators simply stood in shock, quite unsure of what to do next, when, all of sudden, and almost as quickly as the market fell, it found its footing again – leaving onlookers stunned.

Initially, HFT was blamed for the crash, but nobody really knew for certain. Others thought that it was the result of what many in the industry call a ‘fat finger’ mistake. Needless to say, a joint investigation by the SEC and CFTC was launched, which six-months later was able to pinpoint the cause of the crash: the sale of 76,000 E-mini S&P 500 futures contracts by a large institutional investor, a move that was then mimicked by other algos in the market, driving the index down with it. It took five years before regulators managed to identify who they think the culprit of the crash was. Dubbed the “Hound of Hounslow” by the press, British-born investor Navinder Singh Sarao, was recently implicated by US prosecutors who accused him of triggering » the crash by manipulating markets on a massive scale. The fact that it took such a long time to catch up with the alleged market manipulator highlights just how in the dark regulators really are.

“As with most financial crashes, the exact cause is uncertain and has been blamed on a number of factors, but algorithms certainly played a part since they dominate most normal trading”, explained Orrell. Many just turned themselves off as prices began to fall.” It would be nice to think that the SEC-CFTC learnt something meaningful from the crash, but when they published their summary report, outlining their recommendations regarding regulatory responses, it showed just how in the dark both regulators are about the dominance of HFT in the market.

Yet, the main thing that regulators took away from the 2010 flash crash was that when the market is particularly volatile, the automated execution of a massive sell side order has the potential to cause large swings in price. Regulators were able to see how automated execution programmes like the one allegedly used by Sarou, along with HFT can almost instantly remove liquidity from markets.

The next flash highlighted just how sophisticated HFT has become. On April 23 2013, a tweet was published on an Associated Press Twitter account that claimed a massive explosion had gone off at the White House. Almost immediately, the Dow Jones reacted once again, but this time by just one percent, yet as before, quickly righted itself within a few minutes.

Uncertain results
Regulators are still unsure of what caused the mini flash crash, but some commentators believe that it is another example of HFT fuelling instability in the markets. If the crash was the result of HFT, then it proves just how sophisticated black box trading has become, capable of responding to news keywords at lighting speed. But responding fast, especially to false information, it is not necessarily something worthy of praise, as such drastic action merely helps to turn declines into crashes. A more recent example of a flash crash took place on October 15 2014 when prices of US Treasuries spiked up by over seven standard deviations, but were back to normal within 12 minutes. This time the US treasury jumped on board and collaborated with the SEC and CFTC to investigate the cause of the crash.

In the report, the regulators explained how ‘the market for US Treasury securities, futures, and other closely related financial markets, experienced an unusually high level of volatility and a very rapid round-trip in prices.’ What makes this crash stand out, however, is that the US Treasury market is accustomed to low-levels of market volatility. In the end, the report concluded that a combination of HFT, economic uncertainty, and larger trading volumes contributed to the crash – nothing new here then. But the regulators did pick up on a new risk that HFT brings to the market. It is known as ‘spoofing’, which is the name given to the process of competing algos bluffing trades back and fourth in an attempt to get the other to make a move in the market that can be capitalised on.

Once again, regulators were unable to reach a decision on how best to regulate the market and account for the disruptive nature of HFT: “The trend toward increasingly automated and algorithmic trading on trading platforms is being addressed by various regulatory efforts underway by the SEC, the CFTC and others”, claimed the report. “To further these steps, the public and private sectors must continue to work together to address the outstanding risks, including operational risks and risks that may harm liquidity provision or price discovery.”

After the 2010 crash, the SEC implemented market circuit breakers designed to stop trading for a short period of time in the event that the market began to run away from investors in an attempt to stop flash crashes occurring. But many see it as merely a band-aid for a much deeper laceration in the market. “I view them as an obtuse solution to a problem the [SEC] do not fully understand”, added Dassault. “Their view is that if a stock is too volatile it must halt trading. [But] this simply defers the ultimate price destination.”

Regulatory challenges
Technology has always driven innovation in financial markets. It has allowed for greater transparency, better communication, and lowered costs of doing business. Not only that, but during a time of increased regulation, technology has helped the industry to not just develop and grow, but thrive.

The fallibility of humans will inevitably be incorporated into the algorithms they design and this poses a serious problem for regulators

It is just one reason why regulators have been reluctant to implement strict rules around HFT, as despite its obvious flaws and the periodic risk it poses to the stability of the market, it – and the quants that program it – also bring many advantages. Yet, not everyone is so sure that the pros and cons level out. Orrell argues that quants do indeed add value to the market by calculating prices for financial instruments such as derivatives, which are used by a diverse range of firms and individuals.

But he also thinks that things get dangerous when they start developing complex new products and trading strategies that no one else can understand. “There are too many incentives in place for them to play down the risks when there are profits to be made”, he said. “Also the strategies often involve a lot of leverage, which is destabilising.

“Note the risks are asymmetric because there is a lot to be made in bonuses etc., but little chance of losing [directly] themselves because they can just walk away from the job if their bets go wrong.” The prevailing argument in certain circles is that HFT provides extra liquidity and reduced margins, but according to Orrell, most of the assets they deal in are pretty liquid to begin with, and the margin is complicated because it depends on whether traders can execute before the price shifts.

While he acknowledges that these issues are not very relevant for buy-and-hold investors. He believes that in the grand scheme of things, HFT manages to extract money from the market, which is why, despite its proclivity to ‘blow-up’; it remains a popular market strategy.

The challenge that regulators face is two fold. On one hand, they must try to identify where black box trading systems present genuine risks to the market and come up with suitable legislation to reduce said risk. While on the other, they must try to keep pace with the market, no matter how quickly HFT makes it move. Only then will they have the necessary powers to challenge trading activity that harms investor confidence and other market participants.

Keeping pace
Seeing the mountain that must be climbed is one thing, but actually conquering it is another entirely, and there are many with serious doubts about regulators’ ability to keep pace with automated trading systems. “The bottom line is the regulators are overmatched and they need to do something now”, contended Saluzzi. “And the option of getting up to speed probably is not in their budget right now.”

Regulators have always struggled to match the speed of the market, as these overseers, by their very nature, are reactive, but just because the SEC lacks the money necessary to build systems capable of monitoring HFT, the algorithmic trading expert offers up an interesting alternative.

As he sees it, the most contentious form of behaviour exhibited by black box trading platforms is ‘spoofing’ – the action of placing an order to buy, but immediately retracting the bid without filling the order, which is a form of market manipulation, as it tends to drive up securities price. He suggests limiting their ability to do so, by implementing a minimum life on orders.

“If I said to you, ‘We want a 50 millisecond minimum order time life, would that be a problem?’ I’d think it would not be a problem. Because, guess what? I just blink my eyes and it took me 200 milliseconds to do that. So 50 milliseconds really shouldn’t be that big of an issue. And there have actually been reports, studies by academics that have said, ‘Any order less than 50 milliseconds really does not contribute to any liquidity.’ So do not give me that you are going to be hurting liquidity.”

This could very well be an option and is one that has been floating around for some time, but coming from someone who refers to black box trading as parasitic in nature, means that they are probably not the best person to put forward the proposal. It is also wrong to demonise algorithmic trading. After all, HFT is just the new edge in a world dominated by technology and machines. Rather than worrying about whether or not it creates more or less stability for the financial markets, it is more important to have a backup plan if the market turns sour like it did in 2008.

One simple solution that has been proposed, but which has faced much push back from the members of the financial industry is the implementation of financial transaction tax (FTT). According to a 2009 report by The Centre for Economic and Policy Research, a 0.5 percent levy on all stock transactions would be capable of raising $110bn a year – even if trading fell back by 50 percent as a result of the tax. And while an FTT rate of 0.5 percent is relatively high, legislative action like this would help make up for regulatory incompetence and offer the market and wider society protection against black box blow-ups and other negative market forces.

How to navigate investor-state disputes settlement in Iran

Posted on by Ashton Wenborn

Iran qualifies in many respects to be a good location for foreign investment and doing business. Some of the features of the country which make it a heaven for foreign investors (FIs) include: strategic location, market potentials and proximity, labour privileges, developed infrastructure, low utility and production cost, abundant natural resources, climate conditions and fiscal incentives.

Despite the attractiveness of investment in Iran, in recent years the country was not in a satisfactory situation in respect of foreign investment. The main reason was the international sanctions imposed on Iran over the country’s nuclear issue. However, in recent years – with the new government coming into tenure – the country started negotiations with the P5+1 to solve the long-lasting dispute and to remove the sanctions accordingly. As a result of the negotiations, a preliminary agreement – officially titled the Joint Plan of Action – was made between Iran and the P5+1 group of countries in Geneva, Switzerland, on November 24 2013.

Despite the attractiveness of investment in Iran, in recent years the country was not in a satisfactory situation in respect of foreign investment

After the Geneva interim agreement, many experts predicted that foreign investors would return back to Iran for investment. In recognition of this fact, Sidar Global Advisors reported that, due to the deal, Iran oil sales went up – as well as interest in foreign investment. As predicted beforehand, after the interim agreement many FIs commenced their negotiations with regard to their aimed investment projects in order to be able to start investment in Iran after the final nuclear deal and consequent removal of sanctions.

Finally, On July 14 2015, after years of negotiations and discussions about Iran’s nuclear programme, Iran and its counter parts (China, France, Germany, Russia, the UK and the US) reached an agreement to adopt the Joint Comprehensive Plan of Action (JCPOA).

One of the main consequences of the JCPOA is lifting of the sanctions and allowing for foreign investment. However, potential FIs need to know what have been provided for settlement of disputes arising from foreign investments in Iranian laws and regulations.

On the one hand, many foreign investments made in the past led to disputes due to sanctions. On the other, new foreign investments that are increasing in the light of recent agreement depend on the knowledge of how to resolve the dispute – whereby enabling FIs to predict the future of their investment in case of dispute.

Among different types of foreign investment disputes, disputes between the host government and the FI are the most common. This type of dispute arises from violation of the mutual obligations by one of the parties within the framework of foreign investment.

Investor-state disputes settlement
In order to increase foreign investment in Iran, new foreign investment law, titled ‘Law of Foreign Investment Promotion and Protection’ (FIPPA) – which is currently enforceable – has been approved in 2002. FIPPA is applied to foreign investments that are carried out within its scope. In drafting FIPPA the importance of resolving disputes arising from investments is addressed. As a result, article 19 of FIPPA has been allocated to the settlement of disputes between the FIs and the government.

Article 19 of FIPPA provides that: “Disputes arising between the Government and the foreign investors with regard to their respective mutual obligation within the context of investments under this act, if not settled through negotiations, shall be referred to domestic courts, unless the law ratifying the bilateral investment agreement with the respective government of the foreign investor provides for another method for settlement of disputes.”

With respect to the article 19 of FIPPA, the following points are noticeable:

1) Article 19 of FIPPA includes all types of disputes between the government and the FI arising from investments (i.e. disputes arising out of fair compensation in case of expropriation).

2) Negotiation has been specified by the Iranian legislator as a primary means for settlement of disputes between the government and the FIs in order to be in the same line with international practice. However, the legislator didn’t specify a time period for the negotiation, which may entail conflicts in practice. A period of time should be specified for the negotiation – so if the negotiation doesn’t lead to an agreement within the specified time, the dispute could be settled through other methods (like court and arbitration).

Lacking a time limitation may create problems in practice – however, invoking to good faith rule may be a solution. Parties could continue negotiation as long as they perform such negotiation in good faith, and when one party fails to negotiate in good faith, the other party could refer the dispute to the said authorities.

3) If the parties have not reached an agreement by the negotiation, the dispute will be settled by Iranian domestic courts, unless there is a bilateral investment agreement between the home state of the FI and Iran stipulating another method (like arbitration) for settlement of disputes. Article 19 of FIPPA refers only to the bilateral investment agreements (BITs) and has not mentioned multilateral investment agreements (MIAs); however this cannot affect credibility of the other methods foreseen in the MIAs and does not preclude resorting to MIAs. The reason is MIAs have international credibility and their violation leads to international responsibility of the breaching party.

Finally, it should be noted – as article 19 of FIPPA is one the most important provisions with regard to investor-state disputes settlement in the mainland of Iran – in entering into investment contracts with Iran, FIs should also consider other related laws and regulations such as foreign investment treaties between Iran and their home countries, Article 139 of The Constitution law and Free trade and special economic zones laws and regulations.

Ali Darzi is a legal and contracts specialist at Shahid Bahonar Copper Industries Company

For further information, email a.darzi@yahoo.com

Vontobel

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switzerlandVontobelWith a dedicated sustainability committee, Vontobel has set the standard not only in Swiss corporate governance, but also in sustainability management. The firm has a sustainability strategy that is under constant review, and which utilises internal structures to push environmental and climate initiatives. Vontobel’s many banking products reflect this.

Triodos

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spainTriodosWith a commitment to addressing the world’s social and environmental afflictions, Triodos Bank focuses on everything from financing organic farming businesses to tackling inequality. The bank sets an example for others in Spain with its innovative education projects and funding activities that help those at risk of social exclusion in the country’s labour force.

Santander

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uruguaySantanderSantander in Uruguay is a pillar of the community and a force for positive change in the country’s development. It is involved in numerous social initiatives, such as organising blood donation days and helping children in poverty. Santander also sponsors children’s orchestras and a paper collection programme to help low income schools, among other charities.

ING

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south koreaINGTaking a deterministic approach to sustainable banking practices in the local market, ING in South Korea has a sustainable lending team that looks out for the most deserving and long-term projects. The bank sets about this with a range of goals and performance metrics that allow it to analyse the very best in sustainable practice.

Nedbank

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south africa NedbankThe Nedbank Group takes sustainability extremely seriously – from responsible lending to green funding and a plethora of other sustainability initiatives.The bank fully supports client drives while pushing its own. Nedbank has also taken a special interest in renewable energy, considering landfill gases, and solar, hydro and wind energies as paramount.

Saudi Hollandi Bank

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saudi arabiaSaudi Hollandi BankSaudi Hollandi Bank is the longest-established provider of financial products and services to Saudi Arabia’s leading companies – large and small – and is building a strong reputation in the retail market. Over the past 88 years, the bank has maintained a consistently strong capital base while incorporating a broader social engagement.