Who is Minding the Desk?

One of the largest Margin Trading Product (“MTP”) brokers on the planet, DMM Securities of Japan, has announced their Australian subsidiary will stop taking and executing client orders around news events.  DMM is not specific exactly which news event will be excluded.  This is an incredible change of policy; news events create some of the highest-volume moments of each trading day / week / month.  This is like Target or Walmart deciding to close it’s stores on Black Friday here in the US.

The reason for this change can be boiled down to one of two reasons; DMM’s technology stack can not handle the massive spike in volumes around news events/releases, or their risk management practices are failing them.

I am not privy to DMM’s risk management practices.  They may be acting as an agency model and passing on all risk to aggregated counter parties which generates revenues by adding a mark up or a commission to each execution.  If this is their risk model, then the only reason to shut down trading during the busiest moments of the month is their technology stack can not process the tens of thousands of requests and execution confirms correctly.  Though they may be passing on all market risk to their own LP’s, the retail clients face DMM as the counter party.  And therefore DMM is likely on the hook for any technology failures that results in losses or missed potential gains from client orders/executions that are mishandled.  I am sure DMM’s account application documents state that DMM is not liable to their clients for any mishandled orders or failed technology; all brokerage firms include language as such.  Therefore if they are using an agency model, and still terminating trading during these news release moments, the technology failures can be expected to be massive.  Enough so that clients who have signed agreements absolving DMM of liability have strong cases that DMM’s technology failures are blatant, observable, and could have, SHOULD have been fixed.

The other possibility is that DMM operates on a principal basis and DMM has a dealing desk taking the other side of client orders and running a risk book on their desk.  (This post is not here to pass judgement on either an agency or principal revenue model; the most capital and human resource efficient brokers use a combination of agency and principal models).  If DMM is working on a principal basis and is turning off trading during news events, it is likely that their risk team has had large losses on news events.

I have worked as a dealer and as a risk manager on active desks.  And I can state from personal experience, and from the information I see on a weekly basis as a provider of technology to MTP brokerage firms around the globe, that news events are normally cash cows for principal-basis brokerage firms.  There are numerous reasons brokers tend to cash in during news events (spreads widen, over-leveraged clients react poorly, etc).  In fact I have seen risk desks have the most success during news events by applying a “hand’s off” rule (dealers can not execute hedging or prop trades for the 10 seconds prior to, and 20 seconds after a news release)  This “hand’s off” rule assumes the client flow will be fairly neutral and be executed over widened spreads.  The likely reasons for a principal-basis brokerage to lose money during news events are slow technology, or most likely, poor risk management practices.

The good news is that risk management practices can be changed quickly.  The bad news is a broker’s cost model of paying rebates to third parties for introducing order flow, fixed investment costs, or even direct variable costs are not easy to change.  So even though the risk/revenue mix can be changed quickly, the new revenue model may not support the cost structure of the brokerage.  Hopefully this change at DMM is a temporary change and the company can re-organize their risk management model in a way that still supports their cost model, yet allows for them to operate during the busiest time of the markets.


Will Currency Carry Trades Stage a Reverse Comeback?

In July of 2007, the British Pound (“GBP”) vs the Japanese Yen (“JPY”) hit a price of 251.  That is, a single British Pound would get you 251 Japanese Yen.  It was a great time for UK residents to visit Japan.

By January of 2012, that same British Pound would only get you 119 Japanese Yen.  The relative value of the GBP vs the JPY had fallen be more than 50% in just four and a half years.  This time period saw numerous wealthy Japanese residents buying London properties with their (relatively) stronger Yen.

The macro forces that drove the GBP/JPY higher in the early and mid-2000’s was an expectation of rising short term interest rates in the UK (6% and trending higher), and the expectation for falling short term interest rates in Japan (0.3% and trending lower).  Essentially you could borrow cheaply in Japan and invest at higher rates in the UK.  This is what drove the currency pair to new highs.

And now we see the European Union’s Central Bank promising to fight deflation by lowering short term interest rates.  And on the other side of the world, the Bank of Japan is promising to do increase inflation rates in Japan by any means necessary.

So if the EU is actively dropping interest rates, and the BOJ is working to increase interest rates, is it possible that this year’s carry trade will be long JPY and short EUR?

Fred Wilson of Upfront Ventures’ 2015 Predictions

Fred Wilson’s avc.com blog is must view material for me.  Fred is a part of Union Square Ventures and has a knack for seeing 2 – 4 years ahead.  His predictions for 2015 make for great conversation among those who pay attention to technology trends.

From Fred’s blog, http://www.avc.com / Jan 1, 2015


What Is Going To Happen

Yesterday I wrote a post summing up what happened in 2014. In it I promised a post on what is going to happen. What I did not specify was how far forward I am going to look. It’s a lot easier to predict the future without a timeline on it. I think we all know, for example, we are going to have driverless cars. When that is going to be mainstream, however, is a pretty big question that I can’t answer.

But, because yesterday was about 2014, I am going to make this post about 2015. And so here is what is going to happen in 2015 according to me.

1/ The big companies that were started in the second half of the last decade, Uber, Airbnb, Dropbox, etc, will start going public. Investors will be glad to scoop up some of their shares. That will lead, in turn, to a wave of acquisitions by these newly minted goldmines.

2/ Xiaomi will spend some of the $1.1bn they just raised coming to the US. This will bring a strong player in the non-google android sector into the US market and legitimize a “third mobile OS” in the western world. The good news for developers is developing for non-google android is not much different than developing for google android.

3/ More asian penetration into the US market will come from the messenger sector as both Line and WeChat make strong moves to gain a share of the lucrative US messenger market.

4/ After a big year in 2014 with the Facebook acquisition of Oculus Rift, virtual reality will hit some headwinds. Oculus will struggle to ship their consumer version and competitive products will underwhelm. The virtual reality will eventually catch up to the virtual hype, but not in 2015.

5/ Another market where the reality will not live up to the hype is wearables. The Apple Watch will not be the homerun product that iPod, iPhone, and iPad have been. Not everyone will want to wear a computer on their wrist. Eventually, this market will be realized as the personal mesh/personal cloud, but the focus on wearables will be a bit of a headfake and take up a lot of time, energy, and money in 2015 with not a lot of results.

6/ Capital markets will be a mixed bag in 2015. Big tech names will continue to access capital easily (see 1/), but the combination of rising rates and depressed prices for oil will bring great stress to global capital markets and there will be a noticeable flight to safety around the world. Safety used to mean gold, US treasuries, and blue chip stocks. Now it means Google, Apple, Amazon, and Facebook.

7/ The Republicans and Democrats will start jockeying for position in silicon valley for the next presidential election and tech issues will loom large. Republicans will put forward their own answers on immigration and net neutrality (Title X) and the White House will meet them halfway. Both sides will claim victory, but the real winners will be the people.

8/ The horrible year that bitcoin had in 2014 will be a wakeup call for all stakeholders. Developers will turn their energy from creating the next bitcoin (all the alt stuff) to creating the stack on top of the bitcoin blockchain. Real decentralized applications will start to emerge as the platform matures and entrepreneurial energy is channeled in the right direction.

9/ the enterprise/saas sector will shine in 2015 with dozens of emerging important new companies taking advantage of the cloud and mobile to redefine what work and workflow looks like in the enterprise.

10/ cybersecurity budgets will explode in 2015 as every company, institution, and government attempts to avoid being Sony’d. VCs will pour money into this sector in the same way they poured money into the rental economy. and, yet, the hacks will continue because on the open internet there is no such thing as an impenetrable system.

11/ the health care sector will start to feel the pressure of real patient centered healthcare brought on by the trifecta of the smartphone becoming the EMR, patients treating patients (p2p medicine), and real market economies entering health care (people paying for their own healthcare). this is a megatrend that will take decades to fully play out but we will see the start of it in 2015.

Of course, many other things will happen this year. A lot of them will be things we could never see or predict. And this list is biased by what interests me and what we’ve invested in. It is, as someone said in the comments yesterday, “biased”. But then so is every single word ever written on this blog. As it should be.

Happy New Year everyone. Here’s to a great 2015.