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Editor's Corner: How much should alpha cost? Also Noted: Spotlight On... Barclays' biggest cuts may be in servers
Calpers chops hedge fund allocation and much more...
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How much should alpha cost?
If a trader spends large amounts of money to get a proportionally small amount of alpha, is that successful or inefficient? Brian Mannix, a George Washington University professor referred to on page 174 of "Flash Boys," recently wrote an article on TabbFORUM about the inefficiency of high-frequency trading that drew a fair amount of comments both for and against his argument. Whenever an article sparks a healthy back and forth of debate, it's worth looking at in more detail. Mannix is the first to point out that his area of expertise is natural resource economics, so finance is not his field. His observations more represent an outsider's view of an insider's world. His article looks at situations where a large investment (of money or time) delivers a small but important return and basically questions whether it was worth the effort--i.e. is there a better way? The first thing worth pointing out is that his article is not (at least in my view) calling high-frequency trading corrupt. Attorney generals do not, as a rule, prosecute inefficiency. Rather he demonstrates that in many real world cases people do make seemingly extravagant investments to get a small but necessary return. If you had to get to work very early just to get a parking spot, pulling into that spot must have felt like success, but was it worth it? Did it represent the best use of resources? Mannix tells the story of a trader who contracted a helicopter to monitor a mineral drilling crew in a remote area, and even built a radio tower to receive communication from the helicopter about whether or not the drilling crew was successful. Presumably, the trader made a profit from the trade, but at what cost? There is an implied parallel between contracting a helicopter and building a radio tower for trading stock in a mineral drilling company and the technology investment high-frequency traders make to get alpha from today's high-speed markets. It's not wrong, but is it efficient? Another question Mannix has not yet asked (but he has a part two forthcoming) is how sustainable are these large investments? Some market observers are already starting to say that high-frequency traders are broadening to new markets (Asia? FX?) because the returns in U.S. equities markets are getting tight. Assuming markets are at least as likely to continue to speed up as they are to start to slow down, how much more investment can be made to still achieve alpha? Read more about: Flash Boys, Brian Mannix
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Today's Top News 1. LSE bids for Russell Investments, rumored to be interested in benchmark business
The London Stock Exchange Group is reportedly one of the bidders for Russell Investments, the stock index and asset management company being divested from its parent. Northwestern Mutual reported in January that is was planning to sell its majority stake in Russell Investments, which it acquired in 1999 for more than $1 billion. LSE is reportedly competing against MSCI and Canadian Imperial Bank of Commerce for the business, according to the Wall Street Journal. LSE and MSCI are reportedly both interested in the index side of the business, which includes the Russell 2000 index of small stock performance in the U.S. The asset management portion of Russell Investments had $260 billion in assets under management at the end of March. Offers from all three bidders were reportedly turned in at the beginning of May, and Russell Investments and Northwestern Mutual have met to weigh their options, but a decision has not yet been made, the Wall Street Journal reports. The paper's sources estimate that the index business, which generated $200 million in pretax earnings last year, could fetch $2.4 billion on its own, and together with the asset management arm the whole company might attract $3 billion.
For more:
- read the Wall Street Journal article
- read the Financial Times article
Related Articles:
Nasdaq and S&P look to acquire index businesses as others look to sell
Buy-side wish list: IT for managing new asset classes and regulatory reporting Read more about: MSCI, Northwestern Mutual
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2. Dimon sees competition coming from the West Coast, hires accordingly
JPMorgan chief executive Jamie Dimon sees growing competition coming from the West Coast, and a look at recent hires indicates the bank's policy for beating the competition is to keep it close at hand. "When I go to Silicon Valley ... they all want to eat our lunch. Every single one of them is going to try," Dimon said at an annual investor day meeting in late February and reiterated at a conference in Saudi Arabia last week. Dimon went on to tell the audience at the Euromoney Saudi Arabia conference, "We're one of the largest payment systems in the world. We're going to have competition from Google and Facebook and somebody else." He has also indicated that San Francisco-based Well Fargo will be a major investment banking competitor. With that sense of a rising West Coast, perhaps it's no surprise that several recent JPMorgan hires have West Coast tech company experience on their resumes. For example, the bank's new head of digital customer experience Tim Parsey is a former senior vice president of design for Yahoo, and is based in San Francisco. Last month Abhijit Bose, who was part of the founding team that helped develop Google+, joined JPMorgan as head of data intelligence. He will help the firm better use customer data to personalize the customer experience on banking applications and digital platforms. San Francisco-based Claudia Richter joined JPMorgan from a Silicon Valley startup and will measure the performance of Chase's digital assets based on customer data and feedback.
For more:
- read the Quartz article
- read the Wall Street Journal blog
Related Articles:
JPMorgan to revamp UK operations center
Tech savvy ETF APs embrace bond trading technology
Do banks need to combat tech giants like Google, Apple? Read more about: Jamie Dimon, TIm Parsey
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3. RBS's Citizens files for an IPO as restructuring plan continues
Royal Bank of Scotland's U.S. retail bank, Citizens Financial Group, filed for an initial public offering Monday in the latest chapter of the wide-scale restructuring of RBS. Morgan Stanley is a lead underwriter and is also running a dual-track process for Citizens, meaning the bank could either become listed or be sold, according to the Financial Times. Goldman Sachs is also a lead underwriter of the IPO. In terms of a possible sale, RBS has reportedly attracted interest from Japanese and Canadian banks but has not received formal bids. RBS said last fall that it plans to divest 20 to 25 percent of its stake in Citizens this year and fully divest of the bank by 2016. RBS's chief executive Ross McEwan, who took the role in October, has been engineering a huge restructuring as a result of a large loss in 2013 and to cope with new regulatory demands. As part of the restructuring, McEwan is setting up an internal bad bank, and has plans to take 5.3 billion British pounds worth of costs out of the bank over the next three years. RBS is still 80 percent owned by British taxpayers after being bailed out by the government in 2008. In surprisingly strong first quarter results reported earlier this month, quarterly profits tripled to 1.2 billion British pounds. Citizens has about 1,370 branches across New England, the Mid-Atlantic and the Midwest.
For more:
- read the Financial Times article
- read the Reuters article
- read about RBS restructuring in the Scotsman article
- read about RBS first quarter results in the Bloomberg article
Related Articles:
RBS expected to exit investment banking, focus on UK retail banking
RBS blames Cyber Monday glitch on inadequate IT investment
RBS unveils mobile payment app after second card network crash Read more about: Royal Bank of Scotland, Ross McEwan
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4. UBS to virtualize multiple data centers
UBS has tapped Juniper Networks to overhaul its enterprise data center network architecture. The ultra-scalable system Juniper is building for the Swiss company will serve as a building block to help it virtualize multiple data centers. The firm will implement key components of Juniper's MetaFabric architecture, an open standards-based construction. The new networking architecture will include advanced orchestration, management and data analytics. The MetaFabric design, which launched last year, was created to allow customers to pool resources from different data centers, making them more available for application demand. "Banks are re-engineering their business models in light of changing market and regulatory conditions, changing customer behavior, and emerging technologies," said Shaygan Kheradpir, CEO of Juniper Networks. To meet today's new business models, he said, banks need network infrastructures that can adapt to business demands and private clouds for quick delivery of applications. According to Gartner, 68 percent of banking and investment institutions will change their technology and sourcing approach within two to three years. Meanwhile, Reuters reported last month that Juniper Networks hired UBS to help it find a buyer for its Junos Pulse enterprise mobile infrastructure business. The company is under pressure to restructure from activist investor Elliott Management Corp., Reuters reported.
For more:
- read the Finextra release
- read the Automated Trader article
- read the ComputerworldUK article
- read the Reuters article
Related Articles:
CME Europe opens for business
Firms seek 'Big Data' upside from compliance records requirements
BATS to consolidate data centers in New Jersey Read more about: Gartner, Shaygan Kheradpir
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Also Noted SPOTLIGHT ON... Barclays' biggest cuts may be in servers In announcing its restructuring plan last week, Barclays made headlines with its job cuts, but the firm is making deep cuts in another area flying under the radar: servers. Barclays decommissioned 9,124 servers in 2013, and that's on top of 5,500 servers pared down in 2012. As a result, the British bank has won the Uptime Institute's Server Roundup award two years in a row. (This year it shared the honor with Sun Life Financial and last year it shared with AOL.) Barclay's 2013 server cuts resulted in 2.5 megawatts of power savings which equated to a $4.5 million reduction in the power bill. It also saved $1.3 million in legacy hardware maintenance costs and freed up 500 server racks, more than 20,000 network ports and 3,000 SAN ports. While it seems like removing servers that are out of use would be part of a firm's regular housekeeping, the Uptime Institute says it's not, and part of the reason the contest exists is for some playful motivation. A big part of the reason why server cuts are not done as often is fear, the Uptime Institute says. In a complex server environment, an accidental misstep can lead to costly downtime. > Developing for the Internet of Things: Challenges and Opportunities - Wednesday, June 18th, 2pm ET / 11am PT Cisco estimates that 50 billion devices and objects will be connected to the Internet by 2020. Will there be a role for developers in this area? And if so, how can developers position themselves in the months ahead on this nascent but potentially explosive opportunity? Register Today!
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