PropelGrowth's  Instablog

You've probably already read the news about Cyprus planning a levy against retail banking deposits. On Friday, Cyprus announced that they will apply a one-time levy against all retail bank deposits held in Cyprus. They plan to take 9.9% of all deposits over 100,000 Euros and 6.7% of all deposits under that threshold.

The Cypriot government is in a pickle about how to rescue their banking sector and that they're trying to get EU bailout money. Where other bailouts made bank creditors and bond holders take huge hits, Cyprus has fewer options. But this draconian measure seems more like something that could tip the EU financial sector into a deeper financial crisis rather than shore up the Cyprus economy.

There has already been a limited run on the banks in Cyprus, as depositors rushed to ATMs over the weekend trying to withdraw their cash. Most of the ATMs were emptied within hours, preventing Cypriots from accessing their money. Today is a bank holiday, so no money can flow out until tomorrow.

It's uncertain whether the measure will actually be passed as three parties in the Cyprus Parliament have already announced that they will not back the plan, and Cypriot ministers are looking for ways to soften the blow. But the only alternative may be a default.

But I wonder how this is going to affect the entire Eurozone banking sector? If Germany can dictate levies like this in Cyprus, what's going to happen with Ireland, Italy, Greece, Portugal and Spain? Eurozone banks are already taking a hit, andMoody's is warning that the move would have negative implications for other EU banks.

If I stood to lose 10% of my savings overnight, I'd be looking out for alternative places to stash it. Heck, even the mattress could start looking safer than EU banks.

As you're probably aware, GETCO - one of the world's largest high frequency trading (HFT) prop shops, is buying Knight Capital. This came about after Knight nearly collapsed when a technical glitch on August 1, 2012 caused it to lose $440 million. While the acquisition is clearly opportunistic, since Knight was so crippled after its August losses, the move also signals GETCO's lack of confidence in the long term profitability of the HFT model, particularly in equities.

GETCO and Knight are two of the largest market makers on the New York Stock Exchange. But apparently, GETCO's decision to purchase Knight is based partly on sharply declining profits in high frequency trading which is driving a decision to diversify away from pure prop trading. Knight is a market maker with substantial retail flow. They get huge equities flow from retail brokerages like Fidelity, E*Trade and TD Ameritrade. According to Traders, Knight makes markets in some 19,000 U.S. equities, handling 3.0 billion shares a day.

According to Traders Magazine, "GETCO, which began as a prop shop, intends to use Knight Capital Group's wholesaling connections along with large retail order flow to become a trading superpower. That, it hopes, will...attract new institutional clients." So if they're looking to attract institutional flow, then we can conclude that the high speed market making business isn't expected to make much of a recovery.

According to GETCO's public statements about the merger, they're looking "leverage Knight's deep customer franchise and GETCO's leading edge technology platform" to become a leader in marketing making and agency execution. If that's the case, then is the regulatory and congressional focus on curbing HFT in equities too late? Will it curb itself naturally as the business model runs out of steam?

You can read the Trader's Magazine story here.

What's your take? Do you think HFT in the equities markets has a healthy outlook?

State Street is under fire again. Last month, Boeing launched an action against the bank for allegedly over-charging for FX trades. This is similar to other ongoing lawsuits against State Street filed by several US states. State Street continues to "vigorously defend" itself in these lawsuits. But these accusations point to how important pre- and post-trade transparency is.

As I work with various vendors and banks, I repeatedly hear frustration from both the sellside and buyside about how lack of transparency in routing and execution make it difficult to make good trading decisions. The buyside is getting increasingly more sophisticated at transaction cost analysis and are looking for ways to better understand the impacts to trading costs. They're beginning to demand more information and transparency to enable this evaluation.

November 2012 issue of FIX Global Trading has an excellent article on this topic. They interviewed Bill Stephenson, Director of Global Trading Strategy at Franklin Templeton Investments. He says that they are now insisting on more real-time transparency and end-of-day reports from their dark pools, ATSs and even algorithmic providers. As the buyside gets more sophisticated in evaluating and understanding execution quality, the sell side is going to have to be prepared to provide meaningful information.

But the sheer volume of data is also going to create a problem. In the article, Stephenson talks about the challenge of building a platform to manage "concatenate, analyze, and interpret that data."

These issues represent competitive opportunities for vendors and sell sides. It will be interesting to see what new developments arise in the areas of execution quality over the next 12 months.