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Neil A. O’Hara has extensive experience writing about financial topics for both professional and general audiences. His familiarity with the financial markets gained during an earlier career in the City of London and on Wall Street enables him to explain complex concepts in terms that any reader—whether or not financially sophisticated—can understand.

Here are some of his recent articles.

Trading

 

ALGO trading: a moveable feast

ALGO trading: a moveable feast

Algorithms have come a long way since the early days when traders used simple volume weighted average price (VWAP) routines to facilitate execution in large cap stocks. Technology has helped, of course; computers can now process so much data in near real time that programmers can incorporate feedback from the market to alter the way algorithms execute or route orders on the fly. Attitudes toward algorithms have evolved, too.

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The dark side beckons in calm markets

The dark side beckons in calm markets

In an ideal world, no trader would ever betray a directional bias by crossing the bid-offer spread. Better to sit on the bid—or lurk in dark pools, where execution is often at the mid-point between bid and offer, revealing nothing. Time is of the essence, though, and delay increases the opportunity cost if the price moves against the trader. Little wonder that as market volatility has tumbled in recent months dark pools have grabbed a bigger share of volume in US equities.

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Trading strategies in the middle market

Trading strategies in the middle market

Trading small and mid-cap names has always required special skills. These stocks are highly sensitive to institutional-sized orders, which can amount to multiples of average daily volume. Bid-offer spreads tend to be wide too, which means the willingness to cross the spread conveys a stronger signal to other market participants than for a large cap trading at a penny spread.

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Low risk by name, but is Delta One risk free?

Low risk by name, but is Delta One risk free?

Prospective implementation of the Volcker rule and higher regulatory capital requirements have already curbed proprietary trading at the big banks, ratcheting up the pressure to snag as much customer order flow as possible. Combining their formidable trading expertise with high-powered information technology, banks seek every opportunity to meet the needs of customers around the globe.

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Derivatives clearing: down to the nitty-gritty

Derivatives clearing: down to the nitty-gritty

The year-end deadline for clearing OTC derivatives under the Dodd Frank Act is fast approaching but market participants are still working out the practical details. Everyone knows trades will have to be reported, but who will report what, when, and to whom? The introduction of a central clearing counterparty requires new legal documentation and alters the trade processing workflow, too.

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FX trading: the algos are coming!

FX trading: the algos are coming!

The banks embraced electronic trading among themselves in the early 1990s through platforms such as Reuters and EBS, which initially denied access to other market participants. The bank-only platforms later opened up to a wider audience, attracting among others high frequency trading firms whose liquidity some banks consider toxic. The banks began to pine for a trading venue for their exclusive use, or at least where they were protected against scalpers.

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LME goes east

LME goes east

In the latest manifestation of China’s rising economic power, Hong Kong Exchanges & Clearing (HKEX) has agreed to buy LME Holdings, the parent company of the London Metal Exchange, for £1.388bn, an eye-popping 58.3x net profits for 2011 even adjusting for a higher fee schedule implemented only on July 2nd this year. It is a trophy price for a trophy property: the largest base metals futures and options exchange in the world, with an estimated 80% market share.

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Fixed income: Electronic trading in an illiquid market

Fixed Income: Electronic trading in an illiquid market

While electronic trading has made some inroads among retail fixed income investors, most buy side institutions continue to place their orders in the traditional way: by voice, through dealers who hold sizable inventories of fixed income securities and will commit capital to facilitate customer trades. The dealers are beginning to balk, however.

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Comparing execution quality on different venues

Comparing execution quality on different venues

In an increasingly fragmented market for European equities, trading venues are fighting to attract order flow any way they can. Some trumpet statistics boasting of their prowess, whether in market share, tight spreads, low latency or whatever else shows them in the best possible light. For brokers and the buy side, though, the data deluge does little to facilitate cross-venue comparisons.

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Leveraging Expertise in a Changing Market

Leveraging Expertise in a Changing Market

The combination of low trading volumes, low commission rates and low asset returns has created a tough environment for traditional ­brokerage firms. Lacking the diversified revenue streams bulge bracket competitors enjoy—from underwriting, mergers and acquisitions advice, proprietary trading and principal investments—the pressures small to mid-size ­brokers face today have in the past led to consolidation. Not this time, however.

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In the OTC regulatory bruhaha, clearing comes first

In the OTC, Clearing Comes First

In 2010, legislators on Capitol Hill sent down two commandments etched in stone: “Thou shalt centrally clear most OTC derivative trades” and “Thou shalt trade most OTC derivatives upon a swaps execution facility (SEF).” Two years later, market participants and regulators have still not figured out how to obey.

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Securities Lending

 

Hedge funds look to fixed income

Hedge funds look to fixed income

At first blush, today’s securities lending market appears a pale shadow of its former self. Figures compiled by Markit Securities Finance (formerly Data Explorers), show the value of securities on loan dropped more than 50% from the December 2007 peak to about $1.4trn in early January 2013. It isn’t for lack of supply, either.

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Regulations shake-up in sec lending

FTSE Global Markets

No end in sight for the big squeeze on US money market funds

During the 2008 financial crisis, frightened investors in the United States poured money into money market funds, boosting assets under management to a record $3.9trn in March 2009. As the panic receded, the money began to flow out again, and has continued to do so ever since.

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Low Rates Crimp Securities Lending

FTSE Global Markets

For securities lenders accustomed to earning their revenues from the interest paid on borrowers’ collateral balances, rock-bottom interest rates are about as welcome as low tide to a naked swimmer.

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Securities Lending on the Rise in Latin America

FTSE Global Markets

The Latin American market has turned out to be a mixed bag of tricks for the international custodian banks that dominate securities lending elsewhere.

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Hedge Funds

 

Gunslingers don tuxedos

Gunslingers don tuxedos

Hedge funds took a hit during the financial crisis—along with everything else—yet many were quick to bounce back. Industry assets under management now total $2.5trn, up from $1.5trn five years ago, growth that has come despite mediocre performance relative to market benchmarks in recent years. The institutional investors that plough money into hedge funds take the long view and expect them to outperform bear markets (as they did in 2008/2009), not bull runs. Are expectations out of whack with reality?

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Hedge funds look to fixed income

Hedge funds look to fixed income

At first blush, today’s securities lending market appears a pale shadow of its former self. Figures compiled by Markit Securities Finance (formerly Data Explorers), show the value of securities on loan dropped more than 50% from the December 2007 peak to about $1.4trn in early January 2013. It isn’t for lack of supply, either.

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Opportunities to invest in size and strategy

Opportunities to invest in size and strategy

Hedge funds are always looking for capital. Even funds that are nominally closed to new investors will make an exception if the money will diversify their capital base in a desirable way, perhaps geographically or by extending the expected average duration of their capital. Start-ups and smaller established funds are less discriminating; they take whatever capital they can get. Prime brokers tout capital introduction services in their sales pitches, but managers who sign up and expect investors to throw money at them willy-nilly will be sorely disappointed.

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Prime Brokers Pray For Higher Rates

FTSE Global Markets

Prime brokerage firms took a one-two punch to the solar plexus after the financial crisis.

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Overcoming the Quant Quandary

Absolute Return + Alpha

Ever since electronic execution and deregulation transformed equity markets, traders have yearned for a way to replicate the block trades that once dominated institutional trading through the brokers’ upstairs desks.

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Credit Hedge Funds Fish for Gains

Absolute Return + Alpha

Credit-oriented hedge funds have been on a roll for two years, but it won’t be long before the Federal Reserve tries to end the party. The central bank is getting ready to back away from the easy monetary policy it has pursued ever since the financial crisis erupted in late 2008, ending its second round of quantitative easing in June. It is a question of when, not whether, the Fed will begin to nudge interest rates higher—and put credit hedge fund managers to the test.

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ABS 2.0: Waterfall Asset Management Returns to its Roots

Absolute Return + Alpha

For most investors in the asset-backed securities market, the financial crisis overturned assumptions about credit quality, liquidity and the probability of default. To Tom Capasse and Jack Ross, the founders of Waterfall Asset Management, it was simply a throwback to the early days of the securitization business.

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Securitization

 

CLOs firing on three cylinders

CLOs: Firing on three cylinders

Collateralised loan obligations (CLOs) were among the first segments of the securitisation market to bounce back after the financial crisis. Prices tanked in late 2008 and early 2009 when investors feared the recession would push up corporate default rates—but the concerns proved overblown. Although returns on CLO equity varied by manager, the credit support mechanisms built into the structure kept even the worst deals current on their debt capital. Robust performance resuscitated investor interest in CLOs, but regulators could stall the revival.

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Vive la Difference

Vive la Difference

Mainstream securitization may continue to struggle, but esoteric— or non-traditional — asset securitization is thriving. Investors are buying new deals in diverse areas such as timeshares, structured settlements and whole business securitizations. Lack of origination, not lack of investor demand, is the only thing holding the market back.

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Speed bumps ahead for auto market?

Hardly any prime auto deals suffered ratings downgrades in the financial crisis. Some were even upgraded in 2009.
But while auto ABS may have steered around the worst hazards of the credit bubble, the market needs to be wary of troubles still ahead.

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CLOs have a challenge: Surviving the Recovery

The financial crisis took its toll on the market for repackaging senior secured corporate loans into securities. Investors fled — or were
themselves destroyed. But CLOs have proven to be made of tougher stuff than their CDO cousins.

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Is credit card ABS set for a rebound?

Spooked by a market meltdown and then bruised by regulatory and accounting uncertainty, credit card securitization has taken a battering and issuance has plummeted. As the economy recovers, however, and as bank balance sheets expand once again, some in the market are quietly confident that a recovery is in the cards.

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Canadian Markets

 

Canadian Regulators Ruleā€”and Roil

FTSE Global Markets

Investors who use sponsored access in Canada have always had to pass their order flow through a risk filter before it gets to market. Most high-frequency trading firms operating in Canada rely on their own systems to satisfy the requirement, but that may no longer suffice.

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HFT Tips The Dark Pool Agenda

FTSE Global Markets

In Canada, like other markets where high-frequency trading has taken hold, bid-offer spreads have collapsed and trading volumes have soared. Advocates often cite the benefit increased liquidity brings; and for retail investors, the advantage may be real. They can trade against other market participants on a more equal footing. It’s a different story for institutions that want to trade blocks, however—and it’s a nightmare for traditional broker-dealers, who face soaring trade processing costs.

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Canadian Banks Bulk Up

FTSE Global Markets

Before 2008, Canadian banks were hardly a significant force in prime brokerage. The local hedge fund industry was too small to support the required infrastructure on its own, and most of the banks lacked the global footprint to support funds that wanted to trade outside North America. To the dominant prime brokers in the United States, Canada was just one more country on the map and one easy to service given its proximity, advanced market infrastructure and close ties to the US—so close that 183 Canadian stocks are interlisted on exchanges in both countries.

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Other Financial Topics

 

Will high yield come into its own post-tapering?

Will high yield come into its own post-tapering?

The widely expected Federal Reserve move to taper its monthly bond purchases foreshadows higher Treasury interest rates, a big red flag for most fixed income investments. Even so, it is likely that short-term rates probably won’t tick up until 2015. US treasuries, a risk-free pure play on rates, are the most vulnerable, while the credit spread in investment grade corporate bonds will cushion the blow. For high yield bonds, credit quality is the principal risk— literally and figuratively—so provided Fed tightening reflects a stronger economy corporate cash flow will be robust and default rates should remain low. In fact, high yield could be the 2014 star performer in fixed income.

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Why traditional asset maangers should look again at interest rate swaps

Why traditional fund managers should look again at interest rate swaps

The interest rate swaps market is huge. The Bank for International Settlements (BIS) tallied $379trn in notional amount outstanding in June 2012 (the latest available data), almost 60% of the total for all OTC derivatives. However, take up by traditional asset management firms has been slow.

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High performance vehicles: Beyond the BRICS

High performance vehicles: Beyond the BRICs

Emerging markets are supposed to enjoy superior growth prospects and stronger public finances than G7 countries. Even so, equity investors had second thoughts about this rosy scenario in 2012. Bond investors kept the faith even while the eurozone debt crisis played out, driving credit spreads on sovereign debt of many emerging economies below spreads on debt of every major European nation excepting Germany. Meanwhile, equity investors lost their nerve during the second quarter, sending emerging markets indices into a tailspin amid concerns that recession in Europe and a hard landing in China could stunt growth elsewhere.

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In or out of MTNs

In or out of MTNs

The medium term note (MTN) market is rather like a stealth airplane: precision-engineered, hard to detect but highly effective. The deals are typically private placements customised to meet the needs of the issuer and either a single investor or a small club. Individual amounts raised are often so modest they create barely a blip on the market radar. Bespoke finance is no more immune to the whims of fashion than Savile Row tailors, however.

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The renewed appeal of pension pooling

The renewed appeal of pension pooling

Until recently it looked like pension fund pooling had fizzled into insignificance even before it had managed to enjoy prime days. In part this was due to events beyond the immediate control of those major international firms which had spearheaded the movement, or the banks which supported them.

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The inevitability of a slimmed down euro

The inevitability of a slimmed down euroclub

At a recent conference in Dubai, ex UK Chancellor Alistair Darling said that despite the problems facing the euro it would be catastrophic for the world economy for the currency to fail. In that regard, he suggested that Europe would coalesce to find ways to keep the currency; however it would be unlikely that all current eurozone members would remain in the club.

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Shadow banking: pussycat or polecat?

Shadow banking: pussycat or polecat?

The European Commission pledged at the end of April to tighten control of shadow banking. At a pivotal time in the global financial markets, regulators have become concerned that as the remit of traditional banks is gradually redefined (and, in some cases shrunk) that the shadow banking segment (said to be worth $61trn) could step into the breach.

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Private shares go pseudo-public

In the highly illiquid market for private company shares, a mechanism to facilitate trading did not exist until the backlog of companies unable to go public ballooned after the financial crisis. It wasn’t long before technology platforms designed to streamline private share transfers popped up, making it easier for investors to tap into the burgeoning market.

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Raising the stakes in fund administration

The financial crisis has created new business opportunities for European fund administrators, the green eye-shade bean counters who crank out valuations and account balances for everything from UCITS-qualified mutual funds to hedge funds and private equity vehicles. Lower market values have clipped asset managers’ revenue, forcing them to re-examine costs and focus on their highest value-added skills in research, trading and portfolio management.

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Taxes Are Forever (but tax laws may be changing)

Investors and advisors often turn to tax planning only during the fourth quarter, but such tunnel vision may prove to be a mistake in 2012.

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Can synthetic ETFs continue to compete?

The sovereign debt crisis has become a gigantic stress test for synthetic exchange-traded funds (ETFs) that may well determine whether they can compete against physical ETFs or will survive only as niche products used in markets where physical replication is impractical.

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No end in sight for the big squeeze on US money market funds

During the 2008 financial crisis, frightened investors in the United States poured money into money market funds, boosting assets under management to a record $3.9trn in March 2009. As the panic receded, the money began to flow out again, and has continued to do so ever since.

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The Greater Fool Theory

The New York Society of Securities Analysts

The most dramatic financial meltdown since the Great Depression occurred despite recent advances in risk management techniques. Because of a fervent but unfounded belief in some quarters that VaR (value at risk) measures worst-case scenarios, financial institutions were exposed to crippling losses when VaR models failed to anticipate the extent of potential price movements, in some cases by whole orders of magnitude.

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The Unfair Attack on Fair Value Accounting

The New York Society of Securities Analysts

The blame game for the financial crisis has no limits. In an effort to divert attention from their own culpability, bankers who took risks they did not understand and politicians who encouraged mortgage lending to people with shaky credit have pointed the finger at the accountants. Banks faced with severe losses on their structured debt portfolios and other securities pressed regulators to suspend accounting policies that oblige the banks to record these holdings at fair value, which usually means the current market price.

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