“Mind The Gap!” – The life and times of a man on the move Episode 4

No more status symbols, WeChat about data, apprehending a burglar and its relevance, let’s talk about the weather, and what will you do when the cash stops?

In this new weekly series, I look back on what stood out, what was bemusing, amusing and interesting during my weekly travels, interesting findings within the FX industry and interaction with an ever-shrinking big wide world. This is purely observational and for your enjoyment. 

Monday: Hardware-free and IOT

It does not seem very long ago at all since those concerned with their up-to-date image and position within modern society were continually measuring the make and model of their most recently acquired lifestyle trapping with current ownership trends by their peer groups.

Not a day went by in the late 1990s or early 2000s when those entering their offices would not catch sight of several cellular phone handsets intentionally placed on display on the desks of colleagues, accompanied by desktop screens containing adornments including adhesive branding stickers with the latest model of pocket sized hardware ranging from electronic personal organizers to writable CDs.

The 1980s was all about visible display of status

Fifteen to twenty years ago, what you carried defined your status, which echoed the shallowness of modern society during its transitional period between the solidity of the 1980s ‘Generation X’ which moved the Western world out of the austerity of post-war European socialism and regrouping and into an emulation of North America’s freedom of choice for consumers and business people with tremendous success.

The analog lifestyle trappings that accompanied Generation X’s journey were as rudimentary as the once-vaunted Filofax and the pinstripe suit. Back then, substance and hard work was the underlying status symbol, the stylized diary and power dressing simply the garnish which made those in the lead stand out.

Traded asset classes were also often analog. Before my career in electronic trading technology development began in 1991, the wearers of said pinstripe suits, toting their Filofaxes, traded stocks and equities on open outcry pits in London, New York and Chicago.

The Yuppie’s Zinobar red two door BMW 325i and Platinum Silver Porsche 944 with its somehow fitting pinstripe half-leather interior had become a thing of the past by the 1990s, and the subsequent generation to come of age found themselves in a void between today’s code-savvy and digital focused Millennials with aspirations of off-the-wall startups and lack of any interest in accruing physical acquisitions, be that a house or a desktop computer, and the powerful way that was paved by what they considered to be the uncaring and unmodern 1980s power dressers.

On Monday this week, a clear sign that the hardware-based status symbol has now become well and truly a thing of the past manifested itself when a good friend of mine asked me if there was any benefit in buying a ‘smart TV’. My response was not to spend the money, as they are really not cheap at all, and instead buy a standard TV and connect it to Google Chromecast via HDMI cable which can be bought from any supermarket for $40.

Chromecast is then controllable by a modern smartphone’s operating system and can perform the task of any internet-ready TV for a fraction of the cost.

My pal, a studious academic but not a technology enthusiast by any means, then told me that he had been offered a 52″ smart TV for just $80.

I could not understand why it was such a giveaway, but a quick look at Walmart or Best Buy’s stock list shows that new smart TVs are now down to a fraction of their cost when initially launched and have decreased in value so rapidly that built-in obsolescence is not even a factor – just lack of interest in such devices.

This code was written by a 7 year old. The future customers of tomorrow’s financial services firms

In 1996 I watched a colleague of mine, an astute programmer at RBS in London, who was not known for frivolity, pay over £350 for a NAD DVD Player. If you ask anyone under the age of 12 today what that is they will either not know, or think it is something from the dark ages as they connect their Spotify account to a hifi quality amplifier and play endless streams of peer-to-peer available music via high quality audio systems with Google Chromecast Audio or Amazon Fire Audio.

The net result – NO hardware is interesting to today’s generation.

The screen – whether it be that of a smartphone, tablet or laptop, is a disposable means to an end. Simply a remote controller for their entire cloud-hosted, IP address-dependent lifestyles.

The IBM Middleware system provided my insight into back office and operational software such as database connectivity and regular visits to Sun Systems and Oracle in Reading took place, in a 1989 Ford Orion driven by one of the technical team leaders, whose name was unknown to most engineers as he was more notable for his extremely short temper and continual hushed cursing whilst performing any activity, whether it be driving, or installing 400 non-conflicting bank applications onto a deployable folder on a main server.

Indeed, testing hardware conflicts whenever a new application was packaged and deployed would be enough to test anyone’s patience – however the smiling and relaxed faces of today are largely attributed to the single API connection needed to place bank liquidity in the hands of an entire brokerage! No more hardware or frameworks, and no more performance testing networks!

Nobody is interested what make and model, what upgrades are available and what array of devices anyone carries. It is simply not part of any dialog anymore. Today’s generation want the globalized social opportunities, high quality information and interactive applications that do everything from arrange meetings to open and close the electric shutters or turn the air conditioner on or off in their homes whilst they are enjoying sushi at a fashionable private event that has also been organized at the touch of an app such as Eventbrite or Meetup.

Today, your status symbol is your social mobility and connectivity to the world’s resources, not the matt black consumer durable that sits immobilized on a beige desk.

Uber and Lyft have replaced the need for car ownership in some cities. And for those who still do not want to give up their own personal mobility, car clubs which send you to the nearest vehicle at the touch of a button are considered very post modern.

Practical necessity, or millstone round my neck?

At a 1980s dinner party, it was de rigeur for social climbers to empty their pockets and place an openly visible Porsche keyring and Filofax on the table to show their standing. In Japan, people were actually going to tanning salons and virtually toasting their left arm so that it would show a deeper hue than the right arm, giving passers by the impression that they were able to afford an imported American car with its drivers seat on the left side.

Today, that sort of posing is considered extremely poor taste in most circles, and indeed throughout my entire weeks’ work over the last few years, when working closely with senior executives of large firms, not one of them displays any visible sign of ownership of branded consumer goods.

The modern world is about what is possible, not the objects that can in the end become a millstone around one’s neck.

Considering this, the trading environments of the future may well become completely socially available or app driven. Desktop? What’s that?

Tuesday: WeChat. We chat some more. We will chat worldwide.

China, a fascinating nation in which I have spent considerable lengths of time, most of which have been dedicated to studying and learning how business relationships are structured within Chinese companies that wish to engage via extremely complex methods, with service providers in free market nations.

China is widely recognized as an industrial, commercial and technological powerhouse, designing and manufacturing pretty much everything for pretty much the entire world, however it is doing so via the gargantuan purchasing power and regimented, holistic nature of its communist system.

Nobody can compete with such an other-worldly, independent nation of highly educated, hard working and determined perfectionists who are supported and overseen by a business-orientated central government that has ownership and jurisdiction in every aspect of life.

Hence, the innovative and free West has long since realized that routes to market for Chinese technology can be perfectly partnered with Western channels, and vice versa, through strictly managed channels.

One of the ways that the Chinese government has harnessed this is to ensure that the entire nation becomes mobile phone literate regardless of age and location, and this way everything can be centralized (and supervised!) via cellular applications.

In January last year, I was joined in Shanghai by a senior executive from WeChat, who explained that China has 895 million mobile internet users, and almost nobody uses email. Every business transaction and update is conducted via WeChat, hence our decision to embody that as a mainstay of our Chinese service.

The executive told me that WeChat has become a vital tool in use among all introducing brokers, liquidity providers, technology partners and brokerages across China. FinanceFeeds has met with some of the largest introducing brokers and brokerages across the country, all of whom use WeChat as the main source of media as well as connection with their customers. It is quite clear that the Chinese FX industry is reliant on developing massive WeChat networks, regardless of the size of their business or amount of assets under management.

This Tuesday, I was doing a data backup from my commercial WeChat account to my cloud storage. It held tremendous amounts of valuable information, and when analyzing the information, had various extraneous information that could be translated into English via Baidu translator that could easily be used by Chinese firms, sold for marketing and is not my intellectual property.

Effectively, the way China intereacts with the world and domestic entities on the mainland has been cleverly engineered to make everyone’s life easier whilst also enabling the government to grow its own database by using AI to gather relevant data and distribute it. Very clever indeed.

China does not need to purchase data or marketing information. It generates its own by providing a single means for every business and individual to communicate, which facilitates ease of business and is welcome among all those needing to have efficient and well organized pragmatism in their lives.

I discussed the data driven dominance of WeChat in Shanghai with 300 FX professionals and a WeChat executive last year

Once I had discovered the amount of extra data that is being harvested, I did a bit of further research, and it is clear that this is a priority by China’s government.

This week, the government began a new part of a pioneering experiment in the use of facial recognition technology. In a scheme that started last year in the southern city of Guangzhou, the Chinese government is allowing users of WeChat to link their ID cards to the ubiquitous social media app created by WeChat developer Tencent.

By scanning their faces with the WeChat app, users can obtain a digital ID that they use to register for a variety of services. For Tencent, there is a further upside to the scheme: the owner of WeChat is becoming the repository for another vast store of data about Chinese citizens.

The pilot project, due to be rolled out around the country, highlights one of the most intriguing aspects of China’s headlong push into the world of artificial intelligence and other frontier technologies: the relationship between the Chinese Communist Party and the country’s ambitious and enormous tech companies.

Even after four decades of market-based economic reforms, the party places a high priority on maintaining state control over the strategic uplands of the economy — from finance to energy and media.

While large private companies have emerged, the party has often looked with suspicion at high-profile entrepreneurs who might present a challenge to its hold on society.

As part of a recent crackdown on a group of private companies, the chairman of insurance group Anbang, Wu Xiaohui, was sentenced to 18 years in jail for fraud.

Yet the high priority that has been given to becoming a leader in new technologies means that the party is — for now — placing a large bet on a small group of private sector companies such as Tencent, Baidu and Alibaba, whose founder Mr Jack Ma is probably the only Chinese public figure whose global fame gets close to that of President Xi Jinping.

Given the party’s chequered history with the private sector, the global prominence of some of the big tech groups could become a source of considerable tension in the future, say observers.

However, as the WeChat-ID card programme shows, the stakes on both sides are higher than ever before: the nominally private-sector tech companies are inextricably linked with the Chinese state and its security apparatus, and the authorities retain the upper hand in the relationship.

The tech groups, said Mr Duncan Clark, chairman of consultancy BDA and author of Alibaba: The House That Jack Ma Built, this week “are increasingly co-opted into national policy”.

They have even been assigned roles in government strategy documents, including a directive on AI that was published last year. “The party is still in charge and the party is going to use them,” he adds.

Close ties with Beijing mean that Chinese tech companies often appear to their international rivals as effective arms of the state— something that has on occasion attracted the attention of the Committee on Foreign Investment in the United States.

And as one Beijing based lawyer puts it, US and European companies believe they are competing “not with a company, but with a country”.

Fast growing internet businesses like Tencent and Alibaba, as well as the likes of Xiaomi, the smartphone maker that listed this month, and ride-hailing app Didi Chuxing, have changed the way people in China work, pay and play.

With their gleaming headquarters and asset-light models they bear no comparison to the sprawling monolithic state-owned enterprises.

If the more than 50,000 state-owned enterprises controlled by central government and employing more than 20 million people, according to OECD data, are symbolised by plants churning out steel for the price of a cabbage, the 2018 tech company is about turning data — nominally a free commodity — into cash.

Its main asset are the employees, who are sweated assiduously: working “996” or 9am to 9pm, six days a week.

As it stands, China’s top nine tech companies, both listed and privately held, have a combined market value of around US$1.5 trillion (S$2.06 trillion).

Alibaba and Tencent, the biggest — and in many cases the financial taproots of China’s tech universe — generate billions of dollars of free cash flow.

Wednesday: Burglary and the new face of the nation. Sound familiar?

This Wednesday evening signaled yet another unpleasant scenario which I am certain many have had to deal with at some point in their lives. I caught and apprehended an intruder who was scaling the high security fence at the entrance to my home, who was even determined (or desperate) enough to climb over the barbed wire at the top of the security fence.

Upon seeing this, I realized that this was not someone who had simply left their key at home or had forgotten the access code to the security gate at the entrance to the condo.

Dressed in a white shirt and wearing a large white Kippa, the man, in his late thirties or early forties, ignored me and continued his unauthorized entry.

When confronted, he resorted to immediate anger and aggression, and did not leave the premises at all. He stood on the premises, and was joined by two other unsavory characters who proceeded to conduct what appeared to be a very dubious deal between themselves. Claims of residency, threats and a torrent of abusive language were his response, rather than any discretion or attempt to leave. During the past two years, cars and bicycles have been stolen by what the police consider to be organized crime gangs taking luxury items to order, and entry has been gained by several opportunists riding on the back of this wave too. The barricaded fences and electromagnetic entrances that adorn the buildings here differentiate the gracious and welcoming home entrances in America or Britain.

Will we all have to go to this extent?

This has become the new face of the nation and resembles what has been experienced in the digital sector in Israel recently.

Fifteen years ago, the country had a population of just 5.6 million, and was recognized as a pioneer in electronic trading technology. Companies that have now been acquired by mainstream giants were founded here. Traiana is a good example, which was bought by ICAP.

Now, the nation is home to 8.1 million people – representing a growth of almost 80% between 2009 and now. Meanwhile, whilst the growth is there in statistical terms, over 1 million highly educated Israelis of European descent have left the country for New York, Berlin, London and Paris.

A longstanding friend of mine works at senior level with a design agency in California, which also has an office in Berlin, Europe’s hipster capital and land of networking opportunity for those wanting to gain access to international firms based there, told me that over 100 Israelis are landing in Berlin every week. That is 5,200 per year! Their path is usually to do two years at an international firm there and keep the living costs low, then get a sponsored Green Card, and off to the US it is.

Silicon Valley, the next step from Berlin, is also home to many skilled and talented former inhabitants of Theodor Herzl’s dream.

So, if the quality is leaving, who is replacing them at such a high rate?

It is clear – binary options, affiliate marketing fraud and underworld networks that have made the headlines over the last few years and attracted the adverse attention of the FBI, destroying the State of Israel’s reputation as a business-orientated nation. These entities are operated by individuals who resemble the unpleasant chap that I had to apprehend the other day, and their responses to criticism are similarly aggressive.

When you can bribe the authorities so easily, a circumstance that NEVER used to exist in this country, it is easy to see where these individuals get their levels of confidence from.

You can read my synopsis of this dynamic here.

Thursday: Weather  futures are a thing of the past.

What is going on with the weather this summer? England has experienced 35 degrees celsius on a few occasions, and for the last two months, sustained summer temperatures of over 30 degrees that would usually be synonymous with San Diego rather than Southampton.

I even caught the sun on a fishing trip in Cornwall this month.

Central and Eastern Europe has had heatwave followed by rainstorm, there are talks of an impending earthquake in the Middle East, Hawaii has been rocked by a severe natural disaster, and the usually unremarkable state of Iowa has experienced some terrifying storms.

On Thursday, a series of Tornados brought havoc upon various towns in the Midwestern state, and there were 27 reports of tornadoes across the state, CNN meteorologist Brandon Miller said. The exact number will be released by the National Weather Service when it surveys the damage.

Weather can have an impact on corporate deals, hence it is a serious derivative. Source: Business Renewables Center

One reported tornado hit a company in Pella town, about 40 miles from Des Moines, sending at least seven people from Vermeer Corporation to hospital with injuries.

The company, which manufactures industrial and agricultural equipment, had major damage, said Vermeer CEO Jason Andringa .

It is likely that the human mind does not remember the bad weather days during youth, and only highlights the fair weather which facilitated childhood activities, but I am not so sure.

My youth was really spent during times of predictable conditions. Winters were cold, and the late 1970s relative poverty meant memories of ice on the inside of windows and sidling up to a free-standing Alvima gas heater with a coat on, and summers were bright, glorious and welcoming. Cycling through endless countryside, the sound of alloy spokes catching the wind whilst perfectly true Mavic wheels turned was all that could be heard.

By contrast, today’s constantly changing weather is no longer a topic of light conversation over a scone and a cup of tea in rural England, but a serious environmental consideration.

If this is the case, why did speculative traders bet on the weather in the 1970s and yet they do not do so now?

In the 1970s, CME Group began offering weather futures to direct customers. This still exists today and yet is relatively uncommon and is not ever raised in any discussion about genuine, listed binary futures products on derivatives venues or in any discussion on how to attract low-deposit traders to steady and reliable products, which is a potentially large market share.

By February last year, Exchange traded weather derivatives had been still struggling to make headway across Europe, as demand for bourses’ contracts remains limited, suggesting a need for further sector education and innovation.

Speaking at a conference as part of Germany’s E-World trade fair at the beginning of last year, weather risk transfer experts discussed the persistent challenges and struggles facing a successful European energy market for weather derivatives.

Europe, as with the wider world, experiences seasonal changes and a variety of weather events across numerous regions, including wind events, storms, earthquakes, flooding, and so on. But despite the dynamics of the European energy market, which continues to adapt to renewable energy advances, industry experts explained that bourses such as Nasdaq and EEX have seen limited demand for solutions.

Speaking at the conference Jens Boening, Head of Weather Derivatives at EDF Trading in Britain, said, “most European utilities consider weather risk management as strategically important,” adding that “the weather derivative market is still in its infancy.”

I have spoken at length on various occasions to senior executives within Chicago’s listed derivatives exchanges about this and they are often as perplexed as I am. Effectively weather futures trading is an exchange listed binary option. Surely it would make sense that this would be more appealing to those wanting to make a quick guess on the outcome of two circumstances than the horrific fake binary options that had been peddled by the fraudsters of Ramat Gan via outlets in Limassol and a plethora of offshore regions?

Nope. Instead, the weather became more unpredictable, and in financial terms that could be called ‘volatility’, yet demand for weather futures on genuine venues issued by large derivatives providers with unquestionable outcomes dwindled, whilst the fraudulent OTC binary options business aggressively stole $10 billion a year from an unsuspecting global public.

A very strange dynamic indeed.

Friday: No more cash. 

On Friday, I received an email from a supplier, explaining that their entire business will become cashless by February next year. This particular supplier owns conference venues and golf clubs. This means that even those wishing to enjoy a beverage in the 19th hole, or have a quick round of golf before work when not a full member, will have to pay via PayPal or credit card.

Indeed, it is very unlikely that the move to a cashless operation will affect anyone at all, because quite frankly, everyone these days uses cards, transfers or payment processing channels such as PayPal for every day purchases.

If this is a direction that customer-facing venues are taking, then it should be taken more seriously than just an attempt to remove the need to handle cash.

In London, public transportation no longer handles cash. Buses use contact-enabled cards, Apple Pay or the London Transport “Oyster Card” to charge passengers for bus journeys, parking meters around the world are either electronically enabled via SMS, or have been abolished completely in favor of payment via applications that hold car license plate details and are enabled when parking and disabled when driving away from a parking space.

This, and thousands of other everyday items, could provide a steady diversified revenue stream for OTC brokerages

In essence, we already live in a world in which actual physical cash is not completely necessary. Of course, there will always be a need for cash transactions, even in highly developed regions, due to the anonymity and immediate ability to perform a transaction that cash offers, however we already live in a pretty much cashless society, so why are FX brokerages not embracing this as an additional and rapidly expanding revenue stream?

An interesting point is that the dramatic growth in this sector, which includes international firms such as MoneyGram, Travelex, and Western Union operate in such a separate business environment to the FX brokerages in the electronic trading sector that the paths do not cross in any shape or form.

This is the case as far as the actual service providers to end users are concerned, but what about the wider operational components?

At that level, the electronic trading industry and the deliverable FX businesses share common ground, and services are provided by liquidity companies which are veritable giants in the prime brokerage and non-bank liquidity business.

This reminded me of a conversation I had recently with Falgun Khamar, FX Sales Trader at Sucden Financial on how large institutional businesses provide service to deliverable FX companies.

When discussing how  Sucden Financial gained a presence in this field, and where the company stands against retail providers in London, Mr Khamar said “Sucden Financial is well established in FX and has supplied deliverable/physical foreign exchange for over 30 years. Our clients include money service businesses (MSBs)/commercial FX providers, who in turn deal with companies and individuals wishing to exchange foreign currency.”

“The market has historically been dominated by a small number of large banks. We identified a gap and over the last few years have increased our efforts to capture a greater market share. Sucden Financial is not a bank and does not compete with retail providers. The technological advances of FinTec payment providers mean we are a strong fit to assist with these firms, especially in their initial growth stages.”

The thing that is noticeable here is that very few industry participants associate Sucden, or any other provider of this nature, with payment settlement or deliverable FX. It remains a very small aspect in the OTC market that we are used to.

As I understand, Sucden does not offer the sort of direct payment system that I am advocating – it is purely international deliverables for large corporates, however this type of arrangement could easily be extended to government departments (like London Transport) or small to medium enterprises like the golf club which made me think of this in the first place.

It is clear to me that by providing an immediate spot settlement facility from a retail brokerage to small to medium enterprises that want to go cashless and yet facilitate easy international business is a first class opportunity.

The retail firms in this industry are highly innovative, can outstrip the legacy mentality of banks, undercut them on price and offer a fully digital order management system and back office to customers.

The turnover in that sector is huge and growing, and carries absolutely no risk as it is a commission business, not a margin business. This would allow companies to strengthen their margin FX business and use a secure capital base generated by deliverables and payment processing, and a capital base is in many cases what retail firms lack.

Getting onto the cashless revolution is quite easy – going to small businesses and ensuring them low cost and immediate settlement via an API connected prime of prime and direct market access would bring good commercial business and is much easier than looking for retail traders in today’s market.

Let’s see if one day I go to an app to pay for parking and the gateway between the parking firm and its international owner is powered by well known FX trading firms.

Wishing you all a great week ahead!

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