“Mind The Gap!” – The life and times of a man on the move Episode 51

In this 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: Man vs Machine

As I landed among the undulating green fields at one of Britain’s much underrated and very much recommended provincial airports in a mid 1980s Boeing 757 having spent the previous two hours marveling at the engineering magnificence of this relic from my teenage years which had been brought back into temporary service by charter carrier TUI, recollections of bakelite switches and rotary dials instead of LCD screens gave way to the modern world.

Exiting the 757 and re-establishing connectivity with the online world that did not exist in 1983 brought me with a low-latency thud away from the bakelite control panels and analog cabin dials into what is very much the machine age. And I do not mean mechanical machines.

A message from a long term colleague and friend in London appeared, and with it, a wish to speak to me about the FinanceFeeds London Thought Leadership Conference that he had attended six weeks ago to share a conclusion that he had drawn about the direction of the higher end of the FX trading business, which, let’s face it, is where all retail brokers should be aiming their future business plan.

“I attended the conference session in May during your FinanceFeeds conference in London, designed to foster thought leadership for the professional trading community. With the benefit of hindsight, it’s probably fair to say I wasn’t expecting to come away with quite the vision I did, but it’s clear that the concept of self-directed trading or investing as we know it today in pursuit of financial alpha is on the cusp of dramatic change” said my colleague, whose 35 year career in this industry ranges from senior positions at London’s derivatives exchanges to leadership roles at some of the UK’s largest publicly listed brokerages.

“Perhaps it’s worth remembering that the advent of managed funds came about around a century ago when a small amount of effort could help unearth significant financial return, owing largely to market inefficiency and lags in information dissemination. The lure of bumper returns means that more analysts flocked into the market, with investors keen to hunt out abnormal returns. Efficiencies were finally realized and the more recent realization has been that managed funds perform no better than trackers in the long term. The machines can do it better, but what does that tell us about what might happen next?” he asked

His opinion was that our conference wasn’t short of talk about cutting edge concepts, be that “next generation”, “artificial intelligence”, “quantum computing”, “understanding investor psychology” and so on.

“In summary, take these aspects, blend them together, build some clever tools and then get traders or investors to subscribe in order to make their strategies smarter and more successful. All good on the surface, but traders are still paying a premium in the form of subscription-based access to the magic black box and will remain as an inefficiency in the process. That combination of extra costs and an extra step in the chain means that their alpha in terms of financial return alone will by definition always be lower than that of the optimal trading machine or robot. There seems to be some parallel with the evolution of the managed funds industry here – once efficiencies are realised, the advantages can no longer be realised” he said.

Bearing in mind my colleague’s esteemed background at some of London’s most notable institutions, he has reflected on some possible outcomes if the dialog at our conference really does reflect the thought leadership within the minds of those who actually trade accounts for themselves or others, at very high institutional level. “Whether you are day trading or investing for the long term, we’re approaching the point where you give the machine your risk metrics and let it churn away” he said.

“Assuming you don’t have any inside information, the machine is always going to generate a better return than you could manage. It knows more than you do and can work quicker. There’s a factor of scale here which could present liquidity issues and give individuals an edge, but on the basis an individual trader will always be slower than the machine, that’s an irrelevance. The price has already moved by the time you try to get in.”

“Is this the death of the day trading and investing industries as we know them? Well, in the pursuit of financial gain alone, that may well be the case. But day trading has a significant role to play in terms of entertainment, as well as ‘wealth management’” he said.

Controversially, the conversation then moved on to whether standardized affiliate-driven off-the-shelf platform brokerages are not able to modernize and keep up with the likes of Pipster, Revolut, Hargreaves Lansdown or CMC Markets and the inability to develop their own infrastructure and nurture a specific client base has left them backpedaling into the world of gamification.

Perish the thought, as that would be a travesty in my opinion. I have never, and will never accept that our technologically advanced, leading edge business will ever bear any resemblance to anything ‘entertainment’ orientated.

My colleague, an earnest and conservative gentleman of seniority, however did touch on this subject a bit on Monday during our conversation. “Having a flutter on an asset price movement is at its core little different to betting on a horse race, taking a trip to a casino or buying a ticket for the latest Euromillions draw. Mathematically it’s not going to deliver the best outcome, but there’s always going to be a side benefit to be had from the emotional value the activity derives. It remains an engaging distraction which could have a positive upside” he said.

What about investing? Arguably this has the potential to result in a wholesale societal shift. No longer will the obsession be with achieving market beating risk adjusted returns. The machine will do that for you, better than you ever could. Instead investors will have the benefit or privilege of finding an alternative alpha. That could be supporting a company delivering below market financial returns whilst providing a solution to climate change, the small cap local enterprise that will deliver useful services but might otherwise struggle with capital formation or buying into a zero coupon bond to back the work of a charity.

Before signing off a and being driven autonomously by my car which has replaced me, the traditional driver, with algorithms, radar, active GPS and a series of cameras, all I could conclude was that for decades, finding how to align investors with mission-based impact businesses has confounded the wider market. A resignation to the fact everyone is playing on a level field when it comes to our traditional view of alpha might yet prove to be the proverbial silver bullet.

Tuesday: Anyone for Chess?

The relatively recent proliferation of  giant chess boards adorned with equally large pieces assembled correctly on their squares as per the beginning of a tournament has caught my eye several times as this type of garden decoration within stately homes, conference centers and some of the more well tended public parks across Britain becomes more and more viral.

There are even dedicated suppliers and installation companies which will sell your business or hospitality center an oversized chess set and install it into the grounds of the premises with absolute style.

Where, I wonder, does this trend originate, and why specifically is it confined to chess sets?

Whilst at Marco Pierre White’s MPW Steak House in Yatton, which is in the shadow of Bristol Airport’s runway, I noticed that one of these large black and white polygons had planted itself in the middle of one of Cadbury House’s magnificent ornate gardens.

Cadbury House is an ancient establishment and is the location of MPW’s classic-meets-modern chef restaurant, but is also a very well recognized meeting and conference venue for the entire Bristol area.

Of course, Bristol is by no means able to even come close to London in any sphere of life, but it does have a small Fintech sector, it has a long established and massive insurance, investment and wealth management industry and is also home to the world’s third largest self-directed retail financial services firm, Hargreaves Lansdown.

Thus, some financial sector exists, and what does exist represents a relatively high level of acumen.

The chess boards, are they synonymous with strategy? Are they a large, ornate and aesthetically marvelous allusion to business strength and winning through careful thought against rivaling companies?

Most of the examples I have seen (such as the large outdoor set at Lucknam Park near Castle Combe Racing Circuit, are static and purely either symbolic or ornamental depending on whether my perception is right or not, however some are actually able to be played by guests to conference centers, featuring movable pieces which perhaps subconsciously evokes thoughts of business leadership and refines abilities toward competitive strategy.

Britain’s venues are so angled towards the country’s vast business community which in many ways leads the world, that there has to be something in my theory.

Somerset House in London has gone one step further, and has introduced a Virtual Reality experience for playing chess – the board game evolutionary equivalent of taking open outcry pit trading to algorithmic self-executing electronic trading with hosting at Equinix and dedicated fiber optic cabling for optimized data transfer.

In many ways I do hope there is some connection between business evolution and the chess sets. Nurturing today’s massively empowered, technologically astute and open minded interns and post graduates into key developmental roles in our industry is necessary, and sometimes this level of intellect can be encouraged via abstract means.

Britain. Modernity and futuristic thinking via traditional imagery!

Thursday and Friday: Suid-Afrika, land van geleentheid

Yes, Holland is a land of opportunity and extremely well structured fintech entities, perhaps the most aligned with the Anglophone nations that dominate the global financial services sector, however there is another country within which two of its 15 official languages would be immediately recognizable to the astute, sensible and ultra-modern Dutch, and it is not even in the Northern Hemisphere.

I refer of course, to South Africa, one of my favorite nations and environments anywhere in the world. Johannesburg, an absolutely magnificent international, multi-cultural city of 9 million people is the world’s largest man made forest, and is one of the 50 international Alpha Cities.

It is home to a wealth of resources, an enviable, highly luxurious lifestyle, quite simply magnificent surroundings and a world-renowned social lifestyle, and is also the most important business city in the entire continent of Africa.

Johannesburg may well be located in the middle of the southern tip of the African continent, but it combines 400 years of Western culture and education with ultra modern infrastructure, a very well educated population who are used to extremely high quality, and as a result is the opportunity center for a massive, resource-rich, unexploited continent which views Johannesburg as the epicenter of civilization for all of Africa.

Indeed, many brokerages now  looking toward emulating Australia’s success are moving into South Africa, largely because it has similarly well organized regulations as those in Australia, a world class banking and financial infrastructure environment – Standard Bank, Mercantile Bank, Investec and Standard Chartered are among the world’s best Tier 1 institutions – and has access to an entire continent that looks upon South Africa as a bastion of business sensibility with English common law and culture, rather like the relationship between Australia and the APAC region on which its success has been built.

During the end of the week, I began my preparations for a series of conferences that FinanceFeeds will host in Johannesburg this  year, and will be heading to the  City of Gold tomorrow for a week, within which the first event in the series will take place.

On June 25, at the Bryanston Country Club in Sandton, one of Johannesburg’s most important business and wealth centers, FinanceFeeds will host an IB conference, in which the subject of discussion will revolve around how South Africa’s vast and very well developed IB networks can achieve an edge by partnering with high quality Western brokerages to give their clients more security and greater longevity.

This will be the precursor to the main event which will take place in November this year at the Bryanston Country Club.

The main event will be in the form of an all day conference, its format to be very similar to that of our London Thought Leadership Conference which took place in May this year, however the focus in South Africa will be on top level Introducing Brokers, FX hedge fund managers and proprietary traders which use brokerages to execute their trades.

If you are an IB and you would like to attend or present your thoughts and what can be provided in order to help you achieve greater synergy with brokerages and expand your asset classes, engender greater trust among your clients, please feel free to get in touch and join us throughout this year in Johannesburg.

I set off tomorrow morning, and look forward to seeing you on the other side of the equator.

Have a  super week ahead!