Category: Financial Markets

Reporting Season Shows Impact of Low-growth Era

According to The West Australian, there are two main lessons from the 2016 earnings season. First, the Australian economy is well and truly in a low-growth era and second the earnings-growth potential of some of the nation’s favourite blue-chip stocks is not invincible. The economy is now basically a zero-sum game and few companies have any pricing power left. For example, CBA chief executive Ian Narev admitted last week over the medium term the bank could only grow profits at roughly the same rate as GDP.

This is creating an inter-generational structural problem, because policy overly skewed to supporting the housing market is continuing the Australian ‘tradition’ of making the community debt slaves to the banks.

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Solid dividend growth has proved not to be nearly as bankable as many income-dependent investors believed.

The market severely punished companies that missed forecasts or downgraded guidance but, by and large, they have ignored the steady lowering of the earnings bar over which companies are expected to jump.

No doubt most long-term shareholders have not yet lost faith in the profit potential of Wesfarmers, Commonwealth Bank and its three major bank rivals, the corporate behemoths that straddle the Australian continent like no others.

But it can no longer be argued they do not carry real downside profit risks as wage growth limps along at record lows, the workforce is increasingly “casualised” and world-beating household debt levels nudge 125 per cent of GDP, all of which pose severe risks to bad debts and weak spending trends.

This means the economy is now basically a zero-sum game and few companies have any pricing power left.

The management fad of cost-cutting to profit growth is perpetuating a negative feedback loop into deflating nominal GDP growth — growth not adjusted for inflation — that has begun to bite hard into revenue and profit potential in Australia and around the world.

One company’s cost saving is another’s lost revenue but there is little “fat” left to be cut after three years of corporate austerity to pay the juicy dividends investors have demanded.

CBA chief executive Ian Narev admitted last week over the medium term the bank could only grow profits at roughly the same rate as GDP, and that’s true for a Wesfarmers and many of the bigger companies too.

Nominal GDP roughly equates to the sum of the transactions upon which all companies can draw revenues and profits, and it has has sunk to a 60-year low of 2.1 per cent, a third to a quarter of levels prevailing prior to 2007.

That’s why even with a dominant national consumer footprint Wesfarmers’ Coles managed just 4.2 per cent revenue growth as rival Woolworths headed headed into a tailspin, reporting a 1.2 per cent drop in revenue last year. The average of their sales growth equates to nominal GDP growth.

CBA once demanded a 20 per cent price-earnings valuation premium to its rivals but the country’s biggest lender grew earnings just 2 per cent as the banking regulator began to rein in east-coast speculators driving house-price growth at multiples to income growth.

Overall, with just a handful of companies still to report, earnings have dropped about 8.5 per cent, dragged down by an average 48 per cent slump in resource profits — 15 per cent down for miners and a whopping 60 per cent for energy stocks.

Along with banks, industrial earnings have slipped too, down about 3 per cent on average according to Deutsche Bank analyst Tim Baker.

“Momentum is still strong for those with US dollar exposure, and for many domestic cyclicals,” he said.

“But falling profits in food retail and non-bank financials have hurt, as has ongoing softness in resource-exposed earnings.”

But analysts have tried to remain upbeat, supporting high valuations and slimmer dividend yields for now.

UBS strategist David Cassidy said, “defying the naysayers”, the 2017 outlook for S&P-ASX 200 stocks was a positive 6 per cent for the average non-resource stock.

Forecasts are one thing, however, and meeting them another, something all too many company executives and shareholders are learning the hard way after being mesmerised by lofty share prices and fooled by headline “real” GDP and unemployment data.

Over the past six years every rate cut has been forecast to be the bottom by growth optimists and yet nominal GDP has continued to decline deeper into recession levels with little room left to cut further.

“Our nominal growth today is lower than our real growth, by a full percentage point,” Treasurer Scott Morrison said this week.

“This is an uncommon predicament and a core challenge in working to bring the budget back to balance.”

Outgoing Reserve Bank governor Glenn Stevens pointed to the problem two weeks ago when he said “someone, somewhere” needed to be willing to borrow money and spend it.

Strategists at Patersons explained why this was difficult.

“Policy overly skewed to supporting the housing market is continuing the Australian ‘tradition’ of making the community debt slaves to the banks and is a huge disservice to the next generation who also need to afford to buy shelter, along with things like a university education that used to be supplied by the government through the taxation system in a former world where promoting higher community education was seen as economically beneficial and worth supporting,” they said.

“There is too much passive investment in the Australian economy, passive, idle cash sitting in assets like housing and stocks, and not enough funds pushing productivity, technological initiatives and creating real tangible benefits for the economy and wider community.”

Low productivity creates a dividends pickle

From InvestSMART.

Believe it or not, that smartphone in your pocket has more computing power than all of NASA circa 1969. Okay, so it won’t get you to the moon but it can get you a pizza, or anything else. The silicon revolution that spawned the internet has created global companies and upended centuries-old industries. It’s the kind of creative destruction Schumpeter would appreciate, making us (labour, that is) more productive and the companies in which we invest more profitable.

Except that there’s no evidence of that actually happening, at least not since the 1990s. Earlier this month the US announced that non-farm productivity fell for the third consecutive quarter, the longest period of decline since 1979. It’s strange, don’t you think? Here we are in the midst of a transformative era of Uber, AirBnB, gene splicing and coffee cups that give you a kiss* – and the country that’s leading the way is experiencing falling productivity.

Theories abound as to why; from lazy workers and poor data to income inequality and under-investment (a story I will one day get to). Facebook investor Peter Thiel is so concerned he’s lovingly published a beautiful online lament (one must be careful about what one says about dear Peter), titled ‘What happened to the Future?’ It claims the rate of technological innovation is actually slowing, which is why we got Twitter’s 140 characters instead of flying cars.

The truth is more banal; no one really knows why productivity growth has been in long-term decline.

Investsmart2 The Treasury chart shows Australia’s performance is better than most, although that’s not saying much. It’s been decades since Western countries experienced the rates enjoyed in the 1950s and ’60s. We might be transitioning away from the mining boom with some success, via an investment-led property boom, but slow productivity growth is a global problem.

This issue looms large over negative interest rates, currency wars and sovereign debt; all of which would be less of an issue if productivity growth were stronger. Rising productivity drives increases in household income, which boosts economic growth and corporate profits. In the long run we can’t expect dividends to increase without it. And yet dividends have been increasing faster than corporate profit growth.

InvestsmartHigher dividend payout ratios mean lower levels of reinvestment but that’s what investors demand, sacrificing higher future income in favour of cash right now. And companies have all the excuses they need to comply. Hurdle rates are ridiculously high compared with interest rates and they, like their customers, are worried about the future. Why not spend earnings on mergers, acquisitions, share buybacks and dividends? So, enjoy the sounds of those fat cheques hitting the doormat over the next few months, they may not be quite as high in years to come.

Reading between the lines, Commonwealth Bank chief executive Ian Narev might hold a similar view. At the bank’s recent results presentation he said that “dividends are not annuities”, a bland statement of fact but a rebuke of sorts to dividend-chasing investors. Our banking analyst, Jon Mills, meanwhile, believes the big banks “are going to find it tough to raise earnings and dividends over the next few years”.

It’s a common view among brokers and fund managers and has been for quite a while. Increased capital requirements and regulatory costs, potentially higher provisioning and slower credit growth could be a drag on the sector’s earnings. Last week, corporate trailing indicator Moody’s joined the slumber party, putting the sector on a negative credit outlook – not an actual downgrade but the threat of one.

Bank shareholders shouldn’t be too concerned. InvestSMART’s research director James Carlisle, who excitedly told me yesterday the banks are within spitting distance of joining the Buy list, certainly isn’t. If investors are reaching for yield, they’re not leaning the banks way.

Perhaps a change is afoot. Wealth manager IOOF Holdings and conglomerate Wesfarmers, both of which in the past have registered extremely high dividend payout ratios, recently announced dividend cuts. Neither were punished for it, which is as it should be. Dividends should reflect the state of a company’s finances and the opportunities it has to reinvest capital. When boards get hung up on maintaining dividends bad decisions can be made on both those fronts.

Kudos, too, to BHP Billiton, where management rather than mine-quality is the problem. It has committed to pay out at least 50 per cent of underlying earnings as dividends. With one hand tied behind its back the company’s capacity to make more overpriced acquisitions is therefore halved. Sometimes, a company unable to reinvest too much capital is a good thing.

There’s another lesson here, too, one that might be echoed in the banking sector should a credit downgrade actually occur. Deputy research director Gaurav Sodhi, in his review of BHP, put it thus: “It’s not good enough to wait for improvements in business conditions before buying shares. Uncertainty and pessimism are what create opportunity and expectations will always lead reality.” Investors aiming to outperform the market must lead, and we can’t do so from the back.

Another factor evident this reporting season is the effect bond yields are having on growth. Low bond rates have caused a weird reversal, one where bonds are purchased for capital growth and shares for income. Highly-leveraged, tick-tock infrastructure stocks like Transurban and Sydney Airport, plus just about every Australian Real Estate Investment Trust (AREIT) you can think of, have enjoyed huge share price increases as a result. We’re currently at the point where high yield usually implies higher share price risk.

Now it’s the turn of growth to get a little love. Earnings growth expectations were low this reporting season and any company that managed to beat them, even by a bit, has benefited. ASX and Trade Me – the latter still on our Buy list and the former only recently removed from it (disclosure: I’m a shareholder) – are good examples. Whether this is the return of common sense or an early preview of another episode of crazy we’ll just have to wait and see.

All of these examples, though, point to the incredible influence the bond market is having on share prices. Bond yields that are either negative or in low single digits are the widespread numerical expression of Larry Summers’ belief in secular stagflation. In non-economists speak, that means structurally lower global growth, accompanied by lower-for-longer rates as a consequence. So common is this thesis it’s hard to find anyone of note that contradicts it. Right now “lower for longer” seems the epitome of a cheery consensus, which is perhaps the best reason to worry about it. Time to kiss the coffee cup for good luck perhaps?

*Korean designer Jang Woo-Seok’s ‘Human Face Coffee lids’:

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Directors of Storm Financial found to have breached their director duties

ASIC says the Federal Court has found that the directors of Storm Financial, Emmanuel and Julie Cassimatis, breached their duties as directors.  The Court also found that Storm Financial provided inappropriate advice to certain investors.

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Since around 1994, Storm Financial operated a system created by the Cassimatises, in which what ASIC considered to be “one-size-fits-all” investment advice was recommended to clients.  The advice recommended that clients invest substantial amounts in index funds, using “double gearing” (Storm Model).  This approach involved taking out both a home loan as well as a margin loan in order to purchase units in index funds, create a “cash dam” and pay Storm’s fees.  Once initial investments took place, “Stormified” clients would be encouraged to take “step” investments over time.

By the time of Storm’s collapse in early 2009, approximately 3,000 of its 14,000 client based had been “Stormified”.  In late 2008 and early 2009, many of Storm’s clients were in negative equity positions, sustaining significant losses.

The case that ASIC advanced against the Cassimatises centered around a sample of investors who were advised to invest in accordance with the Storm Model.  ASIC alleged that the advice provided to those investors by Storm was inappropriate to their personal circumstances, considering that each of the investors were alleged to be over 50 years old, were retired or approaching and planning for retirement, had little or limited income, few assets and had little or no prospect of rebuilding their financial position in the event of suffering significant loss.

Among other things, it was also alleged that Storm failed to properly investigate the subject matter of the advice given to those investors.  As such, ASIC also alleged that Storm failed to do all things necessary to ensure that the financial services covered by its licence were provided efficiently, honestly and fairly.

ASIC further alleged that because the Cassimatises were responsible for the day-to-day significant decisions in relation to the provision of financial services to Storm’s clients and exercised a high degree of control over its systems and processes, they had caused Storm to contravene its obligations under the Corporations Act and did not exercise their powers as directors of Storm with the degree of care and diligence that a reasonable person would have exercised in that situation.

In a 217 page judgment, Justice Edelman found that:

  • Storm provided advice to certain investors, that was inappropriate to their personal circumstances and failed to give such consideration to the subject matter of the advice and did not properly investigate the subject matter of the advice given.
  • “A reasonable director with the responsibilities of Mr and Mrs Cassimatis would have known that the Storm model was being applied to clients such as those who fell within this class and that its application was likely to lead to inappropriate advice.  The consequences of that inappropriate advice would be catastrophic for Storm (the entity to whom the directors owed their duties).  It would have been simple to take precautionary measures to attempt to avoid the application of the Storm model to this class of persons.” (paragraph 833)

Commissioner Greg Tanzer said, “This is an important decision which emphasises the importance of directors’ duties to ensure that they do not cause the companies that they control, to breach the law.  The decision also highlights the significant obligation on financial services licensees to provide financial advice that is appropriate to the persons to whom it is given.”

The matter will be listed for a further hearing at a later date to determine what civil penalties and disqualification orders should be imposed on the Cassimatises as a result of the breach of their director duties.

‘Reliable’ equities not a replacement for bonds

InvestorDaily says income-seeking investors should be wary of buying Australian equities despite their strong dividend payouts over recent years, says State Street Global Advisors (SSGA).

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In a note to investors, SSGA said Australia’s equity market is one of the highest yielding in the developed world, and its “perceived reliability” could mistakenly cause some investors “to think of the market as almost bond-like”.

“This is a potentially dangerous misunderstanding: the capital value of an equity security is far more at risk than a bond, furthermore, unlike bond coupon payments, dividend payments are not fixed,” SSGA said.

The firm cautioned that data from the past five years shows that payout ratios in aggregate have climbed, while dividend yields held steady.

“This reflects a period during which resource companies and, to a lesser extent, banks held their dividends unchanged while experiencing a fall in earnings,” SSGA said.

For Australian market dividend yields to be maintained at the current level, SSGA warned, earnings need to improve since current payout ratios “cannot increase much further, and probably need to come down”.

“There is no guarantee that last year’s dividend payment will be repeated this year, or even that forecast dividends from sell-side analysts will be paid this year,” SSGA said.

“A strategy of blindly buying companies with the highest reported dividend yield could expose investors to some high-risk securities.”

SSGA added that while investing for dividends “may have long-term merit”, a different approach was needed by investors looking for short-term capital stability.

Super funds return three per cent

According to Financial Standard, superannuation funds have returned an average of 2.9% for the 12 months to 30 June as measured by the SelectingSuper workplace default option MySuper Index, thanks to relatively high returns from property and fixed income investments. Equity and cash dragged overall performance down.

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The SelectingSuper workplace default option MySuper Index showed a negative 0.9% monthly return in June. However combined with the positive return in the period March to May, the rolling 12 month performance for the 2015-16 financial year was a positive 2.9%.

The monthly fall in superannuation performance in June was driven by a fall in both Australian and international equities. The negative return for super funds in the latest month comes at the end of a period of relatively volatile returns in the first six months of the 2016 calendar year.

The positive 2.9% performance for funds in the 2015-16 financial year, although lower than prior years, was nearly 2% above inflation for the period.

The performance over multi-year time periods benefits from the positive impact of high returns in the years 2013-15. Reflecting this, three-year rolling MySuper returns are 8.3% pa and five-year returns are 8.1% pa. The longer term 10-year return is a more modest 5.2% pa although this period incorporates the full effect of the GFC and is overlaid by a lower inflation environment.

On an annual basis, Australian equities, often the largest asset class in many balanced funds, positively contributed with 0.6% return as the market has progressively drifted down since early 2015. The contribution of international equities has been a positive 0.4%, although this impact has been muted by many funds through hedging in-built within their portfolios.

Property has continued to provide a significant positive impact on fund investment outcomes with the listed property sector having a positive 24.5% return in the 12 months to end June. To further highlight the positive impact buffering that property has had on superannuation returns, the three year average return to June 2016 from listed property is 18.5%.

Over the year ended June 2016, the fixed interest index return was a strong 7%, although, on average, fixed income portfolios within superannuation funds underperformed this index. Meanwhile cash returned a modest 2.3% over the same period.

In net terms this means funds with relatively high exposure to Australian equities and international equities underperformed in the 12 months to end April. Similarly funds with relatively larger holdings in property and potentially fixed interest, outperformed in the period.

Regarding the market segments, the gap between not-for-profit (NFP) funds and retail funds within the Workplace sector continues. The 12 month return gap is now at 120 basis points in favour of NFP funds. The long term five-year segment gap is 30 basis points in favour of NFP funds.

ASIC review highlights inconsistent practice by firms handling confidential information and conflicts

An ASIC review of risks related to the handling of confidential information and conflicts of interests, particularly in the provision of sell-side research and corporate advisory services, has found that most firms have policies and procedures in place to deal with these risks. However, there remain instances of poor and inconsistent practice in their application.

Investment-PigReport 486 Sell-side research and corporate advisory: Confidential information and conflicts of interest details the review’s findings and highlights areas of concern requiring a greater focus and care.

Between September 2014 and June 2016, ASIC conducted reviews of the policies, procedures and practices of a range of investment banks and brokers active in the Australian market and reviewed a sample of transactions, including initial public offerings (IPOs) and secondary offerings. This review followed on from previous monitoring and surveillance work undertaken by ASIC that had indicated some poor practices in these areas.

While most firms have specific policies and procedures in place, the review found considerable variation in the following market practices:

  • Identification and handling of confidential information: Some organisations do not have appropriate arrangements to handle situations where staff members come into possession of confidential information. This includes the inadequate use or supervision of information barriers and restricted trading lists.
  • Management of conflicts of interest: There is an inconsistency in how conflicts of interest are managed. This includes the structure and funding of research, insufficient separation of research and corporate advisory activities (particularly the involvement of research in soliciting business during the IPO process), decisions about share allocations in capital raisings, and mixed practices in relation to the disclosure of conflicts of interest.
  • Staff and principal trading:
    • There is also considerable variation in the strength of controls to manage staff trading, including trading by corporate advisory and research staff. In particular, some questions remained as to whether the approval process adequately addressed the conflicts of interest, and whether a staff member might be in possession of confidential information.
    • In mid-sized firms, it is more common for staff to participate in capital raising transactions that the firm is managing. This presents an increased risk of unacceptable or questionable activity that firms need to be aware of and manage.

ASIC Commissioner Cathie Armour said the purpose of the review was to understand current market practices and identify areas of particular concern.

‘The proper handling of confidential information and the management of conflicts is a key element in preserving and promoting market integrity, improving market efficiency and increasing investor confidence,’ she said.

‘Where confidential information is mishandled or conflicts are not managed appropriately there is a risk that a breach of financial services laws may occur. This may include insider trading, market manipulation, misleading and deceptive conduct, and breaches by Australian financial services licensees of their general obligations.

‘All firms should review this report and consider whether their controls – including policies, procedures, training and monitoring – are appropriate and sufficiently robust to meet legal and regulatory requirements’, Ms Armour said.

ANZ May Sell Share Trading Platform

ANZ today announced it is exploring strategic options for ANZ Share Investing that may include a sale of its share trading platform.

Bus-GrapghAs part of this process, ANZ has issued an Information Memorandum to a number of international and domestic specialist providers.

ANZ Managing Director Pensions & Investments Peter Mullin said: “ANZ is committed to providing customers with access to a market leading share trading platform at a competitive price.

“As we have seen with ANZ’s recent introduction of Apple Pay and Android Pay, the days of a bank needing to own every piece of technology are gone.

“We believe we can achieve better outcomes for our customers by partnering with a specialist provider committed to the technology investment and product innovation needed to provide a world-class offering.

“The process is expected to take a number of months to finalise and in the meantime it’s business as usual for both our customers and staff,” Mr Mullin said.

UK Progress On Creating A Fair and Effective Market

A status update has just been released describing some of the steps taken to reform the wholesale Fixed Income, Currency and Commodities (FICC) markets, following the earlier review. Whilst some of the legal and process related issues have been addressed, there are many cultural and behaviourial issues which remain to be addressed by market participants. The review stresses that Firms must create, both individually and collectively, cultures that place integrity, professionalism and high ethical standards at their core to ensure that behaviours are not limited to complying with the letter of regulation or laws. It took years for the ‘ethical drift’ that resulted in misconduct to occur and it will take time to build new ethical norms in financial markets. Progress is at a critical point.

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The Fair and Effective Markets Review (FEMR) was launched in June 2014 to conduct a comprehensive and forward-looking assessment of the way the wholesale Fixed Income, Currency and Commodities (FICC) markets operate; help to restore trust in those markets in the wake of a number of high profile abuses in both UK and global financial markets; and to influence the international debate on trading practices.

On 10 June 2015 a Final Report was published, setting out 21 recommendations to:

  • raise standards, professionalism and accountability of individuals;
  • improve the quality, clarity and market-wide understanding of FICC trading practices;
  • strengthen regulation of FICC markets in the United Kingdom;
  • launch international action to raise standards in global FICC markets;
  • promote fairer FICC market structures while also enhancing effectiveness; and
  • promote forward-looking conduct risk identification and mitigation.

Now a status update has been presented to Chancellor of the Exchequer, the Governor of the Bank of England and the Chairman of the Financial Conduct Authority.

The job is far from done. A key theme that came out of the ‘Open Forum’ held by the Bank in November 2015 was that there remains a lack of trust in financial markets and financial institutions because of past misconduct. Participants saw cultural and ethical changes as an essential component of building a social licence for financial markets.

Responsibility must now fall increasingly to market participants to see through the changes in market practices and behaviours that are necessary to restore the reputation of the industry and thereby deliver markets that are both fair and effective. Firms must create, both individually and collectively, cultures that place integrity, professionalism and high ethical standards at their core to ensure that behaviours are not limited to complying with the letter of regulation or laws. As was indicated in the Final Report, a failure to do so will inevitably lead to further regulation and/or legislation.

While authorities can put in place legislation and regulation, firms are responsible for creating, both individually and collectively, cultures that place integrity, professionalism and high ethical standards at their core to ensure that behaviours are not limited to complying with the letter of regulations or laws. The work of the FMSB to ensure that market practices and structures are consistent with broader principles of fairness and effectiveness is therefore of vital importance and must be sustained. The complementary work of the Banking Standards Board (BSB) to promote high standards of behaviour and competence in the banking sector has a crucial role to play in this area too and we strongly support its work.

They state that the initial momentum must not be lost. It took years for the ‘ethical drift’ that resulted in misconduct to occur and it will take time to build new ethical norms in financial markets. Progress is at a critical point. It requires all involved to see through the changes that have begun, and to be alert to future challenges, if the financial services of tomorrow are to be characterised by the high standards of fairness and effectiveness to which we aspire.

ASIC crackdown on unlicensed retail OTC derivative providers

ASIC has warned of a dramatic increase in the extent of unlicensed conduct by retail OTC derivative providers seeking to expand their market with new customers for their complex and risky products such as binary options.

The recent Report 482 Compliance review of the retail OTC derivatives sector (REP 482) highlighted an increase in activity among licensed and other participants,  especially binary option providers, operating through online platforms or websites that are offering financial services to retail investors in Australia without an appropriate licence or authorisation.

ASIC has raised its concerns with more than 40 unlicensed providers. The majority are binary option issuers but also contacted were some binary option review websites, binary option trading signal providers, binary option broker affiliate websites, margin FX providers and managed FX service providers.

Of those providers contacted, 21 have agreed to co-operate with ASIC and take remedial steps to ensure they are no longer providing financial services in Australia until they are appropriately licensed or authorised.  Remedial actions that have been implemented include:

  • removing references to Australia on their website;
  • ceasing marketing campaigns directed at Australian investors;
  • adding appropriate disclaimers to websites and mobile apps;
  • blocking sign-up access to Australian investors;
  • educating introducing brokers and affiliates to cease targeting Australian investors;
  • closing down existing Australian accounts; and
  • informing Australian investors that the entity is not appropriately licensed in Australia.

Some of these entities have indicated an interest in obtaining the appropriate licence to operate in Australia and have been provided with information to assist them with that process.

A further nine entities have not directly responded to ASIC regarding our concerns but appear to have made some changes to their websites, including removing references to Australia.

Entities that agreed to implement remedial actions appropriate to their circumstances include:

  • IQ Option Limited and IQ Option Europe Limited trading as IQ Option
  • Rodeler Limited trading as 24Option, Quick Option, 24FX and Grand Option
  • BDB Services (Belize) Ltd trading as Banc de Binary
  • Ouroboros Derivatives Trading Ltd trading as AnyOption
  • NXB Financial Services Ltd trading as Stockpair.com
  • Up & Down Marketing Limited trading as OneTwoTrade
  • AM Capital Ltd trading as Tradorax
  • Centralspot Trading (Cyprus) Ltd and CST Financial Services Ltd trading as Opteck
  • Nuntius Brokerage & Investment Services S.A. trading as Topoption.com
  • OptionRally Limited trading as OptionRally
  • Market Punter Limited trading as Market Punter
  • Terapad services LTD trading as FMTrader
  • Growell Capital Ltd trading as GrowBinary
  • CherryTrade at www.cherrytrade.com
  • Tradersasset.com
  • Binary Options Pty Ltd via www.binaryoptions.net.au, www.binaryoptionsptyltd.com.au, www.privatesignalsgroup.com and www.freesignal.com
  • Best10binarybrokers.com.au
  • 10bestbinarybrokers.com.au
  • Binaryoptionrobot.org
  • Diamond Managed FX
  • Blackwell Global Investments (Cyprus) Limited trading as Blackwell Trader

Entities that have not directly responded to our concerns but appear to have made some rectification actions include:

  • OTP Solutions LTD operating as No1Options
  • Brevspandnz Limited trading as AutoTradingBinary.com
  • Pacificsunrise UK Ltd trading as AAOption.com
  • TTN Marketing LTD trading as Trades Capital
  • Lerona Impex SA and Norske Inter LP trading as Finpari
  • Chemmi Holdings Limited  trading as Binary Tilt
  • Peter Knight Advisors
  • Banc de Options at www.bancdeoptions.com
  • Advanced Binary Technologies Ltd trading as Ayrex

ASIC has also released a number of recent public warnings in relation to the entities that have not responded to our concerns in any way.

ASIC Commissioner Cathie Armour said, ‘The dramatic increase in unlicensed conduct – particularly in entities offering binary options – is of real concern to ASIC.

‘We remind investors to be wary of advertising on websites or unsolicited calls or emails by people offering these types of products, and to verify that product providers are appropriately licensed or authorised before dealing with them’, she said.

Products such as binary options and margin FX are very complex and risky. Australian investors may be exposing themselves to increased risk when they deal with an entity that is not appropriately licensed or authorised in Australia because they will not be able to rely on many of the protections available under Australian regulation.

Australian investors should check ASIC’s professional registers to determine if an entity is licensed to provide financial services in this jurisdiction and should not deal with an entity that does not hold the appropriate authorisation.

Background

A binary option is a financial product, in particular a derivative, under the Corporations Act.   Any entity that deals in, or provides advice about, binary options in Australia must hold an Australian financial services (AFS) licence, or be authorised by an AFS licensee.

Australian clients who receive financial services from an entity that is not appropriately licensed may have the right to rescind their agreement with the entity and may be entitled to recover brokerage, commissions and other fees paid to that entity.

Recent advances in technology have made it more possible for providers of retail OTC derivative products to quickly set up low cost website businesses often from overseas locations which may be largely outside our jurisdictional remit. ASIC has responded to this emerging risk by seeking timely public outcomes to;

  • better inform investors of the risks and give them the tools (e.g. ASIC Professional Register and the Moneysmart website) and information to make  informed investment decisions and promote consumer trust and confidence;
  • encourage industry standards; and
  • improve industry compliance with regulatory obligations.

Where ASIC has identified concerns it has adopted a more facilitative approach to encourage appropriate and timely remediation of unlicensed conduct. Where entities have not cooperated with ASIC, it has issued public warnings. Where the conduct identified is more serious ASIC may take further regulatory action as it considers appropriate.

Can slower financial traders find a haven in a world of high-speed algorithms?

From The Conversation.

It sounds like a scene from “Jurassic World”: fast, agile predators pursue their slower, less nimble prey, as the latter flee for safer pastures. Yet this ecology framework turns out to be an apt analogy for today’s financial markets, in which ultra-fast traders vie for profits against less speedy counterparts.

In fact, the algorithmic traders (known variously as algos, bots and AIs) proliferating in financial markets may well be viewed as an invasive species that has upended the prevailing order in their shared habitat. A 2013 article asserts that the financial world has become a “techno-social” system in which human traders are shunted aside, unable to keep up with the bots interacting in a “new machine ecology beyond human response time.”

And in a rapidly evolving world of autonomous traders, past experience may not provide reliable assurance of safety and predictability. The hallmark of a flash crash is lack of an apparent triggering event, generating uncertainty that can further destabilize markets.

Is the regime of algorithmic traders making the financial world more dangerous? How can market innovation and regulations shape this habitat for better or worse? For policy makers, the pressing question is: how can we operate our markets so that they remain stable and efficient amid fundamental technological changes?

In my research on artificial intelligence and strategic reasoning, I’ve been exploring answers to these questions by modeling how the world of trading works.

‘Latency’ arms race

What makes this world especially different and unpredictable is the unprecedented speed at which trading bots can respond to information.

A slight edge translates into profit because of the way exchanges match orders. When new information arrives, the first trader to react is able to make money off of slower rivals, while any relative delay or latency of even a fraction of a millisecond can mean no trade and no profit.

This leads inevitably to a latency arms race in which the designers of trading algorithms adopt any available method to shave milliseconds or even microseconds – one millionth of a second – from response time.

Most exchanges and trading forums have catered to the high-frequency traders, providing premium access options and interface features that preserve or enhance the advantage of speed.

An exception is the alternative trading system IEX, featured in Michael Lewis’s Flash Boys and backed by institutional investors, which introduced a 350 microsecond delay on order submission to shield against high-speed bots. On June 17, the Securities and Exchange Commission (SEC) approved IEX’s application to operate as a public exchange – rather than only as a private trading platform – against strong opposition by high-frequency traders and competing exchanges.

Ending the latency race

But there is another way to neutralize small speed advantages: change the way markets time the matching of buy and sell orders.

Today’s typical market works by matching orders to buy and sell a stock or other asset on a continuous basis. For example, when a trader submits a request to buy a share of Apple at a specific price, the exchange matches it immediately if there is an offer from someone else to sell at the same price or less. This immediacy is what allows a trader able to react more swiftly to new information (say news about the latest iPhone) to profit off of slower rivals.

In a frequent call market, on the other hand, orders to buy and sell are matched at fixed intervals (such as once every second). So our Apple buyer with knowledge of the release of a big improvement in the iPhone wouldn’t be able to get a jump on rivals because her order wouldn’t transact immediately, giving time for others to “catch up.”

By ensuring that speed no longer categorically prevails, the incentive for shaving milliseconds and microseconds is virtually eliminated. Orders within the interval compete instead based on price, leading to a more efficient overall set of trades.

Regulators have taken notice. New York Attorney General Eric Schneiderman has publicly endorsed the frequent call market – also known as a frequent batch auction – to even the playing field. And SEC Chair Mary Jo White said it could help counter problems with algorithmic trading.

At present, however, no stock exchange operates as a full-fledged frequent call market. One major hurdle to adoption is perception: the view that faster is always better.

Another problem that some have raised is that it would only be viable if all exchanges adopted the method simultaneously because otherwise traders would always pick the venue offering the most immediacy.

But is this true? Given the option of trading on either a continuous market or a frequent call market, which one would investors prefer? Or, in the terms of our ecology metaphor, would they flock to the new habitat operating in discrete time intervals or stay in the traditional continuous domains?

Predator and prey

To answer this question, in research conducted at the University of Michigan, Elaine Wah and I developed a model with two markets, one continuous and the other a frequent call market.

In this model, traders are either fast (think high-frequency) or slow (such as institutional and retail investors). Each trader can choose to buy and sell in one of the two markets and so will prefer to pick the one that offers the highest expected trading gains, taking all others’ behavior as given.

If all the agents are in one market, no individual can benefit by going to the other, as there is nobody to trade with. We therefore focused on market attraction, measured in terms of the prevalence of conditions that would make one trader want to switch.

Our results show that fast traders prefer the continuous market, where they can make the most money, but only when the slow traders are also there. In other words, the predators need their prey in order to be profitable, which means they have a pronounced tendency to follow the slow traders to whichever market they go.

Slow traders, on the other hand, can evade their pursuers by fleeing to the market with fewer fast traders. If the fast traders are prevalent in both markets, then slower ones tend to seek refuge in the frequent call market, which offers some protection from faster traders with better information, as well as generally higher trading gains.

A recent paper by Zhuoshu Li and Sanmay Das from Washington University also found, under quite different assumptions, a tendency for the frequent call market to attract traders away from continuous markets.

Lessons for exchanges

What both of these studies suggest is that we may not need a top-down mandate to transform financial markets from continuous to discrete-time trading. Simply making the option available in one or two exchanges may capture the population, as the haven for slow traders can attract both the prey and the predators in pursuit.

High-frequency traders have been relentless in their pursuit of lower latencies and faster access to market-moving information, but ultimately it’s the continuous markets that deserve blame for allowing this predator-prey dynamic to take shape.

Neutralizing the advantage of tiny speed improvements with something like a frequent call market offers a clear-cut solution. The introduction of such a market will provide an attractive haven for investors, and widespread adoption could eventually send the latency arms race the way of the dinosaurs.

Author: Michael Wellman, Professor of Computer Science & Engineering, University of Michigan