Ever since the controversial AIFM directive was first made public there have been fears that hedge funds would leave Europe in their droves and head for either off-shore tax havens or the landlocked, legislative liberalism of Geneva.
The news that BlueCrest Capital is swapping its London headquarters for a Guernsey base and that the majority of its portfolio managers are heading to Geneva has been seen by some as the start of a major exodus.
Up till now, say reports, the only migrants have been smaller hedge funds or the more portable parts of larger firms. But BlueCrest’s departure to less taxing climes is the first time a major hedge fund has moved all of its major players out of London.
However, there is some good news for London. Even if the hedge funds are moving their fund mangers and their tax status abroad, any of them engaged in algorithmic trading will be leaving their trading engines in London.
London has become home for high frequency trading as seen by the sheer number of execution venues that have placed their matching engines within a short bus ride of the Square Mile.
Firstly there were the MTFs, such as Chi-X, Turquoise, BATS Europe and NasdaqOMX, all of which recognised that the bulk of high frequency traders are based in London. Consequently they all built their trading engines in London to capitalise on the trend for co-location (whereby traders aim to have their execution systems as close as physically possible to the matching engines of the execution venues).
Such has been the success of the MTFs and various other alternative venues that the major exchanges are now following suit. Aside from the London-based exchanges such as the LSE and the London Metal Exchange, and all the LSE-affiliated exchanges such as Oslo, Johannesburg and Milan, there is the fact that Euronext Liffe has its matching engine in London (or Basildon to be precise).
In fact the only major execution venues with matching engines outside of London are the Nordic-focused MTF Burgundy and the Deutsche Boerse, which has so far resisted the move.
One wonders what the implications are for such a concentration of physical liquidity in one City. Does this give London a distinct advantage over the likes of Paris and Frankfurt (and Geneva) in the competition to be the financial centre of choice? And what of the stated objective of MiFID’s architects – to introduce a level playing field for Europe’s securities marketplace?
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I think you are right that London has clearly won the battle around the location of liquidity, but not sure that translates into the conclusion that its the optimum location for HFT funds (although it certainly doesnt hurt).
The whole outcome with co-location and proximity hosting is that the actual trading systems are usually remote from the people configuring and operating them. Proximity to liquidity doesnt require proximity to the operator, since usually all that is being passed from the UI or scripting studio is the logic and the control parameters.
Most HFT funds use managed service providers such as Fixnetix for network connectivity, data access, execution access and application hosting, with the implication that the entity doing the trading can be located (and incorporated) pretty much anywhere, and generally the location of the servers doesnt affect the tax jurisdiction of the business or the ability of the fund to remotely operate them. Particularly with developments like cloud computing, the location of servers cannot be used as the basis for business nexus, since it can essentially be transient and optimised in real time.
There is another aspect to this that I don't believe has been much picked up on. The Digital Economy Bill has just pushed through Parliament under pre-election "wash-up" with only two hours debate, and one of its unintended consequences is that any individual or business can have their access to the internet suspended by law if found guilty of breaching intellectual property for things like illegal file sharing.
Whilst the objective of addressing the violation of copyright may be laudable, this has all sorts of perverse implications- for example if an employee (or indeed a family member) where to rip off Dark Side of the Moon on a peer-to-peer music share site on your company's IP address, the company could potentially have its ability to access the internet (and thereby its trading servers!) summarily suspended by law by all ISPs in the UK.
For a piece of legislation with so many potential unintended consequences to be rushed through without a proper debate and without proper consideration of these in committee is a profound stupidity, and something that funds should potentially be wary of. Obviously the courts have the capacity for interpretation, but how much comfort can we afford to take in that when the financial sector is the obvious scapegoat and populist whipping-boy for politicians of every hue? It wouldn't be the first time legislation designed for one purpose has been used for another- just take a look at how anti-terrorist rules have been misused in relation to legitimate public protest and low-level civil disobediance.
Ken Yeadon 1804 days ago
I agree that the Bill was passed with worrying haste. The weeks before an election seem to be the perfect time to smuggle contentious legislation through parliament. And I do not underestimate a government's potential to abuse a Bill's remit. But part of me thinks that any company (big or small) that fails to enforce an IT policy that prohibits copyright infringement only has itself to blame. A friend of mine gave his iphone to his young son in a bid to shut him up on a long car journey...only to find weeks later that the boy had managed to run up a £1,000 bill by pressing random buttons.
I am concerned about what the Bill will could mean for news aggregation services and the like, especially where there are no concrete agreements in palce with the original content providers. Whistleblowing side wikileaks has been cited as an example of a service that could fall foul of the legislation. but in the main, the principal target seems to be the Dark Side of The Moon downloaders (especially those that recently found the Alan Parsons Quadrophonic Mix)
nikpratt 1803 days ago