China Construction Bank seeks acquisitions in Europe — report

Chinese lender China Construction Bank Corp (SHA:601939), or CCB, is interested in buying a European bank, or a minimum of 30% to 50% in one and has CNY100bn (USD15.8bn/EUR12.01bn) of cash available to finance a deal, according to chairman Wang Hongzhang, as cited by the Financial Times.

Hongzhang told the paper in an interview that CCB views UK, Germany or France as the most attractive markets in Europe for an investment, as it is looking to potentially buy a bank that covers all top countries and that would serve its strategy for international growth.

The executive did not wish to name any of the potential targets, but said that a suitable one should have a large enough international network instead of being focused on its home market and would not raise significant cultural issues.

Investment bankers point at European lenders partially nationalised during the financial crisis as good investment targets, the report said naming 82%-state-owned Royal Bank of Scotland Group Plc (LON:RBS) and Commerzbank AG (ETR:CBK) in which the German state holds 25%.

The British bank has a current market capitalisation of GBP17bn (USD28bn/EUR21.1bn), while the German peer is valued at EUR9bn (USD12bn).
Despite long-time predictions of analysts and bankers that Chinese companies with high market valuations could buy cheaper western lenders, there have been few such attempts, the paper said.

Guo Shuqing, former CCB chairman, said in 2011 that the price of a European bank would not be the only criteria for a potential acquisition, even if that would recommend them as good targets. With their shares declined significantly, such banks may not serve CCB’s development strategy, the Financial Times cited Shuqing as saying at the time.

Germany looks into planned merger of European defence giants EADS and BAE

The German government is currently looking into the details of the planned tie-up of European aerospace and defence group EADS NV (EPA:EAD) and British defence contractor BAE Systems Plc (LON:BA) and will give an answer within the deadline, Chancellor Angela Merkel told a news conference on Monday.

The two companies announced last week negotiations to combine their operations creating a world class international aerospace, defence and security group which would benefit from cost savings from procurement and sourcing efficiencies available to the enlarged group and ensuring significant new business opportunities, they have said.

Under the terms being discussed, EADS’ current shareholders would own 60% in the combined group, while the shareholders of BAE Systems would hold the other 40%, the companies said. The resulting group would have substantial manufacturing and technology excellence centres in France, Germany, Spain, the UK and the USA.

EADS and BAE Systems have started discussions with various governments about the effects of a potential merger and plan to issue special shares to each of the French, German and UK governments to replace the UK government’s stake in BAE Systems and the stakeholder concert party arrangements in EADS, the have said.

Merkel said the German government is evaluating the proposal and is talking with others on the planned deal.

According to industry sources cited by the Financial Times Deutschland earlier, EADS would be willing to give Germany a veto right and job guarantees in order to secure its approval for the deal.

The two companies have until October 10 to announce a deal, with BAE Systems saying it would file for an extension if talks continued beyond that date.

UPDATE 2: No problems with HSBC’s internet banking system

Banking giant HSBC has contacted Financial News and confirmed that there currently are no problems with the bank’s internet banking system.

Nigel Hinshelwood, UK Retail Bank Chief Operating Officer at HSBC said: “There are no problems with payments going through our internet banking system. All payments made are being processed, and within normal processing times.”

Earlier today, an HSBC business banking client told Financial News that the bank was unable to process internet banking payments and any payments that had been made this morning were currently trapped ‘in-limbo’ with HSBC unable to give customers any guidance on when the payments would be processed.

The source added that this was the explanation given by the designated HSBC relationship manager. The source contacted Financial News later and said that payments were again being processed around midday today.

The earlier Financial News story follows:

HSBC Bank plc have experienced an internet banking failure today (17 September, 2012).  The bank is currently unable to process internet banking payments and any payments that have been made this morning are currently trapped ‘in-limbo’ with HSBC unable to give customers any guidance on when the payments will be processed.

Customers are being told not to try and make any payments from their online banking until the problem has been resolved.  Members of the HSBC call-centre have ‘promised’ cutomers that the payments will go out today, although without any timescale being offered customers are quite correctly concerned at whether the bank will be experiencing the type of outage that NatWest and Ulster Bank experienced earlier in 2012.

What is is for certain is that this is another embarrassing online banking failure for a UK Bank and further shakes the now fragile confidence that the British public has in it’s financial institutions.

Swiss banks expect exodus as foreign tax authorities demand increased transparency

Swiss banks are expected to lose billions of francs in deposits and assets as cash-strapped European governments, struggling to balance their budgets, are applying pressure on Switzerland to introduce tighter rules to prevent foreigners from using secret accounts to avoid their local taxman.

In an interview with Schweizer Bank magazine, head of UBS wealth management Juerg Zeltner, said that hundreds of billions of francs would flow out of Swiss banks in the coming years.

Zeltner’s remarks are mirrored by German financial consultancy firm Zeb Rolfes Schierenbeck, which is forecasting that wealthy Europeans will withdraw as much as CHF200bn of funds and assets from Swiss banks by 2016.

The Swiss government has reached deals with Germany, UK and Austria to increase transparency and 11 Swiss banks are being investigated by US tax authorities.

Recently, a former UBS banker was paid $104m by the US Internal Revenue Service (IRS) for revealing systematic efforts by the bank to help rich Americans evade taxes in their home country, which resulted in UBS being fined $780m in the US.


European policymakers debate severe limits on high-frequency share trading

Welcome to the world’s most intense electronic battle. It’s waged on world stock markets and the ammunition is tiny fractions of pennies, fired through super-charged computers. The object is to wipe out the opposition.

The theatre of war is a long way from the raucous bear pit of baying stock traders. Instead, capital is unleashed in a cavernous space, lined with banks of computer servers and chilled by air conditioning. Rather than the shouts of traders, orders to buy and sell come in electronic pulses; processed instantly in near-silence.

‘It’s high tech war,’ explained a City computer expert working for an investment bank. ‘When they’re doing a trade, they can blast it with full volume so you can’t get up.’

It’s become a technological race for traders trying to exploit quirks in human behaviour. So what’s at a premium is the timing and getting hold of the data as quickly as possible.’

– former banker 


Buy low, sell high remains the market’s mantra. But the age of computer-driven trading has ushered in speed and processing power. Trading times have accelerated exponentially. Markets are so fast today, a trade is now measured in microseconds – millionths of a second.

Allied to speed is staggering computer processing power. Now processors can assimilate transactions made on virtually every single exchange and assess who made the trade, all in the blink of an eye. This gives investors more ammunition in their battle to outmanoeuvre and second-guess rivals.

At this level, humans are out of the game. Instead, investment banks, fund managers and traders put all their trust on complex algorithms run by computers to buy and sell shares, with varying degrees of human involvement. And the fastest players of all are a new and evolving breed of market participant: the high frequency traders.

In the past five years, high frequency trading (HFT) has stormed the citidels of finance. Today it accounts for more than a third of activity on European markets and 70% in the US. Its dramatic rise to prominence has polarised opinion. Exponents say it has reduced trading costs and increased activity on markets – but critics point to two devastating US market collapses in which HFT played a central role. And now European policymakers are debating whether to impose severe limits on HFT. Influential figures are even calling for it to be banned.

Related story: Britain opposes MEPs seeking ban on high-frequency trading

The cash/time continuum

HFT takes place at speeds more commonly associated with particle physics. In the quarter of a second it takes you to blink, an HFT computer can carry out over 5,000 transactions.

Computers are locked in a permanent race against one another, and against the wider market, to perform millions of tiny, rapid trades, each yielding a tiny profit. There is no interest in actually owning a company’s stock. The game is to sell it on at a fraction of a penny’s profit very, very quickly. The tiniest delay is the difference between profit and loss.

So HF traders pay to place their servers close to an exchange’s, and invest in ultra-high speed feeds of market data. The reason? Whittling microseconds off ‘latency’ – the time it takes their message to reach the exchange and return.

Related story – Infographic: Trading at the speed of light

‘It’s become a technological race for traders trying to exploit quirks in human behaviour,’ says a former banker. ‘So what’s at a premium is the timing and getting hold of the data as quickly as possible.’

And with billions of microscopic transactions to monitor, detecting market abuse is increasingly becoming impossible for regulators. ‘Markets get manipulated. It does happen. And there are accidents sometimes,’ a City computer expert said.


Trading tactics

Forget Gordon Gekko: the new generation of financial masters of the universe are quantitative programmers, who write the sophisticated algorithms that HFT relies on. ‘Quants’ are advanced mathematicians rather than financiers, often educated to PhD level or beyond – although their pay is closer to a banker than an academic. A junior quant can expect to earn £50,000 or more.

The algorithms they design use a variety of tactics to hunt down profits on the stock exchange. Some programmes search out stocks that are rising, to cash in on the momentum. Others look for minuscule price variations between the same stock on different markets and seek to close the price gap.

Perhaps the most innovative, or feared (depending on what position you take), are behavioural algorithms. These hunt for clues an investor wants a specific stock. Gaining this prized intelligence requires gathering and crunching colossal quantities of data to second-guess rivals. HFT’s algos then buy the stock and sell it on to the original buyer for a tiny bit more than they paid.

Then there are murkier practices that cross the line into market abuse: tactics such as ‘quote stuffing’ – firing thousands of trades into the markets and cancelling them within microseconds, with the intention of slowing down the markets and profiting from the price differences. Or ‘smoking’ or ‘layering’: entering fake trades at artificially low or high prices, to mislead other market players. American regulators have already sanctioned at least one firm for this HFT strategy.


Prepare for takeoff
It was an arcane European Union directive that effectively launched this new era in financial trading. Called the Markets in Financial Instruments (Mifid) directive, it abolished the monopoly enjoyed by stock exchanges in each EU country in 2007 – although some, like London, had already started introducing competition. New exchanges opened and a wave of merger activity ensued.

Mifid’s aim was to force stock exchanges to compete. The theory went this would make transactions cheaper and more transparent. Its introduction incentivised exchanges to increase the amount of trading providing the perfect conditions for HFT to take off. With transactions ostensibly cheaper, HFT could profit on a huge number of transactions that yielded small margins.

The industry argue it’s not just HFT which benefits. Investors now enjoy reduced spreads – the gap between bid and offer prices, and trading fees have fallen. Most importantly, they claim, HFT boosts liquidity – the willingness of the market to buy what you’re selling and sell what you want to buy.

But storm clouds are gathering for HFT. It is also blamed for making markets more predatory and volatile, causing sudden spikes and dips as black boxes bet against one another at frenetic speeds.

The critics are becoming more vocal. Last weekend a senior European Central Bank policymaker called for the trade to bebanned outright, while Andrew Haldane, the Bank of England’s head of financial stability, used a speech last year to call for ‘grit in the wheels’ to slow trading and ‘forestall the next crash’.

The complaints are the sound of vested interests at work, says Remco Lenterman, chairman of HFT industry body the European Principal Traders’ Association (Epta). ‘Initiatives to try to stop our members [are] because we make the market so efficient that it becomes less profitable for the financial industry,’ he said. ‘Clearly it’s a very disruptive technology.’

The price of progress?
Concern on the potential for market harm that HFT could bring is mounting. HFT’s reputation was severely dented by the ‘flash crash’ of May 6 2010, in which already choppy US stock markets dropped by 600 points inside five minutes – wiping nearly $1 trillion off share prices at a speed only possible with quantitative trading, before rebounding just as quickly.

Two years on, many in the financial markets are still shaken by the event.

‘It was Chernobyl for stock markets,’ said one observer.

‘It was a near-death experience,’ said another: had the fall happened at the end of a trading day, markets would have closed mid-crash, sparking panic on the international markets.

‘The Flash Crash was a near miss. It taught us something important, if uncomfortable, about our state of knowledge of modern financial markets,’ Haldane said in his speech.

The flash crash could happen here: it wouldn’t be as dramatic, but we could still have a 10% drop before the circuit breakers kick in’

 Kay Swinburne MEP 

SEC investigation into the events found that the fall was triggered by a mutual fund trying to shift a large amount of stock in edgy markets using an algorithm. But it gathered momentum as HFTs took advantage and drove the prices down.

If this wasn’t bad enough, last month a malfunctioning algorithm in the US saw trading firm Knight Capital lose $440m in half an hour, causing market chaos in the process.

European stock exchanges say such events couldn’t happen here: they have safety features such as circuit breakers, which halt trading on a stock when prices move too sharply. On the London Stock Exchange (LSE), they kick in around 35 times a day – although during market stress last August, this rose to 170 times a day.

But such European measures may not, according to some, be enough. Only luck has prevented major crashes in the UK, several market observers have told the Bureau.

‘The flash crash could happen here: our system’s automatic stops would kick in automatically so it wouldn’t be as dramatic, but we could still have a 10% drop before the circuit breakers kick in,’ said Kay Swinburne, a former banker and Conservative MEP on the British government’s Economic Affairs Committee.

Certainty at a premium
The trouble is that getting clarity as to whether HFT harms Europe’s markets is not an easy task. The debate is characterised by apparently contradictory studies, claims and counterclaims.

‘A lot of the research is biased,’ an informed source said: many studies are commissioned by investment banks, who count HFT firms among their clients and use HFT strategies, and others with vested interests.

The markets haven’t got worse since the advent of HFT, but they’re not much better either, a government study found

There are huge technical barriers to researching HFT’s impact on markets and trades – the raw datasets are massive, complex and scattered across multiple exchanges and trading platforms.

The lack of any conclusive evidence has allowed HFT to thrive with only limited regulatory understanding. There is not even a commonly accepted definition of what HFT actually is. ‘With the regulator understanding we are in a similar situation to how they handled off balance sheet and debt markets. The regulators are starting to realise that they know fuck all,’ said the City IT manager.

This uncertainty about HFT’s benefits or pitfalls has made European politicians nervous. They are now planning tough new measures on HFT in the revised Markets in Financial Instruments Directive (Mifid 2). The proposals, which include forcing high frequency traders to trade in all market conditions, pose a serious threat to HFT, MEPs told the Bureau.

As Europe debates HFT, the British government has launched the Foresight Review, which has commissioned a series of academic studies on HFT’s impact.

The LSE’s Professor Oliver Linton examined the overall quality of the UK’s markets. Examining daily data, he found no significant rise in volatility over the past 10 years. But nor did he find significantly more liquidity. In other words, the markets haven’t got worse since the advent of HFT, but they’re not much better either.

Experts at the Financial Crisis Observatory asked whether HFT could lead to crashes, concluding, ‘We believe it has in the past, and can be expected to do so more and more in the future.’ Though some of HFT’s supporters argue this position fails to reflect some markets have better systems to prevent a crash happening than others.

Drying up
Traditional investors, such as pension funds, complain HFT’s dominance of equity markets means the dice are loaded against them: a majority told a poll by the Foresight project they were finding it ever harder to access liquidity.

Big players have an advantage because they can afford the algorithms, be close to the exchanges and can manipulate the market.’
– City IT expert

The liquidity HFT claims to provide can also prove illusory – bids or orders vanish when traders go to use them, market observers told the Bureau. This is because the vast majority of messages signalling willingness to buy or sell are actually HFT’s attempts to probe the prices others will accept. These orders are cancelled in the blink of an eye – the ratio of cancelled to traded orders can be as high as 1,000:1. And in depressed markets, liquidity can simply evaporate.

‘A lot of the price discovery methods may seem dodgy,’ said the head of IT at a City bank. ‘HFTs might throw $5m on five exchanges [and] it looks like $25m liquidity. Big players have an advantage because they can afford the algorithms, be close to the exchanges and can manipulate the market.’

The argument from critics of HFT is that it makes it harder for pension funds and other institutional investors to buy large blocks of shares without being detected by behaviour-seeking algorithms.

‘Institutional investors today know the moment they begin to trade a large position at one price, it will likely be detected by software, which may then effectively front-run the order. In the past, it would have been arranged hush-hush over the phone by a block trading desk, and the trade size and price would generally appear only after a large order was placed. You can’t hide large position trades anymore,’ said Professor Bruce Weber, a markets expert.

This, critics point out, forces fund managers to buy or sell in smaller blocks in an attempt to hide what they are doing, pushing up transaction costs. Research commissioned by the EU has shown that the overall cost of buying shares has risen by 14% in three years, despite individual transaction costs having fallen.

Other costs are also incurred as many traders feel forced to join the technological arms race. ‘As HFT becomes more important it’s driven more market participants to invest more in trading technology,’ said Robert Talbut, chief investment officer of Royal London Asset Management.

A third of traditional investors polled by Foresight said the real cost of trading shares had risen, as the benefits of lower spreads and trading fees were offset by the need to invest in ever-faster equipment and staff costs.

Into the shadows
The rise of HFT has had other repercussions. It appears increasingly to be pushing traditional investors from mainstream exchanges, and onto conducting big transactions in ‘dark pools’ – off-exchange trading platforms operated by brokers, or even by exchanges, where shares are traded anonymously, without the prices being published in advance.

Market observers and traders alike say fear of having their trades detected and headed off by HFT computers are driving longer-term investors away from the ‘lit’ open markets. In Foresight’s poll, two-thirds of traditional investors said they used dark pools, especially for large orders.

‘There’s a perceived problem that strategies by HFT firms are picking off long-term only investors. That perception is why people on the buy side have moved significant amounts into dark pools,’ said a market observer.

This shift to dark pool trading raises a number of concerns. Trading in the dark is more expensive – it also affects the markets’ transparency, making it harder for other players to gauge prices.

In the UK, dark pools have almost tripled their market share in the last three years, to 3.3% of trading volume, an analysis of data from the Federation of European Securities Exchanges (FESE), by the Bureau shows. Today London’s dark pools are handling over €3bn of trades every 24 hours, and those close to the market point the finger at this rise as a response to HFT.

We need to build financial markets that make sense for society and the economy as a whole’

– Benoît Lallemand, Finance Watch

Consultancy Rosenblatt Securities estimates that across Europe, the share of trades changing hands on dark pools may represent up to 6.75% of turnover.

The meaning of markets
The rise in dark pools and the increasing difficulty of dealing in open, regulated markets add to a sense that the markets are no longer working as they should: they are separating from their original purpose.

‘I see [the] role of financial markets as matching up providers of capital with users of capital. I see HFT as absolutely nothing to do with investment. It is trading for tradings sake. It has no interest in a company’s fundamentals. Therefore I fail to see why it’s an activity we should be encouraging to be part of our market,’ said Robert Talbut.

‘We need to build financial markets that make sense for society and the economy as a whole. This means discouraging practices that only benefit high frequency traders, for example, and encouraging markets to serve end-users. It means helping to feed innovation and productive investment, in short: more investment and less betting,’ said Benoît Lallemand, senior research analyst at public interest advocacy group Finance Watch.

Despite the relative paucity of hard evidence to support many of the gut-felt criticisms of HFT, the overall view that HFT does more harm than good is gathering momentum in Europe. It is a view that is likely to influence the debate when MEPs meet later this month to agree the measures for Mifid 2.

Related story – Britain opposes MEPs seeking ban on high frequency trading

The Bureau understands there is broad support for forcing HFT players to keep trading in all conditions – ending the problem of trading opportunities vanishing in stressed markets. But a Foresight analysis of the proposals released just as MEPs returned from their summer break, warned this could ‘force high frequency traders out of the business of liquidity provision’.

The next three months represent a watershed for HFT. If the current tough measures stay on the table, the industry will have to change – and may even wither away.

Its fate is bound in with other Mifid market proposals including reining in commodity speculation and protecting investors. HFT may yet emerge unscathed in compromises inevitably struck between the Commission, the European parliament and national treasuries over the nature of the entire Mifid package. Perhaps it is only a souped up algorithm that can at this stage accurately predict HFT’s outcome.

Written by  of the Bureau of Investigative Journalism.

Boots invests in Chinese pharmaceutical distributor Nanjing

Swiss pharmacy-led health and beauty group Alliance Boots GmbH said it would invest some GBP56m (USD91m/EUR69.2m) in Nanjing Pharmaceutical Company Ltd (SHA:600713) in exchange for a 12% stake in the Chinese pharmaceutical distributor, under a strategic alliance agreement.

The move will see Alliance Boots becoming Nanjing Pharmaceutical Company’s second largest investor with representation in the target’s board and operational management, the buyer said.

The alliance marks a step forward in Alliance Boots’ long-term strategy for China, its executive chairman Stefano Pessina said in a comment, adding that his company sees significant potential in working together with Nanjing Pharmaceutical to create a great healthcare distribution network.

In turn, Nanjing Pharmaceutical’s chairman Zhou Yaoping described the partnership with the Swiss group as a move of great significance given the slowdown in the global economy and the reforms in the Chinese medical and healthcare sectors. With Alliance Boots advanced supply chain management technology and experience, Nanjing Pharmaceutical will improve its management practices and boost performance, he added.

Nanjing Pharmaceutical, whose biggest shareholder is Nanjing Pharmaceutical Group Limited, claims to be China’s fifth largest pharmaceutical wholesaler, generating some GBP2bn in sales last year. Based in the Jiangsu province, the company runs distribution centres in 12 cities across eight provinces and one autonomous region.

Alliance Boots stepped into the Chinese pharmaceutical distribution market in 2008 via its joint venture Guangzhou Pharmaceuticals Corporation. The group is present in over 25 countries with more than 116,000 employees.

Completion of the deal is subject to various regulatory clearances.

Sponsor Carlyle secures a deal to acquire Landmark Aviation

US private equity firm Carlyle Group LP (NASDAQ:CL) has revealed a deal to buy Texas-based business aviation services provider Landmark Aviation from investors GTCR LLC and Platform Partners LLC.

Carlyle did not disclose the value of the deal, but said it would finance it with equity capital from its USD13.7bn (EUR10.4bn) buyout fund Carlyle Partners V.

The buyer said it would invest to further expand Landmark, modernise its fixed based operation (FBO) network and add new locations via acquisitions and greenfield projects.

Carlyle managing director and head of the Global Aerospace, Defence and Government Services division Adam Palmer welcomed the agreement, saying that the private equity firm will partner with Landmark’s management to step up the growth of company’s FBO network.

Dan Bucaro, Landmark president and CEO also expressed confidence that under the umbrella of Carlyle which has been investing in aviation of over 20 years, his company will be able to further grow its franchise.

Landmark runs one of the world’s largest FBO networks with 51 locations across the US, Canada and France and also offers aircraft maintenance, charter and management services.

Since 1987, Carlyle’s Global Aerospace, Defense and Government Services group has invested around USD4.2bn in over 40 aerospace and defence firms.

Morgan Stanley (NYSE:MS) Barclays Plc (LON:BARC) and Kirkland & Ellis LLP are advising the vendors. Evercore Partners Inc (NYSE:EVR) and Latham & Watkins LLP are acting as advisors to Carlyle.

Completion is expected in the fourth quarter of this year, subject to conditions, including regulators clearance.