Having taken a look at Galen Stops’ predictions for 2018, Colin Lambert decides that overall he didn’t do a bad job, but there is an obvious reason why…

Obviously having been a very generous marker over the years when assessing my own predictions from the previous year I have now swung 180 degrees and plan on being as critical as possible when looking at Galen’s five key themes for 2018. The problem is that, overall, he didn’t do too badly.

Firstly, he suggested that 2018 could be the year that active currency management makes a comeback, although – and this is a theme of this review – there was a caveat because the headline ended with the words “sort of”.

Second up, the prediction that MiFID II would be all about the background with very little impact first up. A more authoritative review of this prediction is elsewhere but for me, all I can say is “tick”.

Cryptocurrencies were next in his spotlight so obviously he has me at a disadvantage (not that I will ever admit it), followed by an example of audaciousness that took the breath away when he dared to write about last look! If that wasn’t enough, his fifth focus was a prediction for an exchange rate, so clearly he was trying to show up my rather patchy record in my trades of the year in previous years.

Underpinning everything was Galen’s defence mechanism against overly harsh criticism – he actually spoke to experts about his predictions and used their words, a fence-sit par excellence.

Luckily, I have never had a problem disagreeing with experts for I am, after all, sometimes right, sometimes wrong, but always certain, so let’s have a look at some of this in detail.

1.”And the Pendulum Swings Back” – “After years of investors shifting towards passive currency management, there will be a modest uptick in those looking for active management. But rather than just active vs. passive, more will look at things like smart beta or factor investing.”

And the Pendulum Swings Back

Did active currency management actually make a come back in 2018…sort of? Well it sort of did because speaking to several asset managers there was a definite sense that while benchmark fixes were still important and were the mechanism of choice for the majority of their hedging flows, the proportion of funds actively hedged rose last year. Greater uncertainty in markets generally and the hope (expectation) that active hedging would help preserve valuable percentage points of performance were the main reasons given.

The problem for active currency managers, however, is that a lot of the traditional asset owners are happy for their managers to hedge as and when required, they don’t see the need for them to allocate to specialists…yet.

This is reinforced by looking at the data from hedge fund data provider BarclayHedge, which shows that while redemptions from macro hedge funds were the highest of any sector up to October (data for currency funds are not available), its Currency Traders Index was the best performing at +4.4% y-t-d in November (admittedly amidst a very poorly performing CTA sector).

Overall though, I think this prediction was pretty sound and although I would have, of course, given myself a full score, I will give Galen 7/10.

2.”MiFID II: Like a Swan Gliding Through Water” – “The continued implementation of MiFID II will be characterised by lots of hard work in the background and not much immediate action in the foreground. Come the end of the year the conversations will all be about the implications of Brexit for Mifid II and the boundary will build throughout the year between those operating within and without the Mifid jurisdiction.”

MiFID II: Like a Swan Gliding Through Water

I think Galen’s defence mechanism here – apart from again hiding behind experts – was that I would be asleep by the time I got to analyse his thoughts. My sense around MiFID II is that it has been a damp squib, we were swamped in predictions of chaos a la Millennium Bug and in reality we were all ready for it.

Generally I would say, given the uncertainty around the impending Brexit, that on this prediction the jury is still out, but luckily I have experts of my own who have analysed the prediction…

Tom Morris, head of sales Europe at RegTek.Solutions, agrees that transaction and post-trade transparency reporting has been a major challenge, as expected. “Duplicate or even triplicate ISINs have been created for the same instrument which has caused confusion, instrument ref data reporting is still chaotic and incomplete (according to ESMA) and getting data back from the MDP hasn’t been straightforward, making daily reconciliations impossible,” he says. “Identifying correct LEIs has been an ongoing issue and many firms are reporting against the parent company/fund manager rather than the funds/allocations, or are using the CCP LEI instead of the market counterparty LEI which distorts the regulator’s view of market activity.”

Unfortunately (for me), Morris also agrees with Galen’s suggestion that early issues would be less of a problem thanks to the regulators’ practical approach to enforcement – especially if firms show a “good faith effort” to comply. “The FCA always said they’d take action against any firm which made no effort to be ready or to report correctly, but there has been nothing in the media about such enforcements to date,” says Morris. “It seems firms, particularly the buy side, have been quick to report transaction reporting issues to the FCA via the required forms and this includes a section on how they plan to ensure the issue doesn’t reoccur. It will be interesting to see whether they follow their track record (as per MiFID I) of punishing those firms without demonstrable, robust controls in-line with the RTS 22 Article 15 requirements.

“Good effort, I believe, means taking all steps feasible to ensure you monitor and resolve inaccuracies in advance of sending transactions to the TR/ARM rather than resolving them after the fact, and not relying on your TR/ARM to do everything for you,” Morris continues. “Reconciliations is a focus area at the moment but the trend seems to be more focused on ensuring completeness of reporting (i.e., checking for under- and over-reporting) rather than ensuring the actual data content of the reports received by the regulator which is, again, a requirement under RTS 22, Article 15 – regular reconciliation of front office records with regulator data. To many firms this is being interpreted as ensuring everything reportable has been reported rather than the actual data elements themselves, which probably won’t be enough of an ‘effort’ in the eyes of the regulators in the long run.”

If the disappointment of Galen being bang on wasn’t enough for me, then Adam McIntyre, senior BA and industry relations lead (Europe) for RegTek.Solutions, drives it home by agreeing that Brexit is the big unknown when it comes to MiFID II. “This is the case and the simple fact is that the regulators, much like you and I, do not know exactly what is going to happen and have no alternative other than to plan for a few different outcomes based on what deal is agreed, ranging from a soft, hard or squishy Brexit,” he say.

I can’t see anyway around this, so… 10/10.

3.”One Cryptocurrency to Rule Them All?” – “Bitcoin’s market share of the overall cryptocurrency space will continue to decline in percentage terms (it was at about 35% of the overall cryptocurrency market capitalisation at the time of writing, according to CoinMarketCap), but this is not a negative thing for the development of the crypto markets.”

One Cryptocurrency to Rule Them All?What is it with the question marks Galen?

Obviously I am at a huge disadvantage here given a) my general ignorance of the crypto space and inability to look at it other than something to be traded; and b) the lack of unbiased and reliable experts to help. I did think of going to a “crypto expert and guru” who confidently predicted bitcoin was in a “bull phase” in early November when the market was at $6500, or even better the other guru (how many can a market have I wonder?) who told Bloomberg News in December that “fair value” for bitcoin was around $14,000, but could be around $150,000. I would be interested in the fair value of his bank account right now…

This lack of unemotional analysis of the cryptocurrency market leaves me with data, then, and luckily (should that be unsurprisingly?) Galen wasn’t actually talking about the value of cryptos directly. The actual prediction was that bitcoin’s share of the crypto market – as measured by market capitalisation – would be lower than the 35% cited in his article.

Last year’s article cited CoinMarketCap, a crypto website that tracks these things so I took a look at the site and it says that total crypto market capitalisation is just over $120.75 billion and that bitcoin’s market cap was $63.5 billion. On that basis the prediction has to be a miss, but, I would have to say, not a bad one.

Anecdotally one hears a lot more from serious players about crypto generally and less about bitcoin. The data may be swayed by price action or time of the year stuff that I clearly have no clue about.

Bitcoin remains the poster child for crypto, indeed Galen closed last year’s prediction by stating it would remain “the largest cryptocurrency out there”, but it didn’t seem to lose much in terms of its percentage share, indeed it grew it a little, therefore, thankfully, he has to be marked down on this one at 4/10.

4.”Edging Towards the Exit?” – “Last look will not disappear as a practice in 2018, although it’s use may diminish slightly. More importantly, the industry will move on from the discussion around this practice because of increased transparency from LPs and platforms about how it’s used and better analytics on the client side to monitor the impact of last look.”

Edging Towards the Exit?This was where Galen really nailed it in last year’s predictions – although if I were being churlish (which of course I am) I would add it was like leaning on an open door! He argued that last look would not disappear as a practice but that it would be less of an issue in FX markets, thanks to transparency and better data.

That has undoubtedly happened, thanks to better data from the platforms, traders are better informed and can make smarter decisions about their liquidity providers (and that same data can help LPs explain to toxic clients why they are being last looked for longer).

I still think there are one or two disclosures from single banks that need looking at when it comes to last look, a particular favourite is the “we use last look, if you don’t like it go somewhere else” style of disclosure, but generally speaking 2018 was the year in which the last look debate culminated and people could settle down and use it as it was originally intended – to protect LPs from predatory clients or technology breakdowns.

BUT…and we all knew that was coming… last look should not be brushed under the carpet and better disclosures from all platforms will only really dismiss this as an issue, for there are still too many whispers in the industry of some lower level “liquidity providers” who are abusing last look still.

Equally, there are clients still unhappy at the use of the practice by LPs, especially when things get busy, because as one asset manager’s execution chief told me recently, “last look means you get nothing done when markets are moving”. Whether that is fair or not is still open to question so perhaps there is still blood in this stone, but generally the FX market seems to have understood that in last look it has a manifestation of the sense of entitlement that permeates the industry. 9/10

5.”EUR to Spring a Surprise on Markets?” – “Despite a strong H2 performance in 2017, the euro will not – as some analysts predicted – continue to strengthen in 2018 and work its way to EUR/USD 1.30. Instead markets will get spooked by the Italian election in March and EUR will drop, it might recover a bit in the second half of the year but won’t be near 1.30.”

EUR to Spring a Surprise on Markets?And again there was a question mark from Galen here. Seriously – how does he get dressed in the morning? First the facts: EUR/USD opened on January 2 in Asia at 1.2010 and it closed in New York on December 31 at 1.1469 – that’s a 4.5% move lower. If the surprise was that EUR/USD would be boring he’s nailed it.

Again experts were the bulwark of his prediction, which actually meant that – and yes this is mixing metaphors – while he sat on the fence he threw them under the bus! It is with no glee then that I have to call out analysts from ING and Deutsche Bank who cited 1.30 as their target for the euro, but it is with admiration that I laud Julius Baer analysts who saw the market dropping to “around 1.14”.

Galen decided he was with the pessimists so this did mean he went against the majority view, so kudos to him, however his second half recovery did not materialise. Julius Baer 10/10 – Galen 7/10.

Galen Stops

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