Back on July 8th of this year, the New York Stock Exchange (NYSE) experienced a temporary outage and proactively suspended trading. In many ways, the NYSE acted swiftly and responsibly when they noticed that there was a technical issue with its trading platform. The NYSE realized quickly that traders would not be able to reliably trade and ultimately decided to suspend trading across the market until full functionality could be restored. In total, NYSE trading was suspended for nearly four hours.
Although the overall impact of the downtime was minimal in the grand scheme, had this event impacted the public market data feed which traders and investors use to access critical information on public markets, the impact would have been more severe. Even still, there are some takeaways from this event. A positive: the success of the SEC Regulation NMS implementation. A negative: critique of the initial communications from the NYSE. Let’s examine these a little closer.
A Win for SEC Regulation NMS
The technical issues that caused the NYSE to suspend operations on July 8th occurred as the result of a new software rollout. All open orders at the time were canceled. Most investors were able to continue trading utilizing one or several of the 11 other Exchanges or 40+ dark pools to execute trades. A recent Wall Street Journal article1 indicated that as of 2005, 80% of the trades conducted across the U.S. stock market were via the NYSE. That figure currently stands at about 20%, in part because of a 2007 regulation commissioned by the SEC called Regulation NMS (national market system). This rule, enacted in 2007, allows for orders to be directed to the exchange that quotes the best price. It also reduces transaction fees for investors as a result of increased competition. Therefore, there is fortunately redundancy and flexibility for traders if a single or multiple markets are experiencing downtime. Had July’s technical glitch taken place a decade earlier when the majority of US stock trades were executed on the NYSE, the impact would have been more severe.
If you’ve seen or read the news lately, there’s been a lot of talk about the recent Ashley Madison hacking scandal, by which a group of hackers known as Impact Team attempted to blackmail the site into shutting down – or risk having the information of some 37 million members released. Member information, including account details and payment transactions, was ultimately released over the Dark Web. Sounds spooky, yes? But what exactly is the mysterious Dark Web? And how can you access it? Here’s what you need to know about the Internet’s black sheep.
The Dark Web: What exactly is it?
In essence, the Dark Web is a cloaked portion of the Internet only accessible to users with specific software or authorization. It is part of the Deep Web – a section of the World Wide Web not indexed by search engines, meaning your standard Google and Bing crawls won’t do the trick.
Much of the concern surrounding the Dark Web has to do with the types of activities generally perceived to take place there. As you can see in Figure 1, according to Dr. Owen Gareth’s presentation “Tor: Hidden Services and Deanonymisation,” the majority of so-called hidden services lurking in the Dark Web are worrisome. Drugs, fraud, counterfeit, hacking, porn, abuse, guns, gambling: the list goes on. And let’s not forget the identities of the alleged cheaters from Ashley Madison.
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The following article is part of our Hedge Fund Insiders Article Series and was contributed by Eze Castle Integration (us!). Read more articles from the Series HERE.
Technology was historically an afterthought for many hedge funds and a “check-the-box” item at that. Many firms took the approach that they could get away with the bare minimum on the technology front, often overlooking the reality that technology today is a critical component to a hedge fund’s daily operations.
Today’s hedge funds are generally embracing the role technology plays in investment management operations. In fact, in today’s competitive landscape and with investors expecting more than ever from funds, technology has really emerged as a competitive differentiator and an asset that can help grow a firm’s business.
2015, specifically, has posed its challenges for hedge funds and investment firms, as the Securities and Exchange Commission (SEC) and the investor community as a whole have highlighted cybersecurity as one of the most critical areas of focus. Beyond security, hedge fund startups continue to face challenges as they look to keep pace with their established competitors and make their own impression on the marketplace. From a technology standpoint, we’ve identified three top priorities for hedge funds and investment management firms looking to find startup success.
Categorized under: Hedge Fund Insiders
The following article is part of our Hedge Fund Insiders Article Series and was contributed by Meyler Capital. Read more articles from the Series HERE.
So, I'm talking to a friend from the UK the other day when we stumble onto the topic of sports. Every time the word, “football” crosses my lips, he visibly cringes. “Football? You mean that game that you play with your hands? Tell me, JD, how often during a football game does anyone but the kicker actually ever touch the ball with his foot?
Yeah – this argument is not new...football will always mean something different to Americans than everyone else in the world. But it made me wonder the same thing about our business.
Why is it that capital placement agents refer to themselves as "Third Party Marketers"? Does this mean something different to people in these roles than it should to everyone else?
Let's call a spade a spade – there is about as much marketing happening in this industry as “footballing” in the American sport. Sure – there is lots of relationship management happening and certainly plenty of overt selling. But marketing? Not really…
The following article is part of our Hedge Fund Insiders Article Series and was contributed by CBRE Group, Inc. Read more articles from the Series HERE.
As a team focused exclusively on advising hedge funds on their strategic real estate planning, we have observed several trends continuing to proliferate in the market. Below are three real estate-related issues relevant to all hedge funds.
Increasing Construction Costs
Construction costs for office interiors throughout New York City are rapidly increasing and firms that built space 5–10 years ago will find that overall expenditures for the same quality installation have increased 30–40% based on benchmark construction cost data across NYC. Although benchmarking numbers are not available specifically for hedge fund construction, high-end design details like custom millwork and architectural metal and glass are often a significant part of the design and are seeing the most rapid appreciation in cost, driving even more significant increases specific to hedge funds. Additionally, these premium and other critical trades such as HVAC and electrical are in high demand and can cause scheduling delays, pushing associated costs higher than ever.
It is crucial for hedge funds to have an owner’s rep / project manager advisor involved to ensure projects are appropriately budgeted from the initial due diligence phase, assessed on a project-by-project basis throughout the site selection process, and effectively implemented during the design and construction of the selected space.
The following article is part of our Hedge Fund Insiders Article Series and was contributed by TriNet. Read more articles from the Series HERE.
Beginning January 1, 2016 every U.S. firm with 51-100 employees will be migrated to the “small group market” for healthcare benefits, as part of Affordable Care Act (ACA) mandated changes. Currently, in many states the small group market encompasses firms with 50 or fewer employees. But for policies that renew in 2016, this market will be expanded to include companies with up to 100 full-time employees.
Companies with 51-100 employees, who previously enjoyed the “economies of scale” benefits associated with being in the large group health care market, will become part of the small group market as of their first renewal on or after January 1, 2016. While this change will happen across the U.S., we believe its impact will be very significant in New York State.
What mid-size businesses can expect from ACA changes:
Healthcare premiums, on average, will increase – potentially significantly – and the access to a wide-array of rich benefit plans these companies previously enjoyed is likely to be reduced. This is because New York State’s small group healthcare market is “community-rated,” which means the demographics (for example, average age of employees) at a firm have no impact on small group market healthcare pricing. New York State currently prohibits insurance rate variations based on the demographic characteristics of the firm. This is in stark contrast to the rest of the country, where firms are priced based on their employee “census”- thus taking into account their demographic characteristics. We believe this will result, on average, in significantly higher healthcare premiums – especially if the firm has a relatively young average age composition, as so many New York financial firms do.
“Small group” market plans will be “canned,” meaning you will now have to select your benefits from a group of plans that the carrier offers – and plans cannot be modified. This will likely cause firms with 51-100 employees to lose some of the previous benefits they were able to offer employees. As a result, this change is likely to affect deductibles, out-of-network coverage, advanced infertility treatments and lower limits on certain services.
Companies that have 51-100 employees and a relatively young demographic composition will likely be hit with significant healthcare premium increases, as the small group community rates will be much higher than what they currently pay. By my calculations, some groups could see premiums increase as high as 50 percent for plans similar to what they offer today.
The following article is part of our Hedge Fund Insiders Article Series and was contributed by Willis Group Holdings Ltd. Read more articles from the Series HERE.
The Cyber risk landscape is rapidly evolving. Governments are facing an unprecedented level of Cyber attacks and threats with the potential to undermine national security and critical infrastructure. Similarly, businesses across a wide range of industry sectors, particularly those in the health care, retail and financial services industries1, are exposed to potentially enormous liability and costs as a result of Cyber incidents and data breaches.
Given the risk landscape, it is no wonder companies of all sizes continue to be subject to increasing data breach liability, both in the form of single plaintiff or class action lawsuits and regulatory investigations and proceedings. Negligence, breach of fiduciary duty and breach of contract are just some of the allegations that a company may face as a result of a systems failure or lax security that compromises the security of customers’ personal information or data.
Plaintiffs in data breach class actions typically allege that businesses failed to adequately safeguard consumer information and gave insufficient and untimely notice of the breach. Companies may also face class actions from banks and credit unions seeking damages for administrative expenses, lost interest, transaction fees and lost customers.
Settlements of data breach class actions can be exorbitant. For example, 25 class action lawsuits were settled in the wake of a retailer’s 2007 data breach involving the theft of data related to over 45 million credit and debit cards. The settlement included: up to $1 million to customers without receipts; up to $10 million to customers with receipts ($30 per claimant); $6.5 million in plaintiffs’ attorneys fees; and three free years of credit monitoring, with total costs reportedly up to $256 million. More recently, in 2014, two major retailers reported that the total costs of data breach and related class action lawsuits (less expected insurance recovery) was estimated at $63 million and $191 million, respectively. And, this year, two major health care companies are separately facing several lawsuits as a result of data breaches that reportedly exposed the personal records of 80 million and 11 million people, respectively. While these matters have yet to be resolved, the anticipated costs of litigation and settlement may set records.
The following article is part of our Hedge Fund Insiders Article Series and was contributed by Haynes and Boone, LLP. Read more articles from the Series HERE.
Cybersecurity risks pose an increasingly significant threat to investment advisers. In early 2015, the Securities and Exchange Commission’s (the “SEC”) Office of Compliance Inspections and Examinations (“OCIE”) identified its annual adviser examination priorities which reflect certain practices perceived to present heightened risk to investors and/or the integrity of US capital markets, one of which was cybersecurity compliance and controls. In April 2015, the SEC’s division of investment management (the “Division”) issued guidance (the “Guidance”)  reinforcing cybersecurity as a priority for advisers and suggesting that advisers implement cybersecurity risk assessment plans, response strategies, and written policies and procedures. Included below are measures advisers should consider (some of which are directly from the Guidance) when addressing cybersecurity risks relating to their operations:
Risk Assessment. Advisers should conduct assessments of: (1) the nature, sensitivity and location of information that it collects, processes and/or stores and the technology systems it uses; (2) internal and external cybersecurity threats to and vulnerabilities of the adviser’s information and technology systems; (3) security controls and processes currently in place; (4) the impact should its information or technology systems become compromised; and (5) the effectiveness of the governance structure for the management of cybersecurity risk.
The following article is part of our Hedge Fund Insiders Article Series and was contributed by Wells Fargo Prime Services. Read more articles from the Series HERE.
All business relationships are driven by the belief that both sides will receive a mutual benefit that will allow for a long term sustainable partnership between the firms. For a prime brokerage /alternative asset manager relationship this principle is no different. An alternative asset manager (“AAM”) looks for certain services from its prime broker (“PB”): financing, access to balance sheet, securities lending, Capital Introduction, research, Corporate Access, technology and other services that are essential to the AAM as it deploys its strategy. PBs are looking to generate an attractive after cost return based on the revenue generated from the client vs. usage of financial resources such as balance sheet and capital.
Driven primarily by post financial crisis regulatory pressures, banks and prime brokers are being faced with significant new requirements, which has changed the client interaction dynamic and has led to changes in balance sheet strategy, business objectives, and capital markets activity. While the fundamental nature of the business relationship has not changed between hedge funds and prime brokers, AAMs need to understand the impact of regulation on prime brokers and how best to optimize their impact on the prime brokers balance sheet in order to optimize the overall relationship.
While Basel III is the primary driver of this change, perhaps the most significant shift in the PB model has been the introduction of the return on assets “(ROA”) metric on a pre-tax basis as opposed to the pure top line revenue that previously drove the business. In summary, a balance sheet denominator has been added to the revenue numerator creating an ROA equation that now determines the health of a prime brokerage relationship. To be most effective, funds should understand how to minimize the balance sheet denominator as well as their impact on other relevant metrics:
Liquidity Coverage Ratio (LCR)
Net stable funding ration (NSFR)
Tier 1 capital ratio
High-Quality Liquid Assets (HQLA)