EICM 2007
Today I’m at the inaugural Exchange Invest Conference Monaco organized by Patrick Young and supported by HSH Prince Albert II. Patrick’s idea was to bring together a variety of different people involved in the rapidly changing world of financial exchanges in order to discuss, debate and better understand the forces driving these changes.
The opening speaker was Rene Karsenti, CEO of ICMA who spoke generally about the challenges currently facing global financial markets, followed by a presentation by the Monaco International Chamber of Commerce highlighting the state of the local financial sector.
I gave a short-ish presentation (longer than I was prepared for – apologies to the audience for my rambling – but needed to ad lib as the a/v guys debugged the flashplayer) on the context behind AmazonBay, after which when the a/v was working, we showed the film.
Next on the agenda was Eric Bettelheim who, to set the scene for a discussion on the “Future of Environmental Finance”, gave us a presentation on the impact of our modern civilization on the Earth’s biosphere. After going quickly through the science, he highlighted the increasing financial relevance of the developing carbon markets on industrial companies and economies, and the opportunity that creates for financial markets. He asserts that climate stabilisation by mid-century is impossible without forest carbon credits, and says the best (lowest cost) way to do this is via forestation projects in developing countries. Next he went on to articulate the growing risk of insufficient fresh water supplies to the global economy and predicts that water trading will be the ‘next big thing’ (after carbon) and gave various examples of new environmental markets such as biodiversity markets. It’s great to see and hear about voluntary markets emerging in areas that would not have historically been conceived as ‘tradeable’: yet another indication that we are entering the age of markets?
With the stage set, Steve Zwick moderated the panel discussion on the future of environmental finance. Patrick Birley (CEO of the European Climate Exchange) flagged that the dramatic market growth in Europe is very much due to the mandatory nature of CO2 reductions in the EU and expects that if (when) this happens in the US it will create another strong growth driver. Eric felt that the US would be able to take advantage of not having signed Kyoto, by now developing a better, more robust market mechanism having learned the lessons from the mistakes of others. A key topic was the discussion of ‘voluntary’ vs ‘mandatory’ carbon reduction markets and the myriad of different and often conflicting or contradictory standards. Gareth Hughes (Climate Change Capital) pointed out that voluntary markets were very useful is providing test beds for new and innovative ideas and experimentation. This led to a discussion on standards – how they should be set and by whom – where Eric pointed out that there will likely be multiple standards and competition should be allowed to operate to determine what are the ‘best’ standards, but emphasized that standards need to be commercial viable (which is not the case necessarily for Kyoto/EU credits which are bureaucratically nightmarish. Furthermore the compliance periods (5 years) are too short and create a structural mismatch between the projects that will effectively mitigate carbon emissions and the permit regime. He suggested that the future of carbon markets may well look similar to oil markets today with multiple grades and different contracts.
I questioned the approach whereby governments gave allotments to industry (rather than selling them – via auction or otherwise) and suggested that this was a fundamental handicap to developing efficient and working markets; I suggested that in this context emission permits were akin to spectrum licences – it seems odd to me that the energy companies (and other major industrial polluters) are too fragile to pay for their way while telecom companies were given no such indulgence when it came to buying 3G licences.
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Michael Mainelli kicked off the afternoon session with a presentation looking at competition between financial centres and what are the elements that underpin a strong and successful financial centre, and described the methodology behind the Global Financial Centres Index that his firm, in co-operation with the City of London, has developed. This led in to a panel, moderated by Michael, looking at new markets and products. Lamon Rutten (CEO of MCX of India) pointed out that exchanges should seek out opportunities where they can identify manifest market inefficiencies and benefit by removing or mitigating these inefficiencies. Colin Howard then described the key success factors for “micro-exchanges”: all trading is dematerialized, no/low regulation, integrated administration. Liquidity is low on micro-exchanges and so the running costs typically cannot be paid for out of transaction costs. Mike Chadney (CEO of CityOdds) gave a very good explanation of the convergence of betting, insurance and derivatives (he’s obviously been indoctrinated by the Park Paradigm! 
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Next up was Robert Barnes (MD, UBS) with a snappy presentation entititled “Dark liquidity and the changing trading environment” (some of my ramblings on the subject from last year are here). He highlighted that as transaction numbers explode, rising transaction costs are becoming a significant drag on further growth of on-exchange trading. Also, as (MiFID driven) competition leads to increased competition and higher complexity, smart order routing will pool liquidity ‘puddles’ and accessing dark liquidity (defined as firm orders that are neither executed nor disclosed) pools will be key.
