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LIBOR is dying. UK regulators announced last week a 5 year plan to phase the controversial and flawed rate. It will be replaced. By what and when is a matter of debate and speculation at this time, but changes are afoot.

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So what does this mean for the more than multi-trillion dollar bank loan market?  Stephen Hazelton, Founder and CEO of Street Diligence, a leading fixed income analytics platform explores the potential impact.

Bank loan credit agreements have, for decades, relied on LIBOR to price interest rate payments. Typically, interest payments have been based on LIBOR plus a risk premium. With last week's announcement that LIBOR will disappear and be replaced by 2021, we are set to see significant change.  Though status quo will rule the day in the short term, the changes may come sooner than many anticipate.

The Mechanics:  Pricing off of LIBOR (the London Interbank Offer Rate) is the overwhelming standard in bank loans, including but not limited to revolving credit facilities and term loans.   A loan will usually pay interest quarterly based on an “Applicable Rate,” comprised of the greater of 1) LIBOR plus a risk premium or 2) a minimum interest rate floor (usually 1%).  Thus, as LIBOR fluctuates, the interest due on a particular loan does as well, providing lenders protection in a rising interest rate environment.  Traditionally, this floating rate protection has been a significant differentiator for bank loans as comparison to fixed rate corporate bonds, and is particularly attractive in the low interest rate environment we’re currently in.

Manipulation:  The manipulation of LIBOR has been well documented and is not the focus of this piece.  That said, it is important to understand the basis of the rate and it weakness.  LIBOR is based on estimates, not actual transactions, submitted by banks for interest rates they would be willing to pay other lending institutions for borrowings of varying terms and in numerous currencies.  The key here is that the estimates are not actionable, and thus subject to manipulation for the benefit of conflicted parties at the participating banks.

The Changes:  These loans typically mature in five or six years, meaning the phase out period for the LIBOR rate is a near term issue for any new issuances.  Lenders and borrowers, and by extension their attorneys and underwriters, will have to consider the alternatives in the coming weeks and months.  Waiting until the rate phases out and sunsets will necessitate marketing a loan with some level of uncertainly on the back end, an unappealing and unlikely scenario.  Thus, loan markets will adjust and likely replace LIBOR well in advance of its official phase out date.

A Replacement:  There are a number of options to LIBOR, some of which are better than others.  The likely winner, or winners, may well be an upgrade from LIBOR and may also require geography-specific solutions.  For instance, one initiative in the UK, which is supported by a number of global banks, proposes the use of the Sterling Overnight Index Average, or SONIA, a measure of Sterling-denominated overnight funding rates from actual transactions in the wholesale money markets. While this eliminates the reliance on estimates, the frequency of transactions is an open question.  Often times, interbank lending transactions are not frequent enough across the spectrum of short term periods to represent a credible, liquid view of market rates at any given time and across currencies.  In times of market stress, as we experienced during the recent financial crisis, credit markets can dry up completely, leaving rates in limbo.

The crux of the matter lies in liquidity and choice of currency.  Interbank lending transactions, which in theory represent a close measure of a near risk-free rate, have declined since the financial crisis.  In the US, the Overnight Bank Funding Rate (OBFR) and the overnight lending rate in US Treasury-backed repurchase “repo” agreements are two leading alternatives.  The OBFR is based on a weighted-average, overnight federal funds rate for unsecured, dollar and Eurodollar, loans.  The overnight lending rate, in contrast, is secured by Treasuries to backstop the loans.  Other markets developing similar alternatives include the Swiss, Japanese and Euro markets.

Bottom Line for Bank Loans:  For stakeholders in bank loans, the new benchmark will likely consist of several alternatives, based on actual transactions.  Will arbitrage opportunities or drawbacks arise due to the lack of a frequent, reliable volume of transactions underpinning the new benchmark?  That’s unlikely, particularly given the block size and illiquid nature of bank loans.  The process of amending existing loans to reflect the new benchmark will, however, be an interesting and potentially difficult process.  Most agreements allow for successor rates to be adopted, but language varies, leaving a potential for conflicting interests particularly in multi-currency or cross-border paper.

What’s certain is that borrowers and lenders will begin the slow process of transitioning to the new rate(s), including an adjustment to managing their portfolio of loans based on a multi-currency risk profile, rather than a single, LIBOR-based profile.  In the medium term, the transition will keep attorneys busy advising and amending credit agreements outstanding in the marketplace to reflect the new benchmark.

Banks have had several extended periods of being "Hot & Cold" over the past 10-years. Since 2007, they have been much cooler than hotter. Over the past couple of months, they have been much hotter, than the broad market.

Are banks about to turn Cold again or become much much hotter? Below looks at Power of the Pattern thoughts on the question-

CLICK HERE TO ENLARGE CHART ABOVE

Banks have been much hotter than the S&P since hitting support at (1). Premium Members went long banks right after support was hit for the second time in a few months. What caught our eye, the ratio was near the 2009 financial crisis lows and was at the same prices as the lows back in 2011. Both times, banks had strong rallies.

While many say banks have rallied since the election was over, they actually started pushing higher, over 100 days ago.

Banks in the states and around the world remain an important influence to the broad markets.

Below looks at the patterns of banks in Europe (EUFN) and Italy (EWI) and why they are at one of the most important price points in years!

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When EUFN and EWI started heading lower in 2015, the broad markets in the states struggled to move higher. When these ETF's hit falling channel support earlier this year and rallied, so did the broad markets in the states.

Now the S&P is testing 2015 highs at the same time that EUFN and EWI are testing falling channel resistance at (1).

We humbly feel what happens at (1) above with these bank ETF's, while have a large impact on stocks in the states going forward.

By Mark Melin                        

Technology is moving to disrupt as many business models as it can and investment banks are not immune, an August 26 91 page Bank of America Merrill Lynch report points out. Banks in the European Union are struggling with different challenges than some of their US or Japanese counterparts. Inside banks, there are emerging approaches that differ from one bank to the next which can primarily be described based on how technology spending is categorized. It is this approach to managing the future and embracing or rejecting technology that could determine winners and losers in a segment beset by relatively low stock price-to-book value multiples.

Banks have been the only stock category trading below book value

In a stock market environment where banks are trading below book value -- the only industry group to be doing so, as we have noted inValueWalk -- bank managers are searching for a solution. That solution could be found inside a powerful societal trend: eliminate humans and replace them with technology as therobots come for the jobs. The major investment banks will not be the first in financial services to go down this path. It was the human trading floor that was first automated -- most notably pushed aside by high-frequency trading. What resulted was a market structure where information traveled around the world in microseconds, the subject of a pitched battle at the Securities and Exchange Commission over the IEX Exchange.

The next real battle that matters to banks is trading in SWAPs, which firms such as Citadel and Bloomberg are both looking to automate. Speed is one part of the technology-driven formula to reduce costs at major investment banks, but the exchange clearing systems typically also include the risk management benefit of the organization facilitating the trade not facing directional market risk. The August 26th 92 page BAML report, "Optimus Primer: how technology is transforming the investment bank," touches on these issues but goes deeper. While it explores the time advantage, focusing mostly on European banks, it raises issues that apply regardless of geography. (The benefit of clearing swaps on a central exchange was not discussed in detail in the bank report.)

Robotics are a societal trend and banks can leverage IT to reduce costs 4% to 12%

The report documents the societal trend, part of their thematic work on millennials, that shows a preference for robotics despite concerns over cybercrime. In the financial services industry, it is witnessed in the rise of Robo advisors and low-fee Exchange Traded Funds over active mutual funds. With general consumer preferences tending to favor robotic interactions as a powerful trend indicator, the report is about more than consumers. Perhaps the most material point is how technology can be used to reduce overhead burden and immediately improve rate of return to shareholders. "Industry estimates have suggested savings could be significant," the report said, pointing to areas automation disruption areas. "The status quo has a multitude of duplicated systems and processes that need humans to operate, maintain and reconcile them.

Automating much of this process could yield substantial IT and staff cost savings." BAML estimates that by deploying innovative technologies it could cut costs anywhere from 4% to 12%. "An 8% reduction in group costs improves RoNAVs by 2-3%," the report noted. But one of the problems with the cost reductions in a stock market world driven by quarterly earnings is that "some technology solutions seem long-dated."

Banks are not embracing technology to revolutionize their business

With such a rich estimated return, one might think the banks would all be moving in unison. But they are not, the report noted. The majority of bank IT spend, nearly three in four dollars, is directed towards maintenance, while a smaller percentage directed towards innovation. The banks have been under criticism for their failure to innovate, and the tech spending points to a divergence in thought process among the largest European players. Banks at the top of the list in IT spending include Spains Banco Santander, Deutsche Bank, Barclays, RBS and HSBC, with significant differentials in technology spend from top to bottom. France's Societe Generale, for instance, spends $354 million on technology, 79th on the global spending list, while Banco Santander spends near $1.3 billion, at the top of the IT list. Numerous areas of cost reduction in bank process could be impacted:

Artificial intelligence comes in many forms which may be useful to banks. At the extreme, it can replace many functions currently carried out by humans. Key uses will be populating Big Data sets, carrying out maintenance reports, corporate audits, monitoring of conduct, compliance, risk, and trading.

A large portion of technology spend cost reductions come in the compliance department, with automated systems monitoring and flagging inappropriate behavior at a significantly more efficient rate than humans:

...if a trade looks odd, if there is a problem, if the trade looks very different to how that client normally trades. Machine learning may be able to automate and resolve many of the issues, referring fewer exceptions to the trader.

The report, using "the industry rule of thumb" that one third of all investment bank costs emanate from the back office, says this area could be best automated. Citing a study from Santander Innoventures, BAML points to 20-50% of back office clearing and settlement costs could be eliminated with technology, for example. Technology and artificial intelligence solutions could also monitor trading and asset transfer regiments for red flags, tasks now monitored by humans.

Bank research could be automated -- including the filtering of reports for the buy-side -- but will research results ever be tracked?

One area that could be impacted is bank research, a notable topic of interest. Those inside bank profit centers have had research costs assigned to their division balance sheet. Bank research is projected to be a cost / revenue center of its own, with buy-side clients paying for the research. This will create an interesting dynamic where the valuable research will be identified through a free market system rather than the somewhat socialistic system where bank research is less accountable as a clear bottom line revenue generation number. From BAML's perspective, automation first streamlines the compliance function:

Research is a heavily regulated area with each regulator applying its own set of requirements. There are a myriad of regulations which require research divisions and its analysts to operate specific procedures to protect the quality of the research output. Analysts are generally required to distribute their views simultaneously to all their clients to prevent selective dissemination. That includes the salesforce and/or clients of their own firm. This can take up valuable time (as the analyst works out the consequences of an economic event, finds relevant data, makes some charts, and then edits and publishes a report).

Not only will technology streamline research production, but also how it is consumed. Buy-side analysts are inundated with research. Technology could be used to help organize and differentiate among research thesis and information. Could advanced technology -- gasp -- lead to success tracking of a researcher's thesis, predictions and modeling? While this might be a great fear among researchers -- rarely is the success of their analysis fully tracked -- it could likely separate the research wheat from the chafe. There will be winners and losers if this occurs.

Citadel and Bloomberg looking to disrupt traditional investment banks while investment banks pushing back in other ways

A new paradigm is reshaping banking and certain industry innovators are gunning to disrupt the status quo. The BAML report highlighted three primary forces targeting technological improvement that included two well known names: Citadel and Bloomberg.

Some non-bank competitors have been far more successful than the banks in pushing down variable cost per trade which has allowed them to creep into areas that have traditionally been fulfilled by banks. New entrants have the luxury of building their infrastructure from scratch for the new rules, rather than needing to make alterations to legacy systems. Well-known examples include Citadel which has pushed into the trading of liquid, standardized swaps, or XTX which ranked top 10 in the latest Euromoney survey for FX trading. Bloomberg is also making in-roads into being a SEF in CDS and also encroaching into some of the traditional sell-side research roles of providing analysis of standardized data sets through Bloomberg Intelligence.

And the report also notes:

The tools of research broadly similar for 10 years – expect this to change A decade ago, the main tools of the average analyst were Excel, Word, email, pdfs, Bloomberg chat and a phone. Today, these are pretty much the same. Client relationship management systems are better, more integrated and matter more than they did 10 years ago. But essentially, the tools are unchanged. Meanwhile, Facebook has grown from 6m monthly users in 2005 to 1.6bn in 4Q15. In 2005, the best-selling phone was a Nokia 1110; the iphone was a mere glint in the eye of Sir Jonathan Ive (1st gen not launched until 2007); 2MB broadband had just been launched for UK households (now 100MB is fairly standard). The word “Fintech” would certainly not get past the editors. It seems likely that research will need to make faster technological progress over thenext decade. In our view, as the value of Research becomes more clearly defined, there is the potential for a raft of changes.

Perhaps the behind the scenes race to watch will be who disrupts whom first? Will Bloomberg disrupt the banks first or will the banks disrupt Bloomberg ?

Turning The Housing Bubble Into Movie Magic In "The Big Short ...

There’s endless amounts of information when it comes to our finances. We have unlimited choices, almost to anxiety-inducing measures. From stocks, bonds, mutual funds, alternative investments, and more, there is never a failure to provide options. That’s why we need sites like ValueWalk, places which provide us with the important details and guidance to make these difficult decisions.

People’s attention and obsession with money are never abating, whether we like it or not, humans eat, sleep, and dream money. And why not? Money makes the world go round.

So, how do the experts do it, and how do they keep their cool? Hollywood has never been shy about its fascination with Wallstreet, with dozens and dozens of movies showcasing the ruthless efforts of heartless financiers. These Hollywood portrayals focus on the pursuit of one thing, and one thing only—money. And audiences everywhere sigh at the thought of passed opportunities or offensive tactics.

Movie Adaptions: Books To Read Before The Movie Comes Out ...

But, if there is one thing we can all agree on, it’s the entertainment value Hollywood provides us. Find out the best ways Hollywood and Wallstreet have converged with this list of the 9 best Wallstreet movies.

So take a break, and get your Netflix account ready with these proven hits. ”

Below is a list followed by an infographic describing the movies

Trading Places

Wall Street

Boiler Room

Glengarry Glen Ross

Enron: The Smartest Guys in the Room

American Psycho

Bonfire of the Vanities

Quants: The Alchemists of Wall Street

Arbitrage

Intergalactic Finance: Valuing The Star Wars Franchise

Trading Places (1983) Starring Eddie Murphy and Dan Akroyd, a snobby commodities broker and a homeless con artist are unknowingly part of the same bet, where they trade places and make for a hilarious role reversal.

Wall Street (1987) The original Wall Street is a classic Wall Street film. The story of a young stockbroker that gets involved with legendary trader, Gordon Gecko. Contains the famous line, “greed is good.”

Boiler Room  (2000)

Movie "Virgin Cheerleaders In Chains" Searches for Investors ... Watch two “pump and dump” brokers create artificial demand for fake companies and risky penny stocks. This movie also resonates with anyone who has worked in telemarketing.

Glengarry Glen Ross (1992) The story of four real estate salesmen who find out that all but the two top salesmen will be fired. This movie is known for it’s use of profanity and the cast jokingly refers to the movie as “Death of a Fuckin’ Salesman”.

Enron: The Smartest Guys in the Room (2005) A documentary about one of the biggest financial scandals in American history – the fall of Enron Corporation. Includes interviews with former Enron execs, stock analysts and reporters.

American Psycho (2000)

China's Film Industry: A Blockbuster In The Making - A Wall Street professional that loses his mind over a co-worker having a superior business card. He hides his psychopathic ego from his co-workers and dives into a spiral of violent fantasies.

Bonfire of the Vanities (1990) A Wall Street exec and his greedy girlfriend run over a boy and drive off without reporting it. A tabloid reporter finds out and riles up New Yorkers with his coverage of the case, eventually driving the couple to go on trial.

Quants: The Alchemists of Wall Street (2010) A 45 minute documentary that goes inside the minds of quants – the mathematical geniuses and computer programmers who are the engine of the global financial system. This film covers how quants are developing a system to trade at the speed of light.

Arbitrage (2012) The story of a troubled hedge fund manager who is desperately trying to sell his trading empire. While driving with his mistress, he falls asleep at the wheel, she dies and he has to turn to an unlikely source for help.

Reference

http://www.imdb.com/list/ls076122542/ https://blogs.cfainstitute.org/investor/2013/09/20/20-finance-films-for-entertainment-and-education/]

Investing In The Film Industry Offers Big Opportunities

Infographic via PersonalIncome

By Mark Melin                        

The Southern California region is known to be one of several hotbeds for alternative investing thought. That reputation might have been cemented just a little further when PIMCO, formerly the world’s leading bond fund manager, lured Emmanuel “Manny” Roman away from his perch as CEO at London-based Man Group. The move installing Roman to CEO is significant from several standpoints, including the PIMCO trend towards strategy diversification, which ValueWalk first discussed on January 21, 2014 and later addressed in more detail. A seed was sprouting at PIMCO about the same time a dichotomous trend towards strategy diversification was taking place at Man Group. The historic managed futures strategy leader, spawning some of the industry’s greatest names, was at this time diversifying from CTA space amid then quantitatively challenged market environments that lacked cyclical adjustments and price persistence.

PIMCO Receives SEC Wells Notice On Total Return ETF

From rough and tumble commodity trading, Man Group has been on a quest for strategy diversification

Roman, 52, replaces Douglas Hodge at PIMCO, a firm that lost its title of “World’s largest bond fund” in May of 2015 to Vanguard.

There are meaningful comparisons to be made between the path PIMCO has taken and that of MAN Group – as both have attempted to diversify their product mix. PIMCO has been moving towards a mathematically driven approach, initially nesting a managed futures division amid its product offerings, while Man Group has been diversifying in the opposite direction. Man Group, the world’s largest listed hedge fund, went on its own quest for strategy diversification when Roman become its CEO.

Bill Gross Needs To Get Over Pimco Love Affair

Man Group was founded by James Man in 1783 and, like many in the commodities business, the firm has a colorful history. The commodities trading firm, now housed in respectable Riverbank House in London, initially supplied rum to the British Navy, a profit center that lasted for nearly a century. The firm entered commodity trading early in the industry's history, executing trading tactics among the docks of London before such trading took place on physical exchanges. Man excelled at brokerage but an intellectual, mathematical side of the business, the asset management group, was also leading an industry forward its brightest stars.

Man’s lead momentum-based AHL product line, for instance, is representative of some of the top minds in the business, including Sir David Harding, who represents the "H" in AHL. He, like the other company namesakes, left the firm to start their own momentum-based funds. Harding started Winton Capital Management, whose $12.6 billion Futures Fund was a hero during the 2008 market crash. Recently, however, the fund, up just 0.56% year to date, is not keeping pace with peers who have more nimble assets under management. HSBC's Managed Futures Systematic Global performance average, for instance, is up 5.07% year to date, driven in part by exposure to niche markets such as German interest rate products and lightly traded agricultural exposure.

Ultimately Man Group's fund management and brokerage business split amid what was known to be considerable acrimony, with fees and commissions being charged from MF Global to Man Group said to be a point of heated discussions.

PIMCO Says Bill Gross Needs Better Screenwriter

They separated in what appeared to be a nasty divorce. MF Global was the resultant brokerage firm and it collapsed in 2011 in what can be described as one of the industry's most historic moments. Man Group, for its part, went on to become the world’s largest publicly traded hedge fund company.

Shortly after MF Global’s demise, Man Group set about a calculated strategy to diversify from its historic roots in momentum-based investing. In bringing aboard Roman and embracing GLG, Man Group signaled a shift to a balanced product set that included equity-driven products. What many inside the CTA industry appreciated at the time was GLG, while equity-based, embraced strategy diversification. The firm maintained a quantitative, mathematical focus but just took the managed futures CTA mindset to a new level.  The firm did not eschew core managed futures CTA strategies. But in 2012 - 2013 when decisions were made and execution strategies were in place, the majority of managed futures strategies were floundering in the face of wide-spread central bank quantitative stimulus that dulled volatility and price persistence. Even divergence and reverence to a mean was finding difficulty in oddly correlated markets. Man Group was being publicly accused of "backing the wrong horse."

These mostly long-only denizens of the street who were throwing stones didn't apparently understand a key point of technical market structure. Market environments have tended to be cyclical. This was math and statistics used to understand market structure and general price patterns, not uncover a formula to find the next big stock pick. Those in the commodities and derivatives industry learned much about cyclicality from agricultural markets, but they also existed in economic cycles as well. Changing market environments lead to different strategy win size.

Fast forward to 2016 and it is the momentum-based investing strategy that is holding up Man Group business. In a world of negative interest rates and QE being blasted about amid already reasonably good economic growth, institutional investors are logically thinking about hedging. During rocky times managed futures has delivered when price persistence has followed volatility. The best programs have high win percentages during periods of beta upside deviation, but can manage risk well during negative beta market environments.

Bernanke Joins PIMCO Global Advisory Board

Based on performance reporting documentation reviewed by ValueWalk, Man Group has varying strategy performance relative to beta market environments. Man Group’s $1.5 billion AHL Evolution managed futures program is up 6.69% year to date, beating industry average. The large $4.5 billion AHL Alpha is up 2.19% and the AHL Diversified is up 1.67%. The lightly subscribed $33 million AHL Currency Fund DN USD, however, is down -15.44% year to date.

PIMCO Is Diversifying Strategy In Favor of Quantitative Alternatives

Contrast Man’s history with that of PIMCO and see the same logical overall goal – diversification of strategy. But instead of moving away from managed futures strategies and other quant approaches with a documented history of delivering “crisis alpha,” PIMCO is embracing a quantitative approach – a legacy brought forward by former PIMCO top executive and founder Bill Gross.

After a historic twenty-year bull run in bonds, Gross wanted to diversify the firm’s strategy mix, a move that was at odds with Mohamad El-Erian, leading to a well-publicized split between PIMCO’s founder and his heir apparent. On January 21 ValueWalk discussed the alternative asset ideology rift between El-Erian and Gross.  The PIMCO quantitative division appeared at the center of a then nascent trend developing. On February 24, ValueWalk provided more reporting on a move that would today manifest itself in a new CEO taking the reins at PIMCO, one with a significant alternative investing background.

Bill Gross: El-Erian Wouldn't Accept Performance Responsibility ...

The ugliness that proceeded both Gross and El-Erian departing PIMCO might have seemed like an illogical and unproductive argument to Josh Davis. He was the mathematical mind who then led eight-man team out of Newport Beach, California. At the time Davis was said to be among a small but growing voice calling for logical diversification of strategies. With the appointment of Roman as CEO of PIMCO, the quest for diversification grows amid an illogical world of negative interest rates and generally strong economic growth. Against odd volatility patterns comes a common quest for lower overall portfolio volatility. The path PIMCO is taking leads to the same location as Man Group, they just appear to be arriving from different backgrounds.

Luke Ellis, an honors mathematics and economics student with a background at GLG in multi-manager (strategy) integration, will replace Roman as CEO of Man Group September 1.

Man Group and PIMCO did not respond to a request for comment.

[Photo Credit: Kirrus, Flickr]

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Goldman Sachs put together a list of the best books and it is impressive and long – unfortunately it is hard to sift through since it just has the title and the author without any information on the book so we are helping you out by filing in that info. If you want to find the full list go here we also list it below at the bottom along with descriptions. Note: we do not endorse the short term trading strategies (well we really do not officially endorse anything) but to keep the list complete we have included all descriptions of books below. Because this is lengthy we will be breaking them up by section so stay tuned for more!- which brings to Industry Background and Flavor – there are some real classics in here and a few lesser known names and many of the books only cost a few pennies from Amazon and even with shipping will cost you less than $5 TOTAL, a bunch only cost a penny plus a few dollars shipping – so make sure to check them out! Or Listen to the books on Audible. Try Audible and Get Two Free Audiobooks.

Also see Bill Gates: 5 Books To Read This Summer

Also see Written About, By or For Money Managers and Traders -> here

Also see Goldman Sachs’ Recommended Reading List – Industry Background and Flavor Part I

Goldman Sachs’ Recommended Reading List – Industry Background and Flavor Part II

Goldman Sachs reading list sections

Written About, By or For Money Managers and Traders

Industry Background and Flavor

Broad Industry History

Analytical and Reference

Periodicals

Wall Street Journal (daily, Monday through Friday)

Barron’s (weekly publication)

General

IMD

FICC & Equities

Options/Derivatives

Goldman Sachs’ Favorite Books List – Options/Derivatives

How I Trade Options by Jon Najarian

Wiley Online Trading For A Living

Beat Risk and Reap Rewards Like A Pro!

The Compelling True Story of How a Top Market Maker Built a Successful Trading Business

Praise for How I Trade Options

“To much of the outside world, trading appears to be as incomprehensible as rocket science. What Jon Najarian has done in this engaging and very readable book is to ‘demystify’ the world of options for both the aspiring trader and the retail investor. How I Trade Options is a rare opportunity to look over the shoulder of this experienced options trader, teacher, and lecturer.” -Lewis J. Borsellino, CEO/Founder, www.TeachTrade.Com; Author, The Day Trader: From the Pit to the PC

“How I Trade Options gives retail investors who have little or no prior knowledge the insight into how options work and how to use them effectively and responsibly. For those who want to learn about options, this is a rare opportunity to learn from a master trader. Najarian shows commitment to educating investors on the use of options to enhance their portfolios.” -Rance Masheck, President, Quantum Vision Inc.

“Not only is Jon Najarian a Supertrader, he is a Superteacher. I owe much of my good fortune to Jon Najarian. I learned more from him than I had learned in an entire decade-plus it was fun! Jon’s abilities to make his profitable trading strategies understandable are sure to make How I Trade Options a must-have tool that every option trader will want to own.” -Don Fishback, Developer of the Fishback Option Pricing Model

“Jon Najarian is a world-class options trader and a world class options educator. His crystal clear explanations of such strategies as vertical spreads empower the average investor to participate in attractive options approaches that, until now, have been dominated by professional traders.” -Bernie Schaeffer, Chairman and Chief Executive Officer Schaeffer’s Investment Research, Inc.

When Jon Najarian embarked on a career in the world of market making, he went from playing with the Bears to running with the bulls. In this chronicle of his trading evolution, the former middle linebacker for the Chicago Bears focuses on the key ingredient for his market success-learning to control risk.

From achieving speedy victory to coping with some enormous losses to building his own business, Najarian reveals here how he successfully trades the market with options traders, showing investors how to trade like the pros by:

Honing self-discipline

Handling volatility successfully

Grasping puts, calls, and spreads

Seizing opportunities and adapting strategies to changing times

Looking to Najarian’s compelling personal-and highly educational-story as an example, stock, futures, options, and bond traders, as well as individual investors, will learn to limit risks, be aware of and avoid potential pitfalls-and trade options like a market maker.

Options as a Strategic Investment by Lawrence McMillan

The market in listed options and non-equity option products provides investors and traders with a wealth of new, strategic opportunities for managing their investments. This updated and revised Fifth Edition of the bestselling Options as a Strategic Investment gives you the latest market-tested tools for improving the earnings potential of your portfolio while reducing downside risk—no matter how the market is performing.

Inside this revised edition are scores of proven techniques and business-tested tactics for investing in many of the innovative new options products available. You will find:

Buy and sell strategies for Long Term Equity Anticipation Securities (LEAPS)

A thorough analysis of neutral trading, how it works, and various ways it can improve readers’ overall profit picture

Detailed guidance for investing in Preferred Equity Redemption Cumulative Stocks (PERCS) and how to hedge them with common and regular options

An extensive overview of futures and futures options

Written especially for investors who have some familiarity with the option market, this comprehensive reference also shows you the concepts and applications of various option strategies — how they work, in which situations, and why; techniques for using index options and futures to protect one’s portfolio and improve one’s return; and the implications of the tax laws for option writers, including allowable long-term gains and losses. Detailed examples, exhibits, and checklists show you the power of each strategy under carefully described market conditions.

Options:Essential Concepts by The Options Institute

Get the acknowledged industry classic – revised and updated to deliver everything from time-honored options concepts to strategies for individual and institutional investors and traders. Every stock trader or market maker, whether currently involved with options or not, should own OPTIONS: ESSENTIAL CONCEPTS AND TRADING STRATEGIES, THIRD EDITION. Written by today’s leading options practitioners – and edited by The Options Institute, the globally renowned Educational Division of the Chicago Board Options Exchange – OPTIONS leaves no stone unturned in delivering the most complete, authoritative, and easy-to-understand blueprint available for navigating the profitable twists and turns of today’s options marketplace. No-nonsense, packed with useful information, and valuable as either an introductory textbook or a comprehensive fingertip reference source, this thoroughly revised and updated edition details: What options are, how they are priced, and how they are traded; Basic option trading strategies such as covered writing and protective puts; Advanced strategies involving LEAPS and the stock repair strategy; Options from three points of view: private investor, institutional investor, and market maker; How to use the power of the Internet for trading and detailed information gathering. The well-organized, thought-provoking, and dependable ideas found here will help you use options to increase the returns in virtually any investment mix. The comprehensive answers to a wide range of options questions, as well as insights into the latest options trading strategies, cover: Option Market History –  From early transactions to latter-day innovations including LEAPS and index options, knowledge of options industry history will help you intuitively understand and trade profitably today; Essential Concepts – Fundamentals of options pricing theory and their relationship to market prediction, stock selection, and risk management; volatility explained; and introductory strategies from long call to covered strangle;. Investing and Trading Strategies – Discussions of how to approach and understand “investing” strategies that focus on ownership of an underlying equity versus “trading”. . strategies with no intent to hold the underlying stock; plus, the function of market makers ; Real-Time Applications – Institutional case studies; how to use options as an indicator of price moves for an underlying stock; using the Internet for instantaneous trades and information; plus, a comprehensive glossary of option market terminology. . OPTIONS, THIRD EDITION, takes the guesswork out of trading options and gives you the information you need to become a savvy options trader. So get your questions together, and use this step-by-step guidebook to develop option strategies that meet your investment objectives: hedging your stock market risk, increasing your portfolio income, or improving your trading results.

Options For The Stock Investor: How Any Investor Can Use Options to Enhance and Protect their Return by James B. Bittman

Options for the Stock Investor thoroughly explains how to use stock options safely and effectively. James Bittman demonstrates how to integrate options into a long-term investment program explaining in a clear and simple language time-proven strategies that will add value to any investor’s portfolio. He recommends specific strategies for investors with various risk tolerances and investment goals. Authoritative and enlightening, this book is complete with tests and a graphic summary of option strategies.

For individual investors seeking to profit with options, Options for the Stock Investor is an invaluable resource. Specific topics include:

The mechanics of basic option strategies

Understanding option price behavior

Selling options on the stocks you own

Using options to achieve your long-term investment goals

Option strategies for both newcomers and veterans

Trading Index Options by James B. Bittman

Designed and written for active traders who are interested in practical information that can improve their results, Trading Index Options offers tried-and-true techniques without a lot of theory and math. Bittman provides traders with the know-how to evaluate practical situations and manage positions. Among the key features: the basics of index options, including various spreads; how to match strategies with forecasts; alternatives for losing positions; the importance of price behavior and volatility. A windows-based software program that provides multiple option pricing and graphing is included in the package.

Reviews  – From the Back Cover

Leverage Strategies to Make High-Volatility Markets Work For You! Today’s volatile markets are ideal for profitable index option trading. Trading Index Options was written for active traders-spectators who need to see every trade from every angle-and contains market-tested strategies from one of today’s leading options educators and traders. With ready-to-use, battle-tested information on virtually every page, this amazing book: Explains how toption prices behave, letting you stay focused on market activity. Provides proven techniques to understand risk and limit your exposure.

Shows how to take advantage of index options’ unique flexibility. Covers trading psychology-how to think and trade with discipline. Presents strategies from basic to complex-buying, selling, spreads, straddles and more (with case studies to demonstrate each). And because today’s fast-moving markets require instant calculations and adjustments, the easy-to-use OP-EVAL3 option pricing and strategy graphing computer program lets you analyze option prices, set profit target, implement trading decisions, and of critical importance, monitor multiple positions simultaneously.

No other trader’s program can match its speed and versatility! Short on hard-to-comprehend mathematics and long on tried-and-true tactics and strategies, Trading Index Options is fast becoming the bible for index option mastery.

All About Options: The Easy Way to Get Started by Thomas A. McCafferty

Discover the Potential of Options for Managing Risk, Profiting from Bull or Bear Markets, and Leveraging Your Investments

Thousands of individual traders and investors used the first two editions of Tom McCafferty’s All About Options to master every aspect of the options market_and develop strategies for making winning investments.

Now revised and updated, the Third Edition of this best-selling guide provides a clear, no-nonsense explanation of the risks and rewards of using options, ranging from options basics to hedging and speculating to options pricing.

This new edition of All About Options covers the dramatic changes in technology, world finance, and market conditions that have take place in recent years.

How the Options Markets Work by Joseph A. Walker

Designed to serve as a convenient source of basic information about options, one of the most misunderstood products in the investment world, this handbook offers the reader a practical explanation of how the option market works, covering equity options, index options, foreign currency options, interest rate options. It aims to give comprehensive guidance on the subject, concentrating principally on equity options, one of the most important – and popular – options instruments.

Mastering Derivatives Markets: A step-by-step guide to the products, applications and risks by Francesca Taylor

“The first port of call for anyone looking to truly understand derivatives markets, appreciate the role they play within the global financial system and develop the technical knowledge to trade.” Matthew Thompson, Chief Strategy & Business Development Officer, Dubai Mercantile Exchange

“An essential read for anyone serious about understanding the impact of derivatives and technology on the global financial market.” Kevin Thorogood, Global Head, Investment Banking/Energy Trading, Thunderhead Ltd

“We have used Francesca for training on derivatives in the past. She demonstrates a passion for these markets and for learning. In a fast changing world, the combination of technical learning and practical experience that Francesca applies is helpful in keeping abreast of market developments.” Rachael Hoey, Director, Business Development, CLS

Your Essential Companion To The Derivatives Markets

Mastering Derivatives Markets provides full up-to-the-minute explanations — with worked examples and screen shots — covering the basics of options, swaps and futures across the key asset classes: rates, currency, equity, commodity and credit.

This book is relevant to anyone working within the financial markets, from the new entrant to the seasoned trader looking for updates, and to non-trading personnel working in IT, legal, compliance, risk, credit and operations.

Please note that the ‘look inside’ feature is currently displaying the content of Mastering Derivatives Markets Third Edition, this will be updated soon.

Mastering Derivatives Markets Fourth Edition has been completely revised and features new chapters on:

The most up to date thinking in the market

OTC clearing

Regulation

Benchmarking

Electronic futures trading in the FX market

New insights into the commodities markets

Carbon trading and environmental products

“An invaluable and straightforward guide, full of practical applications.” David Ford, Training & Development, International Petroleum Exchange “Another valuable step on the road to improving competence and confidence in the world of financial derivatives.” Paul Dex, International Sales Manager, LIFFE “A vital book for every new entrant into the market.” Christopher Bellew, Director, Prudential-Bache International Ltd “Contains just about everything you might ever want to know concerning the derivatives markets… a well written book about a difficult subject.” The Trader’s Magazine “We run a number of courses on financial products and this book serves as excellent pre-course reading as well as an everyday reference handbook.” Maricar Obieta, Vice President, GCIB, Citibank, NA “As professional market-makers we have found this an invaluable, easy-to-read book. We always have a copy to hand for quick reference.” Andrew Holdstock, Director of Foreign Exchange, IG Group Plc –This text refers to an out of print or unavailable edition of this title.

“The first port of call for anyone looking to truly understand derivatives markets, appreciate the role they play within the global financial system and develop the technical knowledge to trade.” Matthew Thompson, Chief Strategy & Business Development Officer, Dubai Mercantile Exchange

“An essential read for anyone serious about understanding the impact of derivatives and technology on the global financial market.” Kevin Thorogood, Global Head, Investment Banking/Energy Trading, Thunderhead Ltd

“We have used Francesca for training on derivatives in the past. She demonstrates a passion for these markets and for learning. In a fast changing world, the combination of technical learning and practical experience that Francesca applies is helpful in keeping abreast of market developments.” Rachael Hoey, Director, Business Development, CLS

McMillan on Options by Lawrence G. McMillan

Legendary trader Larry McMillan does it-again-offering his personal options strategies for consistently enhancing trading profits

Larry McMillan’s name is virtually synonymous with options. This “Trader’s Hall of Fame” recipient first shared his personal options strategies and techniques in the original McMillan on Options. Now, in a revised and Second Edition, this indispensable guide to the world of options addresses a myriad of new techniques and methods needed for profiting consistently in today’s fast-paced investment arena. This thoroughly new Second Edition features updates in almost every chapter as well as enhanced coverage of many new and increasingly popular products. It also offers McMillan’s personal philosophy on options, and reveals many of his previously unpublished personal insights. Readers will soon discover why Yale Hirsch of the Stock Trader’s Almanac says, “McMillan is an options guru par excellence.”

Thousands of investors turn to Larry McMillan, leading finance writer and advisor, for expert advice on options. In this reader-friendly book, McMillan offers the latest information on the high-profit world of options trading. This up-to-date guide provides an information-hungry marketplace with in-depth coverage of pricing strategies, volatility and risk control, hedging techniques and option philosophy, as well as key insights into the predictive power of options, the versatile option and buying and selling. Real-world examples provide hands-on applications and clear illustrations to turn theory into practice. –This text refers to an out of print or unavailable edition of this title.

The McMillan name is virtually synonymous with options. Over the years, this legendary trader’s popular and informative books, newsletters, and seminars have helped both new and seasoned investors use options to consistently enhance their trading profits.

McMillan first shared his personal options philosophies and techniques in the original McMillan on Options. Now, in this revised and expanded Second Edition, he reveals a number of new approaches for success in today’s fast-paced and ever-changing investment arena.

By exploring both the flexibility and predictive ability of options, this highly revised resource will show you the best new ways to apply options to everyday trading situations. You’ll quickly learn how to establish self-contained strategies, substitute options for other financial instruments, and protect your positions–whether in stock, index, or future options. More importantly though, you’ll receive a complete education in the exciting new products that are popular with investors, from single-stock futures and exchange-traded funds to LEAPS and the brand new volatility futures.

Backed by over 100 case studies, updated charts, and new examples, McMillan on Options, Second Edition:

Illustrates how a stock can be “pinned” to a striking price at expiration, what causes it, and when to expect it

Discusses put-call ratio charts and theory on individual stocks

Examines how to use volatility indices as an accurate market predictor

Adapts trading systems and strategies–such as intermarket spreads and seasonal trading systems–to the realities of a new market environment

Presents advanced approaches to options trading, including the concepts of expected return and Monte Carlo probability simulation

Offers guidance for those who need to find reliable options trading data and tools online

This timely Second Edition also expands on discussions regarding the NYSE as a faulty indicator, the history of market volatility, and the importance of buying and selling volatility.

Readers can now gain a unique insight into McMillan’s personal philosophy on options, and discover the innovative new tactics and strategies he applies to his own trading and analysis. Packed with hands-on examples and techniques that address hedging and volatility–plus fresh new pricing concepts–this comprehensive and updated work will help you understand and unleash the full power of options.

New Financial Instruments by Julian Walmsley

In the beginning, there were four financial instruments: a bank deposit, a bill of exchange, a bond, and an equity. Today, as a result of a steady stream of financial innovations, the market landscape is far less sparse-and far more complex. To help you maneuver smoothly and profitably within this crowded and much-evolved arena, Julian Walmsley’s New Financial Instruments has been thoroughly revised and expanded to include complete coverage of all the new financial instruments available to market practitioners.

New Financial Instruments, Second Edition offers a clear, practical perspective on the shifts and changes behind today’s dizzying proliferation of market tools and techniques. Its in-depth examination of both international and domestic markets probes the nature, causes, and consequences of financial innovation, as well as the ins and outs, advantages and disadvantages of the myriad products engendered by change.

New Financial Instruments, Second Edition is a comprehensive, comparative guide offering concise descriptions of convertibles, warrants, preferred stocks, and other instruments. In addition, Walmsley’s clear-eyed analysis distills the latest variations in areas such as barrier options, asset-backed securities, credit derivatives, structured notes, and equity derivatives. There’s important information on the origin and methodology of each innovative technique, as well as essential details on the risks, rewards, and key considerations that must be understood before deciding on one instrument over another.

New Financial Instruments, Second Edition takes you step-by-step through a wide range of procedures, revealing how to:

Analyze risk level and return

Use interest rates and currency swaps in synthetic securities

Value exotic options, weighing the risks they entail against the leverage they provide

The book also addresses such key topics as:

Basic analytical tools-present value calculations, zero-coupon curves, modern portfolio theory, value at risk, continuous compounding

Securitization-transferable loan instruments, Eurocommercial paper, and asset-backed securities

Swaps-interest rate, currency, diff, zero coupon, asset, and equity

Options-barrier, binary, cliquet, ladder, rainbow, shout

Mortgage-backed securities-market development, superfloaters and inverse superfloaters, PAC bonds, reverse PACs and lockouts, TAC bonds

Supported by extensive illustrations and working examples, this indispensable resource is a must for anyone seeking to understand and apply the latest financial innovations.

A comprehensive guide to today’s new financial instruments-what they are, how they work, and how you can profit from them

Written by an expert practitioner in the field, this up-to-date, systematic guide takes you through the ins and outs, advantages and disadvantages, risks and rewards of today’s sophisticated new financial tools and techniques. Now revised and expanded, New Financial Instruments has complete coverage of bonds, equities, warrants, and other traditional vehicles, as well as a comprehensive overview of the latest developments in asset- and mortgage-backed securities, credit and equity derivatives, convertibles, and preferred stocks.

“With the flood of innovations we have seen in international finance in recent years there was a great need for a succinct, comprehensive survey of the field. New Financial Instruments fills that need admirably.”-Professor Brian Scott-Quinn, ISMA Centre, University of Reading, U.K.

(www.ismacentre.rdg.ac.uk)

“For the practitioner to keep up with innovations across a wide range of markets is always difficult. This book will be a great help to those who need to bring themselves up to date with a great variety of markets.”-John Langton, Chief Executive, International Securities Market Association, Zurich

Options, Futures and Other Derivatives by John C. Hull

For graduate courses in business, economics, financial mathematics, and financial engineering; for advanced undergraduate courses with students who have good quantitative skills; and for practitioners involved in derivatives markets

Practitioners refer to it as “the bible;” in the university and college marketplace it’s the best seller; and now it’s been revised and updated to cover the industry’s hottest topics and the most up-to-date material on new regulations. Options, Futures, and Other Derivatives by John C. Hull bridges the gap between theory and practice by providing a current look at the industry, a careful balance of mathematical sophistication, and an outstanding ancillary package that makes it accessible to a wide audience. Through its coverage of important topics such as the securitization and the credit crisis, the overnight indexed swap, the Black-Scholes-Merton formulas, and the way commodity prices are modeled and commodity derivatives valued, it helps students and practitioners alike keep up with the fast pace of change in today’s derivatives markets.

This program provides a better teaching and learning experience—for you and your students. Here’s how:

NEW! Available with a new version of DerivaGem software—including two Excel applications, the Options Calculator and the Applications Builder

Bridges the gap between theory and practice—a best-selling college text, and considered “the bible” by practitioners, it provides the latest information in the industry

Provides the right balance of mathematical sophistication—careful attention to mathematics and notation

Offers outstanding ancillaries toround out the high quality of the teaching and learning package

By Knowledge @ Wharton

Technology is changing the global financial system so rapidly, the World Economic Forum recently noted, that there is an “urgent need” to set standards and develop regulations. While the “use of technology in finance is not new, nor are many of the products and services that are offered by new entrants to the sector,” the group pointed out, “it is the novel application of technology and its speed of evolution that make the current wave of innovation unlike any we have seen before in financial services.”

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Under the Radar: Bank Executives Not Aware of Key Fintech . 

The report, developed with input from leaders of the world’s biggest banks, grew out of discussions at the group’s annual gathering in Davos, Switzerland, in January, where the focus on financial technology, or fintech, was so intense that Bloomberg News ran a story headlined, “Biggest Global Banks at Davos: We’re All Fintech Innovators Now.”

At its simplest, financial technology – or fintech – applies technological innovations to financial processes, products and services. The attention to fintech has accelerated quickly. In 2014, big banks began shifting focus in earnest toward fintech and away from the regulatory compliance issues and cost-cutting fallout from the economic crisis. That year, global investment in fintech ventures tripled, to $12 billion – mostly in the U.S. — from $4 billion in 2013. In 2015, investment in private fintech companies rose nearly 60% more, to $19 billion, according to Citigroup and consulting firm CB Insights.

And investing in startups is only the beginning.

Bank of America spends $3 billion a year on what it called “technology initiatives” in its annual report. Likewise, JPMorgan Chase chairman and CEO Jaime Dimon wrote in his annual letter to shareholders the bank spent about $3 billion on new investments in technology last year.

Dimon said that the bank has built its own “extraordinary in-house big data capabilities — we think as good as any in Silicon Valley — populated with more than 200 analysts and data scientists.” The data those techies are crunching is being used to court new customers in commercial banking, to improve underwriting and marketing, to make the bank’s operations more efficient, and, of course, to optimize trading, Dimon said.

The interest in fintech from major banks reflects the fact that the digital market is barely tapped. Citi estimates only about 1% of North American consumer banking revenue has shifted to new digital business models so far. It forecast that figure will rise to 10% by 2020 and 17% by 2023. And it points out that the shift is already well underway in China, where top fintech companies like Alipay and Tencent, have as many or more clients than the biggest banks. Greg Baxter, Citi’s global head of digital strategy, notes that 96% of all online sales in China are conducted without a bank.

“Fintech is no longer a niche.” –Matthew Carey

The potential for losing market share to startups is just one of the reasons big banks are pouring money into their own technology, as well as startup ventures.

“Digital disruption has the potential to shrink the role and relevance of today’s banks, and simultaneously help them create better, faster, cheaper services that make them an even more essential part of everyday life for institutions and individuals,” wrote Julian Skan, managing director in financial services at Accenture, in a 2015 report. “To make the impact positive, banks are acknowledging that they need to shake themselves out of institutional complacency and recognize that merely navigating waves of regulation and waiting for interest rates to rise won’t protect them from obsolescence.”

Fintech – No Longer a Niche

With major financial institutions moving into the fintech space at a rapid clip, where does that leave the startups? To some, it means fintech is no longer pigeonholed.

“Fintech is no longer a niche,” writes Wharton alumnus Matthew Carey, the co-founder of Abaris, an annuity comparison site that has raised $720,000 in two rounds of funding according to CrunchBase, in a post on the school’s Entrepreneurship Blog. “Where once venture capital firms scoffed at the burdens of launching a startup in financial services, there are now few sectors generating more attention.”

Carey points to a comment last summer from Goldman Sachs CEO Lloyd Blankfein that the venerable investment bank is now first and foremost “a technology company” as proof that fintech has entered the mainstream.

But while money and attention is flowing in from banks and venture capital, so far fintech is getting less attention on a wider scale.

Saikat Chaudhuri, director of Wharton’s Mack Institute for Innovation Management, says the lack of visibility is due in part to fintech being such a broad term, with some portions that seem immediately viable, some that are more difficult to envision and some that are aimed at markets outside the U.S.

“If you think about fintech in terms of Paypal and Apple Pay and Google pay and everything else ‘pay’ — as an alternative to, say, credit card payments or direct deposits — that’s already in action,” he says. “That’s happening in a world of innovative devices.”

The next major step for payment services is likely growth in less developed countries that can use mobile devices for payments, “not so much a substitute, but an enhancement,” Chaudhuri says. In emerging markets where banks have far less reach, for example, new platforms can be exploited to serve the unbanked market.

MasterCard President and CEO Ajay Banga, for one, has for years beat the drum about the inefficiencies of cash and the potential for digital payments in countries where residents who have no access to banks already carry mobile phones.

“It’s not just an alternate payment channel, it’s that we’re allowing other entities in the system to act as banks.” –Saikat Chaudhuri

“That addresses a whole new market and it really addresses the unbanked market,” Chaudhuri says, noting that the technology could also serve U.S. consumers who don’t use banks. By some estimates, up to 50 million Americans don’t use banks or use them minimally, and mainly rely on alternative financial providers like check cashers, a potentially huge new market for fintech companies.

Citi data shows that 73% of the investment in fintech last year was dedicated to personal and small business banking, including 23% into payments and 3% into money transfer.

Another area with enormous potential that has been a bit slow out of the starting gate is peer-to-peer lending, especially those platforms that are integrated into social media.

Online platforms that match borrowers and lenders have been around for a decade, but account for less than 1% of total retail loans outstanding in the U.S., and, according to Citi data, at current growth rates would just crack about 3% by the end of 2018.

Chaudhuri says regulations are still a challenge for this portion of fintech, especially those with a social media component. That may contribute to slower growth despite the vast potential, but it also depends on what lending arenas are targeted, especially after the housing market crash.

“It’s not just an alternate payment channel, it’s that we’re allowing other entities in the system to act as banks,” he explains. “The way that it would have to proceed, is that some of these big online properties and social media would really need to almost apply for a banking license. I’m not sure the regulators, after what happened in the financial crisis, would allow for that.”

Investors are piling into lending, however, with 46% of the capital deployed in private fintech companies going to that arena, according to Citi.

Virtual Currencies in Murky Territory

Also in murky regulatory territory is digital currencies. Bitcoin and its cousins are already in use, of course, but many see alternative currencies as mainly a way to facilitate underground transactions. The technology behind them however — officially called “distributed ledger technology” but more typically referred to as the “blockchain”– is of great interest to large financial institutions.

“What Wall Street is most interested in is the underlying technology of the crypto-currencies.” –Ron Quaranta

“What Wall Street is most interested in is the underlying technology of the crypto-currencies,” says Ron Quaranta, chairman of the Wall Street Blockchain Alliance, a trade association.

True believers claim blockchain technology can transform international financial transactions in much the way the Internet transformed communications. But with players from startups to Goldman Sachs, Citi and BofA developing their own versions of the blockchain, how they might work together is still up in the air.

“We’re very early into understanding how firms interact with each other in a blockchain world,” Quarant says. Nevertheless, he expects the technology could some day extend “up and down the chain of financial services and capital markets.”

In fact, he envisions that the blockchain, which incorporates the ability to trace individual transactions, will someday extend to other industries as well. The entertainment industry, for example, could use distributed ledger technology to ensure that every time original content is copied, royalties are paid to the creator, thus limiting the revenue-draining problem of intellectual piracy.

Digital currencies received about 3% of the capital spending by private fintech companies last year, Citi data showed.

Overall, the pattern in any technology sector is well established, Chaudhuri says, and he doesn’t expect fintech to be very different. Startups disrupt the landscape, then larger actors step in and “carefully cannibalize” the technology, either through M&A or developing their own versions. “In turn, that’s what legitimizes the technology,” he says.

Still A Young Cycle

The fintech cycle is young, and there are still a lot of players and designs at all levels. A shakeout of both the technologies and the companies behind them looks to be inevitable at some point.

“We haven’t seen that yet, which is why you are seeing this amount of money being spent,” Chaudhuri adds. “We’re in the middle of it right now. Some things will work out and others won’t.” He notes that fintech applications are for the most part new approaches to doing business that’s already done. “These are just alternative technologies. I don’t think it’s a sector in itself.”

That’s not to say fintech applications don’t have powerful potential, though it may take many years, even decades, for them to fully emerge. “In terms of the number of the number of people who can participate in the financial system and in transactions, I think it’s revolutionary,” Chaudhuri said. “The traditional system kept so many people out of the system, I think this is going to fundamentally change that.”

Republished with permission from Knowledge @ Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.”

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