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Networked markets: the evolution of high-frequency trading (HFT)

By Lucy Thompson, on 9 November 2022

Financial markets have undergone a deep reorganisation in the last 20 years. A mixture of technological innovation and regulatory constraints has promoted the diffusion of market fragmentation and high-frequency trading. In this blog, IFT PhD student Zihao Liu reports on the inaugural seminar in IFT’s Agora Seminar Series – “High frequency trading and networked markets” with Professor Rosario Nunzio Mantegna.

Due to the high-speed development of FinTech and technical innovations in recent years, the operation of the global financial market has changed beyond recognition. Ever more market participants are beginning to use powerful computer algorithms to execute and complete orders in mere microseconds. The new stock market has changed the traditional ecology of market participants and market professionals.

With the development of strategic trading decisions based on high-frequency trading, the fragmentation of markets has occurred. Contemporary stock markets are now “networked markets” where liquidity provision of market members has statistically detectable preferences or avoidances.

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Finance, technology and interdisciplinarity

By Lucy Thompson, on 2 November 2022

The Institute’s USP is rooted in linking research in finance and technology – the latter in two senses, technology in finance itself, and technology in the wider economy – the customer of financial services. A subsidiary aim is to link academic research with industry and the public services. This stance demands interdisciplinarity and it is useful to explore what this means. In this contribution, our Director of Research, Professor Sir Alan Wilson, presents the framework for interdisciplinarity offered in his recent book, Being interdisciplinary.

white puzzle pieces interconnecting on a plain white background
A first step is to define a system of interest for a research project. In broad terms, this will demand specifying the components of the financial services ecosystem, and those of its customers that are relevant to the project. To fix ideas, consider a project to explore the maximisation of ESG objectives in portfolio construction by an asset management company. The system of interest is based in the elements of the portfolio and hence the wider economy, risk and uncertainty, the companies own market, and the elements of ESG to evaluate those dimensions of the portfolio. The drive into interdisciplinarity comes from posing the question: what is the requisite knowledge base needed by the company to be efficient and effective? This will embrace all the elements of portfolio management (and hence mathematics and statistics), the companies represented in the portfolio (economics, geography and business – national and international), the government and regulatory context (hence politics and public administration), and the elements of ESG (environment, including climate change, the social impacts of investment, and governance – business again). This is a huge agenda, demanding both breadth and depth in the company’s staff and access to top-class reference material. Parcelling the knowledge into disciplinary siloes will be a very inefficient way of handling this hence the need for interdisciplinary teams. There is a big challenge here that can be research-informed.

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Transforming public services through collective entrepreneurship and sustainable finance

By Lucy Thompson, on 19 October 2022

In the following blog, IFT PhD researcher Filippo Addarii presents his rationale for engagement with sustainable finance. His story is that of the first Social Outcome Contract (SOC) in Italy for the work inclusion of prisoners. As an illustration of his attempt to put reformist theories into practice, it shows that the business of “changing the world” for good requires us to leverage market forces to serve a purpose that is more than profit.

man carrying a bag walks into the light thrown by a single door. bars and prison clothes lie on the floor behind him. The SOC – also referred to as a Social Impact Bond (SIB) – was conceived by a coalition of policymakers, financiers and charities to drive innovation and efficiency in public services and strengthen government to fulfil its mission. In essence, the SOC is a partnership between public and private sectors in which the former sets the goals – in this case, social outcomes – and the remuneration for having achieved them. The private sector provides risk capital, delivers services and manages the whole process. A third party, often academia, carries out the evaluation of the results that trigger payments. Application of the SOC is justified when straightforward state and market solutions fail or are not possible.

This is the theory – evidence reveals that real-time implementation of a SOC can vary greatly based on context. The first SIB/SOC was piloted in the UK in 2010 and since that time, the SOC model has been implemented across the world, with examples now totalling 251 worldwide. A SOC is the flagship product of impact investing, the international movement to put finance at the service of public value creation. It can be categorised as a form of sustainable finance.

My company, PlusValue, has been involved in the conceptualisation and implementation of the first SOC for the work inclusion of prisoners in the private sector in Italy.

Italian law allows prisoners to work outside a prison while serving their sentence, if they are deemed fit by a judge. There are 60,000 prisoners in Italy, most of them on short term sentences. At least 4000 of these prisoners meet the criteria for employment. There is overwhelming evidence about the effectiveness of employment in reducing re-offending rates and fostering social inclusion. Furthermore, scaling employment of the prison population would not only reduce costs of the prison system (approx. €3bn annually) but would also reduce the need for new prisons. (more…)

Welcome to the Parnassus Blog!

By Lucy Thompson, on 5 October 2022

During the summer heat in Rome, Professor Francesca Medda, our Institute Director, likes to escape to the Vatican Museum. In this blog, she reflects on why we have named this platform Parnassus, in celebration of Rafael’s painting by the same name. Rafael’s work pictures a host of artists from Sappho to Dante, surrounded by the muses on the mythological mountain, Parnassus, where the arts and study are protected. This painting is our inspiration – a blog that will be a sounding board for new ideas and discussions on digital finance. 

parnassus mountain silhoette against an orange and red sky

We live in chaotic times. Covid-19 is not yet over, the war in Ukraine rages on, and the climate crisis is not only accelerating the digitalisation of the financial market, but also highlighting the chronic difficulties – of time and sometimes complex procedures – that we face to supply capital from conventional financial services.

The implementation of effective finance and economic solutions calls for responses to several preliminary concerns, including applicability, types of technology, time frame, budget constraints, acceptability and awareness of stakeholders, and declining central government revenues. Solutions must also correspond with levels of risk and the uncertainty posed by an unknown future. Importantly, however, these concerns cannot be resolved by ‘one-size-fits-all’ or ‘try-everything’ strategies for digital transition, particularly when future uncertainty is likely to exacerbate social and income inequality.

Given the interdependency characterised by the financial market today – and noting that digital silo-based solutions have fallen short of expectations – we can take the position of curatorship in this era of exponential change, as in The Parnassus of Rafael, where solving problems takes priority over incremental solutions.

From the perspective of a curator, we are indeed on the cusp of finance change and new technologies in digital finance that arise from the need for sustainable and efficient financial market systems. However, managing innovation for the financial market is not easy-peasy, given the current and predicted global trends. These include:

  • demographic and social imbalances, often dramatic and diverse in different countries, from sharp growth in migration patterns in many emerging economies, and aging and population decline in cities of several of the richer economies;
  • risks and hazards in the form of natural and human-caused disruptive events, particularly to infrastructure, and to assets that are complex systems and therefore potentially most vulnerable to threats; and
  • issues relating to resource protection and steady supplies required to maintain productivity and welfare.

Writing from the vantage point of IFT, it seems that these complex issues can be transformed from challenges into opportunities only if we focus on research and apply our knowledge towards enhancing access to information and communication technologies, to the better management of resources, and to improving our financial systems by reducing waste, to mention just a few. Fortunately, the research panorama is very fertile; scholars from a variety of organisations, not only from established academic institutions, are responding to these challenges by developing solutions and merging instruments that leverage excellence in research and knowledge and also within the social and environmental impacts they produce. In this context, our blog is indeed a sounding board, a protected area, as in The Parnassus, where we can benefit from the exchange and development of ideas.

This blog also aligns with the spirit of the Institute of Finance & Technology’s work and research generally. Three words encapsulate our objectives and vision.

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Searching for success: job hunting for international students

By Lucy Thompson, on 15 August 2022

Ting Chen, a recent IFT graduate, presented her key recommendations to ensure a smooth job search process.

On Friday 12 August, we were pleased to welcome back an alumna of the Institute of Finance and Technology, Ting Chen, to share her experiences of job hunting as an international student.

After graduating from the MSc Banking and Digital Finance in 2021, Ting completed an internship with Progressive Equity Research, which provides investment research for a wide range of small & mid-cap UK companies. She was then offered the role of Graduate Analyst at Barclays, where she started work in early August 2022.

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Creative Investing: New Paths for Venture Capital and Private Equity

By Lucy Thompson, on 8 August 2022

On 17 June 2022, IFT assembled a panel of experts in finance and technology to discuss how the landscape of investment must change to meet the challenges of the times. IFT PhD student Millie Deng recaps what we learned.

two presenters stand at a projector screen at the front of a lecture hall, with students in rows coming up

The Covid-19 pandemic has been a turning point for humanity, bringing world economies to a standstill and highlighted our vulnerabilities. The Russia-Ukraine conflict has further amplified uncertainty and instability. Venture capital and private equity are engines of change and growth in terms of the way we invest in businesses. But these investments, particularly of Venture Capital (VC), are vulnerable to volatility as they follow economic up and downturns.

The last three years have showcased this dynamic like perhaps no other period in history. And yet, despite the universal and potentially long-lasting economic, social, and political impacts of Covid-19, 2021 was actually a record-breaking year for VC. The International Monetary Fund was able to raise its projection for economic growth in 2021 from 5.5% to 6%, and project 4.4% growth in 2022. This was partly based on how well the pandemic continues to be controlled, and the effectiveness of global economic policies to cushion the damage to the markets. Now, we must ask how we continue to recover, while reconfiguring existing systems to be resilient to shocks.

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Financial Derivatives

By Lucy Thompson, on 29 June 2022

With nearly $700 trillion in notional value – over seven times the market capitalisation of global stocks or over five times global GDP – the sheer volume of Financial Derivatives dwarfs any other forms of financial instrument. In this blog, derivatives expert Philippe Dufournier reflects on the challenges and opportunities presented by these mechanisms.

By definition, Financial Derivatives are a contract by which two parties agree to exchange in the future (i) cash flows or assets (ii) the values of which are indexed to changes in financial variables such as foreign exchange, interest rates, commodities, equity and credit and (iii) at terms agreed upon today. Contracts are bilateral, confidential in nature and involve either two private parties in what is called the Over-the-Counter (OTC) market or a private party and a Derivatives Exchange, in the case of an exchange-traded contract.

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Deal or No Deal – Assessing the factors that shape the choices of a VC

By Lucy Thompson, on 16 May 2022

Ideas are never in short supply, but the funding to make them fly is often harder to come by. Venture Capitalists (VCs) have been a huge source of financing for early-stage businesses, and the impact they bring to their portfolio companies makes founders covet them. In this article, Keisi Mancellari and Muideen Abubakar evaluate the critical factors that run through the mind of a VC before making an investment, a valuation and even hiring choices. This report is based on a recent IFT seminar on “Key Drivers in Early Stage Venture Capitalism” with David Grimm, Albion VC and UCL Technology Fund.

Just as every other category of investors, VCs are seeking alpha. This means they are far from a jack-of-all-trades and will not necessarily throw money at start-ups in every industry, in their quest for superior returns. This takes us to the first question that comes to the mind of a VC approaching a founder.

What’s your playing field?

VCs tend to have industry preferences as to where they deploy capital. That way, they can demonstrate their specialised knowledge of an industry, the dynamics, and the potentials. Knowing what kind of companies are being funded by a VC should give direction to founders on which VC they should court as they jostle for cash. As David Grimm highlighted during his seminar at the UCL Institute of Finance and Technology, his VC focuses on enterprise software, deeptech, data analytics and digital healthcare. It is common for VCs to build a specialist fund for every industry that they have an interest in. For instance, Albion VC being a tech-oriented investor manages the specialist UCL Technology Fund in collaboration with UCL Business.

When a VC funds a venture, the deal doesn’t end with the handshake. They assume the role of an adviser to the management. This is another reason why they focus on a niche, as they must be able to deploy their specialist knowledge to provide critical guidance to founders, bear the torch for them on the customer acquisition path and perhaps refer them to other investors of interest.

As David also alluded to, valuation plays a key part in why a VC may ignore a pitch if the proposal doesn’t fall within their industry remit. A VC’s knowledge of an industry enables them to put an appropriate price on the table when they are approached and, most importantly, to forecast the viable exit opportunities and magnitude of multiples. After all, the end should justify the wait and the risk. (more…)

The Future Must Be Interdisciplinary

By Lucy Thompson, on 4 May 2022

Credit: UCL Press / Alan Wilson

Global challenges such as climate change, the future of work, and smart cities increasingly require input from a range of subject experts.

Professor Sir Alan Wilson, Director of Research at IFT, reflects on the importance of interdisciplinarity for skills and capacity building, and for research.

His book Being Interdisciplinary was published on 3 May 2022. It is now available for free Open Access download or to purchase via UCL Press here.

 

For those unfamiliar with the concept, how would you define interdisciplinarity, or what it means to be interdisciplinary?

Disciplines can be defined in terms of ‘systems of interest’ – in the broadest terms, the physical, the biological and the social – often subdivided into specialisms. These disciplines all have their research challenges; but most research problems demand the application of elements of more than one discipline – and hence are interdisciplinary. To be interdisciplinary means being prepared to respond to this challenge to have the depth of what might have been your first discipline, and the breadth to be able to draw on concepts more widely.

Can you provide more concrete examples?

Start with perhaps the biggest challenge of all: climate change. It involves all disciplines and perhaps surprisingly, the most important might be social science. Or take cities, my own field. Professional areas such as medicine or engineering are inherently interdisciplinary because their focus is on identifying problems and solving them whether through clinical interventions or innovative, disruptive design.

What is the value of interdisciplinarity in a university setting?

There is an old joke: industry has problems and universities have departments – usually discipline-based. Introducing the idea of interdisciplinarity adds a new kind of thinking to a discipline-based core.

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