SecFinex

» see secfinex.com as it lived, on the wayback machine

~ the last words ~

NYSE Euronext's statement on the closure said the company still believed central counterparty clearing would play an important part in stock borrowing in the future. It simply was not going to keep paying for one. The business had not gained enough traction, so the funding stopped, and SecFinex wound down in December 2011 after eleven years.

There is no screenshot of this product in anybody's memory. Securities lending is the market where a fund that owns shares rents them to someone who wants to sell them short, against collateral, for a fee measured in basis points. It has no consumer surface whatsoever. For most of its history it has been conducted by phone and instant message between a handful of prime brokerage and agent lending desks who all know each other, which is the context SecFinex walked into in November 2000, when a company called PPA Capital Limited renamed itself and went looking for a different way to do it.

The pitch was that stock loans should look like equity trades: posted on a screen and executed against a visible book, then novated to a clearing house that stands between the two sides so neither carries the other's credit risk. Allen Postlethwaite founded the company and ran it on that argument for eleven years. The argument was correct, and it required agreement from the exact firms whose revenue depended on the old arrangement.

~ the record ~

~ who bought in ~

The exchanges believed it. Euronext's purchase of a controlling fifty-one per cent of the London business was reported in December 2006 and the subsidiary relationship was on the books by March 2007, with Société Générale's corporate and investment bank keeping a minority stake alongside Fortis Bank Nederland. By the end NYSE Euronext's Liffe holding company was sitting on 59.52 per cent, which is an unusually precise number to find in a shutdown story and comes out of an annual report rather than a press release.

The clearing side got built too, which is the part that should have been hardest. LCH.Clearnet cleared the Belgian, French, Dutch and Portuguese names. SIS x-clear in Switzerland took the Nordic and German-speaking markets, with EuroCCP in the mix as well, and BNP Paribas Securities Services was signed up in January 2009. By the end the platform covered equities in ten national markets plus the United States, with real central counterparties standing behind them. The catch, which Finadium pointed out on the day it closed, is that the counterparties did not actually go live until 2010, well behind the dates originally promised.

~ why nobody came ~

Finadium's numbers are the whole story. In 2009 less than one per cent of European securities lending volume went across SecFinex's bid and offer market, and under five per cent across its private bilateral one. Neither figure grew in the two years it had left. It was running three separate electronic markets by then, after three changes of business model, and none of them had a source of liquidity built into it.

That is the structural problem with the idea rather than with the execution. A lending venue is worth exactly as much as the inventory posted on it, and the inventory belonged to the agent lenders and prime brokers whose margins came from being the quiet middle of the trade. Publishing a rate on a screen removes the reason a borrower calls one desk rather than another. EquiLend, the competitor that is still running, was built the other way round and is owned by the big dealers themselves, so the firms that had to supply the inventory also owned the thing asking them for it.

~ the paperwork ending ~

The trade press carried it on 29 November 2011, with the shareholders' own wording attached: further financial support for the company in this climate was no longer appropriate. The timing was not innocent either. NYSE Euronext was in the middle of trying to merge with Deutsche Börse and was clearing expenses and risk off its own books while the regulators looked at it.

The platform stopped in December. The company was wound down over the following weeks and its authorization came off the FSA register on 6 January 2012, which is the closest thing this grave has to a precise moment of death: a regulator's database row changing state on a Friday in January.

secfinex.com does not resolve at all today. Not a parking page, not a redirect into NYSE's site, nothing in DNS. Eleven years of a market structure argument, and the domain did not even get resold.

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