We frequently interview students at the campus of Tilburg University about their opinion on trending Topics. This time we asked whether it is fair that companies outsource their activities to countries like India in order to reduce costs. Name: Jelter van Buren Age: 21 Study: Fiscal Economics I do not think it is a problem if people in Emerging Markets take over employment. You can’t see this as ‘stealing’ jobs. In the Netherlands I believe everyone has opportunities and possibilities to grow. So why shouldn’t people in India get these chances? I think it is not an issue when people from Emerging Markets take over employment from Europe. Activities like call center jobs should be done in the most cost-efficient way. When people in India get to do these jobs, they probably only speak English. I would not mind if I get called by an English speaking person from a call-center. It depends on the product or service I get called for. If something is complicated or I have a problem that has to be solved, I prefer Dutch speaking, but it can also be a nice experience speaking with someone from, for example, India. Name: Remco Daemen Age: 21 Study: Economics and Business Economics I think it is a little bit weird when a Dutch company approaches you in English. When an international company does this, I think that it is more normal. It also depends on which kind of people you approach, for example, when you approach people from University it will not be a problem most of the time. Of course there are always people who do not fully comprehend the English language. It is important that the quality of the phone calls is not diminishing for people who do not comprehend English as well. For these people there should be an alternative in a way that they do not get disadvantaged by locating call centers in India. Furthermore, it is not a problem to me that people from emerging markets take over employment opportunities. It is logical that companies choose for a minimum cost approach, therefore it is justifiable that companies replace jobs to emerging markets. Name: Ward Schijns Age: 21 Study: Fiscal Economics First of all, it is logical that companies choose for the lowest costs. Through globalization it is much easier for companies to replace employment activities to low labour cost countries. If I had a company I would also choose for the cheapest option and if this means outsourcing to emerging markets, I would do this. Every company has to cope with competitors and when competitors minimize their costs, as a company you also have to search for ideas in order to have a cost advantage above your competitors. Outsourcing your activities like call centers is a good opportunity to reduce your costs. I think it is not a bad idea that people from, say, India take over jobs from employees in the Netherlands. These people should also get the opportunity to develop their knowledge and skills and therewith getting these jobs in call centers. Name: Erwin Boomsma Age: 20 Study: Business Economics My opinion is that I would not prefer getting an English phone call from a call center from, for example, India. Most people do not have enough English knowledge and experience. If these people that get called do not have sufficient English skills, it is difficult for them to have an understandable and clear conversation. On the other hand, I understand why businesses outsource activities like this and employ people from these countries. Unfortunately, this means less employment in the Netherlands. In these emerging countries the wages are much lower. Eventually every company wants to minimize their costs to maximize their profits. Therefore, it is understandable that call centers are located in emerging markets, such as India.
Interview Gijs Vereijken
Gijs Vereijken just received his Master of Economics, Netspar track, from Tilburg University. He completed his thesis project at the Dutch pension provider PGGM and Rabobank on the topic of “Balance sheet alliances between Dutch banks and pension funds.” Gijs is currently traveling through China while he decides exactly what he wants to next. China is a very interesting country, especially given the ageing problem. Why did you choose it as a travel destination? “It’s true that it wasn’t entirely coincidental,” Gijs says with a smile. “As part of my master’s program, I wrote a paper on the Chinese pension system, which triggered my interest in the country. One of the major findings was that a tremendous number of people fall outside the scope of the pension coverage. Indeed, during my trip I saw many elderly people living in poverty or still working in their old age to make ends meet.” Gijs met many other backpackers (including economists) from around the world and discovered that it is with good reason the pension system in the Netherlands is the third best in the world. “That experience gave me a broader perspective and changed my opinion of the Dutch pension system,” he admits, “but I still think we need to reform it.” How do you think the pension system will change over the next ten years? “I think there is going to be a shift in the Dutch pension system from collective pension schemes to more individual plans,” he says. “As the job market becomes more flexible, there is a growing need in Dutch society for more flexible, and more transparent, pension plans. So, as opposed to collective defined benefit pensions, which were the most common type of scheme in the past, I think we are moving more toward individual defined contribution pensions.” Gijs adds another argument for this change: “There is an inherent transfer of wealth from young to old in the current system. You cannot justify that to my generation, in my opinion.” What do you think you learned with the Netspar track above and beyond what you would’ve gotten in a standard Master of Economics program? It turns out it wasn’t all about academics. “I learned a lot about pensions, in both theoretical and practical terms,” he says. “With the company visits and possibility of writing your thesis while working at one of Netspar’s partners, you see how things happen in real life, and of course, you are given a unique opportunity to network.” As part of his thesis project, Gijs researched a possible win-win collaboration between pension funds and the banking sector. The main conclusion of this was that, in today’s market conditions, it is very attractive for pension funds to invest in the mortgages from banks. On the one hand, the banks maintain their customer relations, while achieving balance sheet reduction; on the other, the pension funds obtain a more optimal return on investment. “It could be very beneficial for pension funds, partnering with the banks, to gain control of the liquidity premiums,” he points out, “since pension funds could use the banks’ screening expertise and thus gain access to a category of assets with very attractive risk and return characteristics. You are already seeing an increase in activity in terms of transactions between banks and pension funds. A good example of that is the transaction between the health workers pension fund Pfzw and Rabobank, in which Pfzw assumed a portion of the risk for one of Rabobank’s loan portfolios.” Your trip through China must certainly also be yielding new insights. What are you going to do once you’re back in the Netherlands? Gijs ponders this seriously for a moment. “It has definitely taught me a lot and expanded my horizon,” he says. “I have put off looking for a job until after my trip: I want to work in the pension industry. Due to the fact that, in my opinion, the industry is going to experience tremendous change in the next few years, I think it would be a great challenge to be part of that. I believe the pension industry needs an influx of more young people to make the pension system in the Netherlands future-proof, generation-neutral and more flexible.”
Is it time to put a limit on high frequency trading?
Frank Kopers, Editor-in-Chief of Marketupdate, explains in this article the concept of high frequency trading and hereby discusses the implications for both the market and private and institutional investors. Probably all investors today are aware of high frequency trading, computerized trading using fast computers which are programmed to buy and sell securities in milliseconds. These computers operate on very advanced algorithms, which can take advantage of small inefficiencies on the financial markets. Computers are able to process new data way faster than human investors, giving them a substantial and profitable speed advantage. As a result of this, arbitrage became much faster and efficient year after year. The bid-ask spread for example (the difference between the prices at which investors are willing to buy and sell) decreased substantially thanks to high frequency trading. In just twenty years the bid-ask spread narrowed down from about 90 to just 3 basis points, which means there is much less overhead now then there was back then. Computerized trading also improved the arbitrage capabilities of the financial markets, according to a paper published in 2013 titled “The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response”. In this paper, the researchers looked at the differences between an ETF and a futures contract based on the same S&P 500 index between 2005 and 2011. After analyzing the data, they found out that arbitrage took 97 milliseconds in 2005, compared to just 7 milliseconds in 2011. High frequency trading works on a very short time horizon, one that is invisible for the eyes of investors. While human investors can only see the stock market movements from second to second, the computerized trading takes place on a completely different playing field within a second. The following graph shows the difference between what investor see on their computer screen and what high frequency trading computers see. The graph on the left shows the movement of an exchange traded fund and a future based on the S&P 500 index within one minute, while the graph on the right shows the price of the same securities within just 250 milliseconds. As you can see both the exchange traded fund and the future track the stock market closely in the long run, while they do fluctuate over a time horizon of just milliseconds. Those small fluctuations is where high-frequency trading can arbitrage for a profit. Race to the bottom High frequency trading has the highest profitability if your computers can front-run those of your competitor. Computers which can process new information faster and buy and sell in and out of positions faster make more profits. This is a race to the bottom, shaving off milliseconds using faster hardware, smarter algorithms and better networking technologies. The following graphs shows the result of this race to the bottom. Liquidity evaporates High frequency trading makes the financial markets more efficient, you might think. But this is not the complete story. Computerized trading can also disrupt the market, for example when algorithms get out of control. Back in May 2010, the Dow Jones index lost more than a thousand points in just a couple of minutes, the biggest drop ever witnessed on the US stock market. After a sharp drop, the same computers started buying again until prices were back at the level they were before the flash crash. In a study about the cause and effect of this flash crash, the American supervisor called it a ‘hot potato volume effect’ caused by high frequency trading. One might wonder if such volatility could take place in a market where computers do not represent more than half of the total trading volume… The speed at which high frequency trading takes place can cause instability as well. It takes time to bring buyers and sellers together and to guarantee market liquidity and everything high frequency tries to accomplish is to remove the time factor. Image a high frequency trading system trying to sell a large amount of securities, without any buyers showing up for a second. So the volume dries up, if you look at it on a millisecond scale. Going too fast? So it looks like high frequency trading can be too fast, reducing liquidity and causing volatility in the stock market. Austin Gerig and Daniel Fricke recently published a working paper titled “Too Fast or Too Slow? Determining the Optimal Speed of Financial Markets”. In this article, they collected historical data from US stocks to determine the optimal trading interval for computerized trading. After analyzing the data, they came with an efficient trading interval between 200 and 900 milliseconds. According to their research, trading is most efficient with one to five trades per second, depending on the volatility and the popularity of a specific security. Trading at a higher speed than five times per second appears to be unnecessary at best and harmful at worst. High frequency trading might be a profitable business for those companies running those systems, but for society at large it doesn’t provide any real productivity gains. All those smart people building high frequency computers do not improve the standard of living of the society as a whole. Instead of using their knowledge to develop models which can be applied in the real economy, they build models to shave a few pennies of the profit of other investors. It might be a good idea to introduce a trading frequency limit, where transactions are made in fixed batches of 0,1 second. Introducing a speed limit to trading ensures market liquidity and stability, without the harmful effects of trading on the milliseconds and nanoseconds. Sources: – Too Fast or Too Slow? Determining the Optimal Speed of Financial Markets (Fricke et al, 2015) – The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response (Budish et al, 2013) – http://www.theatlantic.com/business/archive/2014/04/everything-you-need-to-know-about-high-frequency-trading/360411/ – http://www.bloombergview.com/articles/2015-01-25/high-frequency-traders-need-a-speed-limit – http://www.businessinsider.com/high-frequency-trading–a-liquidity-hoax-2010-12?IR=T
Exchange; the experience of a lifetime
Esmee Aarts writes about her experiences in Stockholm. She is studying her semester abroad at Stockholm University Business School. Moreover, she extensively describes all the beautiful places that Sweden has to offer. I am doing my exchange at Stockholm University Business School. The reason why I chose to go to Sweden is because I really love Scandinavia. It has got everything; pretty good weather, nice people, beautiful nature and everybody (yes, everybody really means everybody) can speak English. Before I went to Stockholm, I already saw Denmark and pieces of Norway so I had a vague image of what Stockholm could be like. But of course I did not know what to expect when I arrived When you ask someone what they think about Sweden, the first words they will say are: cold, moose, reindeer and beautiful blond people. There is some truth to this, but not all of it. Stockholm is a beautiful city that consists out of different islands. The city is divided into fourteen districts, which are spread across the islands. So everywhere you look, there is water. Stockholm is therefore also called ‘Venice of the north’. The only difference is the weather and the width of the canals. Every part of the campus of Stockholm University is located in nature. Also the Business School is, and it has its own campus called Kräftriket, which is surrounded by water. Everyday it is a blessing to go to the university, so studying becomes something fun. I could choose my own courses, and they offer something interesting for everybody. Business School also has an introduction program of two months with all kinds of activities to get to know the city and your fellow students. The last activity was a ‘booze cruise’ to Turku and back to Stockholm, which was a great end of the introduction program. In Stockholm you have different kinds of people. First there are the students, who all dress the same. The girls wear a black skinny pants with a black or grey sweater and some ‘Chelsea boots’. Their hair is long and has got the messy beach look. The guys are all wearing basic grey or black pants with a classy white shirt or a sweater. And you have the young parents with their little children. The parents look like they are 25, but in fact they may be older, nobody knows. Here the mothers are at home and the fathers walk with their kids. They are also called ‘latte papa’s’ because they drink trendy latte macchiato while spending time with the kids. One thing that every Swedish person has in common is that they all care about their health and how they look. During the day, all you see is trainings leggings and sport shoes, and in the evening everybody dresses up to go out. Next to the fact that I am here to study, I am also here to travel a little bit. And this is what I am doing since I arrived in Stockholm. First I went to several little islands by boat, for example Fjäderholmen. This is a little green island with big rocks and small beaches. I also went to Gotland, which is a big island with the nickname ‘Ibiza of Sweden’. This island has every type of nature that you can imagine. Long white beaches, rough rock formations in the sea, big green lands and savannah-like areas. We had a great time in a house that looks like the house of Pippi Longstocking. I did not only discover beautiful parts of Sweden, I also went to Norway to see Oslo and some villages and nature around it. For example, I went to the oldest town in Norway called Tønsberg. I also travelled by boat to Tallinn, St Petersburg and Helsinki. These three cities are even more amazing than anyone can imagine! There are still some trips coming like Kraków to see Auschwitz. And the last trip of my exchange semester will be to Lapland. Here I will go dogsledding, driving a snow scooter, visit the ice hotel and I will meet people who are member of the Sámi society. And if I am really lucky, maybe I will get to see the northern light. So, my stay in Stockholm is amazing! Going abroad is something that I can recommend to everybody. You develop yourself as a person and get to meet a lot of people from different cultures. Going on exchange for one semester is the experience of your lifetime!
Finance and Innovation
Dr. Alberto Manconi has the reputation of giving interesting and interactive lectures; a perfect fit for Chairman of the Day during iFinance 2015. The following article, written by Dr. Manconi, is his consideration of the topics discussed during the event. Whenever I face the trite refrain that finance is “too large,” I observe that it was likely the largest industrial sector in Renaissance Florence (Medici bankers ruled the city!), the cradle of cultural renewal which got us out of the Dark Ages. So I do believe finance affects innovation, mostly in a good way – today we discuss whether it can also hinder it, how, and what we should do about it. Among the general public, much blame for an alleged innovation slowdown (and many other ills) goes to investor short-termism:[1] Shareholders expect quick results, but innovation is all about the long-run, so excessive reliance on external finance hampers progress. While this view has its merits, I’d like to raise two caveats. First, not all shareholders have equal horizons: There are deep, “structural” reasons why a pension fund may have longer horizon than a mutual fund (e.g. their respective retail investor pools). Innovative companies might simply turn to longer-horizon investors. Second, shareholder horizon affects corporate investment in a less direct way than, say, managerial incentives. For instance, a recent study[2] finds that managers are more likely to innovate when they face weaker labor market penalties for failure – i.e., when they have a freer hand to take risk. Risk, of course, is a double-edged sword. Yes, we want companies to take risk to innovate. However, we don’t want to promote risk-taking to the point of creating instability. Hence the debate on the recent changes in bank regulation and supervision, which we also discuss today. Will Basel III limit banks’ ability to lend, thus placing a constraint on corporate innovation? I admit, that is a possibility. However, banks are not necessarily the primary source of financing for innovative firms – just think of venture capital.[3] Further, addressing risk in credit markets, especially in the aftermath of the recent financial crisis, promotes trust – a second, essential ingredient to innovation. The topic of regulation brings me to my last point, the first we discuss today, and potentially the most controversial: What is the government’s role in all this? As an economist, my “Pavlov reflex” is to say that the government should simply create a good set of institutions, and then stay well out of the market. The question is just what is a good set of institutions? Does it involve additional channels for financing innovation, e.g. concessionary loans, tax breaks, etc., or are the existing channels adequate? Should the government promote innovation in certain sectors deemed more relevant, or should it let the market decide? Or, rather, should it focus on the premises of innovation, e.g. education, developing an entrepreneurial culture, etc.? These are very broad and deep issues, way too broad and way too deep to address in this short note – but I look forward to our discussion of them today. [1] E.g. Denning, S., 2014, Why Financialization Has Run Amok, Forbes 3 June 2014, available at the URL: http://www.forbes.com/sites/stevedenning/2014/06/03/why-financialization-has-run-amok/ (last accessed: 29 December 2014). [2] Custódio, C., M. Ferreira, and P. Matos, 2014, Do General Managerial Skills Spur Innovation?, Working paper, Arizona State University. [3] Cf. Kortum, S., and J. Lerner, 2000, Assessing the Contribution of Venture Capital to Innovation, RAND Journal of Economics 31, 674-692; or more recently Popov, A., and P. Roosenboom, 2012, Venture Capital and Patented Innovation: Evidence from Europe, Economic Policy 27, 447-482.
The creation of iFinance 2015
Youssef Essaghir, Chairman iFinance 2015, was asked to give us some insight regarding his experience at Asset | Accounting & Finance. He talks about what it is like to organize an event such as iFinance. If you would like to learn more about why he signed up for the committee or why he believes you should attend iFinance, you can read his story. Could you give a short introduction about yourself? My name is Youssef Essaghir, I’m a third-year bachelor student in Business Economics and I am planning to do my master in Finance after obtaining my bachelor. This year I am the chairman of the iFinance committee and an interviewer for the Food for Thought committee. Why did you join Asset | Accounting & Finance? Asset | Accounting & Finance is the gateway to put theory into practice. This means that you get the opportunity to organize an event in your field of study. By doing this I am able to prepare myself for my future career. For instance, I develop my organization skills and my understanding of finance. Furthermore, the steep learning curve of working as a member on projects is an ideal way to develop your problem solving skills. This is the main reason I joined Asset | Accounting & Finance. But of course this is not the only reason. It is also a great way to meet new people with the same kind of interests. What appealed to you to sign up for the committee iFinance? I knew one thing for sure, after my bachelor Business Economics; I would either do my master in accounting or finance. So that is why I was hesitating between Accounting Insight and iFinance. During that time I was treasurer of the Asset Events committee and iFinance started just after the ending of the Events committee. That made it easy to choose for iFinance. I didn’t choose for an informal committee because I thought it was time to do something where I could use my full potential. iFinance is a very dynamic event. This makes it a perfect opportunity to put my qualities to the test. What and when is iFinance? IFinance will take place on February 5th on Tilburg University. The ‘i’ of iFinance stands for interactive. This means that you will have the possibility to actively participate and discuss a current and finance related topic. During the event different propositions will be introduced by short movies, speeches and voting rounds. Our aim is to spark a discussion between our speakers and the audience after presenting the proposition and a quick presentation. This presentation will be done by one of our speakers. Which guest speakers will there be at iFinance? This year we have some prominent speakers. We will start with Prof. Dirk Schoenmaker, Dean of Duisenberg School of Finance who will elaborate the first proposition. The speakers of the second proposition will be Mrs. Vaishali Bapat, Finance Manager at Shell and Mr. Martijn Rozemuller, Managing Director of Think ETF’s. After this we will also have two speakers who will review the third proposition. The first one will be Mr. Bas Pulles, Former Managing Director NL EVD International and current Director International Programmes at Netherlands Enterprise Agency. The second speaker will be Mrs Marije Lutgendorff, Owner of Crowdlokaal. The chairman of the day will be a known professor amongst finance students, Dr. Alberto Manconi. He is professor of ‘Financial Management’ and ‘Corporate Governance and Restructuring’ at Tilburg University. Are there any possibilities to get in touch with companies? Preceding the event there will be a lunch with the recruitment of Royal Dutch Shell (Shell), which is also our main partner. During this lunch eighteen students have the ability to get in touch with the recruiters of Shell, one of the biggest companies in the world. How did you develop iFinance? What were the processes from beginning to end to organize this? The first and most difficult part of organizing the event is coming up with a subject. During the summer, we tried to keep in touch with all the financial related news articles in order to find a subject that would still be current when the event would take place. This is also what will determine the success of the event. After narrowing it down to one subject we started to contact and invite potential speakers. We tried to have speakers that would be able to clarify the subject from different perspectives e.g. political, academic, entrepreneurial and of course a financial perspective. Until last Friday we were focusing on finding partnerships in order to finance the event. The next coming days we will start with promoting the event and making sure that everything will run smoothly at the 5th of February. What are the benefits to participants of iFinance? Why should students participate? Like I mentioned before, eighteen students are able to attend a lunch with the recruitment of Shell, an ideal way of to get your foot in the door at this company. Of course the subject itself is very interesting for people interested in finance or entrepreneurship. This year we considered the rapid changes in the world of Finance, ranging from the new banking regulations to the rise of crowdfunding. The subject of our event will consequently be: ‘The Future of Finance’. Where we will look at different financing methods, ranging from well-known methods to innovative ways of financing. This subject will be a value-adding experience for students interested in finance. Where can you register? You can register on the website. Here it is possible to register for the event, but also for the lunch that will take place beforehand. I hope to see you all at iFinance 2015 on February 5th. I’m confident that this will be another great Asset | Accounting & Finance event.