guy debelle : the state of play in the securitisation market address by mr guy debelle, assistant governor ( financial markets ) of the reserve bank of australia, at the australian securitisation conference 2010, sydney, 30 november 2010. * * * thanks to patrick d'arcy and daniel ji for their help. at this forum last year i outlined the effects of the financial crisis on the australian securitisation market and the prospects for securitisation in the post - crisis environment. at that time my assessment was, as it still is now, that securitisation assists in the efficient distribution of risk across the financial system and should have a role in the financial architecture going forward. the fundamental logic of securitisation is well understood by those in the room today. of course, as is also widely appreciated in the industry, the financial crisis highlighted significant inadequacies in securitisation practices, particularly in the united states. some of those inadequacies are still coming to light. this has forced participants on both sides of the securitisation market to re - assess the assumptions underpinning their business models. these inadequacies were absent in the australian securitisation industry, but unfortunately the local industry has had to deal with brand damage not of its own making. this is despite the asset class in australia continuing to perform exceptionally well in terms of rate of return. today, i intend to briefly recap the main changes that have affected the securitisation industry as a result of the crisis and to review developments in the market over the past year. the main message that i want to leave you with is very similar to the one i gave last year. while it was clear that the industry will take some time to adjust to this new environment, there are sound prospects for securitisation remaining an important part of the financial landscape, albeit not at the levels seen in the heady pre - crisis period. background over the decade leading up to the financial crisis, securitisation was a rapidly growing segment of the financial sector globally and in australia. this is demonstrated in the share of housing lending in australia financed through securitisation, which rose from less than 5 per cent in the mid 1990s to over 20 per cent in 2008 ( graph 1 ). while residential mortgage - backed securities ( rmbs ) accounted for the bulk of securitisation activity, growth in other parts of the industry

trading can then be divided into manual, where instructions are executed by humans on an electronic trading platform, and automated, where instructions are executed by computer algorithms and there is little or no human intervention. the split here is about fifty - fifty. mind you, the landscape is changing at a high frequency! in the fx market, segmenting types of traders is difficult ; there is inevitably a lot of crossover in styles and blurring of boundaries. so for the purposes of our study, we split algorithmic ( algo ) trading into two categories : algo execution and algo decision - making. the former is when a trader uses an algo to execute an order, often used for large orders. the latter is where a model is used to initiate a trade based on parameters such as order book imbalance, momentum, correlations and systematic responses to economic news. it is in the latter camp that hft is located. hft firms generate their revenues from doing a large number of small - size, small - profit trades. they operate with low latency and their risk - holding period is very short, frequently less than one second. as speed is of the essence, indeed the defining characteristic of hft, co - location is important, that is locating the server that sends the order message as close as possible to the servers of the trading venue. however, our discussion with a number of participants in the market suggested that diminishing returns to speed have well and truly set in, such that the value of future gains may not be worth the investment cost. indeed, there was a general sense that hft was reaching a mature phase, where greater returns were more likely to be had from moving into new market segments rather than spending more on enhancing speed. 2 hft participants in fx tend to be located in three cities : chicago, new york and london, although the physical location of the server is more important than the physical location of the office. the bulk of trading volume appears to be accounted for by several large firms. most of the activity occurs on the inter - dealer electronic broking platforms ( reuters and ebs ) and the multi - bank electronic communication networks ( ecns, such as currenex, hotspot and fxall ). the various platforms have differing technologies, trading rules and trading parameters. for example, there are varying restrictions on quote life and fill ratios. this assumes, of course, that technology is not developed to let one trade faster than the speed of