MyATMonitor Expert Panels by ATMonitor

ATMonitor Commentary May 2012 issue

MyATMonitor Expert Panels Selected Q&A commentary

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MyATMonitor Expert Panels ATMonitor Commentary

Foreword This is not an academic paper on theoretical discussions but rather a series of practical questions and answers that members of MyATMonitor have asked and industry experts answered. Our primary goal is to bring knowledge that may be useful to traders on the buy-side. In fact, this philosophy is well reflected in the very heart of MyATMonitor, a reliable, independent and trusted peer-group network of and for buy-side only institutional traders. This publication has been compiled from ongoing Q&A activity on the MyATMonitor Expert Panels. At the time of publication, MyATMonitor Expert Panel topics include Dark Pools, Commission Sharing Arrangements, EMS/OMS Relationships, Fragmentation of Liquidity, MiFID II and Transaction Cost Analysis and Best Execution. The ATMonitor team would like to thank all members and experts that have generously contributed to the success of MyATMonitor. ATMonitor Team.

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MyATMonitor Expert Panels ATMonitor Commentary

Experts Panellists: Bob Cumberbatch Bob is European business lines director, Pricing and Reference Data, Interactive Data. In this role, Bob focuses on executing product development plans, product reliability, product infrastructure, future business opportunities and the product development process. Bob Cumberbatch joined Interactive Data in June 1998 as production director to run the company’s IT operations. He was responsible for the mission critical IT infrastructure with a 24 x 7 data centre, a 24 x 6 help desk, technical support group, network support and project planning. From January 2003, Bob led an international real-time integration programme aimed at integrating the then newly-acquired ComStock’s infrastructure into that of Interactive Data. Bob also led Interactive Data’s cross-organisation MiFID project team. Prior to his work at Interactive Data, Bob worked for Telerate / Dow Jones Markets for 10 years where he helped to establish an exchange-traded securities service more commonly known as TIQ. Bob held senior management positions as IT strategic planning and IT operations manager for the EMEA region. He has also worked for Mercury Communications (Cable & Wireless) and British Telecom. Bob has an MSc in Networked Information Engineering. Natan Tiefenbrun Natan Tiefenbrun joined LSEG in 2009 to develop a pan-European dark pool, and became commercial director of Turquoise following LSEG’s acquisition of a majority stake last year. At Turquoise he is responsible for product development, sales and marketing. Prior to that, he spent 13 years at Instinet, a pioneer of electronic trading, latterly as President of the Asian & European businesses. Over the years he was responsible for the conception & delivery of Instinet’s global EMS platform for singlestock, portfolio & algorithmic trading, the after-hours crossing network, transaction cost analytics, and for servicing the needs of quantitative investors from indexers through to high frequency traders.

Disclaimer: The content of this report is provided for informational purposes only and has been obtained from sources believed to be reliable, but it is not necessarily complete and its accuracy cannot be guaranteed. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Moreover, this material should not be construed to contain any recommendation regarding, or opinion concerning, any security. Any views expressed in this report are those of the individual experts and do not necessarily represent the official view of ATMonitor or participating organisations.

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MyATMonitor Expert Panels ATMonitor Commentary

Experts Panellists: Charles-Albert LEHALLE Charles-Albert has a PhD in applied Mathematics at Ecole Normale Supérieure and University Paris 6. Currently Head of Quantitative Research at CA Cheuvreux, Charles-Albert Lehalle is an international expert in optimal trading. He published papers in international journals about the use of stochastic control and stochastic algorithms to optimise a trading flow with respect to flexible constraints. He also authored papers on post trade analysis, market impact estimates and modelling the dynamics of limit order books and co-organised the first international conference on market microstructure held in Paris in December 2010. Charles-Albert Lehalle lectures at “Paris 6 (El Karoui) Master of Finance” (Ecole Polytechnique, ESSEC, Ecole Normale Supérieure) and MASEF/ENSAE one and gives master classes in the Certificate in Quantitative Finance in London. Charles-Albert’s core fields are stochastic processes, information theory and nonlinear control. David Bilbé David began his career in financial services with the First National Bank of Chicago in 1981 with responsibility for commodities and securities houses. In the run-up to deregulation of the London Stock Exchange in 1986 he joined Chase Manhattan Bank as Assistant General Manager.After a spell as Managing Director of Chase Investment Bank he joined the LSE as Director of Secondary Markets, where he was responsible for defining the new trading market strategy and for de-merging the commercial information services. David was subsequently appointed as Managing Director of Securities for the newly merged Chemical Bank and Manufacturers Hanover. He went on to become General Manager of State Street Bank and Trust Company in Europe, where he redefined the strategy for the bank in the region and oversaw rapid and significant growth of the business, culminating in the largest outsourcing deal of its type with Scottish Widows and Lloyds TSB. After a brief spell at Brown Brothers Harriman, David went on to become Commercial Managing Director of Thomson Financial. David was until recently Managing Director of Line Data Services in Northern Europe. He has an MBA from Manchester Business School and is FSAregistered.

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MyATMonitor Expert Panels ATMonitor Commentary

Editor’s Choice: Selected Questions and Answers from MyATMonitor’s Expert Panels

Given the recent tensions in the eurozone, and France’s leaning towards going it alone on a transaction tax, does the panel feel that MIFID passporting of regulated activities in Europe will come under strain? We seem to be moving apart rather than together as home country interests appear to prevail. Bob Cumberbatch Great question! I have seen some hedge funds escape the threat of regulation by moving to Switzerland: http://www.guardian.co.uk/business/2009/sep/22/hedge-funds-switzerland and if countries did leave the European Union then individual countries may compete for business. That said then it is difficult to see how a country would abandon many of the financial stability and investor protection oriented regulations. Returning specifically to passporting – then I figure that there would be a proliferation of bilateral agreements needed between countries. FSA say: “Passporting rights only apply within the EEA. So, for example, they do not apply in the Channel Islands or the Isle of Man, as these are not EEA States. Although Switzerland is not an EEA State, Swiss general insurers nevertheless have the right to set up a branch in the EEA under the provisions of special bilateral treaties between the European Union and Switzerland. EEA general insurers also have equivalent rights in respect of Switzerland under these treaties. Special arrangements also apply in relation to Gibraltar: http://www.fsa.gov.uk/ doing/regulated/notify/apply/faqs Natan Tiefenbrun Aside from consideration of an FTT, politicians and regulators are generally pressing for greater harmonisation across Europe – with existing rules applied to a broader set of instruments & asset classes, ESMA’s powers enhanced to allow the setting of binding technical standards, and new rules created in pursuit of transparency and risk mitigation in OTC derivatives. Charles-Albert Lehalle MiFID2 tries to empower ESMA to avoid local and specific interpretation of the directive. That being said, we all know that the viewpoints of European regulators are not the same. It probably comes from the fact that the state of the pre-MiFID micro-structure was specific. In France and Spain the market was concentrated, it was far less the case in the UK. Consequently the actual level of fragmentation is seen as an improvement for most UK participants, and a decrease of efficiency from Spain or France. The convergence of these habits will take a long time and isolated measures (like the FTT) will continue as far as there is not a widely shared viewpoint on the role of each type of market participant and the goal of the price formation process.

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How can the panel suggest that market users obtain clear and reliable measures of liquidity across different dark pools and liquidity providers? Natan Tiefenbrun Presuming that your question pertains only to historic liquidity (since dark pools by their nature don’t/shouldn’t disclose currently available liquidity)... there are a variety of vendors who compile realtime post-trade information (published trades) from MTFs and report on volume executed in the dark by venue/stock/day. However, bank BCN activity cannot typically be identified in this fashion, so end-of-day reporting from the banks (where provided) is the only option. This approach has several weaknesses – that historic liquidity is not always a reliable indicator of future liquidity, that it will not differentiate the quality of liquidity (e.g. whether trades are happening at prices which are fair to the less latency-sensitive participants), and that it cannot assess the latent liquidity of unexecuted orders. There have also been some third party measurements of the quality of dark liquidity which are easily available. Charles-Albert Lehalle You have several sources available to obtain the “market shares” of trading pools. Bloomberg or Fidessa for instance give some figures. We are also giving some on a constraint universe that we are monitoring carefully (select not all liquidity pools and trying to avoid a lot of double countings): https:// www.cheuvreux.com/statistics/fragmentation/default.aspx However the “market share” is not the “liquidity”, for liquidity you need something close to a market depth. We have built an index (same link) at 100% when on one stock all pools are giving the same kind of liquidity, and 0% when you have to be careful to select where you want to trade (on an orderby-order basis) for dark pool (I mean anonymous MTF, not unregulated pools declared as “OTC” in markit boat), it is known that in Europe you have “liquidity bursts” of several minutes, rather than a regular pace of liquidity available.

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The ESMA recently issued their ‘’Final report – Guidelines on systems and controls in an automated trading environment for trading platforms, investment firms and competent authorities’’ (http://www.atmonitor.co.uk/content/researchimages/2011-456_0.pdf) The report states that market participants should be able to comply with the guidelines from 1st May 2012. Does the panel know who has already implemented this regulation? What is the overall cost of this implementation? And what layers of the micro-structure will be impacted i.e. market operators, intermediaries, high-frequency traders or final investors? Charles-Albert Lehalle The guidelines cover different topics: • Governance, resilience, continuity, testing, monitoring, security, staffing, etc for MTFs and firms operating electronic trading systems • standardization, trading controls, information on members, monitoring for MTFs • controls, risk management, regulation, training, etc for firms operating electronic trading systems • market abuse preventing practices for MTFs and RMs; with a precise description of some prohibited behaviour (pinging, quote stuffing, momentum ignition, layering and spoofing) • good practices and organisational requirements for DMA/SA providers (responsibility, due diligence, monitoring, etc) Most of MTFs, RMs or brokers providing electronic systems have already implemented similar guidelines, the main effort for them will be to have more control on the implementation of their guidelines. To make them evolve, question them regularly. Investment firms using electronic trading systems for prop trading may also have to change their habits to comply to the ESMA guidelines.

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With the functional lines between OMS and EMS blurring, what would be some of the circumstances (if any) where it would be advantageous to maintain a strong distinction between the two? David Bilbé In my view, there is a clear distinction between an effective OMS, defined and derived to handle particular instrument types and an EMS which effects the best execution of a particular trade. There are two implications: 1. an OMS should be able to link with common data standards to an EMS 2. the EMS should be a liquidity gatherer from multiple OMS sources There will be over time more regulatory constraints which ensure that the distinction between the two separate but linked provisions is clear. Answer – yes there is an advantage to separate the two – one as a commercial support system, the second as a form of ‘market’.

If OMS and EMS systems are kept functionally separate, how are reporting discrepancies between them accounted for, specifically in regards to timestamps for the lifecycle of the trade? David Bilbé We are not at a point where such discrepancies do not exist. However, over time with the continuing demand and provision of common data standards and protocols, multiple OMS systems will continue to feed into EMS with reduced time discrepancies. During my time as Director of Secondary markets at the LSE the issue of order capture into the market system was a prominent agenda item. At that time there was a firm proposal to bring all trades onto a common latency level through an order aggregator to reduce the differing network speeds, lack of standardisation (as there was at that time) and therefore deep concern from market participants concerning timeliness of available market data. The problem was never overcome satisfactorily. However, feeding order for execution to a ‘liquidity pool’ which is non-proprietary is both good for the market and with the enhance standards for data capture and reporting this will reduce as an issue.

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MyATMonitor Expert Panels ATMonitor Commentary

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