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Q1 • 2015 • Issue #53
G lo b a lT r a d i n g
Technology: There Is No End Game Paul Collins Head of Trading EMEA Franklin Templeton ALSO INSIDE : Pohjola
Asset Management • AXA IM • Baring Asset Management • BMO’s LGM Investments • Schroders • Troy Asset Management • Nordea Investment Management
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GlobalTrading’s Editorial Think Tank Dear Readers, Here’s hoping that the New Year is treating you well. If we were to make some qualified predictions for 2015, we could arguably say that the current momentum of buy-side firms focusing more intently on self-empowering technology related to smart order routing, TCA and the like will continue, including the involvement of the age old buy versus build debate. Despite conjecture, this would not equate to the disintermediation of brokers and the services they provide. Brokers continue to deal with ever increasing regulatory demands while becoming more specialised in providing value to their clients and we present a number of article contributions in this edition of GlobalTrading offering some interesting views on all of the above. Bill Hebert Alpha Omega Financial Systems, Inc. Co-Chair, FIX Trading Community Global Membership Services Committee
Marcus Consolini Societe Generale
George Rosenberger Connex
Also this year we should expect to see ongoing attention given to the development of solutions for the non-equity and particularly fixed income markets. Whether it is fixed income liquidity versus transparency or the electronic means by which debt instruments are negotiated and traded, the FIX Trading Community is actively involved and we offer some experienced views on those topics in this edition of the journal as well. Other areas of interest covered in this quarter include improvements in the automation of the IPO process via FIX, China decoupling from emerging markets and growing more prominently as a global equities entity, and a look at the year ahead for the FIX Trading Community by Tim Healy from the FIX Program Office in London. As always we thank you for your interest, support and contributions to GlobalTrading and FIX Trading Community. Please feel free to reach out to us with any feedback, thoughts and suggestions which you may have. We also look forward to meeting with you at our various regional forums and events.
Best Regards, Greg Lee Barclays
Carlos Oliveira Brandes Investment Partners
Bill Hebert Alpha Omega Financial Systems, Inc. Co-Chair, Global Member Services Committee, FIX Trading Community
Emma Quinn AllianceBernstein
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Publishers’ Note GlobalTrading is proudly published by HM Publishing in support of the FIX Protocol and the FIX Trading Community. GlobalTrading is the official quarterly publication of the the FIX Trading Community, however, the content does not necessarily represent the opinions of the FIX Trading Community. The opinions expressed in this publication are not necessarily those of the publishers or of the institutions of the contributing author. Although care has been taken to ensure the accuracy of the information contained within the publication, neither the publishers, authors nor their employers can be held liable for any inaccuracies, errors or omissions; nor held liable for any actions taken on the basis of the views expressed, or information provided within this publication. No part of this publication covered by the publisher’s copyright may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, be they graphic, electronic or mechanical, including photocopying, without the written permission of the publisher. Any unauthorised use of this publication will result in immediate legal proceedings. All Rights Reserved © 2015
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Contents 5
FOCAL POINT
5 Technology, There Is No End Game - Paul Collins, Franklin Templeton 9 Driving IPOs - Adam Conn, Baring Asset Management
Technical Implementation - Scott Atwell, American Century
15 Trading In Dark Pools – An Asset Manager’s Perspective - Øyvind Schanke and Simon Emrich, Norges Bank Investment Management INSIGHT 18 Using Technology To Drive Transparency - Paul Squires, Lee Sanders and Yann Couellan, AXA IM 21 Liquidity And Transparency: Not Necessarily Two Sides Of The Same Coin - Brett Chappell, Nordea Investment Management 24 The Fixed Income Status Quo, And Project Neptune - Sassan Danesh, Managing Partner, Etrading Software
Project Neptune; A Buy-Side Angle - Lee Sanders, AXA IM
28 Converging Technical And Regulatory Changes - Kim Man Li, Bank of America Merrill Lynch
9
OPINION 31 Disintermediation? Don’t Bank On It. - James Cooper, Troy Asset Management 34 The Power Of The Cloud: Thinking Beyond TCO - Brian Ross, FIX Flyer 38 China: The Year Ahead - Stephen Ma, BMO’s LGM Investments
EUROPE
41 Current Evolution Of The Buy-Side/ Sell-Side Relationship - Saku Sänkiaho, Pohjola Asset Management Execution Services
31
FRAGMENTATION 60 Fragmentation Of Liquidity In Europe INDUSTRY 62 Another Year Over And A New One Just Begun… - Tim Healy, FIX Trading Community 64 Company Profiles 66 FIX Trading Community Members
MY CITY
68 Edinburgh
43 An Emerging Middle East - Ahmed Tabaqchali, Asia Frontier Capital 46 A New Model For Changing Markets - Stephen McGoldrick, Plato Partnership 48 European Equities: How We Got Where We Are Today - Robert Barnes, Turquoise AMERICAS 50 Reforming The Regulation - Jim Toes, Security Traders Association ASIA 52 Man vs Machine – The Schroders Story - Jacqueline Loh, Schroders 56 Singapore Roundtable: Maximising Your Data - Peter Waters, GlobalTrading
46
FOCAL POINT | 5
Technology: There Is No End Game With Paul Collins, Head of Trading EMEA, Franklin Templeton
More Buy-side Interviews
Q1 • 2015 | GLOBALTRADING
6 | FOCAL POINT
As we enter 2015, the main focus for our industry participants has been on MiFID II and the ramifications for Europe and beyond. In my mind the attention is two-fold; a focus on the impact that MiFID II has in terms of the use of client commissions to pay for research, and the emphasis on better execution.
“The build versus buy debate for technology is a perennial one, across the whole of our technology platform. We do have a number of systems that we have built and are maintained internally, but we also leverage products offthe-shelf or collaborate with outside vendors......” From the research perspective the industry across Europe may be forced to truly unbundle research from the execution process. We have talked about it for long enough, but MiFID II will most certainly encourage this to happen. The buy-side and the sell-side may be forced to put a monetary value on research. The sell-side will have to come up with a form of pricing and the buy-side will need to show that the research it consumes has value. This change will certainly overhaul the industry especially given the length of time the industry has been paying for research in this way. As the industry in Europe continues to be driven towards unbundling, differences will emerge between Europe and the US in terms of commissions and research payments. There could be a significant contrast between these two regions and it will be interesting to see how they come together.
GLOBALTRADING | Q1 • 2015
Best execution is also very much to the fore for the buyside in MiFID II, this follows the FCA’s recent thematic review. While the focus of the FCA’s review was on the sell-side, there is no doubt that the emphasis will fall equally on both (buy- and sell-side) to prove we are achieving ‘best execution’, especially given ESMA’s latest comments late in 2014. Technology We have been fortunate at Franklin Templeton to invest in key resources from a technology perspective, which has allowed us to pursue best execution practices across all our markets. We have a proprietary OMS, providing us the ability to be more agile and make changes in a timely fashion without having to wait on an external provider. We can readily, adapt and update our OMS by utilising our team of programmers that are focused primarily on maintaining and enhancing this trading technology. The build versus buy debate for technology is a perennial one, across the whole of our technology platform. We do have a number of systems that we have built and are maintained internally, but we also leverage products off-the-shelf or collaborate with outside vendors to help build exactly what we’re trying to achieve. It really depends on the specifics we require and the competitive advantage it will derive. Technology has always been the focal point of what we’ve done on the trading side ever since Mat Gulley joined Franklin Templeton almost 20 years ago. Mat, then as Global Head of Trading and Bill Stephenson who took on Mat’s role last year, have always recognised technology as an advantage to our desk as markets evolved and changed. It is not just about technology, our global trading platform with experts on 12 desks around the world bring their own unique expertise. This provides unique insights which we apply to execution and drives how we collaborate with our investment teams around the world. For example, we have a trading desk in Dubai with a focus on the Middle East and Africa. The desk provides us with market knowledge and expertise which is applied to both the execution and investment process. Having local expertise on the ground, local relationships plus this knowledge is invaluable when you’re trading in less penetrable markets.
FOCAL POINT | 7
Paul Collins, Head of Trading EMEA, Franklin Templeton
“The more electronic trading we do the more we have to rely on our own team and the technology that supports it. We are now able to do more analysis on the pre-trade, posttrade, and intra-trade; real time processes that look at trades as they happen.” Technology that is co-ordinated globally further enhances the execution process. Sitting in Edinburgh, I can see every trade that’s happening live around the world. If there was a disaster recovery situation in Hong Kong and we need to pick up trading for them, we can do so seamlessly. Some initiatives we undertook were
order and execution audit trail projects. We looked at market structure and recognised what was happening in the markets in terms of algorithmic trading and high frequency trading and decided to be proactive in how we leverage both our technology and execution processes globally. We realised the need to have more transparency, so we crafted the project to require the execution and order data needed to understand exactly what was happening with our orders in the market: where are we having the most impact, what algos are performing the best, what venues are performing better, and why does one broker favour a certain venue over another. We have been able to use that data to approach brokers and trading venues as a conversation point for a two way discussion on the mechanics of their algos and matching logics, to the point of highlighting where they may not be working as well as we would expect. MiFID II will not only drive greater transparency around order flow, but it will also increase the onus on the buy-side to ensure we understand what is happening to our orders. In terms of best execution, the two key elements we are looking at are the technology that the brokers provide in
Q1 • 2015 | GLOBALTRADING
8 | FOCAL POINT
terms of SOR, and the execution decision – how are we going to trade this stock? The evidence that we’ve got: the technology, skill-sets, processes, and outlook will be a key focus to determine this decision. We are also up-streaming through collaboration with the portfolio managers, which will become more important as we look to enhance the wider investment process through execution.
“There is a lot that technology can do, and we continue to progress down this electronic route to ensure that the traders have the tools and the knowledge in real-time needed to be able to react.” The more electronic trading we do the more we have to rely on our own team and the technology that supports it. We are now able to do more analysis on the pre-trade, post-trade, and intra-trade; real time processes that look at trades as they happen. Transparency When MiFID I was initiated and the market opened up to competition, it was fragmented and there was a tendency to just accept what the brokers were giving us because we weren’t building our own algorithms or SORs. As we have gone through this whole process and built out the tools, the brokers have become much more collaborative. Going forward brokers, exchanges, and other trading venues, will have to be much more transparent, and so will we. We have to be prepared to be asked questions by our clients and be able to demonstrate that we understand our processes as well as what happens to client orders once they interact with a broker’s algos. We are going to have to be in a good position to provide evidence that we are achieving the best execution for our clients. Whether it’s electronic trading, which
GLOBALTRADING | Q1 • 2015
continues to increase, or via a traditional broker, the execution decision itself lies with us. However, there remains an objective for best execution that brokers need to ensure they’re fulfilling. The assurance that they’re getting us the best price, and that they’re going to the best venue under the circumstances. At the micro-level when we are trading and something happens to the stock outside of its normal parameters, i.e. when a stock is outperforming/ underperforming its peers, the spread widens or tightens significantly or volumes increase significantly; we want our traders to have access from a live perspective to these intra-day signals. Traders need to be able to recognise what’s happening to their order flow and react in real time and change their execution decision process. We compliment this information with proprietary technology – our Investment Dashboard and internal idea generation systems coupled with the external signaling tools enable the traders to separate meaningful signals from all the noise, and efficiently interact and collaborate with our investment professionals. There is a lot that technology can do, and we continue to progress down this electronic route to ensure that the traders have the tools and the knowledge in realtime needed to be able to react. Once you bring all that together, it changes the traditional dynamics between buy and sell-side. The future There is always a little bit of debate around whether regulation is going to stifle technological innovation and development. From our perspective, we continue to develop our electronic trading capabilities and know how, to ensure constant innovation in our trading processes. So what’s next? More disruptive technology, social media, and new technologies that will impact how we trade, gather and manage our data technology which will continue to move as we do.
9 | FOCAL POINT
FOCAL POINT 9 | FOCAL |9 POINT
Driving IPOs Adam Conn, Head of Dealing, Baring Asset Management looks at the FIX Trading Community’s IPO Automation Project At the 2014 FIX Trading Community conference at Old Billingsgate in London, Michele Patron of Alliance Bernstein and I spoke on a panel to discuss initiatives such as the standardisation of Execution Venue codes and the use of FIX in electronic trading of Fixed Income.
these placed orders by trying to replicate the electronic order placing process in the secondary market.
We also set out our vision of a world where we as traders could create an STP Process for the electronic transmission of new issue orders from an asset manager’s Order Management System through to the Deal Managers and receipt of allocations back to it.
Automation would also address other problems with the status quo, namely speed, reliability and the integration of this workflow into wider systems: part of the on-going trend of ‘Straight Through Processing’ from front to back. It would essentially upgrade the existing methodology whereby some of the largest single orders an asset manager may give are manually placed with each manager in a book-building syndicate. The electronic communication of new issue applications and receipt back of allocations (quantity filled/ executed) seems a natural extension of the existing integration between the Buy-Side OMS and Broker.
The primary driver behind such a process would be mitigation of risk by digitising a manual process. Current market practice is for applications (orders) for new issues such as IPOs to be placed manually. The idea is to try and eliminate the risk of error in the transmission or the possible misinterpretation by the receiver of
At that conference I met with Scott Atwell of American Century, who had discussed a similar aspiration with other members of the US Buy-Side group. After discussion within FIX Trading Community, a Global Buy-Side Working party was established to devise a set of best practice guidelines that would work for both Buy and Sell-Sides.
We were there in our roles as two of the three co-chairs of the EMEA Investment Management Working Group, along with Paul Squires of AXA Investment Managers.
Q1 • 2015 | GLOBALTRADING
10 | FOCAL POINT
The multinational approach arising from the global nature of the working group has allowed us to draw on each other’s experiences in different jurisdictions and create a process that should fit regional nuances. The advantage of doing this through the framework of the FIX Trading Community is its neutrality, allowing us to engage with a variety of enterprises to create this new process mindful of the need to standardise disparate processes between markets, participants and systems. To facilitate this workflow, many factors have been identified for consideration, starting with the need to ensure official stock identifiers are available well in advance of the closing date of an offer. It is crucial that these standard identifiers are used by all parties. The London Stock Exchange has been very supportive, working with us to ensure that global SEDOL codes may, subject to the permission of the Lead Deal Manager, be released when a deal is made public. We have also had similar positive conversations with CUSIP, which also releases its symbology in good time and Bloomberg, as a leading data provider, which confirmed that when this data is released it is immediately made available to its users. The focus has been on equity IPOs given there is a more significant time period between when an application is made and the deal potentially closing, but the intention is that this process will equally lend itself to Fixed Income new issues, provided ISIN stock identifiers are made available. The move towards single access to all fixed income electronic platforms and the innovative changes we are starting to see in book building should both benefit from the move towards greater automation in order generation and receipt of allocations. Whilst the FIX Trading Community remains strictly vendor neutral, there have been some detailed conversations to understand the proposed workflow with the leading providers of Book-Build software to the Brokers, which are looking to offer their software to the Buy-Side and with other technology and FIX network providers. There must of course be two ends to a connection and the next stage of the evolutionary cycle will be to work through the feasibility of this project with the Syndication Managers who, in early conversations have expressed support for this initiative. Finally, we are all aware that paradigms shift and today’s norm may not be the same as tomorrow’s. The Global BuySide working group is mindful to progress this initiative
GLOBALTRADING | Q1 • 2015
Adam Conn, Head of Dealing, Baring Asset Management
in a manner that lends itself to the future of the book building process, in whatever direction that takes. Whilst ensuring there is no impediment to future direction, we believe risk mitigation is a step in the right direction. This is an industry initiative for the industry. Whilst there is no directive pushing this change, we hope our colleagues who want this new world will join us in making this successful.
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12 | FOCAL POINT
Technical Implementation By Scott Atwell, Manager FIX Trading and Connectivity, American Century Investments Leveraging the FIX Protocol to electronically communicate IPO order-related information is a natural extension to the existing FIXbased integration buy-side Order Management Systems already have in place with their brokers. FIX’s Global Buy-side IPO Working Group was able to bring together a number of buy-side firms with similar needs, and we were able to specify how firms can easily use existing FIX messages to support IPOs. The working group’s recently released IPO Recommended Practice/Guidelines document identifies two workflow models. The first model describes “Point-to-Point”, whereby a buy-side firm communicates directly with the sell-side firm who is acting as the IPO’s “Booking and Billing Agent”.
GLOBALTRADING | Q1 • 2015
That sell-side firm would then be responsible to communicate the buy-side firm’s intentions to the other sell-side firms within the syndicate. The second model describes “Multi-broker Deal Hub”, in which the buy-side firm communicates via a single session to a multi-broker deal hub platform – without specifying a specific target broker – where the hub integrates connectivity to all of the relevant sell-side firms. The most complex orderflow scenario is “Stepping (Multiple Limit Orders)”, used when a buy-side firm is willing to buy one amount at one price, and more at a better price, in which case multiple FIX limit orders will need to be sent – each one exclusive of the others. FIX’s Global Buy-side IPO Working Group believes
FOCAL POINT | 13
“Leveraging the FIX Protocol to electronically communicate IPO order-related information is a natural extension to the existing FIX-based integration buy-side Order Management Systems already have in place with their brokers.” that the industry can significantly reduce risk and enhance efficiency and accuracy by leveraging the FIX Protocol for IPOs. Fortunately, several key sell-side firms and deal hub platforms have already expressed interest in working with the buy-side firms to adopt FIX for IPOs.
Scott Atwell, Manager FIX Trading and Connectivity, American Century Investments
Q1 • 2015 | GLOBALTRADING
Americas Trading Briefing 2015 April 15 | Thomson Reuters | 3 Times Sq | New York City FIX Trading Community provides members with the best educational and networking opportunities available. Having held successful events globally for over 10 years, we know that the key to providing maximum value for our delegates, speakers and sponsors lies in offering the most relevant, timely and impactful topics along with the best opportunities to build relationships. We are introducing a new more convenient half day format which has been produced in partnership with senior representatives from the local market. 200 delegates expected on the day will hear from expert speakers in their field who will share their knowledge on the highly topical agenda items.
Opening the event is Gregg E. Berman, Associate Director of the Office of Analytics and Research in the Division of Trading and Markets at the SEC in Washington, DC. Agenda topics include:
Changes in Market Structure Meeting the Needs of the Buy-Side Financial Markets Cybersecurity Affirmation Processing over FIX - Opportunities and Challenges
How Big Data is Reshaping Capital Markets Financial Markets Cybersecurity
Supported by our sponsors:
For more details and to register visit: www.fixtradingcommunity.org/NYCBriefing2015
Nordic Trading Briefing 2015 May 12 | Berns Hotel | Stockholm FIX Trading Community returns to the Nordics for a day of high quality, educational and debate focussed sessions, presented in the centre of Stockholm. Back by local industry demand, the 2015 event will bring together the Nordic trading community to respond to challenges facing Nordic desks over the coming year. This sell-out event will attract 200+ senior representatives from across the region’s investor, broker, regulator, trading venue and vendor communities who will benefit from the knowledge and insight of 25+ expert industry speakers. An exhibit hall featuring the latest products from the region’s leading solutions providers will also play host to extensive networking opportunities throughout the day and into the evening at the post-event drinks reception.
REGISTRATION NOW OPEN! FREE passes are available for representatives of Buy-Side firms and Regulators. An allocation of FREE passes is available for all FIX Trading Community Member firms. Additional Member Passes: £125 Non-Member Passes: £250
Limited sponsorship opportunities remaining! Email lois.ranft@fixtrading.org for more information or visit the event website at: www.fixtradingcommunity.org/nordic2015
Supported by our sponsors:
For more details and to register visit: www.fixtradingcommunity.org/nordic2015
FOCAL POINT | 15
Trading in Dark Pools – An Asset Manager’s Perspective Øyvind G. Schanke, CIO and Simon Emrich, Lead Analyst at Norges Bank Investment Management examine the rise of dark pools and highlight issues of concern to large longterm global investors.
Off-exchange trading has evolved and increased in importance in recent years. This is partially driven by the increased ‘institutionalisation’ of asset management. At the same time, the advent of computer-based trading and the emergence of new forms of liquidity providers such as highfrequency traders in an increasingly fragmented market has changed the nature of equity trading1. ‘Dark Pools’ have been in the news recently, and are often seen as one of the potential problem areas of modern market microstructure – no doubt due in part to their somewhat unfortunate name. As a large participant in asset markets globally, NBIM has a
more differentiated view. ‘Dark pools’ cover a wide range of trading venues that are utilized at different stages of the investment process, either directly by the investor, or by a broker employed as an agent. The impact of dark pools on market quality needs to be analysed based on these different uses. Do dark pools contribute to well-functioning markets? For present purposes, we define this as supporting a market structure that maximizes natural liquidity (long-term, natural buyers and sellers can find each other with high probability) while minimizing cost (rent extraction by intermediaries such as high-frequency traders, exchanges and broker/
1 As background reading on a related topic, see “High Frequency Trading – An Asset Manager’s Perspective”, Norges Bank Investment
Management, Discussion Note #1 (2013).
Q1 • 2015 | GLOBALTRADING
16 | FOCAL POINT
Øyvind G. Schanke, CIO (Right) and Simon Emrich, Lead Analyst (Left) (Implementation Strategies) at Norges Bank Investment Management dealers should not be excessive). Several dark pool characteristics can help in achieving these objectives: • they can efficiently facilitate direct block trading between institutional investors, • they can serve as competitive checks on exchange monopoly power, and • they can be tailored to specific market participant requirements, and innovate rapidly. These benefits have to be weighed against the potential efficiency drag that dark pools can introduce to the price discovery process. Dark pools operate without pre-trade transparency. This means that the residual volume that is traded on ‘lit’ exchanges becomes more informative. This can increase instantaneous volatility and the cost of price discovery. Dark trading venues can be classified in a number of different ways – Butler (2007) segments 24 US
“Subject to a broker’s best execution obligations, their algorithms’ venue routing decision will be driven by economics. This includes explicit access costs for the broker, as well as competitive considerations which can lead to excessive fragmentation. ” dark pools into 16 different types, for example2. A classification by the stage of the investment process in which a venue is used is particularly useful. Some dark pools focus on direct block crossing, and typically appear early in an investor’s execution plan. These pools show large average trade size and low fill rates. Other dark pools – most of those operated by broker/dealers, as well as independents and HFT ping destinations – have smaller trade sizes (comparable to those in lit exchanges) and higher fill rates. These pools typically appear later in an investor’s execution plan, after the investor has delegated execution to a broker. Block crossing venues are the modern-day equivalent of ‘upstairs trading’, which is probably as old as exchanges. Their potential utility has increased as global asset markets have become increasingly ‘institutionalized’3. Institutional liquidity demand is likely to be ultimately satisfied by the contra liquidity demand of another institutional manager. Block
2 See Butler, G., “Liquidity Aggregation: What Institutional Investors Need to Know”, The Journal of Trading 2.2 (2007). 3 In the US, for example, more than 80% of a typical large cap stock’s shares outstanding are held in investment vehicles that are professionally
managed (by 13f-filers). Other markets tilt even more heavily towards institutional management. See Rydqvist, K., J. Spizman and I. Strebulaev, “The Evolution of Aggregate Stock Ownership”, CFS Working Paper, No 2011/18 (2011).
GLOBALTRADING | Q1 • 2015
FOCAL POINT | 17
crossing venues serve to efficiently facilitate such trades. Ready (2013) shows that these venues account for between 5 and 8% of US large cap institutional flow4. One area of interest for us is whether this percentage can be increased. For the remaining institutional flow, a broker is typically tasked with sourcing liquidity, with the understanding that this will lead to market impact. Typically, this involves a trading algorithm, which will break up a ‘parent order’ into small, sequential ‘child orders’. At this point, the number of venues that may be accessed increases significantly. In addition to traditional exchanges, these include the second type of dark pools described above. Trade sizes across these trading venues are typically comparable. However, the venues differ in probability of fill (from near-certainty for market orders sent to exchanges, to very low for most HFT ping destinations), toxicity (information leakage) and cost. Subject to a broker’s best execution obligations, their algorithms’ venue routing decision will be driven by economics. This includes explicit access costs for the broker, as well as competitive considerations which can lead to excessive fragmentation. This increased competition is effective in limiting rent extraction by exchanges and liquidity providers. However, execution quality considerations mean the investor has to direct the broker on permissible venues and trading strategies. Execution benchmarks are an important tool, but in our experience more explicit venue selection criteria are also necessary. For example, we do not believe that the liquidity from HFT ping destinations is worth the information leakage costs. For other venues, as well as exchange-operated hidden books, the picture is more nuanced and requires constant monitoring of execution quality.
At the same time, transparency around the operating procedures of many dark trading venues is needed. Publication of Reg ATS forms by many of our US brokers is a useful first step; we are in favour of further transparency about operating procedures and available order types, particularly if they differ by client. If we do not feel we have sufficient transparency in a given trading venue, it will not be on our whitelist of permitted trading venues for our brokers.
“If we do not feel we have sufficient transparency in a given trading venue, it will not be on our whitelist of permitted trading venues for our brokers. ” We are also actively working on establishing and strengthening direct block crossing venues. We believe these trading venues should have greater prominence in today’s equity markets, and are a better reflection of the reality of everincreasing institutionalisation of asset markets. Dark pools are a valuable complement to exchanges, and are an essential part of today’s market structure. However, they can introduce avenues for novel forms of rent extraction through insufficient transparency. This is also not a new phenomenon – as always, it requires vigilance and a proactive approach by asset owners and managers.
We believe that both block crossing venues and other dark pools can play an important role in ensuring well-functioning markets. In particular, they are useful in limiting rent extraction by intermediaries. Recent letters from US exchanges to brokers and investors indicate the effectiveness of this; however, we believe that there has to be a broader discussion on exchange costs – especially around data fees. 4 See Ready, Mark, “Determinants of Volume in Dark Pool Crossing Networks”, University of Wisconsin-Madison (2013).
Q1 • 2015 | GLOBALTRADING
18 | INSIGHT
Using Technology To Drive Transparency With AXA IM’s Paul Squires, Head of Trading, Lee Sanders, Head of Fixed Income and FX Dealing, and Yann Couellan, Head of Fixed Income Execution Paul: I suspect by the time we’ve finished this discussion you’ll realise that we’re big supporters of technology. That said, people are much more important than technology because experience remains a very valuable asset. Technology can only enable you to execute what the market allows you to, whereas human experience adds value in deciding how to execute with that technology.
Paul: The underlying principle is: the narrower the focus, the better the expertise and resulting execution. We have people dedicated to particular bond types even within fixed income. That said, building out to a multiasset conversation, we have a lot of shared technology to harmonise where each clients’ needs are more efficiently taken into consideration.
Within a fixed income environment, it comes down to which part of the fixed income market you are trading. You expect a lot more transparency in government bonds; pricing transparency, more insight into the macro, what kind of cost you are expected to pay to implement a trade. And a lot of that obviously benefits from technology, both internally and externally. When you move down the liquidity waterfall into EM/high yield, you expect less transparency. You expect to be taking a surrounding position, access pricing information on the bond. It’s very much tailored to which part of the world that you are trading.
Build vs buy Yann: We need to extend our fixed income trading applications globally to Hong Kong and also the US. I think it would be fair to say that the international state in pre- and post-trade is slightly lagging. We will all benefit if we maximise efficiency on the pre- and post-trade information available on new issues and also the secondary market. The buy side community and the market globally demands more transparency on the primary and the secondary market in fixed income.
Lee: We have segregated the areas that we trade and assign orders according to those areas of expertise. Orders in European debt will predominantly be traded in Paris, sterling will be traded in London, and then EM and high yield orders traded in London, and non-euros, anything around the edges is traded in London. Coordination by us for the fund managers is key. If the index-linked fund manager in London wants to place a trade with a euro or dollar leg, they will tell us and we’ll talk to our specialists and coordinate the trade to make sure the trade is executed correctly.
GLOBALTRADING | Q1 • 2015
Many buy-side firms are at different stages of development with regard to their technology. Some do not invest very much and others often underestimate the size of the job that developing their own solutions can really amount to. You need big investment in terms of time and resource to develop proprietary trading tools. Paul: Our parent and largest client is a very large insurance company and therefore, fixed income is our primary asset class. Yann is responsible for a very large amount of that fixed income trading which means we benefit from his expertise in deploying the budget. This
INSIGHT | 19
Paul Squires, Head of Trading
Lee Sanders, Head of Fixed Income and FX Dealing
allows us to continuously develop our platform for fixed income trading and stay at the forefront of our peers in terms of fixed income trading.
down the road. Although with time, as that day approaches, we get a better idea of how the market is going to trade and what we need to trade in that environment. There’s a lot of consensus across the industry. The debate, and the way these topics are discussed at conferences, is very informative for all of us, but now everybody’s playing catch up. We need to see how the market structure is going to change and be part of that debate, and then set ourselves up in a way in which we can take advantage of those changes to put us at the front.
Most asset management trading desks that have an order management system tend to be off-the-shelf. Proprietary work is often done to extend that limited platform to give you trading functionality. With regard to multi-asset trading requirements, our OMS covers all asset classes but we also use an EMS for equity trading. In FX we also have an EMS functionality for some of our FX trades. For fixed income by contrast, it’s all been proprietary development under Yann’s leadership. Ultimately, it’s a question for each individual asset manager and their trading desk how to get the best return from the money that they want to invest. Lee: We still don’t really know exactly how best to set any desk up for the regulatory impact that we’ve got coming
“......how the market structure is going to change and be part of that debate, and then set ourselves up in a way in which we can take advantage of those changes to put us at the front.”
Yann rolled out an internal TCA which gives us immediate credibility, both internally and externally in terms of what we’re trying to achieve. Whether you put that at the beginning of what you’re doing or at the end will depend on the process in the middle. That process is all about trying to write a ticket at the best price possible. The implications of this for us as a business is that more orders will be fragmented. We won’t necessarily be able to fill the order with one liquidity provider, but it will differentiate venues that we’re pointed to by using smarter technology which will be the coalface of our operation. Yann: Benchmarking is something we continuously look at and extend year after year. As we gain expertise and make it much more efficient we increase our credibility both internally and externally. Due diligence conversations are more common, because clients are more demanding in how they check the cost of
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implementing a portfolio and all positions. Now, when we participate externally in these conversations, based on the analysis we’ve got and using our TCA we have minimum cost and maximum saving. This also allows us a way to profile a bank and also for traders to see where we can trade and benefit from that data. Industry initiatives Paul: Adam Conn of Barings, co-chair of the Buy-side Working Group of the FIX Trading Community, has led the initiative on the IPO project. The simplistic objective is to lessen the existing gap around operational risks that a lack of access to relevant technology creates. The new issue process still doesn’t use the latest tools. This creates operational risks when trying to coordinate interest from multiple fund managers and then transmitting that interest to brokers who are syndicating primary deals. To have that operation transmitted by FIX for example, is immediately a positive step. We are already more advanced than most of our peer group in that we already have some automation around the IPO process. But on equities we still don’t have the same technology that Yann’s introduced in fixed income. The operational risks are therefore higher and regulators may come in and challenge you on that process because there are many different ways that interest can manifest itself: price sensitivity, interest indicated via value or number of shares or just different ways of approaching it by different clients. Fixed income technology has suddenly opened up to a lot of innovation. Technology gets replicated quite quickly and then the challenge is to make yourself different again by innovating further. It’s going to sound a little bit philanthropic, but we have taken the view that there is a bigger picture out there and that the industry benefits as a whole from this universal access. Even though it will reduce our competitive advantage purely on execution of fixed income against our peers, we think it’s for the greater good. And that’s why Lee has invested a lot of time getting Project Neptune off the ground, not only by being another buy-side involved in the process, but intermediating with the sell-side to drive this paradigm shift for an asset class which has reaped very lucrative revenues for the big investment banks over the years. If you look at why the buy-side fixed income desk is getting involved in the initiative, it’s possibly because they had previously written off technology in this asset class. The thought process is as an OTC market, you can’t have
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that STP environment. The problem is, that a lot of people on the buy-side and sell-side use that as an excuse to not do anything. If it then becomes more feasible to develop a platform where they can develop that type of connectivity then they start to take more interest.
“Benchmarking is something we continuously look at and extend year after year. As we gain expertise and make it much more efficient we increase our credibility both internally and externally. ” People’s ideas of how to be agile in the bond market vary greatly from institution to institution. It does however seem that now everyone’s working out how we can overcome the hurdles ahead of us. It’s been a real privilege to have been in the position to be involved in this. Lee: Going out and giving people options around a solution, educating them on the advances being made and aligning that with the banks is the key to Neptune’s success. I think we have established some really solid foundations. Through conversation, contact, conferences, and association with trade organisations we are working out what’s best for all of us. We’re not necessarily looking out for ourselves here. We’re looking out for the banks and we’re looking out for our peers because we need to have an effective and fair fixed income market for all to participate in. That’s what we are trying, as an industry, to achieve. Equity is not going to change that much, but in this context of industry-led change, fixed income is really where it’s going to change a lot.
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Liquidity And Transparency: Not Necessarily Two Sides Of The Same Coin
Brett Chappell, Head of Fixed Income Trading at Nordea Investment Management examines the changing dynamic of European fixed income, and how the answers may not be as simple as they first seem. Liquidity is making the rounds as the top buzz-word of 2015 in the fixed income universe. Everyone bemoans the lack of it, and points to the heady days of a decade ago when it was abundant. In the run up to the crisis, there was in fact a liquidity bubble, one which led to a somewhat overzealous use of balance sheet by certain market players. When RBS filed its 6-K with the SEC on August 3rd, 2007 it stated “Total assets were £1,011.3 billion at June 30 2007.” To put that in perspective, this roughly equates to the 2007 annual GDP of the Republic of Italy. Today things are very different, and the pressures being exerted on the flow of secondary market trading have reached boiling point. In certain asset classes, such as European Credit Bonds, it is becoming close to impossible to move wholesale sizes in the market without causing a ruckus. Banks are being told to swim with handcuffs on – the regulation is both onerous and in certain cases contradictory. A deluge of acronyms: COFIA, CRD IV, CRR, CVA, etc. is causing alphabet soup-induced indigestion among front office and compliance personnel alike.
It is abundantly clear that banks are displaying greater reticence in using their balance sheets in providing two-way liquidity to the market. The cost of capital is at a premium, and many banks’ market operations are reevaluating their business models. Is it economically viable to allocate resources and balance sheet to this business? Bank trading desks are changing their modus operandi from a principal-based to agency-based approach. “We can work an order for you…” is a rather clichéd response we receive on many queries when we seek to move any size superior to 5 million EUR in the market. Transparency Liquidity ESMA (the European Securities and Markets Authority) issued a behemoth of a consultation paper concerning MiFID II on December 19th, 2014 http://www.esma. europa.eu/system/files/2014-1570_cp_mifid_ii.pdf , which asks participants to revert with their input before March 2nd, 2015. There is a very small window for stakeholders to read, analyse, and formulate a coherent response. • Two topics which the technical paper discusses in depth
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are the definitions of instrument liquidity and transparency. The latter is not a solution to the former. • Moreover, superimposing an equity market template on a fixed income market which has more granular and diversified maturity profiles would make no sense. The United States introduced TRACE in the United States in the 00’s in an effort to increase transparency in the bond market. The OTC European bond market is less deep and more heterogeneous than that of the United States. There seems to be a current mood to introduce an even stricter transparency regime in Europe in both the pre- and post-trade levels. Transparency in and by itself sounds like a good thing, however the application of it may have a detrimental effect on a smooth functioning of the European financial system. If a bank must make “professional counterparty” prices available prior to trading a given security, then chances are that the market-makers’ bid-offer spread will widen.
“It is abundantly clear that banks are displaying greater reticence in using their balance sheets in providing two-way liquidity to the market.” Post-trade reporting will open the door for faster-moving hedge funds and less scrupulous brokers to effectively front-run the interest of a larger asset manager who is incrementally attempting to take-on or off-load a wholesale position. Deferral times should be sufficiently long for market-makers to square positions, otherwise they may find themselves unwilling to provide markets in given bonds. ESMA is proposing to set up standards for a liquidity classification on an ISIN by ISIN basis per instrument (covered, credit, etc.) with classifications such as SSTI (Specfic Size to the Instrument) and LIS (Large in Scale). Deferral rules and waivers will apply on an individual basis. Experience shows, especially in times of market stress, that the European corporate bond market is by its very
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Brett Chappell, Head of Fixed Income Trading at Nordea Investment Management nature illiquid. Some insurers, for example, with very specific accounting rules in place, will buy a well-rated benchmark bond and hold it for an extended period of time. In an ideal situation with no major swings in investment strategy or issue ratings, this bond will be held until maturity or at least the point when it reaches a short enough tenor to be reclassified and sold off to money market portfolios. CSDR (central securities depositories and securities settlement regulation) legislation in the EU will introduce forced buy-ins, which may reduce banks’ willingness to provide offers in a market where the bonds are simply squeezed in the repo and difficult to procure. Market-makers may have to reevaluate their willingness to provide two-way prices in the bond markets. Dude, where’s my liquidity? We at Nordea Investment Management wish to have as many viable trading counterparties as possible for access to greater liquidity. We speak to bulge-bracket and niche players who endeavour to provide us with good research, prices, and liquidity when we need it. To this effect we must ensure that our counterparties are solid entities on whom we should rely. The KYC process is very thorough, as it is important that we deliver the best returns to our clients whether they are retail or institutional investors.
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Trading Most outstanding European debt is no longer on the traders’ books, and the bottleneck to access the market in RFQ format is currently dysfunctional. Many initiatives are underway for various trading platforms to enter the fray to challenge incumbents Bloomberg, MarketAxess and Tradeweb. The technology is there, and MiFID II requirements can be programmed in. The three majors are all introducing more developed platforms along with nimble entrants who can tailor-make solutions to the needs of 2015. Examples of the latter include Algomi, BondCube, TradingScreen and Liquidnet. These new solutions are meant to supplement, not replace, existing relationships with sell-side counterparties. Inventory Technical projects further upstream from trade execution, such as Project Neptune, will create the nuts-and-bolts of pre-order delivery of bank inventory to the buy-side through a FIX API standard. This is supplemented by receiving Excel spreadsheets from brokers, on-line services such as B2Scan, and pure data mining on Bloomberg. It’s NOT equity When financial laymen ask what I do, and I reply finance, I usually receive hostile stares. Often people will ask me what stocks to buy but I have to come clean and tell them I work with bonds. Explaining debt maturity profiles, coverage ratios and Basel III capital requirements is a sure-fire way to kill a dinner party. The equity market is easier to grasp – there are one or two instruments to choose from in general, not in some cases several hundred ISIN codes from which to choose. Dealing in debt requires great patience as the general illiquidity of the instruments makes it very difficult to trade at levels seen on screen. A typical European Bloomberg ALLQ is simply a two-way indication of 1 million x 1 million EUR. Our experience shows that circa 50% of the time, the prices are purely indications, and even small queries to the tune of 250,000 EUR can lead to a bank pulling back its offer by 15 cents in an investment grade bond. When the size tends to be larger, say in excess of 10 million EUR, we on the trading desk have to very carefully consider how, where, whom and when to best to approach the market lest we sweep the rug right out from under us.
out throughout Europe from Lisbon to Helsinki. These players are in constant dialogue with the local regulator, but need to be aware of the changes afoot and to openly discuss the matters at hand. The changing landscape will have very large consequences for the asset management community. Since many European banks are becoming less willing to lend to the real economy due to capital restraints, it is the investor community, which is now in the driver’s seat providing funding for companies, infrastructure, and other projects that promote growth and employment.
“it is the investor community, which is now in the driver’s seat providing funding for companies, infrastructure, and other projects that promote growth and employment.” European Commission President, Jean-Claude Juncker has proclaimed his support for a Capital Markets Union http://ec.europa.eu/priorities/docs/pg_en.pdf This is a lofty goal, but the devil is in the details. It is of paramount importance that ESMA gets this right. Finance is already the most regulated industry in Europe. Decisions taken in the coming months will have a resounding effect on the business and repercussions beyond the trading floors. Ultimately it becomes a question of how end-investors can efficiently provide financing for the firms that make up the real economy. The approach must ideally be backed by both a broad representation of buy-side and sell-side to put forward as much as a common front as possible given what is at stake. Unity makes strength, and it is important that the rules are set right from the beginning. It’s not just good for the clients’ investments at risk, but Europe as a whole.
L’union fait la force / Eendracht maakt macht The drivers for this European innovation seem to be based at the termini of the Eurostar: Paris and London. However, the asset management community is of course spread
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The Fixed Income Status Quo, And Project Neptune By Sassan Danesh, Managing Partner, Etrading Software
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Today, reading about the challenges faced by the credit market is a tale with recurrent themes of tightening regulatory controls, changing business models, market structure, and discussions about the increasing impact of electronic interaction in the marketplace. Historically, the credit market was an OTC voicetraded domain. In the last decade, technological advances have prompted an increase in electronic transactions in this space. Yet, this dematerialisation is largely disjointed as market participants have implemented bespoke technologies in a silo approach to regulatory reform. Digitisation of the credit markets is proving both a cause and a solution to fragmentation.
“One thing does appear to be clear – almost all of the current set of initiatives are closed, proprietary plays to enhance existing enterprises despite some large participants and regulators claiming that standards are the key to solving the current challenges... ” As dealers’ inventories are reduced in the wake of regulatory changes, so is their ability to act as effective market makers – making liquidity more difficult to both source and leverage. For investors, further challenges are found in the distribution and sorting of pre-trade data; this is the data distributed by market makers that allows investors to locate and obtain the best price on assets for their portfolios. Currently, they receive this data from multiple sources in multiple formats and have to rely on a range of methodologies to sift and collate the data.
Sassan Danesh, Managing Partner, Etrading Software In a broader sense, the credit market could be seen as being in good health. Since 2007, corporate bond issuance has increased – growing from $600bn in that year to $1.8tr in 2012. This has coincided with a decline in direct bank lending and a very low interest rate environment. However, the start of 2015 has seen the lowest levels of corporate bond issuance since 2010, down around 20% from the same period in 2014. There appears to be some correlation with the growing uncertainty in the macro-economic environment. Falling oil prices, divergent monetary policy in developed countries, reduced growth in developing markets including China are having an effect. Political instability is also a factor in the Eurozone and Greece and even the UK. A jittery market is a difficult place for issuers to feel they have value but it’s still too early to tell whether or not issuance is slowing. Should it slow, it would be another pressure on the liquidity of the credit market as bonds mature and companies reduce their debt profile. The regulatory landscape is also changing this year. MiFID II rules will be firmed toward the middle of 2015
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with Basel III and EMIR also phasing in during the year. Basel III’s particular focus on the liquidity coverage ratio and its treatment of corporate bonds as ‘High Quality Liquid Assets’ with a haircut of 50% will further push banks away from holding these types of instruments. Whilst this is only true for issuance with a credit rating between A+ and BBB, this nevertheless covers a significant portion of the corporate bond market. Demand for high quality corporate bonds will increase further as EMIR’s centralised clearing for OTC derivatives begins in Q1 this year. Lower quality corporates will incur a higher haircut charge as non-cash collateral, should they be eligible at all. All of this means that addressing the issues of liquidity is paramount in the credit market and there are a number of initiatives attempting to fix the problem. Some are trying to simply change the market structure – for example by enabling the buy-side to trade directly with each other in a ‘trusted player’ market place. These are proprietary, closed markets that have specific access rules and behaviour. This should help access the large portion of assets that are currently sitting as inventory on the buy-side. However, for those bonds which only trade infrequently in the open market there is the significant issue of finding a price. Not all investors are willing to become price givers. Evaluated price generation is becoming increasingly popular but it is difficult to validate ‘best execution’ for many illiquid assets. A number of other initiatives lean on existing execution venues or trading platforms. They encourage the sell-side to publish their inventory onto the platform and then will aggregate it for the buy-side. The best approach is still under contention with some saying that the focus should be on the most liquid part of the market whilst others saying the opposite. One thing does appear to be clear – almost all of the current set of initiatives are closed, proprietary plays to enhance existing enterprises despite some large participants and regulators claiming that standards are the key to solving the current challenges in the credit market. Project Neptune is an initiative married to the standardisation ethos. Sponsored by institutions from both sides of the market, the project’s first phase in Q4 last year was focused on developing open standards, using the FIX protocol, to support the workflows of structured pre-trade data exchange. With these now completed and ratified under FIX governance, the
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project is now moving into an implementation phase. The idea is not to compete with trading venues or liquidity platforms but rather create a network that can be used as the basis for pre-trade communication. The collaborative nature of the project ensures that there’s no attempt to capture advantage – all sponsors are clear that this is just opening a direct channel between banks and their clients that uses open standards. This means that, rather than as they do today with their customised delivery mechanisms, banks can deliver structured data to whomever they wish without having to support complex data mapping and transformation systems; improving control whilst reducing risks and costs.
“Evaluated price generation is becoming increasingly popular but it is difficult to validate ‘best execution’ for many illiquid assets.” The use of open standards in this way – development, ratification followed by a shared implementation points us towards a different approach of dealing with market structure issues. Many of these issues have, as mentioned earlier, come about because of the swift implementation of technology – that rapid growth left little room for standards especially in the OTC space. With the new focus on costs, liquidity and fragmentation, it seems that it is now time for standards to play a stronger role in restructuring the marketplace and bring supply and demand together.
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Project Neptune; A Buy-Side Angle With Lee Sanders, Head of Fixed Income and FX Dealing, AXA IM only ten of them are relevant, it would take a lot of intense work over a one or two-year period to integrate access to those ten platforms with your OMS. You’re incurring a huge amount of expense because you pay your OMS providers to do that work and additionally that invariably means that your own very limited IT resource is stretched even further. While to some extent we feel that we will lose some of the competitive advantage that we currently have in our set up, initiatives like Project Neptune, which is intended to reduce costs by standardising connectivity between market participants, are of great value to us and the industry as a whole. I think that reflects the general principles of the FIX Trading Community as well as addressing some of the specific issues that are evolving in terms of market structure and liquidity in fixed income at the moment. Lee Sanders, Head of Fixed Income and FX Dealing, AXA IM There are a lot of new initiatives that have emerged in fixed income. The principle behind Project Neptune is to simplify these practices. It’s equally relevant to both the buy- and sell-side as both incur a lot of costs from accessing each other. From the buy-side perspective: getting your order management system provider to connect to more than one third party platform at any one point is very challenging and might require a six-month lead time (at best). So imagine that an optimal execution framework identifies 30 initiatives; even if we think
We support Project Neptune because the concept is platform neutral across OMS and EMS. By using a single standard protocol all market participants can talk to each other and the underlying principle is the platform’s agnostic nature. You can get to those platforms via an OMS, via an EMS, via a GUI, anyway you like, but it’s the language that connects it all up. If you sit down and look at all these platforms, you have to be agnostic. This is at the core of what we are driving towards. To get a consensus view on where we put our attention. Neptune makes more sense than anything else as it is about trying to get as near to the mid-point of an execution as we can or better.
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Converging Technical And Regulatory Changes Kim Man Li, Head of Japan Institutional Electronic Trading, Bank of America Merrill Lynch, looks at ongoing microstructure and buy-side trader behaviour changes in Japan.
In recent months, we have seen several changes to Japanese tick sizes that have been gradually introduced to the market. Whilst these individual changes have been implemented incrementally, the collective milestones should not be overlooked as they have fundamentally altered the behaviour and usage of Japan’s favourite benchmark algorithm, Volume Weighted Average Price (VWAP). Japan has a long history of small and measured changes to its environment. Each is seemingly compact, potentially trivial, but collectively all these measured changes are part of a very long-term vision or plan to help maintain Japan as a reputable investment centre to the global investment client base. It has been nearly nine years since the fated Livedoor incident that caused a deluge of order flow causing the Tokyo Stock Exchange (TSE) to shut its doors early and subsequently re-evaluate its approach to the operational needs of its investors. Since this incident, the TSE has embarked on a multi-year, calculated and steady approach to rebuild its systems and reputation. In some respects, adopting a more measured approach allowed the TSE to be flexible with its incremental short-term plans. This strategy, coupled with relatively light-handed regulatory oversight, has allowed the TSE to evolve whilst adapting to additional financial shocks along the way, modifying its plans to accommodate the emergence of technically demanding businesses such as HFT trading, co-location participants, competition from technically superior PTS
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Kim Man Li Head of Japan Institutional Electronic Trading Bank of America Merrill Lynch and alternative venues, increased data demands from algorithm trading and market data processing. We must not forget that this was also done with the backdrop of several releases of trading systems and a merger with the Osaka Stock Exchange to create the JPX along the way. Considering these factors and some other more recent regulatory induced products, including the new JPX400 Index with strong in-built corporate governance metrics for its constituents, Japan’s future trading environment looks favourable. Looking back specifically at the most recent changes, we correctly predicted that the latest tick size changes would cause some fundamental changes to the trading landscape.
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Overview of TSE Tick Size Reduction: Two changes occurred in Japan last year: Phase One in January 2014, which considered stocks where the price was over JPY3000 and the subsequent Phase Two in July 2014, which focused on stocks that were below JPY5000. In both cases the aim was to reduce the prevailing tick sizes to substantially smaller sizes in absolute terms. The combined result of these two phases amounted to changing the tick sizes for names which collectively made up to 50 percent of the TSE market turnover. Traditionally, the desire to have the smallest tick size possible allows for less frictional cost when buying
and selling shares. Where stocks had previously had large minimum ticks, the bid/offer queues were subsequently long as buyers and sellers refrained from crossing the bid/offer spread to pay an expensive price. With minimised ticks, the cost to taking liquidity is reduced and ultimately these cost savings are passed onto the ultimate investor, be it direct retail, or retail via institutional vehicles such as mutual funds or other investment strategies. It would also be fair to say that this was a competitive reaction to alternative PTS venues which already had capability to trade these names at the smaller tick sizes and had been offering these savings for some time.
Tick Size Table
Source: BofAML In-house database. As of 18th July 2014
The ability for the TSE to do this, however, was only possible due to the technical advances it had made over time. Whilst decreasing the minimum tick size leads to savings for the end client, it comes at cost for the exchange which will now see the available liquidity distributed more finely across the order book. Finer minimum tick sizes ultimately means an increase in total number of (smaller) orders, which in turn leads to more market data requirements and potentially more work from the exchange participants to cope with the demands of the increased data requirements. If you consider that in 2006, the TSE had to shut early when it neared then capacity of 4.5 million transactions, to the current day where we saw peaks of 30+ million orders back in Q1 2014, you
can get a sense of the how much the systems have grown. In terms of how the market microstructure has affected participants we see that for stocks with a tick size reduction, the following is true: • Reduced spread (from 10.4 to 4.3bps) • Reduced available liquidity at the bid/offer (from 590k to 33.5k) • Reduced trade size and queue time which shows how long you must wait before being able to make your transaction • Increased spread from 1.3 (at old large tick size) to 2.2 (at new small tick size) • Increased trade frequency (in correlation to smaller trade sizes)
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Changes in Trading Characteristics on the TOPIX 100 Index:
Source: BofAML In-house database.
VWAP Algo Performance of Affected Names: Algorithm providers have also needed to enhance their abilities in-line with the exchange’s microstructure changes. Some providers will have had experience trading on the PTS venues. Regardless of trading experience, given the larger trading volumes on the TSE, all brokers will have needed to ensure that they can process the increased market data given the more granular tick sizes. Additionally, it is important that algorithms can also read market data that are more than just a few levels below/above the current bid/offer. Given the ticks can be up to 1/10th of the original tick size, in order to see the same amount of liquidity you would potentially need to read 10 times the depth of book. Algorithm systems that may not be able to react to the increased data demands and read this level of depth in
real-time will ultimately pay for this in loss of execution quality.
IVWAP and Arrival Performances
Trade Volume Distribution
Narrowing of tick sizes have ultimately led to both improvements in interval-VWAP (IVWAP) performance, as well as performance versus arrival price. For IVWAP it’s simply the ability to trade at more granular levels. For arrival price, given that liquidity is distributed across smaller ticks, the ability to complete execution at less than the previous full-sized tick also leads to an improvement to this arrival price benchmark. If we look at the distribution of trade volume pre and post tick size change and adjusted to old tick size, we can see that more volume executes in a narrower band post change, i.e. orders are able to complete more quickly at more favourable prices.
Source: BofAML In-house database. Pre-Change: January 14 - July 18, 2014. Post-Change: July 22, 2014 – present
To conclude, the TSE and indeed all exchanges continue to evolve their technology and structure to compete with their peers and ensure they deliver the trading functionality that investors demand. Brokers must continually invest to ensure that they keep in step with the regulatory and technological changes. Whilst each incremental change
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may seem small in isolation, the amount of technical investment needed by participant brokers can be very high. It is imperative that brokers continue to invest in-line with the market developments to ensure that they advance in step with the market and continue to provide optimal execution for their clients.
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Disintermediation? Don’t Bank On It. By James Cooper, Head of Execution, Troy Asset Management There is a creeping fear among banks and some brokers that they are destined to be squeezed out of the execution chain by the exchanges on one hand and the buy-side community on the other. The three-way relationship has been a mainstay of execution since the days of the Buttonwood Tree and the London coffee houses. The broking community, originally banished to the coffee houses from the Royal Exchange for their rowdy behaviour, has always been expert in bringing buyers and sellers together; they have continually innovated the hard technology and new commercial initiatives whilst maintaining (in nearly all cases) a reputation for trustworthiness and discretion. Traditional exchanges meanwhile have provided not just a safe environment in which to transact but have
always helped to form the rules of engagement well before regulators were even dreamt of. Since Thomas Gresham founded the Royal Exchange in 1571, there have been clear rules and exchanges remained broadly self-regulated until June 1985 when the forerunner of the FCA, the SIB, was created. Indeed self-regulation of the exchanges only really came to an end following the collapse of Barings in the 1990s. From the rules applied in the original London or New York coffee houses, to the circuit breakers and randomised electronic auctions of the present, public exchanges have provided a robust infrastructure upon which to transact. The relationship, however, hasn’t always been cosy and the past few years have been especially tense. Since the liberalisation of exchanges under Markets of Financial Instruments Directive I (MiFID I),
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the incumbent exchanges have been buffeted by heightened competition that has occasionally threatened their very existence and very often their own independence. Initially the broking community didn’t compete directly with the exchanges on their own patch, preferring to leave that to either competing foreign exchanges or start-up technology outfits. However, the
“Traditional exchanges meanwhile have provided not just a safe environment in which to transact but have always helped to form the rules of engagement well before regulators were even dreamt of.” development of Broker Crossing Networks (BCNs), originally envisaged as a means to allow the brokers’ institutional clients to cross large blocks discretely, soon offered a means for the brokers to apply even greater pressure on the exchanges. At the same time, brokers have been raided by the buy-side for both their human capital and their technology. The buy-side has felt the regulatory pressure to deliver better and more transparent execution and much of the required expertise have come from the sell-side. Demoralised brokers have moved to the buy-side to develop the dealing desks and help develop the in-house, direct-to-exchange routers that were first pioneered by the sell-side. Finally, both sell-side and buy-side have felt let down by the exchanges on two counts of late. The first has been their apparent reluctance to lower data charges and the second has been their perceived kowtowing to the high-frequency traders (HFT) at the expense of the “real investors”. The exchanges and their shareholders have benefitted greatly
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James Cooper, Head of Execution, Troy Asset Management over the past ten years from the volumes traded by the HFT – as indeed have many of the banks. Institutional clients have felt that their ability to transact large blocks effectively has been made much more difficult. Many buy-siders have become so frustrated by these perceived conflicts of interests that radical initiatives are often threatened. Occasional flashpoints highlight the tension in the three-way relationship. Most recently the lobbying of EU parliamentarians and regulators by the exchanges and the brokers about the dangers or otherwise of “dark liquidity” and “off exchange” transactions has cut some particularly deep scars that will take time to heal. But heal they will As we enter the second half of the decade, and as the various stakeholders think about the shape of the industry post-MiFID, there are signs that the industry is rediscovering the value of the three-way partnership. I was fortunate enough to be involved recently in the development of the Turquoise Block Discovery
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Service (BDS). The buy-side working group for BDS felt strongly that transactions should take place on a public exchange and that the service should be broker neutral. Some of us were worried that the broking community might be cautious of such an initiative. The reality has been the opposite: the brokers have understood the value of the service, have helped police it and have been instrumental in making it available to all. At the
“Brokers meanwhile are vital for their skill in bringing buyers and sellers together in a discrete and ever more efficient manner.” same time, the stock exchange involved in the BDS project, showed how adept it could be at implementing the buy-side’s specific requests. Although exchanges have tried to become more commercial in recent years and have tried to understand the buy-side’s requirements more comprehensively, they will always remain a long way behind the brokers in understanding investors’ all-round needs and guessing how they might improve their service. Brokers will always own the nexus bringing clients together especially for the purpose of large block transactions. As the industry faces the end of BCNs and tighter regulation on dark pools, both sell-side and buyside are appreciating how difficult it is to create the scale and integrity needed for a successful trading venue. Importantly, the public censure and fines received by Barclays and Goldman Sachs for the failings of their own venues combined with the sometimes sensationalist allegations made in “Flash Boys” by Michael Lewis, mean that politicians and the public may find it hard to ever trust bankowned venues. Public exchanges have the expertise embedded deep within and have earned a valuable reputation for neutrality and competence. The current attempts to influence the shape of European
trading ahead of MiFID II implementation and beyond have revealed that recent tensions between the actors have been a cause for positive change. Recent spats have helped to clarify where the role of one party ends and that of another begins. It is true that there is a surfeit of European trading venues currently, but sensible regulation and market forces are gradually reversing this. True, also, that brokers are finding it hard to earn a decent risk-adjusted return on agency execution. But again, market forces and a growing reluctance to subsidise loss-making execution platforms are both correcting this. It is clearer than ever, that exchanges are required in the system for their neutrality and their technical heritage. Brokers meanwhile are vital for their skill in bringing buyers and sellers together in a discrete and ever more efficient manner. For its part, the buy-side has two distinct roles in the game. Firstly, it should focus on its core competence of managing other people’s money and not on building buy-side to buy-side venues from scratch. Secondly, it should visibly support and promote this three-way partnership that continues to provide the best possible structure for long term savers. Disclaimer The views expressed in this document are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument. The information contained within this document does not constitute advice and should not be used as the basis of any investment decision. The document does not have regard to the investment objectives, financial situation or particular needs of any particular person. The views expressed reflect the views of Troy Asset Management Limited at the date of this document; however, the views are not guarantees, should not be relied upon and may be subject to change without notice. No warranty is given as to the accuracy or completeness of the information included in this document.
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The Power of the Cloud:
Thinking Beyond TCO By Brian Ross, CEO, FIX Flyer
There’s been much hype about the Cloud and Managed Services recently, and for good reason. The prevalence of outsourcing has been primarily a story of the Total Cost of Ownership (TCO) and cost controls. And of course cost savings continue to be a major driver of the movement to the Cloud. But the promise of the Cloud and specialised managed services moves the discussion beyond economics to other strategic considerations. The Cloud enables firms to do more, faster and better. In today’s complex landscape of evolving regulation and fast-changing market opportunities, the Cloud offers the potential for true competitive advantage. Virtually all industries have benefited from widely available cloud-based applications such as Salesforce,
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Dropbox and Slack. These tools have become ubiquitous not only because of the attractive ondemand pricing model, but also because they simply work better than what was available before. The Cloud offers turn-key deployment, headachefree management, universal access from inside and outside the company’s network, and ultimately engenders a radical degree of collaboration and sharing. These same benefits are driving a watershed shift in solution implementation and deployment for financial services applications, from FIX connectivity and OMSs to monitoring and reporting. Cloud-based offerings are becoming mature at an apt time. Today’s financial services firms are under pressure to fulfill increasingly complex and
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demanding regulatory requirements. Depending on your region and corner of the industry, RegNMS, MiFID, Reg SCI, Sarbanes-Oxley, Dodd-Frank and more may have something to say about what you do and how your track it. More data needs to be stored, it has to be transparent and accessible across systems and departments, and it must be digested and reported on frequently. Often monitoring and reporting solutions must be independent of core trading platforms to provide an independent and untainted view of the underlying data. Historically, many financial services firms have avoided the Cloud out of concerns around security and privacy. Technology has caught up, and today there is a range of platforms and services designed to meet the specific needs of the industry. Major cloud vendors including VMware, IBM, Microsoft and Amazon offer cloud infrastructure solutions engineered with robust encryption and security features. The stage is set for the industry to adopt the Cloud in a big way. TCO is a fundamental part of the story, but there are other strategic benefits firms can realise. Strategic Benefit 1: Division of Expertise Even modest IT projects require a deep and varied skill set; networking, fault tolerance, redundancy, system administration, intrusion detection, performance optimisation, and so forth. Technologies in each of these areas are evolving quickly, putting a burden on firms to acquire deep expertise across skill sets to implement robust solutions. Cloud and managed service solutions allow firms to capitalise on the best-in-class skills and practices of highly specialised vendors, embodied as turn-key products. Infrastructure-as-a-Service (IaaS) vendors specialise in data availability and server optimisation. Platform-as-a-Service (PaaS) vendors provide bestof-breed security and application management. And higher up the solution stack, FIX-as-a-Service like FIX Flyer are experts in platform integration, connectivity management, on-boarding and certification. Consider how the on-demand market data service from Xignite is solving a challenge that many firms face. Xignite provides Data-as-a-Service (DaaS) including normalised security definitions, corporate actions, pricing, market listings, and other information. Accurate and timely security
Brian Ross, CEO, FIX Flyer
“The stage is set for the industry to adopt the Cloud in a big way. TCO is a fundamental part of the story, but there are other strategic benefits firms can realise.� master data is a requirement of many financial applications. Maintaining this data is complicated and expensive. At the same time, the data is essentially a commodity that does not itself create competitive advantage. It makes sense for firms to subscribe to this data within the Cloud and apply their own resources to more value-creating activities.
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Division of expertise is straight from a page of Business 101 – focus on what you do best, and let others do the rest. Concentrating resources and management attention on activities that add core value ultimately make a firm more innovative and competitive. Strategic Benefit 2: Leverage the Ecosystem The Cloud is not a single “thing” – it is a paradigm of service delivery that allows firms to pick and choose the right components for each part of a solution. PaaS solutions productise the operating platform for your applications, from virtual servers and storage up through the operating system. IaaS solutions commoditise the provisioning of hardware, data storage, and network connectivity. Now, Software-as-a-Service vendors are increasingly offering cloud-enabled applications like Order and Execution Management Systems, Managed FIX Services, Trade Surveillance, Trade Reporting, Security Master and Market Data. Like any network, the Cloud becomes stronger and more useful as more connections are formed and more applications become available. For instance, as Apple sells more iPhones more developers invest resources in developing iOS apps – which
“As more financial services firms are in the Cloud, vendors will develop more capabilities for the Cloud.” then encourages consumers to buy more iPhones. Today the roots of such an ecosystem have taken hold in the financial services industry. One example of such an ecosystem is the Cloud Exchange offering from the data center provider Equinix. Their community cloud platform integrates with PaaS providers such as Amazon Web Services (AWS) and Microsoft Azure, but is hosted in a data center with other cloud participants just a cross-connect away. This proximity and seamless
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connectivity between various cloud providers allows participating firms to essentially create a hybrid cloud model with private and ultra-fast connectivity to various flavoured counter parties including those in the electronic trading ecosystem. As more firms join the cloud, this creates growing opportunities to crossconnect to one another for different solutions within a data center or scaled amongst geo-diverse sites. Specialised cloud technologies such as these are specifically designed to address the unique needs of the industry. Comprehensive security, entitlement and auditing capabilities are now becoming commonplace. These solutions are built ground up with InfoSec compliance built in, making it easy to clear what was once a major hurdle for any IT project. Strategic Benefit 3: Business Agility Ultimately, leveraging cloud services allows a firm to deploy solutions faster and with fewer resources. And then after the solutions are operational, cloud and managed services allow them to scale flexibly and operate more efficiently. In today’s competitive market, speed and agility are critical sources of competitive advantage. Regulations and compliance requirements frequently impose new demands on firms, such as increased trade reporting and data transparency. Growing business opportunities lead to more counterparty integrations, FIX connections and drop copy destinations. A cloud strategy provides the foundation for growth and scale without heavy up-front investment of time or resources. One way the Cloud makes firms more agile is by facilitating on-demand managed service relationships. Managed FIX vendors operate FIX infrastructure on a shared cloud environment. These vendors can manage FIX sessions, on-board clients, monitor connections, perform conformance testing services, and provide a host of other services. Under this model, firms are freed up to work on initiatives that are in line with their core competencies. The Cloud also enables an agile build-and-deploy model. Consider the situation where a firm needs to conduct a proof-of-concept ahead of making a buy decision, for instance the deployment of a new FIX monitoring tool. Because the data is in the Cloud, a vendor can easily deploy a new environment,
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much like buying an app from an app store. Then, if all goes well, readying the system for production is much easier and faster than it would be with a self-managed platform: InfoSec, High-Availability, Disaster Recovery, additional compute power and more bandwidth are all essentially services that already exist within the IaaS / PaaS environment. Agility is a competitive differentiator for firms of all sizes. For smaller firms, a cloud strategy provides instant access to resources and technologies that allow them to keep up with the bigger players. And for larger firms, on-demand cloud technologies simplify projects and greatly compress go-to-market timelines, leading to better responsiveness to market needs. An ongoing expansion A cloud strategy is about more than keeping costs down. It enables firms to leverage productised platform solutions that radically simplify complex technology projects. It leads to an ecosystem that allows simpler and faster connections to counter parties, and simple integration with vendor services and applications. And it drives agility and velocity so firms can be more nimble and reactive. As cloud adoption expands, we can expect these benefits to compound. Mature cloud platforms in more consumer-oriented spaces such as Salesforce and Amazon Web Services (AWS) provide good indications of where things will go. As more financial services firms are in the Cloud, vendors will develop more capabilities for the Cloud. Evaluating and deploying sophisticated and specialised financial services applications and resources will be as simple as buying an app from an app store. Firms will have instant access to market data, order routing services, risk management tools, trade support applications, and everything else we can imagine.
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China: The Year Ahead Stephen Ma, Head of Greater China Equities at BMO’s LGM Investments lays out the drivers for China’s booming equity market. After an end-of-year rally in China’s A-share market following a robust northbound interest in the ShanghaiHong Kong Stock Connect, fund managers are returning to a larger, more mature Chinese equity market. For many years, although the A-share market has a large number of common stocks dually listed in Hong Kong and China, most offshore fund managers probably only knew a handful of quality A-shares that are uniquely listed in Shanghai. Blue chips, such as banking and energy companies, listed on both markets were well known, but when the Shanghai index suddenly spiked it generated global attention. Depending on how the rally pans out, for Chinese equities to successfully recapture the global investment focus, there is much work to be done. Viewed as a national aggregate, Chinese market capitalisation is not far below the US, but in terms of trading patterns, there is still a long way to go. It is very difficult to quantify the extent it is improving and reaching international norms. There is significant information leakage versus other more developed markets, such as Singapore and Hong Kong or the US. Insider trading happens, but no one can prove it. The difficulty is that this caused a large portion of retail investors to give up on Chinese stocks for many years, thinking they can never beat the insider trading. Only recently has retail flow started coming back into the Chinese market. Improvements in education and trading culture are needed before China reaches international market standards, but the five-year horizon remains positive. Adjusting to retail From a trading point of view, the return of retail flow is definitely good news. For example, daily turnover in an A-share can be double if not triple the H-share volume in Hong Kong, which allows us get in and to out with much less share price impact.
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Nevertheless, the consensus amongst institutional investors is sceptical. In Shanghai’s A-share market, we have seen seven years of average markets, so there is reluctance to fully believe that China will recover. Many global investors are quite disappointed after several attempts to enter a bull market. With the interest rate cut of 40bps in late November fresh in investors’ memories, it is too quick to call the recent market upswing a trend. From a longerterm perspective, in one or two months Chinese equities merely regained what they lost over the past three years – we have yet to enter fresh ground. Most China fund managers would say they spent the past three years scratching their heads at weak earnings despite the seeming strength in the underlying fundamentals. Part of the problem is that real interest rates are too high relative to the rest of the world, creating unfair headwinds for the Chinese economy. If retail investors leave the market again for another seven years, then everything would be written off, and the market would revert to previous lows. The question then becomes, what triggered the increased retail appetite in the first place. Decoupling from emerging markets In terms of nominal GDP, China is number two, and the domestic A-share market now ranks second in market capitalisation, so it cannot be considered frontier. If, however, you consider it from a GDP per capita angle, China is still very much a developing nation, partially explaining why it still exhibits characteristics of an emerging market. Valuation remains a real problem for investors. For example, a Chinese company listed in Hong Kong, can easily be 20% more expensive in Shanghai. For offshore investors, it comes down to our standard of valuation versus growth as to whether we decide to play that proxy, but a lot of smaller Chinese stocks have 25, 30, 35 times P/E ratios. For investors
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“Viewed as a national aggregate, Chinese market capitalisation is not far below the US, but in terms of trading patterns, there is still a long way to go.” Our firm had similar problems and we are working aggressively with our internal team as well as external parties and clients to provide access. In the meantime, many firms use the RQFII program, but it does not offer the scale most investors desire. Stephen Ma, Head of Greater China Equities at BMO’s LGM Investments uncomfortable with that approach, there is no need to own those stocks, as MSCI China index, which is listed in Hong Kong, provides comparable exposure. Through the third quarter of 2014, China was underperforming compared to the rest of the world including most emerging markets. When oil prices were high before October, many emerging markets benefited from lower energy prices and commodity prices. The recent correction in commodity and oil prices is good news for the Chinese economy. Chinese banks are still trading at six times P/E, with a typical 6.5% dividend, placing them among the cheapest in the world. After this rally, they are still not expensive when compared even to other emerging markets or Japan. Attracting institutional flow Despite these attractive valuations, additional transparency is needed to induce more institutional investors to connect with Chinese equities. Regulatory and internal limitations have kept many institutional funds from using the Shanghai-Hong Kong Stock Connect, which would otherwise break down discrepancies between the A-shares and H-shares that have not had the chance to be traded out.
If we can sort out this custodian issue, additional institutional trading will see the H- and A-share prices converge. There is no reason for the same stocks to be 20% different for the same company, which demonstrates international funds are unconvinced this current trend will last. After being burned multiple times, some fund managers are willing to miss the first quarter and will wait to get in during the second quarter if the rally continues. We expect 2015 will be another unfortunately volatile year because China is so exposed to the rest of the world. Better quality, but economically sensitive companies, will still be relatively more vulnerable because the rest of the world is growing slowly or not at all. In this environment, it does not pay to be overly aggressive. In a tough year for equity markets, many good quality, economically-sensitive companies’ earnings and share price have suffered. We do not foresee another collapse, which means Chinese markets should touch bottom soon and then gradually go back up. Once investors regain a modicum of faith in the global economic outlook, investors who can pick the right Chinese stock should be rewarded accordingly.
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Current Evolution Of The Buy-side/Sell-side Relationship With Saku Sänkiaho, Senior Analyst at Pohjola Asset Management Execution Services The buy-side has a growing desire to take more control. Increasing scrutiny of buy-side trading and execution practices by the regulators, senior managers and clients is driving transparency and the need for greater accountability. And there has been a growing suspicion from the buy-side that they need to take greater control in order to avoid suboptimal liquidity and execution. The buy-side has been working hard to increase their awareness and improve their skill-set when it comes to trade execution.
“The need for control is one of the most significant trends coming out of the buy-side at the moment in terms of technology and development.” As a consequence of this growth in their knowledge, the buy-side increasingly demands customisation and acquisition of different trading tools and algorithms. When we developed our own buy-side smart order router (SOR) with ITG in 2011 the idea was to take full control of the routing and execution. The need for control is one of the most significant trends coming out of the buy-side at the moment in terms of technology and development.
Saku Sänkiaho, Senior Analyst at Pohjola Asset Management Execution Services Catching up with the sell-side Also contributing to the increasing involvement from the buy-side, is the way that the buy-side is now better able to measure their performance. Using better developed TCA, traders can monitor comparative performance of algos and execution and have a more informed discussion with their brokers; the buy-side can tell their brokers what they would like to see and then of course the sell-side can help them deliver. The process will be more consultative
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because both have similar levels of understanding about market structure and the needs of traders. This means that there is more interaction between the two, which is a good thing. Currently, many buy-side firms use external TCA providers, which gives them standardised, comparable TCA reports that they can use to directly compare their brokers. Relying on broker reports is difficult because different metrics are used; you end up comparing apples and oranges. Independent execution analysis that successfully combines macro and micro level TCA is a way for the buy-side to look under the hood to fine tune the car, so to speak; firms have to be able to capture and analyse their own data. When we started the buy-side SOR user group, which currently consists of 15 different buy-side firms, the whole approach was to share ideas with each other. Because everybody has their own experience from the market, we can work better once we have shared these thoughts. Everybody has a different trading profile and different benchmark, but we can help standardise the data and conversation. The aim is to also give the members of the group more data to use in discussions with their brokers. There is a definite evolution in the way that the collaboration has increased between the buy-side and sell-side, but maybe there is more that brokers need to do to move that forward. What does the future hold? It is a long term trend that the buy-side are taking more control. First one started to use algos to implement electronic trading strategies, then the focus was on the liquidity seeking algorithms. Now more focus is put on which venues to access; as the buy-side increase their ability and knowledge, they are becoming more demanding. After increasing our knowledge on electronic execution and order routing, for us, the next logical step was to create the buy-side controlled SOR to offer an unconflicted way of interacting with the aggregated liquidity without unnecessary intermediation. However, every firm develops their own methods in regard to how they would like to interact with the sell-side; what level of collaboration is required and
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on what frequency. But I think that there will definitely be even more involvement. The collaboration between the buy-side and sell-side will evolve towards more standardised practices, transparency and comparability of data.
“There is a definite evolution in the way that the collaboration has increased between the buy-side and sell-side, but maybe there is more that brokers need to do...� Tightening regulation will also increase the execution quality that brokers provide and drive greater transparency between the buy-side and sell-side. When research and execution are unbundled, the trading team has more autonomy with whom to trade. In this case, the only way for an executing broker to win mandates is to provide order execution of high quality. Transparency is now seen as an integral part of a high-quality execution service. As the buy-side increasingly take control, and collaborate more frequently with the sell-side, technological advances will be a fascinating area to follow. There will be a need for sell-side technology and market knowledge, but they do need to adapt to stay relevant.
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An Emerging Middle East With Ahmed Tabaqchali, CIO of Iraq Investments, Asia Frontier Capital When people think of the Middle East, they think of it as one homogenous place. The Middle East should be looked at as broad, distinct areas with different dynamics regarding populations, history, especially recent history, and other factors. On the one hand there is the Gulf Cooperation Council (GCC) which comprises Kuwait, Saudi Arabia, UAE, Qatar, Oman and Bahrain. They are incredibly rich nations; rich in oil and resource, but relative newcomers to the world stage. They also have very small populations.
“The Middle East is primarily made up of family businesses which are massive players in the economy but very few are listed in the market. The markets are composed mostly of banks, telecoms and real estate.”
2003 saw rapid growth in western interest in Middle Eastern markets as the Iraq risk premium was mostly removed. If you examine the stock charts, you’ll see from 2004 onward, enormous growth in the Saudi market in terms of market capitalisation. Kuwait and the UAE were similar. Eventually they all peaked at about 2006 after the strong bull markets. Now they are a major asset class, with Egypt, the UAE and Qatar as part of the emerging market index. And the frontier market index also has major regional representation. The GCC is one of the biggest components in the MSCI frontier market. A False Economy? Within the Middle East, the real economy is not well represented in the stock markets. The GCC’s biggest driver is oil and petrochemicals. Now, with the exception of Saudi Arabia, none of the other markets i.e. Kuwait, UAE, Qatar, have an oil company represented on their markets because the oil companies are government owned.
On the other hand you have Egypt, with a massive population but poor resources; similarly lacking in resources are Jordan and Syria. Countries such as Iraq and Iran fall between the two; they were established well before the oil boom with a long history of urban development and share the incredible oil wealth that the GCC has.
Saudi Arabia is an exception because Saudi Aramco is majority government owned but is listed. It is one of the biggest components in the index, but still nowhere near a true representation of the of the oil sector in the economy. The Middle East is primarily made up of family businesses which are massive players in the economy but very few are listed in the market. The markets are composed mostly of banks, telecoms and real estate.
In stock market terms, most of the Middle East is retail driven, where retail accounts for around 80% of the market in some places. The occupation of Iraq in
Market technology In terms of technology, most of the exchanges use modern systems. NASDAQ-OMX systems are
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“Quite a few countries in the region need to diversify their economies, and they’re using the sovereign wealth funds to build assets overseas, but they are also using them to develop their local economies.” traded individually, X in this account, Y that account which complicates the execution process. Ahmed Tabaqchali, CIO of Iraq Investments, Asia Frontier Capital widespread across much of the region. Egypt was one of the first to use NASDAQ with the UAE and Qatar having the same technology. Kuwait moved to NASDAQ-OMX latest system Xtreme in 2012 and Iraq converted in October of last year. In the Middle East every investor has a unique National Investor Number, whether an individual investor or institutional investor. In the case of an institutional investor the NIN is attributable to the individual fund/account; for example, in a typical asset management firm the Growth Fund or the Small Cap Fund for example will each have a separate NIN.
The other element which differentiates the Middle East stock markets is that there isn’t a specialist or market making function. There is no specialist book, all orders in the order book are customer orders and as such volatility can be high as there is no specialist/ market maker to ensure a fair and orderly market. This is especially the case when a larger order is placed; it can take out all offers or hit all bids and as such the price can swing a great deal. For all these and other reasons that complicate trading systems in the Middle East, technology firms have to think “outside the box” when developing new technology for the region.
Furthermore, trading is done in the NIN’s name; for example, a trader cannot aggregate orders and offer 20,000 shares for sale for four people and allocate afterwards. A firm has to put in the four separate orders at the same time using the individual account NIN number for each order. Moreover, each NIN number is linked to a unique settlement account. At an institutional level this becomes very difficult; for example, where an institution has ten funds and one is a growth fund, one is a pension fund, etc. If the firm wants to buy a million shares of Alpha Beta Gama Company for instance, the order has to be placed/
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Using actual 2013 GDP figures (2014 numbers are mostly estimates)
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Iraq focus Using Iraq as an example as it is my focus; as a major economy with estimated 2014 GDP of USD 230 billion, the economy will only contract by half a percent this year despite ISIS occupation and plunging oil prices according the IMF’s latest figures. The stock market, as a percentage of the economy is less than 4% of GDP. The region as a whole is in the 50s and in more developed stock markets, that figure is substantially higher. If you believe the estimates, based on the latest available full IMF figures (Jan 2015) Iraq will start growing again by 2.5% in 2015 and by over 7% until 2018. These figures haven’t factored in future lower prices. However, Iraq will still likely grow strongly paced by increased oil production. A stock market at under 4% of GDP is unsustainable with this economy and with such growth. The major obstacle facing the great majority of institutional investors entering Iraq is the lack of a global custodian. Iraq has custody laws and infrastructure to allow the entry of a global custodian, however, a major obstacle is the size of the market. The whole market cap right now is USD 8 billion with an average daily trading of USD 1 million which doesn’t leave room for any custodian to operate profitably. And without global custody most foreign funds cannot operate. The wider future There is much talk of the need for unity across the the region’s stock markets. Finally the preparations are underway about opening up the Saudi market to foreign investors, and I believe they will use the Indian system of the qualified investors. In terms of international institutional presence, the UAE has the largest because it has been open earlier and easier. It’s a fast growing region. The companies are developing pretty quickly. There is enormous potential for growth in the markets.
these markets as they develop will become major global markets. With a long term average oil price of USD 70 per barrel, the GCC will be a significant force. Quite a few countries in the region need to diversify their economies, and they’re using the sovereign wealth funds to build assets overseas, but they are also using them to develop their local economies. A lot of the family businesses will come to the stock market because like all family businesses, when they reach the second or third generation, family members who either want to monetise their assets or start their own projects, move to listings. That’s how almost all major international family companies became public companies. As that happens the markets will start to resemble the real economy, and they will start to move from frontier to emerging and they will be major asset classes. One of the major drivers for uniformity in the Western markets is the growth of institutional investors as a force in the market i.e. other pension funds, insurance funds and ultimately down the road, mutual funds. In the Middle East, that is at a very small scale and almost non-existent. For example, insurance companies are not players in the stock market. Most of their assets are in fixed income and even the fixed income markets of the GCC are hardly developed. So there is not that big force which is needed to drive the market: retail is non-homogenous in behaviour and driving needs. These markets are developing very rapidly in terms of technology, lifestyle, influence, institutions etc. in line with a society chasing technological and social economic developments. The system itself has to catch up with all of that: how the markets work and how the investment culture and business culture develop, will ultimately drive this region. It will either make or break these markets.
Most of the regulators see themselves as comparable to other emerging markets, but technology is a constantly changing challenge that pushes their ability to catch up. The speed of technology advances and the speed of the transformation of the economy is outstripping the capacity of regulators and the law to catch up. That is where the opportunity is because
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A New Model For Changing Markets
By Stephen H. McGoldrick, Project Director, Plato Partnership The institutional equity markets are a complex ecosystem. In recent years the fragile balance of that system has been challenged by compromised stewardship and new regulations. It could be argued that since demutualisation, exchanges have been focused on driving value for their shareholders and the pricing power they exercise in relation to market data costs, trading fees and ancillary services has led them to tip the balance toward their own revenues. Similarly, while regulators have an imperative to ensure the security of the market, they also seek to balance that with maintaining the appeal of equities as an investment class. In recent debates the regulators have been poorly served by venues and participants who have supplied scant data. These failings are threatening the attractiveness of the equities, both for investors in the secondary market and for potential primary issuers seeking financing. What is Plato? In light of this environment, a consortium of market participants from the asset management and broker dealer community are collaborating to create a not-for-profit trading utility in Europe. Its governance structure recognises the traditional symbiosis and demarcations in the relationship of the buy-side with sell-side while updating that old model to reflect the significant increases we have seen in the sophistication of the buyside approach to execution. By remutualising participant involvement in market design, the proposed governance model would allow Plato’s members to focus on driving improvements in the market without some of the challenges created by the conflicts inherent in current venues. Integral to the vision for the platform is an academic research fund. This should produce
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Stephen H. McGoldrick, Project Director, Plato Partnership independent research and analytics, open to peer review, and aimed at seeking out ways in which participants can collectively build a better financial ecosystem, as well as helping to inform and support the regulators’ market structure debate. This research will be funded by revenue generated from Plato’s trading utility.
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“For large investors, wellfunctioning markets are essential, and over recent years, a number of changes to markets, regulations and participant profiles have altered the buy-side’s experience of trading in size.” In terms of its governance structure, the platform will have the participation of both buy- and sellside firms. This is important since the success of the venue can only be guaranteed if it works for both sides. A Trust-like structure will be employed to ensure that our core principles will not be compromised over time. Plato’s founding members include Deutsche Asset and Wealth Management, Norges Bank Investment Management, UBS, Barclays, Citi, Deutsche Bank, Goldman Sachs, JP Morgan and Morgan Stanley, along with others yet to be named. Significantly, this is the first time that this range of organisations have worked together in this manner, which we believe makes this a very exciting and unique proposition. MiFID: A Catalyst for Positive Change For large investors, well-functioning markets are essential, and over recent years, a number of changes to markets, regulations and participant profiles have altered the buy-side’s experience of trading in size. The forces shaping the market have led to dramatically declining average trade sizes, and with the ever-increasing prevalence of high frequency strategies, block trading has become increasingly more difficult to transact.
specifically around increasing the size of trades done in the dark. We believe that MiFID II, due to be implemented in January 2017, can become the catalyst for positive change to this ecosystem. Today, dark trading under MiFID typically utilises the Reference Price Waiver (RPW) for public nondisplayed midpoint trading of child/algo orders. However, MiFIR Article 5 imposes a cap on such trading at 8% of trades transacted under the RPW and certain Negotiated Trades in aggregate. This, together with new Trading Obligations (MiFIR Art. 23) will limit how and where trades are executed, moving more activity onto lit exchanges that are ill-equipped to serve the entirety needs of large asset managers. In the absence of a market response, this will have a material impact on the market, altering the European trading landscape significantly, especially for larger wholesale funds as well as for less smaller listed stocks. Rehabilitating Equity Markets There are a large number of processes and data flows ancillary to executions where we pay too much or where I don’t believe it helps any one firm if another one does them badly. What actually suffers is the equity market efficiency or external stakeholders’ views of the fairness of the market – something which the financial services industry has certainly had to deal with in recent years. It is relatively easy to identify the areas where a collective approach should produce a better outcome for less expenditure but the economics of tackling those issues are challenging if you have to create a new vehicle to do it each time. Plato could play a vital role in helping to build fair and robust future markets through the neutral governance it is answerable to and its combined research arm.
Plato is embracing the changes that are explicit and implicit in the regulator’s direction to the market,
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European Equities:
How We Got Where We Are Today With Robert Barnes, CEO, Turquoise Modern equity market mega trends include global passive indexation and the desire to outperform benchmarks by trading block liquidity, increasingly in mid and small caps, diversified by geography. Today European real returns are near zero, so the focus is on efficiency of trading clearing and settlement at instant of investment to minimise slippage cost to enhance long term returns.
framework included introduction of single order books that could admit for trading securities from multiple countries via a single connection. Complementing these new ‘lit’ order books were broker crossing and external venue ‘dark pools’ where price and size is not displayed until after a trade. In an automated MiFID framework, post-trade transparency is like pre-trade transparency for the next trade.
In 2001, The Committee of Wise Men on the Regulation of European Securities Markets1 noted that returns on assets over a period of time were growing faster in the US than in Europe. With rising population demographics and an increasing reliance on private sector pensions, European capital markets needed to be competitive for meaningful long term investment returns.
“Innovation will drive the future of European equities defined by client demand, buy and sell side, for market structures that comply with regulations, lower costs, and generate revenues.”
At the time, Europe featured an exchange landscape comprised of single country monopolies. While there were some advantages, this model did not serve well an increasing demand by the user community for nimbleness on fees and functionalities as equity volumes grew world wide. Europe as a ‘single market’ was underperforming its potential. Among contributing factors were higher costs of trading, clearing and settlement. The regulatory tool to address frictional costs was competitive entry. The findings of the Wise Men report led to the European framework that became the Markets in Financial Instruments Directive (MiFID) which encouraged competition, transparency and investor protection. Best execution was redefined as a process to deliver best possible result on a continuous basis. What followed was a raft of new market entrants, of which some took hold and continue today. Competition reduced exchange fees for cash equities. Innovations driven by the private sector within the regulatory
Post-trade clearing and settlement With competitive new entry, there was more customer choice and greater efficiency of execution venues, but this required more sophisticated tools and methods to manage. The next major innovation arose from addressing the challenges of clearing in that fragmented environment and the consequence of electronic order books: the trend of shrinking trade size. In 1999, the average trade size on London Stock Exchange was £64,000. By 2008, this had fallen to below £10,000 per trade. Interestingly, the overall order book value traded from 1999 to 2008
1 http://ec.europa.eu/internal_market/securities/docs/lamfalussy/wisemen/final-report-wise-men_en.pdf
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EUROPE | 49
had grown by six times for UK equities but due to the shrinking trade size, the number of tickets had grown by 35 times. Because clearing and settlement costs tend to correlate with the number of tickets, if nothing was done to address this post trade trend, then the overall cost of processing the same value of trades would grow year on year. This was one of the catalysts encouraging introduction of interoperability of clearing, whereby customers of certain trade venues can choose a single CCP to consolidate their respective trades. Competitive scalable volume discounts drove reduced clearing fees. Consolidating clearing into a single CCP of choice also offered significant settlement savings. Prior to the introduction of CCP interoperability, if one was trading, for example, Vodafone shares on multiple trading platforms, then, shares via London Stock Exchange would be cleared through LCH. Clearnet or SIX x-clear while trades executed on Chi-X or Turquoise would have be cleared through EMCF and EuroCCP respectively. As a consequence there would be at least three net settlement messages and three net settlement fees per stock per day. Today, that same member can save twothirds in one step by directing each of those trades into the single clearing house of choice. Block trading adds further benefit regarding posttrade costs. Let’s say a stock’s average trade size is ten thousand Euros with unit clearing fees charged per ticket. If one can trade a block of a million Euros, in one step, the clearing fee is one hundred times less than trading the equivalent value in 100 trades x the average trade size. Block trading on order book The bigger prize of block trading is to match size at a price while avoiding market impact. As buy side dealers often explain, there are a number of channels through which they may direct an order. Channel one might be the high touch sales trader, channel two might be the algorithmic smart order router slicing up and dicing small size into multiple order books, but there is a new channel appearing: the anonymous order book mechanism that can rest larger orders safely until finding another side to match in block size without informing the market until after the trade.
Robert Barnes, CEO, Turquoise equities is the potential spectre of the dark pool double caps that can prevent a stock trading for 6 months via a relevant ‘dark’ mechanism. The caps are, on a rolling 12 month average, matches of 4% of turnover on a single dark venue or, if that single stock trades across multiple venues, more than 8%. MiFIR Article 4(1)(c) allows authorities to waive the obligation for orders that are large in scale (LIS) compared with normal market size. Currently, ESMA defines LIS bandings that reflect average daily trading values for stocks over 50 million a day for blue chip companies to micro-caps matching less than 500 thousand a day. MiFID II will add more bands. Innovation will drive the future of European equities defined by client demand, buy and sell side, for market structures that comply with regulations, lower costs, and generate revenues. The opportunities are for those delivering the highest standards. It will be a fascinating year ahead.
A feature of MiFID II that’s often discussed in cash
Q1 • 2015 | GLOBALTRADING
50 | AMERICAS
Reforming The Regulation Jim Toes of the US Security Traders Association discusses the role of public comment in forming US regulation as well as its effects on other asset classes and international markets.
US equity market structure endured criticism in recent years, raising questions about its functionality. Yet, US equity markets remain the most liquid in the world, with the tightest spreads. It would appear, investors do not share the same level of concern as the financial press. In considering market structure and the role of regulation, a balance must be struck. Regulation should allow market participants to compete among themselves like, one broker dealer with other broker dealers and then, to a certain degree, between themselves like broker dealers competing with other participants for example exchanges. While the regulator and market participants differ, in that regulators and participants have fundamentally different roles to play, the discussion must move to procedures and policies. It is the responsibility of regulators to be in touch with the marketplace and decide whether more feedback is needed via a review or a concept release, after which, new rules can be introduced with comment periods.
GLOBALTRADING | Q1 • 2015
All market participants are able to comment on SEC concepts, releases and rule proposals. Regardless of whether ideas start from public discourse and the SEC takes them into consideration or the SEC pens a proposal and submits it to the public for comments, ideas and the responses they engender, do circulate in a transparent manner. To facilitate more accurate regulation, the SEC has taken great strides in its ability to capture data through its Market Information Data and Analytics System (MIDAS). The SEC’s Office of Analytics and Research, comments on its interpretation of the data via its website, which enables market participants to comment on the process. So they have the ability to pull in data through their MIDAS system, they have the ability to interpret it through their department of economists. They’re being transparent in how they are interpreting it and through the website, which is their outreach program to market participants, and which enables people to look and comment.
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The SEC’s transparency has reassured traders, and its transparency dramatically increased the SEC’s industry credibility. Increased reliance on data may also encourage regulators to prioritise standardisation of infrastructure to facilitate more efficient supervision. Competing visons Similar companies, with similar business models could be expected to think, well, similarly. The proposals from BATS and NYSE, however, appear to disagree on fundamentals, or at least priorities. HFT has created a virtual exchange where liquidity can flow rapidly from one asset class to another, yet there is a natural friction from pressing different asset class’ trading infrastructures into one model. Now there is pressure amongst the two competitors to homogenise trading infrastructures across assets so liquidity can flow even more easily. The rise of ETFs as a widespread investment vehicle are an obvious source of this pressure, given their need for electronic access to different assets.
Jim Toes, President and CEO, US Security Traders Association
“Global money flows pressure regulators’ decisions because the wrong decision could very easily see liquidity leave their nation.”
jurisdictions depend on their domestic regulators’ tacit cooperation with US counterparts.
Global disharmony Regulatory harmonisation, a central thrust of financial regulators’ response to the global financial crisis is beginning to lose steam. There was a time when the SEC would make a market structure rule and other countries would replicate it. As markets globalise, however, a number of larger markets are making decisions based upon what they deem best for their participants.
FINRA’s Trade Reporting and Compliance Engine in the US obviously had a major impact on fixed income and benefited investors, but market participants need to realise that transparency has a cost. That cost can be explicit, through the operational costs of providing added transparency to investors, or implicit through the way existing participants change their behaviour. In the next three to five years, non-equity asset classes will go through a review as to how it would work on an equity-style market structure platform. Just as FX went from an over-the-counter market in the 1980s to the equity-style market we have today, the pattern will repeat.
Having said that, liquidity continues to course around the world. Global money flows pressure regulators’ decisions because the wrong decision could very easily see liquidity leave their nation. Traders in far flung
Q1 • 2015 | GLOBALTRADING
52 | ASIA
Man vs machine – the Schroders story By Jacqueline Loh, Head of Asia Trading, Schroders Schroders Asia first started using direct market access tools and algorithms for trade execution in 2006. Since then, the proportion of trades carried out via electronic execution has grown significantly in terms of volume of traded turnover. This would not have been possible without the increased sophistication of algos and refinement of TCA (transactions costs analysis) analytic tools to measure trading performance. In line with Schroders’ best execution policy of implementing trades with minimal total impact costs to clients, electronic trading was initially introduced to help traders minimise impact costs by gaining better overall control of their trades. It was not a conscious effort to pay less commission, although that later turned out to be one of the indirect results. The journey over the past few years has been a very profitable and enlightening one. We made new discoveries every day, such as which broker provides
GLOBALTRADING | Q1 • 2015
the most hardy algos, which algos work best in which Asian markets, which ones were particularly suited for volatile markets. We continuously monitor the quality of our low touch and high touch execution, and the relative proportions of these to ensure that we are making optimal use of all the execution venues available to us. The past few years have spawned a myriad of DMA and algo providers for Asia electronic trading, accompanied by a vast array of algorithms. It therefore made sense to try to differentiate between the algos as well as determine whether we were utilising algos in ways that added value. Objective of the study: To determine if there are any significant differences in trading performance, measured against two benchmarks (arrival price and VWAP), between results achieved using fully automated algos and semi-automated algorithms.
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Methodology
Graph 2: - Algo provider 1 – VWAP performance per ADV bucket.
Using data for all of 2014, we classified all the trading strategies used by the Asia trading desk into the following two categories: - Automated - Semi-automated algos Definition of automated algos: All auto schedule, auto participant type algos. Definition of semi-automated algos: Algos with a high degree of trader input such as picking price levels and market timing. Graph 3: - Algo provider 1 – Arrival performance per spread bucket. Automated algos VWAP, TWAP, POV, Custom Semi-automated algos
DMA, float hidden, Ambush post, float ambush, smart DMA, swoop, Custom
The performance of all these algos were compared against two benchmarks – arrival price and VWAP. Results These are the results obtained from our two algo providers.
Graph 4: - Algo provider 1 – VWAP performance per spread bucket.
Graph 1: - Algo provider 1 – Arrival performance per ADV bucket.
(For illustration purposes only)
From the above graphs, it is clear that semi-automated algos outperform automated ones against both benchmarks – arrival price and VWAP. Divergence in performance is increasing with difficulty of trades, as represented by high ADV trades.
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54 | ASIA
Graph 5: - Algo provider 2 – Arrival performance per ADV bucket.
Schroders: vs ARRIVAL (bps), by ADV
Graph 6: - Algo provider 2 – VWAP performance per ADV bucket.
Graph 7: - Algo provider 2 – Arrival performance per spread bucket.
Jacqueline Loh, Head of Asia Trading, Schroders combination of trader judgement (e.g. by picking stock levels, market timing) and algorithms rather than use of fully automated algos. Differences in results are particularly marked in higher MDV orders. This has several implications for buy side trading desks. The average desk MDV (median daily volume) is a good indication of optimal algorithm usage for the desk. While desks with low average daily volume ( 20% or less as suggested by these results) may benefit from lower automation, higher average MDV desks do better with constructive trader input. Amongst our automated algo suite, the algos we use most are the ones which enable us to accumulate or sell stock at certain levels while causing minimal market impact. Conversations with our brokers are therefore centred around refinement of their algos in such a way that allows us to trade size and yet not reveal our intent.
These results show the same trend – performance of semi-automated algos is superior with outperformance particularly marked in higher MDV type orders. Where do we go from here One reason for looking into this was to explore further scalability of our business i.e. if there is any deterioration in trading performance with maximum usage of algos. One Head of Execution Services had mentioned that our desk is the most scalable one he knows as we have been able to cope with large fluctuations in turnover without any change to headcount. This study shows that although efficiency can be enhanced by use of DMA tools and algorithms, the best results to the clients are achieved by a
GLOBALTRADING | Q1 • 2015
Automated algos too will continue to evolve to become less commoditised and more customised. We do have conversations with brokers around development of specialised, customised algos for us; however, we seem to perform better with those algos that require more manual intervention. Every desk will be different in this respect; that’s not surprising as there isn’t just one way to achieved desired outcomes.
56 | ASIA
Singapore Roundtable: Maximising Your Data
By Peter Waters, Managing Editor, GlobalTrading
On the 3rd December 2014 GlobalTrading hosted a roundtable discussion to examine one of the key challenges for market operators; how to better capture, analyse and use data to generate revenue. Getting the data and viewing the data are two very different challenges, and both need addressing before a market operator can use the data both as a strategic asset for internal purposes and as a revenue generating asset. Our roundtable, moderated by long-time market operator expert Ned Phillips, developed around numerous key themes; one of which is the idea that firms need to constantly adapt to the changing nature of data itself. Market operators need to be constantly incorporating new data sources as well as the existing types of data which can be structured, semi-structured and unstructured. And most importantly, all of this data needs to be captured and analysed in a comparable way. A significant area for development, in Asia and globally, is the division between regulatory data and that which can be used and sold as a marketable commodity. The room discussed the consequences of the fact that in Asia especially, different regulatory regimes determine at what point data can be released and to whom, and so market operators need to be aware of their obligations. The other side of this debate is around data standards, and what standards, if any, exist in terms of capturing data, time-stamping, formatting, and storage. These questions need to be addressed before an exchange can fully appreciate just what freedom it has to monetise the data. Data is one of the major areas where exchanges now realise they can generate increasing revenues. For firms looking to provide those services to exchanges, the key is to capture and analyse all of the available data, and GLOBALTRADING | Q1 • 2015
ASIA | 57
Alex Kech,
Head of Standards APAC, SWIFT
“
SWIFT provides its community with securities and cash related data and messaging standards, connectivity to transport that data and solutions to automate it. We also now provide business intelligence and data analytics tools to ensure our customers deal effectively with not only market data but also their own data, allowing them for example to benchmark themselves against competitors. As a post-trade service provider, it was interesting for me to hear Exchanges, primarily pre-trade trade practitioners, share their views and challenges around market data. I was glad to hear some of them highlighting the importance of post-trade market data such as corporate event announcements and the need for more accuracy and structure in this field, a challenge SWIFT is working on. I am looking forward to participating in more of these roundtables in the future.
”
let clients decide what is useful, rather than deciding for them. One differentiating factor to consider is the divide between institutional and retail clients, and the big difference in demands and needs that they have. The different exchanges present each offered their own views on their precise retail/institutional mix, and how it had affected their decisions. Institutional clients are constantly searching to benchmark themselves against their peers and competitors, whereas retail defines their data needs differently, with the potential for data piracy being a concern. The levels of service and price sensitivity need to be flexible enough to allow each recipient of the data to tailor their services. However the point was made that simply by charging for a given asset, it ascribes value to it, so giving away certain datasets for free might not be the best use of that data. The progression reflected in the way exchanges deal with data ties into the wider theme of exchanges adopting behaviour from the sell-side – a recurring theme throughout the roundtable. Exchanges are increasingly going to clients with products and looking to generate revenue more directly and actively. This trend will continue to grow as market operators realise that they need to be more proactive, both in offerings to clients, and reacting to client needs before those clients realise the need themselves. The holistic dataset that exchanges have, once properly analysed and visualised, can go a long way to drive sales. The biggest subsequent question from market operators is then their own peer comparison; “What are the other regional exchanges doing?” which goes into how market operators also view themselves – what are their own core competencies and competitive advantages, and how can new datasets and visualisations maximise that? These questions are not simple, and each of the exchanges in the room had a slightly different interpretation of exactly what the best mix for their customers was, the common factor being using the data to better analyse the options available. The discussion also broadened out to consider a multi-asset aspect, as the differences between data sets and clients in the cash and derivatives business can be another area for development for the exchanges. While the
Q1 • 2015 | GLOBALTRADING
58 | ASIA
Eva Saidec,
Product Manager Data & Analytics Market Technology NASDAQ
“
Efficient data management is often a major challenge that market venues, clearinghouses and securities depositories face as a result of changes in market dynamics and from various regulations. Compliance alone is requiring the creation of swathes of data to be made available at any given time and participants are requiring indepth and more easily accessibility of information surrounding their engagements with the exchange, clearing house and CSD. Real-time requirements are replacing batch updates adding to the complexity. As we’ve been working with our 80 or so market technology customers in this space, it is clear that they can seize new opportunities if data is managed in new, more efficient ways. Many organizations are still evaluating data in siloes –business units, operations and IT teams to mention a few. If these organizations could compare various relevant data sets, internal as well as external, within the same context, valuable insight could be gained not only to improve strategic planning but to support the creation of new offerings as well as better and more proactively service their participants. This year we created MiQ, to help our customers conduct the type of “cross-silo” analysis needed – even across inaccessible or incomparable data types -- to gain new benefits and help them truly understand their markets and the environment they operate in while save a significant amount of cost in the process. We believe MiQ can help them navigate the move from the capital markets of today, into tomorrow, with better intelligence. Overall, managing data more effectively is critical, especially to help manage tumultuous period, service new requirements and understand the real commercial impact of market pressures. By better leveraging data, exchange and post-trade operators alike can take the management teams and brands beyond the realm of coping and into the realm of competing.
”
relationship between the two was firmly established, differences in micro-structure, speed of trading, and regulation lead to very different methods of generating and capturing the data and of the needs of the clients. Marrying the two together is another future challenge worth considering. Sources and types of data are expanding all the time, but so is how that data can be sliced, packaged and analysed, both for internal use and as a product: exchanges need to see what their peers are doing and get ahead of the curve to make the most of their data.
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ASIA | 59
Parasuraman Nurani,
Vice President Market Data & Access - Singapore Exchange
“
At SGX, innovation in market data products is driven by the needs of our customers and market participants. We focus on innovation to address problems for which solutions are often not readily available and there is an opportunity here to think out of the box. We believe in “customer-centric design” in our product development, and try to engage our stakeholders from the beginning.
We seek to develop differentiated products which appeal to various data consumer segments. In addition, SGX is investing in technologies and solutions to provide structured data in areas which tend to have unstructured information and are left open to interpretation by data consumers and participants. We have made significant progress in areas such as Corporate Actions and Financial Statements related data. We are also keen to share our experience with others and learn from other markets so as to make markets more efficient and transparent.
”
Q1 • 2015 | GLOBALTRADING
60 | Fragmentation
GLOBAL FRAGMENTATION AT A GLANCE
MARKET SHARE ANALYSIS (January 2015)
Note: the analysis is based on lit venues only for Europe and lit and dark for all other regions
GLOBALTRADING | Q1 • 2015
Source: Fidessa
Fragmentation | 61
Fragmentation of liquidity in Europe When MiFID came into effect in 2007, allowing competition between venues, the marketplace was completely transformed. Further changes planned under MiFID II look set to reshape the markets once more. Now, as then, regulators are concerned about the quality of trade execution in this complex and competitive marketplace. In its Thematic Review, published in mid-2014, the UK’s Financial Conduct Authority (FCA) outlined concerns that brokers are still not doing enough to deliver best execution – defined by them as reasonable action towards acquiring the best possible result for the end customer. With execution quality firmly under the spotlight, brokers and buy-sides alike are going to need ever-more granular analysis of the trading landscape if they are to satisfy the regulators’ requirements.
Market share analysis for European lit and dark venues - January 2015
In Europe lit venues still account for the majority of market share. In January 2015 dark pools* took just over 4% of total equity trading in Europe, up from 3.37% in January 2014. Initially launched as a means for trading large blocks with minimum market impact, dark pools are gaining share outside the pure block trading activity. As a result, the average trade size on dark pools has dropped significantly since 2008 and remains relatively low. In January 2008, for example, an average of 31,752 shares were traded on dark venues; a year later this had decreased to 2,572 shares and in January 2015 it was just 1,138 shares.
* Dark venues include dark MTFs and dark order books of exchanges
Source: Fidessa
Q1 • 2015 | GLOBALTRADING
62 | FIX
Another Year Over And A New One Just Begun… By Tim Healy, Global Marketing and Communications Manager, FIX Trading Community and Futures Commission (SFC) and the Hong Kong Shanghai Stock Connect Project to further promote the use of FIX. Additionally, the Committee established a group to promote ‘new blood’ into the region and encourage greater participation.
Tim Healy, Global Marketing and Communications Manager, FIX Trading Community January is an odd month. A time to look back on the past year, to look forward to the New Year, make resolutions and be very abstemious. All of this following the hectic overindulgence and festivities of the previous month. An odd month indeed. As we look back over the achievements and milestones for the FIX Trading Community in 2014, we also look forward. There was a huge amount of work done by the various committees, subcommittees and working groups during the year. The events organised by the membership and the FIX Program Office were very well received. The targets and aims for 2015 are to continue this work and improve on what we did during 2014. The markets move and we need to keep up to speed with them. Looking back first, there were a number of specific highlights for the year across the different regions. The Asia Pacific Regional Committee worked collaboratively with a number of different bodies such as the Singapore Exchange (SGX), Hong Kong’s Securities
GLOBALTRADING | Q1 • 2015
“In EMEA, the work of the Investment Management Working Group was to the fore with continued development of the execution venue analysis and a new initiative to address the workflow for transmission of orders for Initial Public Offerings (IPOs).” In October, the Japan Regional Committee helped to host the Biennial Japan Trading Conference which saw a record number of delegates – more than 600 people attended the event. The President and CEO of the Tokyo Stock Exchange, Akira Kiyota, gave a keynote speech and outlined their plans to become the premier exchange in Asia. The Committee also worked closely with the Financial Information Services Centre (FISC) in Japan to provide information for its annual report. In EMEA, the work of the Investment Management Working Group was to the fore with continued development of the execution venue analysis and a new initiative to address the workflow for transmission of orders for Initial Public Offerings (IPOs). The Trade
FIX | 63
awarded the IPO initiative the Buy-side Project of the Year. Our flagship EMEA 2014 Conference was a great success and planning is in full swing for the 2015 event on 10th March. In the Americas, similar to what has been done in EMEA and Asia Pacific, there was a drive to get fresh
“One other area which FIX will look at is cybersecurity and if there is a role that the FIX Trading Community and its members can play to address the issues in this space.” impetus in the region as two new networking groups were launched in New York and Boston. A successful conference in Brazil was followed by a standing-roomonly audience in New York to discuss Trading and Transparency. Elsewhere the region also re-launched the Risk Management Working Group to look at a number of different topics as well as globalize the group. Looking at the more specific product Committees, the OTC Markets Committee Group accomplished a large body of work as the Fixed Income and Foreign Exchange markets become more electronic and regulated. The vast majority of Swap Execution Facilities (SEFs) and bond trading venues use FIX and the Committee continues to engage with both venues and vendors to push for greater standardisation. Project Neptune gained a lot of media attention during 2014 and our penultimate press release of the year announced the draft publication of the Best Practices for the use of FIX for pre-trade in the bond market. The Global Buy-side Committee was active across all regions during 2014. Inherent differences in every country and region means that there are diverse challenges to be met but the global collaboration on the IPO Initiative and the Execution Venue Initiative show that working under the umbrella of the FIX Trading Community, significant results can be had. Additionally, the Global Post Trade Working Group are working to widen the asset class coverage for FIX in the post trade space having published guidelines for equities earlier in 2014. There will be a strong focus on regulation in 2015.
The Global Technical Committee has focused its efforts on High Performance whilst also continuing to develop FIX to address the significant increase in regulatory activity. Their work on the next generation of the FIX Protocol will fully support high performance on all levels (application, presentation, session) with the objective to offer an open standard that can replace today’s proprietary interfaces for high performance trading and market data. Each committee has outlined its own respective targets for 2015, however there are a number of themes that cut across all the different working groups and committees: • Continue to assess the ongoing changes in regulation and address how FIX can help. • Continue to work with different trade associations and regulatory bodies to promote the use of standards in the different markets. • The promotion of FIX as the de-facto messaging language for all asset classes. • Continue to encourage greater involvement from market participants. • Continue to encourage new users to become involved with the committees and working groups. One other area which FIX will look at is cybersecurity and if there is a role that the FIX Trading Community and its members can play to address the issues in this space. This will be a new departure for the Community but given the prevalence of FIX in the lifecycle of a trade, the information that can be gleaned could prove to be key in helping meet the challenges. The work that these groups do should not be underestimated. The FIX Trading Community holds a somewhat unique position in the market and will continue to work in a collaborative and unbiased manner as we go through 2015. Let’s hope it’s a good one.
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64 | RESOURCES
Industry Resources Bloomberg Tradebook
Bloomberg Tradebook is a leading agency broker that partners with both the buy side and sell side to provide high-quality liquidity,
market insight, and customized solutions based on innovative technologies. Founded in 1996, Tradebook offers its customer base trading solutions for equities, futures, options, and foreign exchange (FX) to actively manage complex trading strategies in more than 100 global exchanges. Our America Merrill Lynch, Goldman Sachs, and more to build high quality, feature-rich software.
FIX Flyer
FIX Flyer develops advanced technology for managing complex, multi–asset, institutional securities trading using highly scalable software and network technologies. Since 2005, as an agile technology provider we have partnered with our 170+clients worldwide, including UBS, Barclays, TD Ameritrade, Fidelity, Berenberg, Unicredit, GBM, Interacciones, Bank of
Fidessa group
Exceptional trading, investment and information solutions for the world’s financial community. 85% of the world’s premier
GLOBALTRADING | Q1 • 2015
Flyer has built a team of operational experts who manage and provide FIX software as a service. Our subject matter experts create and operate FIX servers for you to realize the full potential of our software to deliver the highest level of service and return on investment. The FIX Flyer Engine is the first FIX server designed to manage high volume, ultra low latency trading networks and ECNs, easily scaling to thousands of connections. financial institutions trust Fidessa to provide them with their multiasset trading and investment infrastructure, their market data and analysis, and their decision making and workflow technology. We offer unique access to the world’s largest and most valuable trading community of buy-side and sell-side professionals, from global institutions and investment banks to boutique brokers and niche
solutions provide direct market access, algorithms, a breadth of trading analytics, and independent research to institutional traders who seek maximum alpha on every market transaction. Contact details: www.bloombergtradebook.com
FIX Flyer also provides the Daytona trade surveillance monitor, the F1 Risk Control Gateway, the Ignition regression test and certification tool; the Flyer Online hosted OMS; the Flyer Trading Network, and tools for commission management. FIX Flyer has headquarters in New York City with offices in Boston and Hyderabad India. Visit fixflyer.com for company information and to request a free demonstration. Follow us on twitter.com/fixflyer. Contact Details: www.fixflyer.com
hedge funds. $20 trillion worth of transactions flow across our global connectivity network each year. Fidessa’s unrivalled set of missioncritical products and services uniquely serve both the buy-side and sell-side communities. Contact details: info@fidessa.com www.fidessa.com/contact
RESOURCES | 65 to FIX and proprietary protocols.
CameronTec Group is the global standard in financial messaging infrastructure and tools for the Capital Markets industry that today powers the largest user base among financial institutions.
CameronTec’s flagship offering Catalys is underpinned by marketleading connectivity technology and engineered on the widely acknowledged standard in FIX engines, CameronFIX. Catalys Market Access offers FIX-powered gateways to more than 60 equity, derivative and FX markets across the globe, as a locally deployed or managed / hosted service.
Uniquely positioned as a software and service provider for enterprise, hosted and managed platforms, our dedicated professional services team ensures optimal integration and deployment performance.
Complementary FIX integration, testing and management solutions, including VeriFIX, build out a complete offering to provide end-to-end global connectivity solutions for any electronic trading environment, using or migrating
Contact details: www.camerontecgroup.com
connectivity for clients, tailoring infrastructure to meet business goals and requirements including cost reduction, connection engineering and FIX customization. Clients receive access to sophisticated tools that monitor their orders, while a web-based dashboard provides transparency into the onboarding lifecycle. Connex technologies and knowledgeable support group helps ensure that interfaces remain connected.
expenditures and minimize risk. Outsourcing connectivity allows clients to focus on core business objectives and worry less about upgrades, hardware changes, scalability, redundancy and FIX customization. Connex also offers a pre-trade risk management module that helps clients address regulatory requirements.
CameronTec Group
Convergex Connex
Connex is Convergex’s fully-managed technology solution for brokerdealers. Streamlining the onboarding life cycle for clients, our experienced professionals are committed to helping to reduce clients’ connectivityrelated expenses. As a third-party, broker-neutral managed services provider, we act as an intermediary between broker-dealers and their network partners. We configure
GlobalTrading
Thought leaders’ perspectives pack the GlobalTrading journal with the latest in industry trends, buy-side insight and global electronic trading news, however, it is only the tip of the iceberg of our offering.
Managing operations for customers, Connex helps firms save on capital
www.fixglobal.com offers our entire searchable archive of industry contributions, meaning that over 10 years worth of leadership commentary and content is available in an accessible format, entirely for free. We are also pushing out the latest industry-led thought leadership through our
CameronTec’s solutions are tested and trusted by the world’s best firms in over 50 countries, on all five continents, representing the broadest cross section of tier 1 and 2 investment banks, brokers, fund managers, exchanges, regulators, and members of the ISV community.
Contact details: For more information, contact George Rosenberger at 212.468.7726 or via email at grosenberger@convergex.com
Twitter feeds (@FIXGlobalOnline) and our LinkedIn group (GlobalTrading journal). These are forums for free-flow debate and to engage with industry peers on the burning issues of the day. Contact details: yulia@fixglobal.com www.fixglobal.com
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66 | FIX Trading Community MEMBERS
FIX Trading Community Members *Premier Global Members marked in bold
360 Treasury Systems AG ABN Amro Clearing Actuare AFME- Association for Financial Markets in Europe Albourne Partners Ltd Algomi Algospan Ltd AllianceBernstein Alpha Omega Financial Systems, Inc American Century Investments Ancoa Software Aquis Exchange ARQA Technologies ASIC Australian Securities Exchange AXA Investments Managers Ltd B2BITS EPAM Systems Company Baader Bank Aktiengesellschaft Baillie Gifford & Co. Banco BTG Pactual Banca IMI SpA Banco Itau S.A Bank of America Merrill Lynch Barclays Baring Asset Management BATS CHI-X Europe Baymarkets AB Beijing RootNet Technology Co., Ltd. BlackRock, Inc. Bloomberg L.P. Bloomberg Tradebook Blue Ocean Company BM&F BOVESPA BNP Paribas Bolsa de Valores de Colombia Bolsas y Mercados Españoles (BME) Borsa Istanbul A.S. Brandes Investment Partners LP Bridline Brook Path Partners, Inc. BSE Limited BT Bursatec SA de CV BVI C24 Technologies Cameron Edge CameronTec Cantor Fitzgerald Capital Group Companies, Inc. Charles River Development Chicago Board Options Exchange Chi-X Global Inc
CIBC World Markets INC CIMB Securities Cinnober Financial Technology AB Citi Citihub Consulting CL&B Capital Management CLSA Limited CME Group Colt Technology Services Compagnie Financiere Tradition Connamara Systems LLC Convergex Corvil CQG inc Credit Suisse CSC Cynopsis Solutions Daiwa SB Investments Daiwa Securities Group Inc. DATAROAD DealHub Deutsche Bank Deutsche Boerse Group Dimensional Fund Advisors Eastspring Investments (Singapore) Limited Ecodigi Tecnologia e Serviços Ltda Edelweiss Securities Limited Egypt For Information Dissemination Enmetrica Orion K.K. Japan Equinix Espirito Santo Securities India Esprow Pte. Ltd. ETLogic Ltd ETNA Software Etrading Software Ltd EuroCCP Euronext Paris SA EuroTLX Exactpro Systems EXTOL Eze Software Group EZX Inc. FIA (Futures Industry Association) Fidel Softech Pvt Ltd Fidelity Management & Research Co Fidelity Worldwide Investment Fidessa Group First Boston Group First Derivatives FISD Fiserv FIX Flyer LLC Fix8 FIXNETIX FIXNOX Forex Capital Markets, LLC FpML Franklin Templeton Investments Gamma Three Trading, LLC
Premier Global Members
GLOBALTRADING | Q1 • 2015
GATElab GETCO Asia GFI Group Inc Goldman Sachs & Co. Greenline Financial Technologies, Inc. GreySpark Guosen Securities Ltd Hatstand HM Publishing Hong Kong Exchanges & Clearing Limited HSBC Bank PLC ICAP ICMA (International Capital Markets Association) IG Group Holdings PLC Ignis Asset Management Informagi AB InfoWare Infront AS Instinet Integral Development Corp. Intelcheck Services Inc. Interactive Data Intercontinental Exchange (ICE) International Securities Exchange (ISE) Investment Management Association Investment Technology Group (ITG) IPC Systems IRESS Limited IS Investment ISITC ISO J.P. Morgan Jordan & Jordan JP Morgan Investment Management (J.P. Morgan) JSE Limited K & K Global Consulting Ltd (K&KGC) KB Tech KCG Holdings Kotak Securities LCH Clearnet Linedata Liquidnet London Market Systems LSEGroup M&G MACD Macquarie Securities Limited MAE - Mercado Abierto Electronico S.A. MarketAxess Market Prizm Markit M-DAQ MFS Investment Management Mizuho Securities Morgan Stanley Investment Management Morgan Stanley MTS SpA
FIX Trading Community MEMBERS | 67
NASDAQ OMX Newedge Group NICE Actimize Nikko Asset Management Nomura Asset Management Nomura Nordic Growth Market (NGM) Norges Bank Investment Management OCBC Securities Private Ltd. OMERS OMG (Object Management Group) OTAS Technologies Omgeo On Budget and Time Ltd Onix Solutions [OnixS] OpenSettlement GmbH Options Clearing Corporation Options Technology Ltd Orc Group Oslo Bors ASA Pantor Engineering AB Peresys (IRESS) PFSoft Portware Pravega Financial Technologies, Inc. Primary E Trading PropelGrowth Proquote Putnam Investments Quendon Consulting Quod Financial R Shriver Associates Rabobank International Rapid Addition Ltd. Raptor Trading Systems, Inc. RBC Global Asset Management REDI Technologies Robin Associates Royal Bank of Scotland RTS Realtime Systems S&P Capital IQ Real-Time Solutions Santander Global Banking & Markets SASLA (South African Securities Lending Association) Sberbank CIB Shanghai Stock Exchange SIFMA SimCorp Singapore Exchange SIX Swiss Exchange Skandinaviska Enskilda Banken AB smartTradeTechnologies Societe Generale Spotware Systems Spring Securities International AB Squawker Limited Standard Life Investments State Street eExchange Solutions State Street Global Advisors
State Street Technology Zhejiang Sumitomo Mitsui Trust Bank SunGard SWIFT Sycamore Financial Technology Systemware Innovation Corporation (SWI) Taiwan Stock Exchange Tata Consultancy Services Telstra Global The Continuum Partners The LaSalle Technology Group, LLC The Nigerian Stock Exchange The Technancial Company The Vanguard Group Thomson Reuters TickSmith Corp TMX Atrium Tokyo Stock Exchange Tora Trading Services Tradeflow AB TradeHeader, S.L. Tradeweb Trading Technologies TradingScreen Traiana (ICAP) Transaction Network Services, Inc. Transatron Systems trueEX Group LLC Tullett Prebon Group Ltd Turquoise TWIST UBS Investment Bank ULLINK Velocimetrics Versitrac Systems Corporation Volante Technologies Volta Data Centres Warsaw Stock Exchange Wellington Management Company Winterflood Securities XBRL Xetra (Deutsche Bรถrse) Yambina Limited Yieldbroker Zeopard Consulting
New Member FIX Trading Community wishes to welcome the following companies to its growing worldwide membership. For more information, please visit: www.fixtrading.org Activ Financial
www.activfinancial.com
ARQA Technologies www.arqa.ru
Citihub Consulting www.citihub.com
Colt Technology Services www.colt.net
CSC
www.csc.com
Cynopsis Solutions PTE Ltd www.cynopsis-solutions.com
FIXNOX
www.fixnox.com
LIST GROUP S.P.A www.list-group.com
Sycamore Financial Technology www.sycamorefintech.com
Warsaw Stock Exchange www.wse.com.pl
Premier Global Members
Q1 โ ข 2015 | GLOBALTRADING
68 | LAST WORD
My City
Edinburgh By Paul Collins, SVP & Head of EMEA Trading, Franklin Templeton Investments
Best thing about your city? Edinburgh really does have one of the most beautiful cityscapes in the world and the incredible history and natural beauty bring visitors from all over the globe, particularly during the famous Edinburgh Festival. Worst thing about your city? January! Post the New Year celebrations, the weather and short days make it a long month. Getting to work? For a capital city, Edinburgh is actually quite small and getting around is pretty easy. I have the choice of a 10 minute drive or a 30 minute run along the canal… sadly, it is the former. View from your desk? I think I could claim a first here as our
GLOBALTRADING | Q1 • 2015
trading desk looks directly onto an extinct volcano. Known locally as Arthur’s Seat, it sits pretty much in the heart of the city and an easy climb up gives the most incredible views of Edinburgh and beyond. Where to take your clients/brokers for dinner? I love “Ondine” in the city’s old town which specializes in fish while “Angels with Bagpipes” on the Royal Mile prides itself on its locally sourced and seasonal ingredients – and if they have been lucky enough to catch a haggis, you could be in for a treat! And a relaxed spot with friends and family? The Outsider, again in Edinburgh’s old
town, is always lively, or for a change of scene, head down to the area of Leith on the Shorefront for a great selection of very relaxed sea food bistros. Best place to stay when in town? The key is to be central. Edinburgh is an amazing city to walk round with everything close by. G&V on the Royal Mile is a newer addition but for the traditionalists, the Balmoral or the Caledonian at opposite ends of Princes Street are hard to beat. Best tourist spot? Arthur’s Seat offers great views of the city and is a must to shake off those whisky-induced cobwebs but the Royal Mile with Edinburgh Castle at the top and Holyrood Palace at the bottom has to be at the top of every visitor’s agenda.
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