Portfolio Management Profiling - 2015Q3

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Q3 • 2015 • Issue #55

G LO B A LT R A D I N G

Portfolio Management Profiling Joe Sowin Head of Global Equity Trading Highland Capital Management J.P. MORGAN ASSET MANAGEMENT, MATTHEWS ASIA , NATIXIS ASSET MANAGEMENT, FRANKLIN TEMPLETON, PIONEER INVESTMENTS, EMPLOYEES RETIREMENT SYSTEM OF TEXAS ALSO INSIDE :

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GlobalTrading’s Editorial Think Tank Dear Readers,

Bill Hebert Alpha Omega Financial Systems, Inc. Co-Chair, FIX Trading Community Global Membership Services Committee

Oliver Sung Convergex

Carlos Oliveira Brandes Investment Partners

Even before the recent global financial crisis we have long been discussing discovery of, and access to liquidity. Figure in all of the regulatory mandates and related factors along with continuing progressions in technology, and the exercise becomes even more complex. In equities trading, with the traditional centralised markets and focus on automation the changes in liquidity access came early. The result in some regions was increasing market fragmentation, an algorithmic trading arms race and yes, even more regulation to properly manage it all. Depending upon your perspective this could be either positive or negative (or both). On the positive end we know we are not wholly dependent on one or more primary markets to find liquidity, but we also have to weigh in any challenges related to the existence of multiple dark and other pools and managing the enhanced trading complexities.

Aside from equities, more recently the fixed income markets have warranted a great deal of attention related to liquidity, including technology changes affecting a primarily dealer based market. This includes the buy- and sell-sides’ reaction to the risks of trading and holding debt securities in a global economy which continues to stabilise.

This edition of GlobalTrading provides valuable viewpoints on much of the above including buy- and sell-side perspectives on fixed income liquidity access, dark pools in the US and transparency in FX trading. We are also thankful for contributions regarding the Shanghai-Hong Kong Connect Trade initiative, new approaches to multi asset management for hedge funds and some thoughts on the buy side’s taking control of technology and banks’ optimising of trading architecture.

We wish the best to those currently enjoying summer and continually appreciate your interest, support and contributions to GlobalTrading and the FIX Trading Community.

Best Regards, Emma Quinn AB Global

Greg Lee Barclays

Bill Hebert Alpha Omega Financial Systems, Inc. Co-Chair, Global Member Services Committee, FIX Trading Community

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Contents 7

FOCAL POINT

7 Portfolio Management Profiling - Joe Sowin, Highland Capital Management 12 Finding Liquidity In Bond Markets - Luis Carvalho, Credito Agricola Gest 14 Finding Liquidity: Today’s Greatest Challenge - Gianluca Minieri, Pioneer Investments

Fixed Income Liquidity: The Sell-Side Perspective - Liana Seah, UBS

INSIGHT 19 Cyber Security And FIX: A Time For Focus - Marcus Prendergast, ITG - Michael Cooper, BT - Tim Healy, FIX Trading Community - Tom Jordan, Jordan & Jordan

How Prepared Are You? - Lisa Toth, Hatstand

24 Seeing Through The Cloud: A Roundtable Write-Up - Will Haskins, GlobalTrading 27 Buy-Side: Taking Control Of Technology - Ben Jefferys, IRESS 30 The Future Of Securities Processing: A Roundtable Write-Up - Simon Osborne, GlobalTrading

14

47

OPINION

ASIA

35 Expanding The Connect - Shane Neal, Matthews Asia

62 The 12% Rule For Asia’s Closing Auctions - Gary Stone, Bloomberg Trading Solutions - Tom Kingsley, Bloomberg Tradebook - Gabriel Kan, Bloomberg Tradebook

38 A Changing Approach To Multi-Asset Management For Hedge Funds - Phil Chevalier, Clare Witts, ITG 41 A More Efficient Stack - Michel Balter, CameronTec Group

65 One Year On: Hong Kong’s Algo Regulation - George Molina, Franklin Templeton

44 Joining The Dots Of Compliance - Michael Karbouris, NASDAQ

67 Towards Unbundling - Lee Bray, J.P. Morgan Asset Management

FRAGMENTATION

FX

47 Changing Analysis Of FX - Brigitte Le Bris, Natixis Asset Management

Tech Spend Key In Australia And Beyond - Chauncy Stark, NAB

50 Out With The Old, In With The New - Roger McAvoy, 360T Trading Networks EUROPE 54 The Ongoing Role Of Multi-Asset Technology: A Roundtable Write-Up - Peter Waters, GlobalTrading AMERICAS 58 Employees Retirement System Of Texas (ERS) Discuss Managing Their Own Assets - Neil Henze, Michael Clements, Rob Newhall, ERS 60 How Technology Reacts - Oliver Sung, Convergex

70 Liquidity Fragmentation In The US INDUSTRY

72 Company Profiles

74 FIX Trading Community Members My City

76 Dallas

65

HighlightS “Once groupings and methodology are established, the trading desk can analyse this data to detect patterns in portfolio manager tendencies and style factors across order size, sectors, and market capitalisation. In other words, traders should understand portfolio manager tendencies and apply that understanding to nuance the portfolio manager’s orders in the market.” P.7 Joe Sowin, Global Head Of Trading, Highland Capital Management

“FIX isn’t the only element but it is a major common mechanism of exchange and as such it needs to be evaluated and assessed for security. The challenge is that it doesn’t just extend to the edge of a firm, the edge of a network, it extends downstream. So now we’re having a conversation looking at how firms have invested in their information security together with how they secure what they are sending downstream, and what is being accepted coming upstream.” P.19 Marcus Prendergast, CISO, ITG

“With foreigners making up a small portion of the market currently, it is unrealistic to think China will adopt an entirely new trade settlement mechanism. Hopefully, China can find a way to accommodate foreign investors while the market matures.” P.35 Shane Neal, Head Trader, Matthews Asia

“As a fund manager, I can see two major consequences of this shift towards more analytics for our trading desk. It will help us to see which bank is providing us with the best price, and also it will help us to know how good the trading desk is, how quickly they enact our trades, how well they implement them and then how good a broker or bank is so that we can better delegate our flows.” P.47 Brigitte Le Bris, Head of Emerging Markets Debt and Currencies, Natixis Asset Management

“What our process often allows for is the realisation that, if we have dealt with a similar requirement and solution in one market, we can leverage our knowledge and experience towards the efficient and timely development of solutions for other markets. And so, having a global development team allows for some comfort, because there is a good chance that, if something changes in one regulatory zone, it is likely that regulators elsewhere will follow suit.” P.60 Oliver Sung, Managing Director and Head of Electronic Execution, Convergex

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FOCAL POINT | 7

Portfolio Management Profiling With Joe Sowin, Head of Global Equity Trading at Highland Capital Management

More Buy-side Interviews

Q3 • 2015 | GLOBALTRADING

8 | FOCAL POINT

As pioneers and leaders in the asset management space over the past twenty years, we at Highland are committed to a world-class investment platform that drives results for our clients. Highland has had tremendous growth and success in the Alternatives space over the past five years. Highland Alternative Investors, the investment platform for our $6.3B in Liquid Alternative assets, has become the fastest growing segment of our $20.9B AUM. Our trading desk remains integral to the success of our investment platform, and below we outline trading challenges

“We believe implementing intra-day strategy adjustments to expand order duration through the closing auction, thus lowering order participation rate, will provide an ability to participate in intra-day mean reversion, thus combating fund growth and increased order size.” generated by multiple product offerings, and the solutions we believe best address them.

We believe managing the trading process as follows optimises process, time management, and execution: • Organisation of order flow.

• Consideration of how portfolio manager tendencies should influence trading.

• Intra-day trading strategy adjustments.

• Identifying where automation works and where it doesn’t.

Order flow organisation We recommend tagging each order with a reason code prior to order routing. This allows similar orders

GLOBALTRADING | Q3 • 2015

to be grouped and facilitates post trade analysis of execution and portfolio management decisions. We benchmark arrival price orders versus arrival price and over-the-day orders to Interval VWAP. Sub-sets of orders are sub-grouped according to order size relative to average volume, order seasonality, transaction side, and sector. Lastly, we compare the groupings and sub-groupings to the appropriate index performance to assess order momentum. We believe order momentum is a significant driver of trading costs. Individual order momentum and index momentum can be analysed by comparing such things as: • Opening price to arrival price.

• Arrival price to order completion price.

• Completion price to closing price.

Challenges As assets under management, notional dollars traded, and order size increase, our trading desk must continue to evolve to support multiple funds, strategies, and portfolio managers. But, how does a trading desk; • Organise order flow?

• Implement intra-day trading strategy adjustments?

• Differentiate among routine functions and value add activities?

• Identify order types where automation is appropriate?

At Highland Capital Management, we use Transaction Cost Analysis (TCA) to quantify the value add of the execution process, a constantly evolving opportunity to improve the feedback loop from the trading desk back to the portfolio manager. The trading desk can continue to add value in 2015 and beyond by creating, maintaining, and constantly improving order flow organization.

Portfolio manager tendencies Once groupings and methodology are established, the trading desk can analyse this data to detect patterns in portfolio manager tendencies and style factors across order size, sectors, and market capitalisation. In other words, traders should understand portfolio manager tendencies and apply that understanding to nuance the portfolio manager’s orders in the market. Is it preferable to work the order aggressively by crossing

FOCAL POINT | 9

Joe Sowin, Head of Global Equity Trading at Highland Capital Management

Solutions • Maintaining a robust trading “process” that prescribes a defined set of trading rules and that automates order flow only where appropriate.

• Understanding portfolio manager tendencies and viewing trade execution from both a technical and portfolio manager perspective.

• Optimising trading desk personnel.

• Managing execution quality quantitatively.

the spread or work passively over the day? Different paths of execution can be used, in each case guided by information gleaned from TCA, together with historical portfolio manager behavior. It is important to note, however, that the portfolio manager-based approach to trading may not be an effective solution for all trades.

For example, we have found small-cap stocks are less likely to exhibit identifiable patterns as compared to large-cap stocks.

Intra-day adjustments We believe implementing intra-day strategy adjustments to expand order duration through the

Q3 • 2015 | GLOBALTRADING

10 | FOCAL POINT

closing auction, thus lowering order participation rate, will provide an ability to participate in intra-day mean reversion, thus combating fund growth and increased order size. Portfolio managers have a higher level of comfort with and understanding of the trading process following detailed quantitative trading analysis.

“Automation and use of technology can significantly improve resource allocation and personnel requirements.

We envision a desk of traders, trading assistants, technical analysts, risk managers, and portfolio managers engaging in a collaborative process.”

Automation At Highland Capital Management, we embrace technology and view automation as an imperative and competitive advantage. We leverage our internal and external technology providers to conduct execution analysis and quantify data. The resulting analytical data provides insights that can be utilised to enhance trading workflow and thereby lower execution costs.

This data can then be utilised to identify routine trades that can be automated, and those trades where the trading desk can enhance execution through direct involvement.

We view automation in two forms: • Single point automation: Any function that can be fully automated at a single point and does not require modification, i.e. managing all emails with a single rule.

• Multiple point automation: Any function that requires customization and monitoring, i.e. our trading process.

GLOBALTRADING | Q3 • 2015

Key Takeaway • In the context of growth and increasing trading volume, we seek to expand order duration, thus lowering participation rate, allowing trading desk personnel to participate in intra-day mean reversion.

Both forms of automation allow trading desk personnel to focus on value-add functions like sourcing liquidity for outsized orders relative to average volume, derivative trades, market color, and filtering research/ trading ideas.

Looking ahead The end result of these trading solutions is a successful and repeatable trading strategy for all applicable clients. Automation of over-the-day strategies enhances execution and extricates trading desk resources. Automation and use of technology can significantly improve resource allocation and personnel requirements. We envision a desk of traders, trading assistants, technical analysts, risk managers, and portfolio managers engaging in a collaborative process. Technological evolution will be rapid across all asset classes and the trading desk should implement technological enhancements that deliver better execution in a cost effective manner. Accordingly, buy-side desks must be staffed with technologically savvy investment professionals. We believe these trading processes optimise allocation of time and resources while also enhancing execution, and providing a strong basis for repeatability and consistency.

Multi-asset trading and investment management solutions for the world’s financial community. fidessa.com

12 | FOCAL POINT

Finding Liquidity In Bond Markets

Luis Carvalho, Head of Investments, Credito Agricola Gest The trouble with liquidity Sourcing liquidity is becoming more and more challenging every day. Five years ago a 20 million dollar position on a corporate issue would take two hours to get done. Now, it will take two weeks. These days the best answer you can receive when asking for a firm level on a euro government bond is “I can price you 5 million if you give the remaining balance to work”, but in truth, this preferred answer is rare.

“Can I work an order” or “my trader is out of his desk, tell me your size and I’ll get back to you as soon as they are back” are the most common responses I hear when I ask for liquidity. While we wait for the trader to come back, we just watch the price on screens being adjusted against us in 15-20 cent intervals before the trader arrives at their desk and replies with a price.

Since the global financial crisis liquidity has been severely impacted by regulation, which diminished a bank’s ability to maintain inventory. Also under the current low interest rate environment, combined with the positive impact of QE on credit markets not to mention low volatility, volumes have decreased. As a consequence, price transparency on the corporate bond market has also decreased. It is easy to find examples of issuers that saw their CDS spreads increase because of news that affected their business sectors, but the cash bonds of those issuers continued to grind tighter just because there were no sellers of bonds.

Regulation is forcing banks away from acting as a principal to acting much more as agency brokers, as their balance sheet size is severely reduced. Smaller broker balance

GLOBALTRADING | Q3 • 2015

sheets transfers the execution risk from the dealers to the investor. This is pushing the buy-side increasingly into reducing our limits per issuer to avoid being caught with an exposure size that will take too long to reduce.

Where to look?

As liquidity is becoming more fragmented, execution complexity moves in step. The challenge is not only where to find liquidity but also to print at the best execution price as liquidity fragmentation increases the risk of slippage against the price on the screen.

Finding liquidity means taking more time mining the list of axes we receive every day and checking the reliability of those published axes. Again, it is very common to call someone that published an axe on a specific bond and when we reveal the amount we need to trade, the answer is “oh my apologies, but my trader got hit a minute ago on that bond, they’re not axed anymore”. There goes the price on my screens.

Trying to achieve best execution price in this environment is difficult, even though we analyse all the data of previous trades. We are yet to develop formal transaction cost analysis as it is rather empirical, but by looking closely at previous trades we get a close idea who are the best counterparties for specific bonds or issuers. Of course, for certain issues, liquidity is more fragmented than others, and in those cases ideally the analyst has to find a similar risk by choosing another issue or issuer that has more liquidity.

Electronic trading platforms provide important help by incentivising dealers to publish inventories with

FOCAL POINT | 13

develop this method but trading volumes remain rather small. However, all-to-all RFQ protocols that gather interest from dealers and investors would increase liquidity. Trading platforms featuring historical execution details are increasing pricing transparency.

A few investors claim that the behavioural change should be broader than just the buy-side. Fixed income markets are very fragmented in terms of the number of issues by nature. Those who seek behavioural change argue that issuance should be more standardised, which would allow for a reduction of the number of issues, hopefully increasing liquidity.

Luis Carvalho, Head of Investments, Credito Agricola Gest

“As liquidity is becoming more fragmented, execution complexity moves in step. The challenge is not only where to find liquidity but also to print at the best execution price as liquidity fragmentation increases the risk of slippage against the price on the screen.� firm prices that can be traded on a click-to-trade basis rather than on the traditional RFQ system. Electronic platforms have been developing information for trading cost analysis, which will not only be needed to meet MIFID II requirements but can also be used by the execution desk on a pre-trade basis. Last Deal information showing interdealer trades for a given time period is also a valuable indicator.

New measures, technologies Technology is evolving fast, but electronic trading platforms still have a long way to go. For corporate bonds in particular, market fragmentation makes it very difficult to replace or reduce the interaction between execution and analysis, as per the example given above when an issue is found to be illiquid and a substitute has to be found. The technology to underpin an increase in electronic trading exists and there are already a number of different venues.

The question, rather, is how to convince dealers to move towards a more transparent form of showing liquidity and potentially compromise firm pricing.

The aim of the buy-side is to analyse and implement investment ideas that will potentially result in positive returns for their clients or institutions. If those ideas include less liquid assets the premium demanded for holding those assets will be higher, which has a cost effect on issuers. The buy-side can, for instance, lead efforts that would result in an increase in liquidity by sharing more of their execution intentions on the available venues, be it on an auction platform or an anonymous RFQ, but the responsibility should be on those who charge fees for new issuance and benefit from a bid/offer spread.

Issuers should also be persuaded towards a more standardised market. Then they would also not be penalised in times where the liquidity rarefaction can limit their ability to raise new financing on markets.

Buy-side on all-to-all Buy-side investors still seem a little reluctant in adopting all-to-all trading venues. There have been efforts to

Q3 • 2015 | GLOBALTRADING

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14 | FOCAL POINT

Finding Liquidity: Today’s Greatest Challenge Gianluca Minieri, Global Head of Trading, Pioneer Investments

If there is one overarching theme today in debates around trading it is certainly the progressive and consistent erosion of secondary markets liquidity over the last few years. I do not think we exaggerate if we say that finding liquidity has become today the biggest challenge on trading desks. Especially for a large asset manager like us, it is becoming increasingly difficult to deal in large sizes unless a particular bank is “axed”. Markets have become very shallow and prices and sizes shown on the screens can no longer be taken as “firm”. The consequence is that moving large amounts of bonds without impacting the spread can prove very challenging. Traders have to be much more strategic than before and carry out a sophisticated activity of market intelligence and price discovery before they decide how, where and when to trade.

The European bond market has dramatically changed over the last few years mainly due to a tighter regulatory environment which enforced stricter capital requirements for market makers. This makes it extremely expensive to hold bonds inventory and has led to a severe reduction of leverage. Broker-dealers have responded by changing their models: the larger bulge bracket firms continue to commit capital but

GLOBALTRADING | Q3 • 2015

are much more cautious about the positions they take and for how long they keep them on their books.

The smaller firms shifted more towards working client orders on an agency basis rather than making markets, progressively stepping away from principal trading. Overall, the level of inventory held by the sell-side has dramatically reduced. Although smaller inventories have been to some extent offset by an increase in inventory velocity, we think that the old market-making model is definitely broken and that banks will inevitably become agency brokers.

On the contrary, the buy-side has been consistently growing over the last few years. Buy-side firms are believed to hold in excess of 90% of bonds inventory in issuance today. This means that when we want to buy or sell a bond today very often the main challenge is to find another buy-side firm on the other side and a broker can that facilitate the trade between us. The problem that we need to address is therefore not who is going to intermediate the bond but what initiatives can be taken to defrost that significant percent of bonds inventory currently held by the buy-side. We think that unlocking buy-side bond inventories can be done

FOCAL POINT | 15

together. I do not believe in a bond market that is completely disintermediated. Eliminating the sell-side tout-court is not a solution, because bond markets need some level of intermediation. Also, it is wrong to assume that bringing buy-side together onto the same venues will automatically unlock that frozen liquidity, for the simple reason that large asset managers do not want to share or disclose their trading intention to their competitors, especially on their larger positions. So the problem here is not to bring us around the same table but rather how to ensure a more efficient dissemination of the information.

How do you create a method that gives the right information to the right people at the right time?

Gianluca Minieri, Global Head of Trading, Pioneer Investments through a more efficient dissemination of pretrade information between market participants.

So while we understand that electronic venues will not be a substitute for liquidity, especially on the less liquid side of the market, it is very much the future. In such a fragmented environment, we think that electronic venues should look at changing their objective and elect aggregation of liquidity as the most important service they can offer. One of the hot topics is the concept of all-to-all trading, i.e. not limiting the trading flow between buy-side and sellside firms but to have a more open, all-to-all market.

Given the above, many electronic venues and vendors have sniffed out the business opportunity and have come to the market with new ideas on how to find alternative sources of liquidity in such a challenging environment. Today there are probably in excess of 30 new fixed income trading initiatives being launched to the market, all with the same objective of sourcing liquidity. In Pioneer we are in favour of such initiatives and always try to be engaged as early as possible where we feel that the right business model is proposed. In fact, while all-to-all platform and buyside-to-buy-side trading might be a potential solution, it is important to remember that the objective is to unlock and supply liquidity, not just bringing people

Shared initiatives will be a must in coming years because the cost of the necessary infrastructure to compete in such a fragmented market is too high to be borne by one single company. So everyone, including ourselves, are now looking at shared architecture or utility to reduce the cost and develop a new way of connecting between the sell-and buy-side.

Pioneer approach We continue to be very proactive with vendors, peers and the sell-side on every proposal that is aimed at enhancing quality of execution by standardising connectivity through multi-participant networks.

We believe that the buy-side should continue to have an active role in this space and together with all market participants should push for an industry-led solution. This includes the sell-side and exchanges, which so far have not always had a proactive approach in addressing these issues.

However, we cannot wait until the perfect solution is put in place. That is why one year ago we decided to centralise all our trading on a common platform by deploying a Global Trading Model. The concept behind this model is the capability to route orders to regional desks and execute them in local time zones leveraging local market expertise at no additional cost. This model will increase opportunities for synergies, enhance our ability to support growing demand for global products and allow for superior price discovery and market intelligence, leading eventually to less alpha slippage and better performances for our clients. It will also result in a quicker decision-making and improved execution, letting the firm react faster to market changes, which may require a change in the trading strategy.

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16 | FOCAL POINT

Regulation As said above, tighter regulations around the world have profoundly changed the financial markets landscape over the last few years. While in many cases new regulations have contributed to bringing more clarity, in many other cases they created more ambiguity and uncertainty. Usually the normal approach provides for evidence and argument being discussed among various parties through lobbying.

This is done with the knowledge that the outcome might not be optimal but the underlying objective is to make financial markets more competitive and more efficient. Instead, we observed the difference in the consultation and engagement process between Europe and US. In US there seems to be an open and ongoing dialogue between regulators and market participants to ensure that the regulations achieve their objectives and do not produce unintended consequences. In Europe, this has not been the case. We have tried to be as proactive as possible during the last regulatory reform approval process but the outcome clearly shows that hardly any of the feedback given by the industry to policy-makers has been taken on board.

Take transparency for example, which soon became a philosophical topic for policy-makers that worked under the assumption that transparency and liquidity are the same thing. The reality is that especially for large sizes, transparency can be the enemy of liquidity. If information is made public too early, you will have the market trading against whoever is trying to unwind the risk and that will eventually result in a worse execution for the end investor since it will force market makers to price under a worst case scenario. We are in favour of regulation but we hope that going forward market supervisors will support a greater interaction with all market players. Regulators needs to get more involved in the ongoing discussions with all parties to create and maintain a trading environment in which best practise is encouraged through greater transparency, comparability and choice between service providers.

Future thoughts The hot topic nowadays seems to be the so-called equitisation of the fixed income market. If equitisation of the fixed income market means forcing full transparency, irrespective of the asset class traded, liquidity, the type of order or the market conditions, then I think it is wrong. It will deteriorate rather than

GLOBALTRADING | Q3 • 2015

“The reality is that especially for large sizes, transparency can be the enemy of liquidity. If information is made public too early, you will have the market trading against whoever is trying to unwind the risk and that will eventually result in a worse execution for the end investor...... � improving the price formation process. We remain convinced that transparency, especially in fixed income, is strictly correlated with liquidity and would not work for all markets. We are in favour of the development of electronic books for certain very liquid bonds where the platform could operate in a similar fashion to an equities-style exchange driven order book which would take the noise out of the market and increase transparency. In the more illiquid markets these challenges are harder to solve through an electronic platform, because all you need is real liquidity. We feel that the extension of pre-trade transparency without a proper calibration to the less liquid part of the market could have a number of undesirable effects.

As things stand, we do not feel that the bond market is ready to handle a sharp correction. The combination of a few large asset managers holding the majority of inventory, the banks less able to absorb positions, and that we would all be on the same side of the market were there to be a problem in secondary liquidity is probably the worst possible mix.

FOCAL POINT | 17

Fixed Income Liquidity:

The Sell-Side Perspective With Liana Seah, UBS’s APAC Head of e-Fixed Income Sales

Two thirds of 116 institutional investors across Asia surveyed by UBS on secondary liquidity in corporate bond markets were dissatisfied with available levels of secondary market liquidity. The survey, conducted in January this year, showed that a decline in liquidity had promoted a shift in asset allocation away from high-yield bonds towards investment grade and sovereigns, where credit quality is superior and issue sizes tend to be larger. In addition, we also saw a shift in client strategies to a more long-term, less trading-orientated strategy.

Role of the sell-side The role of the sell-side is twofold: first, as a principal which will manage the risk of the inventory (RFQ-driven model); and second, as a facilitator to identify interest among its client universe (order-driven model). Clients still benefit from the bank’s holistic service of content and execution. With the deterioration in secondary market liquidity, the RFQ-driven model is no longer the default execution model, especially with smaller issue-sizes. We can expect the current constraints affecting sell side’s ability to provide liquidity to remain.

The more pertinent question is: Does the buyside have the capacity and/or the will to become liquidity providers when liquidity is scarce?

Our survey showed that clients want an easy-touse and transparent client-order facilitation system, and that they are also amenable to us accessing different liquidity pools across time zones and regions. A clear and transparent mark-up schedule shows clients both that their orders are not being treated as free options, and that the reach of our electronic platform is in their best interests.

This shift in buy-side mentality towards liquidity contribution will be a crucial point in the success of the agency model.

New venues There is a race to providing all-to-all execution venue, looking to build up liquidity provision from buy-side firms. While an all-to-all venue is the Holy Grail, fragmentation in the fixed income market can be expected to prevail for the foreseeable future. We

Liana Seah, UBS’s APAC Head of e-Fixed Income Sales

“Our survey showed that clients want an easy-to-use and transparent client-order facilitation system, and that they are also amenable to us accessing different liquidity pools across time zones and regions.” believe that no one single platform will be dominant, and we expect to see a more balanced split between RFQ model and order-driven model emerging.

In the RFQ model, different electronic platforms dominate particular markets, while in domestic markets there are electronic platforms for local government bonds. Similarly, using the agency model, the buy-side now requires access to all relevant venues without incurring operational or other technology-related overheads. There will also be requirements for sell-side firms to route the client orders to the best venue, both on voice and electronically. A concept known as smart-order routing, this is widely used in exchange-traded markets.

The market needs many sources of liquidity, such as auction venues and crossing venues. These innovations are necessary to ensure there is enough liquidity during times of distress and dislocation.

UBS clients are served by UBS Bond Port (previously UBS PIN-FI), a Matched Principle Trading venue where clients can access various sources of liquidity: from other UBS clients, other third-party venues, as well as from UBS.

Q3 • 2015 | GLOBALTRADING

INSIGHT | 19

Cyber Security And FIX: A Time For Focus

A panel discussion, with Marcus Prendergast, CISO, ITG; Michael Cooper, CTO Radianz, BT; Tim Healy, Global Marketing and Communications, FIX Trading Community; Tom Jordan, President, Jordan & Jordan.

Why cyber security, why now?

Michael: I’ll just focus on three things very quickly. I think one point I’d make is that as a group, we have focused on security in the context of the FIX protocol for some time, it’s not necessarily something that is new. It is just the latest iteration with regard to considering security in a FIX protocol context. Two, I think the landscape and the attention on security makes it a prudent time to review the security of the protocol, even in the absence of any direct threat. And I think increasingly, all of us have been touched by security or have to consider it in the context to which we operate, especially as time goes on.

Marcus: Just to build on that, I’d say we’re focusing on being proactive and trying to stay ahead of any new potential major attacks on the markets.

Why embed this process within FIX and the FIX Trading Community?

Marcus: The firms themselves have been focusing on their own information security and investing in that very heavily over the past 5-7 years, and we are realising that we have a couple of points of commonality. FIX isn’t the only element but it is a major common mechanism of exchange and as such it needs to be evaluated and assessed for security.

The challenge is that it doesn’t just extend to the edge of a firm, the edge of a network, it extends downstream. So now we’re having a conversation looking at how firms have invested in their information security together with how they secure what they are sending downstream, and what is being accepted coming upstream. FIX seems to be a good common point. FIX is the common core protocol used

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20 | INSIGHT

Michael Cooper, CTO Radianz, BT

Marcus Prendergast, CISO, ITG

across the industry and now we’re trying to have a conversation on how we secure that as a group.

proactive because all of us are so dependent upon the use of FIX.

Tom: I think the reason why FIX is important is because it is the language of trading. The industry cannot run without FIX, and while it used to be principally for equities, FIX is now applicable across

Michael: As an additional point, this is absolutely not the only place to look at security. We have to examine security in a holistic manner. However, the FIX Trading Community is responsible for the protocol. It has a responsibility to look at security, and by building this working group we are taking that responsibility seriously. It’s highly appropriate and the right thing to do. If you look across the industry, this is one of a number of times to review how we operate as an industry in the context of changing environmental backgrounds.

“This is a global issue and the ability of the FIX Trading Community to respond on a global basis is a strong and compelling point.” the entire trading process and across multiple asset classes. We do a lot of work in post-trade, we use FIX going into the clearance and settlement process and those roles are expanding all the time. FIX is so integral to the capital markets that we have to be

GLOBALTRADING | Q3 • 2015

This is a global issue and the ability of the FIX Trading Community to respond on a global basis is a strong and compelling point. There is definitely an invitation for everyone to be engaged in this initiative. It does affect everyone and we will welcome everyone’s input into it.

Tim: Within FIX we do have the entire industry represented. We’ve got vendors, brokers of all types and sizes, exchanges, the buy-side etc. We have constituents of the whole investment process involved within the membership and getting involved in a working group is the next stage to that.

INSIGHT | 21

Tom Jordan, President, Jordan & Jordan

Tim Healy, Global Marketing and Communications, FIX Trading Community

Marcus: I think it shows our commitment long-term to the protocol. It’s amazing that over the past 10 years we haven’t had something private replace it.

That just shows the commitment of the various members to keeping the protocol not just up to date and relevant but also to address these new concerns as they come in, and as these security concerns evolve to ensure that we’re keeping ahead of it as best as we can.

“The first thing is to assess the concern as a group, prioritise what can be addressed and then we will develop a couple of items that are going to come out in the short term, including an updated white paper.”

Immediate goals of the group?

Marcus: The first thing is to assess the concern as a group, prioritise what can be addressed and then we will develop a couple of items that are going to come out in the short term, including an updated white paper. We’ve had a white paper on FIX security that’s been out there since 2008, which is something I want to focus on. We need to update that for the community and look at what can be done next, over the coming six months, one year, and five year horizons to better secure FIX for the industry.

Michael: One of our goals is to collaborate and share knowledge in terms of a free and defined best practice. A key part of the general response to areas

like a cyber security threat is how we share information amongst the industry.

The element of sharing is a thread that runs through pretty much all FIX working groups. One of the reasons that I think cyber security is a growing focus for the industry is that there is an ever expanding

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22 | INSIGHT

universe of hacking tools; the ability to leverage technologies like cloud and collaboration makes it easier to find and exploit vulnerabilities. One part of this group is that we’re responding to that by seeking to collaborate on our side of the issue, and FIX has the concept of the working group which has set ways and processes of sharing that vital information.

To what extent is this always going to be fire fighting?

Marcus: Much of the battle is simply about making sure that FIX isn’t a significant area of vulnerability.

While we have spent money individually as firms protecting our infrastructure, now we’re working to make sure that FIX implementations are protected industry-wide.

Michael: The threat is a constant and we’ve clearly been looking at this problem, and increasing our awareness for some considerable time. I suspect we will always be conscious of it. Some of this discussion has to evolve around how we design the protocol to minimise if not totally mitigate the risk, and as Marcus says, to make sure we are not an area of vulnerabiity. But it’s almost definitely not going away and I think this awareness accounts for a lot of the activity and action across the region with regards to what the regulators are looking at. And that regulatory conversation is definitely developing.

Marcus: I’ve been involved with the SEC’s ongoing cyber security review, and they’re definitely starting to have a deep and knowledgeable focus on cyber security. They’re reaching out to their member firms to have their cyber security experts and representatives speak up. I certainly expect, as we’ve seen from comparable organisations in Canada and Europe, that more prescriptive cyber security regulation will emerge out of the various global regulators. And whether that will be specific to FIX or not, it is certainly going to touch the protocol and be applicable to it.

Michael: I think if you look at the Bank of England, which takes its prudential responsibilities very seriously, it has looked at this in a very deep manner. I have definitely noticed an uptick in regulatory interest in markets such as Hong Kong and Singapore. All the regulators have a prudential responsibility, and this a prudential concern. They’re all seeking to understand the extent of the problem, which goes back to just

GLOBALTRADING | Q3 • 2015

how do we as an industry respond. My personal view is that the regulators will respond with at least some guidance. And again, there is the collaborative element here. The regulators are consulting and engaging people across the industry.

Tom: One key area is figuring out what should be included in the regulation but it is definitely a good sign that regulators are starting to ask questions on

“I certainly expect, as we’ve seen from comparable organisations in Canada and Europe, that more prescriptive cyber security regulation will emerge out of the various global regulators.” security of their member firms. While there is clearly a responsibility to protect your client’s information, they can start asking questions about how you protect, who can access it, how is it shared etc, and we need to be able to answer those questions when the regulator asks. Europe is probably further ahead of the US in terms of the formulation of that, but the point is the process has already started within firms.

The business reasons for security protection are ahead of the regulation at this point. In some areas, you’ll have the regulators driving the behaviour. In this case, it’s the business reasons that are driving the security work being undertaken that have demanded everyone’s attention.

INSIGHT | 23

How Prepared Are You? With Lisa Toth, Head of US Risk, Compliance and Regulation, Hatstand

There has been a lot in the press over the last year on not IF you will experience a cyber-related event but WHEN. With this in mind, every firm should have a clear understanding of their cybersecurity preparedness not only to external threats, but also to internal ones. A sound cybersecurity program should cover governance, asset definition, communication protocols, incident management, employee training, resource assignment and accountability, current threat awareness (internal and external), control deployment and disaster recovery/business continuity.

Early in January 2015 the Securities and Exchange Commission (SEC) released guidance on their expectations for cybersecurity programs for registered advisors and funds, identifying what they would be looking at during their 2015 exam reviews.

In May, the SEC further recommended that investment companies and advisers consider assessments of their cybersecurity controls, strategy and procedures. This theme from the regulators has been picked up globally, encouraging firms to take a more proactive view of their risks; benchmarking where they stand today and put in place a plan to close any identified gaps in their current cyber defence practices. This benchmarking process should not be a one-off exercise but rather a continuous, periodic process, to show key stakeholders that each firm is taking their cybersecurity risk management responsibilities seriously and being able to evidence this through comparing their progress against their baseline assessment.

In terms of resources, there are a few assessment tools and frameworks that can assist in this process, as well as consulting firms that are well versed in running these assessments. The building blocks commonly used by the financial industry are provided by the National Institute of Standards and Technology (NIST) Cybersecurity Framework, the Council on Cybersecurity (CCS) Critical Security Controls and, just released in June, the Federal Financial Institutions Examination Council (FFIEC)

Lisa Toth, Head of US Risk, Compliance and Regulation, Hatstand

“With this in mind, every firm should have a clear understanding of their cybersecurity preparedness not only to external threats, but also to internal ones.�

Cybersecurity Assessment model.

The value of the assessments is to give management a very clear picture of the key assets that need to be protected as well as identifying where the firm is most vulnerable in regard to these same assets. Firms can then use this knowledge to plan and make provision for the right balance of defensive controls versus the cost of implementation, supplemented by policies and procedures.

Q3 • 2015 | GLOBALTRADING

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24 | INSIGHT

Seeing through the Cloud: A Roundtable Write-Up Cloud Services Need Education and Articulation to Take Root in Asian Trading

By Will Haskins, GlobalTrading

Uncertainties over cloud-based services persist in financial services, and particularly in the trading world. Migrating trading architecture to the cloud has been hindered by regulatory limitations and the lack of a compelling business case.

However, best practice is emerging. As the industry gathers around best practices and establishes uniformity in cloud technology applications, regulatory approval should become easier.

A Cloud by Any Other Name 30 senior leaders from trading and technology backgrounds attended the roundtable discussion in Hong Kong at the China Club, hosted by GlobalTrading. The discussion began with charting the industry’s current usage of cloud services.

“Cloud is a dirty word,” mused Patrick Shum, Head of APAC Trading Systems for Fidelity Worldwide Investment. “Many banks and asset managers are going through a market exercise to understand what applications and cloud technologies we are already using, “ Shum added.

GLOBALTRADING | Q3 • 2015

“We have always used clouds in the electronic trading world when we used private networks. The issue is when we discuss public networks,” explained Jim Timmins, COO of FIXFlyer.

“In years past, financial technology firms built proprietary data centers and maintained all of their data locally. However, many firms now comfortably use secure third-party data centers with managed infrastructure and software for corporate business operations and it is now ripe for FIX and electronic trading ” Timmins noted.

The understanding of what the cloud is and what it can do is increasingly mature, according to Gareth Bridges Senior Manager of Enterprise for Equinix.

“People are starting to consider the implications of data sovereignty, regulatory compliance and leveraging other cloud applications.”

One firm actively considering such applications is Macquarie. “We have been looking to drive usage of the cloud across a spectrum of businesses, but every business’ appetite for cloud applications is different

INSIGHT | 25

Gareth Bridges, Senior Manager of Enterprise Markets, Asia Pacific, Equinix

Stacy Baird, Chairman of the Asia Cloud Computing Association (ACCA) Data Governance Committee

depending on the need they are trying to solve,” commented Ashok Kalyanswamy, Global Head of Equities at Macquarie. “The number one differentiator of a cloud offering is utility billing and using Infrastructure-as-a-Service, because traditionally technology costs are locked in capital expenditure,” observed Kalyanswamy.

where that was done; but this worried regulated business, ” suggested Stacy Baird, Chairman of the Asia Cloud Computing Association (ACCA) Data Governance Committee.

“Moving to the cloud will not be about picking up what we have today and dropping it into another facility.”

“It is easier to make the business case to regulators for using the cloud for storage and compute in testing environments, but a production environment in a public cloud faces too many security hurdles at this time,“ Kalyanswamy said.

Regulation and Security “The reality is cloud computing is saddled with it’s initial positioning. Described as an amorphous, ‘puffy white cloud’ where data was held without individuals and companies needing to worry about how and

An ACCA report examining 14 Asian countries found the cloud services provider needs to work with the client to get through the regulatory process. “There has to be a better understanding of the regulatory environment by the cloud-services provider as well as the kinds of services that will fit that regulatory compliance framework,” Baird said.

The report, Asia’s Financial Services: Ready for the Cloud – A Report on FSI Regulations Impacting Cloud in Asia-Pacific Markets, scored jurisdictions specifically on their approach to cloud for financial and insurance applications.

From a security perspective, internal technology systems may also have greater risks than third-party systems, Timmins said. “Cloud-services providers can do a lot to help their clients with maintenance and reporting of security updates to improve regulatory and compliance auditing.”

“In the past two years, regulators have become more interested to learn how cloud computing can work for their regulated community because they heard of the business benefits, but did not understand how it

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26 | INSIGHT

Ashok Kalyanswamy, Global Head of Equities and Futures Technology at Macquarie

Patrick Shum, Head of APAC Trading Systems for Fidelity Worldwide Investment

could fit into their compliance and security regimes,” Baird said.

Identifying Best Practice FIX connectivity which has become a successful case study for trading architecture in the cloud. “Whereas trading desks used to own the physical connections to their various brokers and counterparties, reliable FIX connectivity via a managed cloud service allows traders to focus resources without dedicating time and personnel to managing a wired FIX infrastructure,“ Timmins explained.

Latency-sensitive systems, however, do not fit that model. “If it’s latency-sensitive, for example marketmaking, activity will still be on a traditional compute platform until the performance in virtual environments is suitable” Kalyanswamy said.

Understanding not only which business processes can be moved to the cloud, but which parts of the business process can be moved, is critical for ensuring data compliance. “Moving to the cloud will not be about picking up what we have today and dropping it into another facility, but looking at ways to enhance their current capabilities through close access to key providers, whether platform, data or network providers,” Bridges suggested.

A better understanding of the location of customer data should enable more informed decisions about

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Jim Timmins, COO of FIXFlyer

what to keep on the cloud as security improves. “As a customer, I’m pleased to see the providers investing in cloud-computing,” Shum opined. “When we have business problems, cloud-services should provide additional tools we can deploy to solve them.”

INSIGHT | 27

Buy-side: Taking Control Of Technology Ben Jefferys, Head of Trading Solutions, IRESS, examines increasing ownership of technology and trading on the buy-side.

A changing dynamic in equities trading is the increasing prevalence of buy-sides taking more control of their order flow. This is largely in response to the need to trade global markets more directly.

as they did in the past. So sell-side offerings have become more commoditised and the buy-side is taking more control of order routing and decisions about where and when to trade.

This trend is clear for smaller sized orders and orders involving algorithms where liquidity is readily available.

(The exception is block-sized trades. Brokers still have active block and facilitation desks. Block-sized crossing pools such as Liquidnet and ITG continue to innovate by providing direct services to the buy-side.)

Trading is changing and both sides are adapting. New regulations, for example the proposed Financial Conduct Authority UK (FCA) changes regarding unbundling will further drive this trend as dealing commissions can no longer include payment for broker research.

In the past sell-side brokers have offered value-added services to differentiate themselves such as smart order routing (SOR) and transactional cost analysis (TCA). But buy-sides now don’t value these as much

Connections on a global scale A related theme sees geography and time zone being less of a barrier when it comes to facilitating trading where technology becomes the enabler for the

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28 | INSIGHT

“To support the functional shift from the sell- to the buy-side, the industry is trying to avoid the limitations of the past, such as an inadequate ability to change their systems to react and adapt.�

Ben Jefferys, Head of Trading Solutions, IRESS

buy- and sell-side. The challenge now is how to connect quickly and efficiently whilst maintaining a sufficient level of availability and redundancy.

For some regions, such as Europe, trading cross-border or internationally has always been the norm. This is not the case in other regions where, for various reasons, technology as a solution to this challenge has been less widely adopted.

This is despite a growing number of options for both buy-side and sell-side to pick and choose the technology that best suits them and break away from some of the constraints of the past.

An example is Australia where the superannuation or pension industry invests substantial amounts each year into the domestic equities market. Because of the

GLOBALTRADING | Q3 • 2015

ever-increasing superannuation pool in Australia, fund managers are increasingly looking outside the domestic equities market to ensure sustainable returns. The superannuation pool in Australia is currently $1.8 trillion AUD and is forecast to quadruple to $7.6 trillion by 2033. One of the ways that fund managers are seeking alpha outside of the domestic market is through trading more international cash equities. In the past, trading internationally was expensive and those fund managers with an international mandate often outsourced their international trading to a counterparty overseas.

Access to international markets is now more viable because the capital and service cost of technology is lower and the need more pressing.

Technology has also changed the landscape for the sell-side brokers. In particular, technology has made offering services in other markets easier because of greater technology options.

Capacity constraints To support the functional shift from the sell- to the buy-side, the industry is trying to avoid the limitations of the past, such as an inadequate ability to change their systems to react and adapt.

Importantly, more robust and scalable solutions are being deployed as electronic trading and connectivity

INSIGHT | 29

matures. The industry has also become much more cost conscious, helping all brokers to remain competitive, reactive and scalable. As an example, bulge-bracket brokers are relying less on in-house trading technology, freeing them from huge development and maintenance costs. This allows the buy-side in particular to outsource commoditised components and focus their efforts on parts of the stack that differentiate them.

In addition, managing connectivity is a major consideration for buy- and sell-sides. It’s critical to be able to access and on-board clients from across the globe in an efficient manner while minimising costs.

Only the biggest players in the market have the scale to warrant their own international connectivity networks and dedicated, leased lines remain eyewateringly expensive when connecting globally.

Finding the right blend of connectivity, service and support that fits the business is essential. Similarly shared infrastructure service providers that deliver cheaper access but, like a dedicated line, require each end of the connection to manage what goes through it.

Then there are hub technologies and networks that allow both buy- and sell-sides to access all counterparties via a single connection. These offerings provide global reach and cost-effectiveness and are fully managed.

This is not to say the era of in-house trading technology and self-managed connectivity networks is over as there will always be niches to fulfil. But for many a different model is required to succeed in today’s market.

‘Flexibility’ as a service All too often the buy- or sell-side finds it difficult to change due to the huge costs of new technology. This is true for proprietary technology and, vendor-based solutions that come with lengthy and expensive contracts. Outsourcing to vendors can bring transparency with regards to costs. But this rarely relieves the buy- or sell-side from the associated costs of deploying and maintaining an outsourced solution.

With a higher need for flexibility vendors need to offer products and, importantly, their service in a different way.

“All too often the buy- or sell-side finds it difficult to change due to the huge costs of new technology.

This is true for proprietary technology and, vendorbased solutions that come with lengthy and expensive contracts.” connectivity services is becoming increasingly popular.

This involves a fully managed service that incorporates software and connectivity.

The result is more flexibility for the buy- and sell-sides, which are no longer limited by previous technology choices. The key is how to efficiently and effectively integrate all the components in the system.

Nevertheless, the outcome is an ability to adopt and scale more quickly and cheaply.

Overall, unlocking new opportunities is driving change for the buy- and sell-sides. Accessibility and connectivity become the keys to success with buysides taking more control of their order flow and sell-sides reaching out to find new clients in new regions.

Cost efficient, flexible and scalable connectivity that is reliable has become a key factor in facilitating business across the globe and, as a trend, shows no sign of slowing down.

Software as a Service (SaaS) – think of it as pay-asyou-go or pay for what you use – for software and

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30 | INSIGHT

The Future Of Securities Processing: A Roundtable Write-Up Simon Osborne, GlobalTrading, writes on our latest roundtable examining ongoing evolution in post-trade processing

On 18 June 2015, industry participants gathered in Hong Kong to give their views on the state of securities processing in Asia. Having diagnosed a number of the issues that characterise the industry locally, they also looked forwards to conjecture about possible future changes.

Comparatively, there has been much heavier investment in Asian front offices than in the middle and back offices.

Revenues in Asia are decreasing but regulatory and operational costs are simultaneously increasing.

The problems of Asian securities processing The infrastructure in Asian markets, individual exchanges and central banks, drags the industry backwards. That is happening at the same time as there are demands to process ever greater volumes of trades.

At present, it seems impossible that in Asia a joint clearing platform between countries will evolve.

Participants have to work with the current mentality between competing and accepting that there will always be a core equities platform (or more than one) in each Asian country.

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A straightforward overlay of European or US systems in Asia seems inconceivable. There are too many discrete markets and national interests in the continent.

Problems come from disjointed services that are found not to be collectively efficient. That state of affairs has meant that multiple back offices have become, as vividly described by one panellist, as a ‘big bowl of spaghetti’. How to eliminate such log jams via good management and new technology is the question to be solved, but not one that lends itself to a straightforward answer.

The costs of development With the Shanghai-Hong Kong Stock Connect market participants witnessed how expensive it was to build new systems. Stock Connect’s problem was not only about its cost but the short time frame required for implementation which led to pressure on IT and operations departments.

The expenditure budgets to implement the Stock Connect systems had not appeared in firms’

INSIGHT | 31

Philip Foo,

General Manager, Operations, Operations & Technology Group, China Citic Bank International Limited

“

Great panel discussion with very active interactions from everyone around the table. Moderator did a fantastic job in engaging the participants with topics and questions that are clearly the passion of many.

Process efficiencies and controls, big data, disruptive technology and its potential to impact a traditional business. These are clearly the current theme many of us are facing. Whether is it buy or sell side, collaboration is demonstrated in an unprecedented way, coming together to make it work! Likewise, business and support management of any firm will have to be aligned and in agreement as to when, how, and where to spend the investment dollars to tackle these priorities and agree to the timeline of deliveries. By coming together within the firm and as an industry, we will break new grounds to meet these challenges ahead. Thank you to GlobalTrading and Citi for facilitating this, Serisys for sponsoring this event and many more opportunities in the future!

”

development plans, as the commencement of the project began in mid-year.

At least with the Stock Connect, the programme did offer, and ultimately delivered, the promise of significant future revenue, which after a shaky start did start to flow through as China markets flourished.

There was therefore a profit incentive to invest in the processes and systems that provided the backbone of a firm’s service offering.

What though if there was no obvious pay-off? If it was a mandatory regulatory change, such as FATCA, with no profitable implications, would the industry’s response have been as vigorous and enthusiastic?

It is hard to explain to accountants and head office CFOs in the financial industry that delivery of projects has to be completed intra-financial year. They, in response, pose the question why, for example, does a simple, straightforward fee change need so much work and expenditure. It is up to the back office to justify internally why there are additional hidden complexities.

systems, developers sometimes have had no Asian experience. Decisions about systems development are being made elsewhere, with Asia being treated merely as an afterthought.

The panel observed that Hong Kong is, in terms of vendors, geared towards funds rather than to the sell-side. Furthermore, if one buys off-the-shelf

The end of the ‘one-stop-shop’ The days of all-singing, all-dancing investment banks are numbered according to the panel. Processing is either a

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32 | INSIGHT

James O’Sullivan,

Head - Client Development Banks and Broker Dealers, BNP Paribas Securities Services

“

It’s very clear that a large part of the industry has not, historically, invested in upgrading post trade technology. This has led to the continued use of old, non-scalable technology and the associated manual workarounds.

With this backdrop, we see greater appetite for banks and brokers to reengineer their value chain - partnering with a third party to simplify their middle-to-back office solutions in turn reducing their overall existing and future IT and operational risk.

Previously outsourcing was a way of moving from a fixed to a variable cost model, although this is still part of the equation we are increasingly winning mandates by building products which optimize or minimize capital requirements and which provide access to liquidity and cash solutions.

Choosing the right partner is key – you need to be confident that they have the expertise, the appetite to continue to invest and the long-term commitment to the business.

”

core business, or if that is too expensive, then one can think about outsourcing it to external providers.

The question was raised whether those firms which do still want to offer everything understand their value proposition well enough? Operations itself in Asia has become a commoditised service. If a firm does it right, people say nothing, but if they do it wrong, the company risks getting into serious trouble.

Looking into the crystal ball By this juncture, the mood among the panel and audience was sombre. If the plan is to move to a bright future, this doesn’t seem like the right place to start from, with under-investment, regulatory overload, a tangle of systems and differentiated platforms in Asian countries ill-disposed to seek joint solutions.

Nevertheless, ideas did emerge. The panels’ predictions revolved on the concept that for the future of processing to bear fruit, today’s infrastructure needs to be swept away and replaced in total, rather than patched together and the cracks papered over.

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Tim Marsh,

Chairman, Serisys Solutions Ltd.

“

Hong Kong has T+0 now. How long before we have real time settlement?

”

INSIGHT | 33

Endre Markos,

Director and Regional Head of E2C, Citi Markets and Securities Services

“

Block Chain may not be the future of securities processing, but the quickly escalating attention it is getting underscores the industry’s hunger for material progress in deploying new technologies and processes that can reduce its efficiency drag.

There is a reason why not much has changed in the back office.

Without a holistic approach and optimization of the entire lifecycle of the trade, very little can be further improved. By aggressively exploiting new technologies and deploying data scientists, we can ensure that processing trades is not a necessary evil, but an integral part of a precision investment machine.

”

One panellist speculated that AliBaba might become the world’s biggest financial company if it leverages the power of its payments infrastructure to cross sell other financial products.

In China, payments systems such as that offered by this major online merchandising company have meant that the country is in the process of by-passing the need to have a credit card industry. Their payments are conducted via the internet. If that theme unfolds, it will mean that credit cards, which have never penetrated China, will never do so, being superseded by an entirely new payments’ processing mechanism.

So, we were told that we must keep our eyes open for disruptive technologies such as Block Chain, which is currently being used by NASDAQ for its grey market business.

Block Chain is a way of recording data in a decentralised way. It was developed originally for bitcoin, clearing and verifying transactions. It is an enabling technology to make settlement real time, rather than T+1 or T+2.

If China is to drive change therefore, Hong Kong is in a good position to participate. Today, the securities processing industry is bedeviled by a maze of systems and complications. Solving these problems with the tools currently at hand seems to be an impossible task.

They are insufficient for the job. Therefore, the panel concluded that any leap forward will not be derived from evolutions of today’s processes, but from completely new technology and procedures on the drawing board.

They now look for answers from Silicon Valley, rather than Wall Street.

The adoption of technologies such as Block Chain would imply replacement of all of today’s technology. It would have a knock on effect on the securities processing industry as we know it, foremost of which would be the apparent need to have lower staff numbers working in the back office.

Q3 • 2015 | GLOBALTRADING

OPINION | 35

Expanding The Connect Shane Neal, Head Trader at Matthews Asia, examines the enhanced model of the Shanghai-Hong Kong Stock Connect, and the drive towards Shenzhen.

Launched in November of last year, the ShanghaiHong Kong Stock Connect (SH-HK Connect) initiative provides mutual market access between the Hong Kong Stock Exchange (HKEX) and the Shanghai Stock Exchange (SSE). This is undoubtedly one of the most interesting market structure developments I have seen in my career. The exchanges, regulators, banks, brokerages and fund managers have devoted vast resources to ensure its successful implementation. Many traders were tasked with understanding and communicating various new aspects of settlement mechanisms, taxation, and the securities laws, as the China model provided some unique features. At Matthews Asia, we began using the SH-HK Connect in the first half of 2015 as a complement to our investments

in Chinese-listed A-shares via the Qualified Foreign Institutional Investor (QFII) program.

The enhanced model An original feature of the SH-HK Connect trade workflow required sellers to transfer securities to be sold into the account of the executing broker prior to the trade as a way to ensure stock was available for delivery and reduce risk of failed settlement.

Many fund managers had concerns that this predelivery of shares in free-of-payment method would lead to information leakage, and it could also conflict with custody compliance requirements in several jurisdictions. To address this concern, an integrated model of pre-trade checking was designed by banks that had the ability to link their execution

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and sub-custodian platform. This allowed for a fund’s assets to remain in custody as the broker could verify positions prior to trading without free of payment transfer. While effective in addressing the issues surrounding pre-delivery, an investment manager was left with a single broker trading solution based on a fund’s sub-custodial relationship.

The developers of SH-HK Connect more recently introduced special segregated accounts (SPSA), whereby investors open account(s) with a unique ID in the Central Clearing and Settlement System (CCASS) via their custodian, in order to keep shareholdings of investors separate. Once the SPSA accounts are open, a fund manager can link multiple brokers, which I believe is the best way forward for

“With foreigners making up a small portion of the market currently, it is unrealistic to think China will adopt an entirely new trade settlement mechanism.

Hopefully, China can find a way to accommodate foreign investors while the market matures. ” SH-HK Connect. This model could be enhanced to closely resemble other ID-based markets in Asia, with linked broker trading accounts and omnibus trading agreements maintained by brokers, as this is already familiar to most foreign investors.

Increasing investor participation In order to attract more participation, regulators in China and Hong Kong have been receptive to feedback for reforms to the program, which is clearly set to develop and grow. A few issues continue to arise when discussing SHHK Connect with those already using it and those still waiting for enhancements.

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Shane Neal, Head Trader, Matthews Asia One challenge for international investors remains the T+0 settlement of securities, and T+1 settlement for cash, as it is not in-line with developed market practice, and creates operational challenges and potential counterparty risk. Investors with operations departments in other time zones may find it difficult or costly to accommodate. With foreigners making up a small portion of the market currently, it is unrealistic to think China will adopt an entirely new trade settlement mechanism.

Hopefully, China can find a way to accommodate foreign investors while the market matures.

It also seems that the regulations governing stock borrowing and lending of northbound Stock Connect securities could benefit from modifications. At present, only SH-HK Connect exchange participants can lend SSE securities, but these entities aren’t typically capitalised for stock borrowing and lending operations, so short selling of SSE securities has been a non-event. An alternative arrangement may be to allow for the affiliate entities of the exchange participants in London or New York to conduct stock borrowing and lending operations.

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Lastly, the daily trading limit imposed on northbound access was also highlighted as a “capital mobility” issue by MSCI in its recent decision to postpone the introduction of China A-shares into its global indices. Many investors believe this daily limit should be lifted because it is a great source of uncertainty for investors who need to trade near the close of day. As modifications and developments like these are introduced, the overall accessibility of the China A-share market for foreign institutional investors will likely improve.

mature businesses. Access to trading SZSE listed securities had been limited to domestic and QFII/ RQFII investors, so the SZ-HK Connect will increase the investable universe for many international investors into more diverse sectors and market capitalisations. The official launch date and details regarding the number of stocks available via the SZ-HK Connect are still pending, but I’d expect a similar timeline of events that preceded the Shanghai-Hong Kong Connect launch. First there

IPOs There is no shortage of potential issuers or lack of liquidity in China’s A-share market, which are the two of the biggest challenges faced by many other global exchanges. Over 500 A-share IPOs are pending listing according to the CSRC website, so there is certainly interest among foreign investors to access the China’s IPO market. At present, SH-HK Connect participants are restricted from participating in China’s IPO market. QFII and RQFII (Renminbi Qualified Foreign Institutional Investors) investment schemes allow for investors to participate in IPOs, but it can be complicated and dominated by retail investors.

“Something interesting to watch for will be the eventual first rights offering conducted by an A-share listed company with shareholders via the northbound Stock Connect.”

Additionally, it seems that both the regulators in Hong Kong and in China would have concerns about who is accessing an IPO via the northbound Stock Connect link and the protections required for investors in the primary market. Since investor IDs are not required to track northbound trading, it seems unlikely that the regulators would be able to open IPO participation outside the domestic market and QFII/RQFII investment schemes. Something interesting to watch for will be the eventual first rights offering conducted by an A-share listed company with shareholders via the northbound Stock Connect. This would be a good test for regulators and market participants and could be a stepping stone for future primary market developments.

would be a joint announcement by the HKEX and SZSE, followed by a period of systems testing, then publication of final rules and tax clarity, before going live. From my recent meetings with representatives from the CSRC and SSE they are clear in saying that the mechanism for any future trading links will be consistent with that of the SH-HK Connect. I would expect other major global exchanges have discussed their own links to China. This opportunity could also grow to include different asset classes as well. It’s possible to envision HKEX, as owner of the London Metal Exchange, making commodities futures trading available to mainland China.

The Shenzhen desire The regulatory and technological framework for SHHK Connect can be used to for additional trading links, like the much anticipated Shenzhen-Hong Kong Connect (SZ-HK Connect). The Shenzhen Stock Exchange (SZSE) is dominated by small and medium sized companies, as compared to Shanghai-listed companies, most of which are

These trading links and other future developments represent a significant step in China’s financial reforms and the opening of China’s capital markets.

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A Changing Approach To Multi-Asset Management For Hedge Funds

By Phil Chevalier, Platforms Product Specialist and Clare Witts, Director, ITG Asia Pacific

Technology is constantly evolving to meet the demands of increasingly sophisticated asset managers and growing regulatory scrutiny. When it comes to multi-asset investing and the trading tools that go along with it, hedge funds are at the front of this curve and are looking increasingly ‘institutional’ in their use of technology to deal with the wide variety of asset classes they invest in. This is particularly important in today’s markets where the Asian hedge fund industry is growing at a rapid rate, and strategy diversification is an important part of generating alpha and attracting investment.* At the same time, the global regulatory landscape is demanding higher levels of transparency and

risk management than ever before. In Hong Kong, the SFC’s electronic trading regulations place risk and systems adequacy requirements directly on to hedge funds and asset managers across their use of electronic trading platforms.

Singapore, Hong Kong and Australian regulators all have current consultations out regarding the reporting and management of OTC derivatives.

There is a global focus on FX trading and a push to drive transparency in that market following high profile scandals. Furthermore, from a purely commercial perspective, reducing risk and minimising work by having operational and trading systems working seamlessly across asset classes is a top priority for many hedge fund COOs.

*Total hedge fund AUM in Hong Kong increased by 39% between 2012 and 2014. Equity long/short and multi-strategy remained the most popular investment strategies. Source: SFC Report of Hedge Fund Activities, March 2015.

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“Integrated systems ensure that data formats are consistent and are drawn from the same source, reducing the risk of errors in ‘translation’ between areas of the business and costly duplication of data sources.”

Phil Chevalier, Platforms Product Specialist, ITG Asia Pacific

Learning from equities, building for multi-asset In many respects, lessons can be learnt from the evolution of the equity markets and the technology tools that have developed. Trends from equities now flowing through to other asset classes include the increased focus on transaction costs, counterparty risk management and transparent business processes. This can be seen in the development of products such as TCA for FX, block crossing systems for fixed income, or automated quoting tools for complex OTC products.

Bringing a singular, standardised approach to multiasset operational management is essential for hedge funds who are looking across products for investment returns. When it comes to selecting trading platforms, the integration of these analytics, execution and quoting tools into both the equities and the multi-asset model has now become an essential part of doing business. However, given how different the various asset class workflow requirements are from the more traditional equity-only model, multi-asset platforms must be chosen carefully.

Finding consistency in a multi-asset world A key criteria is that systems need to be integrated from front to back with a straight-through process.

This reduces both operational risk for the business, and the workload of those who use the systems day to day. The systems must link together, from the Execution Management System (EMS) which sends orders out to broker desks and algorithms, on to the order management system (OMS) that sets allocations and compliance rules, through to the position management system (PMS) that displays real time profit and risk while interfacing with prime brokers, custodians and fund administrators.

Integrated systems ensure that data formats are consistent across asset classes and tools and are drawn from the same source, reducing the risk of errors in ‘translation’ between areas of the business and costly duplication of data sources.

Choosing integrated tools can also have a significant effect on both the initial and future cost of multiasset platforms – buying separate components from different vendors and then needing to manage and pay for interfacing and development work to connect them all typically results in a far higher set up cost and slower implementation. However, it is also important to choose platforms that deliver not only on the requirements of the fund today, but also for future growth. Many platforms are priced according

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to number of users, asset class modules, or by AUM of the fund, with additional charges added at every level of expansion. An EMS/OMS/PMS platform that may have an upfront cost of USD $50,000 per annum can end up costing many multiples of that after all the integrations are done with different counterparties, or after two years as the fund grows or adds strategies.

Scalability across asset classes and size should be part of the decision making process for a hedge fund whenever they are reviewing their platforms, and understanding how costs will change with growth or diversification into different asset classes can save both money and time down the track.

“Scalability across asset classes and size should be part of the decision making process for a hedge fund whenever they are reviewing their platforms,......”

Using technology to get, and stay, in the game The rate of development in multi-asset technology is benefiting hedge fund managers in a number of ways. Particularly in Asia where hedge fund startups are typically smaller than those in the US or Europe, new, accessible multi-asset platforms are enabling them to compete with larger firms at an operational level from day one. This frees up portfolio managers and traders to focus on their day jobs of alpha generation; it allows their investment strategies to evolve over time without being limited by operational and systems constraints; and it positions them well when it comes to reporting to existing clients and fund raising with new investors.

This last point is particularly important in the context of global investment and fund raising. In order to attract investment from institutional asset owners, hedge funds need to demonstrate ‘institutional grade’ systems and processes. Whether this relates to best execution, risk management or portfolio valuation

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Clare Witts, Director, ITG Asia Pacific

and reporting, technology platforms that can help to automate these processes become essential.

When it comes to choosing a platform, there is little future for a non multi-asset system. It’s already possible to automate not just OMS/ PMS and EMS functions, but also embed functionality such as the ability to get STP request for quotes on complex OTC products, or stream FX. Around this there is a requirement for accurate analytics, access to different execution venues and streamlined reporting tools.

In many ways hedge funds are leading this integration of multi-asset tools as they drive their investment models forward. Choosing platforms that grow with them is an essential part of both their business and investment strategy, now and for the future.

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A More Efficient Stack Michel Balter, CSO of CameronTec outlines the questions to ask and rules to follow when optimising a bank’s trading architecture.

Recently, we sat down with 30 of our biggest sellside clients to discuss their trading architecture, pain points, lessons learned from recent years, their concerns for the future and what they are doing to improve their businesses today.

Inefficient architecture is the most common issue we heard about. After buying any technology required to close a deal during the boom years, combined with layers of acquisition and geographic expansion, different systems were not only siloed by asset class, but duplicated across regions and business lines.

Beyond these legacy issues, policies within banks were also responsible. Consider the degree of freedom within teams to determine their FIX infrastructure for example. Large banks never have one FIX provider. This freedom was tolerated because the technology could be on-boarded quickly, but now there are inefficiencies in the architecture. This is a real problem when it comes to basic functions, such as monitoring, efficiently on-boarding clients and testing systems.

Migrations are also a challenge for inefficient systems. The more solutions a firm has, the more migrations it will have. In a chain of 20 solutions, migrating one may require changes to 15 others, which creates potential headaches assuring quality. Addressing these problems takes time, which used to be solved by hiring people but firms can no longer afford that.

Large banks with reduced headcount often focus on day-to-day operations, and the time required to update systems to comply with regulatory changes is exponential as the number of systems increases.

Some banks have exited businesses because the cost of maintaining compliant infrastructure is prohibitive.

We have also seen a power shift within banks. The power used to be with IT, but now it is more with the business after the financial crisis.

Banks are spending less, so everything is validated by the business. More and more, IT is sponsored by the business, and the business makes the ultimate decision.

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“Ultimately, efficiency is about the architecture.

The first recommendation is to decouple the front office, market layer and the backbone layer, from any subsystems.” when your provider says, ‘you only need to rely on us’. That is not a serious position.

Michel Balter, CSO of CameronTec Untangling your system We advise banks to go through an infrastructure assessment to find their inefficiencies. A common issue our clients identified was that different teams are writing code without notifying other teams. When staff leave the company and a new person takes over the attitude is often ‘if it works, I do not have the time to change it’, because there is no documentation.

The most important decision is to simplify. Best practice in this area is about creating business rules for the entire flow: documentation to ensure the process can be taken care of if someone is not there; making infrastructure easily configurable rather than writing custom rules. Trading desks should shift from writing rules, which hide business intelligence, to customizing via in-built functions.

It is important to work with a partner that provides more than software solutions. A flexible partner should empower banks with best practice and readymade templates so the client can progress to the next level on their own. It is a bad sign

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Ultimately, efficiency is about the architecture.

The first recommendation is to decouple the front office, market layer and the backbone layer, from any subsystems. There will always be disparate subsystems, but if client connectivity is coupled to a vendor platform, a firm may lose the connectivity via the vendor. As banks consider their regulatory and risk management requirements, decoupling allows a concentrated view across clients and each of their connections.

Asking the right questions The first questions large brokerages should ask themselves are what are my inefficiencies and how can I better manage them. The reality often is that firms may not know what issues they have. Firms should ask their partners to tell them about their inefficiencies as well as the different approaches to addressing them. The solutions vary widely depending on how quickly a firm is ready, willing and able to implement change.

Another question brokers should ask is what are my peers doing and how has it worked.

These provide invaluable insights that would otherwise be difficult to obtain.

In my experience, most firms plan about three years out. They need to plan farther to think what are the challenges of tomorrow and how can they best serve their clients today. Bear in mind, IT staff have two clients: the internal business owners and the external

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clients, each of whom have very different needs.

Building an architecture that is scalable will allow a broker to meet clients’ needs today and position the firm as a leader of innovative high value services which increases competitiveness.

Take back your stack Here are four steps to take back your stack. #1 No shortcuts.

Brokers must assess their existing flows and then translate those existing flows into better processes and architecture to improve efficiency. This process

“Bear in mind, IT staff have two clients: the internal business owners and the external clients, each of whom have very different needs.” has no shortcuts. If you don’t go into the details of the flows, from the end point at the client connectivity level to the trading and the back office integration, valuable business knowledge may be overlooked. #2 Integrating business logic into flows.

If business logic is well-integrated, it will greatly increase the effectiveness of risk controls.

Many systems employ strong risk solutions, but apply them at the wrong end of the cycle. Order modification after the risk check often does not pass through the risk check again, which may result in a failure. The client can do something they are not allowed to getting both client and broker in trouble with the regulator. Designing business logic into the architecture is very important.

only have the IT team in the room. Efficiency is achieved through infrastructure but it begins with knowledge of the clients’ needs, which usually sits with the business and the on-boarding team. The on-boarding team knows what type of business the client wants to do, what testing they have implemented, which type of orders they prefer, etc.

Improving architecture should involve the business and IT as well as processes like risk and compliance.

Banks should not underestimate the number of people involved. Occasionally, we see a situation where management wants to do something and fears that the IT will block it, so they drive the change with minimal disclosure. That will not work. The best way to get to an honest solution is to include everyone in the process. #4 Automate processes.

How can firms best improve efficiency? The most effective answer is the automation of processes and controls. Among our clients, about 70% perform manual FIX testing and 30% use automated testing. The most efficient testing system is a continuous testing service.

The on-boarding process has much that can still be automated. The solution most banks use is a certification utility, which can be locally deployed or accessed via a hosted solution with on-demand testing. The reality is that on-boarding is about much more than just certifying a client’s system.

A number of our clients are automating the creation of business rules specific to each client.

In the certification process they test the rule in the broker UAT environment and automatically transfer it into the client’s production environment.

After speaking with many clients and leading brokers, the best way to for banks improve efficiency is to optimize the architecture itself. Only then will they be in a position to go after the next business goal and capture the next wave of growth.

#3 Know your business.

As an external provider we are required to understand our client’s business, and so should the bank’s IT team. It is wrong, when improving efficiency is to

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Joining The Dots Of Compliance Michael Karbouris, Head of Business Development, APAC, Nasdaq examines ongoing regulatory and technological changes in surveillance.

What do manipulation in the FX and LIBOR markets, the explosion of dark pool trading volumes, and the growth of high frequency trading have in common?

The answer is that all of these issues are keeping compliance officers up at night, and they are having a profound impact on all stakeholders in the financial markets. In most (if not all) regions, they are influencing investors’ perception of fair and efficient markets and eroding their confidence. In response, broker-dealers, exchanges and regulators alike are stepping up their surveillance efforts across the entire trade lifecycle.

OTC market manipulation made front page news in 2012, when it was revealed that global banks colluded to falsely inflate or deflate their LIBOR rate submissions to profit from trades or affect the perception of their creditworthiness. Fast forward to 2015, and LIBOR has a new benchmark administrator, the rate-setting process has been tweaked, and the banks involved in manipulation have been fined billions of dollars.

In retrospect, poor internal controls are to blame for this market abuse – at least to some extent.

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Banks lacked surveillance technology with strong capabilities to connect the dots. They could not link their positions in loans, swaps, options and futures with the LIBOR rate submissions to detect unusual pricing. Further, they were either not scanning electronic communications or not using robust enough systems to detect keywords indicating collusion. The investigation of the LIBOR scandal revealed that the scheme was devised and implemented through emails and instant messages.

Then in June 2013, yet another scandal rocked financial markets. Certain FX dealers at major banks allegedly colluded to profit by trading currencies ahead of large orders at the daily benchmark fix, and sought to influence the fix itself. Several major banks have already been forced to pay billions of dollars in penalties. Since then, the fix process has been changed so that traders need far more capital to manipulate a price because they have to keep buying or selling aggressively over a longer period. Moreover, regulators have forced banks to change their internal processes and increase scrutiny over FX trading.

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“Some countries, including the UK, Australia and Hong Kong are introducing rules to either curtail trading in the dark, or at least ensure higher levels of transparency in dark markets.”

Michael Karbouris, Head of Business Development, APAC, Nasdaq

In light of these incidents, the regulators expect banks to have risk management and surveillance tools that can look across markets and asset classes, and trigger alerts when unusual activity occurs. They need to be able to analyse large data sets, perform an alert run in minutes, and scan all electronic communications for suspicious keywords and relationships.

To be effective, surveillance analysts should be monitoring for patterns such as more active buying or selling, or higher volumes than usual around the fix that influence price (marking the fix), or unusual positioning ahead of the fix (front-running). They also should be watching out for instances where someone is trading a currency they do not normally trade, or trading in a size that is not normal for them.

Banks use surveillance technology not only to detect wrongdoing, but also as an investigative tool to prove scenarios, which are documented for internal and external auditors. When the regulators ask about an irregularity, the bank can say it noticed it too, and explain what was done about it. It can show an audit trail of the investigation and the related communications to explain what transpired. In doing so, it might avoid hefty fines and penalties, not to mention reputational damage.

Dark pool accountability Electronic trading and other factors have led to a marked decrease in order sizes on exchanges. Dark pools were originally created so asset managers could execute large blocks of stock without information leakage or market impact. But regulators globally are concerned about the growth in dark pool trading and its effect on market integrity. Some countries, including the UK, Australia and Hong Kong are introducing rules to either curtail trading in the dark, or at least ensure higher levels of transparency in dark markets.

Like lit markets, it is possible for dark pools to be abused intentionally. To this end, these venues need to be on the lookout for traders who try to game other participants and manipulate open market prices by using orders that are inconsistent with their intended purpose.

One method of manipulating prices in the dark is to test liquidity by placing a small order in a dark pool to see if it gets executed, “pinging” the dark pool. If it does, a larger order is placed in the lit market to narrow the spread and push the indicative execution price in the dark market in a beneficial direction. Ultimately, a larger order is executed in the dark pool at the manipulated price.

Using a bait and switch or spoofing strategy across both lit and dark markets, traders enter orders with the goal of creating fictitious volume on one side of the order book. In these cases, traders place a large sell order in the lit market to influence other market participants to sell more aggressively. If the bait is taken, the manipulator can then buy the security at a lower price in the dark market, safely hidden away from view.

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Dark pools must also monitor for front-running activity not just in the most deliberate cases of proprietary order flow being executed prior to client order flow, but also more general cases. These include frontrunning the release of research reports or using insider information by executing in dark markets. Typically, front-running of large price movements in a dark market may be indicative of potentially suspicious activity.

There is no one-size-fits-all surveillance solution.

A dark pool that operates as a crossing network is different from one that operates as a multilateral trading facility, and the regulators treat them differently.

Ultimately, the onus is on dark pools to operate exactly the way they are advertised to operate. They need to deploy policies and procedures, human resources and automated technology to ensure integrity. A holistic surveillance system should be employed, utilising algorithms to monitor all dark market trading activity for suspicious behavior and anomalous price movements, and generate alerts when suspicious events occur. Over time, dark pool operators can understand trends and patterns, as well as the activities of specific participants active in their marketplace.

Expanding supervisory responsibilities Many trades today are executed via algorithms.

Market participants and regulators are keenly aware that fat finger errors and technology glitches can have a devastating impact on investor confidence.

The flash crash of May 6, 2010 was the first in a string of such events, which has increased regulatory focus on both risk and manipulation.

The front office is required to do pre-trade risk checks as the first line of defence against machines or humans going haywire, and to ensure orders do not exceed specified limits. Traders can pre-define risky events and adjust parameters so the program will shut down in a controlled manner should any one of them occur.

Additional layers prohibit traders from sending orders that exceed a certain number of contracts or shares, and orders are rejected that do not pass a price reasonability check. In contrast, market surveillance for manipulation (not risk) has mainly been a post-trade function.

But newer regulatory initiatives are causing the lines between surveillance and risk to become blurred.

The front office increasingly needs to watch for algorithms that can potentially be used to manipulate

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“The front office increasingly needs to watch for algorithms that can potentially be used to manipulate market prices through front-running, bait and switch techniques and spoofing.� market prices through front-running, bait and switch techniques and spoofing. While most market participants use algorithms to execute trades, they might not be adept at examining them for potentially manipulative behavior. Surveillance systems, with logic programmed to watch for manipulative activities and patterns, can help the trading desk understand normal versus abnormal behavior and help them to mitigate regulatory risk before trading.

Overall, trade supervision is an important first line of defence to ensuring market fairness and integrity, and certainly an area that will attract more attention in the future.

The surveillance platform as the common denominator A common solution to all these disparate issues involves taking a thoughtful, holistic approach to processes and procedures. Firms should define the role of the front office in surveillance and hold trading desks accountable for their activities. Surveillance teams should be empowered with the knowhow and tools to monitor order flow in OTC asset classes as well as dark trading activity in multilateral trading facilities and internalisation engines. In addition, firms should evaluate their current platform to ensure it is sufficiently robust to be effective and efficient across a wide array of investigations now and in the future.

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Changing Analysis Of FX With Brigitte Le Bris, Head of Emerging Markets Debt and Currencies, Natixis Asset Management

I am from the fund management side of our business, and when we give the trading desk orders, fundamentally, we are asking for best execution. The trading desk is in charge of the process of improving the quality of the execution and they have been working hard on that by exploring new methods of transaction cost analysis (TCA). Our head of trading is now in the process of implementing FX TCA tools. While this is not strictly a requirement yet, it is definitely becoming something that more clients are asking for, and it won’t be long before it is the norm. There is a definite regulatory element to this drive as well, and while it is not explicitly on the radar of the regulators at the moment, we believe that it will not be far away, and we would like to get ahead of that curve by ensuring that we have proper systems and analysis in place.

At the moment approximately 80-85% of our trades go via electronic platforms and the rest remains being traded by voice. I think this percentage is about the maximum amount that we are going to achieve through electronic trading, just because there will always be certain orders and pairs that require more attention and specific contact with brokers.

The difficulty with TCA is to define which benchmark you want to use, but as soon as we have that, it will be

Brigitte Le Bris, Head of Emerging Markets Debt and Currencies, Natixis Asset Management very interesting for us to crunch the data. As a fund manager, I can see major consequences of this shift towards more analytics for our trading desk. It will help us to see which bank is providing us with the best price, and also it will help us to know how good the trading

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desk is, how quickly they enact our trades, how well they implement them and then how good a broker or bank is so that we can better delegate our flows.

From the perspective of the trading desk it will help them to check how good the price they receive is from the various counterparties and where there are areas they can improve upon to access better prices and liquidity. There are therefore two distinct areas - one quantitative, and one qualitative.

The fundamental idea would really be to implement exactly what has already been implemented on equities. The systems and processes there have changed as a result of increased electronic trading and platforms use. FX markets need to evolve in the same way that equities trading has.

“The difficulty with TCA is to define which benchmark you want to use, but as soon as we have that, it will be very interesting for us to crunch the data.”

Tech Spend Key in Australia and Beyond Chauncy Stark, General Manager of Foreign Exchange and Cross Asset Trading, NAB, explains the Australian banks’ approach to technology spending.

The banking world is evolving at break-neck speed.

Global banks are retreating to their core markets and new regulations are changing the fundamentals of foreign exchange and fixed income trading. Banks, especially those in Australia, are reconsidering how they deploy technology to remain relevant and meet new demands.

Foreign exchange markets were early adopters of electronic trading platforms. Over the past decade we’ve seen fundamental shifts in volume and liquidity and the very nature of the way customers trade. FX technology development is ongoing and will continue to shape the distribution and risk management of all FICC products.

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Chauncy Stark, General Manager of Foreign Exchange and Cross Asset Trading, NAB NAB continues to invest in building out our digital capabilities from front office through to back office.

Within trading alone we have a team of 10 dedicated e-FX specialists and they handle a range of tasks from building automated risk management algorithms through to managing databases that enable us to measure market impact across trades and clients.

Conventional traders are also becoming more techsavvy.

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Opportunities at scale As outlined above, there has been an explosion in investment in technology. New foreign exchange market-making technologies have drastically expanded banks’ ability to attract volume. As an example, the top five global banks now account for roughly 40+% of global FX volume and they are increasingly operating like exchanges in the way that they internalise risk. Therefore, in recent years, competing in FX has become a scale game and investing in technology one of the only tickets to playing in that game. The magnitude of investment required to maintain a top 10 ranking creates barriers to entry though as technology matures cheaper solutions are emerging.

That said, technology advancements also bring opportunity. Traders and sales people are able to be more innovative in the products and services they deliver to customers. The changing regulatory environment has squeezed the expansionist technology drive in favour of compliance and monitoring solutions.

FX trading technology has filtered into fixed income, commodities and other areas. Fixed income cash has successfully adopted some of the FX technology, but the picture is less clear in products such as interest rate swaps. Current electronic trading platforms cannot handle customised products as well as vanilla products. So, at this point in time, it would appear the fixed income market may be close to reaching its limit in terms of how much can be electronically traded but that could change in the very near future.

Buy-side bears the cost Market liquidity has been quite topical. Firstly regulation is forcing banks to hold more capital and limit proprietary trading activity. This means fewer pricemakers and less balance sheet available to clear client risk. In terms of liquidity, this means the buy-side will have to accept higher transaction costs. If you combine this with the SNB abandoning the Euro peg earlier this year, there is an even bigger impact on liquidity.

Though, liquidity has now normalised, we are still seeing more “liquidity holes” when markets start moving. The conclusion is that the larger liquidity providers have become more defensive in their risk settings and technology investment will help manage these risks.

“Therefore, in recent years, competing in FX has become a scale game and investing in technology one of the only tickets to playing in that game.”

Value for clients We have multiple ways of helping each client and we appreciate that each customer is unique. Technology makes it easy for clients to get access to the products and services they need which in turn helps us develop more meaningful relationships with them.

As I’ve mentioned before, in Australia, global investment banks have retreated away from Australia and back to their core markets. Learning the needs of new clients and exploring how to best meet their trading needs will continue to be a focus for NAB. New challenges, new technology Providing a point of differentiation is vital. Creating a more efficient trading environment – in terms of trading, access and user experience - and combining multiple systems into one trading platform is the way forward. There is no need to duplicate multiple singledealer platforms when they could be run together.

At NAB we are looking at opportunities to apply different technologies in unique ways particularly in the business and consumer space. We are adapting trading technology and using it in innovative ways to support other businesses.

The obvious choice is to extract as much value as we can from our investment in sophisticated technology.

If we just confine investment to FX products, we are missing tremendous opportunities.

This interview has been prepared for education and information purposes and does not constitute financial product advice.

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Out With The Old, In With The New Roger McAvoy, Regional Sales Director - Institutional eFX Sales, Asia, 360T Trading Networks examines ongoing transparency initiatives in FX trading.

There are many reasons why the call for greater transparency in FX execution, pricing and quote management practices are coming under review.

Remarkably, this has accelerated only in the recent past, particularly as a result of public scrutiny and media attention. This centred around prominent court cases in the United States where public pension funds sued their custodians for uncompetitive FX pricing practices going back to 2009, and won (see Global Custodian). Since then, the media has regularly reported on a range of issues on FX pricing practice by certain banks, including the widely-used WM/R 4PM fix. This has accelerated the push by asset owners and regulators to demand improvements.

FX execution centrally as a way to tighten their own fiduciary duty to their clients, and to reduce reliance on past practices such as “auto FX”, the use of standing instructions, chat messaging, and single-bank noncompetitive pricing.

Asset managers are taking a closer look at their “best execution” policies to ensure their own guidelines for FX execution and counterparty management are well defined. Many firms are also taking greater control of

The new era of FX trading Much like the equity markets of recent past, the OTC FX and FX derivative markets are undergoing rapid change in the way liquidity gets sourced, priced and

GLOBALTRADING | Q3 • 2015

Most recently, the Bank of England, along with the HM Treasury and the UK Financial Conduct Authority have laid out a body of work known as the Fair and Effective Markets Review Final Report, which covers the FICC market microstructure, structural issues and standards that will be discussed and debated throughout 2015.

This will result almost certainly in further changes to FX market “best practices”.

FOREIGN EXCHANGE | 51

“In today’s ecosystem, asset managers need to think about which technology providers are incentivised to assist the buyside dealing desk reach below the surface to get a true picture of pricing, price latency, and executable quotes across trade size and tenors,......” has expanded greatly over the years. This has resulted in greater buy-side control of execution, and, at the same time also more responsibility on asset managers to make the right choice of solution providers that truly support their interests and those of their clients.

Roger McAvoy, Regional Sales Director - Institutional eFX Sales, Asia, 360T Trading Networks distributed. As a result, the buy-side trading desk now faces greater choice in technology, analytics, and liquidity provision than what past practice or past providers have been willing or able to deliver. And with that, comes the need to measure if that choice is the right one, given the pre-trade decision support tools data, analytics, and execution options available. And, before making a change, the buy-side needs to know how the new regime is better, not just different. Access to the right analytics is fundamental to exploring the alternatives.

In equities, there was a convergence of best practice that resulted in greater adoption of algorithmic trading, direct market access (DMA), and a shift from single-broker execution management systems (EMS) into the next generation of solutions. These included greater broker-neutral EMS, OMS and transaction cost analysis (TCA) capabilities. The role financial technology providers have played in electronic trading

In FX, more asset managers are taking a closer look at the trading technology and the depth and breadth of the data and analytics available from their counterparties and solution providers in order to better understand and control the cost of execution.

Some will take it a step further, seeking openly to drive operational alpha and trading alpha to improve performance for their clients. Meanwhile the willingness of bank counterparties and their ability to absorb clients’ risk as principal is changing, and the shift to an agency-only model will make the use of technology to manage more pools of liquidity even more relevant to the buy-side trader.

The days of “processing” FX trades as “part of the exhaust” of the underlying equity and fixed income exposures, or to reduce operational-risk at the expense of cost management, are changing. It is evident asset managers are taking more control across asset classes and they need a richer set of data to monitor counterparty behaviour and pricing – not only to minimise explicit and implicit trade costs, but also to achieve and document best execution as a part of their fiduciary responsibility to their clients! This is

Q3 • 2015 | GLOBALTRADING

52 | FOREIGN EXCHANGE

especially important in the OTC FX markets where price formation is mostly bilateral, based on credit, relationship, or the discretion of a sales trader given the client and market information at hand.

Independence and buy-side focus Asset managers have long-embraced the value of using broker- and bank-neutral technology and relationships to aggregate pricing, execution methods, and the ability to compare transaction costs in a nonconflicted manner to protect their clients’ interest. In FX, this is also a major reason why the use of multidealer trading technology has gained favour.

In today’s ecosystem, asset managers need to think about which technology providers are incentivised to assist the buy-side dealing desk reach below the surface to get a true picture of pricing, price latency, and executable quotes across trade size and tenors, for example. While many service providers may be able to talk about what they can do for G10 currencies, or simple FX Spot, most international asset managers will require access to liquidity across G10, emerging markets, forwards, swaps, and more exotic currencies, including NDFs, and the ability to get auto-pricing on block trades.

Achieving real transparency In FX, how you look at the cost of execution relative to your eligible liquidity pool is more relevant than looking at the broad market “indicative” rates or syntheticallygenerated benchmarks of liquidity pools you can’t trade into.

Interestingly, in October 2014 TradeTech FX Survey reported that 56% of respondents stated that both equity and fixed income trading costs were as important as FX trading costs. At the same time, 56% also felt that TCA was the most important technology to improve execution in FX. However, while TCA may be clearer cut for equities, there are far greater challenges in attaining a meaningful result in FX given that price formation and benchmarks are less transparent and not as clear cut. To paraphrase, in FX, “a price is not a price is not a price!”

Having access to all of your own data, measuring price and spread according to currency pair and volume, speed, execution method, effect of blocking and netting, and effect of restrictions on fund counterparties are all factors that need to be measured – not just capturing the mid-price at point of execution.

GLOBALTRADING | Q3 • 2015

“In FX, how you look at the cost of execution relative to your eligible liquidity pool is more relevant than looking at the broad market “indicative” rates or synthetically-generated benchmarks of liquidity pools you can’t trade into.”

Finding the right partner to make the strategic shift The pace of change in the FX markets will continue to accelerate. On the one hand, this will be driven in part by regulators, and on the other, banks will adapt to optimise their capabilities and balance sheets to provide liquidity and their own technology and other services to capture client order flow in a more profitable manner. To navigate in this new world, asset managers need to consider how far and how deep their current technology providers are able and willing to go: engaging with those that deliver transparency and buyside focus as an independent provider has its benefits.

Bottom line: the FX markets offer their own unique practices relative to equities and fixed income. The buy-side dealing desks that are considering a strategic shift from the practices of the past to new standards of the future, may benefit from taking a closer look at newer technology providers in the asset management space who have a track record for delivering price transparency, facilitating broader and more consistent price competition, and driving open collaboration.

Those that do may find themselves better informed with a more powerful lens to navigate the future.

Americas Trading Briefing 2015 October 22 | State Street Global Markets | Boston On the back of a very successful FIX Trading Briefing in New York, we are pleased to announce our next event in Boston on October 22nd.

Join the FIX Trading Community for a half day agenda which will provide 100+ senior industry participants with updates on FIX initiatives and prepare them to tackle challenges facing their firms in the coming year. 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.

REGISTRATION 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: $249 Non-Member Passes: $449

Limited sponsorship opportunities remaining!

Email debra.heffernan@fixtrading.org for more information or visit the event website at: www.fixtradingcommunity.org/boston2015

Supported by our sponsors:

For more details and to register visit: www.fixtradingcommunity.org/boston2015

Germany Trading Briefing 2015 November 25 | Steigenberger Frankfurter Hof | Frankfurt Following the success of the 2014 event, FIX Trading Community will return to Frankfurt this

HIGH LEVEL TOPICS INCLUDE: 

autumn with the Germany Trading Briefing.



This sell-out event will attract 150+ 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.



MiFID II - Inducement rules - The end for bundled research payments?

Bond Markets - What makes them special?

T2S - The emerging new European post trade environment How has MiFID II impacted the OTC derivatives trading landscape?



Global Technical Community update



Plus much, much, more!!

REGISTRATION 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

Supported by our sponsors:

For more details and to register visit: www.fixtradingcommunity.org/germany2015

54 | EUROPE

The Ongoing Role Of Multi-Asset Technology: A Roundtable Write-Up

By Peter Waters, GlobalTrading

On the 25th June, over 25 representatives from the buy-side, sell-side, vendor and exchange communities met in London to discuss the changing role of technology in breaking down silos and processing between asset classes.

The discussion included traders from across the asset class spectrum, and some with specifically multi-asset roles.

One difficulty that immediately became apparent and would stand as a constant barrier to true integration was just that markets are still very specialised. Fixed income traders that cover certain corporates need constant communication and effort to stay up to date on who holds what security. Conversations with brokers are paramount to capturing that knowledge.

No electronic platform can replace certain esoteric asset classes and trading, and nor do the traders even want it to. But, what can technology achieve? The room debated the use of EMS technology and its potential role in combining multi-asset trading. However, the conclusion was reached that the buy-side doesn’t mind having different systems with specialist applications, as long as they work together and there is some cross functionality.

GLOBALTRADING | Q3 • 2015

A perceived exception to this is the hedge fund community. As a specialist and nimble group of firms it was generally agreed that hedge funds were much more likely to request specific technology that allows them to build out multi-asset trades, including derivative elements, and want the functionality to do so on a single platform. Whether this technology then migrates upwards towards the larger asset managers remains to be seen. The room seemed to suggest that the buy-side doesn’t want it even if it were available, and the sell-side may not be willing to invest to scale the technology without specific demand.

One major area where all agreed more work was needed was in extracting the data from these systems.

With increasing buy-side ownership of trading, and more questions being asked of the buy-side with regard to how they analyse their trades, the extraction of data from systems that sit on both the sell-side and buy-side desk remains a major challenge. As does finding ways to combine and manage that data and cross asset class boundaries to calculate proper TCA. This area would be worth exploring from a collateral management and overall risk position management perspective in the context of regulatory consequences as this appears to be an area of focus in Europe at the

EUROPE | 55

Michel Balter,

Chief Strategy Officer, CameronTec Group

“

The new wave of regulations is bringing significant changes to all players - execution venues, brokers and buy-sides. This is triggering increased interest and, for some, investment into multi-asset class technology, from the trading backbone to broker neutral EMS. For electronic execution venues, this will mean new opportunities resulting in an increase of venues and a wave of consolidation making more asset classes accessible from a single backend.

For brokers under pressure and invested to increase efficiencies and reduce costs, the key additional benefits are easier implementation of additional transparency, analytics and centralized risk requirements.

At the buy-side level, hedge funds are happy to embrace the multi-asset class trading backbone, and EMS/ Execution Venues operate more easily when executing multi-asset class strategies. Traditional buy-sides have very similar technology needs today compared to sell-side counterparts, with the exception of market access where the largest asset managers are beginning to connect directly to select markets.

As buy-side firms take more control over trading, the buy-side/sell-side roles will continue to evolve with many participants of the view that sell-side traders act more as adviser to the buy-side dealer, while retaining their traditional role for less liquid instruments/markets.

The debate will continue for fixed income, when it comes to balancing the pros and cons of the adoption of electronic trading, with most agreeing electronic trading is perhaps not the solution for illiquid bonds.

”

moment. It was generally agreed that the back office was an area that could benefit from multi-asset processing and technology, were such areas to be developed.

A topic that followed from this discussion was how the changing ownership and knowledge of the buy-side is impacting the role of the sell-side. One phrase that solicited nods of agreement was that of the “execution consultant”. While the buy-side has ultimate responsibility for the trade, the sell-side retains specialist knowledge of the execution avenues available for a given security and uses its’ knowledge

and technology to facilitate that decision making. Quite how this sits within the current changes to unbundling regimes remains to be seen, but the sell-sides in the room seemed willing to adapt to this new paradigm shift.

It was stated that sell-side, fundamentally, has to follow where there is client interest and demand. And those in the room seemed to suggest that currently their efforts are focusing on FX, with equities and fixed income taking a slight back seat for the time being.

This is just partly a result of the ease of shifting technology around, with FX sitting halfway between

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56 | EUROPE

Melissa Ellis,

Head of EMS Sales - Europe, ITG

“

Consolidation of the buy-side desk and regulatory pressures have increased the need on the buy-side to create operational efficiencies across asset classes. Using advanced execution management systems empowers the buy-side trader to take control of the trade in terms of accessing liquidity, facilitating best execution and managing the costs of trading while streamlining workflows and lowering operational risk across all asset classes. As market structure and the regulatory environment evolve, new innovations will be key to allowing the buy-side trading desk to reach its potential.

As with all innovations, timing is crucial. Financial technology firms need to watch client demand and make sure the regulatory environment will support it for the innovation to be a success.

”

James Cooper,

Head of Execution, Troy Asset Management

“

As ever, GlobalTrading provided a great forum in which some strong opinions could be tested and challenged.

There was a concrete conclusion and clear action points from the meeting: in equities it was agreed that the agency model was generally doing a good job of filling the gap created by the regulatory clampdown on capital available from the banks, whilst in fixed income and Credit it was felt there was an urgent need to accelerate the development of the agency model to prevent disorderly markets. Sell-side, buy-side and fintech left the forum with a stronger resolve to seek out and support the best ideas in multi-asset agency trading with an admission that the clock was ticking to find robust, workable solutions.

”

GLOBALTRADING | Q3 • 2015

EUROPE | 57

Neil Bond,

Equity Dealer, Ardevora Asset Management

“

As liquidity and risk capital wanes, the importance of centralised risk books becomes more important. It is for this reason that we see the sell side embracing multi asset platforms as a way to maximise the efficiency of their capital through the use of centralised risk books. Hedge funds that have the flexibility to move across asset classes also benefit from using multi asset platforms. Unless fixed income moves to a more uniform issuance style it will be difficult to integrate into these multi asset platforms. Markets that have seen very little change over generations can very easily underestimate the size and speed of changes that are now being forced upon them whether from the technical or the regulatory angle.

”

equities and fixed income in terms of technological development and electronification, and partly a result of how mindsets are shifting on the buy-side and sell-side.

Later during the roundtable, platforms and precisely where people trade was also an area that came up for debate. The dozens of fixed income platforms being discussed in Europe, each of which have slightly different characteristics as to who can trade, who their counterparties are, and what size of order they are designed to post, remain controversial. Most of those in the room agreed that over the next few years there will definitely be consolidation of these platforms. It is simply not going to be similar to equities with 80 or so venues strewn throughout the landscape. There isn’t enough liquidity and it will be difficult to get a critical mass of trading on each of these platforms due to the fragmented nature of the instruments in credit. The buy-side however remain observing from the sidelines, looking to see which platforms survive before going through the time and expense of securing connectivity.

technology was shifting to the buy-side, but the fundamental role of the sell-side to make markets and advise on execution would remain. Multi-asset technology only goes so far while certain asset classes remain very difficult to trade electronically. The shift is happening but very slowly - there is a ceiling to how much can be traded electronically. What can be better achieved, and will be pushed by the regulators, is in multi-asset risk management and processing.

All participants agreed that changes are coming to business models, market infrastructure and regulation, but the evolution of the industry takes time, (more so in some areas than others). While firmly looking to the future and driving towards innovation, it was generally accepted that a good dose of realism on the pace of change, was also essential.

The discussion wrapped up by tying together these disparate points. Generally it was agreed that

Q3 • 2015 | GLOBALTRADING

58 | AMERICAS

Employees Retirement System of Texas (ERS) Discuss Managing Their Own Assets Neil Henze, Chief Trader, Michael Clements, Chief Trader and Rob Newhall, Equity Trader, at ERS discuss their technology, commission spend, and development of trading.

Neil Henze: Employees Retirement System of Texas’ (ERS) defined benefit plan currently has assets under management of approximately $26.5 billion. ERS’ history of managing our own assets internally goes back at least 17 years. The difference today is that over the last 10 years we have increased the percentage of assets managed internally to approximately 63%.

Why did we do it? Internal management is less expensive at an average of just 10 basis points to manage funds internally because we have an impressive team of equity and fixed income portfolio managers, analysts and traders. This team has considerable experience generating competitive risk adjusted performance at a reasonable cost.

Our primary rationale for using external managers is attributed to the fact that we do not currently have the capability to manage certain alpha generating assets, but we are constantly learning. In addition, it goes without saying that a lot of our success is attributed to our Board and Investment Advisory Committee, which are very engaged and proactive.

Learning the manager’s role Neil Henze: We trade for both our internal portfolios and most of our external advisors’ portfolios, and this makes ERS unique. ERS trading for external advisors promotes better transparency into the advisor’s portfolio for monitoring purposes, retains control over all trading commissions generated and our trading strategies usually add to the performance of our external advisors’ portfolios. Overall dispersion from the advisor’s composite performance is generally low.

GLOBALTRADING | Q3 • 2015

“We believe consolidation of US dark venues would benefit block trading in this market.

These dark venues remain too fragmented and many institutional participants do not have the same access to the block trades as well as the same priority of accessing each dark venue.”

However, when an advisor has a niche trading advantage over ERS, we recommend the advisor trade the portfolio.

The commissions generated are then applied towards broker research. ERS has a broker commission vote that is based on the quality of broker service and research. TCA performance is measured daily across all of our trades. We trade versus different benchmarks depending upon our portfolio managers’ instructions.

We measure trading performance using arrival price, VWAP and closing price benchmarks.

AMERICAS | 59

Michael Clements, Chief Trader, Employee Retirement System Of Texas – Left Neil Henze, Chief Trader, Employee Retirement System Of Texas, – Center Rob Newhall, Equity Trader, Employee Retirement System Of Texas - Right

Value of technology Rob Newhall: One reason we believe our trading adds value is that ERS has always been extremely progressive towards trading and is very advanced technically. We test and then implement the best trading tools available, and have access to most sources of liquidity. We are quick to reach out to algo trading providers to offer feedback on quality of execution and request changes to algo settings to suit our trading style. Our traders are experienced market technicians that trade currencies, futures and options, in addition to global equities.

priority of accessing each dark venue. It is not uncommon for institutional traders to encounter each other in several dark venues at the same time and then have to figure out which venue the counterparty wants to use to execute.

On this subject, we believe there are no significant differences between what pensions and asset managers want. We want the best of both worlds. We want a healthy competitive marketplace where bid/ ask spreads are low, and a level playing field where rules are transparent and fair competition among all participants promotes vigorous markets.

Meeting in the dark Michael Clements: We believe consolidation of US dark venues would benefit block trading in this market. These dark venues remain too fragmented and many institutional participants do not have the same access to the block trades as well as the same

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60 | AMERICAS

How Technology Reacts Oliver Sung, Managing Director and Head of Electronic Execution, Convergex looks at the process for adapting to changing regulatory environments, and how this impacts the buy-side and sell-side desks.

In terms of regulatory developments, among the biggest changes expected is the SEC’s Tick Pilot Program that is scheduled to begin next May in the U.S. It is interesting to study this kind of event for its impact on our firm; even though it is relatively far off, it is something that we still have to plan for now. We have to start spending money to ensure we are well prepared prior to the date this program goes live.

We are constantly reviewing our development priorities, and any time there are regulatory changes in the marketplace, there is potential impact on our workflow.

Whether it is happening in the US, Asia, or Europe, these are factors that all industry participants must deal with, and we are acutely focused on being up-to-date with regards to our algos in any sort of market. For example, the LSE is coming out with an intraday trading auction , and this is an area that we are looking into – including around how we read the data, how we participate and how our algos work with and around it. Any time there is something new, the marketplace requires us to spend significant time and effort to make sure our solution works seamlessly.

This process starts when we first hear that a change to an existing rule is being proposed. Once we have a broad outline of what is going to change in the market place, we bring in our tech guys and our developers to discuss the upcoming change at a very high level, including the potential impact on our technology. We then use that high-level analysis to start doing rough sketches of possible scenarios (i.e. if the rule says X, we can do Y; if it says A, we should do B, etc). We start by analyzing and planning for how we can tackle the various elements being changed; but, no development is done at this initial stage.

In doing this exercise, we identify potential concerns; posed by the initial rule proposal, which gives us an awareness of possible issues when the final rule is released and becomes effective. This means that we can go into that situation with some form of prior awareness, as opposed to just starting to find a solution when the final rules are implemented.

Global impact We have a global algo development team tasked with

GLOBALTRADING | Q3 • 2015

developing innovative tools for the 35 markets for which we offer algos. That team monitors all the new and potential upcoming changes for those market places. We closely follow ongoing regulatory trends and developments, and watch to see what other global regulators might do in response. While we may address a regulatory change in one local market, we are careful not to directly begin development on a global solution just because one regulator has implemented a new policy.

What our process often allows for is the realisation that, if we have dealt with a similar requirement and solution in one market, we can leverage our knowledge and experience towards the efficient and timely development of solutions for other markets. And so, having a global development team allows for some comfort, because there is a good chance that, if something changes in one regulatory zone, it is likely that regulators elsewhere will follow suit.

Our goal is to provide the best electronic tools for customers wherever they trade. Thus, we are always trying to find ways to further improve the customer experience, whether that is by continuing to enhance our VWAP algorithm, by improving child order implementation, or by developing new algos. If a customer has a particularly specialised request, we will do our best to try and satisfy it. If it is a good idea that can be more broadly applied, we will definitely add it to our platform globally, to the extent it provides value across our client base.

The high touch trader Customer electronic trading has historically been on an agency basis. In contrast, a decision to commit capital has traditionally been handled on the desk by the trader. The real value-add that a high-touch trader brings is giving color, and using their skill set to facilitate a block trade between two counterparties.

We continue to use our electronic tools to drive efficiencies and facilitate block trades where we can.

However, it takes a lot of skill from the high-touch traders to put the large situations together. There’s still a need for human on the sell-side.

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Oliver Sung, Managing Director and Head of Electronic Execution, Convergex As the buy-side continues to develop, we have to foresee what we are going to do next. We have to build automated systems for what we anticipate happening in the future and, therefore, try to take more permutations into account.

However, there will always be instances where human intervention is necessary to handle particular situations.

The reality is that computers can’t react to situations until they are properly programmed. However, the technology is continuing to improve, and the buy-side is increasingly confident using those tools.

Buy-side changes Our buy-side clients are increasingly using more variations of algos, and as a result, algos are becoming much more sophisticated every year. Clients are also becoming increasingly more comfortable with technology. Buy-side traders have moved past asking basic questions about how to use algos. They are now more sophisticated and are focusing more on understanding how the algos should work and how best to integrate them into their detailed workflow. The responsibility for technology is definitely moving from the sell-side to the buy-side. The sell-side is increasingly asking the buy-side about their workflow needs. It is using that information to develop solutions aimed at and addressing those buy-side needs, from the very basic to the very complicated, such as customising algos that the buy-side might require.

“The buy-side is still relying on its brokers for the information, but it is also going to exchanges to obtain it. As they learn and become more sophisticated, the buy-side is going up and down the chain to obtain needed information.” for the trades that they would like us to do. The increasing sophistication of the buy-side is a good thing for everybody involved. It pushes us on the sell-side to continue to innovate, and allows the buy-side to use the tools set in a more informed, efficient and productive way.

The buy-sides’ increased sophistication allows them to better understand and anticipate their own needs and to narrow down the tools that they know are going to work for them. Even if everybody has a VWAP algo there is a continued drive for sophistication on the buy-side to understand the details of how the algo is actually working.

This allows the buy-side to compare and choose the VWAP engine that best suits their needs.

The buy-side is still relying on its brokers for the information, but it is also going to exchanges to obtain it.

As they learn and become more sophisticated, the buy-side is going up and down the chain to obtain needed information.

Conclusion There is much to value in the intuition and instincts of a skilled and experienced trader on a desk who handles special situations. We will continue to see equity desks and algos that become increasingly sophisticated. As other asset class algos start rolling out (depending on how much collaboration they have with their equity brethren), that level of sophistication will accelerate more than it did on the equity side.

By asking more complicated questions, the buy-side is driving us on the sell-side to continue to improve our platforms, invest in the resources, and provide solutions

Q3 • 2015 | GLOBALTRADING

62 | ASIA

The 12% Rule For Asia’s Closing Auctions

By Gary Stone, Chief Strategy Officer, Bloomberg Trading Solutions, Tom Kingsley, Head of the APAC, Bloomberg Tradebook, Gabriel Kan, Senior Quantitative Analyst (APAC), Bloomberg Tradebook Liquidity and spreads have always been a challenge when investing in Asia’s equity markets. Some of this challenge is being alleviated by Asia’s closing auctions growing into a significant liquidity event. Averaging 3-5% of average daily volume (ADV) in 2009, during Q1 2015, the closing auctions across developed, developing and emerging Asian markets account, on

“To measure the market impact at the different participation rates, we benchmark the closing price with respect to the last traded price in the continuous trading period. This is analogous to the arrival price benchmark in the common transaction cost analysis.” average, for almost 13% of the average daily volume.

Given the importance of the closing auction, the Hong Kong Stock Exchange is planning to re-introduce one in 2016. Traders, whether they are seeking liquidity to accumulate or distribute an investment or replicate an over-the-day execution, simply cannot ignore the closing auction anymore. The new challenge, however,

GLOBALTRADING | Q3 • 2015

Gary Stone, Chief Strategy Officer, Bloomberg Trading Solutions is how to trade them. At Institutional Investor’s June 2015 Asia Trader Forum in Hong Kong, more than 60 head traders were surveyed – they said that extreme price movements were their biggest concern in the auction process.

We would like to introduce the 12% “Rule of Thumb.”

Price movement is impacted and the question from a quantitative perspective is: Can we determine the maximum amount that can be allocated to the closing auctions while minimising potential market impact?

The answer involves first estimating closing auction volume and then determining an optimal cap on the participation rate.

ASIA | 63

Figure 1.

Closing auction volume in shares (top) and a ratio of total day volume (bottom) of ANZ AT Equity

Source: Bloomberg

Estimation of the closing auction volume Whether expressed as shares or as a ratio of the day’s total volume, closing auction volume is volatile (Figure 1). To estimate closing auction volume, a predictive model must not only provide a reasonable volume prediction, but, more important, it must minimise and, if possible, avoid overestimation. Overestimation will drive adverse impact. Ideally, if the model misestimates the volume, it should err in a way that minimises tail risk, i.e., does not cause the trader to introduce significant market impact and drive the closing price.

Our quantitative research suggests that estimating the closing auction volume requires an estimation of “today’s volume” combined with other factors such as yesterday’s closing auction volume, the number of trades on the consolidated tape and special events such as month-ends, derivatives expiries, Japan special quote days and index rebalancing days. A model based on these and other factors appears to stabilise around

“Can we determine the maximum amount that can be allocated to the closing auctions while minimising potential market impact?” midday, implying that traders can start to allocate shares into the closing auction based on midday information.

Formulating a “Rule of Thumb” To estimate an optimal participation rate, we used actual ASX execution data over the past year. We believe that the ASX is a good proxy for the rest of Asia’s closing auctions. It used to be that Australia’s

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64 | ASIA

Figure 2.

Distribution of closing auction orders in Australia Stock Exchange (ASX)

Source: Bloomberg Tradebook

Figure 3.

Shortfall of closing auction orders vs. last traded price in the continuous trading period expressed in bid-ask spread

Tom Kingsley, Head of the APAC, Bloomberg Tradebook

about zero when the average participation rate is less than 7%. However, the shortfall starts increasing when the participation rate rises above 7% and the average shortfall crosses the zero mark near 11% participation.

The 25%-tile lower band rises above zero when participation rate reaches 13%.

Source: Bloomberg Tradebook

markets resembled Europe. However, we see the closing behavior maturing toward the ASX as the close has become a benchmark and the closing auction a significant ADV liquidity event. We found in Hong Kong, Singapore, Japan, South Korea, Taiwan, Malaysia, New Zealand and Thailand that traders’ participation in the closing auctions was skewed heavily to the left.

To measure the market impact at the different participation rates, we benchmark the closing price with respect to the last traded price in the continuous trading period. This is analogous to the arrival price benchmark in the common transaction cost analysis.

Figure 3 shows the average shortfall measured in bidask spread for closing auction orders. The shortfall is

GLOBALTRADING | Q3 • 2015

The 12% Rule of Thumb Taking the middle point establishes our “Rule of Thumb.” Our statistical analysis confirms that institutional traders are currently not leveraging closing auctions to their full capacity. The Australian Stock Exchange was used as a proxy; the data suggests that traders should cap their closing auction order size at 12% of the predicted closing auction volume to avoid significant market impact. We believe that this rule of thumb generally applies to the other markets.

In practice, the “Rule of Thumb” works as follows: Take the lesser of 12% of the predicted closing auction volume and 12% of your order and allocate that share amount to the closing auction.

ASIA | 65

One Year On:

Hong Kong’s Algo Regulation With George Molina, Director of Asian Trading, Franklin Templeton Short term impact of regulation Regardless of the transparency Hong Kong’s new regulations may achieve, participants always bear the burden of interpreting and translating it into existing workflows. This process typically resembles a mad dash. The impact to end clients is numerous requests for something similar, but slightly different.

have not seen any slow-down in algos being created but more thought being put into in custom algos for clients. In terms of changes, going back to the transparency comment, we now require all brokers to send order execution trails on our executions and orders and certify this via our Markit system.

Coming together as an industry and agreeing on a standard approach to defining the requirements made the difference in the implementation and execution of the SFC’s algo rules. Instead of the mad dash, we began a thorough search for a technology solution to facilitate more efficient management of interactions and disclosures.

Impact on sell-side Although the regs were focused on due diligence, the rules also spurred the comparison of services, backup, and training offered by algo providers. In order to streamline the due diligence process, the buy-side worked with Asia Trader Forum and Markit to have a standardised due diligence questionnaire deployed online via the Markit Counterparty Manager platform.

Longer term impact of SFC’s algo regulation The impact overall has been positive: there’s a forced awareness to understand your counterparties, and greater transparency created across the industry. We

By consolidating the information online in one location, the buy-side was able to make comprehensive comparisons across algo providers that would have been very difficult before. I believe

Q3 • 2015 | GLOBALTRADING

66 | ASIA

“The timing of the solution rolled out in Hong Kong between the buy-sides, dealers, and Markit was done in less than a year. In other jurisdictions, where no regulatory driver exists, discussions are ongoing among industry participants around a similar process as a ‘best practice’, but progress is slow. ” this has built stronger more frequent relationships with our brokers and vice versa from their side. In this industry “Know Your Client” should be a gauge of your success.

Ongoing drive for transparency A regulatory impetus was clearly needed. The timing of the solution rolled out in Hong Kong between the buy-sides, dealers, and Markit was done in less than a year. In other jurisdictions, where no regulatory driver exists, discussions are ongoing among industry participants around a similar process as a ‘best practice’, but progress is slow.

Without the SFC regulation, one could argue that nothing would have happened to even provide an example of ‘best practice’ for other jurisdictions to follow. At Franklin Templeton we are taking this certification globally and although we have done similar questionnaires with our brokers on both hi-touch and low-touch venues. We believe now that there is a platform we should leverage and expand among all our 13 equity trading desks globally.

GLOBALTRADING | Q3 • 2015

George Molina, Director of Asian Trading, Franklin Templeton This transparency push, as with the dark pool requirements, fits within the theme of regulators requiring greater levels of transparency and due diligence for market participants, both from a client and product perspective. The SFC are certainly ahead in the electronic trading certification space and are prompting buy and sell side firms to think about how they may want to apply similar processes elsewhere in the world as a best practice, irrespective of an active regulation.

Continuing to manually and bilaterally manage the increasing requirements and best practices associated to being ‘ready to transact’ is not sustainable, the industry needs to move towards more standardization, centralization and digitization of common and duplicative workflows.

ASIA | 67

Towards Unbundling Lee Bray, Head of Trading APAC, J.P. Morgan Asset Management, looks at the ongoing trends in unbundling and its impact on the buy-side and sell-side.

There is a definite advantage to the underlying client as there’s a lot more certainty around commission spend under the new European regulatory regime.

This is not to say that there was anything wrong with how commissions were being managed before, the mechanism just changes when you disaggregate research and execution completely. However, there is a discussion over the unintended consequences of the new rules and how is that going to affect the overall client experience? The problem is that the impact is yet to be determined because even at this late stage in the legislative process, it’s not exactly clear how it’s all going to settle down. Will the costs be absorbed by the client or the fund management industry?

“I think that these conversations around the proper pricing of research and execution will be a big focus for the sell-side in the next year or so, and there will need to be a lot of dialogue between the buy -side and the sell-side. ”

Smaller buy-side On top of the uncertainty that we all face regarding what final shape the rules will take, it is becoming increasing obvious that some of the smaller asset management firms will be less able to absorb the extra bottom line costs that this new legislation might impose. It may be difficult for them to remain as a significant client to the brokerage community, and therefore you might see them lose out.

European and global perspective. Many global asset management firms over the last two or three years have been working towards a position where they will be well-positioned to meet that new legislation on day 1 if it goes in as intended.

After much back and forth, and some optimism that there would be a softening of the stance of the regulators, we are reaching the conclusion that the rules are likely going ahead in their current form.

This obviously raises some questions about whether that would be good or bad for the industry, from a

From my perspective, the key question is how we work with the brokerage community to get a price for the research that the buy-side firms are consuming.

It could be argued that there is a slight reticence from the brokers to put a value on items while there is not an obligation to currently do so, this conversation

Q3 • 2015 | GLOBALTRADING

68 | ASIA

“The precise mapping of funds and trading within and between the vast range of global firms that have to be involved is a very difficult topic to deal with.” of these things happened in the equity world seven or eight years ago, and you can see that evolution happening at the very early stages in fixed income.

Lee Bray, Head of Trading APAC, J.P. Morgan Asset Management needs driving forwards. As a result of the uncertainty, exaggerated partly by the legislative uncertainty, the sell-side will hold off on providing us with menu pricing, as they will want absolute clarity before taking this step.

Will they be prepared? Of course, but I think that they will leave an option open until the very last moment.

I think that these conversations around the proper pricing of research and execution will be a big focus for the sell-side in the next year or so, and there will need to be a lot of dialogue between the buy -side and the sell-side.

Fixed income Although I would say the equity world seems to be more prepared given the focus that has been on commissions recently. One difficulty is that the equity world has explicit commissions, whereas in fixed income there is the added complexity of not having the same structure of commissions to break down.

It would require a steep change in the structure of the market to implement some solutions similar to those that we see in equities.

To some extent the process has already begun. There has been a lot of effort to implement TCA and general cost transparency in fixed income, with larger firms now using systems to give quote comparisons. Many

GLOBALTRADING | Q3 • 2015

Asia and global regulation In APAC we have a ‘wait and see’ attitude towards how European regulators are approaching this new environment. Clearly in this region, we have several regulators that don’t explicitly recognise something as simple as a CSA payment. If a firm wanted to implement a global model it may be an even bigger leap to operate the system which MiFID II is proposing.

For example, in Taiwan and Japan there will be ongoing difficulties in breaking down commissions as a firm may wish to.

There is a lot of money that is global and it may be difficult to reconcile the Asian regulation with the European situation, and then wider global regulation.

For example, in Taiwan and Japan there will be ongoing difficulties in breaking down commissions as a firm may wish to. The precise mapping of funds and trading within and between the vast range of global firms that have to be involved is a very difficult topic to deal with.

We are heading towards the separation of execution and research, and the environment will evolve. We will reach the situation where both the regulators and the asset management firms are comfortable, but there are still question marks on a number of areas and we just need to get that clarity. Global firms are well prepared and we are operating unbundled where we can with CSA programs etc.

70 | Fragmentation

GLOBAL FRAGMENTATION AT A GLANCE

MARKET SHARE ANALYSIS, Q2 2015

The analysis is based on lit venues only for Europe, and the USA and lit and dark for all other regions.

Venues with smaller than 0.01% market share are not included in the charts but included in the calculations.

GLOBALTRADING | Q3 • 2015

Source: Fidessa

Fragmentation | 71

Liquidity fragmentation in the US - Q2 2015 Liquidity fragmentation remains stable with few fluctuations over the past 6 months. FFI levels for the major US indices are in the range of 3.8 to 4.5, still well above those in most other countries and regions.

Top traded stocks by turnover in Q2 included Apple, Facebook and Microsoft; and by volume, Bank of America, General Electric and Apple. It is interesting to see that the top stocks by volume are, on average, more fragmented than the top stocks traded by turnover.

Top 10 traded stocks by tunrover based on S&P 500

Top 10 traded stocks by volume based on S&P 500

US lit venues: turnover and market share over one year

Source: Fidessa

Q3 • 2015 | GLOBALTRADING

72 | 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 and operates 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 | Q3 • 2015

Flyer has built a team of operational experts who manage and provide Managed 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 Order Management System, and the Flyer Trading Network.

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 | 73

CameronTec Group

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.

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.

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.

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.

Complementary FIX integration, testing, on boarding and management solutions including VeriFIX, FIX Conductor and FIX Technician CTS, build out an end-to-end global connectivity offering for any electronic trading

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.

environment, using or migrating to FIX and proprietary protocols.

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: www.camerontecgroup.com

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.

Contact details: info@convergex.com. www.convergex.com

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.

discussion? Contact us about our Face2Face Executive Roundtables. @FIXGlobalOnline and GlobalTrading Journal.

Contact details: yulia@fixglobal.com www.fixglobal.com

Interested in meeting your prospects and clients in a neutral setting for a thought-provoking

Q3 • 2015 | GLOBALTRADING

74 | FIX Trading Community MEMBERS

FIX Trading Community Members *Premier Global Members marked in bold

360 Treasury Systems AG 42 Consulting Pte Ltd Activ Financial 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 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. BGC Partners 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. Cedar Rock Capital 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 CQG inc Credit Suisse CSC Cynopsis Solutions Daiwa SB Investments Daiwa Securities Group Inc. DATAROAD Dealogic DealHub Deutsche Bank Deutsche Boerse Group Digital Currency Labs Dimensional Fund Advisors DTCC Eastspring Investments (Singapore) Limited Ecodigi Tecnologia e Serviços Ltda Edelweiss Securities Limited Egypt For Information Dissemination 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 FISD Fiserv FIX Flyer LLC Fix8 FIXNETIX FIXNOX Forex Capital Markets, LLC FpML

Premier Global Members

GLOBALTRADING | Q3 • 2015

Franklin Templeton Investments Gamma Three Trading, LLC 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 Incisus Capital Partners Informagi AB InfoWare Infront AS Instinet Integral Development Corp.

Interactive Data Intercontinental Exchange (ICE) International Securities Exchange (ISE) Investment Management Association Investment Technology Group (ITG) Ipreo 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 KVH Lasalletech LCH Clearnet Linedata Liquidnet LIST Group London Market Systems LSEGroup M&G MACD Macquarie Securities Limited MAE - Mercado Abierto Electronico S.A. MarketAxess Market Prizm Markit

FIX Trading Community MEMBERS | 75

Marshall Wace Asset Management M-DAQ MFS Investment Management Mizuho Securities Morgan Stanley Investment Management Morgan Stanley MTS SpA Nanospeed NASDAQ OMX Neonet 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 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 Pioneer Investments 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 Royal Bank of Scotland S&P Capital IQ Real-Time Solutions Santander Global Banking & Markets SASLA (South African Securities Lending Association) Sberbank CIB Schroders Shanghai Stock Exchange SIFMA SimCorp Singapore Exchange SIX Swiss Exchange Skandinaviska Enskilda Banken AB Sloane Robinson

smartTradeTechnologies Societe Generale Southeastern Asset Mgmt Spring Securities International AB 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 Nigerian Stock Exchange The Technancial Company The Vanguard Group Thomson Reuters 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 Trax trueEX Group LLC Tullett Prebon Group Ltd Turquoise TWIST UBS Investment Bank ULLINK Velocimetrics Versitrac Systems Corporation Volante Technologies Warsaw Stock Exchange Wellington Management Company Winterflood Securities XBRL Xetra (Deutsche Bรถrse) Yambina Limited Zeopard Consulting

New Member FIX Trading Community wishes to welcome the following companies to its growing worldwide membership.

For more information, please visit: www.fixtradingcommunity.org 42 Consulting Pte Ltd www.42-consulting.com

BGC Partners

www.bgcpartners.com

Digital Currency Labs

www.digitalcurrencylabs.com

Ipreo

www.ipreo.com

Marshall Wace Asset Management www.mwam.com

Sloane Robinson

www.sloanerobinson.com

Southeastern Asset Mgmt www.southeasternasset.com

Trax

www.traxmarkets.com

Premier Global Members

Q3 โ ข 2015 | GLOBALTRADING

76 | LAST WORD

Best thing about your city?

I moved to Dallas five years ago and have very much enjoyed living here for several reasons. Firstly, it is one of the more affordable big cities in the U.S. due to having no state income tax, which gives families more control of their discretionary income. Secondly, I love Dallas for its location. Because we are centrally located in the U.S., we are less than three hours away from skiing in Aspen, swimming in California or Florida, and in my case visiting family in the northeast. Last but not least, we spend a lot of time outside and have fantastic weather ten out of twelve months throughout the year.

My City

Dallas, TX

By Joe Sowin, Head of Global Equity Trading Highland Capital Management

Worst thing about your city?

Since Dallas lies at the lower end of the “Tornado Alley”, tornadoes are perhaps the biggest threat to the city, but for most, the summer months of July and August prove to be the most challenging as temperatures often exceed 100 degrees during the day.

Getting to work?

Dallas suburbs are well spread out around the city. I recently moved to Southlake, TX, a suburb 25 miles northwest of the city and my morning commute is around 25 minutes, sometimes closer to 35 minutes in the evening traffic.

View from your desk?

I look out over much of our “uptown” area including the Rosewood Crescent Hotel and Crescent Courtyard.

Where to take your clients/brokers for dinner?

There is a wide variety of great food around Dallas. If you’re looking for seafood or sushi then Nobu, Uchi, Ocean Prime and Trulucks are great options. For your traditional steak house or Texas inspired restaurant I’d check out Stampede 66, Al Biernat’s, The Capital Grille or Nick & Sam’s.

And a relaxed spot with friends and family?

Klyde Warren Park, is relatively new, centrally located perched atop a sunken freeway. The new green space offers a wide variety of activities including a dog park, children’s playground, scheduled concerts, and restaurants all within walking distance of financial and art districts.

Most activities are free and offered year round. My favorite part of the park are the variety of food truck stations.

Best place to stay when in town?

There are a lot of great hotels to stay at in Dallas, but if you want to be centrally located and in the heart of Dallas then you can’t go wrong choosing from either The Rosewood Crescent, Hotel ZaZa, The Omni Hotel Dallas, The Ritz Carlton, The Joule or The Adolphus Hotel, where Queen Elizabeth II and Prince Phillip stayed when they visited Dallas in 1991.

GLOBALTRADING | Q3 • 2015

Best tourist spot?

Too many to choose just one, but the Sixth Floor Museum at Dealey Plaza and grassy knoll will appeal to traditionalists and conspiracy theorists. The George W. Bush Presidential Center is the home of the Bush Presidential Library and Museum, and the Bush Institute. It is an ideal attraction for those interested in history and political science and located on the campus of Southern Methodist University. The Perot Museum of Nature and Science is Dallas’ newest museum and fun for the whole family and conveniently located near the arts district and Klyde Warren Park. Dallas Arboretum and Botanical Garden features water views of White Rock Lake and offers 60 + acres of flower beds, manicured lawns, and seasonal displays such as the pumpkin patch in fall months. Along with the floral displays, the arboretum is now home to one of the best children’s gardens in the U.S. with exhibits that teach about water and wind energy, a special toddler play area and other fun learning areas. Like many things in Dallas, the Dallas Arboretum and Botanical Garden is family friendly and ideal for a picnic.

CONNEX SIMPLIFYING FIX SM

SOPHISTICATED SOLUTIONS FOR BROKERDEALERS A Single Point of Contact to Consolidate and Manage Your FIX Connectivity Empowering you to: > Reduce Overall Expenses > Streamline The Onboarding Lifecycle > View All Connections Through A FIX Monitoring Dashboard > Administer Real-Time, Pre-Trade Risk Management > Utilize Compliance Surveillance and Reporting Utilities For more information about Connex, contact us at connex@convergex.com.