2016q4 ebook

FIXGLOBAL.COM

Q4 • 2016 • Issue #60

G LO B A LT R A D I N G

In From The Cold – The Buy-side Use Of Derivatives Gianluca Minieri, Global Head of Trading, Pioneer Investments ALSO INSIDE :

ASIC, ASIFMA, CANDRIAM INVESTORS, ITAU ASSET MANAGEMENT, NATIXIS ASSET MANAGEMENT

In support of

Global Edition Subscribe at www.fixglobal.com

GlobalTrading’s Editorial Think Tank Dear Readers, Regulatory requirements, especially those contained in MiFID II, are forcing members of the trading community to be flexible and imaginative. Compliance imposes cost pressures on both buy- and sell-sides as they seek to introduce new systems or adapt old ones that meet an evolving landscape in which they are also helping to form through continual consultation with regulators. The demands on both revenues and staffing hours might sometimes feel burdensome, but they also provide an opportunity for innovation through the application of the latest technology that should ultimately enhance trade execution processes and pre- and post- trade operations.

Bill Hebert Co-Chair, Global Member Services Committee, FIX Trading Community

This ingenuity is increasingly being applied across asset classes and geographical regions, improving transparency and efficiency for global institutional investors, who are then better able to service their clients. Dealing costs are reduced, best prices are attained and order sizes are filled – at least, these are the objectives. And, encouragingly, we are finding that the trend is firmly towards achieving those goals.

As many of the articles in this quarter’s issue of Global Trading indicate, there are still many issues that need to be resolved. However, the recognition and discussion of problems and inefficiencies are healthy signs that there is no complacency within the industry. Both cooperation and competition are taking place to ensure that the outlook is promising.

Carlos Oliveira Brandes Investment Partners

Marcus Consolini, Ullink

Several of the initiatives are now being driven by investors, who no longer desire to rely exclusively on sell-side expertise and technology. For instance, many are considering the value of multi-asset trading platforms as they expand their multi-asset fund offerings to clients; others are looking for better ways to extract value from the use of derivatives for hedging and foreign exchange for incremental returns in a low yield investment universe.

Meanwhile, there are also signs that technologies are converging between high- and low-touch trade execution, driven by a common aim to optimise dealing price and access liquidity.

Please enjoy this edition of GlobalTrading. As always, we appreciate your interest, support and contributions to GlobalTrading and the FIX Trading Community.

Emma Quinn AB

Greg Lee Barclays

Best Regards,

Bill Hebert Co-Chair, Global Member Services Committee, FIX Trading Community

GlobalTrading Publisher

Design & Layout

General Manager

General Enquiries

Managing Editor

Advertising

Edward Mangles

Rebecca Trant

Rupert Walker

Sales and Marketing Yulia Kuksina Ravi Gangwani Tania Castro

Photographer

Fennell Photography

Goldie Lee

info@fixglobal.com

Companies interested in discussing sponsorship and/or advertising opportunities please contact your regional editorial representative or sales@fixglobal.com.

Publisher

HM Publishing 2802, 28/F Lippo Centre Tower Two 89 Queensway, Admiralty, Hong Kong Tel: 852 2121 1566

Publishers’ Note GlobalTrading is proudly published by HM Publishing in support of the FIX Protocol and the FIX Trading Community. GlobalTrading is the official quarterly publication of the the FIX Trading Community, however, the content does not necessarily represent the opinions of the FIX Trading Community.

The opinions expressed in this publication are not necessarily those of the publishers or of the institutions of the contributing author. Although care has been taken to ensure the accuracy of the information contained within the publication, neither the publishers, authors nor their employers can be held liable for any inaccuracies, errors or omissions; nor held liable for any actions taken on the basis of the views expressed, or information provided within this publication.

No part of this publication covered by the publisher’s copyright may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, be they graphic, electronic or mechanical, including photocopying, without the written permission of the publisher. Any unauthorised use of this publication will result in immediate legal proceedings.

All Rights Reserved © 2016

How can a court filing at 10 a.m. affect my holdings at 10:05?

The answer is EIKON. The financial platform built for now.

Be the first to know about market-moving events, and the most informed about how a similar event has moved the market before.

It’s our unique connection to, and analytics of, lawsuits that make the difference – one you can leverage in near-real time to your clients’ advantage.

Learn more at financial.tr.com

© 2016 Thomson Reuters S040070b/10-16

CONTENTS 7

FOCAL POINT

7 In From The Cold: The Buy-side Use Of Derivatives - Gianluca Minieri, Pioneer Investments 13 Multi-Asset Trading: To Specialise Or Not To Specialise - Fabien Oreve, Candriam Investors Group

INSIGHT

15 Key To The Highway: The Changing Face Of High And Low Touch Execution - Steve Grob, Fidessa

29

33 The Convergence Of Multi-asset Trading - Vincent Burzynski and Jonas Lindqvist, FIS 36 Pre-Trade Risk Assessment Across Multiple Channels - Marcus Consolini, Ullink EUROPE 39 Uniting Technology and Regulation - Will Haskins for GlobalTrading 42 Trading In The Primary Markets - Laurent Albert, NAM Finance AMERICAS

19 Liquidity Seeking Algorithms: How Can Alpha Expectations Influence Strategy Selection Opportunities - Rahul Grover and Ben Springett, Jefferies 23 Governance, Standardisation Driving Securities’ Blockchains - Will Haskins for GlobalTrading

PRODUCT OVERVIEW

26 MDSL Transaction Reconciliation Reporting OPINION 29 Nothing Is As Constant As Change: How To Achieve Better Outcomes And Embrace Change To Realise Meaningful Results - Roger McAvoy and Andrew Cromie, 360T Group

43

INDUSTRY 54 Company Profiles

56 Nordics Briefing Review 2016 - Tim Healy, FIX Trading Community 59 MMT – The Journey So Far - Anna Branch, Fidessa and FIX MMT

62 FIX Trading Community Members MY CITY

64 Dublin, Ireland - Gianluca Minieri, Pioneer Investments

43 On The Performance Of VWAP Execution Algorithms - Hellinton Takada and Tiago Magalhães, Itaú Asset Management ASIA 47 Conversations And Computers: The Modern Regulator’s Toolkit - Greg Yanco and Nathan Bourne, Australian Securities and Investment Commission

28

50 Shenzhen-Hong Kong Stock Connect Gives Global Investors Access To China’s New Economy Stocks - Nicholas Ronalds, ASIFMA

50

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

HIGHLIGHTS “Through the use of derivatives, the portfolio manager can exactly manage the risks that he wants to manage. Any unwanted risk, any risk that he doesn’t feel like managing, or that he doesn’t feel like sustaining, he can actually hedge very efficiently using a derivative instrument… Derivatives are a vital tool for the asset management industry, as they allow us to improve and enhance our investment process. If derivatives were not allowed for example, the number of transactions that we do quickly and economically using derivatives today, would have to be done using cash systems. We would sustain much larger transaction and operational costs, which eventually would be transferred to the clients. They would therefore see a deterioration in the cost of trading and consequentially, overall performance.” P.7 Gianluca Minieri, Global Head of Trading, Pioneer Investments

“Finally, the development of multi-asset execution teams derives from a greater reactivity to the changes brought about by electronic trading. The growing electronification of the markets has enhanced convergence among asset classes as different as bonds, equities and foreign exchange. The growing sophistication of the multi-asset OEMS has enhanced innovation in data consolidation, with pre-trade, trade and post-trade information directly available in the same place, on the same screen, for every large asset class.“ P.13 Fabien Oreve, Global Head of Trading, Candriam Investors Group

“It is a simple fact that low touch service lines were established after high touch ones and so made the creation of a second whole new technology stack inevitable. This led to a new set of market gateways, a super-lite OMS that could support low touch algos and a FIX interface for receiving client order flow. But, by then, the high touch desk was receiving the bulk of their orders electronically too and, of course, sending them out to market the same way.

The sensible approach, then, is to collapse all the technology supporting both business lines together. This allows more effort to be put into market and asset class coverage, performance, speed and resilience – benefitting both high and low touch service lines.” P.15 Steve Grob, Group Strategy Director, Fidessa

“Advanced execution brokers are well placed to help clients model profiles and refine order instructions / parameterisation (or to develop bespoke customisations), but only when they have garnered enough data points to draw statistically significant conclusions. The likelihood of one broker having sufficient transparency of the investment strategy origin and trade catalyst for order flow originating from a centralised dealing client is low, and thus the onus is more frequently being passed upstream to the buy-side to gather and analyse the relevant datasets.” P.19 Ben Springett, Managing Director, Electronic and Program Trading, Jefferies

“Cyber resilience is a high priority for ASIC, and we have developed a strategy that aims to advance awareness and understanding of the cyber threat landscape, and introduced mechanisms for improving resilience across our regulated entities. In particular, our focus in 2017 will be to work with our population of mid- and lower-tier firms to assess their cyber resilience profile through a process of self-assessment. These firms can be more susceptible to cyber threats if they are not able to access appropriate cyber security skills and put in place adequate risk mitigation plans.” P.47 Greg Yanco, Senior Executive Leader, Market Supervison, ASIC

FOCAL POINT | 7

In From The Cold – The Buy-side Use Of Derivatives

By Gianluca Minieri, Global Head of Trading, Pioneer Investments

Q4 • 2016 | GLOBALTRADING

8 | FOCAL POINT

Many changes have occurred over the last ten years in the way that investment firms manage their strategies.

Certainly at Pioneer Investments, we have seen a significant increase in the volumes of derivatives over the last few years. Ten years ago, asset managers like Pioneer (long only asset managers, insurance companies, pension funds) were all very traditional investors. They mostly managed plain vanilla strategies investing almost entirely in cash instruments, so mainly bonds and equities. In terms of investment, there was less pressure to perform given the market back then, so more focus on investment ideas and opportunities to exploit. The last ten years have been very challenging for institutional investors due to a combination of factors: • the ultra-low interest rate environment, • low volatility, • negative rates in some cases and • significant regulatory change.

In this environment, asset managers have had to significantly expand their product offerings due to competition and the increasing challenge of finding investment opportunities. The resulting trend that the asset management industry in general has taken, has been to increase the sophistication of investment strategies in an effort to improve performance, find new investment opportunities and beat the competition. The resulting trading strategies have consequently become more complex and more sophisticated. Often these strategies now cut across different asset classes, different instruments and different currencies.

Directional strategies are combined with hedging activities, so derivatives are combined with cash instruments. Fixed income instruments are combined with equities across the same order, so the sophistication of our investment strategies has increased.

Increased use of derivatives This type of environment has been the primary catalyst that has led to a significant increase in the use of derivatives in the financial industry in general. One very practical example is the increased demand from our clients for Absolute Return strategies; meaning strategies that can or have the potential to generate returns in ‘all-weather’ conditions. These strategies are, by definition, derivatives intensive, because they need to employ a wide range of different instruments, both cash and derivatives, and that are both listed and over-the-counter (OTC).

GLOBALTRADING | Q4 • 2016

“These strategies can provide exposure to specific risks on top of the core investment strategy for yield enhancement purposes. We also exploit derivatives to provide protection, with derivatives delivering a tailored exposure to a specific risk in a much more effective way than using an underlying instrument.”

Increased volumes At Pioneer we have seen an increase in volumes of over 80% over the last year (yoy), with 120% over the last two years. Also, 90% of our business was traditionally on the spot-FX market, but today a significant portion of our business is made using FX-forwards. Over the last two years we have seen a 150% increase in terms of FX volumes. As a head of trading, I have had to consider if there is any way we might trade more efficiently to minimise or reduce our risk and cost.

Our investment processes, in line with the rest of the industry, reflects that derivatives can have a multitude of uses.

Today’s derivative strategies At Pioneer, we use derivatives for hedging, but also for yield enhancement. One of the typical uses for derivatives is to create overlay strategies. These strategies can provide exposure to specific risks on top of the core investment strategy for yield enhancement purposes. We also exploit derivatives to provide protection, with derivatives delivering a tailored exposure to a specific risk in a much more effective way than using an underlying instrument.

Examples might include: covering a specific bucket on the interest rate curve, coverage for a specific duration,

FOCAL POINT | 9

Gianluca Minieri, Global Head of Trading, Pioneer Investments

or to cover a specific sub‑sector equity exposure.

These are all situations where you can actually tailor your coverage by using derivatives, which wouldn’t be achievable using a cash instrument.

Another use of derivatives are the portable alpha overlays, where you use a derivative to exceed performance of a given market or a given exposure, through an investment in another unrelated asset class.

Derivatives managing risk We see derivatives as a very valuable tool to optimise the way we manage our investment strategies because only derivatives can actually allow you to hedge the unwanted risk. Through the use of derivatives, the portfolio manager can exactly manage the risks that he wants to manage. Any unwanted risk, any risk that he doesn’t feel like managing, or that he doesn’t feel like sustaining, he can actually hedge very efficiently using a derivative instrument. Very rarely do we use them to speculate on the movement on the underlying

asset. Derivatives are a set of precision tools that are available to the industry as a whole.

If you consider the way that the market has changed since the introduction of some regulatory measures, like MiFID 1 for example, you have seen the fragmentation of liquidity, the reduction of liquidity and so on. The reality is that markets have become more complicated. Policy makers have made it more difficult for investment banks to play the role that they used to play in financial markets. There are fewer capital providers and fewer market-makers, resulting in there being fewer firms that are ready to take risk on their book. Clearly, in financial markets you can never eliminate risk: a risk never disappears, it is only transferred on to someone else. Now, the asset management company has to take on that risk. A lot of risk has been transferred and now sits with us to manage. In the primary market, before a new issuance was raised, the underwriter took on the majority of risk. Today, the new issue (the new bond or stock) only

Q4 • 2016 | GLOBALTRADING

10 | FOCAL POINT

takes place after it has been pre-sold to clients, with the asset manager taking on the risk.

As a result, we need to be more active in the way that we manage our investment strategies. Derivatives offer this type of possibility because you can buy or sell them with a small up-front cost. Sometimes they are more liquid than the underlying asset. If you want to hedge a specific risk for a short period of time, you just take a derivative exposure and then you unwind it when you don’t need it anymore. It is much more efficient.

Derivatives often offer a better level of liquidity.

The consequences of implementing these derivative strategies Going back a few years, the term ‘derivatives’ had negative connotations for many investors and regulators, mainly because they were widely misunderstood tools. This has changed. There also used to be a perception that the only way you could improve the management of your derivatives was to hire specialist, skilled people. Certainly we still need to have staff skilled in managing derivatives but the key to improvement is in the education and training of staff across the organisation - from the trader, to top management of the company, to people that manage the back office. Derivatives are very demanding, not only from an operational perspective, but also from an investment perspective; they carry more risk.

Derivatives create leverage, which means that when you take a position in derivatives you are taking a position that is bigger than your funded position.

Leverage can amplify your returns, but it can also amplify losses. A small movement in the underlying assets can actually cause a large price difference in the value of the derivatives. It’s important for firms not only to have skilled staff that can trade them, but also to improve the knowledge and education across the whole company on how to manage a derivative through its lifecycle - from the time you trade the derivative, to the time that the derivative is in the NAV of the fund. This is the secret to success.

Proper infrastructure is essential: your order management system (OMS) and execution management system (EMS) must ensure that the order on a derivative is actually managed through the entire system. It is absolutely key that every single step of the cycle of the trade is done within the system. Processes must be formalised so everyone knows what to do

GLOBALTRADING | Q4 • 2016

and when. Systems must be capable of managing all the more demanding phases in the post-trade environment. For example, the complexity that extends from managing corporate actions, the contractual agreement, pricing and collateral management.

Derivatives are complicated, and therefore demanding from an operational and administrative perspective, so systems, infrastructure, and tight processes are absolutely key.

“Derivatives are complicated, and therefore demanding from an operational and administrative perspective, so systems, infrastructure, and tight processes are absolutely key.”

In addition, the regulatory environments, (for example Dodd-Frank in US and EMIR in Europe) set a very high standard for banks and asset management firms in relation to the minimum requirements to trade derivatives. Dodd-Frank stipulates a need to have a swap execution facility, and EMIR a need to centrally clear OTC trades. These requirements need infrastructure and investment in people, systems, automation and so on.

Last but not least, are post-trade controls: all the monitoring processes that need to be present in order to manage the process correctly. It is essential to understand your risks through proper risk analysis, scenario analysis, sensitivity analysis: all the instruments that are used by the portfolio manager to understand what happens in case of a tail risk event.

There are a lot of risks that might be sitting in your portfolio that seem manageable in a normal situation, but in the event of a tail risk you need the correct instruments to actually simulate what can happen.

Sadly, we all know that in financial markets, a tail risk event has not been a rare occurrence over the last few years.

FOCAL POINT | 11

but also on the derivatives side. In the future, there is going to be a lot more automation in the way you trade derivatives which will help facilitate the operational complexity that usually results from the use of derivatives.

In Europe, more than 50% of asset management companies use derivatives compared to approximately 30% in US. Traditional firms in the past were less keen on this instrument, but now they trade derivatives and have the proper infrastructure to enable this.

Buyside use of derivatives – Here to stay Derivatives are a vital tool for the asset management industry, as they allow us to improve and enhance our investment process. If derivatives were not allowed for example, the number of transactions that we do quickly and economically using derivatives today, would have to be done using cash systems. We would sustain much larger transaction and operational costs, which eventually would be transferred to the clients.

They would therefore see a deterioration in the cost of trading and consequentially, overall performance.

There is of course associated cost. When you improve your volume by 100% you need to understand that derivatives are not free. While users don’t pay fees to trade them, the cost is embedded into their present value. So a cost-benefit analysis is needed when a portfolio manager wants to set up a position in derivatives. As a trading desk, we act as an adviser to the portfolio managers, sitting together with them, to ensure proper understanding of the best way to implement the strategy. We need to keep an eye on how much of the cost, in addition to trading, is involved downstream, including how many people are involved in processing that trade. The cost of trading derivatives means the cost of the entire infrastructure, including the organisational structure that you need to have in place to be able to trade. Cost will improve as we move to standardisation of derivatives, even on the OTC market. Currently, derivative trading is a bilateral contractual agreement between two parties, completely customised, and written on paper. Each one is different from another.

In the future, standardisation and automation will change this, and mean there will be fewer people involved in managing the operational complexities resulting from trading these types of instruments.

From a risk management perspective, not allowing derivatives (or creating a regulatory environment where the use of derivatives is not incentivised) would lead to a sub-optimal risk-return profile. This would be a cost to the final investors because derivative instruments allow us to specifically tailor the risk we want to hedge, for the time we want to hedge the risk, in a quick and efficient way.

Buyside use of derivatives is going to stay. The electronification of financial markets is happening not only on the equities and fixed income markets

Q4 • 2016 | GLOBALTRADING

SmartHub

Global reach with one connection

Today, being able to trade efficiently is more critical than ever before.

With the SmartHub open trade messaging network, you’ll be able to connect with market participants globally, reducing your point to point connections and costs.

SmartHub is a fully managed, cloud-based solution that interconnects with your existing systems, making it easy to trade. And with one connection, you’ll be able to significantly reduce your IT footprint across message protocols while meeting your low latency requirements.

• • • • • •

500+ counterparties, buy and sell side Single connection, single certification Global, multi-asset, multi-currency Pre-trade, trade and post-trade messages Multiple message interfaces Highly resilient

For further information, email: smarthub@iress.com Offices in: Australia, Canada, New Zealand, Singapore, South Africa, United Kingdom.

iress.com

FOCAL POINT | 13

Multi-Asset Trading:

To Specialise Or Not To Specialise?

With Fabien Oreve, Global Head of Trading, Candriam Investors Group In recent years, more and more asset managers have had many good reasons for installing a multi-asset trading desk.

First of all, for reasons of operational efficiency and cost control. Recent improvements in the order and execution management system (OEMS) technology used to handle different asset classes are powerful factors behind operational efficiency and economy of scale. It is, for example, easier to output large numbers of transaction reports when these are generated by a consolidated desk equipped with a multi-asset OEMS.

brought about by electronic trading. The growing electronification of the markets has enhanced convergence among asset classes as different as bonds, equities and foreign exchange. The growing sophistication of the multi-asset OEMS has enhanced innovation in data consolidation, with pre-trade, trade and post-trade information directly available in the same place, on the same screen, for every large asset class.

Another reason is portfolio managers’ growing need to actively invest in a greater variety of instruments, including – globally – listed derivatives and foreign exchange.

The introduction of consolidated trading desks raises questions such as: Is there a standard definition used by everyone for multi-asset trading? Is there a standard trader profile within this new structure? Should this structure be organised at management level only or at trader level? Does the trader have to be a specialist or a generalist?

Finally, the development of multi-asset execution teams derives from a greater reactivity to the changes

For some time now, thanks especially to improvements in electronic dealing, specialised fixed income traders

Q4 • 2016 | GLOBALTRADING

14 | FOCAL POINT

involves working the same type of instrument day in, day out. Encouraging the multi-skilled, flexible approach also means that the team is not necessarily handicapped by the unscheduled absence of a colleague (for personal reasons, illness, etc.).

Nonetheless, multi-tasking should not take priority over motivation or individual performance. In other words, multi-tasking should not inhibit the accumulation of the expertise that staff need to guarantee certain levels of performance at all times.

Such expertise is essential, especially as regards the most challenging asset classes and the least liquid financial instruments.

Fabien Oreve, Global Head of Trading, Candriam Investors Group have assumed a bigger role in foreign exchange transactions. And it is not uncommon to see equity traders negotiate futures on indices and other highly liquid derivatives.

“A certain level of multi-tasking can help smoothly absorb sudden variations of volumes in a specific asset class.”

With a multi-asset OEMS, buy-side traders, regardless of their expertise, gain visibility across all asset classes.

It is useful to have one system that is structured into multiple order blotters, and coordinate team efforts to smoothly trade equities, futures and currencies, or bonds, futures and currencies.

Fixed-income, in particular corporate bonds and emerging market debt, obviously requires such specialisation and expertise. Equities, too, rely on experience and savoir-faire to deal with large lists of complex orders that require combined electronic and voice trading.

A certain level of multi-tasking can help smoothly absorb sudden variations of volumes in a specific asset class. It’s not at all a matter of an equity trader dealing in illiquid bonds or large-size bond orders. However, today the OEMS technology enables traders to filter and select orders by level of difficulty and to delegate the easiest part of the job to less experienced or more generalist colleagues.

From an organisational point of view, the optimal solution could lie, eventually, in balance. Multi-asset trading desks should have their fair share of specialists capable of handling the major equity and bond asset classes (in particular, the less liquid buckets) and, at the same time, allow its specialists to widen their skill set and promote teamwork on the most liquid markets, with the support, in particular, of the ever-more sophisticated OEMS and trading platforms.

Well-documented and internal best-execution procedures regularly updated by the head of the multi-asset desk are also indispensable tools for encouraging less experienced staff to help their more experienced colleagues, while maintaining the same high levels of execution performance.

Becoming multi-skilled in an execution team also limits the risk of weariness in professionals whose main job

GLOBALTRADING | Q4 • 2016

The topics covered in this article were discussed at the Institutional Investor’s International Trader Forum in Rome on September 7th, 2016.

INSIGHT | 15

Key To The Highway: The Changing Face of High And Low Touch Execution

By Steve Grob, Group Strategy Director, Fidessa In the beginning, there was high touch where brokers provided a high-value, solution-based approach to finding the liquidity their buy-side clients were looking for. This worked in an era of high fees and low scrutiny of what end-investor trading commissions were actually funding.

However, as markets electronified, and buy-side operations tooled up, a new paradigm was born: low touch. This reflected the buy-side’s growing desire for cheaper execution, especially for trades that weren’t that hard to execute, and it also offered a path that minimised information leakage.

The result? Two routes to market with very different price tags. The problem was that brokers had to duplicate their trading infrastructure despite receiving fewer net commission dollars. This spawned the short-lived concept of mid touch which offered the

worst of both worlds: junior sales traders with neither the experience nor the expertise to manage either. And so the industry muddled along ignoring the operational overhead of running two technology stacks.

Today, however, the industry is at a cross-roads.

Regulation, combined with the global economic environment, means that the idea of providing separate high and low touch channels is more flawed than ever.

A radical new approach is needed. One that converges technology stacks where appropriate and equips brokers to provide a blended service of premium (high touch) and standard (low touch) services. Most important is that they can be provided to the buy-side in such a way that they switch seamlessly between the two, across the day and throughout the lifecycle of each individual order.

Q4 • 2016 | GLOBALTRADING

16 | INSIGHT

“The high touch desk will often look at the automation and tools employed by low touch or program trading teams for inspiration, and, in some cases, borrow their technology directly.”

Steve Grob, Group Strategy Director, Fidessa Hellhound on my trail The determination by regulators to increase transparency and accountability remains unbowed.

The most recent example is the European move to unbundle the relationship between research provision and trading execution fees. Soon investment managers will be forced to either pay for research out of their own P&L or ensure that execution commission payments are clearly not to the detriment of their end investors.

Change my way The good news is that the buy-side is willing to pay to resolve this complexity, but it requires a completely different approach from the traditional high/low touch separation of old. The fragmented nature of equities trading means that even a relatively low touch order in a liquid stock needs to visit tens of venues in order to be properly executed. Low touch platforms therefore need to stretch across many different venues. The challenge to create a single market access fabric is considerable. Furthermore, sophisticated low touch algorithms are needed to nullify the effects of this fragmentation and provide good execution outcomes for clients.

The flip side of this regulatory coin will be a renewed focus on execution outcomes and so providing the optimum combination of high and low touch services will be more important than ever. On top of this, the regulators are doubling down on their requirements over the transparency of the buy/sell-side relationship which means further costs to keep both high and low touch platforms in line.

Today’s high touch trader needs a range of technology too. This might be dark-seeking algos, smart routing or CRM systems that track who is holding or likely to be holding liquidity. The high touch desk will often look at the automation and tools employed by low touch or program trading teams for inspiration, and, in some cases, borrow their technology directly.

And it’s not as if finding liquidity is getting any easier, especially when firms wish to trade in size. As a result, a number of initiatives such as intraday auctions and block crossing capabilities have all aimed to orchestrate the liquidity available, but because they compete the resulting cacophony just makes matters worse.

So while the activities and business models of high and low touch are diverging the underlying technologies are converging. This requires careful management to avoid unnecessary duplication and cost while optimising the very different business service a high or low touch client receives. This then allows a standard (low touch) and premium (high touch) service to

GLOBALTRADING | Q4 • 2016

INSIGHT | 17

coexist and be interlinked. If architected correctly, the separation between these two can be viewed as a permeable membrane though which orders can travel in either direction, at the client’s discretion, with a higher fee charged whenever the order is in the high touch/premium zone.

Intelligent IOIs are one way to do this, but only if they can be underwritten by genuine merchandise. Another will be pulling together all the information held within a firm about a particular stock. Other decision support tools will all form part of a more sophisticated, but above all technology-fuelled, high touch service.

Smokestack lightning It is a simple fact that low touch service lines were established after high touch ones and so made the creation of a second whole new technology stack inevitable. This led to a new set of market gateways, a super-lite OMS that could support low touch algos and a FIX interface for receiving client order flow. But, by then, the high touch desk was receiving the bulk of their orders electronically too and, of course, sending them out to market the same way.

This allows for some intriguing approaches to solving trading problems for clients. One example is that an investment manager may be using a low touch channel for an order so as to minimise its execution cost. It may be, however, that a smart IOI has uncovered a large block in the same stock over on the high touch desk.

Because they both share the same technology, it’s now easy to communicate the block opportunity to the client and execute it. In this way orders can navigate through high and low touch zones so as to achieve the optimum liquidity outcomes for clients.

The sensible approach, then, is to collapse all the technology supporting both business lines together.

This allows more effort to be put into market and asset class coverage, performance, speed and resilience – benefitting both high and low touch service lines. It is

“The premium zone is where the real differentiating technology can be found, but because it is now sitting on a converged stack its operational costs are much lower.”

This is hip The terms high touch and low touch seem clunky and outdated as they are simply too crude a reflection of the practical realities of trading today. They might well be part of the lexicon of our industry but they imply a separation of technology that simply doesn’t have to be there. This costs money and worsens execution outcomes for clients.

While it is true that the spectrum of trading challenges is getting broader, truly effective trading is about allowing clients to combine a range of different services.

Firms that implement a blended approach will be able to dominate liquidity in their chosen areas. What is more they will operate at lower costs whilst providing a more valuable service to clients.

They really will have the key to the highway.

something that can be extended to other desks too, such as program trading, and even between asset classes or completely separate business units.

Cross cut saw The premium zone is where the real differentiating technology can be found, but because it is now sitting on a converged stack its operational costs are much lower. This frees up resource to deploy cool, high touch tools that can quickly solve any liquidity problem.

Q4 • 2016 | GLOBALTRADING

INSIGHT | 19

Liquidity Seeking Algorithms: How Can Alpha Expectations Influence Strategy Selection Optimisation?

By Rahul Grover, SVP in Quantitative Strategy, Jefferies and Ben Springett, Managing Director, Electronic and Program Trading, Jefferies

Liquidity seeking algorithms (LSAs), often with an “I would” feature, provide traders with the potential to reduce risk faster than schedule- or participation-based algorithms (SBAs). Faster risk reduction is achieved through the search for outsized short term liquidity which can be accessed at low incremental cost.

The time variance of the size and source of available liquidity increases the complexity of allocation decisions within LSAs. Strategy decisions are more sensitive to factors such as expected alpha (short term) in clients’ flow, average information content in execution venues’ past executions, and the stock’s dislocation from its peers. Below we discuss how the

development of customised liquidity seeking strategies is influenced by these elements.

Incorporating Client Alpha LSAs perform best when they are customised to a client’s short term alpha. Given uncertainties in alpha duration and magnitude, it may take a few iterations to get the appropriate urgency and parameterisation into strategy selection. Clients can often rely on brokers to help estimate their short term alpha.

Brokers can use statistics such as comparison of expected-versus-realized impact, and post-execution reversion to tailor the urgency level. To avoid bias in

Q4 • 2016 | GLOBALTRADING

20 | INSIGHT

“LSAs perform best when they are customised to a client’s short term alpha. Given uncertainties in alpha duration and magnitude, it may take a few iterations to get the appropriate urgency and parameterisation into strategy selection.”

Chart 2 shows information content (post-execution price movement) in blocks sourced from different venues. A negative value implies price improved on average post execution

alpha estimation, analysis should exclude orders where multiple slices are received for the same stock in the same day given the obfuscating impact this would have on the data. This analysis often results in statistically insignificant outcomes for a reasonable proportion of client flow, but when significance can be established analysis is very useful in identifying client flow subsets suitable for further discussions on strategy tuning.

Chart 1 shows how the combination of the magnitude of reversion statistics and their statistical significance can be used to identify subsets of client flow that may benefit from changing urgency levels. Allocation strategies that are tuned to this expected alpha profile can avoid either the unnecessary restraint or an indiscriminate search for liquidity.

Information Content in sourced liquidity Large block executions provide immediate benefit to orders by significantly lowering residual risk, and therefore avoiding incremental trading cost. These executions come at the hidden cost of potentially missing a better price for some fraction of the filled shares. This hidden cost can be assessed by comparing the performance of strategies with and without access to “blocks”. In addition, proprietary analysis methods can use post-execution price movement to differentiate information content in liquidity sourced from different venues.

For block executions, it’s relevant to use a proportionately long time horizon (post execution) given the alternative to achieving a block execution would involve working the order over an extended

GLOBALTRADING | Q4 • 2016

Chart 3 compares post-execution movement to costavoided by block executions. period of time. Venues that show a statistically significant improvement in prices after block fills can be restricted for use only by higher urgency orders.

Chart 2 shows that for block executions >1% ADV, average return from execution-to-close is within one standard error for most venues.

Chart 3 shows that the average cost avoided by block executions is significantly higher than the average return to the close.

Dislocation from industry/sector Tactical allocation by LSAs to dark pools should take into account a stock’s dislocation to its industry or market. While dislocation itself is not a sufficient factor to change allocation, when it is taken in conjunction with an understanding of expected alpha and the client’s view on dislocation, it can be very useful.

INSIGHT | 21

As an example, if a stock is highly correlated with its industry, and the client expectation is that the correlation will persist in the short term, a LSA may underweight a short term allocation for a stock which is unfavourably dislocated. Conversely if the client does not expect the correlation to persist, or if it expects short term alpha, the LSA may continue with a search for outsized liquidity.

Conclusion The ability to identify expected alpha profiles of trades should serve to enable the implementation process to be more finely tuned, thus reducing implementation costs either in terms of impact incurred or opportunity cost taken. While this has traditionally been the domain only of more predictable quant driven investment strategies, we are increasingly seeing greater attention on trading catalyst and portfolio manager modelling taking place across more diversified trading desks.

“The ability to identify expected alpha profiles of trades should serve to enable the implementation process to be more finely tuned, thus reducing implementation costs either in terms of impact incurred or opportunity cost taken.”

Ben Springett, Managing Director, Electronic and Program Trading, Jefferies

more frequently being passed upstream to the buyside to gather and analyse the relevant datasets.

Broker contribution to the flow optimisation process can then take place as a second phase, seeking to best-fit flow being sent via more standardised algo selections designed to meet the needs of a specific subset of client flow by urgency, ADV (or another measure of difficulty to trade), time of day, etc.

Source of data for all charts is Jefferies’ trading universe.

Advanced execution brokers are well placed to help clients model profiles and refine order instructions / parameterisation (or to develop bespoke customisations), but only when they have garnered enough data points to draw statistically significant conclusions. The likelihood of one broker having sufficient transparency of the investment strategy origin and trade catalyst for order flow originating from a centralised dealing client is low, and thus the onus is

Q4 • 2016 | GLOBALTRADING

WHERE HEADS OF TRADING SPEAK

Pioneer Investments

AB

Allianz Global Investors

sales@fixglobal.com subscribe@fixglobal.com

Highland Capital

Subscribe for FREE

INSIGHT | 23

Governance, Standardisation Driving Securities’ Blockchains

A roundtable write-up by Will Haskins, GlobalTrading As discussion of blockchain continues to generate media coverage, the securities industry waits for the promised benefits. But the wait might not be long.

Like it or not, blockchain technology is associated with its most public iteration, Bitcoin. Yet, the hallmarks of bitcoin’s appeal – transparency, decentralisation – are seen as antithetical to much of the securities world.

Successful applications of blockchain technology in the securities industry will likely be a shared ledger rather than a fully public ledger, marrying the immutability and simultaneous auditability, but without the public transparency.

Speaking at a GlobalTrading Blockchain and Securities Industry Roundtable hosted by Citi and sponsored by Serisys, participants agreed that within 10 years, there may be hundreds or thousands of securities industry blockchains, but the real question is which will each firm join?

The significance of the answer stems from the enormous cost savings projected to come from distributed ledger technologies, as blockchain is also known, with Banco Santander estimating savings at up to US$20 billion across the securities industry.

Proprietary 2016 has seen a focus on development of proprietary and consortium blockchain applications. While many firms are already involved, participants questioned whether Asia’s heads of trading or their back-office teams know which consortia their companies belong to, or their firm’s strategy for blockchain.

Banks have hedged their bets by actively joining multiple consortia, but the major work to be done in applying blockchain to the securities industry is in the adjoining applications rather than the actual blockchain technology. Despite the offer of real-time, shared access to information, it is unclear whether banks will be willing to change all of those adjoining systems.

As a result, most banks are currently investing in exploratory use cases. Rather than reframing all back-office processes along the lines of a blockchain, certain participants hope to use blockchain to address existing regulatory costs. When adoption does achieve critical mass around any certain application, one of the likely effects in the securities industry is that securities processing revenues will shrink.

Within Asia, a China-specific consortium is looking at blockchain, but the domestic Chinese banks are not

Q4 • 2016 | GLOBALTRADING

24 | INSIGHT

discussing it internally. For the Chinese banks, deployment of any blockchain applications will require an official push from the China Banking Regulatory Commission or China Securities Regulatory Commission. Meanwhile, the international Chinese firms are exploring use cases, but many expressed it is unclear what problem desperately needs to be solved by blockchain. Chinese firms are also concerned how much will it cost to realise the purported benefits?

Governance and standardisation A key piece to keeping implementation costs low is standardisation. Already the exploratory work has revealed intriguing questions about blockchain applications. If a blockchain controls an asset, who determines who is allowed to convert into and out of the blockchain? What happens to the cash that is exchanged for the original asset?

Peer oversight is needed to ease concerns about decision-making on these matters, and the regulators agree. Regulators know governance is required, as they need to certify the identity of the beneficial owner to

conduct proper AML checks, but they are agnostic as to whether governance will come from individual consortia or at a global level. A helpful example of how standardisation can expand the value of a blockchain technology is a KYC blockchain utility, based on certified information.

All participants agreed, the overriding, continuing question in the securities industry will always be how to establish trust and with whom.

Michael Karbouris,

Head of Business Development, Nasdaq

“

One of the key benefits of blockchain for capital markets is that it’s forcing the industry to work together to find more efficient ways of doing back office tasks, and in that respect even if blockchain itself doesn’t end up being a silver bullet, it’s having a hugely positive progressive effect.

”

Tim Marsh,

Chairman, Serisys Solutions Limited

“

The securities industry will inevitably adopt Distributed Ledger Technology because shareholder registers are themselves distributed ledgers.

GLOBALTRADING | Q4 • 2016

”

INSIGHT | 25

Alex Medana,

Founder and CEO, FinFabrik

“

Whilst not obvious, one benefit I see from talking about blockchain is that it forces us to rethink why institutions are set up as they are, having created cottage industries, so much risk and cost particularly in post-trade.

We all have a role to play in shaping the agenda, else I fear a cartelisation of a very promising, though not new, technology in the face of protecting the information asymmetry incumbents have enjoyed for centuries.

”

Dave Chapman,

Co-Founder and COO of ANX International

“

Whilst still regarded as a nascent technology with a number of challenges to resolve, including regulatory governance, blockchain provides unparalleled benefits including disintermediation between participants, transparency and immutability, and reduced settlements. This results in the reduction of operational costs, capital requirements, risks and transaction latency, among other benefits.

”

Q4 • 2016 | GLOBALTRADING

26 | PRODUCT OVERVIEW

Fire Your Unprofitable Clients

Introducing Transaction Reconciliation Reporting from MDSL In a market with falling volumes and revenues, it’s important for investment banks to know they’re being billed correctly for their transaction costs and that they are being allocated appropriately. The advent of commission unbundling also points the spotlight on client costs beyond research to ensure you have profitable execution relationships.

Can you be sure you know the costs of dealing with your clients? How much are you paying for non-trading clients?

How do you know that EMS, OMS, trading venue and FIX connectivity providers are charging you correctly?

You need a service that will give you confidence that you’re being billed correctly. This shouldn’t tie up your own resources or be outsourced to a costly army of people (increasing opportunities for human error). TRR uses a calculation engine that can predict the invoice amount for each trade placed, for each vendor involved in the process. A solution that simply compares the invoice totals is no longer sufficient, identifying only that there is a

20%

MDSL’s Transaction Reconciliation Reporting (TRR) is an expense management platform for your trading costs, from exchange fees to client connectivity. It ensures you’re being billed correctly and that invoices are allocated to the right clients or desks. Having all this spend in one system gives you a global view across multiple asset classes, which can then be used to make informed business decisions.

Whether we are looking at the multiple trading venues (on and off exchange), network connectivity or the EMS/ OMS providers, they all enjoy finding the most varied ways of charging you for their service. The invoice comes in; the invoice is paid. Questions are seldom asked, and even then only after someone has spent hours within multiple spreadsheets trying to get the information together to check it.

Jul

Aug

Sep

Oct

Quarter 3, 2015

Nov

Dec

difference, (and not why there is a difference), means there is a separate task of analysis that needs to be performed later and manually by another member of staff. TRR can compare the invoice detail against its prediction and provide you with any discrepancies to raise with the vendor. Our red-amber-green reporting makes it easy to focus on the lines of interest, reducing the time taken to review and raise disputes.

Jan

Quarter 4, 2015

Average potential savings identified with TRR

Feb

Mar

Quarter 1, 2016

Apr

May

Jun

Jul

Quarter 2, 2016

Aug

Sep

Quarter 3, 2016

01/01/2016 - 09/30/2016

TOTAL SPEND

FINANCIAL DISPCREPANCIES

$723,843 Undercharge

TOP

EXECUTED VALUE EXECUTED VOLUME

$164,799 -$79,345

5 VENDORS BY INVOICE SPEND

TOP

$70,000-

EMS Provider OMS Provider

$60,000-

Trading Venue

$50,000-

FIX Connectivity Network Provider

$40,000-

Equities Futures Options

$85,454

Overcharge

Unknown

Bonds

5 CLIENTS BY INVOICE SPEND

$8,000 -

CARRIER

$7,000 -

OMS EMS

$6,000 -

IOI

$5,000 $4,000 -

$30,000-

$3,000 $20,000-

$2,000 -

$10,000-

$1,000 -

$ Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

$

A

B

C

D

E

GLOBALTRADING | Q4 • 2016 2page.indd 1

31/10/2016 10:02:55

PRODUCT OVERVIEW | 27

TRR Benefits 9 Centralised data management to store and 9 9 9 9 9 9

monitor trading records and associated costs Automated invoice allocation and reconciliation (using vendor rate cards) Forecast by predicting future invoices using our calculation engine Built–in tools to track contract renewals with automated emails Role based trade and usage reporting with drill down capabilities Client cost analysis with export functionality Covers multiple asset classes

The next problem for a financial institution is how they then distribute those costs incurred to the correct desks and clients. This is a task requiring a vast amount of data, and if you’re not including the costs for their transactions, many will appear as profitable when in fact they may have been making a chronic loss. It’s not just external allocations; we frequently hear stories of disgruntled users on desks who have received an even split of a bill (for which nobody can justify if it is seldom used for their desk) or worse yet that the whole invoice has hit their cost centre.

TRR correctly assigns the invoiced amounts to the right clients and area of your business. All the invoicing is allocated at a trade level so that you can easily see how the total is created. Our flexible online reporting portal means that you’re never more than a few clicks away from seeing the cost of a client or desk. These are easily shared to the appropriate audience with live data.

With TRR, you have all this information managed within a database, combined with a powerful reporting portal. Upon entry from various sources, the data goes through our mapping engine to ensure that you’re seeing a normalised data set from the beginning, saving countless hours of file manipulation. Contracts and associated information are also loaded into our role-based portal, so that you can enable the right people to view this information (e.g. an electronic version of a contract). Our alarms mean that you never miss a key contract date again, with customisable emails sent out to contract owners and sourcing teams.

Utilise TRR to achieve: Control

Manage and track all your trading transactions and related records by vendor, relationship, location, function, asset class or individual trader – all in a single, centralised inventory.

Profitability

Match vendor invoices against agreed rates for a fully accurate understanding of actual costs versus revenue generated.

Transparency

Track the precise history of each client connection, for complete visibility of transactions and rate cards, allowing accurate client management.

Savings

Reconcile access versus usage of different services (OMS, EMS, IOIs, Telecoms etc.) and allocate costs accurately across cost centres, locations and trading desks to identify opportunities for potential savings – particularly at vendor contract renewal time.

Cost Avoidance

Identify unused chargeable trading platforms, carriers and exchanges to optimise your resources and minimise wastage.

Financial Discrepancies Drill Through

Vendor

Month

Trading File Invoice File

Matched

EMS Provider

Oct 2016

$0.00

$4,434.60

Trading File Invoice File

Indicator

Overcharge

Client

EMS Provider

Oct 2016

Discrepancy

$1,575.00

Invoice Amount

$1,575.00

Synthetic Amount

Trading File Invoice File

Overcharge

EMS Provider

Oct 2016

$550.00

$550.00

$0.00

Trading File Invoice File

Undercharge

EMS Provider

Oct 2016

-$2,724.99

$2,725.00

$5,449.99

Trading File Invoice File

Matched

EMS Provider

Oct 2016

$0.00

$631.00

$631.00

$4,434.60 $0.00

Overcharge

EMS Provider

Oct 2016

Trading File Invoice File

Matched

EMS Provider

Oct 2016

$0.00

$4,725.90

$4,725.90

Trading File Invoice File

Undercharge

EMS Provider

Oct 2016

-$54,804.61

$27,402.40

$82,207.01

Trading File Invoice File

Matched

EMS Provider

Oct 2016

$0.00

$0.00

$0.00

Trading File Invoice File

Matched

EMS Provider

Oct 2016

$0.00

$1,580.00

$1,580.00

Trading File Invoice File

Undercharge

EMS Provider

Oct 2016

-$1,150.00

$1,150.00

$2,300.00

Trading File Invoice File

Overcharge

EMS Provider

Oct 2016

$590.00

$590.00

Trading File Invoice File

Overcharge

EMS Provider

Oct 2016

$1,000.00

$1,000.00

$0.00

Trading File Invoice File

Overcharge

EMS Provider

Oct 2016

$0.01

$6,230.60

$6,230.59

Trading File Invoice File

Matched

EMS Provider

Oct 2016

$0.00

$2,007.30

$2,007.30

Trading File Invoice File

Overcharge

EMS Provider

Oct 2016

$575.00

$575.00

$0.00

Trading File Invoice File

Matched

EMS Provider

Oct 2016

$0.00

$2,150.00

$2,150.00

Trading File Invoice File

Matched

EMS Provider

Oct 2016

$0.00

$0.00

$0.00

Trading File Invoice File

Overcharge

EMS Provider

Oct 2016

$1,150.00

$1,150.00

$0.00

Trading File Invoice File

$0.01

$5,237.90

$5,237.89

$0.00

By using TRR, you are using a solution built from our award winning expense management platform, with $7 Billion of spend under management. With commission unbundling either underway or having already taken place at your institution, there has never been a better time to put your execution costs under the microscope and ensure the agreed commission rates are profitable.

find out more at www.mdsl.com/trr Q4 • 2016 | GLOBALTRADING 2page.indd 2

31/10/2016 10:02:55

JOIN US AND DRIVE CHANGE

Stay at the forefront of industry change with early access to new initiatives.

Drive change and help shape the future of trading by participating in working groups/committees.

Build and develop relationships with your competitors, counterparties, peers and clients.

Help to shape the agenda for the educational and networking events.

Build your brand by showing commitment to and investment in the FIX Trading Community.

FIX Trading Community is the non-profit, industry-driven standards body at the heart of global trading. The organisation is independent and neutral, dedicated to addressing real business and regulatory issues impacting multi-asset trading in global markets through standardisation, delivering operational efficiency, increased transparency, and reduced costs and risks for all market participants.

Demonstrate your firm’s commitment to FIX Trading Community by becoming a member of this unique organisation.

To find out more, please contact us at fix@fixtrading.org

www.fixtradingcommunity.org

OPINION | 29

Nothing Is As Constant As Change: How To Achieve Better Outcomes And Embrace Change to Realise Meaningful Results

By Roger McAvoy, Regional Sales Director, Asia Pacific, 360T and Andrew Cromie, Global Head of Product Management for Institutional Investors, 360T Group The buy-side recognises that the FX landscape is fundamentally changing. This evolution has a number of direct and indirect macro drivers which, will be about transparency, liquidity and the underlying technology.

At the highest level, regulatory change continues to influence the buy-side dealing desk and the asset manager as a firm. In the past, a buy-side institution might have set up FX execution as a part of the middle office, client services teams or back office operations purely to achieve efficiencies in workflow and error reduction. In other cases, FX might have been done by the equity broker or the custodian of the underlying funds.

Today, more and more heads of dealing have teams and technology that cover multiple asset classes on the execution desk and the amount of FX managed and executed from a central dealing desk continues to increase. With that, there is an even greater focus on how to achieve better transparency and execution quality, improved risk reduction and further trading and operational efficiencies, including automation. Buy-side participants have highlighted that their challenge is how to achieve greater technology adoption, integration, and efficiencies without the budget of a large bank, and how to stay on top of all the choices available to them.

Best execution For some buy-side participants, the goal of best execution is simple, such as just being able to prove where the market was at the point of execution when the FX is transacted either through competition or at mid-rate in a fixing order. For others, there is a deeper focus on how to optimise the many decisions that are made before execution that greatly influences the outcome of the orders, for example: • Which orders and which funds should I deal with first?

• Should I net offsetting orders for different accounts, across single or multiple currencies?

• How long do I hold onto orders in the hope they will net?

• What should my netting strategy be, and what should the timing and frequency look like?

• How much “market risk” am I incurring when I hold onto an order?

• Am I better off using an algo, and at what size?

• What is the inflection point where I trade all risk, or am I better off splitting it up to lesson market impact?

• At what point should I move from electronic to voice and how do I still capture that electronically to be able to analyse it?

Q4 • 2016 | GLOBALTRADING

30 | OPINION

Roger McAvoy, Regional Sales Director, Asia Pacific, 360T Group

Andrew Cromie, Global Head of Product Management for Institutional Investors, 360T Group

Asset managers have a greater demand for a broader set of FX market data and analytics in order to achieve “best execution” policies, understand trader performance measurement, counterpart management, and workflow optimisation. This is driven, in part, as the buy-side dealing desk looks to embrace technology and standards that have been well-developed in the equities markets, and implement the advanced FX technology traditionally only available in the hands of the sell-side.

As a result, expectations are high for what should be achievable by the buy-side. Within the OTC FX market structure and practice there is still a gap that is often a result of what banks are capable of versus what liquidity they are willing to provide and how.

any asset manager with funds under management for UK pension plans will need to ensure their technology can capture not only the time stamp for the calculation of an arrival price, but also individual time stamps and market prices for each trade execution and individual fills. In the FX market, having the right data warehouse and analytical tools to store and report these values on demand, and an easy to access and understand granular audit trail, will become increasingly more important.

TCA standards In many cases, when it comes to transaction cost analysis (TCA), there are few standards for how transaction costs are analysed. As a result, for example, the United Kingdom’s Financial Conduct Authority (FCA) released a consultation proposal (CP16/30) in October 2016 that would require asset managers to provide full disclosure of transaction costs in a standardised format to pension schemes that, directly or indirectly, invest in their funds. This means

GLOBALTRADING | Q4 • 2016

With banks also under increased regulatory pressure, there will be more focus on bank pricing behaviour, e-pricing strategies across distribution platforms, and on their ability to take on and warehouse risk.

Having more transparency into counterpart behaviour, pricing quality, and any resultant market impact (for example, not warehousing risk and going to the interbank market) will become increasingly important for the buy-side to further their control of execution quality on the desk. This new understanding will enable buy-side firms to go to the best bank in any given situation rather than rely on “gut feeling”.

Measurement will drive informed, proactive decisions and support the asset management firm in an increasingly more regulated global environment.

OPINION | 31

Application of new technologies For many years, larger banks have been building out tools and analytics which help them hold or exchange risk with other participants efficiently using quantifiable data, resulting in better predictability in their trading outcomes and profitability. The sell-side continues to embrace even greater automation, more sophisticated auto-pricing strategies and the development of bank algorithms to capture client flow and offset risk.

While it is certainly possible to build out the infrastructure to measure this, the overhead to store

“Today, more and more heads of dealing have teams and technology that cover multiple asset classes on the execution desk and the amount of FX managed and executed from a central dealing desk continues to increase.” this data, let alone to use it, is highly expensive. The buy-side is able to leverage the FX dealing platform provider to help with these issues, which includes not only data warehousing, but also the opportunity to engage meaningfully around best practice.

Data analytics and execution technology are now intertwined and having the ability to leverage that data can provide insight beyond the most basic TCA. For example, although post-trade TCA tells a story, in general it is not a reflection of market conditions (whether they be “normal” or not) before, during and after execution. You also need to consider how your benchmark data is sourced and how relevant those prices are relative to your quoted volumes and eligible counterparts.

repeatable process. Knowing where to source this data and how to carry-out this type of analysis are some of the new demands of the interaction. This type of information will help asset managers make better informed decisions around the merits or costs associated with the execution strategy.

The buy-side embraces new ideas and technology that will help them evolve their workflow, address broader market structure and execution quality issues.

These are the clear focus of the immediate horizon.

Drilling down there are further consideration to bear in mind: working with providers that have a bias for buy-side requirements (or working with providers whose purpose is aligned to the outcomes you desire), getting the right FX data analytics with no hidden fees, and gaining access to alternative solutions that help to deal with liquidity fragmentation.

During the past few years, a broader choice of multibank trading technology providers is now available, beyond the traditional FX technology solutions.

These providers bring much needed market-neutral FX trading technology, data warehousing and analytics into the dealing workflow and investment process. Gone are the days of having to solely rely on bank-developed or bank-owned technology for FX execution. More measured, independent solutions that address the client’s needs can now be quickly and easily implemented. These ‘enablers of evolution’ can be plugged into many processes, including order management systems (OMS) using FIX connectivity and other integrated workflows.

While not all providers are capable of offering the right solutions and engagement, or have the ability to scale with client and regulatory demand around these issues, those that do are finding more and more invitations to help with solving the dilemma.

These are just a few of the questions that we hear from asset managers as they try to build a quantifiable,

Q4 • 2016 | GLOBALTRADING

EMEA Trading Conference 2017 Thursday 02 March — London

The EMEA Trading Conference, now in its 9th year, is one of Europe’s largest one day trading conferences, delivering a high quality, educational and debate focused conference in the heart of the City of London.

Conference facts and figures • 900+ people in one location • An agenda created by senior industry experts • Topical content, created by the industry for the industry • A true industry event without sales pitches • Great learning and networking opportunities • An allocation of FREE passes to FIX members • 45+ speakers across a 4 stream agenda that covers both business and technical topics Supported by our Lead sponsors: Other Sponsors:

Sponsorship opportunities still available - contact Kelly.Harding@fixtrading.org

To view full event information and for details on how to register please visit:

www.fixtradingcommunity.org/EMEA2017

OPINION | 33

This article was first published in the Electronic Trading Journal-GlobalTrading, Q4 2016 Issue #60. Please visit www.fixglobal.com to view all articles.

The Convergence Of Multi-Asset Trading

By Vincent Burzynski, Executive Vice President, Electronic Trading at FIS and Jonas Lindqvist, Business Expert, Product Management, Front Arena at FIS

Several forces are inducing investment firms and brokerages to conflate their securities trading functions. The convergence is taking place not only through their adoption of multi-asset trading platforms, but also with a broadening of the skills-set expected of their staff.

The primary impetus comes from the buy-side.

Institutional investors are promoting multi-asset portfolios, offering clients greater diversification and often the ability to combine incremental yield in a low interest environment with earnings growth potential. Easy access to analytical tools, research data and performance measurement techniques facilitate the decision and allocation processes.

At the same time, money managers face escalating costs to meet regulatory requirements, which include documenting audit-trails and performing other administrative tasks for each sell-side and vendor relationship. Hence, there is an incentive to reduce the number of market counterparties and consolidate dealing platforms into as few as possible without raising operational risks.

This demand puts pressure on the selected sellside firms to provide more services, which in turn encourages them to consolidate trade functions within a centralised hub. In many cases, it is

also consistent with a shift already underway among brokerages and investment banks.

The sell-side is struggling with its own cost pressures caused by lower share trading volumes and dealing margins as well as from compliance implementation.

Equity turnover has fallen well below pre-2008 global financial crisis levels (as much as 45% less) while G4 government bond issuance is six times higher.

Liquidity in both asset classes has declined, as tighter capital requirements and restrictions on proprietary positions constrain market makers from holding shares or bonds on their books for any lengthy period. The effect is to reduce their ability to act as all-weather liquidity providers in addition to their role as intermediaries.

Shifting bond trading practices At the same time, MiFID II is pushing for greater transparency in over-the-counter (OTC) trading, the usual method for fixed income instruments.

The sell-side is responding by creating systems and deploying tools that replicate or are similar to those used in their equity business, while retaining workflows needed for their asset classes.

In addition, there is regulatory pressure to trade bonds on formal trading venues, so the rationale for conflating asset trading platforms, especially

Q4 • 2016 | GLOBALTRADING

34 | OPINION

“......money managers face escalating costs to meet regulatory requirements, which include documenting audittrails and performing other administrative tasks for each sell-side and vendor relationship.

Hence, there is an incentive to reduce the number of market counterparties and consolidate dealing platforms into as few as possible without raising operational risks.” if the buy-side promotes more multi-asset funds, is becoming even more compelling. The sell-side achieves economies of scale and a more streamlined (and perhaps more manageable) operational model.

On the other hand, risk monitoring can be more complex because previously discrete risk silos for different asset classes are aggregated at one source.

For example, the Singapore Exchange recently announced an initiative to trade bonds on its AsiaEx bond platform. The Monetary Authority of Singapore (MAS) is planning to introduce the 5% Rule, which imposes limits on what can be traded by retail investors and that they must have at least five percent of the value of outstanding stocks as collateral with the broker at the end of the day. So before trading any asset, it is necessary for the broker to assess and calculate, in real time, what a customer owns across its entire portfolio. Valuing (and then reassessing its risk profile post-trade) a portfolio containing a mixture of asset classes (bonds, equities, derivatives, alternatives and so on) is significantly more complicated than a fund containing only bonds.

GLOBALTRADING | Q4 • 2016

Vincent Burzynski, Executive Vice President, Electronic Trading, FIS In fact, multi-asset investing has gained traction quite rapidly in Asia. The institutional fund management industry and also the retail investor base is younger than in Europe and North America, so it is less bound by a legacy of siloed trading. Moreover, the private banking or wealth management sector is comparatively more prominent in Asia, and its affluent clients have tended to take a multi-asset approach.

So, it is important to remember that regulatory requirements are not in themselves the driver towards multi-asset trading. Instead, they make it advantageous for an increasing number of market participants to adopt common platforms for different asset classes in order to reduce costs and streamline operations – as the technology becomes available.

Generalist and specialist functions Other imperatives follow the adoption of multi-asset platform. Both buy- and sell-sides need to construct single multi-asset order management systems (OMS) to accommodate the process through from pre-trade to execution to post-trade across asset classes at any time. Yet, the mechanics of trading a bond or a stock, for example, are different so the idiosyncrasies must be built into the systems. In effect, a unified whole must contain specialised parts.

OPINION | 35

Particularly at sell-side firms, a similar structure is needed for its professional staff composition.

Salespeople are increasingly required to service their buy-side clients on diverse asset classes, but those clients might also value the expertise of a specialist, whether in a security-type, a sector

“Both buy- and sell-sides need to construct single multi-asset order management systems (OMS) to accommodate the process through from pre-trade to execution to post-trade across asset classes at any time. Yet, the mechanics of trading a bond or a stock, for example, are different so the idiosyncrasies must be built into the systems. In effect, a unified whole must contain specialised parts.� or a country. A multi-asset trader might need to approach a specialist market maker directly to ensure best execution, rather than just place the order through an automated channel.

However, the generalist salesperson is the first and most important point of contact and might be expected to direct or execute trade orders in a multitude of different asset classes and jurisdictions.

This subjects them to greater strain and closer scrutiny: keeping on top of so much data and so many markets is challenging and the risk of errors is amplified. Rigorous systems should be in place to maximise the ability of the generalist to provide best service while minimising errors.

Jonas Lindqvist, Business Expert, Product Management, Front Arena, FIS

Clearly, lower trading volumes and reduced dealing margins are forcing brokerages and other sellside financial firms to focus on cost-savings. The biggest expense for most is their headcount.

Yet, staff cuts are taking place at the same time as the buy-side, whose margins are also being squeezed, is demanding more sophisticated services, better value for money and a level of automation that is compatible with their own trading styles.

Paradoxically, of course, it is the adoption of greater automation and multi-asset dealing (and OMS) systems that provides hope for both sell- and buysides. The application of technologies can obviate high staffing levels, cut costs and help restore margins. It is also likely that standard rules and conventions, similar to the FIX Protocols that formalised earlier electronic trading practices, will evolve for multi-asset trading.

Q4 • 2016 | GLOBALTRADING

36 | OPINION

Pre-Trade Risk Assessment Across Multiple Channels

By Marcus Consolini, Managing Director, Head of Asia Pacific/Japan, Ullink

Nowadays, market participants face increasingly complex challenges when trying to assess their risk exposure across markets, asset classes and order flows. In the post-trade world there is a high level of integration of risk measurement and management processes, but in the pre-trade world there is certainly less. This is because many participants still have segregated silos for their different trading channels, such as DMA, DSA, Care and Dark Pools.

Attempting to aggregate the pre-trade risks of each discrete channel, requires a strong understanding of their differences, the ability to install centralised and localised risk controls, and the expertise to manage technology and system integration.

Trading channels - the issues with vertical silos and risk exposure Sell-side market participants that provide a broad range of services to clients continue to be faced with a major challenge. What kind of risks exist within distinct vertical trading silos and how should they

GLOBALTRADING | Q4 • 2016

be both individually and collectively managed?

Traditionally, Chinese walls were erected between specific trading activities because risk, technology and operational demands differed. A lower compliance burden, often with prohibitive costs for running an integrated and centralised platform, and less sophisticated trading clients, meant aggregation across trading silos was never put in place.

However, in today’s markets, increasingly sophisticated clients are simultaneously trading across multiple silos, requiring market participants to manage risk in a single consolidated layer. The fact that the segregation of trading activities often results in increased risk exposure for the sell-side market participant and less flexibility for the trading clients, means that those who can implement an integrated and flexible aggregation layer should be able to retain and attract further business.

Specifically, clients are looking for the ability to trade across multiple channels with a market

OPINION | 37

“Attempting to aggregate the pre-trade risks of each discrete channel, requires a strong understanding of their differences, the ability to install centralised and localised risk controls, and the expertise to manage technology and system integration.” participant that can manage their risk limit across those various channels: essentially, providing one firm but fluid trading limit that incorporates all market and asset classes. This can only be achieved with a horizontal risk layer that sits on top of the individual vertical trading silos.

Centralisation and localisation - the issues with multiplicity and aggregation While this horizontal risk layer would provide market participants with a consolidated picture of a client’s overall exposure across multiple trading channels, there is a further issue to address: what risks can and should be centralised and what risks must remain localised, for example whether at the exit point of an algorithm or a best execution engine, before entering a dark pool or a crossing engine?

In practice, there are really two types of risk assessment involved with many trading platforms offering multiple channels and strategies. First, there is what a specific client is actually doing, that is, what are the aggregated positions they hold across markets, asset classes and channels. Second, what is trading on the markets at any point in time through the sell-side market participant, that is, their full real-time market exposure. The first assessment gives a complete view of trading activity for all clients across all channels - effectively the client safety net. The second assessment looks at trades just before they exit the platform and hit the market - effectively the market participant’s safety

Marcus Consolini, Managing Director, Head of Asia Pacific/Japan, Ullink net. The first assessment is where risk can and must be aggregated, while the second is where segregated systems dealing only with specific risks reside.

Business integration - the issues with different risk categories Although aggregation across channels is required in order to accurately assess total risk exposure, the next challenge is how to set up the risk controls needed for each discrete channel. For instance, the

“The fact that the segregation of trading activities often results in increased risk exposure for the sell-side market participant and less flexibility for the trading clients, means that those who can implement an integrated and flexible aggregation layer should be able to retain and attract further business.”

Q4 • 2016 | GLOBALTRADING

38 | OPINION

“In the event that something in the algorithmic strategy goes wrong – and it has happened When trading in a straight DMA channel, buy-side with alarming frequency during clients are the originators of orders and they retain complete control of the orders, with the ability to the past few years - it is not amend or cancel them whenever they want. Risk control in this scenario is relatively straight forward, always guaranteed that the as points of failure in this trading path are minimised. buy-side clients or the market participants themselves will “…the risk parameters and have the ability to intervene and validations when placing an order directly onto an exchange, take control over the execution process.” for instance DMA, are and should be different to placing themselves will have the ability to intervene and take control over the execution process. This highlights a basket of orders within a that the type of risk controls required compared with a straight-through DMA channel are different in nature fully automated strategy. This and complexity and should remain segregated. problem is that buy-side and sell-side market often results in multiple trading The participants have tended to adopt the fastest apparently, most efficient platforms and systems provided by multiple and, supporting systems to meet immediate competitive without fully-understanding the risk vendors coexisting in the same demands, assessment tasks that they might need to perform.

The result is a technology stack that is a mix of environment.” in-house built and vendor-supplied systems. risk parameters and validations when placing an order directly onto an exchange, for instance DMA, are and should be different to placing a basket of orders within a fully automated strategy. This often results in multiple trading systems provided by multiple vendors coexisting in the same environment.

However, the scenario becomes more complex within fully automated trading strategies, such as algorithmic trading. Buy-side clients neither retain full or direct control of their orders on the market, nor does the automated strategy placing those orders directly on the market have control. Rather the trader ends up with a handful of static parameters that are sometimes not even adjustable in real time. In the event that something in the algorithmic strategy goes wrong – and it has happened with alarming frequency during the past few years - it is not always guaranteed that the buy-side clients or the market participants

GLOBALTRADING | Q4 • 2016

As both international and local regulation increases and compliance demands rise, obsolete platforms and architecture must either be completely re-built, re-engineered, or aggregated and consolidated.

Hence, working with technology partners that are globally present and domestically locally focused is becoming increasingly necessary.

EUROPE | 39

Uniting Technology and Regulation

By Will Haskins, GlobalTrading With only months to go until MiFID II’s regulatory requirements come into force, Europe’s trading desks are readying themselves to meet the new trade reporting and enhanced best execution mandates.

As ever, much of the concern is over the cost of the new reporting regimes. Even as market participants wait for further clarification on rules for extraterritoriality, the work must begin. Trading desks need to make sensible assumptions about those issues with outstanding interpretations to make sure the technology and workflows are ready to be deployed.

While larger buy-sides will use this as an opportunity to extract further technology resources from costconscious management, smaller firms may struggle with the added burden. For the larger asset managers, the minimum requirement that buy-sides demonstrate best execution for their end clients will likely be expanded into a TCA analysis engine to rival those traditionally developed by the sell-side. For the smaller investment firms, the increased burden of proof may encourage them to outsource more of their trading operations to their brokers or third party service providers who can amortise the technology development cost across multiple clients.

Speaking at the recent GlobalTrading Uniting

Regulation and Technology Roundtable in London, kindly hosted by Itiviti, many of the buy-sides present said they were already testing new platforms to meet MiFID II compliance in January 2017. One of the buy-sides present had already started development on marrying parent TCA data with order routing data and granular tick data in the cloud. Another buy-side explained how MiFID II has reduced their ability to lean on brokers, as best execution and trade reporting has to be handled internally.

However, there will still be opportunities for sell-sides to provide delegated or assisted services for MiFID II reporting obligations, and this conversation will be on-going through 2016 and into 2017. Buy-sides currently use aggregators to access conditional venues, as large-in-size venues will be a major part of buy-side trading going forward, but the access will sit more comfortably within the buy-side, perhaps as a service offered through their EMS providers. This will likely change the broker’s role in such a trade from a value added one to that of connectivity.

One of the headaches buy-sides will encounter is the challenge of measuring the quality of their trade when they have multiple conditional orders in multiple venues, where there may be a match in one or multiple

Q4 • 2016 | GLOBALTRADING

40 | EUROPE

venues. Sequencing may offer a possible solution, but this may place the buy-side at risk of lowering their reputational score within certain venues. Certain buy-sides are willing to rest liquidity for long times, in large size, in venues that they trust, but the problem comes when the other side of the trade meets the trader in one of eight venues, but then the initial resting liquidity appears to fail in the other seven. Ironically, the attendees agreed the attempts to re-aggregate liquidity appear to be a counteraction to MiFID I’s fragmentation of liquidity.

The shift to trading more in blocks, driven by dark trading caps, must be solved by new technology, as one buy-side trader lamented the amount of sizable liquidity on their blotter that they are currently unable to represent on the venues they participate in.

Whereas sales traders previously solved this situation, the current regulatory environment pushes buy-sides to search for a technological solution that already existed in human form.

The question was raised as to whether buy-sides using voice traders should hold them to the same market impact standard as their algo providers and the tentative answer was yes. Both algos and voice traders pass through the same TCA process, and one buy-side trader suggested voice traders be held to an even higher standard. Even under MiFID II, technology will continue to be an enabler of trading, even if it is a high touch trader using an algo to execute the trade.

Much of the recent focus has been on the raw compliance side of MiFID II implementation, and ensuring all regulatory obligations are met. Traders need to transition into the long-term perspective of asking how they can run an effective trading business, while operating within MiFID II’s regulatory requirements. However, most firms seem to be successful when focused on one or the other, which has given rise to outsourcing components of the non-focal point: e.g. trading to EMS providers or reporting to brokers.

James Baugh,

Head of European Market Structure, Citi

“

In the future, those operating broker crossing networks will not be able to transact client business as today, so we will likely see a proliferation of systematic internalisers and a growing importance of central risk. Brokers will be key to helping the buy-side source block liquidity in an increasingly competitive environment, while assisting clients in meeting new reporting requirements, best execution obligations and managing payment for research. Time is tight, but as an industry we will have to be ready.

”

Matt Howell,

Trader, T Rowe Price

“

When we think about Best Execution we think about the opportunity that it presents to enhance our understanding of the market place and our counterparties. The data collected and the analysis opportunities will be invaluable as we think about the trading desk of the future.

”

GLOBALTRADING | Q4 • 2016

EUROPE | 41

Lee Griggs,

President EMEA, Itiviti

“

Developing systems to manage the sheer volume of data is a significant investment for all firms as we approach the MiFID II application date. As a vendor we are able to leverage economies of scale that trading firms aren’t able to. However, for those firms to benefit, we need to ensure the solution provided is not a compromise when looking to utilise this information for competitive advantage as opposed to simply hygiene, ‘tick the box’, purposes. What desks determine to develop internally versus externally means evaluating the solutions based around areas such as platform openness and multi-asset capabilities that not only store vast quantities of data, but also provide analytics and visualisation that can be seamlessly embedded directly into execution workflows. By doing so the costs can be reduced and the investment leveraged to provide significant business opportunities.

”

Neil Bond,

Head Trader, Partner, Ardevora Asset Management

“

The increased responsibility for the buy-side to be more accountable for research payment comes at a time when resources are being squeezed due to reporting requirements and an evolving trading landscape. This may result in the barriers-to-entry being raised on the industry and some smaller players may find it too challenging.

”

Richard Semark,

Managing Director, Head of Client Execution Strategy & CEO of UBS MTF

“

The discussion was wide-ranging as you would expect given the diversity of the participants: buy-side, sell-side, venues and vendors. I feel we heard some new issues and solutions. The cost of MiFID II will be considerable and borne by the industry and partly by end-investors. This is an important issue for regulators to take into account as they consider implementation.

”

The cost burden across the industry, whether borne by individual firms or shared with external service providers, must be met, and it must be met soon. With mere months to go before the deadline, market participants across the region still have much to do.

Q4 • 2016 | GLOBALTRADING

42 | EUROPE

Trading In The Primary Markets

By Laurent Albert, Global Head of Trading, NAM Finance

What are the most interesting recent trading practice developments in the fixed income primary market?

By way of an example of how things are moving forward, I’d highlight an industry collaborative initiative. Eleven major international banks are sponsoring a new application that will provide comprehensive details about new European primary market deals on a dedicated, centralised website. It will include information on price guidance, the size of the issue and the book and the likely timing of the launch.

The intention is to publish the details of around 80% of new European fixed income issues, giving access to both sell-side and buy-side market participants, and is planned to go live by the end of this year.

Although the service does not aim to offer real-time data, it has attracted a lot of interest within the industry because it is important for several reasons.

First, it sets a precedent for the sharing of sensitive information among market participants. Second, it will provide greater transparency beyond the immediate stakeholders. And third, it should facilitate more robust database construction.

The initiative is especially significant now, because at a time when euro-denominated bond issuance volumes have soared, there has been a decline in the fluidity of the book-building process and the visibility of book sizes.

What reforms would you propose to help improve the functioning of the primary market?

There should be a closer correlation between the issue size posted in the book and the actual size that the issuer wants. This requires a greater level of control than at present, which often has a negative impact on the final yield spread and therefore penalises investors.

GLOBALTRADING | Q4 • 2016

Are there other deficiencies in the market that need to be remedied?

Poor liquidity in the secondary market is a major challenge. More and more banks are widening their bid-offer spreads, so the growth of a vibrant repo market would be a great help.

The high yield market in particular suffers from both a lack of liquidity and transparency. There is almost zero visibility during the book-building phases of new issues, and the buy-side is unable to benchmark their ultimate allocation against an average allocation.

How can the primary market issue managers help improve secondary market trading?

Banks must be fully involved and engaged in the secondary market, by providing liquidity and competitive prices, especially if they are awarded lead manager mandates for primary market deals.

Who is best qualified to resolve these problems, the regulators of market participants themselves?

The over-arching regulation underway will actually lead to a reassessment of the regulatory approach and perhaps even a reduction in the focus on topdown prescriptions. The industry and its commercial participants must resolve the key issues themselves, and enhance market efficiency, liquidity and transparency by exercising better discipline.

AMERICAS | 43

On The Performance Of VWAP Execution Algorithms

By Hellinton H. Takada, Ph.D. Vice President of Quantitative Research at Itaú Asset Management and Tiago M. Magalhães, Ph.D. Senior Analyst of Quantitative Research at Itaú Asset Management

Undoubtedly, the volume weighted average price (VWAP) is widely used as an industry standard approach to measure equity execution performance.

The average executed price is usually compared with the corresponding VWAP benchmark. In this context, our objective is the introduction and application of a statistical procedure to measure more adequately the performance of equity trades using VWAP as a benchmark. However, it is also important to have in mind that depending on the execution procedure and the performance evaluation purposes, it is necessary to have other benchmarks than VWAP. For instance, when the opportunity cost is very relevant or the execution strategy is opportunistic, it becomes important to consider the implementation shortfall.

The measurement of the execution performance is imperative due to regulators’ and investors’ requirements related to transaction cost analysis (TCA) and best execution. However, there are many difficulties related to empirical researches on the subject. Obviously, the lack of public data showing the trades per execution makes the studies scarcer.

Additionally, the underlying execution strategy must

be comparable with VWAP. Consequently, we focus on our private database of Brazilian equities’ trades using third-party VWAP execution algos. The idea is to show the aggregate performance of such algos from several brokerage firms to give an overview of the local VWAP execution services and, at the same time, to illustrate our statistical methodology based on a statistical bootstrapping methodology.

In our dataset of executed trades using VWAP algos, there are more than 10,000 observations from 2014 until the first quarter of 2016. As expected, there is a high autocorrelation structure between observations belonging to the same day, that is, the executed trades over a day are slices of a very larger order.

Since correlated data make the statistical analyses more complicated, as our first step we break such autocorrelations aggregating per day the financial values of all the individual trades. Using statistical tests, it is possible to verify the independence of the obtained daily financial values. It is highly probable that there are many larger orders being executed over several days. However, at least empirically, the autocorrelation caused by them seems to be

Q4 • 2016 | GLOBALTRADING

44 | AMERICAS

Figure 1. Cumulative distributions for the daily and annual metrics.

negligible when they are mixed with other execution flows.

Actually, the publication of the entire distribution of the metric is of utmost importance.

Basically, our performance metric is the financial result in basis points over the VWAP benchmark.

Usually the transaction costs of the investment strategies are all calculated on an annual basis.

Consequently, it makes sense to also present the performance of the executions on an annual basis.

Another point to consider is that the distribution of the daily metric possesses a higher uncertainty than

It is important to remember that we have the daily metric from the aggregation of the individual trades to avoid autocorrelation and, consequently, we also have the distribution of the daily metric.

Unfortunately, the calculation of the distribution of the annual metric using the distribution of the daily metric is not so straightforward because the annual metric is a random variable equal to a ratio of sums of daily random variables. Furthermore, the annual aggregation of the individual trades is useless because we do not have several years to obtain the annual distribution. The alternative is the use of a nonparametric method where we do not impose any specific structure for the related problem.

Consequently, our objective is to avoid making any additional assumptions to obtain the desired annual distribution.

“......our objective is the introduction and application of a statistical procedure to measure more adequately the performance of equity trades using VWAP as a benchmark.� the distribution of the annual metric. In Figure 1, we show the obtained cumulated distributions of the daily and annual metrics. The details related to the statistical procedure to obtain the graphs are presented in the next paragraphs. Yet, it is common to see just the publication of the mean or the median of the daily metrics leading to erroneous inferences.

GLOBALTRADING | Q4 • 2016

Bootstrapping Particularly, we adopt the bootstrapping method from statistics. In statistics, bootstrapping refers to any test or metric that relies on random sampling with replacement from a predefined dataset. This technique allows estimation of the sampling distribution of almost any statistic using random sampling methods, that is, a bootstrapping method lets us obtain useful information such as the statistical moments (mean, standard deviation, etc.) and percentiles (median, quartiles, etc.) of the distribution of interest. Obviously, the number of samplings must be enough to obtain a distribution that does not change significantly after adding new

AMERICAS | 45

Hellinton H. Takada, Ph.D. Vice President of Quantitative Research, Itaú Asset Management

samplings. The cumulated distributions obtained using the bootstrapping method for the daily and annual metrics are presented in Figure 1. As previously mentioned, the distribution of the daily metric has a much higher uncertainty than the distribution of the annual metric.

As a final remark, an interesting empirical observation using our private dataset is that the median and mean of the daily metric distribution are slightly negative.

On the other hand, the same statistics of the annual metric distribution are positive. Consequently, the VWAP execution algos from our dataset generate alpha in relation to the VWAP benchmark on an annual basis. Unfortunately, it is not possible to observe such alpha in a daily basis. It is interesting that the accumulation of the daily metrics with negative median and mean results in an annual metric distribution with positive median and mean. Finally, it is also clear that the annual metric distribution possesses a positive asymmetry meaning that there is a higher probability of the occurrence of extreme positive outcomes than extreme negative outcomes.

Tiago M. Magalhães, Ph.D. Senior Analyst of Quantitative Research, Itaú Asset Management

“......the annual metric distribution possesses a positive asymmetry meaning that there is a higher probability of the occurrence of extreme positive outcomes than extreme negative outcomes.”

Q4 • 2016 | GLOBALTRADING

ASIA | 47

Conversations And Computers: The Modern Regulator’s Toolkit

With Greg Yanco, Senior Executive Leader, Market Supervision, and Nathan Bourne, Senior Manager, Market Conduct Team, Australian Securities and Investment Commission Political uncertainty, algorithmic errors and cyberattacks can all destabilise a market, but the Australian Securities and Investment Commission (ASIC) believes it has the framework and technology to handle the challenges as they come.

Threats to stability Recent volatility brought on by political events illustrates how we always want to make sure the industry is prepared to manage volatility. The unexpected Brexit referendum result is a good example, as successful planning by all within the industry meant the subsequent volatility was well managed. Disruptive threats are common, whether a political event, an economic shock, a terrorist attack or even war. ASIC’s role is to help market participants coordinate and communicate effectively with their counterparties in the trading systems.

Working with the Australian Stock Exchange and the Reserve Bank of Australia, we oversee the clearing house for equities, set capital requirements for nonbank financial institutions and monitor the businesses

they are in to ensure they manage their risks appropriately.

We are also keen to make sure that firms have the right security layers in place to adjust their intraday risk exposures and reduce positions as needed. We speak to participants about their ability to adjust their risk exposure quickly or in an automated fashion, and Brexit was a good test case, because everyone knew it was coming and the systems worked well.

However, the real test is the one people do not expect.

Cyber security Beyond economic and financial threats, we are reviewing the potential impact of cyber incidents on the financial markets ecosystem, and in particular, critical markets infrastructure providers and participants.

ASIC expects the regulated markets to remain the gatekeepers and strongly encourages them to consider their cyber resilience as a key part of their enterprise risk management obligations. We have published two

Q4 • 2016 | GLOBALTRADING

48 | ASIA

Greg Yanco, Senior Executive Leader, Market Supervision, Australian Securities and Investment Commission

Nathan Bourne, Senior Manager, Market Conduct Team, Australian Securities and Investment Commission

reports on cyber: firstly, the cyber resilience healthcheck report (Rep429) which is aimed at raising awareness among our regulated stakeholder population, and highlights the obligations on businesses to effectively manage cyber risks as part of the business risk management processes.

Secondly, ASIC published a report (Rep468) on the cyber resilience of the two major Australian market operators, and shared in this report a number of cyber health management governance and “Good Practices� recommendations for businesses to consider in order to improve their resilience. These Good Practices are drawn from wider engagement with investment banks operating in Australia following a self-assessment process conducted by ASIC.

world. We, along with other regulators, recognise the risk of a cyber security incident has increased, both in terms of frequency and impact.

Cyber resilience is a high priority for ASIC, and we have developed a strategy that aims to advance awareness and understanding of the cyber threat landscape, and introduced mechanisms for improving resilience across our regulated entities. In particular, our focus in 2017 will be to work with our population of mid- and lower-tier firms to assess their cyber resilience profile through a process of self-assessment. These firms can be more susceptible to cyber threats if they are not able to access appropriate cyber security skills and put in place adequate risk mitigation plans.

System account hacking occurs intermittently, but we have detected these attacks early on through our market surveillance systems and ensured they were unprofitable.

Culture and conduct As a markets and conduct regulator, ASIC sees organisational culture as a significant driver of conduct within firms. Good governance is one of the core elements of a positive organisational culture.

ASIC has also established an emerging risk committee to examine events in other parts of the

We are incorporating more cultural indicators into our risk-based supervision and will use our surveillance

GLOBALTRADING | Q4 • 2016

ASIA | 49

“We are incorporating more cultural indicators into our risk-based supervision and will use our surveillance findings to better understand how culture is driving conduct among those we regulate.” findings to better understand how culture is driving conduct among those we regulate. ASIC is also looking out for cultural indicators that suggest we should take a “deeper dive” into issues concerning poor conduct, for instance, when policies are not aligned with what employees say or do, or there is a lack of action when things go wrong. An example of what ASIC might look for during our surveillance work is how responsive senior management or the Board is when a control team raises an issue for consideration: is the issue taken seriously and dealt with, or is it ignored?

We think that there are a number of key indicators of a healthy culture. These include the tone set from the top, such as core values, which are cascaded to the rest of the organisation, and translated into business practices. These need to be backed up by a true sense of accountability, effective communication and challenge processes, appropriate rewards for staff and strong governance and controls.

well-structured teams, processes and escalation channels to deal with conduct issues. However, in some cases we have seen evidence where glossy presentations to regulators have not translated into traction at an operational level, that is, to the business practices of staff on a day-to-day basis.

Technology and market cleanliness ASIC received additional funding for a new surveillance system that enabled us to build on our real-time surveillance to do deeper data analysis. ASIC can now perform analytical work equivalent to that done by other top international regulators and academia. Our recent market cleanliness work is a good example of this, which allowes us to measure the efficiency and integrity of different segments of our market as well as isolate suspicious trading. With improved time series data we will have a better idea of how results evolve, conduct further analysis and accumulate intelligence.

We are also exploring machine learning of natural language and pattern recognition. We are talking to colleagues in other markets about the tools they are building and what they are finding. ASIC first identified latency arbitrage in dark pools 18 months ago, and two other markets have seen the same issue and they might learn something and share it with us. We are a flexible regulator with diverse ways to cut through market activities and more efficiently spot abuse.

In response, we hope the industry takes these capabilities seriously. Most brokers have surveillance over their own activities, so we ask brokers and trading venues to report suspicious activity. When we identify a negative trend or direction, we can bring it to their attention to get them to alter their behaviour. When another problem arises we want the flexibility to respond accordingly.

We are currently completing a survey of market participants and investment banks on conduct risk and will be providing feedback to individual firms involved in the survey. It examines how regulated entities are actually reflecting the firm’s values in their internal policies, business practices and governance structures.

The next step will be to validate those processes through reviews of documentation and interviews.

There is a wide spectrum of firms in our regulated population - from the very small to global institutions.

Some of the larger firms have multiple regulators working with them on the same issues, and they have

Q4 • 2016 | GLOBALTRADING

50 | ASIA

Shenzhen-Hong Kong Stock Connect Gives Global Investors Access to China’s New Economy Stocks

By Nicholas Ronalds, Managing Director-Equities, ASIFMA with Tamir Abdelwahab, Analyst-Equities, ASIFMA Investors around the world chafing to invest into some of the more dynamic companies in China’s restricted market are about to get their wish. The Shenzhen Stock Exchange (SZSE) will be added to the existing “Shanghai-Hong Kong Stock Connect” link, giving investors ready access to such Chinese “neweconomy” stocks as Focus Media Information Technology, East Money Information Co., and about 878 other mostly small-cap issues.

(Although the Stock Connect scheme also accommodates Southbound flows enabling Mainland China investors to buy and sell Hong Kong-listed stocks, this article focuses on Northbound flows only, which are more relevant to non-Mainland investors).

Sophisticated international investors have been able to use other channels to buy into the China story, in particular through the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Institutional

GLOBALTRADING | Q4 • 2016

Investor (RQFII) programmes, since the early ‘oughts.

However, these QFII programmes are restricted to blue-chip institutional investors and have been hemmed in by rules on how much can be invested in which asset class, and more irksome, by restrictions on the timing and amount of repatriation is allowed.

Stock Connect avoids these disadvantages. It allows any investor to buy eligible China A shares, and to sell them any time—subject to the caveat that day-trading is prohibited on Chinese exchanges.

What are the eligible Shenzhen shares? Stocks in the SZSE Component Index and SZSE Small/Mid-Cap Innovation Index with a capitalisation of at least RMB 6 billion ($885 Million) will be eligible. The SZSE Component Index is made up of the Shenzhen exchange’s 500 largest stocks; the SZSE Small/ Mid-Cap Index is composed of small and mid-cap issues including those in the ChiNext Board, which

ASIA | 51

Source: HKEx

features stocks of China’s most speculative—but presumably also some of the most dynamic and promising—young companies.

There is one restriction on access to these Shenzhen stocks: only institutional “professional” investors will be allowed to buy names on the ChiNext board, at least initially, to safeguard retail investors from exposure to volatile and risky issues.

The capitalisation of the 880 stocks in Shenzhen Connect adds up to RMB 15 trillion, nearly threequarters of the exchange’s total capitalization. For comparison, the 567 shares in Shanghai Connect represent a market cap of RMB 21.8 trillion and 85% of the Shanghai Stock Exchange’s (SSE) total market cap.

When it comes to trading volume, Shenzhen punches well above its weight, typically trading more in terms of either share volume or share value than the SSE.

Dynamic Young China The SZSE lists more companies from China’s young, dynamic companies in IT, health care, science and manufacturing. For example, Shanghai lists 30 IT and software companies compared with 150 in Shenzhen.

Shanghai has seven companies in scientific and R&D fields, Shenzhen 15. Most of China’s publicly traded media companies are listed in Shenzhen, which also has more than twice as many manufacturing companies—1,272 versus Shanghai’s 599.

Valuations It’s usually the case that exciting growth companies carry high price tags, and valuations in Shenzhen are no exception. The average price-earnings ratio (PER) of A-shares in Shanghai is a reasonable-looking 15.6; Shenzhen’s is 43. This average conceals quite a range—the 546 Chinext stocks’ PER’s hover at a lofty

Source: HKEX and ASIFMA calculations

Q4 • 2016 | GLOBALTRADING

52 | ASIA

78. The flip-side of the valuation story is that fastgrowing companies often have zero earnings because cash flow is being ploughed into growth. Hence, a high PER doesn’t necessarily imply overvaluation. (For comparison, Amazon recently had a PER of 181.) Stock pickers will have good reason to scrutinize Shenzhen stocks and some skilled (and some lucky) investors will doubtless score enviable returns on their picks in the coming months and years.

The A-H Anomaly In addition, Stock Connect includes all A-shares on the Shanghai and Shenzhen exchanges for which H-shares are trading on the Hong Kong Stock Exchange (HKEX).

H-shares are shares of Chinese companies listed in Hong Kong. A subset of H-shares (about 38%) is dual-listed on both the HKEX and one of the Chinese exchanges: there are 70 dual listed Shanghai Exchange H shares and 17 dual listed Shenzhen H shares. A- and H-shares are economically identical in the sense that they represent the same ownership share, voting rights, and receive identical dividends per share.

When Shanghai Stock Connect launched in November 2014, many investors thought arbitragers would use stock connect and on-shore channels to keep A- and H-shares at parity. It turned out to be a badly losing bet. The A-H differential actually increased steadily after the launch and averages around 20% as of end-October, 2016. For example, Zhejiang Shibao, traded at HKD 11.58 in Hong Kong and RMB 43.71 in Shenzhen. Adjusting for the currency difference, the H-share was at an astonishing 77% discount to the A-share—an H share of the same company could be bought at less than a quarter the price. Similarly,

Source: Hang Seng Indices

GLOBALTRADING | Q4 • 2016

Nicholas Ronalds, Managing Director-Equities, ASIFMA

Luoyang Glass, an H- share dual-listed in Shanghai and Hong Kong, traded at one-fifth the price of the A-share.

The A-H anomaly has not surprisingly attracted considerable interest from academics and traders.

Index manager FTSE has even created an index that seeks to exploit the variation in the A-H differential over time in a modified China A50 index that swaps into the cheaper share, A or H, on pre-determined criteria.

What’s different about Stock Connect?

Stock Connect is a link between exchanges inside and outside China such that orders for Chinese shares (Northbound) have to go through order routing and clearing links from HKEX to Shanghai or Shenzhen via a broker who is a member of the Hong Kong Stock Exchange. The more typical arrangement for customers in one country seeking to trade on an exchange in another country is via their broker’s relationship with a broker in the country of the target exchange, not via a link between the exchanges.

ASIA | 53

The reason for this “link” mechanism between exchanges rather than the more conventional model is that the Chinese authorities want to create access to China’s equity markets but in a way they can easily supervise and adjust if need be. RMB used to buy stocks through Connect, for example, must be returned in Hong Kong when a stock is sold and can’t be re-used for other purposes in China. Such a “closed loop” for the currency wouldn’t be possible using conventional arrangements.

“On the other hand, Stock Connect could by then be working so well, and be so well established in investors’ and intermediaries’ systems that investors just might decide to stick with the model that works.”

The authorities also have to enforce a quota, which is easier via a link. When Stock Connect was first launched a quota put an upper ceiling of RMB 300 billion (USD 44 billion) on the total investment allowed through the scheme. That quota will be abolished with the launch of Shenzhen Connect, but a daily quota of RMB 13 billion remains.

capital gains will not apply to stocks bought and sold via Stock Connect. The street is widely assuming the Chinese authorities will accord Shenzhen Connect the same treatment—nothing else makes sense. But without an official announcement the uncertainty lingers causing delays with internal systems and client documentation that either can’t be completed or must contain additional caveats to take the uncertainty into account.

The Futures of Connect Stock Connect is still being called a pilot program. It will grow and evolve in the coming months and years.

The HKEX has announced that it will add ETFs to the scheme’s product suite in the near future, probably in 2017. Next on the wish list are derivatives, such as stock index, currency, and ETF futures and options.

Eventually primary market listings might also be included.

Looking farther out still, one question is, what happens when China’s capital account becomes truly open, with capital free to move in and out without restriction? A scheme like Stock Connect would arguably be redundant because foreign brokers could establish direct relationships with on-shore Chinese brokers, just as they do in equity markets around the world. At that point Stock Connect might fall into disuse.

On the other hand, Stock Connect could by then be working so well, and be so well established in investors’ and intermediaries’ systems that investors just might decide to stick with the model that works. If HKEX plays its cards well Stock Connect could remain the preferred channel for investing in China’s stock market, quirky, unique, but effective.

If Chinese regulatory authorities want to investigate suspected abuse, they can do so through their familiar relationships with the Hong Kong Exchange and the Hong Kong regulators.

Tax? As of early November, one big question mark still looms: what will be the tax treatment of equities purchased via Shenzhen-Hong Kong Stock Connect?

For Shanghai Stock Connect, the authorities waited until the last day before launch to announce that

Q4 • 2016 | GLOBALTRADING

54 | RESOURCES

Industry Resources Bloomberg Tradebook

Bloomberg Tradebook® is a leading global agency broker that provides anonymous direct market access (DMA) and algorithmic trading to more than 125 global liquidity venues across 43 countries. With unique tools and unrivaled standards of

Itiviti

Itiviti is a world-leading technology provider for the capital markets industry. Trading firms, banks, brokers and institutional clients rely on Itiviti technology, solutions and expertise for streamlining daily operations, while gaining sustainable competitive edge in global markets.

Thomson Reuters

Thomson Reuters is the world’s leading source of news and

GLOBALTRADING | Q4 • 2016

execution, we seek new ways to deliver value to both the buy side and sell side—it’s about putting you first in challenging times.

Founded in 1996, Tradebook offers its customer base trading solutions for equities, futures, options, fixed income and foreign exchange (FX) to actively manage complex trading strategies globally.

Tradebook has been ranked as With 13 offices and serving more than 400 customers worldwide, Itiviti was formed by uniting Orc Group, a leader in trading and electronic execution, and CameronTec Group, the global standard in financial messaging infrastructure and connectivity. From its foundation in 2016, Itiviti has a staff of 400 and an estimated annual revenue of SEK 700 million.

the top Broker for global equity trading in the Institutional Investor best execution league tables for the fifth year in a row. Waters Technology awarded Tradebook as Best Agency Broker in 2015. It also won the Wall Street Letter awards for best Futures ISV, Options Trading Platform and FX platform.

Contact details: www.bloombergtradebook.com

infrastructure built for today’s dynamic markets, offering highly adaptable platforms and solutions, enabling clients to stay ahead of competitive and regulatory challenges.

Itiviti is owned by Nordic Capital Fund VII. Contact details: www.itiviti.com

Itiviti is committed to continuous innovation to deliver trading information for professional markets. Our customers rely on us to deliver the intelligence, technology and expertise they need to find trusted answers. The business has operated in more than 100 countries for more than

100 years. Thomson Reuters shares are listed on the Toronto and New York Stock Exchanges.

Contact details: www.thomsonreuters.com

RESOURCES | 55

Fidessa group

Exceptional trading, investment and information solutions for the world’s financial community.

85% of the world’s premier financial institutions trust Fidessa

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 America Merrill Lynch, Goldman Sachs, and more to build high quality, feature-rich software.

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. www.fixglobal.com offers our

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 hedge funds. $20 trillion worth of

transactions flow across our global connectivity network each year.

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.

FIX Flyer has headquarters in New York City with offices in Boston and Hyderabad, India.

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.

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.

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.

Interested in meeting your prospects and clients in a neutral setting for a thought-provoking discussion? Contact us about our

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

Visit fixflyer.com for company information and to request a free demonstration. Follow us on twitter.com/fixflyer.

Contact Details: www.fixflyer.com

Face2Face Executive Roundtables. @FIXGlobalOnline and GlobalTrading Journal.

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

Q4 • 2016 | GLOBALTRADING

56 | FIX

Nordics Briefing Review 2016

By Tim Healy, Global Marketing And Communications Manager, FIX Trading Community Although the 2016 Nordics Briefing changed its usual venue and time of year, attendance was at a record for the day. The sessions provided thought-provoking comments and analysis with regulation very much at the heart of the discussions. The uncertainty that continues to overshadow the markets was clear and it was interesting to hear about particpants called the unintended consequences of more regulation.

There was undoubtedly a general feeling that the cost base for investment firms would rise as sytems are upgraded to comply with regulatory requirements. As it becomes more expensive to do business, there were also concerns that the trading community might shrink.

would be an affirmation of the independence of their trading desks and their ability to seek and discover the best execution for their clients.

In the afternoon session, the conference separated into two streams, with one focussing on non-equity issues in general and on blockchain in particular, while the other concentrated in more detail on the effects of new regulatory measures.

The overriding theme for the day was collaboration.

Cooperative action is essential and FIX provides that perfect platform to examine guidelines and recommend the best practices for the whole industry to implement.

However, there was a difference of opinion evident in several of the sessions, with some participants confident that rising regulation will actually present opportunities. As the saying goes “one man’s meat is another man’s poison.”

It was particularly interesting to hear the buy-side’s perspective on increased regulatory measures and the direct impact that they will likely have on their businesses. For instance, best execution under MiFID II is a major undertaking for the buy-side and especially, it was noted, for their fixed income operations. However, the sanguine view was that successful compliance

GLOBALTRADING | Q4 • 2016

Tim Healy, Global Marketing And Communications Manager, FIX Trading Community

FIX | 57

On Best-Ex

By Sacha Fellica, Global Product Manager, Trading Products, Bloomberg L.P.

When embarking on projects needed to achieve MiFID II compliance, it is important to focus on the positive outcomes that these efforts will bring to regulated firms. For example, when tackling compliance to the MiFID II Best-Ex regime, a firm should take this as an opportunity to deeply embed TCA (transaction cost analysis) in their main business process by covering the whole lifecycle of a trade. A potential solution could be the creation of a feedback loop that links the TCA Review and Evaluation process with the strategy and algo selection and the execution management of an order. The solution should have multi-asset coverage and should allow the firm to test their order execution policy by analysing order execution performance through different angles and using different benchmarks. By taking such an approach, a firm would not only achieve compliance to the BestEx requirements but also improve their core business process.

Sacha Fellica, Global Product Manager, Trading Products, Bloomberg L.P. increase in quality as a side effect?). When looking at solutions to comply with MAR for Investment Recommendations, it would make sense to implement a move to electronic templates that are easy to complete and to attach to all relevant electronic distribution channels. The templates would have hooks to the related disclosures and recommendations history. As new recommendations are issued, these are captured and integrated in the firm’s surveillance systems in order to create a onestop-shop Enterprise Surveillance System. The goal should be to incorporate both the Best-Ex and MAR processes into a single system which is in turn tightly integrated with the regulated firm’s OMS (order management system).

On MAR When looking at MAR (market abuse regulation) compliance specifically for investment recommendations, it is clear that the new recommendations is heavily impacting the way that recos are issued and used. A likely consequence is the electronification of recommendations and a drop in the number issued (could there be an

Q4 • 2016 | GLOBALTRADING

58 | FIX

The Nordics region has a long history of fintech innovation. Recently there has been consolidation in the region, as there has been across the globe and that trend will likely continue. However, it was interesting to hear how important crowd funding has become to the region for fintech and, how it will perhaps supplement the role of banks.

“Like it or not, every response to ‘what’s new?’, must give a nod to blockchain, named by many as the technology to deliver huge efficiencies, and participants and commentators alike​are keen to see real-use cases emerge.”

Julia Streets, founder and CEO, Streets Consulting chaired the FIX Nordics panel on “Market Innovations”.

She offered some forthright views about the fintech industry, providing a circumspect opinion to counter the hyperbole that often surrounds discussions about its disruptive impact: “Fintech is not a new phenomenon. If it is, I have to ask what have I been doing with my time? Decades ago, fintech was born in the capital markets: electronic trading, algorithms, ultra-low latency connectivity, FPGA processing, market data handling. I can - and do - go on.

GLOBALTRADING | Q4 • 2016

Like it or not, every response to ‘what’s new?’, must give a nod to blockchain, named by many as the technology to deliver huge efficiencies, and participants and commentators alike​are keen to see real-use cases emerge. Some claim wholesale CCP reform is inevitable, others counter that in the quest for real-time settlement the extent of industry participant evolution may be prohibitive. We may have some distance to travel to reach post-trade utopia, however blockchain hands do not rest idly and we’ve seen private share market and share registrar services come to market and some predict that custody is ripe for blockchainification.”

FIX | 59

MMT – The Journey So Far

By Anna Branch, Global Head of Market Data at Fidessa and Co-chair, FIX MMT Steering Committee

When the FPL Trust assumed control of the MMT (Market Model Typology) project, it assured the openness of the standard, but it also brought it into the well-oiled mechanism of FIX Trading Community’s technical committees.

In the two years since, the FIX MMT Technical Committee has achieved much of its to-do list in terms of developing the standard and preparing both the industry and regulators for its full rollout. Today, MMT logic is ready to begin lowering post-trade costs across the buy-side, sell-side and at trading venues.

The makeup of the committee has been one of its strengths all along, as we have involved venues, vendors, sell-side and buy-side to ensure all angles of the implementation are covered. This broad crosssection will certainly aid in speeding adoption and implementation of MMT.

exchanges and vendors alike. By the end of 2015, 15 trading venues had implemented the MMT logic into their market data systems.

In the summer of 2016 we officially introduced MMT v 3.01 that accommodates the applicable MiFID II Regulatory Technical Standards (RTSs): • The trade flags stipulated within RTS 1 for equities and equity-like financial instruments • The trade flags stipulated within RTS 2 for non-equity financial instruments Transparency in fragmentation The MMT was designed to find a practical solution for standards on post-trade equity data that could be adopted industry-wide.

Since the MMT initiative came under the umbrella of the FIX Trading Community, a state-of-the-art and neutral management of the MMT standard has been implemented and the governance structure of MMT has been aligned to FIX guidelines.

Following the implementation of the original MiFID rules in 2007, and the competition that fostered in the trading venue space, market fragmentation became an inevitable by-product. Action was needed to meet the challenges in the area of equity market data, in particular post-trade transparency, in order that the management and development of the relevant standards could be established.

During 2015, the MMT model entered a mature phase and is currently being actively used and published by

The commercial value for the market is in the expected efficiency gains, which will create cost savings for all

Q4 • 2016 | GLOBALTRADING

60 | FIX

Anna Branch, Global Head of Market Data at Fidessa and Co-chair, FIX MMT Steering Committee

Christiane Baumgarten, Head of Regulation, Regulatory Services at Deutsche Börse AG and Co-chair, FIX MMT Steering Committee

participants. The rollout of this is already underway, but when it is fully implemented, post-trade costs will be reduced across the street.

“MMT will provide a consistent yet more efficient MiFID II conforming view of the trade type descriptors, facilitating tighter compare-andcontrast analysis across market data from multiple sources.”

The MMT initiative was developed through the collaborative efforts of exchanges, MTFs (multilateral trading facilities), market data vendors and trade reporting venues all committed to improving the consistency and comparability of data from multiple sources.

Matthew Bumstead, Global Product Manager for Market Data Feed (B-PIPE) at Bloomberg and Co-chair of the MMT Technical Committee, comments: “MMT v3 is the fifth iteration of a five-year long initiative to create an industry-driven post-trade execution type standard that will be adopted by European market operators, posttrade publication arrangements and market data vendors alike, with the potential for global adoption outside of Europe. Incorporating, but going above and beyond, the trade flags stipulated in the ESMA Regulatory Technical Standards 1 and 2, MMT will provide a consistent yet more efficient MiFID II conforming view of the trade type descriptors, facilitating tighter compare-and-contrast analysis across market data from multiple sources.”

The MMT Steering Committee brought the initiative under the jurisdiction of the FIX Protocol Limited Trust in 2014. Participants from exchanges, data vendors and reporting venues have been working hard over two years to translate the original 2010 CESR Technical Working Group recommendations into practical action under the

GLOBALTRADING | Q4 • 2016

well-established values and governance standards of FPL. Communication, cooperation Interaction between regulators and the MMT working groups was a challenge during 2015 and 2016, in order to clarify the MiFID II requirements for MMT. Steering Committee members as well as Technical Committee members (all chairs) engaged in constructive dialogue with regulators seeking clarification in order to make sure the FIX MMT data model fulfills all trade flagging requirements for post-trade transparency purposes (RTS 1 and RTS 2 especially).

Commenting on the transparency flags, Irina SonichBright, Credit Suisse’s Head of Business Development AES Europe and Co-chair of the FIX Transparency Working Group, said: “The MMT standard was developed to address the issues of post-trade

FIX | 61

Matt Bumstead, Global Product Manager for Market Data Feed (B-PIPE) at Bloomberg and Co-chair FIX MMT Technical Committee

Irina Sonich-Bright, Head of Business Development AES Europe and Co-chair FIX Transparency Working Group

“The co-operation was swift and without problems and initially confirmed that MMT will be suitable to all asset classes alike.”

about MMT. The final draft RTS will not, however, directly endorse MMT but both of the MMT committees have maintained compatibility with the regulatory requirements supporting ISO 20022.

transparency under MiFID 1. Being one of the earlier adopters of the standard meant that there was no second thought on how the challenges of the MiFID II post-trade transparency flags should be addressed.

The shares trading community has been using MMT standard to flag different types of trades for a number of years now which means that the standard is already fully integrated into the existing equities trading systems.

“MiFID II post-trade transparency requirements outlined

by ESMA in its technical standards document echoed and enhanced the work MMT has achieved in equities so far. The new challenge was to extend the standard to the non-equity products. The FIX MMT team and Transparency Working Group collaboratively jumped to the challenge to provide the industry with the optimal solution for the MiFID II mandated post-trade transparency flags across multiple asset classes.”

During the formalisation of the draft RTSs (regulatory technical standards), it became clear that MiFID II covers more asset classes than shares only and that the MMT working groups would need to verify if MMT would be applicable to other asset classes as well. This required cooperation with other FIX work streams across the Technical Committees active in MiFID/MiFIR issues (the Transparency Subgroup in particular). The cooperation was swift and without problems and initially confirmed that MMT will be suitable to all asset classes alike.

Christiane Baumgarten, Head of Regulation, Regulatory Services at Deutsche Börse AG and Co-chair on the MMT Steering Committee, notes: “The MMT TC did an amazing job in evaluating the compatibility of MMT, originally developed for equity trades, also for non-equity trades in a very short time span. This was only possible due to the strong commitment of our colleagues in the TC, as well as the close liaison with other FIX Trading Community’s Technical Committees.”

The MMT Technical Committee also delivered a well-documented statement to ESMA as part of the consultation. Feedback is positive from the regulators

Q4 • 2016 | GLOBALTRADING

62 | FIX TRADING COMMUNITY MEMBERS

FIX Trading Community Members *Premier Global Members marked in bold

360T Asia Pacific 42 Consulting Pte Ltd Accedian Networks Activ Financial Actuare AFME- Association for Financial Markets in Europe Albourne Partners Ltd Algomi AllianceBernstein American Century Investments Ancoa Software Aquis Exchange ASIC Association of International Wealth Management of India Australian Securities Exchange AXA Investments Managers Ltd B2BITS EPAM Systems Company Baillie Gifford & Co. Banca IMI SpA Banco Itau S.A Bank of America Merrill Lynch Barclays Baring Asset Management BATS CHI-X Europe Baymarkets AB Beijing RootNet Technology Co., Ltd. BlackRock, Inc. Bloomberg L.P. Bloomberg Tradebook BM&F BOVESPA BNP Paribas Bolsa de Valores de Colombia Bolsas y Mercados Españoles (BME) Brandes Investment Partners LP Bridline Brook Path Partners, Inc. BSE Limited BT Bursatec SA de CV BVI Cameron Edge 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

CL&B Capital Management Clearing Corporation of India Ltd CME Group Colonial First State Global Asset Management Colt Technology Services Compagnie Financiere Tradition Connamara Systems LLC Convergex Corvil CQG Credit Suisse Crown Jewels Consultants Ltd CSC Daiwa SB Investments Daiwa Securities Group Inc. DATAROAD Dealogic Delta Capita Deutsche Bank Deutsche Boerse Group Digital Realty (UK) Limited Dimensional Fund Advisors Drebbel DTCC Eastspring Investments (Singapore) Limited EBS BrokerTec Egypt For Information Dissemination Emagine Consulting Equinix Esprow Pte. Ltd. ETLogic Ltd ETNA Software Etrading Software Ltd EuroCCP Euronext Paris SA EuroTLX Exactpro Systems 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 FIS formerly SunGard FIX4WARDS FIX Flyer LLC FIXNETIX FIXNOX Flextrade UK Ltd FpML Franklin Templeton Investments FXCM Global Services LLC Gamma Three Trading, LLC GATElab

Premier Global Members

GLOBALTRADING | Q4 • 2016

GETCO Asia Goldman Sachs & Co. GreySpark Guosen Securities Ltd Hatstand HM Publishing Hong Kong Exchanges & Clearing Limited HSBC Bank PLC HSBC Global Asset Management ICAP ICMA (International Capital Markets Association) IG Group Holdings PLC Ignis Asset Management Incisus Capital Partners Indata Recon LLC Indian Association of Alternative Investment Funds Informagi AB InfoWare Infront AS ING Bank Instinet Integral Development Corp.

Intercontinental Exchange (ICE) International Securities Exchange (ISE) Investment Technology Group (ITG) Ipreo IPC Systems IRESS Limited IS Investment ISITC ISO Itiviti Jefferies J.P. Morgan Jordan & Jordan JP Morgan Investment Management (J.P. Morgan) JSE Limited KB Tech KCG Holdings Kotak Securities LCH Linedata Liquidnet LiquidMetrix LIST Group Lloyds Banking Group LSE Group M&G MACD Macquarie Securities Limited MAE - Mercado Abierto Electronico S.A. MarketAxess Markit Marshall Wace Asset Management Mawer Investment Management Metagen

FIX TRADING COMMUNITY MEMBERS | 63

Metamako MFS Investment Management Mizuho Securities Morgan Stanley Investment Management Morgan Stanley MTS SpA Nasdaq National Physical Laboratory 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) On Budget and Time Ltd Ontario Teachers’ Pension Plan Board Onix Solutions [OnixS] Options Clearing Corporation Orbis Investment Management Limited Oslo Bors ASA Oyak Securities Pantor Engineering AB Peresys (IRESS) PFSoft Pioneer Investments Portware Primary E Trading Principal Global Investors Putnam Investments Quendon Consulting R3CEV R Shriver Associates Rabobank International Raptor Trading Systems, Inc. RBC Global Asset Management REDI Technologies Royal Bank of Canada Capital Markets S&P Capital IQ Real-Time Solutions Santander Global Banking & Markets SASLA (South African Securities Lending Association) Schroders Sequant Shanghai Stock Exchange SIFMA SimCorp Singapore Exchange SIX Swiss Exchange Skandinaviska Enskilda Banken AB Sloane Robinson smartTradeTechnologies Societe Generale Softsolutions! Srl Southeastern Asset Mgmt Spring Securities International AB

SS&C Technologies Standard Chartered Bank Standard Life Investments State Street eExchange Solutions State Street Global Advisors State Street Technology Zhejiang Sumitomo Mitsui Trust Bank Swedbank Robur Fonder AB SWIFT Sycamore Financial Technology Symphony Communication Services LLC Systemware Innovation Corporation (SWI) Taiwan Stock Exchange Tata Consultancy Services Telstra Global The Continuum Partners The Investment Association The London Metal Exchange The Nigerian Stock Exchange The Realization Group The Technancial Company The Vanguard Group Thomson Reuters Tokyo Stock Exchange Tora Trading Services Tower Research Capital India PVT Ltd 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 UniCredit Vela Trading Technologies Verne Global

Versitrac Systems Corporation VOEB Volante Technologies Warsaw Stock Exchange Wellington Management Company Wholesale Markets Brokers’ Association Winterflood Securities XBRL Xetra (Deutsche Börse) Zeopard Consulting

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

For more information, please visit: www.fixtrading.org

Emagine Consulting www.emagine.co.uk

FIX4WARDS

www.fix4wards.com

Softsolutions! Srl

www.softsolutions.it

Swedbank Robur Fonder AB www.swedbankrobur.se

UniCredit

www.unicredit.eu

Verne Global

www.verneglobal.com

Premier Global Members

Q4 • 2016 | GLOBALTRADING

64 | LAST WORD

Best thing about your city?

The warmth and friendliness of the Irish people.

They are justifiably famous for making you feel welcome and for their generosity.

Worst thing about your city?

The weather!

Getting to work?

On an Italian Piaggio scooter, of course.

View from your desk?

Unfortunately, grey sky most of the time whatever the season. In fact, my Bloomberg screens look more colourful….

Where to take your clients/brokers for dinner?

Matt The Thresher off St. Stephen’s Green for some fresh fish and seafood. It’s always a popular spot.

And a relaxed spot with friends and family?

No doubt at all. It’s Ragazzi Restaurant in Dalkey, owned by my dear friend Fabio. The best pizza and “linguine allo scoglio” in Ireland!

Best place to stay when in town?

The Westbury Hotel is an unmissable, albeit expensive experience. But it’s worth the stay, not least because of its ideal location close to Grafton Street, Trinity College and the museum.

Best tourist spot?

The Cliffs of Moher along the Atlantic coast of County Clare are stunning and should be seen by every visitor to the Emerald Isle.

GLOBALTRADING | Q4 • 2016

My City

Dublin, Ireland

By Gianluca Minieri, Global Head of Trading, Pioneer Investments