2017q4 ebook

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GlobalTrading’s Editorial Think Tank Dear Readers, The approach of MiFID II implementation in Europe is inevitably preoccupying many buy- and sell-side firms. The unbundling of research and trade execution commissions is forcing money managers to choose the most appropriate method to account for research costs under the new regime. Best execution methodology for non-equity asset classes is also a major consideration across the industry. There seems to be a consensus that simply replicating the process used for equities is inapposite for other types of securities, particularly fixed income.

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

The regulators appear to recognise this, and the intention of the new rules points to firms demonstrating a clear methodology that consistently aims to achieve best execution, rather than best price in all circumstances. Moreover, it is widely agreed that greater automation and electronification of trading, which MiFID II implies, will be beneficial. Processes will be more efficient, transparent, auditable and professional. Nevertheless, there are still areas of uncertainty. In particular, the role of systematic internalisers will need to be assessed and there is likely to be pressure to ensure there is equivalence with other liquidity sources, such as exchanges.

Carlos Oliveira Brandes Investment Partners

Greg Lee Barclays

Looking beyond MiFID II, there are clearly important megatrends that will affect the future of stock trading. Most notably, the amount of information increasingly available is prompting the formation of new technologies and the development of systems to process, analyse, understand and apply these expanding structured and, especially, unstructured data sources, to enhance trade execution. Meanwhile, cloud technology is also changing the nature of connectivity between counterparties. And, of course, the application of AI and machine learning is garnering a great deal of attention. The expansion of computer processing power, democratisation in the investment industry, increased information accessibility and the development of different skillsets among a new generation entering the industry will ensure that these evolving technologies will have an increasingly important role in the trading process.

Emma Quinn AB

Michael Corcoran ITG

Best Regards,

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

GlobalTrading Publisher Edward Mangles

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Publishers’ Note GlobalTrading is proudly published by HM Publishing in support of the FIX Protocol and the FIX Trading Community. GlobalTrading is the official quarterly publication of the the FIX Trading Community, however, the content does not necessarily represent the opinions of the FIX Trading Community. The opinions expressed in this publication are not necessarily those of the publishers or of the institutions of the contributing author. Although care has been taken to ensure the accuracy of the information contained within the publication, neither the publishers, authors nor their employers can be held liable for any inaccuracies, errors or omissions; nor held liable for any actions taken on the basis of the views expressed, or information provided within this publication. No part of this publication covered by the publisher’s copyright may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, be they graphic, electronic or mechanical, including photocopying, without the written permission of the publisher. Any unauthorised use of this publication will result in immediate legal proceedings. All Rights Reserved © 2017


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CONTENTS 5

FOCAL POINT

5 Buy-Side Trading Desks: The Need For Constant Evolution - Gregg Dalley, Schroders

INSIGHT

13

41

26 From High Touch To Low Touch - Vaibhav Sagar, Open System Tech

AMERICAS

28 The Securities And Antitrust Class Action Litigation Industry Continues Its Record Pace - Kevin Doyle, Battea Class Action Services

9 Artificial Intelligence And Equity Execution - Ben Polidore, ITG

PRODUCT OVERVIEW

13 Best Execution – Adding Science To The Art Of Trading - Kristian West, J.P. Morgan Asset Management

EVENT 35 Trading In A New World Order - Rupert Walker, GlobalTrading

17 The Future Of Trading Technology: Building A Resilient Stack That Supports Business Growth - Rupert Walker, GlobalTrading

ASIA

OPINION

EUROPE

21 Upgrading Post-Trade Operations - David Pearson, Fidessa

41 Justifying Brokers In An Unbundled World - Ian Mawdsley, Thomson Reuters

43 The Case For Outsourcing - Carl Slesser, Nasdaq

GLOBALTRADING THINK TANK

46 FX Market Supervision And Surveillance - Rupert Walker, GlobalTrading

31 Thomson Reuters REDI INDUSTRY

24 Outsourcing Client Connectivity - Richard Bentley, Ullink

37 Optimising Access Into China - Cale McCulloch and Claud Zhong, CLSA

50 FIX Trading Community Members MY CITY 52 London - David Pearson, Head of Post-Trade, Fidessa


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FOCAL POINT | 5

Buy-Side Trading Desks: The Need For Constant Evolution By Gregg Dalley, Global Head of Equities Trading, Schroders

Q4 • 2017 | GLOBALTRADING


6 | FOCAL POINT

Human traders and automation coexist within an effective trading desk to source liquidity and ensure best execution. The buy-side trading desk is unrecognisable from two decades ago. Transaction volumes have doubled, more portfolio managers and investment teams are being serviced, and the number of financial instruments has increased at the same time as the size of the trading staff has almost halved. The introduction of more extensive and sophisticated technology, extensive automation and improved trading tools has provided faster and enhanced data collection and analysis, removing many manual tasks. These tasks require different skillsets to those acquired and earned by traders in the past, and Schroders has been developing them internally for several years to meet the challenges and opportunities provided by new technologies and regulatory changes. In particular, it is essential to identify the specific roles that machines and humans should best adopt, and also where they complement each other for greatest efficiency. Broadly, the co-existence of machines and humans for a successful trading process is not only critical, but, in practice, inevitable. Technology can be used to analyse data (including “Big Data”) rapidly and detect patterns, as well as calculate complex problems quickly. Automation facilitates transparent and auditable decision-making, and prevents emotion and bias affecting the process. Moreover, technology and automated systems are scalable and should be cost-effective. However, human agency also has a fundamental role. Personal networks help extract information that can augment best execution, especially for block trades. Skilled, experienced staff can also best interpret and prioritise data that is not electronic in natures. It is also incredibly valuable around events, news flow or any occasions when a stock is not behaving as expected and therefore is harder to model. Although algorithms (and artificial intelligence) are more efficient than humans for many activities within the trading cycle, people nevertheless need to devise and direct the algorithms. Here, most starkly, is the symbiosis of human agency and machine.

GLOBALTRADING | Q4 • 2017

Indeed, interaction and collaboration between humans and machines is common throughout the trade cycle. Perhaps, it is most evident when sourcing liquidity to extract the best price for a transaction. Sourcing liquidity If liquidity were easily accessible, then it would be possible simply to plug an order into an algorithm and the trade would be filled at the best price. In that case, success would be determined by speed; it would be a latency race. Certainly, this does happen, but in practice, a broker with a large unwind position or holding a mid- or small-cap position does not place their order into the market for execution in a crossing network or a conditional order type to interact with. Instead, they will typically keep it on their pad, make calls to find the other side or wait from an inbound call from an indication of interest to maximise commission and generate more business.

“The co-existence of machines and humans for a successful trading process is not only critical, but, in practice, inevitable.” Similarly, the buy-side dealing desk often acts as an internal sales trader, crossing up inbound liquidity opportunities with the portfolio managers, adding value to the investment process and reducing transaction costs. In fact, both sell- and buy-side trading desks provide a valuable service for their firms by actively searching for the other side of a trade, rather than the passive, hands-off route of deploying an algorithm. Basically, a trader needs a variety of complementary tools and skillets, and there is a time and place for all of them. The issue of liquidity and its alternative sources will be a major focus after the Markets in Financial Instruments Directive (MiFID) II is implemented in January 2018. In particular, the impact of systematic internalisers (SIs) will be examined.


FOCAL POINT | 7

Some industry participants fear that they might be a source of information slippage and shady practices; others hope they will turn out to be viable, alternative suppliers of liquidity. The truth is likely to depend on the integrity of the firms operating the SIs, but in any case, buy-side traders will have access to the data in order to make their judgements. Impact of MiFID II One purpose of MiFID II is to make trade execution more transparent, and lit exchanges are obvious venues to ensure that happens. There is a danger that trade volumes might migrate to SIs, which would likely motivate regulators to reduce their activities or even remove them altogether. The attitude of the buy-side is ambivalent. On the one hand, the prominence of SIs will make it difficult for buy-side firms to capture the spread on a security because they cannot act as SIs themselves, yet third party orders might interact with external SIs before they route to the order book. On the other hand, the buy-side will have the information about the trades SIs have executed and it will be able to measure and monitor their performance. Gregg Dalley, Global Head of Equities Trading, Schroders

“A broker with a large unwind position will typically keep it on their pad, make calls to find the other side or wait from an inbound call from an indication of interest to maximise commission and generate more business.”

For instance, will brokers provide external or internal Si’s with additional (even damaging) material about their clients, and would individual buy-side firms be told how they are classified. Also, will brokers tell their clients exactly which internal book they have dealt with? In addition, the new regime might cause an unintended paradox: there might be a reduction in trading volumes without a corresponding decline in real liquidity. First, the new reporting and additional tagging of orders will remove double counting and some of the inefficacies of the previous framework. Second, the new liquidity landscape will remove or, at least initially, reduce the amount of market making opportunities for high frequency traders while they figure out the new world and rebuild their models. However, this will not cause a decline in real liquidly for the buy-side, although it may well reduce market noise and the volumes that are traded on a daily basis. After all, if you start flat and finish flat, then what is the net added value at the end of the day?

Q4 • 2017 | GLOBALTRADING


8 | FOCAL POINT

“The MiFID II regime might cause an unintended paradox: there might be a reduction in trading volumes without a corresponding decline in real liquidity.” or venue selection, and a more rigorous assessment of counter-party performance. Schroders is also planning to incorporate portfolio managers’ alpha trading profiles, styles, strategies and algorithmic selection suggestions into the trading desk’s workflow where they have statistical significance.

Simply: less volume, but undiminished liquidity? We will have to wait and see, but it will be interesting. Nevertheless, if headline volumes fall, then there might be criticism that MiFID II is having a damaging impact on market activity. An accurate assessment will require a dispassionate analysis of transaction costs and a proper appreciation of real liquidity before and after MiFID II. Schroder’s algorithm trading wheel allows the quantitative equity trading team to determine which sell-side firms are delivering the best and most consistent execution service. The effect is greater transparency, a reduction of human bias from broker

GLOBALTRADING | Q4 • 2017

Global collaboration and quantitative analysis and input is embedded in the buy-side trading process, and the objective is to utilise additional data in order to be better informed, which should improve decision-making and optimise final outcomes. Will Psomadelis took up the role of head of electronic strategy research working with our Schroders’ data insight unit to provide a quantitative service to the firm’s global trading team and create consistency worldwide. One challenge we all face is that on 3 January 2018 a new era begins and all historical data will be far less relevant as the game changes and we have new rules and venues. Our job will be to put this puzzle together as quickly as we can, using a combination of quantitative data and human trader interpretation.


INSIGHT | 9

Artificial Intelligence And Equity Execution By Ben Polidore, Managing Director, Algorithmic Trading, ITG AI and machine learning can enable traders to manage trading risks better and enhance investor returns. If you believe that variety is the spice of life, then maybe a career in electronic trading is for you. At last count, traders may choose from more than 1,600 broker algorithms and strategies, each with its own unique fingerprint. Despite this vast landscape of trading strategies, traders don’t necessarily see variety as a good thing. A study earlier this year by Greenwich Associates found that only 7% of buy-side traders feel completely satisfied with the standard algorithms offered by their brokers. It is this discontent, along with advances in research and technology that present an opportunity to reinvent algorithms. At ITG, we’ve been developing technology for selfdirected trading algorithms since 1998, and are

beginning to incorporate Artificial Intelligence (AI) into our algo suite following two years of extensive research. Given the growing popularity of the topic, the following is a brief overview of the evolving AI landscape and its growing application to the financial industry, particularly equity execution. Gamers, techies and quants tear down the walls The explosive growth of the video game market, which currently stands at $100 billion+ in global revenues, created millions of customers for graphics processing units (GPUs) and continues to drive rapid improvements in GPU capacity and functionality. Today, a commercial GPU with 9 TFLOPS of computing power (i.e. able to perform 9 trillion floating-point operations/second) is as fast as the 500th best supercomputer in 2008 and retails for just $5,000. Computationally intensive calculations, once requiring expensive and complex server farms, are now run on a significantly smaller footprint at much lower cost.

Q4 • 2017 | GLOBALTRADING


10 | INSIGHT

“In a market operating at microsecond latency, AI-driven execution models operating on a millisecond scale are too slow for certain tasks such as limit order placement or pre-market risk checks.” As advances in computer engineering quickly catch up with academic research in computer science, what was once considered theoretical is now achievable. Simultaneously, widely available research on AI and machine learning is leading to an explosion of interest across many industries in adapting this technology to solve real world problems. In addition to research in

GLOBALTRADING | Q4 • 2017

academic journals, vast amounts of information are freely available on the internet. Anyone seeking an introduction to advanced reinforcement learning concepts need look no further than YouTube to get started. Since much of this research is publicly available, this results in fewer patent entanglements which further reduces the barriers to entry and the costs to employing AI. The challenge of equity execution Despite these technological and intellectual advances, speed remains a challenge in applying AI to equity execution. In a market operating at microsecond latency, AI-driven execution models operating on a millisecond scale are too slow for certain tasks such as limit order placement or pre-market risk checks. Major advances in training models via horizontal scaling (both on-chip and across chips) haven’t done enough to improve latency at runtime for real-time, in-band trading decisions. This is why we have focused our efforts mainly on discretionary order planning, which isn’t as


INSIGHT | 11

“AI-based strategies are less deterministic than traditional trading algorithms.” constrained by latency and may even have more upside for performance improvement. The need for transparency in the execution process is another big hurdle to AI adoption. In short, AI-based strategies are less deterministic than traditional trading algorithms. On the one hand, this behaviour may prove valuable to a trader as less predictive strategies may reduce information leakage by minimizing the signaling risk caused by repetitive behavior. On the other hand, when you ask a model to find hidden relationships between many underlying fundamental factors, it may be difficult to understand and explain what motivates a specific action. Although the motivation may lack transparency, the governing logic is easy to understand, since the goal and the context to achieve that goal are explicitly defined in the AI model definition. To effectively understand and explain AI-based strategy behavior requires traders to effectively reframe the problem and educate their stakeholders (i.e., investors and portfolio managers) making it necessary to equip the trading desk with the appropriate analytics required to facilitate this task. Another challenge to adapting AI for execution products is that posed by the paperclip maximizer in AI researcher, Nick Bostrom’s, now-famous thought experiment: AI algorithms seek to fulfill their goals with maximum efficiency, and with no regard for consequences outside of their objectives. In Bostrom’s thought experiment, a super-intelligent AI tool tasked with maximizing paperclip production might try to turn all available atoms in the universe into paperclips. In an execution context, this means an AI algorithm set to a particular benchmark, say the opening price of a stock, might behave too aggressively in hitting that goal, essentially rediscovering practices already tried and discarded by human traders. Carefully considering the objective function and its second-order effects, is crucial when employing discretionary AI in the execution process.

Ben Polidore, Managing Director, Algorithmic Trading, ITG Fear the robots? To some, the term artificial intelligence elicits feelings of deep despair at the rise of the machines and the inevitable decline of human work. It is beyond the scope of this article (and its author) to speculate on the potential socio-economic impact of AI on the financial industry. However, it is worth recalling that similar fears arose with the introduction of trading algorithms and direct market access. In time, they simply became weapons in a trader’s arsenal and a way to manage an increasingly complex market. We view AI in the context of equity trading in two ways: first and foremost, as an opportunity to improve trading performance and second, as a pathway to simplify a landscape of trading strategies that has grown in complexity over many years. Used appropriately, AI can enable traders to effectively manage trading risks and allow them to focus on the tail events that adversely impact trading performance and, ultimately, investor returns.

Q4 • 2017 | GLOBALTRADING


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INSIGHT | 13

Best Execution – Adding Science To The Art Of Trading By Kristian West, Global Head of Equity Trading, J.P. Morgan Asset Management

Best execution is not merely analytical oversight, but represents the complete order lifecycle, forming the essence of a trading function.

about how to create a factor-based approach to supervision.

Best execution can mean different things to different people, from a high level policy to a core objective. Whether it is a goal, a benchmark or an ineffable aspiration, achieving best execution is a requirement for the whole industry.

From our perspective however, nothing changes. The objective of getting the best possible outcome for our clients is a personal, cultural and corporate goal that hasn’t altered over time. If articulated well, it should be a source of competitive advantage and increased client returns.

Regulations imposed by the Markets in Financial Instruments Directive (MiFID) II, which take effect from January 2018, will require firms to demonstrate “all sufficient steps” have been taken to provide best execution, which is a strengthening of the previous rules that has created a great deal of consternation

So how does one create a systematic, quantitativelyrobust best execution framework? It is a practical rather than a philosophical challenge. Almost every component that touches an order through its lifecycle needs close attention, ensuring that the correct information is collected, stored and analysed.

Q4 • 2017 | GLOBALTRADING


14 | INSIGHT

“Extensive connectivity, data, transparency and integration into the investment process are vital to driving optimal outcomes.” However, as markets have become more complex, technological and quantitative skills have become increasingly necessary. Additionally, the separation of these roles is being questioned, as the overlap between the three becomes more profound. Where does a trader’s role end and a technologist’s start?

Kristian West, Global Head of Equity Trading, J.P. Morgan Asset Management

People Best Execution starts with having the right people; specialists building the systems, executing the orders, analysing the flow and managing the overall process. Having a variety of skillsets is key: including people from outside of trading, and simply hiring quantitative experience is not enough. Having a diverse population form part of the best execution process stimulates creativity, perspective and challenge. To have a robust, structured environment one needs an integrated system where technologists, traders and quantitative researchers work together, using modern techniques, to improve all aspects of order execution. The skills needed to be successful have broadened over recent times. The role of the high touch trader continues to be critical in sourcing liquidity and enhancing capacity.

GLOBALTRADING | Q4 • 2017

Process The trading environment should facilitate a systematic process. Giving traders access to more functionality and data allows them to turn intuition into informed – and importantly, evidential – decisions. Using machine learning techniques in such an environment leads to the creation of real-time “actionable analytics”. This allows one to reduce the variance of outcomes and systematically recommend the most suitable provider, execution strategy and parameters for a given order. This adds science to the art of trading by removing behavioural bias and introducing repeatable, quantifiably measurable actions. Incorporating machine learning in this way also allows traders to focus on the aspects of the execution process where they are able to add the most value. Robustness to change should be core to the best execution approach, so the processes should be dynamic enough to accommodate market developments, such as tick size changes or the growth of systematic internalisers. The review process should act as a feedback loop, continuing to improve the execution process. While robust oversight and evidencing is critical to best


INSIGHT | 15

execution, it should not form the entirety of the framework. Traders, analysts and fund managers need to work together in a data driven process to continually look to improve the full implementation cycle. This needs to be holistic, covering everything from approval workflows to choice of execution venues. First and second line controls should be integrated and monitored by specialists with a deep understanding of the underlying trading processes and market dynamics. Platform Extensive connectivity, data, transparency and integration into the investment process are vital to driving optimal outcomes. Each event and action needs to be recorded, stored and made available for analysis. Only then will you be able to measure performance improvement. The platform required to build, monitor and enhance such an environment goes far beyond the traditional off-the-shelf order management system and transaction cost analysis platforms.

“Combining automation with analytically driven recommendations establishes a controlled environment allowing one to quantitatively improve performance and client outcomes.”

“Best execution is not merely analytical oversight, but represents the complete order execution lifecycle, forming the essence of a trading function.” forms a key element of the best execution workflow and platform. A trader’s performance is proportional to the number of orders they manage, but this need not apply to automated processes. Combining automation with analytically driven recommendations establishes a controlled environment allowing one to quantitatively improve performance and client outcomes. It creates the ability to measure outcomes versus intention, a key element of “all sufficient steps”. Best execution is not merely analytical oversight, but represents the complete order execution lifecycle, forming the essence of a trading function. To succeed, a combination of people, processes and platforms making continual, incremental improvements and adapting to market structure changes is required. Continuing to invest globally in these skills, processes and systems to enhance execution and investment performance regardless of what MiFID may bring in 2018 will differentiate the industry leaders.

Traders, quants and technologists need to be able to build, refine and analyse in parallel. Systems need to be adaptable to allow workflows to be optimized and capable enough to handle the strains of modern quantitative techniques. While automation has featured in the trading landscape for some time it was initially leveraged for operational efficiency. Now it

Q4 • 2017 | GLOBALTRADING


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INSIGHT | 17

The Future Of Trading Technology:

Building A Resilient Stack That Supports Business Growth

By Rupert Walker, Managing Editor, GlobalTrading Regulation and technological innovation are forcing the industry to re-position their existing trading systems, according to participants at a thought leadership discussion. The trading landscape is experiencing rapid transformations and is faced with further disruption. Regulatory imperatives, cost pressures, innovative technologies, vast new data sources, and a constant requirement to deliver competitive services to clients are forcing all industry participants to reassess the quality, efficiency and sustainability of the technology stacks they use or promote. In order to meet the challenges and opportunities ahead, close collaboration between the business and technology departments within each firm is essential, agreed participants at a roundtable discussion held at London’s Royal Exchange on 5 October. Clearly, the Markets in Financial Directive (MiFID) II is concentrating minds. The regime, which comes into effect on 3 January 2018, will force buy- and sell-side

firms to implement trade processes more rigorously. Notably, there will an obligation not only to achieve best execution in all asset classes in re-structured markets, but to do so in a transparent and auditable fashion. Prioritisation Brokerages and fund managers have to determine priorities, avoid wasteful duplication and assess the relative merits of building their own systems internally or buying technology from third parties. It is critical that they streamline processes and install efficient and cost-effective technology stacks, be able to access data throughout the trading cycle, and recalibrate in response to changing market conditions and regulation. Vendors also must prioritise to ensure their time and resources are not wasted on unproductive projects. A client’s request for a specific bespoke product might be commercially unviable if there is little likelihood that it can be cross-sold elsewhere, and even less worthwhile if there is no guarantee of

Q4 • 2017 | GLOBALTRADING


18 | INSIGHT

final purchase and payment. However, vendors need to be flexible and able to offer both customised and standardised technology. They understand the regulatory obligations of their clients, and can tailor their products and services accordingly – but only if it makes financial sense, which typically means being able to offer them to other clients and for use in other asset classes. As a panellist pointed out to general agreement: “You can’t get away with doing the same thing twice these days: you have to get it right the first time, otherwise it’s too expensive.” At a basic level, technology prioritisation is simple: focus on regulation and the issues that all clients care about most, such as stability with flexibility, and systems that are fit-for purpose. However, beneath the surface prioritisation is highly complex. Different groups within a firm have their own particular

urgencies, as well as disparate views about what technologies should be scaled, and sometimes agendas that might favour an in-house investment rather than buying products from third parties. Shared interests Fortunately, many firms now recognise the importance of collaboration and integrated project management. Instead of the traditional segmentation between functions, technology and business operations are cooperating more efficiently, because the selection of appropriate technology is central to the success of their overall success. Business leaders need to understand the role of technology and developers need to place their systems within a business context. Both must recognise that the aim of technology is to enhance capability. The increasing status of the chief technology officer reflects and affirms this trend. Similarly, access to and use of data is a theme shared

Mark Northwood, Consultant, Bipsglobal

Since the future is increasingly about monetising the data that firms have available, the first to be bold enough to junk legacy systems in order to properly enable the transition to a digital business model will gain the early advantage.

Sal Rodriguez,

Head of Trading, Instinet

The likely explosion of data and increased regulatory demands from January necessitates an in depth assessment, understanding and future scalability of existing systems and infrastructure to allow for the curation of liquidity in an increasingly fragmented market place. In a low margin business, knowing what your costs are and could be, is key to running the business profitably.

GLOBALTRADING | Q4 • 2017


INSIGHT | 19

Paul Squires,

Global Head of Trading and Securities Financing, AXA Investment Managers

Automation as a general objective – and the appeal of algo wheels as a specific example – is not just a response to regulatory requirements, but also reflects the need for operational transformation in an industry where margins are increasingly squeezed.

Nej D’jelal,

Managing Director, Co-Head of Electronic Equities, EME, Barclays Investment Bank

Over time the industry has become more comfortable with outsourcing commoditised functions versus investment in key areas of alpha. For instance, in terms of the latter, Barclays’ strategy to further invest in best-in-class electronic execution aligns well with the impact MiFID II will have in levelling the playing field.

by monitoring regulators and the commercial ambitions of buy- and sell-side firms. Data is both the substance of trade transparency and a source of competitive value, so their interests are compatible. Hybrid model Whether or not technology should be developed internally or bought from vendors largely depends on optimising human and financial resources, and on the specific applications of the technology. Trade execution algorithms need to be tested for different market scenarios, are proprietorial and might need to be recalibrated, so there is a strong case for building them in-house. Similarly, data gathering, analytics and interpretation can add alpha, so there are often commercial reasons for build rather than buy. On the other hand, order management systems (OMS) are more generic and their basic requirement is that they are stable and function efficiently. It

makes sense to install an OMS supplied by a vendor whose system has already been tested and which can be fine-tuned when new market conditions or regulations arise. A solid middle- and back-office architecture is a prerequisite for the successful application of complex algorithms designed to give a firm a competitive edge. “There is an opportunity cost every time we decide to do something internally. You have to motivate the technology department, recognize there is an opportunity cost and aim instead to add more value in the areas that we can achieve alpha,” said a panellist. There are, of course, many vendor products and services available to buy- and sell-side firms. The risk management process means they are more likely to choose the bigger suppliers. There is also an opportunity for niche providers, but clients need to be reassured that they can deliver and follow up. The

Q4 • 2017 | GLOBALTRADING


20 | INSIGHT

best option is probably a hybrid: a selection of technology from a small number of vendors with domain expertise to complement the systems provided by a main supplier. However, it is important to ensure that their work and deadlines are synchronised. If not, a one-team policy is likely to be more efficient than a fragmented approach, as delays might offset the gains hoped for from a specific skillset.

integrated into a firm’s OMS and algorithmic systems.

Moreover, entrenched legacy systems can hinder the adoption of advanced systems that are more appropriate to meet the demands of new regulation and dynamic market conditions. They can resemble “calcified spaghetti”, almost impossible to unbundle and too expensive to replace despite their obsolescence.

Technology can be deployed to capture and analyse data more effectively, and present it in a visually appealing way. It is already good at managing structured data, but the greatest challenge now is to find ways to improve the collection and understanding of myriad unstructured data.

Yet, firms must make a commitment to jettison legacy systems if they threaten to ossify their business activities. They will fail to reap the benefits of innovative technologies, which will undermine their commercial future. Valuing Data For instance, it is increasingly possible to harmonise multiple data sets that have been historically formed on the basis of a particular business or product. Visualisation and predictive techniques that can inform a targeted indication of interest, an optimal trading venue or a market making strategy could be

GLOBALTRADING | Q4 • 2017

Data collection and analysis is likely to be the main focus of research into new technologies. Regulators insist on the storage and publication of greater amounts of information in order to explain trade execution decisions. Meanwhile, the capability to tap into new sources of data and make sense of it will give buy- and sell-sides a competitive advantage.

Artificial intelligence and machine learning will be an effective curating and analytical tool, but its adoption should not be a matter of faith, but rather of utility. Fintech innovations will also have important role. Brokerages and fund managers, as well as the established vendors, should retain the flexibility to adopt and promote them when appropriate and cost-effective.


OPINION | 21

Upgrading Post-Trade Operations

By David Pearson, Head of Post-Trade, Fidessa Already well-established for cash equities, automated trade matching, reconciliation and confirmation systems are finally extending to other asset classes. Post-trade operations, at both buy- and sell-side firms, have lacked the investment in technology that the front office has enjoyed. Instead, it has suffered from a piecemeal approach to technology, characterised by a plethora of tactical solutions for different asset classes, especially in the middle office trade confirmation functions. There are two deleterious consequences: First, there is uncertainty at the close of the trading day about the status of transactions; second, there is a susceptibility to errors caused by manual matching which still dominates post-trade operations for most asset classes. These problems are exacerbated for exchange traded derivatives by the additional complexity of having three parties involved in many trades. The lack of electronic post-trade workflow between the buy-side and sell-side means that the allocation process for the broker is based on input from the trader receiving voice instructions, which is vulnerable to miscommunication.

Many buy-side firms totally rely on manual processes to reconcile and match trade details with the account statements from their brokers. Errors are detected late, and sometimes not fixed until the following day. Unmatched trades also mean that the sell-side counterparty may have to margin an open position for its client, and nor is the client sure that the risk hedge it wants is in place. An alternative approach is to meet the problem head on and provide a post-trade functional workflow that brings all the parties together to agree the trade economics of each account allocation. However, it is expensive to introduce internally. A more viable option is to outsource the post-trade functions to a third party which benefits from economies of scale through its provision of the service to other firms. Automated process Fidessa offers the industry a seamless electronic and automated capability to communicate and match trade details in exchange traded derivatives, driven by an electronic stream of trade allocations direct from the buy-side.

Q4 • 2017 | GLOBALTRADING


22 | OPINION

“An alternative approach is to meet the problem head on and provide a post-trade functional workflow that brings all the parties together to agree the trade economics of each account allocation.” Its Affirmation Management System (AMS), founded on industry collaboration, connects and assimilates workflows in a standardised way to support trade confirmation, reconciliation and matching. Firms that adopt the AMS have surety of their trading positions on the actual trade date. This lowers the level of operational risk associated with holding unconfirmed positions, and also reduces the number of errors that can be introduced through manual processing. It is a business utility service-based model, which can be easily incorporated into buy- and sell-side firms’ trading infrastructure using the FIX protocol. The AMS extends existing front office workflows into the post-trade operation, enabling buy-side firms to use the data captured at the point of order execution. The settlement phase is faster with seamless workflows integrated between front and back offices, and errors are immediately flagged in a configurable format. Moreover, the direct electronic workflow with each broker eliminates the need for a central matching facility. It is already well-established for post-trade equities, and has recently been introduced for exchange traded derivatives. Eventually, the service will be applied to over-the-counter and repo transactions where, like exchange traded derivatives, there is little or no automated post-trade reconciliation. Clients send allocation instructions to Fidessa who match their instructions with their brokers, who are integrated into the service for real time processing. Both counterparties will have their trades confirmed and reconciled immediately.

GLOBALTRADING | Q4 • 2017

David Pearson, Head of Post-Trade, Fidessa

“It is a business utility servicebased model, which can be easily incorporated into buyand sell-side firms’ trading infrastructure using the FIX protocol.” In addition, the AMS is flexible enough to integrate with other third-party systems. The objective is to raise the technological standards of post-trade operations to those that have already been reached at other stages in the trade cycle. There is plenty of room for other systems, but it makes sense for them to be compatible to best serve the interests of clients.


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24 | OPINION

Outsourcing Client Connectivity By Richard Bentley, Chief Product Officer, Ullink

Pressures from regulation, technological complexity and burgeoning costs are a wake-up call to sell-side firms to optimise their client connectivity management. Approaches towards client connectivity are in flux. The challenges of new regulations and increasing electronification along the trade process and across product lines are at best forcing modifications of some sell-side systems, and at worst reducing others to obsolescence. In general, the momentum towards greater automation in asset classes such as fixed income and foreign exchange is prompting banks and brokerages to consolidate their systems, applying and integrating the technology and processes already used in equities and derivatives trading in order to curb costs and check complexity. Meanwhile, regulation and in particular the launch next year of Markets in Financial Instruments Directive (MiFID) II will make trade reporting obligations more onerous, enhancing order execution visibility for clients, counterparties, exchanges and other trading platforms.

GLOBALTRADING | Q4 • 2017

MiFID II means that client connectivity needs to be modified, for example to validate that new data items required by the legislation are being correctly sent by clients. Large global banks and brokerage firms usually have dozens of front- and middle-office systems, siloed by product and business division. But, with the implementation of MiFID II, it will make sense to centralise these operations in one place, rather than modify multiple, disparate systems. They might choose to consolidate their systems internally. However, if they choose instead to use an external specialist they can not only deploy their human resources elsewhere (and more productively), but also amortise (as well as lower) their costs. Manging order flows and aggregating data is an increasingly complex, costly and time-consuming business. For about a decade, many organisations have outsourced the post-trade operations that were previously tasked to the back and middle offices. Vendors are well positioned through economies of scale, critical mass, and concentrated expertise and technology investment to perform post-trade functions


OPINION | 25

“Successful providers will be those that offer a package that combines a managed service with the provision of the tools and technology for a client to control sensitive aspects of the client relationship.” Richard Bentley, Chief Product Officer, Ullink in a standardised, efficient way. Third-party service providers can collate orders and disperse allocations automatically communicating to all channels via the FIX protocol, and also compute fees such as stamp duty and exchange charges. In the past, mainly small- and medium-sized firms turned to third-party vendors. However, more recently large sell-side firms have started to outsource the management of their client connectivity. In practice, this involves both the hardware and software infrastructure. It includes linking the sell-side with the buy-side for electronic FIX messaging; routing client orders internally through order management systems (OMS) to trading desks; and on-boarding clients and validating them within the OMS. Hybrid model Now a trend for outsourcing the front office’s direct links with clients is rapidly gaining momentum. For instance, brokers’ indications of interest (IOI) targeted via the FIX protocol to select buy-side firms can be handled by vendors. And the re-emergence of systematic internalisers (SIs) is likely to escalate the demand for external services, as buy-side requests for quotation (RFQs) increase the sell-side’s workload

Certainly, there are some areas that sell-side firms, whatever their size, are unlikely to outsource. Client relationships, both the on-boarding and maintenance processes, are critical to a brokerage, and often nuanced to give a firm what it perceives as a competitive edge. So, although it might it use leveraged centralised services for some trade functions, it is likely to retain other added-value elements. The preference is for the adoption of a hybrid solution or partnership. Vendors should recognize this trend. Successful providers will be those that offer a package that combines a managed service with the provision of the tools and technology for a client to control sensitive aspects of the client relationship. Moreover, Ullink differentiates its managed connectivity service through its independence of a firm’s OMS, even if it is provided by a rival vendor. Indeed, there is a raft of vendors offering FIX engines and hosting services, and brokerages’ IT project management teams are typically keen to advocate an internal solution to any process and platform consolidation. The key to providing a credible alternative is expertise, flexibility and lower costs.

The economic case for outsourcing many of front office functions is compelling. Millions of dollars can be saved if standardised procedures are adopted, while the obligation to implement regulatory compliance across a multitude of platforms within any sell-side firm is an incentive to minimise complexity as well as reduce expenses.

Q4 • 2017 | GLOBALTRADING


26 | OPINION

From High Touch To Low Touch

by Vaibhav Sagar, Senior Technology Consultant, Open System Tech

Regulatory requirements, higher buyside expectations and the rapidity of technological advances means a shift to low touch trading will continue. Back in the day, most market making and client order execution was carried out by human traders. So-called high touch trading was often an opaque process, vulnerable to latency and susceptible to front-running. Since there was no way for buy-side clients to monitor how the broker desks dealt with their orders, there was always an element of mistrust and misjudgment.

GLOBALTRADING | Q4 • 2017

A typical high touch order flow involved buyside orders being sent to sell-side dealers with a limit price range to work on. The sell-side trader would first try and cross an order with other client flow and then maybe cross it with their own book positions. If these approaches failed, the broker would try their best to sliceand-dice the order in the open market. This process had the advantages and disadvantages of using a trader’s judgement, networks and biases. Manual trading also carried the risk of higher slippage and market impact. Moreover,


OPINION | 27

“Algorithms are designed to target venues with maximum liquidity and are also adaptive to changing market conditions to reduce market impact.” there wasn’t a smart way to conduct transaction cost analysis or measure market impact. Arguably, high touch trading often made good sense for illiquid stocks. On the other hand, for liquid, high turnover stocks it was inefficient. As a result, many buy-side clients started preferring direct market access (DMA) orders where they used brokers’ exchange connectivity pipes to reach their exchange of choice and route orders accordingly. This helped solve the trust and front-running issues, but failed to tackle the problems associated with smart trading and market impact. DMA orders could be used to send orders to target exchanges, but that does not necessarily mean they target the high liquidity exchanges. Many large quant and high volume shops also insisted on liquidity seeking executions that had minimum market impact and successfully managed market risks. Since the buy-side firms’ primary concern was the investment decision, they allowed trading intelligence to be handled by sell-side broker dealers.

Vaibhav Sagar, Senior Technology Consultant, Open System Tech

also incorporate historical execution data and analytics to make better trade routing decisions. All major broker dealers have algorithm suites for different investment styles and which are adapted for diverse geographical regions, while specialist technology companies provide trading algorithms that cater to smaller broker dealers and buyside firms. Regulatory demands, greater buy-side expectations and the sheer speed of technological developments means that more and more trade flows will migrate from high touch to low touch. That’s great news for people with technology skills.

Now, of course, with the advancement in computing power, data storage and data analytics, more and more trading is automated. Algorithms are designed to target venues with maximum liquidity and are also adaptive to changing market conditions to reduce market impact. They are configurable and can be tuned to behave in a passive, neutral or aggressive manner depending upon trade and market conditions. Algorithms

Q4 • 2017 | GLOBALTRADING


28 | OPINION

The Securities And Antitrust Class Action Litigation Industry Continues Its Record Pace By Kevin Doyle, Global Head of Marketing, Battea Class Action Services, LLC

Billions of dollars are available to eligible investors, but the extensive class periods, vast array of instruments, and complex loss calculations pose a challenge to individuals filing claims on their own. There has been incredible growth in securities and antitrust class action litigations and settlements, particularly as they have unfolded in 2016 and the first three quarters of 2017. The number of new cases and new settlements from across traditional securities litigation to antitrust rate rigging, spread inflation and other forms of collusion are at an alltime high and shows no signs of slowing down. • In the first half of 2017, 226 new federal securities class action cases were filed. • This surge in U.S. securities class action

GLOBALTRADING | Q4 • 2017

filings is more than 130% higher than the 120 first half filings in 2016. • Of the new cases filed in 2017, 135 cited violations of SEC Rule 10b-5 or of Section 11 or 12 of the Securities Exchange Act of 1934 and the 1933 Securities Act, respectively. • The 2017 first half filings are the highest in history, and should this pace continue, total annual filings would represent a 67% increase from 2016. As new cases are introduced or settle, the claim and loss analysis, litigation research, and rigorous data auditing and monitoring required for these filings have become increasingly complex. In addition to the size and complexities of many derivatives and FX trading cases and settlements, the sheer volume of more traditional securities cases is exploding in the US and abroad.


OPINION | 29

International versus domestic claims filing and complex securities

Antitrust litigations While most antitrust cases are not specifically securities class actions, these two legal subsets may overlap, and the result is antitrust securities class action litigation. Examples include the Credit Default Swaps Antitrust Litigation (which settled for $1.86 billion in 2015), the Private Equity settlement for $590 million, the Libor, Euribor and Tibor scandals, and the recent FXrigging case for more than $2.31 billion.

the hedge fund community is first in line to cash in from these and other regular events.

Although settlement funds are established primarily to benefit damaged institutional investors, many products transact overthe-counter (OTC) and accordingly are not easily identifiable with traditional securities identifiers. Special diligence is required in the filing of these types of claims or investors risk leaving vast sums of money on the table.

“As new cases are introduced or settle, the claim and loss analysis, litigation research, and rigorous data auditing and monitoring required for these filings have become increasingly complex.�

With many mega multi-billion dollar litigations related to Libor, Euribor and Tibor rates and spreads manipulation across a vast set of financial instruments and major multi-billion litigations in foreign exchange related trading,

With nearly $4 billion available to eligible claimants across a variety of cases, ensuring your eligibility by properly filing your claim is an absolute necessity. Here are a few updates on some of the larger available settlement funds.

Q4 • 2017 | GLOBALTRADING


30 | OPINION

“With many mega multi-billion dollar litigations related to Libor, Euribor and Tibor and in foreign exchange related trading, the hedge fund community is first in line to cash in.” FX instruments litigation settlement In quarter 2 and quarter 3 2017, six new defendants agreed to contribute more than $300 million to the litigation settlement fund, pushing the preliminarily approved settlement fund to $2.31 billion regarding the manipulation of benchmark rates, price spreads at which currencies were bought and sold, and exchanging confidential customer information in an effort to trigger client stop-loss and limit orders. However, with one defendant still yet to settle, we anticipate this settlement fund to increase. Euroyen (Tibor) litigation settlement In quarter 3 2017, two new defendants agreed to contribute $148 million to the litigation settlement fund surrounding the manipulation of the Yen Libor and Euroyen Tibor benchmark interest rates. The preliminarily approved settlement fund now stands at $206 million. US dollar (Libor) litigation settlement The current settlements in this case, Barclays Bank for $120 million and Citibank for $130 million, are considered “ice-breakers”. In addition to the monetary contribution, the settlement requires cooperation with the Plaintiffs in their on-going litigation against the Non-Settling Defendants. This is expected to increase the leverage the Plaintiffs have in the settlement negotiations. The list of Non-Settling Defendants is lengthy and includes 16 major banks. It is most likely that additional Banks will fall in line and settle; and with each settlement the Settling Bank will be required to cooperate with the Plaintiffs in their on-going litigation against the remaining Non-Settling Defendants. With each settlement, the Settlement

GLOBALTRADING | Q4 • 2017

Kevin Doyle, Global Head of Marketing, Battea Class Action Services, LLC Fund will continue to grow. It is expected that the total Settlement Fund will be in excess of $1 billion. The time to act is now As there are such significant sums available to damaged investors, it is crucial that to take action to establish a claim. For the US and Canada FX litigations, eligible investors are automatically included in the class, but must file claims to collect their portion of the settlement dollars. International filings require an unparalleled understanding of the filing process, the specifics of each case and the various recovery options available. To maximize recovery potential, it is highly recommended to seek an expert firm who specializes in this area and who can provide the transparency required to validate their performance. Without having that trust there is a risk of leaving large sums of money behind without knowing it. For further information contact Kevin Doyle at doyle@battea.com or call +1 (203) 595-4329.


PRODUCT OVERVIEW | 31

Thomson Reuters REDI Empowering Today’s Buy-Side Trader

Evolving Market Demands Require Evolved Partners The difficulties facing today’s buy-side trading desk are well known, with technology costs rising, regulatory requirements becoming more onerous, and buy-side fees compressing are just a few of the challenges. Traders are looking for partners who can deliver an end-to-end trading solution that meets their execution, analytics and market data needs, as well as one that reduces total cost of ownership (TCO). At the same time, your role as a trader continues to evolve, with new asset classes, geographies and responsibilities now most likely part of your mandate. Given this reality, our trading clients require a single solution that simplifies trading workflows by bringing deeper liquidity, additional counterparties, more powerful trading capabilities, and better intelligence and analytics. Our clients are looking to do more with fewer resources. Both the buy-side and sell-side are rightfully considering big changes to their technology stacks. They are turning to technologies that help them to scale, lower their TCO, offer frictionless integration and connect to a broad array of content and deep pools of liquidity in order to efficiently trade. REDI Rounds Out the Platform With the advanced REDI EMS (Execution Management System) now integrated into the Thomson Reuters platform, you can leverage our award-winning EMS capabilities across a wide range of asset classes. With REDI, you can move

seamlessly from pre-trade activities through to post-trade via a single, fully integrated and open platform environment. With support for the full trading life cycle, Thomson Reuters REDI simplifies trading with a sophisticated execution, workflow and compliance solution. Execution Tools Thomson Reuters REDI supports the trading of listed equities, options or futures globally, as well as advanced execution tools like portfolio and spread trading. • Single-stock trading – Trade single stocks with ease using intuitive execution capabilities • Portfolio trading – Execute global, multi-asset portfolios across multiple counterparties • Spread trading – Implement a broad range of strategies, including ratio, risk arbitrage and relative price • Options trading – Trade equity options, option spreads and options on futures globally • Futures trading – Execute nearly any listed future globally across multiple brokers Workflow capabilities Through integrations with more than 20 prime brokers and clearing firms, REDI’s suite of order management capabilities supports users throughout the trade life cycle. • Order and ticket staging – Create and manage parent orders in REDI, or leverage our integration network to receive parent orders from partner systems • Position management – Easily load your start-ofday position files and use quick filters to view by asset class, notional value, account and P&L Q4 • 2017 | GLOBALTRADING


32 | PRODUCT OVERVIEW

• Locate management – Submit and view status of all requests and the real-time inventory of approved locates • Allocation and commission tools – Allocate equities or options transactions between accounts via the allocation engine while leveraging user-defined commission schedules • End-of-day files – drop executed trade files seamlessly to any of the 20+ prime brokers and clearing firms in REDI’s growing network

with each other, providing either a hard or soft block as defined by the administrator • OATS reporting – Combines order audit trail feeds from multiple third-party platforms (EMS, OMS or proprietary systems) from across your organization and submits a single, consolidated report to FINRA • Custom reports – Customizable Daily Trade Blotter, User and Custom Account reporting tools

Compliance tools REDI’s suite of compliance tools offers a robust, costeffective solution capable of meeting the needs of a wide range of market participants. • Risk Manager – Utilize dozens of trading rules based on symbol, exposure, P&L, liquidity or security triggers that block offending trades at the point of order entry, before they are routed to a broker for execution • Automatic Order Marker – Split US equities sell orders into Sell Long and Sell Short orders based on the net position of the securities in a defined trading aggregation unit • Anti-crossing – Prevents users within the same supervisory group from crossing Futures orders

The combination of REDI with other Thomson Reuters components creates a powerful buy-side trading platform enabling you to identify trading opportunities, connect with counterparties and contacts, and discover liquidity before executing. • With Eikon, Thomson Reuters next-generation financial markets desktop, content running along-side REDI, you now have access to open and powerful pre-trade capabilities which give you access to a growing suite of trader-focused apps and premier content derived from natural language search. • An integrated Eikon Messenger enables you to connect with a community of over 300,000 verified financial professionals across more than

Trade global portfolios with over 175 counterparties leveraging advanced analytics and execution capabilities with Thomson Reuters REDI Portfolio Trader.

GLOBALTRADING | Q4 • 2017


PRODUCT OVERVIEW | 33

30,000 firms in 180 countries, and share text, live data, charts and analytics, and collaborate with your network from a single platform. • Access to the Thomson Reuters Autex Suite, which includes the Autex IOI network and Advertised Trades Apps which provide unparalleled access to liquidity.

• Connectivity to a network of more than 600 brokers and venues with Autex Trade Route. Where you have the option to subscribe to one of the world’s largest FIX order routing networks handling order flow of over 40 billion shares a day.

Visit financial.tr.com/redi © 2017 Thomson Reuters. All Rights Reserved. REDI Global Technologies is a member of FINRA/SIPC. REDI Technologies Ltd. is authorized and regulated by the UK Financial Conduct Authority. This communication is only intended for institutional customers and eligible counterparties as defined by the respective regulators/authorities. Thomson Reuters REDI services and related services are not available in all jurisdictions.

Q4 • 2017 | GLOBALTRADING



EVENT | 35

Trading In A New World Order

By Rupert Walker, Managing Editor, GlobalTrading Regulatory and technical changes are rapidly reshaping the trading landscape and all industry participants need to adapt, according to speakers at the Singapore FIX conference. The growth of the exchange-traded fund (ETF) sector, preparations for the launch of the Markets in Financial Instruments Directive (MiFID) II and the potential of artificial intelligence (AI) were dominant themes at the Singapore FIX Conference, held on 10 November 2017. Speakers and panellists included senior executives from buy-side firms: BlackRock, Eastspring Investments, Janus Henderson Investors, Nikko Asset Management and UBS Asset Management; sell-side firms: Bank of America Merrill Lynch, CLSA, Deutsche Securities, J.P. Morgan, Société Générale and State Street; from the Singapore Exchange, Hong Kong Exchanges and Clearing, and alternative trading platforms; as well from leading trading technology vendors. ETF efficiency ETFs offer investors liquidity, transparency and wide market exposure, and are cost effective. Asian money managers are raising their exposures to US and European ETFs, often trading them in the same manner as individual stocks. It is important to understand that the liquidity of ETFs is determined by the liquidity of the underlying shares, and that the stated volumes traded

on exchanges are not truly reflective of the liquidity that is available, argued speakers. However, Asian home-grown ETFs are 10-to-15 years behind the US and Europe in development. The region needs to create new, unique products in order to attract investor interest, rather than simply replicate existing forms. The Singapore Exchange recently listed three innovative Reit ETFs, and the exchange is also trying to make the tax regime for retail investors more attractive, and promote ETFs to the country’s Central Provident Fund. Other segments targeted by leading ETF sponsors include private wealth management. Although the Asia market is fragmented with competing jurisdictions, many investors are suspicious of the true value added by active strategies and continue to support the growth of passive funds. Issuers and sponsors can tap into this demand by offering new types of ETFs, such as inverse and fixed income funds. MiFID II preparations The approach of MiFID II implementation on 3 January 2018 is inevitably preoccupying many buy- and sell-side firms. The unbundling of research and trade execution commissions is forcing money managers to choose the most appropriate method to account for research costs under the new regime. Competitive pressures suggest that many buy-side firms will feel compelled to absorb

Q4 • 2017 | GLOBALTRADING


36 | EVENT

broker research expenses directly through their profit and loss accounts, rather than pass them on to their clients. Best execution methodology for non-equity asset classes is also a major consideration across the industry. There seems to be a consensus that simply replicating the process used for equities is insufficient and inapposite for other types of securities, particularly fixed income. The regulators appear to recognise this, and the intention of the new rules points to firms showing a clear methodology that consistently aims to achieve best execution, rather than best price in all circumstances.

“Asia needs to create new, unique types of ETF in order to attract investor interest, rather than simply replicate existing forms.” Furthermore, it is widely agreed that greater automation and electronification of trading, which MiFID II implies, will be beneficial. Processes will be more efficient, transparent, auditable and professional. Nevertheless, there are still areas of uncertainty. In particular, the role of systematic internalisers will need to be assessed and there is likely to be pressure to ensure there is equivalence with other liquidity sources, such as exchanges. New technologies There are clearly important megatrends that will affect the future of stock trading. Most notably, the wealth of information increasingly available is prompting the formation of new technologies and the development of systems to process, analyse, understand and apply these swelling data sources, both structured and unstructured, to enhance trade execution. Meanwhile, cloud technology is also changing the nature of connectivity between counterparties. Curiously, considering the size of its resources, the financial industry lags behind other industries in its

GLOBALTRADING | Q4 • 2017

“Competitive pressures suggest that many buy-side firms will feel compelled to absorb broker research expenses directly through their profit and loss accounts, rather than pass them on to their clients.” application of new data analysis techniques – although tighter regulation compared with the controls on pure technology companies might explain its loss of ground. For instance, a failure caused by the unsupervised use of AI would likely arouse widespread political fallout, so it makes sense for the financial industry to incorporate it more slowly and in a more circumspect fashion. Moreover, respect for client security means many front office applications must stay outside the cloud, while economics dictates that investment in technology is determined by immediate client demand rather than long-term research projects that are not guaranteed to garner a financial return. The application of AI and machine learning has become a regular discussion topic at finance industry conferences. However, as several speakers pointed out, these are not new technologies. Instead, a confluence of factors has made them more significant in recent years. These include the expansion of computer processing power, democratisation in the investment industry, increased information accessibility and the development of different skillsets among a new generation entering the industry. Certainly, AI and machine learning technologies will have an increasingly important role in the trading cycle. The more controversial issue is whether or not they will eventually take over the whole investment process.


ASIA | 37

Optimising Access Into China By Cale McCulloch, Sales Trader, CLSA and Claud Zhong, Deputy Head of Trading, Citic Securities

A single trade execution platform and the use of customised algorithms can reduce the complexities of investing in China’s equities markets. The inclusion of China A-shares in MSCI’s global benchmark equity index in May 2018 is prompting international investors to explore the optimal way to gain access to a market that they can no longer ignore. Passive funds linked to the index will need to meet a growing China weighting allocation, and active funds measured against the benchmark should, at least, have systems in place to gain exposure to A-shares in an optimal manner or risk complaints from their investors – as well as potential underperformance. The investment case is also strong. China consumer confidence is recovering, evinced by a robust property

market, a strong household appliance sector and booming ecommerce supported by Fintech innovation. Among traditional corporations, asset quality is improving while New Economy companies are driving the next stage of the country’s economic growth. China reported economic growth of 6.8% for the third quarter of 2017, which was above the government’s full-year target. However, there are concerns about the risks of excessive debt and speculative investments, as recently expressed by the governor of the People’s Bank of China. The government seems prepared to confront those dangers. During the past year the authorities have taken strong measures to curb leveraged M&A activity while President Xi Jinping emphasised the importance of

Q4 • 2017 | GLOBALTRADING


38 | ASIA

“When correctly structured, international brokerages can alleviate the logistical strain by offering investors a one-stop trade execution platform for China equities.” Cale McCulloch, Sales Trader, CLSA

financial security at the 19th National Congress of the Communist Party in October. Investors should be encouraged by the government’s commitment to resolving potential market risk. However, China’s equities markets have idiosyncrasies that complicate the trading process that few in the international community fully understand. Liquidity is extremely volatile, there are multiple order execution nuances, market data snapshots can mislead and obscure liquidity, and technical restrictions restrict execution flexibility. When correctly structured, international brokerages can alleviate the logistical strain by offering investors a one-stop trade execution platform for China equities. CLSA and its parent company, Citic Securities, already provide this service, but it has required a significant commitment in terms of cost and technology to create and implement the necessary platform. Citic Securities accounts for about 25% of equity trade flows and assets under management in the Qualified Foreign Institutional Investor (QFII) programmes, and between 6% and 7% of domestic equities trading in markets dominated by retail flows. As a leading market participant, Citic Securities has excellent execution relationships with the domestic Chinese institutional investors and a close

GLOBALTRADING | Q4 • 2017

consultative relationship with the country’s major financial regulators. These corporate characteristics and assets, combined with the increased foreign institutional interest in China, were the catalyst for the commitment made by Citic Securities and CLSA to create the “One China Execution Platform” offering. Overseas access to China onshore markets China’s equity markets are underrepresented in terms of relative holdings by overseas investors, who account for only 3% to 4% of total daily turnover, compared with around 80% domestic retail market share. In addition, access to the domestic China equity market is fragmented. Licenced foreign fund managers can select from multiple structures such as the QFII and the Renminbi QFII (R QFII) schemes, which in practice tie their trades to a single broker, or the more recent Stock Connect channels to the Shanghai and Shenzhen exchanges. Connect has undergone important changes since the launch of the pilot programme in November 2014 that provides mutual direct access between Shanghai and Hong Kong. Most notably, from 2016, investors could settle trades delivery versus payment (DVP) and safe-keep China A-shares by setting up a Special Segregated Account (SPSA). This has eliminated the need for the pre-delivery of shares that effectively forced them to execute trades through two or three dominant custodians. A further enhancement in November 2017 introduced real-time DVP and improved automated cash


ASIA | 39

“Simply replicating the existing CLSA algorithms was insufficient: Asian algorithms are inappropriate for trading A-shares because of the domestic conditions, rules and restrictions that apply.”

Claud Zhong, Deputy Head of Trading, Citic Securities prepayment services, which satisfied UCIT regulators in Dublin and Luxembourg who had been concerned with counterparty risk. The reforms are also consistent with the MiFID II provisions on achieving best execution by removing a de facto dependence upon custodian brokerages to transact orders - a point many institutional investors voiced concerns about. From November onwards institutional investors will be free to execute with their broker of choice on both the buy and sell legs from a best execution trading result perspective. The MSCI announcement in June led to the opening of many more SPSAs, which has risen to around 2000. New investors often seek guidance on the mechanics of entering the Chinese market for the first time, and on the respective merits of the (R)QFII and Connect channels. In addition there are further complexities for money managers who have established (R)QFII quotas, but also want to trade via Connect in a consistent fashion, utilising one platform front, middle and back. In response, CLSA and Citic Securities restructured the entire algorithm system to address the specific conditions for transacting in the Chinese markets and so created the “One China Execution Platform”.

Simply replicating the existing CLSA algorithms was insufficient: Asian algorithms are inappropriate for trading A-shares because of the domestic conditions, rules and restrictions that apply. On the one hand, the Shanghai and Shenzhen markets (especially the index names) have some characteristics of a highly evolved market: high liquidity, tiny spreads, high trade frequency and small average trade size, but at the same time there is very low volume profile stability and high intraday volatility, which makes trading in Shanghai and Shenzhen more challenging. This is where the onshore expertise of Citic Securities came into play. Citic Securities has effectively exported domestic execution knowledge in a CLSA package that international clients were familiar with. Features of the “One China Execution Platform” include: • Market data blind spots The markets trade continuously, but market data is only distributed in three seconds snapshots. CLSA and Citic Securities’ algorithms are embedded with price and volume controls to manage the blind spots when the displayed order book data does not reflect the real situation on market. • Individual investors dominating the market Liquidity is sporadic in China because individual retail investors account for 80% of the market with liquidity occurring in clusters that are more predictable in the short-term than in other markets. Citic Securities’ understanding of this market segment means that the

Q4 • 2017 | GLOBALTRADING


40 | ASIA

signal footprint of CLSA’s algorithm is reduced and prevents retail investors trading against institutional investors’ order flow. Controls over average daily trading volumes and specialised liquidity capture tactics enable CLSA and Citic Securities‘ algorithms to obtain the best trading result, not following the short-term herd trading mentality. • Market order management Order modification is not allowed in Chinese markets. Instead, amendments require the trader to cancel the original order and re-submit a new one, which results in a loss of queue priority and triggers potential regulatory issues if breaching cancel/fill ratios. The new algorithmic suite does not take the simplistic approach of crossing spread, but rather provides a service that offers a complex posting and queue management logic. • Exchange enforces transaction limit The exchanges also implement a limit on the number of order slices sent to the market at every minute and over the course of a day. Market order slice control is built and overlaid on algorithms to manage the maximum of new order slices being sent to market in a pre-defined time window. “One China Execution Platform” The “One China Execution Platform” provides one stop execution, order management and trade confirmation and settlement facilities for the Chinese market. Clients can send (R)QFII and Connect orders to the same dealing desk, working the same strategies, but deploying different underlying logic that is suitable for onshore (R)QFII or offshore Connect trades. This enables CLSA to maximise execution capability while providing client service at a single broker level, as an alternative to the complexity and inefficiency faced by institutional investors when spreading trades across several brokerages or trading strategies. (R)QFII stock and cash automated checking occurs offshore with CLSA before orders are sent to the market, and an additional safety check is conducted at the slice level as orders pass through the onshore stock verification stage to ensure operational integrity. Clients also receive the same post-trade booking services as when they trade with CLSA in other markets, including FIX confirmations when required.

GLOBALTRADING | Q4 • 2017

CLSA and Citic Securities’ algorithmic trading suite for the China markets include algorithms that operate throughout the course of the day, at opening, closing and auction, at specified participation rates and also opportunistic and liquidity seeking algorithms. The Float, FloatSniper and Dark algorithms have been removed from the China suite, with near touch style algorithms across all strategies disabled due to market regulations.

“Connect trading may fall under the same regulatory supervision framework as (R)QFII with sensitive parameters such as order cancellation and order filling ratios being monitored, irrespective of which channel the client is trading through.” Recent market reports also indicate that the Chinese stock market regulator, the China Securities Regulatory Commission, may cooperate further with the Hong Kong regulator to implement an ID system for Stock Connect’s northbound trading in the first half of 2018. In this case, Connect trading may fall under the same regulatory supervision framework as (R)QFII with sensitive parameters such as order cancellation and order filling ratios being monitored, irrespective of which channel the client is trading through. The “One China Execution Platform” pre-empts this as the functionality is in place today, providing a strong competitive advantage.


EUROPE | 41

Justifying Brokers In An Unbundled World

By Ian Mawdsley, Head of ETI Trading EMEA, Thomson Reuters Brokerages will face tighter scrutiny from the buy-side after MiFID II, and will find new ways to add value. As the effective date of Markets in Financial Instruments Directive (MiFID) II nears, the implications of its mandate to unbundle services are getting clearer. MiFID II aims to provide a level of transparency around certain practices in the financial markets, particularly the use of broker commissions. In practice, the regulation asks: What does the payment facilitate and who should really be paying? Until now, a variety of services have been bundled into simple “pay-as-you-go” commission payments. Research, corporate access and technology services are in these bundles by default. The payments have been used, however, to provide clients with office space and furniture. Ultimately, though, commission costs were passed on to the end-investors – the people who MiFID II protects. MiFID II requires firms to pay for research either in cash or through research payment accounts (RPAs). Order management and execution management systems technology must be paid for through a direct arrangement between a buy-side firm and a vendor. This is a crucial difference from MiFID I, in which guidelines about how dealing commissions could

be used were provided by National Competent Authorities (NCAs), but were not included in the overall European Union directive. In turn, the trading community largely misinterpreted or perhaps even ignored those guidelines as brokers subsidized the costs of vendor services as part of their distribution, effectively inducing clients to trade with them. So, what do these distinctions about which types of services may be or may not be paid for with broker commissions mean for brokers? Adhering to broker scorecards is becoming more of a challenge. The RTS 28 technical standards in MiFID II obligate buyside firms to report on why they chose a certain broker as their execution channel – and to explain why in both quantitative and qualitative terms. Quantitative analysis In a quantitative selection process, transaction cost analysis (TCA) is the key driver. TCA should be inherent in best execution analysis (BXA). The RTS 27 best execution provision in MiFID II requires venues and executing counterparties to achieve more granular reporting detail. This will vastly improve the depth and quality of data. By analysing historical trade patterns, buy-side firms can determine where they will get the best execution of certain orders.

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42 | EUROPE

“The RTS 27 best execution provision in MiFID II will vastly improve the depth and quality of data.” Proving best execution is not as simple as looking at how a trade has performed in the past and replicating the instructions. Firms must account for current market conditions and the executing party’s goals. Is immediate execution required? Does deeper liquidity need to be sourced? What type of benchmarks will be used? The buy-side can access about 1,500 broker algorithms to execute trades on just short of 600 venues. Choosing among these algorithms for thousands of trades will be arduous. The obvious way to address this problem is some form of automation, likely including basic machine learning capability. Using software to perform pre-trade analysis of executions will present the trader with one or more ways to place the orders with brokers. This will not only ease the trader’s broker and algo selection, it will also help compliance officers show that their firms used a systematic approach to best execution. When trades prove to be small compared to a stock’s average daily volume (ADV), the buy-side may automate execution through a rules-based order router, allowing traders to focus more on transactions that are larger or more complex to complete. Broker selection can easily be randomized to distribute resources equally across numerous broker counterparts. Qualitative analysis Qualitative selection processes are obviously broader and harder to measure, but these are no less important to defining the relationship between the buy- and sell-sides. First and foremost, access to liquidity is a large factor in determining which brokers will make the list. Whether they access lit or dark venues, some brokers may choose to act as systematic internalizers (SIs), using their own risk capital to act as a one-stop solution for filling large block trades. Secondly, access to quality and reliable executions, coupled with the appropriate investment in the

GLOBALTRADING | Q4 • 2017

Ian Mawdsley, Head of ETI Trading EMEA, Thomson Reuters associated technologies, will be a must. MiFID II will undoubtedly increase electronic traffic. The performance of sell-side legacy systems may be important for determining where order flow is directed. Finally, the high-touch desk will also continue to play

“As markets become more fragmented and technology offerings more complex, someone will still need to be there to hold the hand of the buy-side trader.” a part, acting more like an execution consultant than like a sales trader who uses the outdated ‘fill-and-bill’ method. As the markets become more fragmented and the technology offerings more complex, someone will still need to be there to hold the hand of the buy-side trader. However buy-side firms figure out compensation of brokers for their services, the value brokers provide – even in a changed compliance climate – cannot be denied.

These views represent the views of Ian Mawdsley and not those of Thomson Reuters.


AMERICAS | 43

The Case For Outsourcing By Carl Slesser, Head of Sell-Side Product Management, Market Technology, Nasdaq

Brokers are turning to third parties for support in running their trading operations. Regulations to promote competition in trading have led to a proliferation of liquidity pools over the last decade or so – many of which are run by large brokers and investment banks. But, these organisations have found that running a trading venue is getting more difficult. Regulations are changing rapidly, and oversight has become much stricter. Firms need constantly to respond to new demands from regulatory bodies while differentiating to retain a competitive edge. With margins continually squeezed, many sell-side firms realise that their efforts could be better spent

on enhancing core competencies aimed at generating revenue rather than on keeping the operations of these venues within regulatory parameters. Complexity breeds an opportunity for outsourcing. To this end, the market technology division at Nasdaq, which has traditionally served the global market infrastructure operator community as a technology partner, has experienced a huge uptick in interest in outsourcing from sell-side firms. Specifically, they are considering having a trusted third party perform certain trading and operational functions and related services. Some firms have ambitions to unify their multiasset trading on a single platform and have us

Q4 • 2017 | GLOBALTRADING


44 | AMERICAS

“Many sell-side firms realise that their efforts could be better spent on enhancing core competencies aimed at generating revenue rather than on keeping the operations of their trading venues within regulatory parameters.” operate it for them, while others want us to help them meet their Markets in Financial Instruments Directive (MiFID) II obligations as a newly declared systematic internaliser (SI) or multilateral trading facility (MTF). In one case in the US, the firm wants us to take on the complete technology and operations of its entire dark pool. As the market structure changes, we see a wider array of use cases for outsourcing, but all with the same underlying need: to re-focus scarce resources on revenuegenerating projects and focus on differentiation. Outsourcing is not new in our space. Not surprisingly, the key drivers are regulatory complexity and cost with the demand for resources, technology evolution and data complexity woven in. Regulatory complexity The stiff fines and penalties regulators have levied against brokers for rule violations on their trading venues have been a wakeup call for the industry. In 2016, a major global bank was fined for misleading customers about its equity dark pool platform pertaining to an issue that involved a failure to address known technical problems with its proprietary dark pool ranking model. With various global regulatory initiatives around the corner, these types of sanctions will become more common.

GLOBALTRADING | Q4 • 2017

Carl Slesser, Head of Sell-Side Product Management, Market Technology, Nasdaq

MiFID II provides us one example where regulatory compliance will get even tougher, as the mandate ushers in a new market structure regime comprising regulated exchanges, MTFs, organized trading facilities (OTFs) and SIs. Ultimately, MiFID II promotes greater transparency and discourages trading in the dark. Broker crossing networks will be eliminated, and firms that internalise trades will have new obligations. As a result, brokers are currently reassessing the way they will service their clients and also the processes, procedures and technology prowess required to meet these obligations. Because the regulation applies to far more asset classes than its predecessor, MiFID I, firms need to take a hard look at a more holistic approach to their technology and operations. Furthermore, the transaction reporting requirements on these firms are onerous, and pre-trade transparency and surveillance monitoring requirements will undoubtedly bring more technological and resource challenges to organisations that claim new status as either an SI, MTF or OTF. Cost pressures Overall, the regulatory compliance burden has increased – whether in Europe in relation to MiFID


AMERICAS | 45

“When comparing the costs of keeping pace with functional developments, client demands and required regulatory changes, outsourcing may provide an attractive alternative.” II, or other regions where regulators are cracking down on dark pools and other internalised order flow. This has put enormous pressure on brokers’ balance sheets, and they need to search for areas where costs can be reduced to achieve capital efficiency. These new demands cannot be executed on aging technology. Firms must either spend the money to refresh it internally, or they must outsource and partner with a trusted third party that can deliver and potentially even run the solution.

and required regulatory changes, outsourcing may provide an attractive alternative. Working with a technology partner that understands the operational needs of a marketplace can enable brokers and banks to concentrate resources on developing and monetizing their intellectual property, such as their suite of algorithms, instead of developing and operating trading solutions. Building a case Outsourcing can be an attractive alternative for firms that are looking for creative ways to better leverage scarce cross-departmental resources and to boost revenues among a complicated, extremely competitive landscape. Outsourcing missioncritical operations to a vendor can be daunting and discomforting, so the choice of partner(s) is critical. Sell-side firms looking to embark on this journey must consider the expertise of their partner, including its technology prowess and its ability to reliably execute on the firm’s behalf, not just tomorrow, but far into the future.

When comparing the costs of keeping pace with functional developments, client demands

Q4 • 2017 | GLOBALTRADING


46 | GLOBALTRADING THINK TANK

FX Market Supervision And Surveillance

Compiled by Rupert Walker, Managing Editor, GlobalTrading Executive Summary • FX Global Code is principles-based rather than rules-based, contrary to the trend across other financial services • Prosecutors struggle to win cases against malpractice in the FX markets and often have to rely on inadequate legislation • The regional centres of FX trading are shifting • Electronic non-bank market makers are proliferating and trading is becoming more relationship-based • Private initiatives enhancing transparency and fairness might establish normal practices that be formalised in regulation • Regulation can be selective rather than wholesale • It is important to maintain a constant dialogue within the industry and promote the issue of regulation as a discussion topic in the media Proposal The world’s financial markets are continuing to adjust to a vast array of new regulations and tighter levels of scrutiny imposed in the wake of the global financial crisis almost a decade ago and amid its disclosures of abusive activities. Legislation, especially in the US and Europe, aims to improve transparency and risk control, reduce market distortions and extreme volatility, and eliminate malpractice and fraud.

Meanwhile, the global FX market has largely avoided closer regulatory oversight. However, following several scandals, in May 2017 the Bank for International Settlements (BIS) issued a new code of conduct for foreign-exchange trading. The 78-page code, developed by a partnership of central banks and market participants from 16 jurisdictions around the world, complemented a version that was released a year earlier. It is not designed to replace local laws, but the 55 principles were compiled through consultation with all the major stakeholders. Central banks have made it clear they expect fairness, discretion and high ethical standards. (1) In addition to a general exhortation to ethical behaviour and good governance, the standards incorporate principles and processes for trade execution, information sharing, risk management and compliance, and confirmation and settlement. The Code is expected to apply to all FX market participants, including sell-side and buy-side entities, non-bank liquidity providers, operators of e-trading platforms as well as other entities providing brokerage, execution, and settlement services.


GLOBALTRADING THINK TANK | 47

However, its principles are guidelines; they are not legal obligations and there are no explicit punitive consequences for breaching them. Instead, they are “intended to serve as a supplement to any and all local laws, rules, and regulation by identifying global good practices and processes.” (2) Guy Debelle, deputy governor of the Reserve Bank of Australia, explained at the launch of the Code of the Code on 25 May, that it is principles-based rather than rules-based, because “the more prescriptive the Code is, the easier it is to get around. Rules are easier to arbitrage than principles…If it’s principles-based and less prescriptive then market participants will have to think about whether their actions are consistent with the principles of the Code.” (3) Arguably however, this embrace of self-regulation and reliance on peer-pressure to encourage good practice is inconsistent with the trend for the strict, detailed regulation and legally accountable measures being imposed on other sectors of the financial industry. For instance, the Markets in Financial Instruments Directive (MiFID) II, which will be introduced across the European investment services industry in January 2018, is unambiguously rule-based. Moreover, the MiFID II regulations will cover the trade execution of most FX instruments, with the notable exception of spot transactions. In this context, and against a background of historical and topical malpractice among FX market practitioners, it is debatable whether or not a principles-based code is sufficient, desirable or even feasible.

UK Serious Fraud Office closed down its own investigation into currency rigging in 2016, so the US has been the sole authority to bring individual charges. Three former HSBC employees are awaiting federal trial in Manhattan and, separately, a former London-based currency trader at HSBC is on trial in New York for his alleged role a front-running scheme. (4) However, it is uncertain if the Code and current regulation will be enough to deter and identify future malpractice. Moreover, the nature of the FX market is changing rapidly with the adoption of new technologies and a proliferation of bank and non-bank electronic trading platforms. In addition, reduced risk appetite is affecting trading behaviour, and there is also a shift towards booking FX trades in regional centres such as Hong Kong and Singapore. In order to assess how the global FX markets could be more tightly and uniformly regulated, an understanding of its current structure and composition and trends in liquidity provision and trading patterns is essential. The industry should continue the comprehensive dialogue that led to the creation of its May 2017 Code, identify ways to share data and information on both a formal and informal basis, and critically examine private sector initiatives that promote greater market transparency and efficiency. The BIS Quarterly Review, December 2016, contains a detailed analysis of the composition of the global FX market, and the latest developments. (5)

Prosecutors have often found it difficult to pursue criminal cases against banks or individual employees for market malpractice.

FX Market Activity For the first time in 15 years, FX trading volumes contracted between two consecutive BIS Triennial Surveys. Global FX turnover fell to $5.1 trillion per day in April 2016, from $5.4 trillion in April 2013. In particular, spot trading fell to $1.7 trillion per day in April 2016, from $2.0 trillion in 2013. In contrast, trading in most FX derivatives, particularly FX swaps, continued to grow.

But, there have been notable successes. An international investigation into currency misdeeds saw seven banks, including Citigroup, Barclays and JPMorgan Chase agree to pay about $10 billion in fines for sharing confidential information about clients. The

The decline in global trade and gross capital flows in past few years partly explains why FX spot activity has fallen. Different monetary policies in major currency areas and the rise of long-term investors in FX markets have also played a significant role.

There is no single regulator of the global FX market. Instead regulation is dispersed among national central banks, and activities at the institutional level are also closely monitored and supervised by government bodies.


48 | GLOBALTRADING THINK TANK

The volume of trading for hedging and liquidity management rather than for taking currency risk (by leveraged traders and “fast money”) has risen, so spot and FX swaps, have moved in opposite directions. The decline in prime brokerage has been associated with a fall in trading by hedge funds and principal trading firms, with spot market volumes contracting as a consequence. In addition, while declining in the aggregate, hedge fund and principal trading firm (PTF) activity has been shifting towards Asian financial centres, partly reflecting greater liquidity of Asian currencies and hence inducing co-location to their main trading venues. For instance, FX trading by hedge funds and PTFs in London and New York dropped by 50% and 10%, respectively, but rose by 88% in Hong Kong SAR, more than doubled in Singapore and tripled in Tokyo. Combined, Asian financial centres now account for 4% of trading by hedge funds and PTFs, compared with 1% in 2013. FX Market Participants The structure of FX markets may be moving from anonymous trading towards a more relationship-based form of activity. The number of dealer banks willing to warehouse risks has fallen, while non-bank electronic market-makers have gained greater prominence as liquidity providers. Yet, the resilience of voice trading suggests that market participants at times prefer to avoid primary electronic venues due to concerns about price impact and information leakage. • Dealer banks have been adjusting their business models to their reduced capacity to warehouse risk and tighter limits on proprietary trading. A few top-tier banks have consolidated their position as liquidity providers, attracting further customer flows, including from other banks. They have also have maintained their position as large flow internalisers ( the process whereby dealers seek to match staggered offsetting client flows on their own books instead of immediately hedging them in the interdealer market) and price-makers. The largest dealer banks include JP Morgan Chase, Citigroup, UBS and Deutsche Bank. By contrast, many other banks are increasingly acting as agents or conduits, sourcing liquidity from the largest dealers and passing it on to their clients. Dealer banks appear to be focused on retaining a relationship-driven market structure, where bilateral over-the-counter (OTC) transactions

dominate. Bilateral trading takes place primarily via proprietary single-bank trading platforms operated by the FX dealing banks, or electronic price streams via application programming interface (API) connectivity. Single bank platforms include Citi Velocity, JPMorgan’s Morgan Markets, UBS Neo and Deutsche Bank’s Autobahn. • Electronic non-bank market participants have gained prominence as market-makers and liquidity providers due to new technologies. While previously focused on high frequency trading (HFT) strategies, they are becoming some of the largest liquidity providers on primary trading venues and have been making inroads in direct etrading with customers. Non-bank electronic market-makers includes XTX Markets, Virtu Financial, Citadel Securities, GTS and Jump Trading. Their trades are prime-brokered by a dealer bank. They are active on multilateral trading platforms, where they provide prices to banks’ e-trading desks, retail aggregators, hedge funds and institutional clients. Typical daily volume for each firm is estimated to be about $10 billion with the highest concentration in spot trading. • Multilateral trading venues, such as EBS and Reuters Matching have suffered a fall in trading volumes due to the emergence of relationship-driven electronic platforms and also because they rely on centralised limit order books (CLOBs) as their primary trading protocol. They have responded by providing alternatives facilities to allow direct e-trading. For example, Thomson Reuters bought FXall, a multibank trading platform based on the request-for-quote (RFQ) trading protocol. Nevertheless, traditional multilateral (or inter-dealer) electronic trading venues continue to be vital to the FX market: they play a major role in price discovery, and they offer crucial backstop when FX market conditions worsen by allowing dealers to hedge their inventory risk anonymously. • Multi-dealer electronic communication networks (ECNs), allow customers to trade directly with a range of dealers, using a suite of trading protocols, such as price streams from individual dealers or requests for quotes, and direct (or bilateral) trading between a dealer and a counterparty. • High Frequency Trader activity has levelled off as a result of tighter FX market access from the decline in


GLOBALTRADING THINK TANK | 49

prime brokerage as well as from various measures, such as “speed bumps” to curb HFT activity which were put in place by major FX trading venues beginning in mid-2013. • Institutional investors and corporate treasuries have increased their participation, notably for hedging purposes. FX Market Regulation The dichotomy between a principles-based and rules-based regime for the global FX markets has been discussed and examined by many experts, and the conclusion was that former is likely to be more effective. Arguably, however, implicit in the message of the FX Global Code is a warning that if market practice comes up short of its recommendations and standards, then the heavy hand of regulation will be administered. The consequences on industry participants would be costly, time-consuming and add a considerable administrative burden. However, regulation does not need to be wholesale. An alternative is to apply global regulation to particular areas that are susceptible to manipulation and malpractice due to ambiguity (for instance “last look”) or where transparency can be achieved. Private initiatives have an important role too, especially if they meet the demands of customers. An example, is a consolidated tape. In September 2017, FastMatch, part of Euronext, announced the launch of a consolidated FX Tape for the spot market. It will publish real-time post-trade information collected from market participants in aggregated and delayed fashion to minimize market impact. The idea is that it will serve as a central reference point for spot FX transacted prices helping market participants evaluate best execution performance, and improve post-trade transparency. (6) Other initiatives are likely to be launched too, and for similar commercial reasons. If they are adopted by market participants at a critical mass, then they are likely to be normalised and hence easier to formalise in regulation. Therefore, if there is momentum towards regulation of the FX markets, it is important for the discussion to identify the scope of that regulation: whether it should be all-encompassing or selective.

Recommendation National regulators and market participants should maintain a constant dialogue about the advantages and disadvantages of global regulation, and where and how it can best be applied. The new Code is all-embracing, and it should be possible to identify some of the 55 principles that can be formalised as rules. The implementation of MiFID II across the European investment services industry and its compatibility with other regional jurisdictions can help point to future difficulties as well as opportunities. The dialogue can be maintained through existing industry bodies such as FIX Trading Community (FICC Committees and Working Groups) globally and any new initiatives that have the purpose of exploring and examining best practice regulation. They should: • Help coordinate the agenda by identifying key issues, working with all stake holders • Support submission of whitepapers and consultative documents about FX markets regulation in general and specific problem areas of the markets • Help coordinate and plan ‘best practice’ implementation strategies • Promote discussion of the issues in industry media outlets This paper is intended to form part of a continuing discussion within the FX industry about market regulation, supervision and surveillance. Sources: 1. Financial Times, 25 May 2017 2. FX Global Code, May 2017 3. Guy Debelle, FX Code Press Conference, London, 25 May 2017 4. Bloomberg, 25 September 2017 5. “Downsized FX markets: cause and implications”, Michael Moore, Andreas Schrimpf and Vladyslav Sushko, BIS 6. Mondovisione, 25 September 2017


50 | FIX TRADING COMMUNITY MEMBERS

FIX Trading Community Members *Premier Global Members marked in bold

360T Asia Pacific 42 Consulting Pte Ltd Actuare AFME- Association for Financial Markets in Europe Alcova AM Algomi AllianceBernstein American Century Investments Ancoa Software Appsbroker Fintech Aquis Exchange ASIC Association of International Wealth Management of India Australian Securities Exchange AXA Investments Managers Ltd B2BITS EPAM Systems Company Baillie Gifford Banca IMI SpA Banco BTG Pactual S.A. Banco Itau S.A Bank of America Merrill Lynch Bank of Ireland Barclays Barings Baymarkets AB Beijing RootNet Technology Co., Ltd. Berenberg Bank BlackRock, Inc. Blitz Trading Bloomberg L.P. Bloomberg Tradebook BlueBay Asset Management BM&F BOVESPA BNP Paribas Bolsa de Valores de Colombia Bolsas y Mercados Españoles (BME) Brandes Investment Partners LP Brook Path Partners, Inc. BT Global Services BVI Cameron Edge Cantor Fitzgerald Capital Group Companies, Inc. Cboe Global Markets Cedar Rock Capital Charles River Development Chi-X Global Inc CIMB Securities Cinnober Financial Technology AB Citi CL&B Capital Management Clearing Corporation of India Ltd

CLSA Limited CME Group Colonial First State Global Asset Management Colt Technology Services Connamara Systems LLC Cowen Corvil CQG Credit Suisse Crown Jewels Consultants Ltd Daiwa SB Investments Daiwa Securities Group Inc. Danske Bank DATAROAD DataArt Dealogic Delta Capita Deutsche Bank Deutsche Boerse Group Devexperts Dimensional Fund Advisors Drebbel DTCC DXC Technology Eastspring Investments (Singapore) Limited EBS BrokerTec EDMA Europe Egypt For Information Dissemination Emagine Consulting Equinix Esprow Pte. Ltd. ETLogic Ltd Etrading Software Ltd Eurex EuroCCP Euronext Paris SA EuroTLX Exactpro Systems Exane BNP Paribas Eze Software Group EZX Inc. Federated Investors FIA (Futures Industry Association) Fidelity Management & Research Co Fidelity International Fidessa Group Financial Information Forum First Boston Group FISD Fiserv FIS Global FIX4wards FIX Flyer LLC FIXSOL FlexTrade FpML Franklin Templeton Investments Gamma Three Trading, LLC GATElab

Premier Global Members

GLOBALTRADING | Q4 • 2017

GETCO Asia GMO Goldman Sachs GreySpark Guosen Securities Ltd H2O Asset Management Haitong International Securities HCL Technologies Higher Frequency Trading Hilltop Securities HM Publishing Hong Kong Exchanges & Clearing Limited Hong Kong Investment Funds Association (HKIFA) HSBC HSBC Global Asset Management ICMA (International Capital Markets Association) IG Group Ignis Asset Management Incisus Capital Partners Indata Recon LLC Indian Association of Alternative Investment Funds Informagi AB Infoware Infront AS ING Bank Instinet InstrumentiX Intercontinental Exchange (ICE) ITG Ipreo IPC Systems IRESS ISITC ISO Itiviti Janus Henderson Investors Jefferies J.P. Morgan JP Morgan Investment Management Jordan & Jordan JSE Limited KB Tech KCG Holdings Kotak Securities LCH Linedata Liquidnet LiquidMetrix LIST Group Lloyds Banking Group LMAX London Stock Exchange Group M&G MACD Macquarie Securities MAE - Mercado Abierto Electronico S.A. MarketAxess


FIX TRADING COMMUNITY MEMBERS | 51

Marshall Wace Asset Management Mawer Investment Management MDSL Metamako MFS Investment Management Mizuho Securities Morgan Stanley Investment Management Morgan Stanley MTS SpA Nasdaq Nasdaq Nordic National Physical Laboratory Newton Investments NEX Group Nikko Asset Management Nomura Asset Management Nomura Nordic Growth Market (NGM) Norges Bank Investment Management Northern Trust Global Investments Ltd OCBC Securities Private Ltd. OMERS OMG (Object Management Group) Omniex On Budget and Time Ltd Ontario Teachers’ Pension Plan Board Onix Solutions [OnixS] Options Clearing Corporation Options Technology Ltd Orbis Investment Management Limited Oslo Bors ASA OTC Exchange Pantor Engineering AB Peresys (IRESS) PFSoft PIMCO Pioneer Investments Portware Primary E Trading Principal Global Investors Putnam Investments QuantHouse Quendon Consulting R Shriver Associates Rabobank International Rapid Addition Raptor Trading Systems, Inc. RBC Capital Markets RBC Global Asset Management Research Exchange Santander Global Banking & Markets SASLA (South African Securities Lending Association) Schroders Shanghai Stock Exchange Shield Finance Compliance SimCorp Singapore Exchange SIX Swiss Exchange Skandinaviska Enskilda Banken AB

Sloane Robinson smartTradeTechnologies Societe Generale Softsolutions! Srl Southeastern Asset Mgmt Spectracom SS&C Technologies Standard Chartered Bank Standard Life Investments State Street Global Advisors State Street Global Markets State Street Technology Zhejiang Sumitomo Mitsui Trust Bank Swedbank Robur Fonder AB SWIFT Systemware Innovation Corporation (SWI) Taiwan Stock Exchange Tata Consultancy Services Technistock 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 Tower Research Capital India PVT Ltd TP ICAP TradeHeader, S.L. Tradeweb Trading Technologies TradingScreen Tradition Traiana (ICAP) Transaction Network Services (TNS) TransFICC Trax Turquoise TWIST UBS ULLINK UniCredit Vela Trading Technologies Velocimetrics VOEB Warsaw Stock Exchange Wellington Management Company Wholesale Markets Brokers’ Association Winterflood Securities XBRL XLP Capital 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

H2O Asset Management h2o-am.com

Hilltop Securities www.hillttopsi.com

Janus Henderson Investors janushenderson.com

Omniex

www.omniex.io

PIMCO

www.pimco.com

Shield Finance Compliance www.shieldfc.com

TransFICC

https://transficc.com/about

XLP Capital

www.xlpcapital.com

Premier Global Members

Q4 • 2017 | GLOBALTRADING


52 | LAST WORD

My City

London

By David Pearson, Head of Post-Trade, Fidessa

Best thing about your city? The blend of so many different styles of culture, people, buildings and history. London has many centres each offering their own thing that makes each visit different. If you have the time, walk to where you want to go – it’s the best way to see and appreciate the city, with fabulous places to eat or shop tucked away in a back street..

Getting to work? Coming in from the west of London, I have a pretty easy commute into Waterloo. I decided some years ago to walk into the City from there which takes 25 minutes and is a great way to wake-up! View from your desk? Royal Exchange at Bank on my left, Cheapside and St Paul’s Cathedral on my right. Can’t grumble!

Best place to stay when visiting? Tricky, this one, because I don’t stay in the city as I can get home easily enough. But I would look for a classy and stylish hotel on one of the “gardens” in Belgravia, Mayfair or Kensington.

Worst thing about your city? The size and scale of London combined with the traffic. The streets of central London would be better without the motor car!

Where to take your clients/brokers for dinner? Recently we have been frequenting Cabote on Gresham Street. Great food and service.

Best tourist site? I love St Paul’s Cathedral. But if you want to feel the potent mix of history and power, try to get an invitation to the Houses of Parliament – there is no place like it!

GLOBALTRADING | Q4 • 2017

And a relaxed spot with friends and family? A picnic in Hyde Park followed by a concert at the Royal Albert Hall is hard to beat.




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