GlobalTrading’s Editorial Think Tank Dear Readers, Despite the advent of new, fast technologies, the task of a trader is fraught with difficulties. Effective order execution requires access to appropriate liquidity and to comprehensive data. But often, a trader has to balance the merits of seeking significant size inventory, which might entail avoiding displayed lit sources, with participating in the full ecosystem and consequently risking damaging transaction costs. In either case, if liquidity is not clearly and consistently defined, then attempts to forecast the market impact associated with the decision will likely suffer.
Bill Hebert Co-Chair, Global Member Services Committee, FIX Trading Community
Data is therefore central to the trading process. Yet, for many traders the problem isn’t a lack of data. Instead, the challenge is sifting through massive amounts of it, finding what’s usable, and acting on it before its usefulness expires: data needs to be useful at the time that makes it relevant to the trading decision. Post-trade numbers are all very well, but they are not going to add alpha. Moreover, if the source of data is poor or the data sets corrupted, then the efficacy of sophisticated algorithms – let alone the next generation of artificial intelligence and machine learning algorithms – will be undermined. A solution might be for market participants to combine resources, and collaborate to create a shared data collection and validation facility. A standardised, consolidated transaction tape utility mandated by the regulators would be a positive first step – and not too onerous, especially for equities.
Carlos Oliveira Brandes Investment Partners
Greg Lee Barclays
The urgency is underlined by the extension of automated buy-side trading to other asset classes, such as US Treasuries, and to sectors previously considered high touch and manual. For instance, new technologies are being adopted by single stock traders which will create the kind of structured trading environment that has been used for some time in the low touch space. Far from disenfranchising the trader, these new technologies will optimize their existing workflows, helping to aid quantitatively based decisions that should lower costs, in what is a notoriously tricky segment of the market to trade. In any case, buy-side institutions will continue to develop or shop for more robust data-capture models, which will be overlaid by more advanced functionality such as aggregation, pattern recognition, and visualization.
Emma Quinn AB
Michael Corcoran ITG
Best Regards,
Bill Hebert Co-Chair, Global Member Services Committee, FIX Trading Community Kathryn Zhao Cantor Fitzgerald
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CONTENTS 7
FOCAL POINT
7 Castles In The Sand - Huw Gronow, Newton Investment Management
16
25
25 Can Technology Solve The Expanded Risks Of Multi-Asset Trading? - Joseph Bacchi, Acadian Asset Management
48 Optimizing Trading Workflows With Agile Platforms - A GlobalTrading Roundtable Discussion
29 An Interview With Elizabeth Stark, Lightning Labs
EUROPE
11 The Future Of Social Investing – And It Is Not About Blockchain - Tan T-Kiang, Grasshopper
32 Technology For The Portfolio Lifecycle - Damian Bierman, FactSet
ASIA
51 MiFID II Impact On The Trading Desk - Fabien Oreve, Candriam Investors Group EVENT
INSIGHT
13 Short-Term Alpha Signals - Andrew Royal, Deutsche Bank
35 China’s Markets Enter The Mainstream - Stephane Loiseau, Societe Generale
16 Applying Technology To High Touch Trading - Lee Bray, J.P. Morgan Asset Management
39 Institutionalising China’s Equities Marketsg - Andrew Freyre-Sanders, Brina Tan and Vernon Willis, Haitong International Securities
18 Global Volumes Shifting Toward The Close - Niamh Golden, ITG OPINION 22 Fixed Income ETFs Provide Flexibility And Liquidity - Steve Sachs, Goldman Sachs Asset Management
42 Third Party Clearing: Have Brokers In APAC Reached The Tipping Point? - A GlobalTrading Roundtable Discussion AMERICAS 46 Why The US Treasury Market Needs Algorithmic Execution - Alastair Hawker, Quantitative Brokers
55 Seizing Innovation In A Rapidly Evolving Landscape - Rupert Walker, GlobalTrading INDUSTRY 58 Internationalizing China’s Trading Standards - Mao Ting, China Foreign Exchange Trade System, and Jim Northey, FIX Trading Community 62 FIX Trading Community Members MY CITY 64 Brussels - Fabien Oreve, Candriam Investors Group
HIGHLIGHTS “Whatever the debate about transparency and the impact of real-time disclosure to large trades and the cost of capital incurred by broker-dealers who may provide liquidity on this scale, the central desire must be consistency in data labelling and disclosure.” P.7 Huw Gronow, Head of Dealing, Newton Investment Management
“The next generation of traders grew up as smart phone users with apps and games that leverage touch screen interfaces and notifications. A simpler user interface that encourages idea generation, validation and sharing would be essential in the social media age.” P.11 Tan T-Kiang, Chief Technology Officer, Grasshopper
“Bottom-up demand for a better way to gain exposure to fixed income markets has met top-down drivers of the ETF industry which promote mechanical efficiency, regulatory guidance and greater professional participation.” P.22 Steve Sachs, Managing Director, Head of ETF Capital Markets, Goldman Sachs Asset Management
“Sensitivity factors are built into the algorithms for trading China’s markets that include a wider acceptance of individual stock price movements from its sector index, yet with maximum limits applied.” P.35 Stephane Loiseau, Managing Director, Head of Cash Equities & Global Execution Services for Asia Pacific, Societe Generale
“It’s hard to imagine that the US Treasury market will not eventually be like cash equities and futures. It is an enormous market ripe for automation and the buy-side stands to benefit from an alternative to RFQs.” P.46 Alastair Hawker, Global Head of Sales, Quantitative Brokers
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FOCAL POINT | 7
Castles In The Sand By Huw Gronow, Head of Dealing, Newton Investment Management
Q3 • 2018 | GLOBALTRADING
8 | FOCAL POINT
A standardised, consolidated transaction tape utility would provide consistent and complete liquidity data which would improve forecast future outcomes. Nearly 200 years ago, the scientist John Brown made the startling discovery that particles inside pollen grains in a drop of water moved around due to their collisions with the water molecules, themselves fastmoving, in a process later proved by Albert Einstein. Brown’s discovery gave rise to the eponymous description of random motion that we know today. To the casual observer, a beaker of water remains a still object in equilibrium; without closer inspection, this assumption does not see that at the molecular (and even quantum) level there is, to put it in layman’s terms, a lot going on .
“It is now necessary to atomise the intended trade into much smaller particles and direct to many different venues simultaneously to retain a high degree of probability of success.” The extension of the discovery of this phenomenon gave rise to what we now describe as stochastic processes, with several extensions into the world of finance, and as a way of applying these to and thinking about the way securities markets work. As it is, our current equity market structure in Europe, and to a greater extent in the US, reflects this. The advent of ultra-low-latency access to markets, with trades now measured in nanoseconds from order to entry to arrival at the exchange matching engines, has developed along with the new fragmented market structure. It is now necessary to atomise the intended trade into much smaller particles and direct
GLOBALTRADING | Q3 • 2018
to many different venues simultaneously to retain a high degree of probability of success, designed so that a significant number of “messages” are sent to the market in excess of the desired intent to trade. This inevitably means that the data seen at one level on the computer screen accounts for just a fraction of the activity that comprises the ecosystem of fast, interconnected exchanges, multilateral trading facilities (MTFs), systematic internalisers (SIs) and the rest. Contributions and benefits In Europe, it is a matter of sometimes-heated debate about whom the development of market structure benefits, in terms of the advances in technology and regulation. The issue most discussed concerns the short-term, ultra-low-latency proprietary trading participants or high-frequency trading (HFT) firms, as they are broadly labelled. These HFT firms are seen as generally either good for the market, claiming to supply liquidity, or predatory, seeking to detect the signals of predictable trading strategies. The reality is that all participants in the ecosystem make a contribution, of whatever value, and that it is the job of regulators, as well as the responsibility of market participants themselves, to police what is deemed illegal, or potentially so in the environment. The aim should be to eliminate any informational advantage given by the composition of the ecosystem itself, where those advantages are identified and considered detrimental to the role of capital markets which is to allocate capital efficiently and fairly. The exponential increase in data that the market has produced by ever diminishing trade sizes and frequency of trading means that the equity market overall can arguably now be viewed in better definition than 20 or even 10 years go. It is unsurprising that the interest from the academic world, of mathematicians, engineers and applied statisticians, schooled in Markov, Monte Carlo, Wiener and so on, has grown substantially. Balancing alternative trading approaches The task of the institutional trader is to navigate two difficult paths: one is between seeking significant size inventory, and therefore (at least for the early part of the risk transfer process of liquidity consumption) eschewing the exposure to pre-trade transparent, displayed, “lit” environments , and thus incurring
FOCAL POINT | 9
“The task for large inventory transfer is a complex one to pre-programme and is better managed in vivo by skilled human traders rather than predictably and deterministically.” possibly punitive transaction costs. The other path is followed by participating actively in all parts of the ecosystem and therefore subjecting the portfolio to potentially deleterious levels of market impact costs. At all times, the balance of these two approaches is determined by the urgency and progress of the trade. The undertaking for large inventory transfer is therefore a complex one to pre-programme and is better managed in vivo by skilled and experienced human traders rather than predictably and deterministically. It follows that the higher aim, and the opportunity provided by the recent changes in regulation in Europe, is to apply this learning to the contribution of transaction costs to the investment process and, in particular, to the efficiency of portfolio construction. What tools are necessary to accomplish the task effectively? Aside from the required efficacy and efficiency of routing capabilities, and exposure and access to all desired execution venues, the ability to analyse, forecast and implement overall trading strategy is vital to delivering the best possible result. The latest revisions to Europe’s Markets in Financial Instruments Directive (MiFID) and Regulation (MiFIR) have the central tenet of transparency coursing through the text, whether it is via the restriction on non-displayed trade activity under large-in-scale size, or the share trading obligation, as well as the requirement to publish most trades
Huw Gronow, Head of Dealing, Newton Investment Management as close to real-time after the event as possible, among other stipulations. Whatever the debate about transparency and the impact of real-time disclosure to large trades and the cost of capital incurred by broker-dealers who may provide liquidity on this scale, the central desire must be consistency in data labelling and disclosure. Accessible liquidity At present, much debate centres on what is “accessible liquidity”; what one may define as the ability for any market participant to take part in a trade at any given moment. This is easy to delineate for a public exchange’s order books or those of a MTF;
Q3 • 2018 | GLOBALTRADING
10 | FOCAL POINT
arguably less so for a periodic auction where “broker preferencing” may be a feature, or a SI source of liquidity, just to take two of a myriad examples. And therein lies the issue. Most if not all measures of the ease of investment in a security have liquidity as a major factor. While it may be marginal if that liquidity is not clearly and consistently defined, even if after the event, the inputs into the liquidity forecast become unsound to a greater or lesser extent. When one then attempts to forecast the market impact associated with the decision, the portfolio construction assumptions may suffer. The highest aim for the next revision of the legislation, unless an enterprising entity takes the opportunity beforehand, is to grasp the opportunity to fill this gap. This is by way of a mandate of a standardised, consolidated transaction “tape” utility. This is clearly within the bounds of possibility for equities, but may be some years away for other asset classes. It is a truism that any attempt to try to model or forecast future outcomes based on inconsistent data and classification amounts to an approximation, however narrow the distribution of these outcomes is. Incorporating this inconsistency into the important
GLOBALTRADING | Q3 • 2018
“While it may be marginal if that liquidity is not clearly and consistently defined, the inputs into the liquidity forecast become unsound to a greater or lesser extent.” task of integrated efficient portfolio construction for the benefit of end-investors and their returns runs the risk of building castles in the sand.
INSIGHT | 11
The Future Of Social Investing And It Is Not About Blockchain By Tan T-Kiang, Chief Technology Officer, Grasshopper
Artificial intelligence and machine learning should be commoditised for the financial industry, but implementation suffers from technology weaknesses, data inadequacies and human inertia. Big data and machine learning have already changed the way we receive information. Advertisers no longer rely on billboards or television to reach us. The recent events surrounding Facebook, Twitter and Google have shed a very public light on the way those mammoths have been using the data of their users to serve the commercial and political purposes of paying third parties. By simply reading the user profile and applying machine learning tools, they can, more easily than ever, identify the user’s needs and wants, with an almost scary accuracy. The pervasiveness with which artificial intelligence (AI) has come into our daily lives is indeed impressive. What if we could also apply this to trading and investing? Actually, this is already possible. Some hedge funds and quantitative funds have developed AI driven trading bots. But how do we make it easily available for everyone? In general, we would like to automate the following investing process: 1. Idea generation 2. Idea validation 3. Trade execution 4. Evaluate steps 1 - 3 to iteratively improve them. This is a very logical place for AI to help us improve our own trading biases.
Most of these processes could be automated with AI bots. We could implement bots that are able to identify changes in prices, volumes or even related news from reputable media outlets. Automation with bots will allow investors to expand their trading universe without spending more time in front of a computer to find and analyse the information that an AI bot would be able to process more accurately and tirelessly. Sometimes we also need automation to ensure that we are not driven by our emotions especially when we have been monitoring a position closely for long periods of time. I believe that AI bots would be able to play a large role here to help our investors to be more reliant on automation and scalability of these bots to become better at their trading. It is almost like creating a trading team without hiring a team. Next Steps For it to happen, there are still many challenges that AI will have to face before becoming commoditised and easily utilised by everyone. The first challenge lies in ensuring the perfect understanding by the AI of the user’s request. To be used for trading, the AI bots would need to understand with 100% certainty the demands of the trader. This 100% capable AI bot is still far from being achieved. Even Siri is still struggling when you request the weather or the nearest gas station. Imagine letting Siri give trading orders to your broker…. I would still be afraid today.
Q3 • 2018 | GLOBALTRADING
12 | INSIGHT
“Wouldn’t it be to the benefit of all to have a single data collection and validation facility to be shared open source with all the market participants?”
Tan T-Kiang, Chief Technology Officer, Grasshopper The second main impediment for a good investing bot lies in the quality of the data and the data collection method. On the former, the current data available to the general public is limited and with minimal checks to ensure validity. If the source of data is not good or the data sets are corrupted, there is no chance for the AI bot to operate a successful investment strategy. In short: “garbage in, garbage out”. On the latter, we replicate the data collection processes over and over again between the different data vendors, hedge funds, individual traders and big institutions. Wouldn’t it be to the benefit of all to have a single data collection and validation facility to be shared open source with all the market participants? I am appealing to all market participants to be “green” about how we are collect and store our financial information. Currently, we are all doing it in a highly non-sustainable, nonenvironmentally friendly manner. One of the main reasons invoked by market participants to run data collection individually is the capability to differentiate themselves from the competition, by obtaining a “better” set of data. Well understood, but I think focusing on the raw information is the wrong battle. The focal point should be growing the capability to harvest the knowledge from the data. This would be akin to the commoditisation of computer power with cloud computing, so why not the data too? After all, data is merely oil within the engine of race car. A good driver is still necessary to ensure that you can reach the finish line.
GLOBALTRADING | Q3 • 2018
New interfaces The third obstacle resides in the user interfaces that currently exist. We see chatbots being used successfully in customer relationship management or as virtual assistants, but not yet in the area of finance. Why? First and foremost, we need a way to transform our financial industry’s reliance on outdated user interfaces such as spreadsheets, watch-lists and chart reading skills to identify signals. The next generation of traders grew up as smart phone users with apps and games that leverage touch screen interfaces and notifications. A simpler user interface that encourages idea generation, validation and sharing would be essential in the social media age. In general, most online brokers have perfected the user interfaces for execution but have neglected the investors’ discovery journey. Once those challenges are solved, the next step would be to increase the complexity of the bots that one creates, by using machine learning tools to develop predictive capabilities and enhance simple regression analysis with neural networks For now, what would make most sense is for everyone to get involved collectively and build community-based investing platforms so that all can benefit. Automation and machine learning is within the reach of many investors today because of the birth of cloud computing, open source code and pre-trained AI models. Let’s make it happen for all.
INSIGHT | 13
Short-Term Alpha Signals By Andrew Royal, Head of APAC Autobahn Analytics and Algorithms, Deutsche Bank
Identifying short-term alpha signals in the market can improve trading strategy logic. The application of agency algorithms can help buy-side firms improve trade execution performance by detecting trends at the micro-scale. Order book and trade flow are two key indicators that can be used to improve algorithm child order placement. In this paper, we examine the neural network model of these short-term alpha signals deployed to enhance the strategy logic on the Deutsche Bank Autobahn Equities platform. Order book imbalance The order book signal at time by the difference in bid size
can be defined to ask size :
Cont, Stoikov and Talreja, 2011) suggests that low ask sizes indicate high probabilities of the ask queue becoming zero before the bid queue, and thus the next price we see should be towards the ask side. The reverse holds if the imbalance is negative. Trade flow imbalance A second signal we can look at is where the trades are occurring. Trade flow can give us good information as to where hidden orders and large meta orders are priced in the market. For example, if there are multiple trades on the ask side, we might conclude a hidden order to be responsible. Hidden orders imply autocorrelation in the trades, and hence multiple trades in a row give us some expectation that the next trade will also be on the same side. We define the trade imbalance at time using the volume of trades at either the bid the ask :
by or
This outcome is on an interval (-1,1) , where numbers close to +1 indicate that we are bid side heavy relative to the ask side. Order book imbalance theory (see
Q3 • 2018 | GLOBALTRADING
14 | INSIGHT
This outcome is in the interval (-1,1), with a “+1” value indicating all trades are occurring on the ask side. When is nearing “+1”, all else being equal, we might expect volume to continue at this price level - there is clearly demand at this price, but there might not be enough supply to satisfy it – that is, the mid-price should tick upwards. The model Our intention is to determine where the next midprice at time is going to move. We let:
The task is to find a function model:
so that we can fit the Andrew Royal, Head of APAC Autobahn Analytics and Algorithms, Deutsche Bank
We find using a feed-forward one-layer neural network. This is quite simple to fit and doesn’t assume any linearity or functional form in the solution. A fitted solution This model was fitted to stock of HSBC for the six months from 1 January 2018 to 30 June 2018, and data was split into training, testing and validation data. We found the following predictions, which are defined as the function and plotted below:
Secondly, the five second signal gives the strongest prediction. The strength of the signal declines as the time interval increases. This suggests that some reversion is going on. Thirdly, the fitted function is non-symmetrical for the five second prediction - we expect that short selling rules here produce this, making it more difficult to observe an imbalanced book. More research is required to prove this. Backtesting Here we analyse the predictability of short-term alpha in the stock price for different time intervals, namely: 5, 10, 15, 30, 60, 120 seconds using out-ofsample data for HSBC for the six-month period. Broadly speaking, the out-of-sample data showed a small decline in the predictability of the stock compared with in-sample data, but it was pleasing to see we were not overfitting the data.
What can we conclude about this surface? Firstly, the signals can be conflicting in nature - a positive trade imbalance (momentum) and a negative orderbook imbalance can reduce the expected price increase.
GLOBALTRADING | Q3 • 2018
Turning the prediction surface into actions necessarily means a tradeoff between false positives (we let in too many signals) and false negatives (we don’t let in enough). The following ROC graph demonstrates the tradeoff and allows us the appropriate way to quantize our prediction surface into actions. We tend to go for a small type 1 error (small number of false positives). The interesting feature is how quickly the
INSIGHT | 15
prediction declines with time – five seconds can produce an informative prediction that will help with the strategy as the ROC curve is above the 45-degree line. However, 120 seconds does not create a useful action so we are better off just guessing.
For a buy order, the cross action means we should cross the spread immediately if we can, as the price is almost certainly moving away. The stay action means we do nothing as the signals are not strong enough. The amend action means that the price is coming towards us so we should either amend the price down if we are ahead of the volume, or amend the quantity up if we are behind the volume. Going forward Deutsche Bank Autobahn Equities continues to introduce more alpha signals into our algo strategy logic. Identifying order book and trade flow imbalance is proving to capture short-term alpha and therefore optimize trading performance. We are testing several statistical models that have important applications and expected performance improvements for global markets, leading in APAC.
Usage in the algo suite We can use these results in our algo strategy by defining a set of simple rules on top of the best quantization of the prediction surface. Graphically, for a buy order we have the following three possible actions: amend, stay, cross.
Q3 • 2018 | GLOBALTRADING
16 | INSIGHT
Applying Technology To High Touch Trading By Lee Bray, Head of Asia Pacific Equities Trading, J.P. Morgan Asset Management
Traditional single stock trading processes have suffered from underinvestment, but new technologies are now being adopted that will create a more effective and structured environment. Over the last few years there has been significant push from the financial industry to create a trading landscape around the implementation process of buy-side desks. There are a few distinct driving forces behind these changes. One is regulation, such as the Markets in Financial Instruments Directive (MiFID) II. Another is modern technology transaction cost analysis (TCA) products are constantly changing, and algorithmic usage is now a significant portion of most trading desks’ flow. As we have seen these changes take effect, certain areas of buy-side trading desks have been impacted more than others. Traders who can now be described as “low touch” have benefited from significant investments in tools to help enhance their decision making, whether this takes the form of in-house models or “wheels” or accurate feedback from TCA products that can store down every parameter that the trader has applied to the stock when implementing their strategy. This has created an invaluable feedback loop in the move towards a more quantifiable implementation in their world.
GLOBALTRADING | Q3 • 2018
Investment in single stock trading Unfortunately, more traditional single stock trading processes have suffered from underinvestment. This critical trading role has historically been more manual in nature. As a consequence, it has been difficult to create a structured trading workflow able to provide meaningful feedback to the traders. Given that this area by definition involves trading in more costly stocks, building out this feedback loop will have positive benefits. Fortunately, we are beginning to see these changes. The market is beginning to apply some of the techniques developed in the low touch world to the “high touch” world. Also, high touch traders are becoming the recipients of more corporate technology spends and putting it to good work by creating innovative solutions to supplement their daily workflow. We have seen this notably in the indications of interest (IOI) space. IOIs have been a big focus for the industry over recent years, enabling buy-side firms to assess their content much more accurately. This has been overlaid with technology and smarts from the quant world to increase the information that can be derived from what was historically a single-stock standard tool. All IOI data is now stored down at JP Morgan, constituting millions of data points a year. Quantitative
INSIGHT | 17
“High touch traders are becoming the recipients of more corporate technology spends and putting it to good work by creating innovative solutions to supplement their daily workflow.” models are now being developed to highlight recommendations to our single stock traders, facilitating more efficient counterparty selection and providing more transparency to our traders around the trading landscape. It doesn’t simply stop at IOIs. The empowerment of the single stock trader armed with information to aid decision making will continue. We are starting to see new products coming to the desk that incorporate aspects of natural language processing. Although it remains at an early stage, in time this may be significant in supplementing our traders when making key strategic decisions. We believe the workflow of the future for the single stock trader will link changes in their strategy back to key events, while simultaneously providing information to enrich the traders’ knowledge on trade outcomes and TCA numbers achieved. In other words, the process will ultimately enable the trader to answer much more detailed questions on how their actions in trading a stock contributed to the quality of the executions. Adding value It is not just the internal framework for the single stock trader that is evolving; now more than ever, investment in this space is impacting the assessment of the brokerage community. Crossing rates – a proxy for measuring the value added by many single stock traders – can now be monitored and assessed much more systematically with the help of technology. It is rarely the case in my experience that a single stock trader doesn’t want to cross stock, but the fear is that by talking to the sell-side there can be negative effects
Lee Bray, Head of Asia Pacific Equities Trading, J.P. Morgan Asset Management
on the stock price which often proves an adverse influence. By providing up-to-date trading metrics using smarter technology, these fears can be confirmed or dismissed by actual data assessed over time. As a result, traders may feel more confident when taking the important decisions they are called upon to make daily. The single stock trader is an important component of the modern, forward-looking trading desk. After a period of underinvestment by the industry as a whole, we are embarking on a period of change which will see significantly more empowerment of the community. New technologies being adopted will create the kind of structured trading environment that has been used for some time in the low touch space. Far from disenfranchising the trader, these new technologies will optimize their existing workflows, helping to aid quantitatively based decisions which will ultimately lead to lower costs, in what is a notoriously tricky segment of the market to trade.
Q3 • 2018 | GLOBALTRADING
18 | INSIGHT
Global Volumes Shifting Toward The Close By Niamh Golden, Director, Analytics, ITG
The move of trading volume to the end of the day in Asia and globally highlights a large natural liquidity event even for those not benchmarked to the close directly. The relative share of market-on-close (MOC) auctions around the globe has increased significantly over the past two years. In some of the larger developed markets, closing auctions can now account for as much as 20% of volume traded.1 The trend toward using the closing facilities—spurred by the continued growth of passively invested funds and the relatively low cost for liquidity at the close—raises a number of important questions about how best to interact with this volume. This article serves as a primer for comparing developed Asian markets with other global markets, focusing particularly on Hong Kong and how volume patterns have changed since the Closing Auction Session (CAS) began in 2016. We start with a quick survey of relative share of closing auctions, as well as the last 15 minutes of continuous trading, in various markets.2
1
NORTH AMERICA
Closing volumes in S&P/TSX Composite names have grown by greater than 1.5 percentage points to 4.6% over the past two years. Meanwhile, trading in the last 15 minutes in the same period, grew and then reverted to historic levels. The 5% of share level is the lowest, by far, of any of the markets we examine in this paper. This is likely best explained by both the relatively high exchange fees of the Canadian closing facility and the high level of intraday turnover in composite names, resulting from arbitrage between fungible listings of like names in the US market. The Canadian close runs at 16:00 Toronto time, with orders entered during the regular trading session. The
ITG’s analysis focused on stocks included in market-level indices.
2 A median of the individual stock’s bin trading as a percentage of daily stock’s trading, weighted by the VWAP price
GLOBALTRADING | Q3 • 2018
INSIGHT | 19
closing auction has a single imbalance publication at 15:40. Updated imbalances are given at 16:00 only if a given name is going to move more than 3% from the last tick.
The market in the US, like those in Japan and Canada, has higher levels of trading in the final 15 minutes than the auction itself. That said, auction share has grown dramatically over the past year. The US is unique in that it has two large exchanges running slightly different closing auctions (i.e. the NYSE and Nasdaq). Both facilities run alongside the continuous trading books, but the NYSE facility has designated market makers participating in the price-setting process, while Nasdaq does not. The two markets have surprisingly similar levels of MOC participation, suggesting that structural differences have little impact on investor use of an auction. We also sliced the US via a few other attributes and observed a few interesting trends: • S&P large-cap names have grown considerably more in MOC share than small- or mid-cap stocks. Large, mid and small market caps saw a similar percentage traded in the close back in Q2 2016; large-caps ended over a full percentage point higher than mid- and small-caps in Q1 2018. • ETF volumes traded a modest 3.4% in Q2 2016 and increased to a high of 4% in Q3 2017. While still much lower than what we see in the equity space, this is nearly an 18% increase. • Perhaps our most interesting finding in the US market was the uptick in trading during the final minutes of the continuous session.3
EUROPE
MOC relative share has grown by more than 40% in CAC 40 names over the past two years, but trading share in the final 15 minutes has remained virtually flat. Like most European exchanges, the MOC facility at Euronext Paris is separate from continuous trading. Continuous trading ends at 17:30 Paris time, when the closing auction opens. The closing cross occurs at a randomized time between 17:35 and 17:35:30.
MOC share grew roughly 20% over the two years in DAX names. This is more modest than most of the markets we studied, although still very meaningful. During the period, we saw a very minor decrease in relative share traded during the final 15 minutes of continuous trading. The Deutsche Börse auction, like Euronext Paris, runs post the continuous trading session and has a randomized end time. The auction begins right at 17:30 and runs through 17:35 Frankfurt time. As is the case with most European closing auctions, the Deutsche Börse publishes updated indicative size and price data during the auction.
3 Aggregate share volume in minute bins across stocks during the quarter as a percentage of aggregate daily share volume. Universe includes stocks traded
on average above $1 and $50k daily volume during Q1 2018 in the U.S. (universe includes 3,400 stocks)
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20 | INSIGHT
The MOC facility has lower relative share than most developed markets, and has witnessed far more modest growth than many peers. This may be explained by the continued high levels of volume weighted average price (VWAP)-style trading in the Japanese markets.
MOC share of FTSE 100 stock trading is up more than 25% in our study period, while trading in the final 15 minutes is down very modestly. The LSE closing facility is similar to many in the European markets as explained above. The auction is a separate book that runs from 16:30-16:35, after the close of continuous trading.
The closing auction runs at 15:00 Tokyo time and is a separate book from that of continuous trading, although continuous trading orders will roll into the auction. Market orders placed in the auction are assigned a limit price equal to the calculated daily limit price for a given stock.
APAC
Stocks in the ASX 200 have seen a nearly 30% rise in closing auction market share over the two years. Meanwhile, relative share during the last 15 minutes of trading has been virtually flat. The Australian Stock Exchange closing mechanism runs separately from the continuous trading facility. Orders are entered during the Pre-Closing Single Price Auction from 16:00-16:10 Sydney time, with the actual match occurring between 16:10 and 16:12.
The Hong Kong Stock Exchange introduced a closing auction in two tranches, starting with the most liquid names on 25 July 2016. Previously, the closing price was calculated as the median of five prints, taken at 15-second intervals during the last minute of trading and a large percentage of volume completed in the last few minutes of the day. Since the introduction of the CAS, there is a clear shift in volumes toward the auction and, by Q2 2017, the auction accounted for as much volume as the last 15 minutes of continuous trading. The auction now accounts for just over 10% of volume in the Hang Seng Index. Hong Kong has taken a European approach to the close, with the auction being run separately from the continuous trading session. The auction starts at 16:00 Hong Kong time, with a randomized close between 16:08 and 16:10. The last thing we examined as part of the comparison was price dislocation. By comparing the last 30-minute VWAP to the closing price, we can look at relative performance across markets. This chart suggests that Hong Kong has the most price elasticity of the markets we looked at, while the North American closing auctions are more efficient.
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INSIGHT | 21
While dislocation is one important factor in market efficiency, there are others, such as price drift and ability to easily replicate a price. To this point, markets including Shanghai and Mexico use a VWAP price to determine the official close.
framework for thinking about both close liquidity and market impact in a dynamic fashion. We welcome client feedback and questions in order to better inform our own research.
It’s clear that volume is shifting to the end of the day in Asia and globally, which highlights a large natural liquidity event even for those not benchmarked to the close directly. At ITG, we are aiming to create a better
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22 | OPINION
Fixed Income ETFs Provide Flexibility And Liquidity By Steve Sachs, Managing Director, Head of ETF Capital Markets, Goldman Sachs Asset Management Fixed income ETFs are straightforward and transparent, offering highly liquid access to a core asset class and its sectors. Exchange traded funds (ETFs) offer investors a number of advantages. The most important is liquidity which, crucially, lies at the underlying level of the structure not at the wrapper level. A deep and extensive market ecosystem exists for this reason.
There is now almost $700 billion in fixed income ETF assets globally. It’s a small proportion of the total $4 trillion market, but it is growing as investors have become more comfortable with different ETF vehicles. In the early days, they mainly comprised marketcapitalisation weighted stocks linked to broad benchmark indices, then evolved to country-specific and niche vehicles, before maturing in sophistication to smart-beta strategies about five years ago.
Fixed income ETFs are at nascent stage in development compared to the vast, global equities ETF market that has grown up in the last 25 years. However, their appeal to institutional investors has increased over the past five years, and accelerated as they are forced to respond to client requirements during the recent up-turn in the interest rate cycle.
Fixed income ETF development has lagged equity ETF maturation for several reasons. Primarily, the equity portion of a portfolio is typically inherently larger than the fixed income portion and thus the focus on ETF development has traditionally focused on this larger slice of the pie and greater need. While bonds traditionally play a risk mitigation and income
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OPINION | 23
“Bottom-up demand has met top-down drivers which promote mechanical efficiency, regulatory guidance and greater professional participation.” generating role in portfolio construction, they have, in the post financial crisis landscape, also driven absolute return in portfolios. With the unwinding of accommodative monetary policies that is taking place globally now, investors are rethinking fixed income allocations and portfolio construction and demanding a more robust set of tools to build allocations. This is driving more demand for the next generation of fixed income ETF’s. Fixed income ETFs driven by client demand As the days of low interest rates and depressed bond yields are numbered, investors can no longer expect predictable returns in their fixed income portfolios. They are facing heightened duration risk, possible negative returns and exposure to credit events. Moreover, the problems for US asset managers are exacerbated by the country’s demographics: an aging population requires wealth and income preservation, yet the conventional asset class for this phase in the investment cycle is fixed income.
buy a large, broad portfolio of bonds, especially if the intention is to replicate a benchmark index or achieve diversification to mitigate risk. While this has improved over the past ten years as more technology has been applied to bond trading, challenges remain.
Fortunately, bottom-up demand for a better way to gain exposure to fixed income markets has met top-down drivers of the ETF industry which promote mechanical efficiency, regulatory guidance and greater professional participation. Basel III, the Dodd-Frank Act and the Volker Rule restrict the warehousing of bonds by banks, leading to new intermediaries providing alternative sources of liquidity, facilitating the construction of fixed income ETF vehicles, which in turn have become a source of price discovery.
An ETF is an attractive alternative for many investors. The ETF structure and its components are transparent and indices don’t need to be entirely replicated, as optimization lends itself well to fixed income portfolio construction. Other advantages of the ETF structure include lower dealing costs, greater tax-efficiency (in the US, because there is no capital gains tax payable), and, perhaps most importantly, they are tradeable as discrete units. Purchases and sales do not necessarily impact the value of the underlying fixed income securities.
Trading in fixed income markets is robust, but it remains opaque and liquidity is fragmented and difficult to access at times. In practice, it is difficult to
Sale or redemption Around $80 billion in ETF notional value are traded a day (including about $25 billion of fixed income
Steve Sachs, Managing Director, Head of ETF Capital Markets, Goldman Sachs Asset Management
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24 | OPINION
“The structure and its components are transparent and indices don’t need to be entirely replicated, as optimization lends itself well to fixed income portfolio construction.” ETFs), but only $10 billion is created or redeemed each day. For a sale, for instance, a dealer can hold the ETF in inventory, either taking an uncovered position or hedging their exposure. They can either find a buyer of the ETF, or might eventually redeem the ETF position with the issuer, who provides a basket of the underlying bonds in exchange. Sometimes, the intermediary might use those bonds to construct a new ETF, warehouse the bonds as inventory, or simply sell the bonds. The idea is that the dealer has choices in which to mitigate risk and find liquidity Investors can take advantage of this flexibility. For example, an insurance company might hold a high yield ETF to gain immediate exposure and earn incremental yield, then redeem the fund through a dealer and take delivery of the underlying bonds. Fixed income ETFs, like equity ETFs, benefit from the dual layers of liquidity that exists: secondary market and primary market liquidity. These two layers work together to not only provide liquidity, but also the ability to arbitrage any price difference between the two, thus keeping secondary market prices in a normal fair value range. Of course, investors can always build a fixed income bond portfolio directly, with individual bond selections. However, there is a trade-off between costs and access, implementation and efficiency.
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Future trends At this stage, most fixed income ETFs are linked to broad benchmark indices, which is a constraint for investors that require more specific or thoughtful exposures. Niche fixed income ETFs are in the early stages, with issuers and providers examining the potential for a next generation of products, such as smart beta fixed income ETFs. In the future, we may see this continue to evolve as the market responds to the ever changing needs of the investors in the asset class.
“Niche fixed income ETFs are in the early stages, with issuers and providers examining the potential for a next generation of products, such as smart beta.” Fixed income ETFs are straightforward and transparent as well as offering highly liquid access to a core asset class and its sectors. The structures and investor choices will evolve as the client demand determines and as ecosystem of participants, their skills and experience, grows.
OPINION | 25
Can Technology Solve The Expanded Risks Of Multi-Asset Trading? By Joseph Bacchi, Head of Multi-Asset Trading and Investment Operations, Acadian Asset Management Multi-asset trading requires a dynamic combination of available technology, broker partnerships, an educated trading team, and belief in the importance of human oversight. As multi-asset strategies proliferate, more and more traders are being asked to expand their knowledge base beyond a single asset class to include a host of new instruments. To be successful, these traders need to master the mechanics of these new asset classes, be aware of a whole new array of risks, and take a new approach to risk management. For the multi-asset (M-A) trader, risk management is less a concept than it is a way of life. From a pure trading standpoint, risk is as broad as the asset classes the M-A trader navigates. And while not all risks will be new to the equity trader, multi-asset requires an understanding of risk across the full spectrum. Risk awareness needs to be front-to-back, from reconnaissance to, in many cases, the last line of defence. Moreover, unlike in the world of equities, technology is not going to offer seamless support. M-A traders must finesse among multiple and imperfect systems, and gain consistency not from technology, but from human understanding and oversight.
Expanding the risk landscape The diagram below illustrates the multitude of risks that many traders deal with on a daily basis. While breaching any of these can lead to adverse results, in equity trading there is typically an understanding that many downstream risks are being systematically managed and can be largely assumed to be under control. For an M-A trader, choosing which to focus on or ignore is not an option. Trading multiple products, in multiple venues, with multiple trading partners means having to understand not only the inherent front-end execution nuances in each, but also their back-end processing mechanisms, as well as an awareness of all issues related to regulation, settlement and compliance.
Market
Cost
Trader
Processing
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26 | OPINION
“Risk awareness needs to be front-to-back, from reconnaissance to, in many cases, the last line of defence.” Here are a few ways that the expanded risk insight can play out in the multi-asset world: • Understanding the context of the trade at hand is the key to the determination of strategy. Here the M-A trader serves as the fulcrum, bridging from the portfolio manager’s desired exposure (and reasons for wanting that exposure) to management of execution risk to all of the downstream dynamics of the trade - including fees, clearing and settlement. Often this is in the context of structured products and other complex instruments, where the trader works directly with a broker to tailor a unique position. This combination of knowledge also gives traders the opportunity to offer their insight back to the portfolio managers in the form of idea generation and position protection. • Impact risk, both from explicit and implicit costs, is much more complex in multi-asset. When you move from the well-defined cost analyses for cash equities to the more specialized roll costs determination and trend analysis for futures; seasonality and roll yield analysis for commodities; interest rate curves and flow measurements for foreign exchange and fixed income related products; and balance sheet usage and funding requirements for over-the-counter (OTC) products, it is clear that not knowing every aspect of M-A trading can have material impact on performance. • Compliance issues are also much more at the forefront of M-A trading. Multiple products mean multiple regulatory environments and multiple forms of compliance risk. Futures and options mean understanding margin risk. OTC trading requires attention to credit and counter-party risk. Consideration of these risks plays directly into the trading process.
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Joseph Bacchi, Head of Multi-Asset Trading and Investment Operations, Acadian Asset Management How can firms most effectively create a trading team that can accomplish this? Education is the key. In addition to training on instruments, operations and regulations: don’t ignore the opportunity to learn from the sell-side. Relationships are essential to the success of multi-asset trading. Viewing the sell-side as a partner, with ideas and experience to offer, can be very productive. How Technology Can – and Can’t - Help Gone are the days when a trader can simply worry about execution and leave the rest in the hands of technology overseen by others. While there are platforms that can address some needs, they are not all easy installs and do not come cheap. A central, robust order management system (OMS) needs to effectively support: • M-A portfolio positions • Benchmarks to track exposure management • Clearly defined protocols for pre-trade violations • Reporting platforms for post-trade exposure management (by rule, regulation, product, counterparty, etc. • Valuation/collateral management for esoterics
OPINION | 27
The hazards of notional calculations, performance and fee payments, credit facility usage and collateralization - to stress just a few - means that the M-A infrastructure needs to be designed with the mindset that back-end processing is equally as important as front-end execution. Think of the audit issues if it were not!
“In certain parts of the process where there is no standardization, it is nearly impossible to create a costeffective technological solution that addresses all components in a holistic manner.” There is no doubt that technology plays a major role in the M-A architectural blueprint, but are machines enough? Can risk be mitigated simply by routing trades through a series of automated checks? The answer is no and it doesn’t appear that in the near future technology will fully take over the process. FX options, total return swaps, structured and commodity products and many other exotics do not have electronic platforms from which to trade, and none of these have systemic, equity-like protocols for booking, settling and processing. As much as one may want automation, the solutions simply have not caught up to the demand. As trading enterprises have moved toward automation for efficiency and cost reasons, the human touch is still a necessary requirement.
create a cost-effective technological solution that addresses all components in a holistic manner. This is further proof that when structuring trades, the M-A trader needs to consider more than just the execution. The trader must also ensure that important allies in legal and compliance, risk and operations departments understand the design and the desired result of the trades, so that they too can help to fill the gaps that technology currently cannot address. Diligence is the byword For some, risk is solely an execution problem. Which algorithm offers the best access and protection? Which trading strategy is best suited for the context? When is the right time to attempt to take advantage of liquidity? For the multi-asset enterprise, risk goes beyond the order itself. It’s embedded in the operational infrastructure, in the execution pathways to various venues for various products with various brokers, in the functionality of the OMS, in the reporting platform and in cash/credit profile management. There isn’t one system to manage these risks or one report that can proactively identify them. Multi-asset trading requires a dynamic combination of available technology, broker partnerships, an educated trading team, and belief in the importance of human oversight. Enhancement in risk management for multi-asset trading is an ongoing enterprise. It may never be fully solved, because the products - both investment and tradable - are evolutionary. Like home improvement, as soon as you get the last room the way you want it, the first room needs to be updated. Diligence needs to be the byword and the rule.
Think of all the moving parts: negotiated terms, distinct trade structuring, term sheets, margin requirements, multiple sourced fee management, collateral postings, varying settlement instructions and multiple clearing relationships. All require experienced oversight and expertise to manage effectively. In certain parts of the process where there is no standardization, it is nearly impossible to
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Americas Trading Briefing — November 8 | Boston
Back by popular demand is this year's Americas Trading Briefing in Boston, Thursday 8th November, kindly hosted by State Street Global Markets at their offices. This half-day briefing will provide a series of panel sessions that address market needs, provide impartial, high quality content, the knowledge and experience of over 20 industry leading speakers. There will be networking opportunities throughout the event and at the post-event cocktail party.
Learn - Network - Debate France Trading Briefing - November 22 | Paris
Returning for a second year, the 2018 France Trading Briefing will take place on Thursday 22nd November at the Crowne Plaza Paris — Republique hotel in central Paris. This year’s event will feature a two stream agenda developed by members of the France trading community. Join 150+ senior industry participants an insightful day of education, regulatory updates and endless networking opportunities. These events are sponsored by—
To view full event information and for details on how to register, please visit:
www.fixtrading.org/boston2018 - www.fixtrading.org/france2018
OPINION | 29
An Interview With Elizabeth Stark, Cofounder and CEO, Lightning Labs The keynote speaker at the 16th FIX Asia Pacific Trading Summit discusses bitcoin, blockchain and the tech industry. What is the greatest transformation in technology you’ve seen in your career? While I was fairly young at the time, watching the internet and World Wide Web spread was fascinating. I then went on to teach about the intersection of law and technology at Yale and Stanford Universities, looking at how the internet is changing society, culture, and the economy. It’s so interesting to see that there’s an entire generation that has never known a world without widespread internet.
I believe we’re seeing the same for the ability to transact on the internet with bitcoin and cryptocurrency, and in many ways it has felt like the early days of the internet. Sounds like you are a firm believer in blockchain and cryptocurrencies? When I first heard about bitcoin, I thought it was fascinating, though I was admittedly sceptical if it would ever take off. A few months later, that scepticism faded and I was hooked! However, I still consider myself a blockchain sceptic. That’s not to say that I don’t think this
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30 | OPINION
“Much of the blockchain discussion is the equivalent of the corporate intranets, or just general hype around use cases that aren’t actually feasible.” technology is important, but for so long there was a movement to minimize the importance of bitcoin and cryptocurrency and instead call the true innovation: “the blockchain.” For me what is so special about this technology is we have the formation of new public, decentralized networks that are similar to how the internet developed. In the early days of the internet, many companies also created corporate intranets, but they were not interoperable or connected to the broader network. I view much of the blockchain discussion as the equivalent of the corporate intranets, or just general hype around use cases that aren’t actually feasible.
Elizabeth Stark, Cofounder and CEO, Lightning Labs
can enable cross-blockchain swaps between currencies like bitcoin and litecoin where you don’t have to trust an exchange to trade.
The true potential of this technology is to create a new financial infrastructure, an internet of value that is open and decentralized, and that anyone can build on top of. This is what I believe bitcoin can achieve.
In short, we’re creating the building blocks for this new financial infrastructure. We are building out the Layer 2 of blockchains, but it is also possible to build a third layer, be it a smart contracting protocol or algo trading protocol on top of Lightning itself. I can’t wait to see what other people build on top of our technology, as the potential for new use cases is massive. Check out this talk I gave at the Blockstack Summit for more on the importance of Layer 2 technologies.
Why did you create Lightning Labs?
The good, bad and ugly of blockchain?
At Lightning Labs, we’re building a software layer on top of bitcoin that can bring it to the next wave of people. We’re making bitcoin faster and more scalable, by enabling instant, high volume transactions. We’re making it easy for developers to build on bitcoin, with easy-to-use interfaces for developers. And we’re enabling interoperability between blockchains, as Lightning
Everything in our industry moves so quickly that it can be extremely hard to keep up, even when you work in the space full time. I see that as a positive sign though, as it means more and more people are getting interested in building this future. Right now there’s a massive opportunity for people to get up to speed and learn about this new technology and where it may be headed.
The beauty of bitcoin is that it has a built-in incentive structure through proof-of-work to keep the network decentralized and secure, along with making public/ private key cryptography more widespread, so it’s really not just about a “blockchain” alone.
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OPINION | 31
As I like to say, there’s no one in the world with a decade of “blockchain experience” (except for Satoshi Nakamoto, of course). What that means is if someone is motivated to learn about the technology they can start reading any number of resources online and get up to speed fairly quickly. That said, the downside is there are a lot of people who have gotten involved lately with a “get rich quick” mentality, not to mention many questionable projects and outright scams. Those who will succeed, though, will have a long term vision and understand that this is a marathon, not a sprint, and this technology will take years of hard work to build out. Tell us about your leadership style and philosophy in life. As I’ve been involved with open source communities for over a decade, my leadership style is very collaborative. I believe in giving people agency and autonomy, not just telling people what to do. That said, communication is of utmost importance, especially with a distributed team like our own. So I would say my style is a mix of collaboration, communication, and guiding people to work on their passion. In terms of philosophy, I’m very much a doer. If I see a problem, my instinct is to fix it. I don’t like it when people tell me I can’t do something. When I first started my company, lots of people told me we were crazy or that it would never work. My approach is to ignore what people say and keep on building.
more technical women into the fold. I’m also co-organizing a conference this autumn in California that will feature leaders in the industry giving technical and business talks about their work - who just happen to be women. In terms of challenges, right now there’s a huge opportunity to reshape the global financial system as we know it. We need participation from all different kinds of people from all over the world, and part of that will be engaging more women in the process. It can be difficult if you’re the only woman in a room, at a conference, or event, as I have often been in the past. One good example was an event I attended recently in Morocco. For the first version of this event four years ago, there were very few women in attendance, and numerous people pointed it out. At this year’s event, it was 52% women, after the organizers made an effort to reach out to female leaders. So, for women who are feeling like they’re the only ones, know that there are many of us out there, and more to come. I make it a point to refer to great women when it comes to speaking, press, or other opportunities because it’s important that their stories are told. The more a younger generation can see role models, the more inspired they will be to get involved.
How could the tech industry be more inclusive for women? First off, it’s crucially important to highlight the achievements of women and people of colour. The more other people can see role models that look like them, the more they will be encouraged to get involved. Second, creating more opportunities to learn, be it on the technology front or the business front. Along those lines, I have been involved in funding scholarships for female software engineers to learn more about the bitcoin protocol with bitcoin developer and educator Jimmy Song, which has been extremely successful in bringing
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32 | OPINION
Technology For The Portfolio Lifecycle
By Damian Bierman, Head of Asia-Pacific, Portfolio Management & Trading Solutions, FactSet Buy-side technology continues to evolve, but solutions offering different pieces of the portfolio lifecycle form a patchwork landscape. The integration of the portfolio lifecycle is fraught with complexity and challenges for all firms who navigate it. This has created an opportunity in the market for a new approach. When we talk about the portfolio lifecycle, we mean, in the broadest terms, the process of executing an investment idea: Everything from researching the idea, generating an order, running it through compliance, trading, settling, and tracking performance attribution. Most buy-side firms tend to fall into one of two categories when approaching a technology provider for the systems required for servicing their portfolio lifecycle. Either they’ve adopted (or evolved) a “best-of-breed” approach engaging multiple
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vendors, or they work with a single vendor who promises a complete “end-to-end” solution. Best-of-breed or one-stop-shop Firms that go best-of-breed have bought themselves a P+O+EMS (portfolio, order, execution management system) by engaging multiple vendors for the different pieces, and have most likely spent years integrating all of it, getting the different systems talking to each other. Then, once their solution is up and running for a while, what inevitably happens is that something changes which causes a disruption to that delicate balance – maybe the firm’s investment strategy evolves, or a particular set of regulations are introduced – and suddenly they have to deal with a multitude of vendors to make the necessary adjustments to get the new workflows to concord. It can quickly become a huge headache. Firms that go the other route, to the “one-stopshop”, live in a world where their vendor manages
OPINION | 33
“Most buy-side firms tend to adopt either a “best-ofbreed” approach engaging multiple vendors, or work with a single vendor who promises a complete “end-to-end” solution.” everything, but the trade-off is that they forfeit full autonomy. They can have control of the frontto-back operations, but only until they want to diverge from the prescribed solution. Even a slight amendment means surrendering some autonomy. So, if you’re a small firm dealing primarily in a single asset class and you’re of a certain size with a relatively simple set of compliance rules, there are solutions on the market that will work well for you. Until, of course, they don’t. Eventually you’re going to want access to other asset classes, and as you grow your compliance rules are going to become more complicated. For instance, you may find that you need a different answer for transaction cost analysis to the one that’s being provided for you. In short: these products work well, until you outgrow them. What ends up happening in the traditional onestop-shop model is that, instead of the technology bending and moulding to fit the needs of the business, the business is forced to mould to meet the limitations of the technology. This limits the asset manager’s ability to implement an investment process that fits the requirements of their business, so they are forced to either to compromise on what they can actually do because of those technology limitations, or they are faced with numerous frustrating inefficiencies in the form of manual processes that lie outside of what their “all-in” system is capable. The result is incomplete information at different stages of the lifecycle, and information that’s not always there where and
Damian Bierman, Head of Asia-Pacific, Portfolio Management & Trading Solutions, FactSet
“The best system would be inherently open and modular, built around a robust set of APIs that can be connected into whatever pieces of the portfolio lifecycle that a buyside firm can’t, or isn’t yet ready, to replace.”
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34 | OPINION
when it’s needed – most harmfully, at the point of decision. This approach leads to a “one-size-fitsnone” type scenario, and it’s not a good spot to be in. A third way But what if there was a better way? The ideal would be a complete solution with a degree of flexibility that allows a firm to have the best of both worlds. In effect, it would be a comprehensive system within an open platform. It is a compelling proposition for a number of reasons, not least of which is that a buy-side firm rarely if ever finds itself in a position to replace its entire technology stack at once. Clearly, there is demand for a higher standard, more flexible solution which provides a complete answer from end-to-end along the portfolio lifecycle. It should be inherently open and modular, built around a robust set of APIs that can be connected into whatever pieces of the portfolio lifecycle that a buy-side firm can’t, or isn’t yet ready, to replace.
“Having the ability to update all those analytics – contribution, attribution, performance, risk in real-time is hugely valuable, but generally unavailable in the marketplace today.” In order for such an approach to be viable, the vendor offering it has to be fluent in several core competencies. First and foremost, it needs to have extraordinary system integration capabilities built into its DNA. It needs to know how to work with, manage, concord and align data from numerous, disparate sources. It also must be capable of managing complex workflows across multiple asset classes in a manner that’s robust and yet
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nimble enough to adapt to markets, strategies and regulations that change constantly. Moreover, it needs to be built for complexity, speed, and scale, and needs to have evolved capabilities for intelligently automating workflows to free up its human operators to add value in ways that machines alone cannot yet accomplish. Real-time analytics The common thread binding all those pieces together has to be a world-class analytical capability. This allows a portfolio manager to have real-time access to the trade executions happening on the dealing desk throughout the course of the day, as their investment ideas are turned into reality. The very moment their investment ideas are transacted in the market, the portfolio manager is aware of what had been a trade simulation is now an active order that’s being filled; and as it fills, it immediately becomes part of the portfolio. Having the ability to update all those analytics – contribution, attribution, performance, risk - in real-time is hugely valuable, but generally unavailable in the marketplace today. Yet, consider just how important it is when one misplaced tweet can send a company’s stock price into a free-fall. If you are portfolio manager holding that stock, surely you cannot afford to wait 24 hours to assess the extent of the damage to your portfolio. Instead, you would want to act immediately to restrict losses. A comprehensive solution that facilitates that timely response is a true game-changer.
ASIA | 35
China’s Markets Enter The Mainstream By Stephane Loiseau, Managing Director, Head of Cash Equities & Global Execution Services for Asia Pacific, Societe Generale
MSCI’s partial inclusion of China A-shares in its benchmark indices is a catalyst for inflows of global capital, and has prompted traders to rethink their algorithmic strategies. Recent developments mean that international investors must build their capacity for efficient and seamless trading in China’s onshore equities. Several enhancements to the Stock Connect schemes introduced by the Chinese authorities have eased risk and regulatory concerns, while the well-established Qualified Foreign Institutional Investor (QFII) and Renminbi QFII schemes have familiarised brokerages and buy-side firms with the idiosyncrasies of China’s capital markets. The catalyst, however, for a surge in expectation and active participation has been the MSCI’s decision in June 2017 to include renminbi-denominated A-shares into its benchmark Emerging Markets and All Country World indices. MSCI added around 230 predominantly blue-chip stocks in a two-step process in June and September this year, following a fourth consultation with global investors since discussions began in 2013. This year’s five percent partial inclusion, making up approximately 0.73% of the MSCI EM index and 0.1% of the MSCI All Country World Index, is likely to attract
about $20 billion of capital into the Chinese equities markets – the third biggest in the world. Passive investors tracking the benchmark emerging market index had already been required to prepare, but active investors have also been prompted to put systems in place to meet the benchmark requirements, and to benefit from opportunities to earn alpha returns. Moreover, the proliferation of active onshore investors has also encouraged a view of China not only as a liquidity option, but also a trading prospect. Evidence of this renewed interest is not hard to find. There were about 4000 special segregated accounts (SPSA) before the implementation of the first inclusion by MSCI in June this year; by the beginning of August the number had soared to more than 5800, just before the second inclusion commenced on 1 September. The MSCI decision was based on positive responses in their consultations with international investors, whose attitude was in turn shaped by improvements to the Stock Connect schemes and to the functioning of the Chinese markets by the Mainland authorities. The Chinese authorities seem clear in their intention to open up their markets to overseas investors and hence re-balance flows, as well as introduce the disciplines of
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36 | ASIA
“The proliferation of active onshore investors has encouraged a view of China not only as a liquidity option, but also a trading prospect.” professional institutional fund management in markets that are still around 80% dominated by domestic retail investors. Indeed, the only significant differences between trading the Chinese market and the US and Japanese markets are some residual operational hurdles which, nevertheless, are navigated by dedicated teams at brokerages, such as Societe Generale. Local skills and professionalism in the Chinese financial industry have also improved in recent years, while a repeat of the destabilising stock suspensions common during the 2015-2016 market turmoil have been forestalled as the authorities pursue a rule-based roadmap to improve market integrity. Removing operational obstacles Although international access to the Chinese market was inaugurated as long ago as 2002 with the launch of the QFII programme, regulatory initiatives during the past four years have accelerated. In particular, the launch of Shanghai-Hong Kong Stock Connect in November 2014 and Shenzhen-Hong Kong Stock Connect two years later have spurred global investor interest and activity. These two-way investment schemes between Hong Kong and the mainland’s two main bourses allow investors to buy Chinese shares through Hong Kong, and vice versa. The daily quota for “northbound” purchases of shares quadrupled to Rmb52 billion ($7.6 billion) from Rmb13 billion on 1 May. China’s regulators have been quick to address several criticisms of the operational aspects of the Connect schemes, such as trade settlement and custodial idiosyncrasies and they continue to act on recommendations from international investors.
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Stephane Loiseau, Managing Director, Head of Cash Equities & Global Execution Services for Asia Pacific, Societe Generale For instance, in June the Shanghai Stock Exchange introduced a consultation to include a closing auction, which is widespread in developed markets and a necessary mechanism for daily valuations of US- and European-managed portfolios. While normally domestic investors are trading intra-day based on market opportunities, many have responded to the recent MSCI trends, by trading towards the close of business too. Perhaps the greatest problem for international fund managers is the number of days that the market is effectively closed to them. Trading through Stock Connect is conducted with offshore renminbi (CNH) and investors cannot buy CNH on public holidays when the Hong Kong Stock Exchange (HKEX) is closed, and nor can they on the day before the holiday. The problem can be exacerbated by the closures of the exchange on typhoon days. HKEX could alleviate this obstacle, at least for purchases; sales would be harder to accommodate because the banking system also shutters on these days. In the meantime, this issue is one of the main reasons why many investors also retain their QFII accounts. Meanwhile, ambiguities about beneficial ownership have been resolved and the T+0 trading cycle is now
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manageable through SPSAs and augmented by the 24-hour coverage of trade pre-allocation by brokerages. It is unlikely that QFII will be abandoned any time soon; instead it may be preserved and enhanced as one of the several parallel routes to China’s capital markets. QFII has attractions in addition to its consistent availability: the channel provides entry to a wider variety of instruments, and recent measures have removed the lock-up period for principal and, crucially, allowed onshore currency hedging. Of course, many of the largest investors with exposure to China would like the fungibility between the QFII and Stock Connect schemes, but it is not seen as the highest priority for them or the authorities at least for now.
“Traders have had to adapt their algorithms to markets dominated by retail investors who sometimes are driven by speculative purpose or indeterminate information, and where daily volume distribution tends to be flat.” Optimizing trading Societe Generale has been trading Chinese equities since the launch of QFII in 2002, and is fully aware of the markets’ idiosyncrasies and challenges as well as its opportunities. Traders have had to adapt their algorithms and electronic trading practices to markets dominated by retail investors who sometimes are driven by speculative purpose or indeterminate information, and where daily volume distribution tends to be flat rather than peak at the end of a trading session which is more commonly observed in other regional and global markets.
“China’s regulators have been quick to address several criticisms of the operational aspects of the Connect schemes, such as trade settlement and custodial idiosyncrasies.” Societe Generale’s full suite of algorithmic strategies, offered to the firm’s institutional clients and equally suitable for QFII and stock connect, are adjusted to fit the individual volume characteristics of around 3500 individual mainland Chinese stocks, and reflect their particular correlation disparities with the index. In addition to trading volumes, they encapsulate volatility and fair-value calculations. Sensitivity factors are built into the algorithms that include a wider acceptance of individual stock price movements from its sector index, yet with maximum limits applied, therefore providing a sound level of risk that incorporates a combination of several microfactors. Gathering data is also difficult, but inroads are being made into identifying informative news and trends from social media. As China continues its effort to open up its capital markets to international investors, the MSCI is likely to decide on full inclusion of Chinese stocks in its benchmark indices which, according to analysts’ estimate, would attract an inflow of $300 billion from international investors. It is therefore essential that trading desks and portfolio managers have the capability to transact effectively as soon as possible.
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Institutionalising China’s Equities Markets By Andrew Freyre-Sanders, Managing Director, Brina Tan, Director and Vernon Willis, Executive Director - Execution Services, Haitong International Securities
Foreign investors raising allocations to China following MSCI partial inclusion will encounter a radically evolving market and will require expert guidance. The most important recent development in China’s equities markets is the establishment of a domestic institutional investor infrastructure. Pension reform and new asset management rules, culminating in the creation of the Financial Stability and Development Committee in November 2017 to formalise, regulate and develop China’s financial system, have set in motion a fundamental shift towards institutionalising the markets. Total domestic assets under management (AUM) held by insurance companies and mutual funds should rise by 30% a year as a result, according to Z-Ben forecasts, and will help erode the dominance of retail investors who currently make up around 80% of market activity. The transfer of 10% of state-owned enterprises’ equity holdings to the existing Rmb2 trillion ($292 billion) National Social Security Fund (NSSF) is one of the largest asset transfers in China’s history. In addition, seven of the Rmb6 trillion local social security funds are moving to the NSSF to manage and invest in broader
asset classes than just government bonds and cash, and 21 external fund managers have also been appointed to manage local social security funds. The introduction of tax-deferred pensions will further boost the savings industry The domestic asset management sector has also been fortified by new regulations, including limits to offbalance sheet offerings, a ban on guaranteed return products and the setting of a 10% provision target for fund managers. Meanwhile, the insurance, banking and fund management sectors have been opened up to foreign investors, allowing majority shareholdings which will rise to 100% ownership over the long term. In combination, this means that China is not only going to see a rapid expansion in institutional pensions and other assets under management during the next five years, but also a major change in the fund management landscape, with greater openings for foreign asset managers and advisors balanced by the rising sophistication and development of China’s new breed of institutional investors. The recent history of the Indian equities market provides a template. It rapidly evolved into an institutional investor driven market as micro changes to
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40 | ASIA
“China is to see a major change in the fund management landscape, with greater openings for foreign asset managers balanced by the rising sophistication and development of China’s new breed of institutional investors.” its infrastructure were introduced, and global funds rushed to correct underweight allocations. Foreign investor access Of course, the eye-catching MSCI partial inclusion of A-shares in its benchmark indices this summer is significant and will attract foreign investors. However, despite the promise of faster MSCI inclusion than previously expected, foreigners’ relatively small size (3.7% of total tradable market) means their influence will be limited for the next couple of years at least. Given MSCI’s endorsement of China Connect, foreign investors, including passive funds, have typically adopted this access mechanism to trade China A shares. However, foreign investors still face considerable logistical and operational challenges accessing the market via China Connect in an efficient manner and satisfying best execution obligations. The magnitude of these challenges can vary depending on many factors including the number of sub accounts, the use and costs of integrated broker model versus SPSA, the process of establishing SPSA sub accounts, limited ability to trade on omnibus, tight custodian settlement cut off times, funding and CNH liquidity concerns, single sided settlement. Success requires coordination and military style planning across clients, their endclients, global and sub-custodians, brokerages and exchanges and this complexity requires expending human and financial resources.
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Andrew Freyre-Sanders, Managing Director - Execution Services, Haitong International Securities Brokerages and foreign investors are required to set up with robust operating procedures. Proximity to the market helps provide reassurance. Many US- and Europe-based investors are understandably nervous about the operational risks, especially the certainty of trade settlement and integrating their Special Aggregated Accounts (SPSAs) within their back-office systems. Moreover, the broker-selection limitations inherent in the QFII and RQFII programmes arouse concerns that aspects of “best execution requirements” of MiFID II might be breached. Dense and voluminous broker manuals are also off-putting. It makes sense, therefore, that investors collaborate with and use a broker who has a deep understanding of the technical and operational features of both the China market and how to access it seamlessly. Trading China Haitong International considers the microstructure and liquidity of the equities markets in Shanghai and Shenzhen as particularly well-suited for electronic trading and algorithmic strategies. To simplify their China instrument order routing, some of our
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institutional clients have indicated they would prefer one broker FIX connection for care and electronic trading orders irrespective of whether they are trading on (R)QFII, B shares or via China Connect and we are in process of implementing this facility. Looking further ahead we intend to deploy our electronic trading platform onshore to provide institutional clients WFOE operations the same execution tools as their offshore trading hubs. Haitong International’s algorithms have been configured and adapted to handle some of the nuances between trading via China Connect and directly on the Shanghai or Shenzhen Exchanges. These include the three second market data latency in Shanghai, client
“Success requires military style planning across clients, their end-clients, global and sub-custodians, brokerages and exchanges, and this complexity requires expending human and financial resources.” odd lot requirements and adaptable trading strategies, trading behaviour around limit up/down alerts, and local regulatory interpretation and market guidance on cancel/fill ratios, order submission numbers and close participation. Our China-focused quant models have shown encouraging results, for example during retailcentric liquidity bursts. Haitong International also aims to utilise Haitong Securities onshore presence and relationships to assist clients to engage the regulators and the exchanges to shape discussions about the common challenges and concerns.
“The microstructure and liquidity of the equities markets in Shanghai and Shenzhen are particularly well-suited for electronic trading and algorithmic strategies.” quickly ahead of the next phase of MSCI A share inclusion . Indeed, as the China markets open up to offshore funds, Haitong Securities onshore presence will be an important resource we hope clients will tap into as they increase their presence. We believe that if foreign investors had three wishes to improve China market access, then amongst their priorities would be:( 1) an extended settlement cycle in line with other regional markets to manage cash flows and accommodate investors in non-time zone locations, (2) the introduction of omnibus trading similar to the models adopted in other ID markets, and (3) making it easier for participants to agree, transact and report block trades in A shares. On this last wish, the provision for both foreign and domestic funds to transact block trades consistently (including within stock connect) will be a milestone, and already it seems a marker has been laid down with a $700 million block which was reported to the exchange on 8 August and appears to have been crossed between an offshore and onshore investor. Clearly brokerages and buy side trading desks need to aware and prepare for the growth and changing composition of the international and domestic client base over the next decade, and be sufficiently agile to adjust to changes taking place in the structure of China’s markets.
The introduction of the Shanghai exchange closing auction on the 20th August appears to be a good example of the Chinese authorities listening to international investors concerns and acting relatively
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Third Party Clearing: Have Brokers In APAC Reached The Tipping Point? A GlobalTrading Roundtable Discussion
Outsourcing clearing can provide capital efficiency and access to liquidity as well as ensure that brokers are compliant with new regulations and accommodate the latest technologies, according to a thought-leadership discussion. Many Asia-Pacific markets are implementing significant changes to their trading infrastructures, while new regulations, products and technologies are transforming their clearing and settlement practices. The changes are not homogenous across jurisdictions, which add further complexities and risks to brokers’ operations. In this environment of dynamic, diverse and rapid evolution, firms are being forced to question whether their historic models of self-clearing are competitive and cost-effective, or if recourse to third-party clearing (TPC) is a more viable and efficient alternative. TPC has already been widely embraced in Europe where more than 85% of equities clearing is now outsourced, but Asia-Pacific offers unique challenges - as well as opportunities - to its successful provision
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and adoption in the region, agreed participants at a GlobalTrading roundtable discussion sponsored by BNP Paribas Securities Services on 9 May 2018. Managing liquidity in Asia-Pacific offers particular challenges. Investors selling a security in one market are required to go through an FX transaction to cover a trade settling in another market which causes a delay in funding and affects intraday liquidity requirements. Similarly, brokers may need to move funds from market to market to ensure the timely settlement of transactions with their clients. One solution is for brokers to seek intraday liquidity from their banking partners. This needs to be flexible enough to cover any peak activity that can come from rebalancing periods for their clients, while not creating significant fixed costs that can hit profitability. For instance, the banking partner may request collateral from the broker to provide a necessary credit line. Liquidity in fragmented markets Alternatively, TPC can provide intraday liquidity solutions to the broker on an uncommitted,
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undisclosed basis to assist in the coverage of their daily activity or, at an extra cost, on a committed or overnight basis to add more certainty. Compliance with the standards and rules governing custodial, clearing and settlement services is critical, but it imposes an expensive and time-consuming burden on a self-clearing broker to invest and adapt to regulatory adjustments and to infrastructure alterations. TPC offers flexibility and efficiency as an alternative to legacy account-operator models. It can reduce capital expenditure on back-office systems and staff hires as well help streamline the clearing and settlement process, taking care of project expenditure on operations and IT, thereby freeing up the broker to focus on its core business. TPC can deliver other cost savings. Although IT expenses are hard to quantify – and it can be difficult to prioritise post-trade operations as budgets are constrained - freeing up capital could save hundreds of millions of dollars if a broker moves its clearing to a TPC. Payment of margin calls and contributions to the default fund are passed to a TPC partner, who also takes on the responsibility of preparing for future changes to market infrastructure. In Hong Kong, the Financial Resources Rules (FRR) imposes strict and onerous capital regulations for
clearing, providing a substantial incentive to choose TPC. Brokers can now include receivables in their liquid assets but cannot net them off against payables (although the Securities and Futures Commission is considering the possibility), which means brokers are wasting capital by not using TPC. If they do not clear trades through a third party, brokers are better off setting up affiliates elsewhere in the region to book trades. Systems inertia However, arguably it makes little sense for a broker to switch to TPC if, as is largely the case now in Asia-Pacific, the service can only be provided for cash equities. Unless a comprehensive, multi-asset service is offered, then a broker will still need to dedicate resources to back- and middle-office clearing and settlement functions - for example for fixed income transactions – which might negate the cost-benefits of moving to TPC and might even increase operational complexities within a firm. Although it is a challenge to TPC providers to cope with the diverse jurisdictions, market infrastructures and regulations in Asia-Pacific - especially in order to facilitate cross-market transactions - it is also a tremendous opportunity. Fragmentation might make the task daunting, but it will be rewarding to those TPC providers who can solve the complexities.
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Julien Kasparian,
CEO, BNP Paribas Securities Services Hong Kong
“
Now this is the right time for banks and brokers to review their current operating model based on the changing regulatory and infrastructure landscape combined with mounting cost pressures and a squeeze on margins.
”
Tom Jenkins,
Partner, Head of Financial Risk Management, Risk Consulting, KPMG China
“
Third party clearing can offer market participants in Hong Kong significant benefits given that trading volumes are a key driver of the regulatory capital requirements for broker-dealers and significant changes are expected to market infrastructure in the coming years. There are currently some regulatory hurdles which impact market participants that have clients directly papered to their Hong Kong entity, but these are expected to be resolved when the revised Financial Resources Rules come into effect.
”
Anthony Ford,
Head of Treasury, CLSA
“
Pricing between custody and clearing providers continues to tighten. With less price differentiation, brokers are putting more consideration into booking models, overall returns and technology.
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Julie Chew,
CFO, Asia Pacific and Managing Director, Instinet
“
Brokers and stock exchanges around Asia are at different stages of technology innovation. The rapid change in both global technology and local regulations will motivate us to think differently about historical trading and clearing processes. It is definitely happening faster in the trading space and less so in clearing. Therefore banks or utilities which are able to provide technology innovation as part of TPC services will have a competitive edge.
”
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One concern is that the continual changes underway make it difficult for brokers to evaluate outsourcing propositions. It is tough to plan and make long-term commitments when the future regulatory environment is so unclear. It is also hard to justify jettisoning legacy systems built up during the past 10-to-15 years to meet the requirements of market evolution successfully and outsourcing (and ceding control of) those settlement and clearing functions to an uncertain future. If current clearing models are working well, then why take the risk and suffer the inconveniences that the disruption and complexities of switching to TPC entail? Perhaps, it is premature to move to TPC when you don’t know what’s around the corner. In addition, there is concern that vendors might miss new regulation and fail to make necessary adjustments to their systems, leaving brokers exposed to financial penalties and reputational risk. On the other hand, a skilled and experienced TPC operator can provide clients access to its technological expertise, saving them the effort of developing, maintaining and upgrading in-house technology, or the aggravation of finding a vendor to outsource their technology needs. Compared to self-clearing’s high fixed costs such as capital for collateral, staffing and compliance, outsourcing the service can lead to lower and more manageable variable costs and reduces the monitoring required by an international broker for every change in each local market.
Asia-Pacific evolution Yet, regulatory changes and the introduction of technological innovation indicate that Asia-Pacific is moving towards adopting new practices. For instance, exchanges in Hong Kong, Singapore and Japan are assessing the merits of blockchain technology following Australia’s lead. Meanwhile, India and Malaysia, among other Asia-Pacific markets, are considering adopting SWIFT’s ISO 20022 messaging format, which could replace legacy systems connecting to central counterparty clearing houses and central securities depositories. Moreover, global investors will have access to a large slice of China’s $7 trillion market following MSCI’s decision to include China A Large Cap stocks in its benchmark emerging markets Index; and late last year HKEX announced major changes to its listing rules and procedures in a bid to gain a bigger share of the global IPO market. These and other factors present a significant opportunity to investors keen on diversifying their portfolios in Asia-Pacific and benefiting from the region’s growth story, while brokerages should expect to play a major role in facilitating the process. During a period of rapid developments in regulation and technology, brokers that do not review their revenue models are risk. Some might choose to maintain the status quo, but they should at least examine the viability of existing models and assess the opportunities of TPC.
There are also concerns among brokers that a rival bank - one that offers a TPC service but nevertheless competes for investor trading business - might have access to the broker’s transaction data. A “utility” TPC, with several banks contributing to its funding, might be a more attractive model to brokers worried about client confidentiality breaches. The creation of such a model is probably a long way off, as TPC is likely to remain a revenue-earning service and continue to provide a commercial edge for individual banks for the foreseeable future. Moreover, if competitors come together in such a joint venture, disputes about who is benefiting or paying the most are perhaps unavoidable.
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46 | OPINION
Why The US Treasury Market Needs Algorithmic Execution
By Alastair Hawker, Global Head of Sales, Quantitative Brokers
Algorithmic execution strategies are available for buy-side firms to automate execution in US Treasuries, improving performance and efficiency. Automated trading, or specifically, algorithmic execution, of cash equities is prevalent to the point where execution without an algorithm is a rarity. In futures, use is not quite as extensive but it is well established. Even FX markets, which are greatly fragmented, have seen growth in execution algorithms in the last couple of years. And then there is fixed income, where it is almost non-existent in comparison. Have a think about what the publisher of this magazine represents: the important FIX protocol that enables standardized messaging for order flow across the industry. It is used extensively for cash equities and futures, so why not cash Treasuries (USTs)? Why should most of the buy-side execution in one asset class be instant via a request-for-quote (RFQ)? Why should executing 1000 ten-year Treasury futures contracts be done differently to executing $100 million ten-year treasuries? Buy-side firms have FIX connections to utilize many types of algorithms that enable them to access liquidity, reduce costs and enhance efficiency. However, although electronic trading of the US Treasury market is widespread between dealers and liquidity providers (the “inter-dealer” market), the buy-side is only at the beginning of the inevitable journey towards automation
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through execution algorithms. It’s hard to imagine that USTs will not eventually be like cash equities and futures. We are not talking about the liquidity challenges of corporate credit markets here – the US Treasury market is an enormous market ripe for automation and the buy-side stands to benefit from an alternative to RFQs. Fragmented market Similar to equities markets and in contrast to futures markets, the electronic Treasury market is characterised by a fragmented landscape, consisting of numerous central limit order books (CLOBs) and direct pricing streams. The result is a complex structure that needs smart order routing (SOR) for successful navigation: aggressive orders need to be routed to where the cost is the lowest, achieving best price and minimum transaction fees. Passive orders are more challenging - they need to be divided between venues in such a way as to maximize the fill rate. Recently, Quantitative Brokers (QB) completed a project on machine learning (ML) for SOR, which facilitates the intelligent aggregation of liquidity from multiple sources. It will be used to solve the problem of where to send child orders when there is a choice between different liquidity pools. Current trading practices by the inter-dealer market participants have established a model for successful adoption of automation by buy-side firms. Almost 70%
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“Similar to equities markets and in contrast to futures markets, the electronic Treasury market is characterised by a fragmented landscape, consisting of numerous central limit order books and direct pricing streams.” of all volume traded in the US Treasury market is conducted via electronic trading platforms, with over 90% of the nearly $200 billion traded daily (interdealer) executed electronically, according to research by Greenwich Associates. Nevertheless, it is surprising how comparatively little buy-side execution in US Treasuries is automated and undertaken directly with electronic liquidity. RFQs still dominate - part of the reason is habit, but for various reasons there has also been a lack of investor access, or willingness to access, electronic liquidity. Independent algorithms Some of the challenges with access can be alleviated by firms that represent the buy-side as impartial agents, providing the connectivity and technology to aggregate liquidity and automate execution. QB is neutral and conducts no proprietary trading - its interests are entirely aligned with its clients. QB’s suite of algorithmic execution strategies help buy-side clients minimize transaction costs, hide their footprint, and improve their productivity. These are available for on-the-run USTs, as well as futures markets. QB’s flagship “Bolt” algorithm facilitates best execution across wide-ranging market conditions, benchmarked to arrival price. “Closer” provides optimal trading into the market close (settlement price benchmark); “Legger” intelligently manages legging risk for multi-leg orders; and “Strobe” attempts to capture the spread within a client’s defined time schedule, tracking a volume weighted average price (VWAP) or time-
Alastair Hawker, Global Head of Sales, Quantitative Brokers weighted average price (TWAP) benchmark. Data The key ingredient for successful automated trading is data. What matters for investors is understanding what means of execution is best for them. It is not just about requesting multiple quotes and trading at the best quoted price. It is evaluating an entirely different way of executing and whether that is more optimal, taking into account pricing, anonymity and information leakage. Comprehensive transaction cost analysis (TCA) helps with this and is another part of QB’s client service. There was also the introduction of TRACE reporting for US Treasury transactions in 2017. This has provided regulators with a more comprehensive picture of US Treasury market activity, but there is an unresolved debate about broader dissemination of this data to the public. Given the full transparency and resulting efficacy of listed markets, it is hard to understand how releasing this data would not be in the public interest. While this remains in discussion, the good news is that there is still enough data available for execution algorithms to work effectively. More data would always be welcomed, especially to help TCA benchmarking.
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48 | AMERICAS
Optimizing Trading Workflows With Agile Platforms
A GlobalTrading Roundtable Discussion Buy-side trading desks have unique requirements, but all need to future-proof their platforms. Should buy-side trading desks buy technology or build their own? How are institutional traders extracting maximum value from data? What is the potential -- and what are the limitations -- of automated trading? Those were a few of the questions explored in a recent buy-side roundtable hosted by TradingScreen in New York. On the buy-versus-build question, roundtable participants noted that every trading desk has its own unique workflow and its own unique needs for solutions, so every desk has its own unique answer. This differs from bank broker-dealers, where the universe is much smaller the suite of trading products and services is comparatively standardized. “Unlike the sell-side, most buy-side firm have unique workflows, which require them to tailor technology and data solutions to drive performance and meet evergrowing regulatory mandates,” said Nasdaq Head of North American Equities Tal Cohen, who moderated the roundtable. Mostly, buy-side trading desks buy systems ‘off the shelf’ and customize to their own specifications -- so, some buying, and some building. But today’s increasingly complex market calls for more sophisticated, higher-horsepower products, so there is a discernible shift towards buying.
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“We’ve gone from mostly proprietary technology to mostly third-party,” said Enrico Cacciatore, Senior Quantitative Trader and Head of Market Structure & Trading Analytics at Voya Investment Management. “We had to have the skill-set to maintain it, and our corporate model is to scale and simplify. So we asked ourselves: ‘Can’t we build this in a third-party product and maintain our edge?’” Interoperability For a large investment firm that trades different asset classes, with different trading protocols, multiple ‘best-of-breed’ solutions are required for specific areas of the trade lifecycle. Then the real challenge is stitching it all together so that systems are interoperable with each other and also the internal technology. “We count on third parties but it’s also critical to have an internal team of developers to handle integration with multiple platforms,” said Alessandro Barroso, IT Manager, Investment & Wealth Management Technology at Franklin Templeton. The largest buy-side institutions with trading desks across continents face another challenge: maintaining standardized workflows while giving individual trading desks some leeway. For example if Sydney traders have a way to efficiently trade Australian securities that differs from how they do it in London, that should be accommodated.
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“The utopian view is that it’s all going to be consistent,” said Eric Thorson, Senior Delivery Manager for Portfolio Management Systems at Vanguard. “But it never really is.”
Institutions are either developing or shopping for more robust data-capture models, which will be overlaid by more advanced functionality such as aggregation, pattern recognition, and visualization.
Or as another roundtable participant said, it’s about “balancing between effective change management and still allowing for the ‘secret sauce’.”
One roundtable participant noted his firm is at the beginning phase of leveraging data to improve trading decisions. “We are not there yet,” this participant said. “We are collecting data and we have a data scientist looking at it. The question is, how is it going to add value to our process?”
Data overload One shared pain point for institutional managers is data management. The problem isn’t a lack of data; on the contrary, the challenge is sifting through massive amounts of data, finding what’s usable, and acting on it before its usefulness expires. “There is too much data, and most of it is bad,” said Jose Marques, CEO of Inferent Capital. “How do we make data useful in a timescale that’s relevant to the problem we’re trying to solve? Post-trade is fine, but that’s not going to add alpha.” Roundtable participants were in consensus that almost every buy-side firm is working to optimize data management; however these is a long way to go, which presents an opportunity for technology vendors to step in with the right solution.
What’s ahead? “The question to ask is not what the buy side needs, but what will the buy side need,” TradingScreen Senior Developer Edmund Caraceni told Markets Media after the roundtable. “For a technology provider, having a future-proof lens enables readiness for shifts driven by regulatory demands for the data aggregation and businessintelligence tools that enable best execution across asset classes.” Regarding the trading desktop of the future, one buy-side technologist who participated on the roundtable noted a secular shift away from a closed
Enrico Cacciatore,
Senior Quantitative Trader and Head of Market Structure & Trading Analytics, Voya Investment Management
“
We had to have the skill-set to maintain it, and our corporate model is to scale and simplify. So we asked ourselves: ‘Can’t we build this in a third-party product and maintain our edge?
”
Alessandro Barroso,
IT Manager, Investment & Wealth Management Technology, Franklin Templeton
“
We count on third parties but it’s also critical to have an internal team of developers to handle integration with multiple platforms.
”
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Eric Thorson,
Senior Delivery Manager for Portfolio Management Systems, Vanguard
“ ”
The utopian view is that it’s all going to be consistent. But it never really is.
Jose Marques,
CEO, Inferent Capital
“
How do we make data useful in a timescale that’s relevant to the problem we’re trying to solve? Post-trade is fine, but that’s not going to add alpha.
”
Edmund Caraceni,
Senior Developer, TradingScreen
“
For a technology provider, having a future-proof lens enables readiness for shifts driven by regulatory demands for the data aggregation and business-intelligence tools that enable best execution across asset classes.
”
system, and towards a more open model that can be described as a container with multiple specialist fintech tools. Machine-based trading will continue to gain traction, especially for what one roundtable participant described as “low-risk, low-value trades.” Trading desks “need humans -- we’re the pilots of the airplane,” another participant said. “We can put things on autopilot, but we need humans. Technology is there to scale the stuff we don’t need to deal with.” The mix may change over time, but trading will always be man plus machine, not just one or the other.
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Humans create technology to extract away all the tedious things that humans are good at the first 10 times, but then they’re terrible at,” said one participant. “Technology can run with that, and when something’s not going well, it gives the human the context they need to engage. That paradigm works.”
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MiFID II Impact On The Trading Desk By Fabien Oreve, Global Head of Trading, Candriam Investors Group
Market fragmentation and tougher trade execution reporting requirements compel greater investment in technology and also a more stringent selection of brokers across asset classes. A major intention of the Markets in Financial Instruments Directive (MiFID) II is to improve the transparency of financial markets, and hence ensure greater justification of best execution for each major asset class. This dual objective of transparency and justification is not one that market participants always find easy to meet; one of the biggest obstacles is growing market fragmentation, and another is the degree of technological investment required. Managing market fragmentation The Candriam trading desk began by revamping its procedures, strengthening order-execution processes by providing greater detail and case studies. It designed a more detailed execution policy with decision trees to identify best execution from pretrade to post-trade. For example, we now describe in greater detail how pre-trade indicators feed into
the broker-selection and best-execution processes. Data-driven decision-making is a key aspect of this evolution. The desk streamlined its lists of brokers and platform providers in order to focus on key partners who know our business inside out. Naturally broker lists have been reduced, in particular for equities. In each business category, we have retained a limited and balanced number of brokers, which entails excluding those we perceive as having no added value. With more reporting obligations and justification exercises, we have tried to streamline connections, focusing on “one-stop shop” brokers and platforms that offer easy access to liquidity. The core list of brokers has been complemented by a group of specialists to cater for more specific business activities. In keeping with the spirit of MiFID II, amid greater market fragmentation, the desk has tried to gain agility in the way it manages equity orders across markets through dynamic multi-placement. Our order and execution management system (OEMS) provides
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systematic internalisers (SIs) to reduce the timing risk. We tend to focus on our large brokers, who facilitate trading for orders in their entirety. The selected brokers are typically those who have made major upgrades to their central risk books, where they hedge positions more efficiently. It’s uncertain as to which trading venues will benefit most from the new MiFID II rules, for instance, from dark pool restrictions, but agility for a buy-side dealing desk in executing orders across brokers and venues will certainly gain ground thanks to the OEMS. New regulations have clearly led asset managers in general to make significant adjustments. These include upgrading their technology to gain efficiency in dealing, enhancing monitoring capabilities, sending legal entity identifiers to brokers and platforms, collecting more trade data and ensuring a more systematic approach to best execution.
Fabien Oreve, Global Head of Trading, Candriam Investors Group
“One of the biggest obstacles is growing market fragmentation, and another is the degree of technological investment required.” a functionality to split a single order by the number of venues and brokers it has been placed with. We can take advantage of any potential increased liquidity through the OEMS. For example, the original order placed with broker “A” on lit venues is automatically reduced in our system if a portion of the order is matched with a natural block offered by broker “B”. With the return of market volatility, we have recently been trading more in emergency mode and relied on
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We have also had to work on further automating our order dealing process in asset classes other than equities without compromising security or order execution quality. FIX connectivity, request-for-quote (RFQ) platforms for bonds, currencies and exchange traded funds as well as algorithmic trading for equities have already, to a certain extent, automated our trading desk. However, we have never had full-scope automation as an option. Why? Because, for example, at the Candriam trading desk, sending an equity order to an algorithm is subject to strict conditions and written agreements with brokers on pre-trade constraints like maximum order value and maximum average daily volume percentages. With today’s OEMSs, there is more room for automation and more opportunities to further streamline our trades. That is true for a portion of our futures and FX order flow. We have selected a multiasset “algo” broker covering equities, futures and FX, and are currently working with the IT teams, legal, compliance and risk management departments to set up trading limits and to document and test new tools. FX is an interesting large asset class where a majority of our flow is handled via electronic RFQs. For the most liquid currency pairs, our RFQ platform can be clearly complemented by other tools, such
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as time-weighted average price (TWAP) and by time- or price-trigger algorithms (equity-like trading mechanisms) to meet portfolio managers’ requirements. However, we do not see any interest in using electronic RFQs for cash equity, because we currently have easy access to indications of interest (IOIs) from those of our brokers who advertise reliable tradable sizes and prices.
business trends and outliers across different bond segments and sub-segments.
“With more reporting obligations and justification exercises, we have tried to streamline connections, focusing on ‘one-stop shop’ brokers and platforms that offer easy access to liquidity.”
As the scope for TCA has become far broader under MIFID II, we are also discussing potential new partnerships with multi-asset TCA providers covering equities, fixed income and FXs
For any given bond category, our post-trade reports provide average bid-ask spreads and executed prices’ deviations versus. mid-price reference. These reports also help visualize top broker-dealers. Knowing top broker-dealers in specific segments is quite useful for fixed-income traders and helps them target counterparties.
Impact on trading desk organization MiFID II promotes market transparency and greater convergence among asset classes. The new regulations are driving more order flows to electronic trading. While electronic trading technology is broadly used today, traditional trading methods still have a significant role to play. At the Candriam trading desk, traders have to work more horizontally and navigate between low-touch and high-touch trading channels, depending on order difficulty and market environment.
Post-trade analysis As a result of MIFID II, the main challenge with transaction cost analysis (TCA) lies in assessing and ranking brokers in a more rigorous, quantitative and yet non-complex fashion. Ranking brokers that have performed under similar scenarios is the first step to more easily identifying outperformers versus underperformers.
Having junior colleagues’ roles confined to low-touch trading only is not a satisfactory solution. Bringing together people with various backgrounds and diverse perspectives, training new employees to find the right balance between electronic and voice trading for specific orders in a particular asset class enhances professional growth and expertise.
Another challenge is that of presenting meaningful post-trade data across the major asset classes: that includes fixed-income, which requires more manual analysis and verification than equities.
Trading desks always need the flexibility of human traders to adapt to changing market conditions and achieve best execution. After all: “It is men who make a city, not walls or ships” (Thucydides).
Candriam has been engaged in post-trade analysis for equities and fixed-income for a number of years. In the case of fixed-income, we internally built a tool that produces reports where each trade is compared against the losing quotes obtained from the RFQ process and the “composite” mid-price level at the time of execution. Of course, there are still market data issues for the most illiquid bonds, and this does not help transaction cost analysis but, we have managed to find a way to know our trading costs,
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Seizing Innovation In A Rapidly Evolving Landscape By Rupert Walker, Managing Editor, GlobalTrading
The challenges and opportunities of new technologies preoccupied delegates at the FIX Asia Pacific Trading Summit.
financial industry,” said panel moderator Huayi Dong, Global Head of Electronic Trading Solutions at Daiwa Capital Markets.
The trading industry is in a race to devise and implement new technologies to gain a competitive edge, while recognising the importance of intra-firm collaboration to reduce costs and direct resources efficiently. Indeed, innovation and adapting to its consequences were major themes of the 16th FIX Asia Pacific Trading Summit held in Hong Kong on 10 May 2018.
Many firms are now moving from proof of concept to proof of value to determine whether or not to invest in the technology, and to assess the efficacy of its application. Practical issues such as interoperability and cost are central to the discussion, increasingly superseding conceptual or academic proselytising.
In particular, blockchain technology and its operational functions are evolving rapidly, with new endeavours underway throughout the financial industry. Panellists in an early morning discussion shared their experiences form various projects, including the ASX Chess Replacement and Corda projects, as well as how they envisage deploying blockchain or distributed ledger technology within their business strategies. “It was a wonderful discussion that examined blockchain based on real-world application in the
Elizabeth Stark, co-founder and CEO of Lightning Labs, argued in a keynote speech that the ascension of blockchain and cryptocurrencies is inexorable, and will help shape commerce in the near future. Her San Francisco-based company is tackling one the main deficiencies of digital currencies by developing an open protocol layer that leverages the power of blockchain and smart contracts to make fast, scalable transactions possible. “Everyone is keen to see how the cryptocurrency market will evolve and institutional investing is likely to be the key factor,” said Avril Parkin, Head of Technical
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Relationship Management, North Asia, Thomson Reuters who introduced Ms Stark to a packed auditorium.
“Many firms are now moving from proof-of-concept to proof-of-value to determine whether or not to invest in blockchain technology, and to assess the efficacy of its application.” Operational challenges The markets themselves are also posing challenges. For example, China’s capital markets are continuing to open up to international investors, and the inclusion of A-shares in the MSCI benchmark emerging market index has induced a sense of urgency to identify the
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best ways to gain exposure. China Stock Connect and the longer established QFII scheme are existing routes with respective merits as well as drawbacks, and the potential introduction of China depository receipts could offer easier access. On the other hand, investor confidence and assurance is dulled by repeated instances of trading suspensions of A-shares by the Chinese authorities, especially when conducted in a manner that appears capricious, warned speakers on a panel assessing preparation for China’s MSCI inclusion. In this environment, sell-side firms are experiencing greater competition while faced with increased demands from clients to adopt new technologies, implement multi-asset services and reduce and be accountable for costs. Brokerages need to consider different ways to improve their services to clients and optimise their own operating models, concluded a panel discussing emerging trends for the sell-side. Speakers reflected on the rate of margin compression affecting their businesses while under pressure to invest and innovate as trading complexity increases. The industry clearly needs to ascertain the
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appropriate payment model and pricing levels to offset the burdens of regulatory compliance and continual system upgrades. “This panel revealed how ‘best ex’ obligations have led to a greater focus by the sell-side on the cost of providing different levels of service, and by the buy-side on who and what they want to pay for, and what it is worth to them,” said Mark Northwood, Founder, Bips Global, the panel moderator.
“Sell-side firms are experiencing greater competition while faced with increased demands from clients to adopt new technologies, implement multi-asset services and reduce and be accountable for costs.” One solution, often proposed by buy-side firms, is the provision of utility-like entities that offer basic, essential services such as risk management and trade processing where there is a limited competitive imperative for individual brokerages to provide separate facilities.
“The buy-side is entering a new dawn, with expectations of the rapid growth of new technologies and promises of intellectual satisfaction for a younger generation entering the industry.” Managing Director, Head of Cash Equities & Global Execution Services – Asia Pacific, Societe Generale – Global Markets who moderated a panel that discussed “The Future of Trading”. Traders will do more than complement automated processes, artificial intelligence and machine learning; instead they will them through the application of different, adaptive skills, expertise and initiative. It should be an exciting future for young professionals entering the trading industry. “It was great allowing new faces on the Next Gen Leaders panel to reflect on career paths and offer intelligence on what strengths and qualities are required to be a leader in today’s electronic trading world,” said Dillon McNiven, Executive Director, Head of Electronic Trading, Asia Pacific, Instinet who moderated a discussion called “Up Next: Next Generation Leaders”, which included an impressive panel of speakers who will take the FIX Community to its next stage of development.
New opportunities Meanwhile, the buy-side is entering a new dawn, with expectations of the rapid growth of new technologies and promises of intellectual satisfaction for a younger generation entering the industry. Indeed, “embracing data science and innovation on the trading desk is essential in order to meet the industry’s future challenges, from front office to operation and compliance,” said Stephane Loiseau,
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Internationalizing China’s Trading Standards By Mao Ting, Senior Manager, China Foreign Exchange Trade System, and Jim Northey, Co-Chair Global Technical Committee and Co-Chair High Performance Working Group, FIX Trading Community CFETS is keen to work closely with the FIX organization and ISO TC68 to improve standardization in China’s domestic market and share its experiences with the world. The China Foreign Exchange Trade System (CFETS), also known as the National Interbank Funding Center, was founded in 1994. CFETS adheres to the principles of “multiple technical approaches, varied trading mechanisms and integrated demands from multitiered markets,” and is committed to developing infrastructure and providing innovative products and mechanisms for the China interbank market. Its strategic goal is to become “a major global trading platform and pricing centre for renminbi (RMB) and related products.” By applying advanced information technology, leased lines and the Internet, CFETS provides a range of services covering issuance, trading, information and post-trade activities for the RMB-denominated interest rate, the RMB exchange rate and related products in the cash and derivatives markets. Every business day, it publishes market benchmarks including the RMB central parity rate, the Shanghai interbank offered rate (Shibor), the loan prime rate (LPR), the CFETS RMB index series, the fixing repo rate, bond indices, yield curves, etc. By the end of July 2018, CFETS has over 23,000 market participants. The total trading volume in the first half of 2018 reached Rmb 557.5 trillion ($81.4 trillion) History of IMIX In 2004, CFETS started to work on the messages standards of the China inter-bank market, so as to enhance inter-system connectivity and improve
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message transmission efficiency. Three national industrial standards have been published so far, including “Interbank Market Metadata”, “Interbank Market Information Exchange Protocol (IMIX)” and “Interbank Market Data Interface”. These three standards jointly form the basis of the Unified Business Data Exchange Platform.
Unified Business Data Exchange Platform based on IMIX
Ever since its release, IMIX Protocol has been widely used in China’s interbank market, covering pretrade, trade, and post-trade processes. IMIX is used not only between interbank market participants and CFETS, but also between CFETS and other interbank infrastructures, such as Shanghai Clearing House, Shanghai Gold Exchange and China Central Depository & Clearing Corporation. The IMIX protocol was based on FIX.4.4 firstly. CFETS extended more than 100 message types and 1000 filed tags to support the business in the China market. Until now, the most used protocol format is “Tag-Value”. In addition, IMIX protocol also supports
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Google Protocol Buffer and JSON format. CFETS, now a FIX Trading Community Global Member, is working on updating the IMIX to support FIX.5.0, SBE and the other FIX standards.
The following is a flow chart corresponding to RFQ in the case of quotation execution. The flow chart describes the process of how members and trading centers conduct transactions through IMIX messages.
Standard usage in FX trading system CFETS launched the new generation of its FX trading system, called the New Trading Platform (NTP), in February 2018. NTP supports FX spot, forwards and swap products and the Quote Driven Model (QDM) and Order Driven Model (ODM). CFETS adopted the IMIX protocol to build the interfaces of the system, including market maker interface and taker interface.
NTP system structure
Taking request-for-quote (RFQ) as an example, the RFQ process is initiated by the member sending a quote request message (QuoteRequest). This contains specific products, trading volume, trading direction and expiration time. Each RFQ is identified by the QuoteReqID field, which will appear in all messages associated with the RFQ. After the system processing the quote request message, the member can receive a series of quote or quote revocation messages. Each quote message will overwrite the previous quote for the same QuoteReqID, LP and product. Members can submit a limit order with only one QuoteReqID, which will match all eligible orders in the RFQ pool. Members can also initiate a new order for a specific offer, the order type is Previously Quoted (PQ), and the message contains the QuoteReqID and the QuoteID corresponding to the offer of the desired deal. At this time, the order will only match the quote. Both limit orders and PQ orders are a combination of Full Amount. The member will then receive an ExecutionReport (ER) to accept or reject an order (if accepted, there will be a further ER indicating the deal or the order is revoked). The termination of the session will end all RFQs.
Flow chart corresponding to RFQ
Experience in submitting ISO 20022 messages CFETS also seeks to make China interbank market standards more internationalized, to keep in line with the internationalization of China’s financial markets and currency. One strategy is to get involved in the implementation of ISO 20022. After gap analysis of the current ISO 20022 messages and IMIX messages, CFETS developed and submitted two business justifications for new messages in January 2014: “FX Post Trade Trade Capture” and “FX Post Trade Confirmation”. Message models and MDRs were submitted and approved in February 2016. The eight FX Post Trade Trade Capture and FX Post Trade Confirmation messages are designed to be implemented in the orange boxes shown below:
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FX post-trade business processes & IT systems
Ever since their release, these eight messages have promoted the rapid development of trade confirmation and straight through processing (STP) APIs of FX market in China. ISO 20022 semantic models The IMIX standard created by CFETS is based largely upon the FIX.4.4 standard. IMIX is represented by QuickFIX data dictionary definitions. One of the goals CFETS has set is to align its standard closer to the FIX standard and at the same time help to integrate the FIX standard within ISO TC68. One of the long standing objectives of the ISO and FIX Trading Community has been to integrate the business level semantics of the FIX protocol within the ISO 20022 standard. The ISO 20022 standard includes both a business domain model and a message model. The scope of ISO 20022 is all of financial services, including core banking, payments, credit card processing, custody, collateral, and settlement. The FIX standard is focused on pre-trade through post-trade/ pre-settlement processing for financial instruments.
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The financial instruments that are traded using the FIX protocol have expanded well beyond equities to include listed derivatives (futures and options), FX, FX swaps, fixed income, repos, interest rate swaps, and OTC-like derivatives traded on a venue. The FIX Community invested considerable effort in mapping FIX into the ISO 20022 model. However, the benefits of this major effort were elusive due to the limits of the modeling tools and the approach. ISO TC68 initiated a working group to bring Web semantic technology into the ISO 20022 standard in 2014. The working group spent considerable time understanding semantic technology. The working group is now identified as ISO TC68/SC9/WG1 after a strategic realignment of the subcommittees (SC9/ WG1). SC9/WG1 has created a multistandard semantic portal that was derived by enriching the metamodel of ISO 20022. This new semantic model of messaging and the corresponding business model provides a common structure to represent multiple disparate standards.
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Jim Northey, Co-Chair Global Technical Committee and Co-Chair High Performance Working Group, FIX Trading Community
Mao Ting, Senior Manager, China Foreign Exchange Trade System
Once in this standardized model format, automation tools and even semi-autonomous machine learning can be used to begin to provide convergence across the disparate standards that exist across the financial services industry. Two of the protocols that are now available via the multistandard semantic portal are the FIX Standard and IMIX from CFETS.
CFETS and the FIX Trading Community are actively participating in the ISO TC68/SC9/WG2 Web service based API in financial services. FIX Trading Community recently released a proof-of-concept system that implements the FIX application level semantics (the business messages) encoded in Simple Binary Encoding (SBE) or JSON (Javascript Object Notation) over a secure Websockets layer. This working example is available via Apache 2.0 licensing to all users of FIX, such as asset managers, brokers, venues, independent software vendors, and other service providers.
To the Web CFETS, now a FIX Trading Community Global Member, is working with the FIX organization and with ISO to create international standards for the use of Webbased APIs. Many readers may have heard of RESTful APIs or REST-based APIs that use the HTTP internet protocol. Financial services, along with all other sectors, has been inundated with the API revolution across payments, card processing, and trading. The problem with REST is that it is a synchronous protocol that does not scale, nor does it lend itself to the high volume asynchronous messaging requirements of trading.
It is hoped that this pioneering work will help inform and assist the ISO TC68/SC9/WG2 in addressing the need for an international standard for financial messaging over web technology.
CFETS and FIX have both pioneered the development of asynchronous messaging using Websockets, which is an IETF standard that is now widely available. Websockets functionality will be fully integrated within the next version of the HTTP protocol, HTTP/2. Both
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62 | 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 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. BSO Network BT Global Services BVI Cameron Edge Cantor Fitzgerald Capital Group Companies, Inc. Cboe Global Markets Cedar Rock Capital CFETS Charles River Development Chi-X Global Inc Chronicle Software Cinnober Financial Technology AB Circle Citi CL&B Capital Management
Clearing Corporation of India Ltd CLSA Limited CME Group Colonial First State Global Asset Management Colt Technology Services Commonwealth Bank of Australia Connamara Systems LLC Cowen Corvil 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 Dimensional Fund Advisors Drebbel DTCC DXC Technology Eastspring Investments (Singapore) Limited EBS BrokerTec EDMA Europe Egypt For Information Dissemination Emagine Consulting Esprow Pte. Ltd. ETLogic Ltd Etrading Software Ltd Eurex EuroCCP Euronext Paris SA European Venues & Intermediaries Association (EVIA) EuroTLX Exactpro Systems Exane BNP Paribas Eze Software Group EZX Inc. FactSet 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 Fix8 Market Tech FIX Flyer LLC FIXSOL FlexTrade FpML Franklin Templeton Investments
Premier Global Members
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Gamma Three Trading, LLC GATElab GETCO Asia GMO Goldman Sachs GTT GreySpark H2O Asset Management Haitong International Securities HCL Technologies 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 KB Tech KCG Holdings Kotak Securities Kx Systems LCH Linedata Liquidnet LiquidMetrix LIST Group Lloyds Banking Group London Stock Exchange Group M&G MACD Macquarie Securities MAE - Mercado Abierto Electronico S.A. Mansukh Securities and Finance Ltd MarketAxess
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Marshall Wace Asset Management Mawer Investment Management MDSL Metamako MFS Investment Management Mizuho Securities Mongol Securities Exchange (MSX) Morgan Stanley Investment Management Morgan Stanley MTS SpA MUREX 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) Perpetual Motion Research PIMCO Pioneer Investments Portware Primary E Trading Principal Global Investors Putnam Investments QuantHouse Quantitative Brokers 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 Sensiple 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 Bank & Trust 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 Torstone Technology 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 Vontobel Warsaw Stock Exchange Wellington Management Company Winterflood Securities XBRL XLP Capital Xetra (Deutsche Börse) XTRD 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
CFETS
www.chinamoney.com.cn
Circle
www.circle.com
Exactpro Systems exactpro.com
GTT
www.gtt.net
Mansukh Securities and Finance Ltd www.moneysukh.com
Torstone Technology
www.torstonetechnology.com
Premier Global Members
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64 | LAST WORD
My City
Brussels By Fabien Oreve, Global Head of Trading, Candriam Investors Group
Best thing about your city? Brussels is the capital of Belgium, a country of great cultural and linguistic diversity and is at the heart of the European Union, hosting some of the largest EU institutions (Parliament, Council and Commission). There are numerous fast train connections each day from Brussels to London, Amsterdam and Paris, making business trips quite easy. Worst thing about your city? Traffic congestion in and around Brussels is a real concern, in particular during EU summits. You can waste a lot of time when driving in or out of Brussels. Getting to work? Driving, as I prefer to be boss of my own I drive or take the bus to the office
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(approximately 20 minutes), depending on the level of traffic. View from your desk? I have a view on Luxembourg Street near the Place du Luxembourg, which is a nice square in the European Quarter of Brussels. Where to take guests to dinner? I take my clients to some great restaurants such as Lola, Place du Grand Sablon, or Kamo, La chaussĂŠe de Waterloo. And a relaxed spot with family or friends? There are many relaxed spots where you can enjoy local dishes with your dear ones in Brussels. I like De Nordzee, Sainte-
Catherine street, for its home-made shrimp croquettes, and Chalet Robinson, Bois de la Cambre, for its traditional Belgian waffles with hot chocolate sauce. Best place to stay when visiting? I would stay a bit outside Brussels Centre, near Avenue Louise, a trendy area where you can find stylish, modern and comfortable hotels. Best tourist site? Most of the best tourist sites are located in Brussels Centre, the Grand Place and its amazing architecture, the Manneken-Pis, the Galeries Royales Saint-Hubert and the Mont des Arts. In the north of the city, a visit to the Royal Greenhouses of Laeken is also very nice.