The Strategy Of Global Heads - 2015Q4

GLOBALTRADINGQ4 • 2015 • Issue #56FIXGLOBAL.COM

The Strategy Of Global Heads

Emma Quinn, Frank LoughlinGlobal Co-Heads of Equity Trading, AB

ALSO INSIDE: T. ROWE PRICE, NORTHERN TRUST ASSET MANAGEMENT, EASTSPRING INVESTMENTS SINGAPORE,PRINCIPAL GLOBAL EQUITIES, ABERDEEN ASSET MANAGEMENT, AMP CAPITAL, CANDRIAM INVESTORS GROUP

Global Edition

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EMEA Edition

In support of

Emma QuinnAB

Carlos OliveiraBrandes Investment Partners

Greg LeeBarclays

Dear Readers,In the current global trading arena we are in the process of observing a perfect storm of multiple factors and forces all gaining equal momentum and affecting our firms and our professional lives. For one, global financial services firms are becoming efficiently smaller in the sense that we can operate on opposite sides of the world and everywhere in-between as if we are in the same building. The necessity of being more global for trading firms has also resulted in more recent advances in platform, communications and even social media technology.

Alongside the need to better trade, process and communicate anywhere in the world we are being driven by, and motivated to address market and regulatory reforms, changes in liquidity seeking, block trading, increasing demands for greater multi asset class automation, data analysis and data dependability. All of these elements combined certainly require all of us to be more innovative and well informed.

As far as being informed (which is one of our responsibilities in reporting to you), this edition of the GlobalTrading journal includes an appealing range of article contributions pertaining to trading and communication in our current worldwide environment. We also specifically address (and compare regional practices in some cases): market open reforms, recent changes and challenges for block trading, ETF’s and futures, multi asset trading technology, pre-trade FX analytics, associations and regulatory reforms, TCA for fixed income and a variety of others.

Please enjoy this edition of the journal. We also wish you all the best for the upcoming holiday season and as always appreciate your interest, support and contributions to GlobalTrading and the FIX Trading Community.

Best Regards,

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

GlobalTrading’s Editorial Think Tank

Oliver SungConvergex

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

GlobalTrading PublisherEdward Mangles

General ManagerRebecca Trant

Managing EditorPeter Waters

Sales and MarketingYulia KuksinaRavi GangwaniJane Lenny

PhotographerJingya Liu

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

The opinions expressed in this publication are not necessarily those of the publishers or of the institutions of the contributing author. Although care has been taken to ensure the accuracy of the information contained within the publication, neither the publishers, authors nor their employers can be held liable for any inaccuracies, errors or omissions; nor held liable for any actions taken on the basis of the views expressed, or information provided within this publication. No part of this publication covered by the publisher’s copyright may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, be they graphic, electronic or mechanical, including photocopying, without the written permission of the publisher. Any unauthorised use of this publication will result in immediate legal proceedings.

All Rights Reserved © 2015

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CONTENTS7 11 36

53

FOCAL POINT

7 The Strategy Of Global Heads - Emma Quinn, Frank Loughlin, AB

11 Between A Block And A Hard Place - Huw Gronow, Principal Global

Equities

15 Beta Play: The Future Holds ETFs - Susan Chan, iShares Asia Pacific

INSIGHT

20 Ongoing Evolution Of Multi-Asset Technology

- Richard Coulstock, Eastspring Investments Singapore

Buy-side Execution: Fad Or The Real Deal? How Prepared Are You?

- Tom Kingsley, Bloomberg Tradebook

24 Pre-Trade FX Analytics; Building A New Type Of Market

- Scott Kurland, ITG - Jim Cochrane, ITG

The Multi-Asset (R)evolution - Vincent Burzynski,

Sungard’s Global Trading Business

29 The Changing Face Of Technology: A Roundtable Write-Up - Peter Waters, GlobalTrading

33 A Trader’s Guide To The FIX Protocol - Irfan Syed, Managing Director, Fixnox

OPINION

36 Developing TCA For Fixed Income - Fabien Oreve, Candriam Investors Group

39 Silicon Valley Meets FinTech - Steve Grob, Fidessa

PRODUCT OVERVIEW

42 Thomson Reuters Eikon

EUROPE

44 The Role Of Associations In Regulation - Christian Krohn, AFME - Matthew Coupe, Barclays and FIX

Trading Community EMEA Regulatory Subcommittee Co-chair

AMERICAS

49 Reforming The Open And Closing Auctions

- Anthony Godonis, Aberdeen Asset Management

51 Competition Driving Reform Of The Open

- John Comerford, Instinet

53 Standardising The Open In US Markets - Richard Vigsnes, Northern Trust

ASIA

55 Building Blocks: In The Dark, On The Phone

- Tom Kingsley, Bloomberg Tradebook

57 Data And Trust - Joe Kassel, AMP Capital

60 Finding Liquidity In Australia - Richard Nelson, T. Rowe Price

FRAGMENTATION

62 Liquidity Fragmentation In Australia and Japan

INDUSTRY 64 Company Profiles 66 FIX Trading Community Members

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

fidessa.com

Fidessa_Generic Corporate Advert_03.indd 1 07/08/2015 11:27

HIGHLIGHTS“In an environment where regulation and market structure issues are increasingly global in impact, this does give us something of a philosophical head start in having a wider awareness. It also means that, because Frank and I have traded all of the regions and markets that we’re involved in, it gives us a depth of expertise and a different perspective – we can understand the detail of what the regulatory impact may be.” P.7

“In reality the soubriquet “dark pools” refers to a variety of non-displayed trade matching mechanisms which are variously accessed at different stages of the trade cycle: the large in scale venues generally at the outset of the trade lifetime, where the risk transfer process is nominally at its most urgent.” P.11

Emma Quinn, Frank Loughlin, Global Co-Heads of Equity Trading, AB

Huw Gronow, Head of Trading, Europe and Asia, Principal Global Equities

“The development of multi-asset desks requires changes in how institutional dealing desks manage themselves and their counterparty relationships. Equity dealers are used to a world of change, a world of measurement, a world of being beaten up by compliance departments faced with ever greater regulatory scrutiny. This is increasingly happening in the more mysterious and less transparent markets of foreign exchange and fixed income.” P.20

“... where provisions have become settled as a matter of politics or where the politicians have agreed and policy makers in general have agreed about what they want the regime to achieve. Then it’s up to practitioners and standardisation bodies such as the FIX Trading Community to help policy makers operationalise that policy and to make sure that the regime actually works.” P.44

Richard Coulstock, Head of Dealing, Eastspring Investments Singapore

Christian Krohn, Managing Director, Head of Equities, AFME

“When an open and subsequent volatility spike occurs in the manner it did on 24th August, it begs the question as to whether the market is always fair and orderly. In particular, the retail investor may question the market’s ability to treat them fairly. Much of the retail order flow in the US gets sold to market makers and those market makers are then responsible for placing those orders. In a volatility spike, questions inevitably arise as to whether this arrangement disadvantages the retail order flow.“ P.53

Richard Vigsnes, Global Head of Equity Trading, Northern Trust

Q4 • 2015 | GLOBALTRADING

FOCAL POINT | 7

With Frank Loughlin and Emma Quinn, Global Co-Heads of Equity Trading at AB

The Strategy Of Two Global Heads

More Buy-side Interviews

GLOBALTRADING | Q4 • 2015

8 | FOCAL POINT

From a quantitative perspective we have been able to learn from the different regulations that apply in different regions and this drove the restructure of our quantitative trading. There are often things that we do in one region that could work well in other regions and this area is one of our main focuses.

Frank: As an example, there are also regional nuances around how IPOs and after market blocks are handled. In terms of best practice, there are probably a consistent set of principles that we should all follow in order to maximise and optimise our outcomes when we participate in IPOs or other types of offerings or liquidity events that are not part of the normal course of secondary trading.

Technology developmentEmma: This global outlook ripples through to vendor relationships and technological conversations, as there is that standardisation in how we communicate. It allows us to prioritise on a global level and we can make sure that there is a priority list that Frank and I are comfortable with. We are effective in that respect; everyone knows where we’re going and everyone’s moving in the same direction.

Frank: Having people like us acting as referees, so that vendors understand what the global needs are, is a much more effective way of deploying resources than having people from different regions who may not understand other regions’ needs, come to the table and just talk their own book. At AllianceBernstein we need people who understand the business globally to balance those disparate needs and global interests, and that requires real global visibility. The regions are not able to make those decisions on their own because they don’t have the perspective to compare their needs to the needs of another desk or regional group.

Emma: And to that effect, Frank and I can. We weigh up the issues using our ‘global heads’ and have the foresight to identify targets further ahead of time; for example in London we may need a particular sort of data for the regulations that apply there, and in Asia we may need something else. We’re not just adding on those tools as and when, we add what they need in a particular region and then we roll it out to the next one.

Furthermore, if we see what may be best practice from a risk or compliance perspective in one region, we can still roll that out from a regulatory standpoint (even though

Emma: Our joint global position came about because AB wanted to ensure that it was focusing on all aspects of the global business. We are a global firm and we wanted to make sure that the structure matched that outlook. We also saw the advantage of having people with expertise in different regions using that experience globally. Although day-to-day we each have responsibilities for certain regions, we had a clear mandate to run the trading team with a global philosophy as there are clear advantages for the clients and the firm for us to have a global outlook.

Frank: It really does need to be a global role – at a high level, a number of strategic decisions have to be made globally, including things like staffing, infrastructure, technology, commission policies and broker relationships; these decisions all have to be made jointly and with a global focus in mind. We can’t operate globally and make decisions regionally, so in terms of the role (notwithstanding that we are in different geographies) we do make decisions jointly and globally.

Emma: In an environment where regulation and market structure issues are increasingly global in impact, this does give us something of a philosophical head start in having a wider awareness. It also means that, because Frank and I have traded all of the regions and markets that we’re involved in, it gives us a depth of expertise and a different perspective – we can understand the detail of what the regulatory impact may be.

Key strategic concernsFrank: In certain instances there are regulations and nuances that differ market by market and region by region. The strategic aspects where issues have to be thought through globally have to flow down from a global level to the team members. They have to think of themselves as part of a single global trading team and not a series of regional desks that happen to report up to the same management structure.

Our teams have to communicate and collaborate as a global entity. They have to behave in that way on a day-to-day basis otherwise it doesn’t work. It defeats the entire purpose if at one level you are trying to make decisions globally but on another there are people acting as if they are part of a local geography.

Emma: I think that has probably been one of the biggest changes that we have seen in the last year – encouraging the traders to develop a more global mentality.


FOCAL POINT | 9

level. Therefore, trust and transparency can be built around that global conversation.

Frank: This applies to clients for whom we manage global mandates, and for whom we trade everywhere, to the extent that we have a logical and consistent process globally. This helps them to understand how we operate in that it is consistent across the portfolio that we manage for them globally.

Our philosophy also makes it easier when we talk to brokers. We want to have a consistent experience with our top trading counterparties, wherever they are in the world and notwithstanding potential differences in their capability. We view our relationships with the brokers globally and holistically and so if we are united in thinking globally it makes it a lot easier to convey that message to the brokers.

Part of this is how the sell-side is structured. While it may be unusual, on the buy-side to have a shared global co-head role, it is not as uncommon on the broker side. Other top firms have global co-heads of equities or of electronic trading so they are probably far more comfortable with the idea than some of our buy-side colleagues.

Emma Quinn,Global Co-Head of Equity Trading at AB

it may not be a problem in other regions). It allows us to choose where to roll out best practice even though it may not be a requirement in another region we see it as good management (particularly good risk management) to do so.

This feeds through into the certainty of the relationships we develop with our counterparties; they know we will adopt global best practices even when they are not necessarily a requirement.

Client impactEmma: Our clients and counterparts benefit from the consistency of our structure; Frank and I make decisions on a global scale and there is consistency among the regions. We would never say that we want one thing done a certain way in Hong Kong and a different way in London and then a third way in New York. There is a consistency throughout in that respect and clients know that these decisions have been made at the highest

“Our clients and counterparts benefit from the consistency of our structure; Frank and I make decisions on a global scale and there is consistency among the regions. We would never say that we want one thing done a certain way in Hong Kong and a different way in London and then a third way in New York.”


10 | FOCAL POINT

The right attitudeFrank: There are benefits to having two people in different parts of the world covering the business as a whole, because the role is active 24 hours a day. Emma is in Hong Kong and I’m in New York. The time difference means that we have non-stop coverage from Monday morning Hong Kong time until the close in New York on Friday, which wouldn’t be the case if we were one person. We can get a lot more done when there are two of us working together.

Emma: But it does come down to those two people having to work well together. The structure wouldn’t work if we were unable to put our own personal agendas aside for the good of the team and then the clients.

Frank: With regard to the actual working dynamic, the two most important attributes are respect and communication. We have to view success as intertwined and seamless. The team’s success is our success, it’s not my or Emma’s success. It requires a certain mindset but if it works, it is very effective. Even with all the

technology in the world you still need the right people and the right thinking to make it work.

Emma: Honesty between the two parties is also very important. Frank and I have very open and honest conversations. We debate things through because we don’t always agree with each other and that’s a good thing. But once we make a decision together, then we are committed to it whether we were for or against it during the debate.

Frank: It is very important that we present a unified front to the team, to other people internally and externally once a decision is made. There can be no uncertainty in people’s minds as to where we both stand on an issue.

Emma: Frank and I are very similar in how we think about ethics and morals, so when we discuss an issue I know about 90% of the time where Frank is going to stand. Frank is the same with me because we have very similar views about clients outcomes or how the team should function or counterparty relationship.

“With regard to the actual working dynamic, the two most important attributes are respect and communication. We have to view success as intertwined and seamless. The team’s success is our success, it’s not my or Emma’s success.”

Frank Loughlin,Global Co-Head of Equity Trading at AB


FOCAL POINT | 11

Asset managers’ relationship with the “dark” environment is changing. Is this a response to new upcoming regulation? In Europe, under the looming MiFID 2/MiFIR landscape, the answer is: partly. But in the US, where no such transformational law changes are imminent, that would not explain the energy and momentum behind Luminex, the buy-side owned and driven block-crossing network due to be launched in November 2015.

Across the pond, the owners and operators of “dark” order books are coming to terms with the prescribed caps on activity in trades where there is no pre-trade transparency under the Reference Price Waiver (RPW) in the original MiFID directive of 2007. What has been the outcome of this directive?

The characteristic that has evolved from the resulting competition for trading volume is the “dichotomy of dark”, where dark volumes are now either genuinely large in scale (in our opinion the original purpose of dark pools) or as small on average as those on the lit market (see figure 1); interestingly the same trend has evolved in the EU under the RPW. Might this latter category of trades as well be transparent on “lit” venues given the little or no price improvement especially on large cap stocks where spreads

By Huw Gronow, Head of Trading, Europe and Asia, Principal Global Equities*

Between A Block and A Hard Place

are thinnest? The EU seems to think so: activity without pre-trade transparency unless large-in-scale will be capped from 2017, to the tune of 4% of trade per venue and 8% overall in any stock.

So, are the “lit” venues jumping for joy in anticipation of a flood of volume, and thus revenue, gushing back to their rightful place? Not necessarily. One could frame the landscape for the buy-side as being, for a number of years, stuck between the “block” - the serendipitous supersized transfer of inventory between institutional investors - and the “hard place” – the highly fragmented array of displayed and non-displayed venues, both exchange and competing alternative - which includes, in Europe, the broker internalisation pools, namely Broker Crossing Networks (BCNs) and Systematic Internalisers (SIs) - and where technology-levered market makers in most cases seek to provide the liquidity that is claimed that institutions immediately require, and where institutions are required to choose to navigate using complex algorithms.

The reality is slightly more nuanced, of course: the considerations of when and why institutions look to access liquidity is more complex than merely “lit” or “dark” at any given moment in the trade lifecycle.

* Principal Global Equities is an investment group within Principal Global Investors


12 | FOCAL POINT

participants is warranted, as long as the opportunity costs are monitored and optimized, in order to avoid the associated frictional costs of continuous trading.

The choice of Dark versus LitIn reality the soubriquet “dark pools” refers to a variety of non-displayed trade matching mechanisms which are variously accessed at different stages of the trade cycle: the large in scale venues generally at the outset of the trade lifetime, where the risk transfer process is nominally at its most urgent. The “small in scale” venues – be they ATS, broker BCNs, public or broker MTFs, in varying degrees and stages, down to the chosen strategy of the buy side trader and the chosen type of interaction with the dark venue, due to its chief differentiating factor of uncertainty of execution (by their nature).

Another consideration for buy-side use of the dark is how to proceed with uni-directional large orders in an elevated volatility environment. Intuitively, we

Urgency is the keyHow urgent is that institutional trade? This is the most important question where this scale of liquidity demand is usually incompatible with its availability at the currently accessible best bid and offer (the “top of book”). This is simply because the parent order is invariably many multiple hundreds, thousands or even million times larger in scale. This incompatibility has magnified over time as executed trade sizes have atomized in the fragmented ecosystem, and as asset manager growth and concentration, has resulted in fewer “natural” block crossing opportunities. The projected time horizon for what we term this “risk transfer” process is dependent on the alpha viewed in the idea – the key being to differentiate between short term alpha (the province of the HFT operators) and long term alpha. If research indicates that in the short term, the proposed trade does not benefit from aggressive liquidity capture, then patience in execution, including parking the block trade in a “large in scale” environment away from predatory short-term

Fig.1 – Average trade sizes in the US market, Jan 2009 – July 2015 (source: Rosenblatt)


FOCAL POINT | 13

infer that high-frequency liquidity providers tend to turn more into liquidity takers during spikes in intra-day volatility. Many academic studies are being produced on the impact of HFT and the aftermath of market dislocations: in a study of the 2010 Flash Crash, Kirilenko et al (2014) concluded that high frequency traders “can amplify a directional price move and significantly add to volatility”, while Menkveld and Yueshen (2015) confirmed the U.S. government’s and Kirilenko’s view on the Flash Crash. Further yet, Hasbrouck (2015) concluded that high frequency quoting significantly increased intra-day volatility, over a ten year period under study. Other studies, notably Brogaard (2012), have taken the opposite view, but what is clear among the noise is that there can be a liquidity premium in transacting in both lit and dark order books, in terms of footprint signalling and information leakage.

Trust, but verifyThe self-evident lack of transparency in some dark venues (in terms of types of participants,

matching engine, IOIs and other considerations) is an issue between the asset manager and the broker as intermediary and operators of these types of venues where applicable. In order to mitigate this, due diligence documents are proliferating between buy-side and sell-side as a best practice, but is no substitute for independent third party transaction cost analysis as the route to verification of the execution experience.

In addition, the increased publication of Reg ATS forms for US venues is welcome additive information, moved forward in no small part by IEX, the US dark pool which catalysed the new trend to increased US dark pool disclosure. We at Principal Global Equities*, since the fragmentation of electronic markets, have set parameters and excluded certain pools and types of intermediary as a result of this

“The inclination towards more discontinuous trading by asset managers is indicated by some of the largest asset managers throwing their weight (and presumably intent to direct their order flow) into new large in scale venues, such as the proposed Plato Partnership vehicle, and Turquoise Block Discovery Service; and surely others will evolve.”

Huw Gronow, Head of Trading, Europe and Asia, Principal Global Equities*

* Principal Global Equities is an investment group within Principal Global Investors* Principal Global Equities is an investment group within Principal Global Investors


14 | FOCAL POINT

ongoing process; with the work of the FIX Trading Community Investment Management Working Group on Execution Venue Analysis, we believe that in the end, asset managers across the spectrum will have the tools to become “judge and jury” for themselves. But this all adds to the complexity of the individual routing decisions where urgency and volatility are key variables – and where signaling risk and information leakage is a primary concern – even in the dark.

The Australian and Canadian modelsAn evolution of the notion of dark pool provision under MiFID 1 was the establishment of choice of interaction in broker crossing networks (BCN); in Australia, where there is no cross-border competition, broker dark pools dominate the non-displayed landscape with over 20 dark pools operated by 16 brokers, in addition to those run by the ASX and Chi-X Australia. In 2013, the regulator ASIC introduced two important enhancements to address the issue of transparency and effect on price formation: that trades executed in non-displayed environments had to show meaningful price improvement, or routed to a displayed order book.

Similarly, Canada introduced a comparable change in 2012, successfully reducing dark activity where there was no significant price improvement, according to research by the University of Sydney this year. In addition, ASIC provided for a minimum execution size should this measure not have the desired effect – a measure that many asset managers, including ourselves, employ as a matter of course. These contrast with the controversial “caps” on the smaller dark trades proposed by the EU – the desired effect (greater transparency) may give rise to unintended consequences (larger trades executed outside of the public exchanges and alternative venues).

The changing relationshipThe inclination towards more discontinuous trading by asset managers is indicated by some of the largest asset managers throwing their weight (and presumably intent to direct their order flow) into new large in scale venues, such as the proposed Plato Partnership vehicle, and Turquoise Block Discovery Service; and surely others will evolve. One of the largest asset managers in Europe, Norges Bank Investment Management, has already indicated in a recent paper that they are shifting towards more patient, block-type executions for lower market impact costs. Recent scandals involving dark pools,

particularly in the US, have served to have asset managers even more closely verify the activity and interaction with these venues and in many cases punish them via exclusion from their routing decisions. Perhaps, on the buy-side, all patience has been lost: the energy behind the formation of Luminex in the US in particular, a buy-side only environment where block trades are non-negotiable and entirely exclude HFT firms, is telling. This contrasts somewhat with the largest comparable mechanism operated by Liquidnet, where a negotiation usually precedes execution, leading to potential information leakage in the event of an unsuccessful trade. Nevertheless, this suggests that the buy-side appetite for genuine, committed transfers of sizeable inventory, while avoiding market impact, is not diminishing.

ConclusionAsset managers have faced a daunting surge in market complexity and, by and large, through their broker intermediaries, have been able to successfully navigate this through the acute understanding of the proliferation of lit and dark venues allied to their measurement of and modification in their interactions with them.

However, in the face of regulation, scandal and increased research into the effects of high speed markets and price volatility, there appears to be an inclination to defragment the market in terms of a return to block trades; in effect, putting Humpty Dumpty back together again.

It is intriguing to contemplate the extreme inference of asset managers across the globe choosing to eschew exchanges and streaming liquidity venues in order to avoid the continuous liquidity premium. Liquidity providers can’t just provide liquidity to each other ad infinitum. Will HFT eat itself? Whether that is fanciful or not; and whether through regulation or desire, asset managers’ relationship with the dark may be moving more towards the “block” in favour of the “hard place” – an interesting step back in time.

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FOCAL POINT | 15

Institutional investors have used financial futures to achieve beta in their portfolios in a quick and targeted manner for decades.

Futures are particularly popular among sophisticated investors such as asset managers and pension funds that need to invest efficiently and cheaply in liquid, easy-to-access markets. This long-held acceptance of futures has created a huge industry with exceptional liquidity.

However, the evolution of financial markets has produced new methods of gaining beta exposure efficiently, and many institutional investors are now adopting them. The efficiency of ETFs, in particular, is surpassing that of futures in many cases due to current market conditions, forcing institutional investors

By Susan Chan, Head of iShares Asia Pacific

Beta Play: The Future Holds ETFs

to reconsider their choice of financial instruments. By the end of 2014, assets under management of S&P 500 ETFs surpassed open interest of the respective futures contract for the first time.

Different tools, different costsListed equity index futures are among the most widely used derivatives contracts available in the financial markets. As of end December 2014, there was more than $ 353bn in open interest on S&P 500 futures only.1

Futures can be used by institutional investors to implement several types of strategies, such as sophisticated trading strategies, leveraged strategies and simple beta plays. For this comparison we will focus on using futures and ETFs for the simple implementation of a beta play.

1 Source: BlackRock, ETP Landscape, Bloomberg, end Dec 2014. The Futures open interests was computed as the combined near month E mini

and SP1 contract open interests multiplied by their respective contract values, referencing the relevant historic S&P 500 index values.


16 | FOCAL POINT

be summarised as clearing, execution commissions and primary market creation or redemption costs.

Futures’ trading costs include relatively low execution and clearing commissions. However the major driver of the price of futures, aside from the underlying index level, is the “basis”, which is the difference in price between the future and the index. This is very dependent on offer/demand imbalances, as well as the cost of carry (including funding). The impact of the basis materialises when rolling a futures contract to the next expiry, within the investor’s holding period. The cost for funding a short futures position and the natural imbalances between offer and demand mean that futures typically trade rich, and therefore that the roll is done at a cost for a long investor.

The rising cost of futuresOne of the challenges facing equity index futures today is a specific supply and demand dynamic. While pension funds, endowments or asset managers may go long or short financial futures, demand for long exposure far outpaces that for short exposure.

Futures investments require two parties, and therefore a short must exist for every long. Investment banks are the main suppliers of short futures, which they synthetically manufacture.

“One key difference is that futures contracts expire on a monthly or quarterly basis, while ETFs are open-ended vehicles with no maturity constraints. Investors wishing to maintain their futures exposure beyond a contract’s expiry incur the cost of rolling the futures contract.”

ETFs and futures are similar in many respects. They are both delta-one instruments which aim to replicate an index, net of fees, and their prices are therefore linked to the index. Both vehicles have become extremely popular due to their intra-day liquidity, exchange-traded nature, relative safety, transparency and other unique benefits they deliver to investors.

However, the mechanisms of ETFs and futures are very different, resulting in varying levels of efficiency as market conditions change.

One key difference is that futures contracts expire on a monthly or quarterly basis, while ETFs are open-ended vehicles with no maturity constraints. Investors wishing to maintain their futures exposure beyond a contract’s expiry incur the cost of rolling the futures contract.

There are also other cost differences. ETFs’ holding costs are driven by rebalancing costs and replication methodology while occasionally being partially offset by securities lending revenues. ETFs’ trading costs can

Susan Chan, Head of iShares Asia Pacific


FOCAL POINT | 17

The bank must hedge those short positions, which forces them to deploy their balance sheet. As a consequence of changing regulations, such as the Basel framework in Europe, bank capital is becoming more expensive, driving up hedging costs.

This has resulted in the market suffering from a lack of institutions willing to sell futures, while demand for buying futures remains strong. Over the last 12 to 15 months futures contracts have become more expensive than their long-term historical average, particularly around year-end, (i.e. for the December rolls), when banks are more unlikely to enter into or maintain long carry positions.

Futures contracts exhibit what is referred to as ‘cheapness’ or ‘richness’ in a similar dynamic to that of premia versus discounts in the ETF space. Currently, futures contracts are “rich”, creating a performance drag and making them less efficient in delivering cheap access to benchmark indices.

This performance drag is well-documented2 and

illustrated by the recent trend for futures contracts

ETF Tracking Difference Comparison vs S&P 500 Total Return Gross Index (SPTR Index)

Source: BlackRock/iShares, Bloomberg. Data as at 30 June 2015. We assume two days before the Future’s roll expiry.

2 BofA Merrill Lynch Global Research – through Aug 2015

3 BofA Merrill Lynch Global Research – through Aug 2015

to roll rich. For example the roll cost on TOPIX had an average roll cost of 0.11% from 1998 to 2014 and has been rolling on average for the past 12 months 57bps rich. This trend is also seen in the S&P 500 futures contract versus corresponding ETFs, which are currently cheaper. See the chart below on the comparison of the tracking difference between an S&P 500 ETF and a corresponding futures contract.

This trend is also seen in futures tracking a wide range of other global indexes3. In Asia, aside from TOPIX equity index futures, the trend is seen on the NSE Nifty, the Hang Seng, the Nikkei 225 and the MSCI Singapore, among others. In Europe, a group of major index futures, including the EURO STOXX 50, the FTSE 100 and the DAX-30 are rolling richer than the longer term average. While in the US, the Russell 1000 and the S&P MidCap are other examples of the tendency.

As the cost of futures rises institutional investors need to consider alternative investment instruments. By contrast, the overall cost ratio for ETFs has fallen sharply, there is a wider spread of liquidity throughout ETFs and fund volumes have increased


18 | FOCAL POINT

4 Data is as of December 30, 2014 for Europe and December 31, 2014 for the US, Canada, Latin America, Israel, and

some Asia ETPs. Some Asia ETP data is as of November 30, 2014. Global ETP flows and assets are sourced using shares

outstanding and net asset values from Bloomberg for the US, Canada, Europe, Latin America and some ETPs in Asia. Middle

East ETP assets are sourced from the Bank of Israel. ETP flows and assets in China are sourced from Wind.

5 BlackRock Global ETP Landscape Report, August 2015. Data is as of August 30, 2015 for Europe and August 31, 2015

for the US, Canada, Latin America, Israel, and some Asia ETPs. Some Asia ETP data is as of July 31, 2015. Static product

information is obtained from provider websites, product prospectuses, provider press releases, and provider surveys.

KOSPI 200 KM Asia Pacific Quarterly Mar-98 70 -0.12% 0.07% -2.04%

TOPIX TP Asia Pacific Quarterly Sep-00 60 0.67% 0.57% -0.09%

Nikkei 225 NK Asia Pacific Quarterly Sep-00 60 0.45% 0.45% 0.21%

Hang Seng HI Asia Pacific Monthly Jan-97 224 -0.81% 1.14% -0.54%

NSE Nifty 50 NZ Asia Pacific Monthly 2-Aug 157 -0.03% 0.66% -4.11%

SGX Nifty IH Asia Pacific Monthly 2-Aug 157 0.73% 1.32% -3.55%

MSCI Singapore QZ Asia Pacific Monthly Jan-99 200 -0.41% 1.07% 0.63%

S&P 500 SP Americas Quarterly Mar-98 70 0.19% 0.29% 0.10%

Russell 1000 RM Americas Quarterly 2-Mar 54 0.23% 0.32% 0.08%

S&P MidCap MD Americas Quarterly Mar-98 70 0.07% 0.05% -0.05%

NASDAQ-100 ND Americas Quarterly Mar-98 70 0.28% 0.36% -0.16%

EURO STOXX 50 VG Europe Quarterly Sep-98 68 0.50% 0.56% 0.10%

FTSE 100 Z Europe Quarterly Sep-96 76 0.58% 0.47% 0.08%

DAX-30 GX Europe Quarterly Sep-96 76 0.30% 0.40% -0.02%

AEX EO Europe Monthly Mar-97 222 0.06% 0.49% 0.16%

Reprinted by permission. Copyright © 2015 Merrill Lynch, Pierce, Fenner & Smith Incorporated. The information is provided "as is" and Bank of America Merrill

Lynch does not warrant the accuracy or completeness of the information.

Equity index futures roll costs for global futures rolls through August 2015

Current roll cost 1-year avg. roll costAvg. roll cost (avail.

history)

Data through Aug-2015, implied financing spreads calculated using forecasted gross dividends except for ASX 200 which uses forecasted net dividends

# of rollsIndex name Base ticker Region Roll frequency Roll cost history start

significantly. As a result, ETFs may be the better choice for some institutional investment portfolios.

Growth of ETFs ETFs have become more efficient tools for beta implementation as the market has grown. Global AUM ETF AUM grew 16% to $2.78trn in 20144, and BlackRock projects that the industry will add another $1 trillion in assets by 2017, resulting in even better liquidity and lower trading costs.

The cost of ETFs offering broad exposures is being reduced by competition and the increasing size of funds, which allows managers to spread fixed costs such as administration and custody fees among more units.

While ETFs were initially created to provide access to liquid equity indices representing the large

capitalisation segment of well-established developed markets, the industry has expanded, with more than 5,7005 products available globally today.

A continuing trendThe past decade has seen an unprecedented level of growth in index investing.

We believe that this trend will continue, putting increased focus on instruments that offer efficient exposure to indices.

As financial markets grow and evolve the outcome of vehicle comparisons change. We urge investors to continuously monitor their full opportunity set beyond myths and pre-assumptions and select the solutions that are best for them at that specific time of trading.


FOCAL POINT | 19

For example, five years ago ETFs were at a much earlier stage of development, with less choice and liquidity than today, often resulting in higher trading and management costs compared to futures. As described above, that situation has changed dramatically to where ETFs are now more efficient than futures in many cases. The efficiency and breadth of offering of ETFs is likely to continue to grow.

A key factor to watch in the current trend of richness of futures will be cost of the balance sheet, which evolves as the banking business model adapts to market and economic conditions. While each bank will deploy capital differently, and have different financing costs, it appears rather unlikely that any of them will achieve the lower levels of cost of capital enjoyed before the 2007/2008 financial crisis.

Banking regulation will also evolve as the Basel framework and the Volcker Rule reach their full-implementation status. While it is difficult to speculate on their impact, we deem it unlikely that regulators will unwind these frameworks or materially change the direction undertaken.

Careful considerationAs for any financial instrument, beta vehicles evolve over time as markets and regulation change. The last 12 months have witnessed a significant change in market conditions, which should prompt investors to reconsider their long-held ideas and practices related to accessing beta.

Futures are experiencing headwinds driven by supply and demand dynamics and the increased cost of capital caused by regulatory changes. A persistent richness of the futures roll versus its fair value has been observed across several contracts over the last 12 to 15 months – particularly towards year-end. Large scale, liquid exposures that very commonly use futures such as the S&P 500 and the TOPIX have both recently seen hugely increased costs.

ETFs, meanwhile, have benefitted from tailwinds associated with increased volumes and larger AUM, producing continually lower costs over the past five years.

While ETFs and futures will continue to co-exist and serve investors well across different portfolio usages and applications, BlackRock expects ETFs

to be the winner as they increasingly represent an efficient substitution opportunity for beta investors.

Disclaimer

In Hong Kong, this article is issued by BlackRock Asset

Management North Asia Limited and has not been reviewed

by the Securities and Futures Commission of Hong Kong.

This article is provided for informational or educational purposes

only and does not constitute an offer or a solicitation of any

securities or BlackRock funds in any jurisdiction in which such

solicitation is unlawful or to any person to whom it is unlawful.

Investment involves risk. Past performance is not a guide to future

performance. The value of investments and the income from them

can fall as well as rise and is not guaranteed. You may not get back

the amount originally invested. Changes in the rates of exchange

between currencies may cause the value of investments to diminish or

increase. Levels and bases of taxation may change from time to time.

Any research in this article has been procured and may have

been acted on by BlackRock for its own purpose. The results

of such research are being made available only incidentally.

The views expressed do not constitute investment or any other

advice and are subject to change. They do not necessarily reflect

the views of any company in the BlackRock Group or any part

thereof and no assurances are made as to their accuracy.

Certain information in this article may be taken from external

sources, which we consider reliable. We do not represent that this

information is accurate or complete and should not be relied upon

as such. Any opinions contained herein reflect our judgment as of

October 12, 2015 and may change as subsequent conditions vary.

©2015 BlackRock, Inc. All rights reserved. iShares® and BlackRock®

are registered trademarks of BlackRock, Inc., or its subsidiaries.

All other trademarks, servicemarks or registered trademarks are

the property of their respective owners C-20151012-0929.


20 | INSIGHT

By Richard Coulstock, Head of Dealing, Eastspring Investments Singapore.

Ongoing Evolution Of Multi-Asset Technology

Last year I wrote an article for this publication entitled “Evolving into a Multi-Asset World”. That piece looked at this industry from a fairly high level, talking about how dealing desks initially came into being and the processes they have gone through over time. It focused on the evolution of the equity trading desk and how other asset classes may follow that model as they begin their own evolutionary path.

Historically, fixed income trading has long been embedded within the fixed income fund management team rather than on a multi-asset desk, but that is changing. This article focuses more on the impact within an asset management company, and in particular to the management of counterparty relationships.

Evolution is a slow process; there has been no “big bang” over the last 12 months. Instead, a slow adjustment has been happening. Trade magazines are including more multi-asset articles, industry conference are including more multi-asset discussions and vendors are moving further into the multi-asset space with regards to execution management systems and execution analytics.

There can be many drivers that encourage movement towards a multi-asset trading desk. In short, the drive is there to see a consolidation of practices, systems and measurement across asset classes and equities seem to be the model to follow. I have seen this described as the “equitisation of foreign exchange and fixed income”.


INSIGHT | 21

in terms of trading electronically and having performance more closely scrutinised.

Dealing teams will need to evaluate their systems. Is their execution management system multi-asset? Do they need to introduce electronic trading systems into the forex and bond trading workflows? How do they measure their execution performance? Do current workflows need to be revised and will they stand up to close examination from clients, compliance departments and auditors? The list of questions goes on, and not all have immediate answers.

On the plus side, the increasing use of electronic platforms in the non-equity space should make it easier to train dealers in the execution of different asset classes.

On the electronic side, there can be some concern about the number of platforms a team may need on their desktops to electronically trade across asset classes. However, increasingly order and execution management systems are embedding such tools into their blotters, making the process far more efficient and helping towards the cross-asset class trading potential for buy-side dealers. In addition to the likely efficiencies and training opportunities, increased electronic trading may have one other advantage for multi-asset desks.

The development of multi-asset desks requires changes in how institutional dealing desks manage themselves and their counterparty relationships. Equity dealers are used to a world of change, a world of measurement, a world of being beaten up by compliance departments faced with ever greater regulatory scrutiny. This is increasingly happening in the more mysterious and less transparent markets of foreign exchange and fixed income.For buy-side desks this will have consequences. Are dealers adequately trained and do they have the necessary tools on their desktops?

Learning new skillsManagers of a certain size and profile will be fortunate enough to have senior, experienced dealers in each asset class. However, not every manager will have that luxury.

For other managers it may be that equity dealers are taking on fixed income trading roles from portfolio managers, in which case new skills will have to be learned. Trading a bond or currency is very different from trading an equity. For existing bond dealers moving to a multi-asset desk, again new skills will be required as they move to a more equity-style mentality

“Dealing teams will need to evaluate their systems. Is their execution management system multi-asset? Do they need to introduce electronic trading systems into the forex and bond trading workflows? How do they measure their execution performance?”

Richard Coulstock,Head of Dealing, Eastspring Investments Singapore


22 | INSIGHT

Breaking through these silos is a challenge, but perhaps on that increased electronic trading can help alleviate.

In summary, asset managers will need to seriously think about how they conduct reviews and arrange meeting schedules with each counterparty to ensure diaries are not flooded with repetitive meetings adding little value. The focus will need to be on quality, not quantity.

Finally, all this should follow a simple philosophy aimed at producing the best results for our clients and the continued development of the individuals and overall dealing team. In both cases we want to increase trading autonomy and improve performance against agreed benchmarks, raising the profile of the desk within the company and the wider investment industry.

Broker relationshipsThat advantage may lie in overall management of broker relationships, a particular area of focus here within Eastspring Investments. If we consider just one brokerage on the equity side we will have senior touchpoints in cash, program and electronic trading. Add onto that facilitation and perhaps a regional Head of Execution and three or four senior sales traders across Asia and you quickly come to nine important contacts with just one counterparty. In just one asset class. Multiply that by the number of equity brokers you use, then add on execution only partners, vendors and TCA vendors and the number of potential meetings over a year is astonishing. That is before you look at non-equity relationships. It is possible in the long term that we could have one electronic touchpoint covering all asset classes.

Compounding the problem of multiple touchpoints with each counterparty is that brokers tend to be highly siloed across asset classes, which can be problematic in terms of conducting multi-asset trading reviews.

Tom Kingsley of Bloomberg Tradebook recounts the successes of buy-side execution and the market forces sustaining it.

Buy-Side Execution: Fad Or The Real Deal?After trials in Canada, buy-side execution has increased among Australia’s superannuation funds. The challenge is for buy-side traders to keep up the pace to offer competitive best execution for their portfolio managers.

We have definitely noticed an uptick in certain markets of pension funds and superannuation funds bringing their trading in-house. These firms are evaluating their algorithms and getting more sophisticated in their electronic trading. It is a great benefit that these firms are starting to take execution in-house. Whenever you start educating

traders, everyone benefits, particularly when it comes time to trade. Now, a trader who might not have been familiar with the challenges of trading electronically, has a nuanced appreciation for opportunity costs, capturing spread, pre- and post-trade checks as well as TCA analysis. There is a learning curve for in-house traders, but because they already understand communicating trades over voice, they are hungry to learn electronic trading.

In these meetings, the first question is often what primary benchmark their desk uses. Is it trade out


INSIGHT | 23

“There is a learning curve for in-house traders, but because they already understand communicating trades over voice, they are hungry to learn electronic trading.”

Tom Kingsley,Bloomberg Tradebook, Head of APAC Execution Consulting and Trading

last or market on close? Do you participate in the auctions and take advantage of the significant liquidity in the auctions? Drilling down into their pre- and post-trade metrics helps them define how they approach a trade, which is always a benefit.

To take it a step further, when you understand their sense of urgency in executing a trade, you can help them understand much easier what algorithms are appropriate and not appropriate.

Technology, market structure decide longevityWhen a trading strategy proves successful for the buy-side in Australia or in Canada, it is fair to assume the buy-side will be talking to each other about it. Whether at global conferences or informally, validation amongst peers is very common.

If something is working for a large fund, they will communicate it. If someone feels a competitor is benefiting from a certain strategy, others will try it. It seems natural that in-house trading will continue to grow.

The challenge, however, is for buy-side trading desks to compete with the sell-side in terms of technology investment. Technology is faster. Information is faster and market impact from news is quicker so the markets have changed. Asian exchanges will continue to change, continue to get lower latency environments and continue to improve their market structure.

Asian markets are likely to homogenize further because there is so much competition that opportunity costs are everywhere in the trading world. The 15 most-liquid Asian markets are already communicating much more than they ever have, whether they are competing for liquidity or looking at opportunities to cross list. There will be challenges with currency and harmonizing regulations, but Asian markets will start to look much more alike in the next few years.

The pressure is already on brokers to change with the markets. Buy-side trading desks’ ability to withstand the same pressure, adapting to the changes in structure and speed, will also shape the longevity of this in-house trading trend.


24 | INSIGHT

With Scott Kurland, Managing Director, Head of Platform Solutions, ITG and Jim Cochrane, Director, Senior Product Manager, ITG TCA for FX

Pre-Trade FX Analytics: Building A New Type Of Market

The electronification and improvement of FX workflows entered a new phase with the advent of aggregators and algorithmic trading, but challenges still remain.

Deciding where to manage that workflow, from blocking and netting to allocation functions, is increasingly complicated because firms must first determine when and how to pass some of that information downstream to third party vendors. Should they pass it from the order management system (OMS) via the execution management system (EMS) or a series of third party platforms?

Today, netting across currency pairs is often calculated in the OMS in order to minimize transaction exposure. However, we are starting to see that functionality move into the EMS, which can offer more flexibility in advanced netting and trade block formation. This upgrade in FX workflows will require the EMS to receive and interpret account and trading counterparty restriction information passed from the OMS.

The second area of workflow improvement relates to FX benchmarking and execution transparency – specifically pre-trade analytics that can help drive decisions as to when, where and how to best trade FX.


INSIGHT | 25

example, a trader can place a Request-For-Stream (RFS) to buy $50 million of GBP/USD and receive real-time streaming quotes back from multiple bank liquidity providers. He can simultaneously compare these to pre-trade cost estimates for this particular currency pair and size, as well as view ECN prices via a consolidated order book. This allows him to determine

Considerable development has occured over the past three years in pre-trade technology and pre-trade analytics, which has been made possible through the wider availability and aggregation of FX pricing and custodial data. However challenges still remain in deciphering ‘What is tradable?’ versus ‘What is shadow liquidity?’

Pre-trade analyticsNew pre-trade FX analytics can help a trader determine expected slippage of a currency transaction based upon the method of execution and time of day traded. What we have done at ITG is cull, arrange and analyse the data en-mass in order to build a range of pre-trade tools for 38 currency pairs. We collect and store over 125 million tradable quotes daily in order to create expected volatility and spread distributions as well as cost curves in the FX market. These cost curves are used to predict slippage under normal market conditions. The volatility and spread distributions help the trader define “normal”.

This next generation of pre-trade analytic tools will provide FX traders with the ability to manage their FX transactions more actively on an expected cost basis, and in turn make more informed decisions as to where, when, how and what size FX trades to execute. For

“Considerable development has occured over the past three years in pre-trade technology and pre-trade analytics, which has been made possible through the wider availability and aggregation of FX pricing and custodial data.”

Scott Kurland,Managing Director, Head of Platform Solutions, ITG

Jim Cochrane,Director, Senior Product Manager, ITG TCA for FX


26 | INSIGHT

whether to route the trade to an ECN, trade with one of the RFS bank counterparties, or wait to trade the same or larger block size at a later time of day, when more favourable pricing might be available.

As in equities markets, pre-trade tools provide decision support; through the concept of creating referenceable price and liquidity data around volatility, volume and the type of currency pair being traded.

Concurrent with the new analytics, referenceable prices and liquidity sources for trading FX, PMs and traders are also being pressured to move towards a more active approach for trading FX. Additionally, institutional investors are now asking their managers to demonstrate best execution for FX trades to ensure unnecessary slippage isn’t occurring after the equity trade has been completed.

As such, buy-side firms are beginning to re-evaluate whether they should use the same bank historically; do they go to the bank with the best immediate price, the custodian where the equity position is held, or do they execute on a DMA basis with an ECN?

These are the same types of best-execution decisions that are currently being made in the equity markets. Arming the buy-side with similar tools and liquidity access for FX trading will help them adopt the same best practices for FX as they utilise for equity trading.

BenchmarkingThe challenge of gathering comprehensive, accurate data with reliable time stamps has been solved with

the arrival of FX aggregation tools and the new openness found in the FX market. The benchmarks that ITG generates allow asset managers to estimate the value of their foreign exchange flows with greater confidence, measure implementation shortfall and provide a holistic view of their currency trading across several constituent groups in their organization. Compliance and “best execution” measures are merely the beginning. Our goal is to assist asset managers in driving transaction costs towards zero optimize their FX flows within a multi-asset trading dimension.

One area still needing significant study is in the matching of an equity trade or any underlying asset with the corresponding foreign exchange transaction. Should a buy-side firm hedge each equity transaction in real or near-real-time with a corresponding FX trade, or is there more benefit to waiting until a significant volume of equity trades have been completed before putting up the FX trade? Does the trader fair better in smaller size FX trades throughout the day, or a larger FX transaction at the end of the day?

The electronification of equity and FX trading combined with a series of FIX time-stamps will help us build better audit trails and collect more data to drive this analysis over time, tracing trades from PM idea

“Better benchmark data in turn will enable traders to defend or re-evaluate their FX trading strategy to institutional investors, similar to how they do for equities today. ”

“This mindset is changing – equity traders are getting accustomed to the idea that they need to give more thought to how the foreign exchange transaction occurs because significant alpha can be lost on the subsequent foreign exchange transaction if not handled properly.”


INSIGHT | 27

generation and order creation all the way through to execution.

Better benchmark data in turn will enable traders to defend or re-evaluate their FX trading strategy to institutional investors, similar to how they do for equities today.

The driving forcesWe are beginning to see a switch in mindset relating to market structure and the move from passive to more active FX trading. To the extent that the emerging best execution responsibility falls to the institutional equity trader, we expect to see a natural push of the FX markets towards an equity-like market structure.

At the same time, advances in technology are enabling this transformation to happen more organically; the electronification of FX transactions from OMS through EMS to liquidity providers, all the way through allocation and settlement processing, is happening.

Traditionally, each part of the buy-side trading desk has had a different view of the foreign exchange markets. The equity trader spent so much time on their equity transactions that the foreign exchange transaction was either given to a custodian or handed to the back office. This mindset is changing – equity traders are getting accustomed to the idea that they need to give more thought to how the foreign exchange transaction occurs because significant alpha can be lost on the subsequent foreign exchange transaction if not handled properly. FX TCA tools, as mentioned earlier, have been helping the buy-side quantify this loss and provide guidance on steps that can be taken to improve alpha preservation on the FX component. Last but not least, one of the main drivers behind the focus on FX best execution is now regulation. The FX market is being more tightly controlled by the regulators and the industry is demanding and shaping more defined benchmarks to be held accountable to. This has led to greater pressure on the buy-side from their clients to ensure that best execution tactics are being put into practice.

The futureAs the markets, electronic trading tools and venues continue to evolve, we expect to see more FX flow shift to a direct access model by the customer without as much bank intermediation, especially for smaller block trades executed in conjunction with corresponding

“The FX market is being more tightly controlled by the regulators and the industry is demanding and shaping more defined benchmarks to be held accountable to.”

equity transactions. This should also lead to increased adoption of algorithmic trading and ECN usage for spot trading, as well as the use of FX prime brokers and aggregators. For larger block transactions, we expect to see an increase in multi-bank Request-For-Stream (RFS) trading in order to keep traditional bank liquidity providers in check.

Just as the industry witnessed with the evolution of the equity markets, as the buy-side takes on a more proactive approach to managing FX transactions, they will demand increased transparency with their liquidity providers, and referenceable prices.

Good data will ultimately drive analytics and lead to better trading. This will enable firms to act as their own watchdog, monitoring performance, alpha preservation or slippage, and keeping liquidity providers in check.

It’s an interesting dynamic that should evolve over time, driven by increased regulatory scrutiny, better referenceable benchmarks, pricing and execution data, and a convergence of equity and FX trading on the buy-side desk. These trends, coupled with improved market transparency and analytics, will help the buy-side develop a cohesive structure for calculating the true cost of their FX transactions, and ultimately driving down the total cost of execution.


28 | INSIGHT

By Vincent Burzynski, Executive Vice President, Sungard’s Global Trading Business

The Multi Asset Trading (R)evolution

Are we in the midst of a multi-asset trading evolution – or perhaps a revolution?

Today, different U.S. trading desk heads mean different things by the term multi-asset trading – some refer to the old dual-asset trading style while others are thinking of the modern one (which includes FI and/or FX). Likewise, when asking their counterparts on trading desks in the EU what kind of trading they do, if they respond multi-asset, they most always will mean the old style. When it comes to Asia-Pacific countries, desk heads may say they do multi-asset trading, but when asked to describe it, they often mean that they have a cash equities desk and an options or futures desk sitting right next to each other and working together – dual-asset trading at best.

But even though the generic term “multi-asset trading” means different things to different brokers, sales traders or traders around the globe, there’s far more agreement on where trading methods and trends are going in their firms and markets.

That’s one of the findings of new research from Aite Group, The shifting sands of global trading, part 1: The Sell-Side’s Multi Asset Migration.

Sell-side firms were asked about the preferred asset classes and products traded as well as where they were headed. As expected, listed cash equities and FX remain the most highly traded products, followed by trading in fixed income. At first glance, this mix is not so multi-asset.

However, when taking into account the current and planned listed equity derivatives trading as well as the planned expansions into listed and OTC derivatives in other asset classes, the trend toward a more multi-asset trading mix is clear. In particular, the planned trading for FX derivatives stands out,

Vincent Burzynski,Executive Vice President, Sungard’s Global Trading Business

which is reflective of expected global currency volatility and the need for FX hedging.

The addition of FI and OTC derivatives products in lower proportion shows that the move from old-style to modern multi-asset trading is well underway on the sell side. The interviews and additional conversations with trading desk heads also make clear that this move is being spearheaded in U.S. markets. EU and Asia-Pacific adoption of multi-asset trading is strongly indicated, and within an accelerated time frame from past trading-method and trend migrations.

Moreover, 62 percent of sell-side desks indicate that they have already organised some trading desks on a multi-asset basis – that is, with multiple asset classes traded either on a single desk or multiple but aligned trading desks.

So perhaps the only real question is when multi-asset trading will catch on.

To explore these issues further, download a complimentary copy of the Aite Group report, The shifting sands of global trading, part 1: The Sell-Side’s Multi Asset Migration from our website: www.sungard.com/shifting-sands-trading-part1


INSIGHT | 29

By Peter Waters, Managing Editor, GlobalTrading

The Changing Face Of Technology: A Roundtable Write-Up

On the 29th of September GlobalTrading hosted an executive industry roundtable in New York. The discussion was moderated by Donald Bollerman, Head of Markets and Sales at IEX, and featured a range of senior business executives, traders and technologists from across the buy- and sell-side. The event was kindly sponsored by CameronTec.

The primary discussion throughout the luncheon was spent drilling down into the following areas:• the development and implementation of technology

in electronic trading throughout the last three years, • how the changing budgetary environment has

impacted development cycles and implementation, • the changing desires of those using the technology.

A principal concern was the changing requirements of those developing the technology, and how responsibility for technology is shifting between technologists and the business side of the firm, and the effect this has on buy-side, sell-side relationships.

The financial services industry in general, and electronic trading specifically, are in a time of massive flux in how technology is developed and applied.

Throughout the debate the participants, coming from a range of buy-side and sell-side firms, discussed that while headcount reductions are continuing to take place, firms are hiring more people in technologist and compliance roles. The onus and responsibility is shifting between firms and departments, but it is continuing to build. Further, there is a growing realisation that financial technology is increasingly competing with other industries. The ability of financial firms to attract the top graduates and most innovative brains is ever increasing, and money is no longer the only motivator that new talent requires. This is especially true in the US, primarily with competition coming from start-ups and Silicon Valley, but also this trend is impacting Canada, Europe and the emerging markets. The challenge is to make the most of the staff and resources a firm has, and the table quickly agreed that both are rarely sufficient. The true differentiator between many firms is in finding a unique competitive edge, and this is an area that will continue to remain paramount. As a consequence, it was put out that the business side should remain in charge of the competitive edge of the business, while the technologists build the


30 | INSIGHT

common stack. There was consensus however that those boundaries are breaking down and evolving.

As a result of this shifting competitive edge, it was agreed that standardisation is a key area to look at.The parties discussed the potential for standardisation in areas as disparate as data for analysis, time stamps, wider technological standards and how exchanges bill their clients. There is a growing need to standardise data and the input that firms receive, so that they can better understand their trading and compare like with like. Whether this ongoing drive becomes the role of a self regulatory organisation or the regulators themselves remained subject to debate. All those present agreed the buy-side will start to generate and

James Rubinstein,UBS

“Increasing demands from our client base, as well as significant regulatory change and the need to continually adapt our products to a complex marketplace have led to new levels of demand for data and analytics. How we balance the tradeoff between presenting detailed data and the meaningful interpretation of that data is a significant challenge. Both the buy and sell sides are working to evolve: deciding what is meaningful, how to provide and interpret it and importantly how to manage the investment in the technology and human capital required.”

analyse more of their own data; how the sell-side continues to provide a competitive edge to those buy-side remains to be seen.

As ever though, the divide between theory and practice continued to move around the table. In a time of infinite budgets and no sudden regulatory changes, there might be time to work out many of the standardisation issues that continue to plague the industry. But while each firm has to remain competitive and drive itself forwards while reacting to the wider market environment, it continues to be difficult to get the necessary cooperation. Again this loops back to the discussed theme of how the buy-side want the ability to manage more of their own data, and to do their own

Donald Bollerman,IEX

“GlobalTrading convened a wide range of participants to debate a healthier, technology-enabled future for our markets. This type of dialogue is critical for our industry, and I commend GlobalTrading for producing a professional yet provocative event.”


INSIGHT | 31

Michel Balter,CameronTec

“The New York roundtable confirmed superior talent and technology remain key business differentiators in a market under pressure to do more with less as budgets remain under tight control. Participants also confirmed what we are seeing in Europe, with the buy-side taking increased ownership of execution technology by investing in solutions. This in turn is placing increased pressure on broker partners to deliver higher value services and increased transparency. All market players – whether buy side, sell side, execution venue or vendor - realise collaboration is the best way forward to tackle key industry evolution requirements and that standardisation is the gateway to achieving goals in a cost effective manner. Responding to industry evolution, solution providers such as CameronTec are increasingly bundling services and solutions to allow market players to optimise their trading infrastructure and transform substantial regulatory challenges like Reg SCI and MiFID II into new business opportunities.”

Mark Gurliacci,AB

“With regards to ongoing developments around execution transparency, our interests are aligned with our clients, and our clients benefit from the innovative trading technology that we require from our trading partners. AB’s ability to streamline our trading with optimised algorithms, sift through the pre- and post-trade analytical complexity and reward the sell-side for quality liquidity provision ultimately lowers our all-in costs of trading and enhances our clients’ returns.

Further, we support sell-side initiatives in the area of actionable IOIs and automating capital provision and believe there are still significant unrealised savings in improving trade workflows.

We look forward to more innovation in the area which will only increase our trading activity and reduce the costly delays in search for quality liquidity provision. However, we do still face tough budgetary constraints. Automation is the solution to our goal of maintaining premium relationships with the sell-side while reducing the explicit costs of trading, including lower blended commission rates. At AB, we limit this automation to our Tier 1 global brokers, we continually measure trade performance and leverage sell-side algo enhancements that allow us to expand the breadth of orders that can be streamlined.”


32 | INSIGHT

Daniel Pense,Morgan Stanley

“This fall’s GlobalTrading roundtable was top shelf. There was a great mix of participants and the discussion was robust and in depth. Hearing from thought leaders from various areas of the industry, Exchange, Broker, Vendor and Institution provided a range of ideas and opinions which spanned from the propositional to the immediately practical. I believe everyone took away some valuable insight as a result of being a part of the group, and I know that I did.

Hearing how others in the industry are addressing the multiple mandates of containing cost, meeting increased regulatory requirements, and adapting to industry changes, all while driving technical innovation for their firms and on behalf of their clients gave voice to the urgency for players in each role to plan to evolve their technology in-line with their industry counterparts.

It is clear that firms will continue to need to migrate to ever efficient platforms that address the needs of their customers. Much of the efficiency of the next generation will come from better data management and standards for that data as it passes from entity to entity in the trading path. For example, there is a call for increased transparency around execution detail, from the venue all the way back to the origination point of the order. While progress has been made in this area and some of the data flowing along the trading path today receives industry accepted normalisation, there is still wide variance in the formatting and quality of the data when it reaches the point of order origin. The need for a uniform paradigm for the most commonly sought data is being realised more and more, as this data is perceived to be something that should be commoditized for ingestion by TCA algorithms that each entity develops along their individual business model.

Opportunities exist for established and even new players in the industry to provide innovative solutions to these challenges. Whatever the solutions or standards proposed, for them to be adopted, the case needs to be made that they are best of breed and that they provide an even playing field between participants. FIX protocol is an example of a successful industry-adopted standard and new candidates for public industry standards would do well to learn from that model. ”

analysis. The ability to control, standardise and manipulate data to suit a firm’s own end is far more powerful than being fed that analysis by another firm. But there is considerable cost involved in the development of the technology required to perform that analysis.

The discussion evolved into a wider dialogue around where firms should cooperate and where they should compete, and how vendors can remain adaptable to these changing and disparate needs. The table agreed

that the future remains uncertain, but there is a growing need for the buy-side, sell-side, exchanges and vendors to standardise where possible so that the industry can continue to develop and compete.


INSIGHT | 33INSIGHT | 33

By Irfan Syed, Managing Director, Fixnox

A Trader’s Guide To The FIX ProtocolThe FIX protocol, like many other computer protocols, has always been a domain of techies. They are the ones to set up new FIX connections and ‘certify’ them by complying with FIX rules of engagements of counter-parties before the users - traders in the case of FIX connections - start to trade over them after minimal testing.

And for any changes or enhancements, traders communicate requirements to their connectivity team, and in turn these techies enhance FIX connectivity software to support the changes and ‘certify’ the FIX connection again. Or if the connectivity team didn’t fully understand the business and/or the protocol, they would just reject the requirements with an excuse that requirements are not supported in FIX, in a particular version of it, or their FIX engine software.

In most organisations, connectivity teams’ understanding of the FIX protocol is often incomplete due to the very fact that many of the terms used in FIX specifications, white-papers and guides will only make complete sense to someone who understands the business of trading well. It should not be expected that technical people will understand “order capacity”, “price improvement” and “participation rate” without reasonable knowledge of the business and industry. But these very terms are used all over the FIX documentation.

In an ideal world, all traders should be well-versed with FIX protocol specifications and adopt a habit of using these as a reference during conversations about trading connections. But most traders, who are already overwhelmed with information in today’s fast moving markets, do not realise the value and competitive edge which can be gained by acquiring knowledge of FIX protocol and using it to set their trading connections ‘right’.

However change is in the air. In the highly competitive world of buy-side trading, where trading technology and infrastructure has a direct impact on performance of buy-side trading desks, traders have started to take ownership of their tools. They are starting to have deep conversations with their technical teams so that they

have correct and properly implemented tools to make precise trading decisions.

They have also started to realise that a complete understanding of a broker’s FIX capabilities - and shortcomings - must be an important factor in selecting a new execution provider.

And that is why we think a simplified FIX protocol guide for buy-side traders, with the most important stuff, should exist.

In collaboration with GlobalTrading magazine, we have created a first version of this guide which can be found at http://fixglobal.com/home/trader-fix-tags-reading/. This version is geared for buy-side traders who are active in equities and use FIX versions 4.2 and 4.4. In the near future and after collecting feedback from the community we aim to update this guide to include other asset classes and functionality specific to FIX 5.0.This guide covers the following business areas:

1. Security identificationFIX field 55 (Symbol) in FIX is still a very common method for security identification but this may not always be the best choice. A preferred alternative is to use a combination of fields 22 (SecurityIDSource) and 48

Irfan Syed,Managing Director, Fixnox


34 | INSIGHT

For multi-day orders FIX has additional fields to carry intra-day quantity information. 424 (DayOrdQty) contains quantity open for execution and 425 (DayCumQty) carries executed quantity during current day. Both of these fields are applicable from 2nd day onward.

4. PricesIn FIX, price for a limit order is provided in field 44 (Price) and associated currency can be indicated in 15 (Currency) field. There is also tag 99 (StopPx) which is used to provide stop price of appropriate order types. In execution reports, sell-side firms use field 31 (LastPx) to indicate the price at which quantity in current fill executed, and field 6 (AvgPx) to provide average price of total executed quantity in current order. Then there is field 140 (PrevClosePx) which can be used to indicate the instrument’s previous day’s closing price. This field is sometimes used as an aid in security identification when symbology in use does not guarantee a unique instrument.

For multi-day orders, the sell-side may use field 426 (DayAvgPx) to indicate average price of quantity filled during current day. And if they have made any price improvement, they can send its value in field 639 (PriceImprovement).

For trades which are executed in one currency and settled in another, field 120 (SettlCurrency) indicates the currency in which those should be settled.

(SecurityID) which allow using any of a number of global security identification databases. ISIN, CUSIP, SEDOL, Bloomberg, RIC, all of them are supported.

Field 107 (SecurityDesc) can also be used to describe the security for manual trades, and field 207 (SecurityExchange) allows for indicating the market from where security identification was taken. Field 167 (SecurityType) in FIX can carry the type of stock (i.e. preferred stock) or CFICode for a futures product.

2. Order and venue identificationBuy-side firms identify their orders using Client Order ID field 11 (ClOrdID) but brokers use field 37 (OrderID). When requesting amendments or cancellations of an order, Original Client Order ID field 41 (OrigClOrdID) comes into play and chains ClOrdID of new trading instruction with the existing one being amended or cancelled.

In multi-market environments, buy-side institutions can indicate the market where order should be executed by providing its Market Identifier Code (MIC) in Execution Destination field 100 (ExDestination). In execution reports provided by sell-side firms, field 30 (LastMkt) is used to indicate the market where the order, or part of it, was filled.

Sell-side firms may also use field 851 (LastLiquidityIndicator) to indicate whether current fill was result of a liquidity provider providing or liquidity taker taking the liquidity.

Field 39 (OrdStatus) exists in all execution report messages so that sell-side firms can indicate the latest status of the order in their system.

3. QuantitiesBuy-side institutions use Order Quantity field 38 (OrdQty) to specify the number of units of a security they wish to buy or sell. Quantity can also be provided as cash value – e.g. for FX trades - in field 152 (CashOrdQty). For CIVs, quantity is provided in field 516 (OrderPercent).

FIX protocol also contains fields for brokers to provide changing quantity information to the buy-side during order execution. Field 32 (LastQty) carries quantity executed in current fill, 151 (LeavesQty) contains quantity open for execution, and 14 (CumQty) has the quantity executed in current order so far.

“We believe that this guide will be useful for buy-side traders who are starting to take ownership of their trading connections. This will answer at least some of those FIX questions you always had but never asked.”


INSIGHT | 35

5. Execution managementFIX protocol supports various order types, and buy-side institutions can use field 40 (OrdType) to indicate the appropriate one for their orders. Order side is provided in field 54 (Side).

Buy-side institutions can also instruct their brokers how they should work on the order by using fields 21 (HandInst) and 18 (ExecInst). Field 21 carries general handling instruction of the order (automatic vs manual) while field 18 allows for provision of one or more specific execution instructions - for example “All or none”, “Stay on bid-side”, “Go along” or “Cancel on trading halt” etc.

FIX also allows the buy-side to control how their order should be displayed in the order books of the trading floor. Field 111 (MaxFloor) is used to indicate the quantity which will be visible on the trading floor at any given time, and 210 (MaxShow) indicates the maximum quantity which a broker can show to their other customers. The latter is useful in IOI flows as it restricts brokers not to fully disclose an order’s quantity in the IOIs they may send to their other customers.

Other useful tags for execution management are 110 (MinQty) - minimum quantity in the order which must be executed, 114 (LocateReqd) - if a broker is required to locate the stock for short sell orders, 847 (TargetStrategy) - name of strategy if order is for one e.g. VWAP, 848 (TargetStrategyParameters), 849 (ParticpationRate) – if target strategy is “Participate”, and 636 (WorkingIndicator) – a flag sent by a broker to indicate they are currently working on the order.

6. Date and timeFIX protocol has the following fields for carrying different date/time information in orders and execution reports. Note that most date/time fields in FIX use UTC/GMT times.

• 60 (TransactTime): Time when a trading instruction, e.g. an order was created in the trading system.

• 52 (SendingTime): Time when a FIX message was sent out by the FIX engine.

• 59 (TimeInForce): Effective time of an order. This can be Day, Good Till Date (GTD), Good Till Cancel (GTC), Immediate or Cancel (IOC), or Fill Or Kill (FOK) etc.

• 168 (EffectiveTime): Time when instruction provided in the FIX message takes effect. For example start time for an order instruction to become active.

• 432 (ExpireTime): Time when an order expires. This is always local time, instead of UTC.

• 75 (TradeDate): Date when a trade happened. Useful when a broker is reporting trades of non-current day.

7. Parties in tradeFIX also provide means to identify various parties involved in the trade, both from buy-side and a broker’s perspective. For example the buy-side institutions may use field 528 (OrderCapacity) to indicate their agency, proprietary, individual or principal capacity and 529 (OrderRestrictions) to specify restrictions on an order (e.g. foreign entity, market maker).

Brokers use 29 (LastCapacity) to indicate the capacity in which they executed the order - e.g. as an agent, principal or crossing as either. If they executed the order via a third-party, they may identify it in field 76 (ExecBroker).

FIX 4.4 and later versions also support repeating groups which can carry information about all parties involved in the trade. The information which can be exchanged may comprise of party ID, source of this identification, party’s role and party information like address, phone number and email address.

We believe that this guide will be useful for buy-side traders who are starting to take ownership of their trading connections. This will answer at least some of those FIX questions you always had but never asked.

At the very least, knowledge gained from this guide will lead to some ‘interesting’ conversations with your brokers, execution venues and internal connectivity teams.

Those conversations should in turn lead to more questions and a desire for even better understanding of FIX. We hope that you will send those questions to us so that we can address them in next update of this guide.

To read a more detailed breakdown of the tags, please go to http://fixglobal.com/home/trader-fix-tags-reading/


36 | OPINION

Developing TCA For Fixed-IncomeWith Fabien Oreve, Global Head of Trading, Candriam Investors Group

In the equities world, Transaction Cost Analysis (TCA) is an important analytical tool which has expanded to FX and more recently to fixed-income. Nonetheless, there are many more challenges in fixed-income than there are in FX and equities.Three main factors explain this expansion to fixed-income. The first is the current economic policy of zero-interest rates. This has forced investors hunting for yields into a wider range of fixed-income instruments and less liquid securities; that has, subsequently, increased the need for post-trade analysis.

The second factor is regulation, the impact of which is being felt on both the sell-side and the buy-side. On the sell-side, the regulatory pressure on balance sheets means that asset managers have no choice but to diversify their access to liquidity and expand their broker lists, which include more specialised and regional banks. This, in turn, naturally means that investors need more analysis to understand who is doing what. The other aspect of regulation pressure is on the

buy-side. We are now seeing increasing numbers of reporting and transparency requests from portfolio managers and different departments, including compliance, risk management and auditing. The final reason for the expansion of TCA into fixed-income is technology: the growth of electronic trading, the integration of multi-dealer trading platforms into OMSs and the sophistication of those OMSs have greatly facilitated the processing of post-trade data.

ChallengesThe implementation of TCA is considerably more challenging in fixed-income than it is in equities. Fixed-income contains a far greater number of instruments and a far greater number of different types of instrument. On top of that, the publication of post-trade public data like TRACE in the US does not exist in Europe. Poor transparency is a challenge to post-trade analysis in fixed-income.

Fixed-income is further complicated by the complexity of categorising bonds as liquid


OPINION | 37

“Building up a best-execution process that identifies when to trade electronically and when to adopt traditional methods (telephone or IB chats) requires not only a dialogue with compliance officers but also full and deep attention to portfolio managers’ opinions.”

order to get the most reliable analysis for bond transactions and to input all those transactions into the TCA tool, you need discipline from the traders, who have to get all the post-trade data into the OMS as quickly as possible.

A truly multi-asset TCATCA is connected to all trading regardless of asset class. It is a tool that promises an effective best-execution process; it helps you analyse your trading activity, the costliest trades and the performances of brokers vs. execution benchmarks.

If you again compare asset classes, there is common ground between equity TCA and fixed-income TCA in the construction phase. The TCA construction process consists of extracting trade history from the OMS (which is the structural backbone for TCA), then combining that data with independent market pricing, sourced (in the case of fixed-income) from any of the multi-dealer platforms and (in the case of equities) from consolidated order books.

or illiquid and the challenge of defining the appropriate thresholds of voice trading (vs electronic trading) across various categories of bond instruments. Building up a best-execution process that identifies when to trade electronically and when to adopt traditional methods (telephone or IB chats) requires not only a dialogue with compliance officers but also full and deep attention to portfolio managers’ opinions.

Another challenge is the execution benchmark. In order to evaluate best execution in fixed-income, each trade can be compared against the composite mid-“bid-ask” spread (the market mid-level) provided by multi-bank trading platforms at the point of execution. That said, in the case of illiquid bonds, comparisons are not always meaningful. The low number of market-makers in a given instrument at any given point in time can make the electronic composite price (that is normally made up of a large number of dealer pricing indications) irrelevant.

The final challenge we face is that far more trades are done over the telephone in fixed-income than in equities, especially in corporate bonds. In

Fabien Oreve,Global Head of Trading, Candriam Investors Group


38 | OPINION

“A key consideration when developing a TCA system in fixed-income is to be aware of market structure and the role played by broker-dealers. The market structure in fixed-income is driven by principal trading, not agency trading, so the way bonds are traded is often “all or nothing”.”

There is, however, a clear distinction between that construction phase and its finalisation. The second phase differs between bonds and equities because, with bonds, you have to determine and analyse more categories, more sub-categories and “liquidity buckets”. In equities, there are many more order types and execution benchmarks. Today, a TCA tool in equities compares trading results against different execution metrics (arrival price, VWAP, % of volume, etc.) across a limited number of categories while a TCA tool in fixed-income compares execution against a composite price across a wider range of categories and sub-categories.

Developing the systemA key consideration when developing a TCA system in fixed-income is to be aware of market structure and the role played by broker-dealers. The market structure in fixed-income is driven by principal trading, not agency trading, so the way bonds are traded is often “all or nothing”. The agency model will gradually progress in fixed-income but this will take time and we will need to keep a flexible model for trading much of our business.

That’s why an efficient post-trade analysis system in fixed-income should go beyond the cost aspect, display who your top counterparties or top liquidity providers are across various categories of instruments, help you trade better and find more liquidity. Liquidity discovery is the natural continuity of TCA in fixed-income. At the Candriam trading desk, we have incorporated a search engine connected to our trade history database into our TCA tool, so we can find our top five counterparties for specific instruments or segments. This tool has been designed to broaden any search and to select the issuer, so we can sometimes get five or ten different issues from the same issuer. This can include correlated or similar issues, and it is very important that the tool is able to give us that information.

TCA for fixed-income is quite a new area in Europe, so our preference initially has been to develop and test our own system. It has taken several months to construct our TCA tool, but it has not been a linear process. Traders have spent time working outside normal business hours and speaking with

portfolio managers. The creation of a TCA tool not only gives us greater control, it also enables us to share appropriate solutions for end-users with our OMS provider and TCA vendors.

The long-term future of fixed-income TCA is closely related to OMS sophistication because today, the OMS is the backbone and, technologically speaking, it is becoming further advanced all the time. The OMS will become more integrated, further standardised and provide increased access to crucial areas such as pre-trade and post-trade functionality. It also involves cooperating with TCA vendors, who are developing peer-data and peer-group analysis.


OPINION | 39

Silicon Valley Meets FinTechWith Steve Grob, Global Strategy Director, Fidessa

The whole financial technology industry is in the process of reshaping its approach towards technology. This presents our customers and prospects with a dual problem. First, how to develop and compete in a cost-constrained environment and, second, in this new super-transparent world, how do people demonstrate and prove their value add to the process?

When examining other parts of the technology universe, it is clear that many interesting think tanks and projects are emerging; for example blog teams, data visualisation and social media interpretation. The problem for our industry is how these firms find their way into capital markets, because the main issue of concern is credibility. What about information security? What about compliance resilience and viability? These firms do not have the capacity to answer these questions for large institutional clients.

As a result we identified an intriguing opening for Fidessa to get involved in this ongoing technology shift. It involved sourcing a number of firms that

we could curate and carry out the necessary due diligence, in terms of their data centres, legal agreements, as well as embedding their technology into our workflow. This is a ‘win-win’ for all – the technology company gets access to all our customers, and our customers are able to access something that has already been pre-certified. OTAS was the first firm to go live on this platform.

Making the transitionThe advantage for us is that these new and relevant technologies are entering our ecosystem and empowering customers to do what they do better. It marks a change from us having to write everything ourselves, to recognising that we have access to a great community of buy- and sell-sides, and we can help them find and utilise the technology they want to be able to access. Our clients are happy because it gives them access to a new wealth of interesting technology, and allows them to demonstrate their relevance and to have deeper and more meaningful conversations internally and with their clients.


40 | OPINION

“It has been necessary to educate the tech firms on how best to use their technology in a way that makes sense for our customers – this has been a steep learning curve. We have also learnt a great deal about how various types of firm approach technology and how different industries handle development and deployment.”

we bring in (a much smaller number than in an app store), really add value to our workflow.

Evolving technologyAnother issue worth considering is that today’s industry needs to solve its cost and relevance problem. In any ecosystem, every member must benefit more than they would otherwise outside it, whether that be the providers of the service or the consumers of it.

It is very much becoming a reshaped industry and firms that can find their way to demonstrate that successful blend of technology and innovation are going to be more successful. In tomorrow’s super transparent world, simply getting in between a customer and source of liquidity will not be a viable proposition. Firms are going to have to collaborate and cooperate and each add value at every stage of the process.

One of the challenges in making the transition from being an upstart Silicon Valley firm into a financial technology lexicon of the industry, is using full language and terms that mean very specific things. It has been necessary to educate the tech firms on how best to use their technology in a way that makes sense for our customers – this has been a steep learning curve. We have also learnt a great deal about how various types of firm approach technology and how different industries handle development and deployment. We see this as a global platform and have had just as much interest from the US as we have had from Europe. Again, this is a way of helping ‘jumpstart’ some of these new firms into an area that might otherwise take them years to develop – they can do it with us in just a few days. And of course, we can also use our technology and reach to build something better, so for example we can provide global datasets that they might not otherwise have access to.

This is very different to an app store for example where, if you buy an app for $0.99 and it doesn’t work, you have no point of redress. Whereas our value added is in ensuring that the firms

Steve Grob,Global Strategy Director, Fidessa


42 | PRODUCT OVERVIEW

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PRODUCT OVERVIEW | 43

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“With every order, a buy-side trader goes through a series of steps to help determine how they want to trade that security and which broker to trade it with. Multiple pieces of information go into these decisions and the Buy-Side Optimised Workflow app helps gather these data points in one quick view.”


44 | EUROPE

With Christian Krohn, Managing Director, Head of Equities, AFME, and Matthew Coupe, Director Market Structure, Barclays and FIX Trading Community EMEA Regulatory Subcommittee Co-chair.

The Role Of Associations In Regulation

Christian: It’s certainly been the case for MiFID II that there has been a lengthy process of negotiation between the European parliamentarians and the member states as co-legislators on one side, the commission on another, and then ESMA and the regulatory community all trying to have a key stake in the shape of that regulation. It’s almost inevitable that the process has become deeply politicised because it’s such an important piece of regulation. It really does govern how Europe’s capital markets are going to function in years to come.

But that’s not to say there isn’t a need for efforts to standardise what we can, where provisions have become settled as a matter of politics or where the politicians have agreed and policy makers in general have agreed about what they want the regime to achieve. Then it’s up to practitioners and standardisation bodies such as the FIX Trading Community to help policy makers operationalise that policy and to make sure that the regime actually works. Matt: Obviously there’s a lot of work going on engaging those various stakeholders while the policy


EUROPE | 45

and political aspects are still very active. But the standards need to be built into that process from the ground up, because if we don’t have standardisation, we’re not going to achieve one of the core goals of MiFID II, which is to enable a much greater level of understanding as to the transactions that are occurring in the marketplace.

The FIX Trading Community is a standards organisation, and we’re promoting free and open standards across the financial service industry. We know that there are a number of trade associations engaged in this space, but FIX is quite unique in the sense that we operate downstream to many other trade associations and we get much more heavily involved in the nitty-gritty implementation of the regulation because it comes from a much more technical perspective. A classic examples of that is the fact that FIX is the owner of the FIX messaging standard and the MMT standard.

However, it goes a step beyond this as well because if we don’t have a standard set of engagement rules and standards in how we interact with the market and each

other, it falls away. Collaboration with AFME adds a business policy perspective and understanding from a higher level in terms of what the impact will be, and establishing an industry position.

The depth of collaborationChristian: The primary role of trade associations is to develop policy positions, initially, often at a high level, but as regulatory regimes are developed, at an increasing level of detail, including quite nitty-gritty policy positions on the interpretation of the evolving legislation. Whereas in contrast, the role of standardisation bodies like FIX is to step in once the position has been settled among policy-makers and work closely with market participants to decide how it’s going to be operationalised.

The collaboration is very close across the various industry bodies. There’s even a joint trade association group here in London where FIX sits as well alongside all the major sell- and buy-side trade associations.

Matt: It is definitely wrong to think that the trade associations don’t intercommunicate or correlate. While FIX generally sits further downstream to the other associations, all the associations have a very close interoperation in terms of communication. This is not necessarily just between sell-side organisations, but also buy-side organisations. We need to be able to address this regulation and if

Christian Krohn,Managing Director, Head of Equities, AFME

“The collaboration is very close across the various industry bodies. There’s even a joint trade association group here in London where FIX sits as well alongside all the major sell- and buy-side trade associations.”


46 | EUROPE

required on the RTS. Those policy changes must then be advocated to the commission, the parliament, the council as well to other stakeholders.

This coming period is about engaging with policy makers to make sure that the Level 2 measures, be they in the RTS or delegated acts are fit for purpose.

Matt: From a FIX Trading Community perspective, right now, we’ve got further detail but a definite lack of cemented detail. We’re leveraging that further detail to try and put the plans in action to try and respond to this regulation within the timeframes that have been laid out. With more details, the more we can do to try and harmonise industry standards and enable an effective implementation for the industry.

Matthew Coupe,Director Market Structure, Barclays, and FIX Trading Community EMEA Regulatory Subcommittee Co-chairwe don’t address it as an industry, it’s going to

create issues. Everyone is actively working together to try and deliver a very large chunk of requirements that need to be operated on across the whole spectrum. This also applies to the venues and the vendors as well, who play important roles. All of the associations have a role in that engagement, in pulling all those different viewpoints together. Christian: One of the reasons why this collaboration between organisations that each have a different focus is becoming increasingly important is the sheer size and scale of the task.

Matt: The scope of MiFID II is across a number of massive asset classes, and this needs to be divided up but also correlated and coordinated because some of the themes fit across asset classes. This cooperation and collaboration is only going to further deepen as we go through the process. The futureChristian: The immediate focus is to try and identify members’ key policy areas where surgery is still

“Obviously there’s a lot of work going on engaging those various stakeholders while the policy and political aspects are still very active. But the standards need to be built into that process from the ground up, because if we don’t have standardisation, we’re not going to achieve one of the core goals of MiFID II,...”


EUROPE | 47

What are each of the subgroups?In May 2015, a reinvigorated EMEA Regulatory Subcommittee met and decided to form a number of different smaller subgroups to look in more detail at specific RTS items where it was felt that FIX could have a positive impact and make appropriate recommendations to ESMA. These subgroups are as follows:

Order Data and Record KeepingClock SynchronisationReference DataTransparencyBest ExecutionMicrostructure

There was a call for participation followed by a press release in August 2015 and there has been very strong interest to become involved. Each subgroup has met a number of times and decided on its own respective terms of reference and goals.

Why these areas, and not others that are also covered by MiFID II?MiFID II is being worked on by a number of trade associations as MiFID II has a massive impact across the financial services industry, and each trade association has areas of expertise and focus that have been shared and co-ordinated.

When selecting key focal areas, the FIX Trading Community were mindful to select areas where we, as an organisation and also the people who are active with our membership, would be able to provide an effective response and solution to the regulatory requirements. In this, we have decided to focus on areas where solutions to the requirements within the trade flow would be formed from free and open industry standards. This would therefore assist in an industry wide cost effective response and also hopefully assist in implementing

New FIX Trading Community EMEA Regulatory Subgroup Update

solutions within the very tight timeline that we are facing.

How are these areas interlinked and what benefits are there to these areas being worked on within the FIX Trading Community?All of the focus areas form key impact areas in the trade flow and are, therefore, continually interlinked in their activities. This is the main reason why we also have the Regulatory Subcommittee to tie these working groups together and ensure we are not re-inventing the wheel twice but with different colour hubcaps.

What the FIX Trading Community, as an organisation, provides is unique as the membership base is a neutral one, and provides a neutral organisation for buy-side, sell-side, vendors and venues, to all interact, ‘with the ability to leaveyour cap at the door’. In pulling together these subgroups, we have been very mindful to ensure, that every member has an equal vote, and we ensure we provide solutions that are effectivefor the entire industry.

Timelines, goals, progress – what’s happened so far and what do you hope will happen?The groups have made good progress, all work streams have mobilised and are meeting at least on a bi-weekly basis.

Each group has started off looking at the subject and indentifying key areas where they can focus and work with the end result being the following:• Enabled, effective and appropriate industry

debate,• Educated participants within the organisation of

the different challenges to implementation,• Standardised approaches to ensure an effective

and efficient implementation of the regulatory requirements.

EMEA Trading Conference 2016 3 March | Old Billingsgate | London

The EMEA Trading Conference, now in its 8th year, is one of Europe’s largest one day trading conferences, delivering a high quality, educational and debate focused conference in the heart of the City of London.

950+ senior market participants are expected to attend the EMEA Trading Conference where they will benefit from the detailed insight of 50+ expert speakers, carefully selected based on their extensive industry knowledge to discuss the critical issues, challenges and opportunities facing the region.

REGISTRATION NOW OPEN! FREE passes are available for representatives of Buy-Side firms and Regulators. An allocation of FREE passes is available for all FIX Trading Community Member firms.

Additional Member Passes: £199+VAT | Non-Member Passes: £549+VAT

Register at: www.fixtradingcommunity.org/EMEA2016

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AMERICAS | 49

With Anthony Godonis, Senior Equity Trader, Aberdeen Asset Management

Reforming The Open And Closing Auctions

When considering open and closing auctions, the bottom line is it that current procedures are reliant on listings. It has more to do with which exchange has the most listings, and whoever has the most can run an auction – so it’s primarily New York and NASDAQ that we are concerned with.

In terms of how the auctions operate, there are indications put in by traders onto the open and close. The majority of people in my position focus on the order balance (the ratio of buyers to sellers). If there’s an imbalance on the buyer and seller side, it gives you an idea of whether the given stock is going to open up or down, but there’s not much indication of what price it will actually do so at.

If there were more transparency in terms of pricing and number of shares on the open and close, more people on the buy-side would be willing to trade. However, I don’t feel institutions like participating on the open and close because it’s too easy for other market participants to figure out your level of interest, whether they are high frequency or other institutional firms.

The close requires that are orders to be entered by a certain time, but it can be difficult to get out of the closing auction. This is because we have to perform a ‘de-quote’, requiring the broker to call someone in New York to get the order pulled out of the auction.

Considering we are part of the most advanced financial ecosystem in the world, this is still a manual and outdated operation. It should be possible to do it much more quickly.

So we need further development in terms of transparency around the available size and price. Consider the volume – 30-50% of a stock’s volume is done at the open and close – in our view that volume should be a driving factor. The main force behind much of the open and close procedure is ‘passive money’; for these firms, much of their trading typically takes place at the close as traditionally they benchmark to the close. It’s a reference price – there is less thought given to individual stock performance and more towards capturing that closing price. And as so much money has moved from ‘active’ to ‘passive’, there has been very little discussion about the open and close because the active traders (myself and my peers) don’t particularly feel price formation is disseminated efficiently.

There should be far better dissemination of information for New York and NASDAQ and it would help if we could see what the auction looks like on a screen on a real time basis.

Greater standardisation The open and close process has become overcomplicated. For example, where specific order


50 | AMERICAS

complexity of the current system means that it doesn’t feel like an auction house anymore.

To summarise, the process of open and closing auctions needs to be simplified. I believe the asset owners should be given more control of the open and closing prices, as opposed to the market makers. The market makers are there to provide liquidity, but they aren’t in the business to lose money either, so it is primarily a profit centre for the market makers. The market makers seem to be more in control of market structure and how things work than the asset owners. I would also say that the buy-side should be reaching out to the regulators as well as exchanges, establishing relationships with them and trying to figure out a better way of working. But until that happens, I don’t think much is going to change.

Anthony Godonis, Senior Equity Trader, Aberdeen Asset Management

“......the process of open and closing auctions needs to be simplified. I believe the asset owners should be given more control of the open and closing prices, as opposed to the market makers. The market makers are there to provide liquidity, but they aren’t in the business to lose money either, so it is primarily a profit centre for the market makers.”types focus on the opening auction. On paper this may

look very simple but when we really look into it, participants may be able to abuse the system simply due to the complicated nature of the structure. So it is clear that the open and close needs to be simplified. If it were, it would certainly be a catalyst for more traders wanting to participate.

It will be a challenge to standardise the open and close procedure. The only way to completely standardise is to force the auction to take place in one particular location; which would be difficult considering the volume and amount of revenue they generate for the exchanges. In the meantime what would help would be a greater effort to standardise across those exchanges that have auctions. This leads to the question what is the role of an exchange? An exchange is supposed to be, fundamentally, an auction. An auction is a group of people who get together to determine the best price of an asset which someone is willing to clear. What is the clearing price? The sellers want to sell at the highest price. The buyers want to buy at the lowest price and where the two meet is the clearing price. The


AMERICAS | 51

With John Comerford, Instinet Head of Global Trading Research

Competition Driving Reform Of The OpenThe conventional wisdom is that the application of Rule 48 on 24th August had a major deleterious effect on pre-trade transparency of the open on the New York Stock Exchange (NYSE). From the NYSE’s perspective they invoked Rule 48 and instigated the necessary manual processes in order to reduce volatility around the open.

However, our research indicates that neither of these statements is entirely true. Rule 48 relieves electronic market makers of a certain subset of their duties. But when we analysed the actual data, we found that almost every single stock showed pre-opening indicative prices and volumes, so in fact there was pre-open transparency reasonably akin to that which is found on any other given day. There were a few notable exceptions, but materially most names had the same pre-trade, pre-open prices and volumes. The one major caveat was that they just stopped at 09:35. This meant that on the NYSE there were opening volumes, volume indications and price indications on all these names, right up until 09:35 and at that moment approximately 60% of stocks hadn’t yet opened. This caused a significant problem.

The main consequence of invoking Rule 48 is that if a stock is going to open significantly up or down, under normal circumstances the market makers have to check with the floor official and receive manual approval in order to open that name. Once Rule 48 has been implemented, there is no further duty to do so, so theoretically stocks can be opened up faster. But clearly on that day the NYSE names did not open quickly enough.

We also observed through our analysis that this change did not reduce volatility. We compared the opening prices to the stock market at 10:00 and by that time everything had returned to normal and there was no significant difference between the electronic

NASDAQ open and the manual NYSE open.The consequences of this could be wider reaching than just what happened on that particular day and the slight disagreements that occurred between NYSE and NASDAQ. This is because we were witness to a far broader picture of the industry which pointed out that all the different assets that are derivatively priced (primarily the futures and options pricings), are all governed by different sets of rules around opening, trading halts etc.

There are therefore some real parallels to the flash crash in that different rules regulate different markets. There is growing pressure within the industry for greater harmonisation across asset classes especially those asset classes that are materially the same. The difference is in how the various exchanges and asset classes address volatility and allow order market functionality during the open, at the close, and during the trading day. Time for regulationTheir participation, whether active or passive is needed, together with retail, because retail participants are more active users of, for example, stop loss orders.

There are always going to be disparate interests between the parties. The market makers are going to have their own interests and obligations and considerations for those obligations. The exchanges have to make sure that there is a balance between the consideration that they get for making markets and the obligations that they then have to uphold to get said considerations.

The open is very different to the close, as there cannot be discontinuities on the close. The close tends to be a liquid area – if their price moves, it tends to be liquidity driven.


52 | AMERICAS

Other competition-driven changes are taking place – there is talk in London of intra-day auctions and the NYSE is also considering different types of auction.

However, there comes a point in the opening process where it isn’t possible to allow pure competition. As an industry, we have to ask market participants to come together to agree on some broader standards. Every party, every exchange, the sell-side and the buy-side all have similar interests – they are much more united than divided.

The flash crash was not good for the industry but the industry rallied as a result and the rules are now much more harmonised – which could be another positive opportunity.

24th August may have as many consequences for global markets and multi-asset and cross-asset class trading as there were from the flash crash. It could be that the events of 24th August are the catalyst which encourages standardisation of process and protocol around the open and closing auctions.

John Comerford, Instinet Head of Global Trading Research

“The challenge is that we have continuous trading rights after stocks open, and so the open itself is as much a period of price discovery as it is one of plain liquidity discovery, unlike the close which is more about liquidity.”

The challenge is that we have continuous trading rights after stocks open, and so the open itself is as much a period of price discovery as it is one of plain liquidity discovery, unlike the close which is more about liquidity. From there we go straight from that price discovery point into continuous trading, and that transition is a challenge when there are disparate opening techniques and disparate opening times.

Competition driving changeThere is much that can be learned from other markets. The US market is very complex but the systematic opening up of exchanges to competition has encouraged a tremendous amount of technological innovation, which has helped the market. The London Stock Exchange had to transform itself because of global competition and if the NYSE hadn’t had the competition of NASDAQ for the opening print, then New York would never have changed.

Intra-country exchange competition is really valuable for investors on the whole, because firms can decide to list elsewhere. This does cause more friction, but a large number of firms have listed outside their country of origin.


AMERICAS | 53

With Richard Vigsnes, Global Head of Equity Trading, Northern Trust

Standardising The Open In US Markets

One purpose of the close is to have a benchmark for various instruments and products, and as a result it has generated more scrutiny and is far more structured than the open. Although there are various types of closing mechanisms across the exchange landscape, there is always a primary exchange for an instrument and anyone looking to achieve the benchmark places their orders on the primary exchange and so volume accumulates there. There have been changes and revisions that have occurred as to how volume accumulates and gets represented (timing, offsetting orders, d-quote, etc.) but at least people are aware of these idiosyncrasies and they can be accounted for, so the closing price can be achieved.

On the other side, there is little standardisation of the way the open functions and the events of 24th August brought that very much to the fore. So while there have been individual attempts at standardisation of the opening process, they have been neither coordinated nor well vetted.

“When an open and subsequent volatility spike occurs in the manner it did on 24th August, it begs the question as to whether the market is always fair and orderly. In particular, the retail investor may question the market’s ability to treat them fairly. ”


54 | AMERICAS

A good example of this is NYSE ARCA, where many ETFs are listed. NYSE ARCA has its own opening mechanism with trading bands. In July, those bands were tightened. At that time the VIX was at 15 and the bands were rarely being hit. When the VIX subsequently hit 30, those bands were very much in play and caused a major dislocation that was unexpected. Since then the bands have been wound out past where they sat before they were tightened.

The exchange has thus modified its opening rules three times within a six-month period. Perhaps more thought is required before these changes are made, and some form of standardisation implemented. This is the point where the industry needs to work together to find a solution without having to resort to regulator involvement. The regulators will find it difficult to keep up with and address every market structure issue, so the preference should always be towards the industry working together to agree standards and then to implement them. If the close has more structure around it, it should be possible for the open to have this as well.

When an open and subsequent volatility spike occurs in the manner it did on 24th August, it begs the question as to whether the market is always fair and orderly. In particular, the retail investor may question the market’s ability to treat them fairly. Much of the retail order flow in the US gets sold to market makers and those market makers are then responsible for placing those orders. In a volatility spike, questions inevitably arise as to whether this arrangement disadvantages the retail order flow. There is vigorous debate on both sides, which I’ll set aside for another time. While sidestepping that debate, the interesting thing about the events of 24th August is that no trades were broken and many retail orders were executed against other retail orders, so if you were a retail investor who had buy orders, you most likely got a fantastic price. So, while there was certainly wealth transfer amongst retail investors, as a group they were not singularly disadvantaged.

The US market is one of the deepest and best functioning markets in the world, but there are lessons to be learned from the 24th August dislocation. One is that it would benefit from re-evaluating the rules and structure such that there is transparency and consistency around how instruments open.

Richard Vigsnes, Global Head of Equity Trading, Northern Trust

“The US market is one of the deepest and best functioning markets in the world, but there are lessons to be learned from the 24th August dislocation.”


ASIA | 55

With many Asian markets trading lower volumes than years past and dark trading yet to assume a larger share of executions, block trades are a stubborn fixture of Asian order books.

When you ask the buy-side what they want, the answer is always liquidity, liquidity, liquidity. The challenge of the last few years in Asia has been generally lower volumes across the exchanges. There has however been growth in volume in Hong Kong, particularly with the Stock Connect and China has seen growth in volumes and volatility. Even India’s volumes grew.

Tom Kingsley of Bloomberg Tradebook examines the rationale for block crossing in Asia.

Building Blocks: In The Dark, On The Phone

However, across the board, volumes are down, including in dark pools. Fragmentation is quite limited except for Australia and Japan, so lower volumes mean wider spreads. Wider spreads mean higher costs. Crossing the spread creates opportunity costs such as how quickly a trader needs to complete a trade and what they are willing to pay for that speed.

Where are the Asian pools?The ultimate Asian dark pool, if there was such a thing, would be a block cross, where orders are never sent to a dark pool and all trades execute


56 | ASIA

electronically at the exchange. In the last 20 years it has always been difficult to find trusted partners to cross with. Now, it is even more challenging because of the risk of information leakage, which is very expensive in a market with thinner volumes.

While block crossing is not a new concept, it has become more important in Asia. Agency brokers maintain strong buy-side anonymity, which is why last year we began testing a combination of electronic trading platforms with traditional block crossing.

The end result is a system that pairs two sides of a trade in the traditional sense of upstairs block crossing, but the counterparties send the trade electronically to create the audit trail. The commitment to anonymity means if two buy-side firms are combined in a cross trade, no one knows who they are. It is anonymous and then the trade is printed on the tape using a local broker we designate.

Remembering how to speakWe are likely to move to more traditional block crossing because the dark executions as a percentage of Asian trades are down. Unlike the US or Europe where multiple venues created fragmentation, and yet homogeneity. Without greater fragmentation and dark pool proliferation or higher volumes, traders are forced to search for blocks.

The problem is, we have a new generation of traders that handle far fewer voice orders. Asking an electronic trader trained around algorithms and DMA to use the phone to execute a voice broker cross is quite different.

Many traders on the buy-side and sell-side do not have much experience trading blocks. Educating traders more comfortable using algorithms about making prudent decisions in a block opportunity is crucial.

“The end result is a system that pairs two sides of a trade in the traditional sense of upstairs block crossing, but the counterparties send the trade electronically to create the audit trail.”

Tom Kingsley,Head of Execution APAC, Bloomberg Tradebook


ASIA | 57

My responsibilities at AMP Capital include relationship management, providing best execution, ensuring that we have proper regimes in place to conduct TCA and that we have a good risk framework in terms of where and how we route, who we are routing with, and who is giving us the best prices across asset classes.

In certain jurisdictions there is increasing pressure on the buy-side to have a deeper and closer understanding of the algos being used when we are going straight to market and certifying our knowledge of those algos. Of course, knowing exactly how our orders are handled is not new to institutional traders but fragmentation of liquidity pools and electronification has led to new considerations such as the participants and toxicity within dark pools and, more recently, the conduct of dark pool operators themselves. From a buy-side point of view, as the

Joe Kassel, Head of Global Dealing and Exposure Management, AMP Capital examines the changing role of data and technology, and the impact on trust.

Data And Trust

microstructure of markets becomes more sophisticated so too does the requirement to be resourced properly to police our counterparties’ behaviour. As a result, more than ever, trust and transparency are the primary drivers of our interactions and relationships with brokers and banks.

Managing dataThere is a tremendous opportunity for the buy-side to manage and analyse our own data. With regard to TCA, there are many different brokers with a multitude of ways of calculating reports and there are a number of forms of data standardisation.

Currently, we engage third party experts to analyse our data and provide independent review and insights into our trading activity, patterns and cost outcomes. But to a greater extent, there is the opportunity now for us to


58 | ASIA

analyse that data ourselves, which is something that we are starting to do more of from a TCA point of view.

Consequently, in terms of that third party position however, the focus is moving more towards real time decision support, TCA in terms of destination selection and performance of various dark pools and how SORs work, etc. We do need to ensure that the wider basis for analysing costs does not get lost in the more granular analysis of real time decision support. Ultimately this wider area is where we are going to find our biggest savings on decisions that should not have been made in the first place from a trading point of view. This is where we will find those ‘holes’ in terms of market access and our ability to access liquidity quickly and globally. The data now available to us is at a peak level across all our activity – across all asset classes. Our data has that information embedded in it, as well as the information that we can extract in terms of the

historical behaviour of counterparties and the historical outcomes across the markets. However, there is still much to be learned in order to better analyse those wider trends in behaviour.

We do require decision support, whether it is software or real time analytics, and it could be something that we develop ourselves or alternatively have our counterparties provide for us. And that decision support helps inform how we route our orders, where we execute and with whom we execute. Ultimately however, the outcome of that trade from a whole cost analysis point of view will be revealed in the longer time frame analysis.

Cross asset standardisationWe are still finding that many of the processes and relationships across asset classes are still relatively siloed. From my perspective the evolution of TCA and 3rd party information systems in equity markets is a very good reference point for the evolving regimes in other asset classes. In particular we can easily transfer equity market principles to futures, which are traded on an agency basis. And that is one step away from FX that is executed versus price benchmarks.

“We do need to ensure that the wider basis for analysing costs does not get lost in the more granular analysis of real time decision support. Ultimately this wider area is where we are going to find our biggest savings on decisions that should not have been made in the first place from a trading point of view.”

Joe Kassel,Head of Global Dealing and Exposure Management, AMP Capital


ASIA | 59

In terms of translating that into fixed income, currently the situation is to compare against prevailing market levels and stored RFQs, and refer to historical data in terms of ‘the trade relative to pricing’. However, this is evolving in terms of our ability to store the data, and then to reference the execution process against the prevailing historical tick data.

Impact on sell-side relationshipsThe buy-side is not trying to drive spreads to zero, because that is in no one’s interest. But before we get to that point there is still some margin compression to happen. It is not our role to preserve margins for our counterparties, but it is certainly not our role to make them go away either.

Our role is to know what the marginal cost of dealing is, and to assess where it is reasonable. And we can compare that in a number of ways. A long as there are sufficient providers of services with sufficient margin in their businesses then we will continue to have the means to deal where we need to be dealing.

We also have a duty to trade on a best execution basis. Our position is to ensure that we are properly set up to access liquidity wherever we can find it. We need to verify on a trade-by-trade basis that we are dealing at the right price and a necessary part of that role is to be able to confirm that those are the right prices.

Regulatory impact on trustThe impact of regulation is definitely driving some of our concerns. An example of this is the ongoing discussion about commission rates and what client commissions can be used for. One point that has been missed by many is how the market has responded to this concern of commissions over time, and the fact is that it has responded quite successfully.

We conducted some internal analysis to look at our equity commission rates in the Australian markets over the last 25 years. Broadly speaking, the result was that over the last 25 years, our equity commission rates in Australia have fallen by 1 basis point per year. This is a very good outcome and is a real reflection of how seriously we take our responsibility to manage our clients’ money effectively. It is also a satisfactory response in the Australian market to the perception of regulators in

some jurisdictions that managers of institutional investors are failing to ensure that that they are not paying too much of their clients’ money towards execution and research.

Our ability to analyse our own activities is getting more sophisticated, as is our ability to analyse peak data in the market, to connect to liquidity pools, to understand who the market’s participants are and how they behave, and how to navigate our way around misbehaviours using minimum acceptable quantities, and avoiding certain dark pools with high levels of toxicity. Ultimately we do rely on third parties to act as agents for us which means that they must act in our interest in an ethical and proper manner. So it comes back to trust, which cannot be regulated or processed or technologised away.

“It is not our role to preserve margins for our counterparties, but it is certainly not our role to make them go away either. Our role is to know what the marginal cost of dealing is, and to assess where it is reasonable. And we can compare that in a number of ways.”


60 | ASIA

In terms of block trading Australia is looking fairly healthy. Most of that is thanks to the agency brokers rather than facilitation; you can get facilitation but not in the sizes that we can when trading agency blocks.

Asia as a whole is a little bit different. Japanese domestic trading is still pretty much focused on hitting benchmarks, and it’s difficult to find blocks. Interestingly though, there is a new facility where people can send a watch list or allow access to what we are putting in our algos, which then allows a proper conversation. In addition, the penetration of dark pools and trading platforms in the region is getting better.

With Richard Nelson, Head of Australia and Japan Equity Trading, T. Rowe Price

Finding Liquidity In Australia

The situation is difficult though overall, and there are certainly difficulties with the current way we have to trade: breaking up orders into different pieces with algos. As big institutional buyers and sellers, if we can’t find blocks, we have to trade in smaller sizes, across multiple venues using algos. This just generates a lot more signalling, which leaves us open to being taken advantage of by HFT and other participants.

However, the situation for finding large blocks and getting trades in size done will get better. One reason for that is that asset allocation around the globe at the moment is still very much in fixed income and not


ASIA | 61

“As big institutional buyers and sellers, if we can’t find blocks, we have to trade in smaller sizes, across multiple venues using algos. This just generates a lot more signalling, which leaves us open to being taken advantage of by HFT and other participants.”

Richard Nelson,Head of Australia and Japan Equity Trading, T. Rowe Price

equities. Once we see interest rates starting to rise we’ll see a move in asset allocation back to equities, which in itself means that there is more liquidity, with more people looking for liquidity and more liquidity being offered.

We’re probably on the high end of using dark pools to find liquidity. ASIC has been working hard on the issue of trading in Australia, and they have made changes to the regulations so when we are trading in the dark, we have to get meaningful price improvement. This basically means the buy and sell is done at the mid-price which works well for us. Further, we do minimum execution quantities to try and minimise signalling. ASX also has single counterparty fills so we can elect who we execute with. Unfortunately, this facility does not exist at all venues which means we can end up hitting very small orders. This is ultimately just giving a free tip-off to HFT firms to let them know what we are doing. If I could avoid those smaller orders I absolutely would; it doesn’t benefit me at all to hit them.

The market itself can do a great deal to help fix the situation and make it easier to trade more blocks and orders of a meaningful size. Fundamentally we want to be able to get executions done without creating too much noise. It’s a matter of using the right avenues and having the right counterparties available.

Every market can learn from looking at what’s happening in other markets, just as other markets can look to what Australia has done in terms of dark pools and insisting on price improvement, minimum execution quantities and single counterparty fills. They were smart, simple things to do and fair for everybody: some other markets have taken that on board.


62 | FRAGMENTATION

GLOBAL FRAGMENTATION AT A GLANCE

MARKET SHARE ANALYSIS, Q3 2015

Note: The analysis is based on lit venues only for Europe and USA, and lit and dark for all other regions.Venues with smaller than 0.01% market share are not included in the charts but are included in the calculations. Source: Fidessa


FRAGMENTATION | 63

LIQUIDITY FRAGMENTATION: AUSTRALIA AND JAPAN

Note: Venue turnover history is based on all listed stocks in Australia/Japan

Source: Fidessa

Venue turnover history: Australia Venue turnover history: Japan

Top 10 traded stocks by turnover based on S&P/ASX 200

Top 10 traded stocks by turnover based on Nikkei 250

Liquidity fragmentation in Australia remains stable. Overall, there has been a positive trend and FFI levels for the major Australian index S&P/ASX 200 are in the range of 1.25. Such levels are still well below those in most European countries. In Japan we saw a drop in FFI around Q3 last year and these levels have remained low. FFI for Nikkei 225 was in the range of 1.08, suggesting a dominant market share for Tokyo Stock Exchange.


64 | RESOURCES

Industry Resources

Fidessa groupExceptional trading, investment and information solutions for the world’s financial community. 85% of the world’s premier

financial institutions trust Fidessa to provide them with their multi-asset trading and investment infrastructure, their market data and analysis, and their decision making and workflow technology. We offer unique access to the world’s largest and most valuable trading community of buy-side and sell-side professionals, from global institutions and investment banks to boutique brokers and niche

hedge funds. $20 trillion worth of transactions flow across our global connectivity network each year.

Fidessa’s unrivalled set of mission-critical products and services uniquely serve both the buy-side and sell-side communities.

Contact details:

[email protected]

www.fidessa.com/contact

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

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

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

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

Contact details:

www.bloombergtradebook.com

FIX FlyerFIX Flyer develops and operates advanced technology for managing complex, multi–asset, institutional securities trading using highly scalable software and network technologies.

Since 2005, as an agile technology provider, we have partnered with our 170+ clients worldwide, including UBS, Barclays, TD Ameritrade, Fidelity, Berenberg, Unicredit, GBM, Interacciones, Bank of

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

Flyer has built a team of operational experts who manage and provide Managed FIX software-as-a-service. Our subject matter experts create and operate FIX servers for you to realize the full potential of our software to deliver the highest level of service and return on investment.

The FIX Flyer Engine is the first FIX server designed to manage high volume, ultra low latency trading networks and ECNs, easily scaling to thousands of connections.

FIX Flyer also provides the Daytona trade surveillance monitor, the F1 Risk Control Gateway, the Ignition regression test and certification tool; the Flyer Online hosted Order Management System, and the Flyer Trading Network.

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

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

www.fixflyer.com


RESOURCES | 65

CameronTec GroupCameronTec Group is the global standard in financial messaging infrastructure and tools for the Capital Markets industry that today powers the largest user base among financial institutions.

Uniquely positioned as a software and service provider for enterprise, hosted and managed platforms, our dedicated professional services team ensures optimal integration

and deployment performance. CameronTec’s flagship offering Catalys is underpinned by market-leading connectivity technology and engineered on the widely acknowledged standard in FIX engines, CameronFIX. Catalys Market Access offers FIX-powered gateways to more than 60 equity, derivative and FX markets across the globe, as a locally deployed or managed / hosted service. Complementary FIX integration, testing, on boarding and management solutions including VeriFIX, FIX Conductor and FIX Technician CTS, build out an

end-to-end global connectivity offering for any electronic trading environment, using or migrating to FIX and proprietary protocols.

CameronTec’s solutions are tested and trusted by the world’s best firms in over 50 countries, on all five continents, representing the broadest cross section of tier 1 and 2 investment banks, brokers, fund managers, exchanges, regulators, and members of the ISV community.

Contact details:

www.camerontecgroup.com

Convergex ConnexConnex is Convergex’s fully-managed technology solution for broker-dealers. Streamlining the onboarding life cycle for clients, our experienced professionals are committed to helping to reduce clients’ connectivity-related expenses. As a third-party, broker-neutral managed services provider, we act as an intermediary between broker-dealers and their network partners. We configure

connectivity for clients, tailoring infrastructure to meet business goals and requirements including cost reduction, connection engineering and FIX customization. Clients receive access to sophisticated tools that monitor their orders, while a web-based dashboard provides transparency into the onboarding lifecycle. Connex technologies and knowledgeable support group helps ensure that interfaces remain connected.

Managing operations for customers, Connex helps firms save on capital

expenditures and minimize risk. Outsourcing connectivity allows clients to focus on core business objectives and worry less about upgrades, hardware changes, scalability, redundancy and FIX customization. Connex also offers a pre-trade risk management module that helps clients address regulatory requirements.

Contact details:

[email protected].

www.convergex.com

ITGITG is an independent execution broker and research provider that partners with global traders and portfolio managers throughout the investment process, from investment decision through settlement. With 15 offices in 9 countries and multi-asset capabilities that support the needs of institutional investors and hedge funds, we combine the power of global reach with

the precision of local vision.

We founded ITG in 1987 with the launch of the POSIT® crossing network, along with an unwavering commitment to provide actionable investment insights and improved outcomes for our clients. Over the years, we’ve deepened that commitment by creating a powerful network of intellectual capital, true industry experience, and market-leading technology. We bring together award-winning tools and high-touch expertise to help clients understand market trends, improve performance,

mitigate risk, and navigate increasingly complex markets.

Our liquidity offerings deliver quality matches before others know they exist. Our platforms provide fast, open access to a broad universe of global brokers and providers. Our research and analytics access data is derived from exclusive proprietary sources, delivering in-depth insights other research sources can’t provide. And our trading desk offers deep local knowledge around the globe.Contact details:

[email protected]

www.itg.com


66 | FIX TRADING COMMUNITY MEMBERS

FIX Trading CommunityMembers*Premier Global Members marked in bold

360 Treasury Systems AG42 Consulting Pte Ltd Activ FinancialActuare AFME- Association for Financial Markets in Europe Albourne Partners Ltd Algomi Algospan LtdAllianceBernstein Alpha Omega Financial Systems, Inc American Century Investments Ancoa SoftwareAquis ExchangeARQA Technologies ASIC Australian Securities Exchange AXA Investments Managers Ltd B2BITS EPAM Systems Company Baillie Gifford & Co. Banco BTG PactualBanca IMI SpA Banco Itau S.A Bank of America Merrill LynchBarclays Baring Asset Management BATS CHI-X Europe Baymarkets ABBeijing RootNet Technology Co., Ltd.BGC Partners BlackRock, Inc. Bloomberg L.P.Bloomberg TradebookBlue Ocean Company BM&F BOVESPA BNP ParibasBolsa de Valores de Colombia Bolsas y Mercados Españoles (BME) Borsa Istanbul A.S. Brandes Investment Partners LP BridlineBrook Path Partners, Inc. BSE Limited BT Bursatec SA de CV BVI C24 TechnologiesCameron Edge CameronTec Cantor Fitzgerald Capital Group Companies, Inc.Cedar Rock Capital Charles River Development

Chicago Board Options Exchange Chi-X Global Inc CIBC World Markets INC CIMB Securities Cinnober Financial Technology AB CitiCitihub Consulting CL&B Capital Management CLSA Limited CME GroupColt Technology Services Compagnie Financiere Tradition Connamara Systems LLCConvergex Credit SuisseCSC Cynopsis Solutions Daiwa SB Investments Daiwa Securities Group Inc. DATAROADDealogic DealHub Deutsche Bank Deutsche Boerse GroupDigital Currency Labs Dimensional Fund AdvisorsDrebbelDTCC Eastspring Investments (Singapore) Limited Ecodigi Tecnologia e Serviços LtdaEdelweiss Securities Limited Egypt For Information Dissemination EquinixEsprow Pte. Ltd.ETLogic Ltd ETNA Software Etrading Software LtdEuroCCPEuronext Paris SA EuroTLX Exactpro SystemsEXTOLEze Software Group EZX Inc. FIA (Futures Industry Association) Fidel Softech Pvt Ltd Fidelity Management & Research CoFidelity Worldwide Investment Fidessa Group First Boston Group FISD Fiserv FIX Flyer LLC Fix8FIXNETIXFIXNOX Forex Capital Markets, LLC FpML Franklin Templeton Investments

Gamma Three Trading, LLCGATElab GETCO Asia GFI Group Inc Goldman Sachs & Co. Greenline Financial Technologies, Inc.GreySpark Guosen Securities Ltd Hatstand HM PublishingHong Kong Exchanges & Clearing Limited HSBC Bank PLCHSBC Global Asset Management ICAP ICMA (International Capital Markets Association) IG Group Holdings PLCIgnis Asset Management Incisus Capital PartnersIndata Recon LLCInformagi AB InfoWare Infront AS Instinet Integral Development Corp. Interactive Data Intercontinental Exchange (ICE) International Securities Exchange (ISE) Investment Management Association Investment Technology Group (ITG) IpreoIPC Systems IRESS Limited IS Investment ISITC ISOJefferies J.P. Morgan Jordan & Jordan JP Morgan Investment Management(J.P. Morgan) JSE Limited K & K Global Consulting Ltd (K&KGC) KB TechKCG Holdings Kotak SecuritiesKVH LasalletechLCH Clearnet Linedata LiquidnetLiquidMetrixLIST Group London Market Systems LSE Group M&G MACD Macquarie Securities Limited MAE - Mercado Abierto Electronico S.A.

Premier Global Members


FIX TRADING COMMUNITY MEMBERS | 67

MarketAxessMarket Prizm MarkitMarshall Wace Asset ManagementMawer Investment ManagementM-DAQ MFS Investment Management Mizuho Securities Morgan Stanley Investment Management Morgan Stanley MTS SpA Nanospeed NASDAQ OMXNeonet Nikko Asset Management Nomura Asset Management Nomura Nordic Growth Market (NGM) Norges Bank Investment Management OCBC Securities Private Ltd.OMERSOMG (Object Management Group) OTAS TechnologiesOn Budget and Time Ltd Onix Solutions [OnixS] OpenSettlement GmbHOptions Clearing CorporationOptions Technology Ltd Orc GroupOslo Bors ASA Pantor Engineering AB Peresys (IRESS) PFSoftPioneer Investments Portware Pravega Financial Technologies, Inc.Primary E TradingPrincipal Global Investors PropelGrowth Proquote Putnam InvestmentsQuendon Consulting R Shriver Associates Rabobank International Rapid Addition Ltd. Raptor Trading Systems, Inc. RBC Global Asset Management REDI TechnologiesRoyal Bank of Canada Capital Markets S&P Capital IQ Real-Time SolutionsSantander Global Banking & MarketsSASLA (South African Securities Lending Association)Sberbank CIB SchrodersShanghai Stock Exchange SIFMA SimCorp Singapore Exchange

SIX Swiss Exchange Skandinaviska Enskilda Banken AB Sloane Robinson smartTradeTechnologies Societe GeneraleSoutheastern Asset MgmtSpring Securities International ABSR Labs Standard Life Investments State Street eExchange Solutions State Street Global Advisors State Street Technology Zhejiang Sumitomo Mitsui Trust Bank SunGard SWIFTSycamore Financial Technology Systemware Innovation Corporation (SWI) Taiwan Stock Exchange Tata Consultancy Services Telstra Global The Continuum Partners The Nigerian Stock ExchangeThe Technancial Company The Vanguard GroupThomson Reuters TMX Atrium Tokyo Stock ExchangeTora Trading Services Tradeflow ABTradeHeader, S.L. TradewebTrading GurusTrading Technologies TradingScreen Traiana (ICAP)Transaction Network Services, Inc. Transatron SystemsTrax trueEX Group LLC Tullett Prebon Group LtdTurquoise TWIST UBS Investment BankULLINK VelocimetricsVersitrac Systems Corporation Volante Technologies Warsaw Stock ExchangeWellington Management Company Winterflood Securities XBRL Xetra (Deutsche Börse) Yambina LimitedZeopard Consulting

New MemberFIX Trading Community wishes to welcome the following companies to its growing worldwide membership. For more information, please visit: www.fixtradingcommunity.org

Drebbelwww.drebbel.eu

HSBC Global Asset Managementwww.hsbc.com

Indata Recon LLC

Jefferieswww.jefferies.com

LiquidMetrixwww.if5.com/LiquidMetrix

Mawer Investment Managementwww.mawer.com

Principal Global Investorswww.principalglobal.com

Royal Bank of Canada Capital Marketswww.rbccm.com

SR Labswww.srtechlabs.com

Premier Global Members

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