Passive investment strategies, (indexed funds) have continued growing in 2024, while investors continued their exodus from active equity-based funds.
US-based equity index funds saw inflows of US$415.4 billion year to date at the end of October 2024 compared to outflows of US$341.5 billion for active managers, according to data compiled by the US Investment Company Institute (ICI). The flows are part of a continuing long-term trend, with $3.4 trillion of outflows from active funds since 2016 compared with $3 trillion of passive fund inflows, the data show.
At the end of October 2024, US-based long-term mutual funds and exchange-traded funds (ETFs), net assets under management stood at US$13.13 trillion for equity index funds globally, and at US$10.98 trillion for US-centric equity index funds compared to US$9.78 trillion for global actively managed equity funds, and at $7.26 trillion for US-centric active equity funds. Index funds now account for 57% of equity funds by assets according to the ICI data, compared with 36% in 2016.
Data from ICI, Blackrock and Morningstar showed continued and record-nearing flows for passive investment in equity index funds, and more generally for exchange-traded funds (ETFs), with Blackrock showing net year-to-date inflows of $928.3 billion at the end of October 2024.
The continued outperformance of benchmark indexes over active managers was exemplified at mid-year when S&P Global performance tracking service SPIVA published its scorecard showing 57.3% of active fund managers benchmarked on the S&P500 underperformed the index. This continued outperformance for the index and the cheap cost associated with carrying related products is one of the drivers of investor appetite for passive investments.
Returns this year have been concentrated toward US mega caps which dominate the weightings of the S&P 500 index. With a new administration coming focused on deregulation, Barclays, JP Morgan, Société Générale, and Morgan Stanley have issued research notes predicting a more stock-picking-friendly.
environment in 2025. According to Malcolm Smith, head of the international equities group at JP Morgan:” We believe recent shifts in the economic and market backdrop may now once again favour an active approach to global equity investing.”
Marc Riez, general director, Vega Investment Management
Natixis Investment Managers is transferring €50 billion in management activities from Natixis IM International to its wealth management business subsidiary Vega Investment Managers, effective January.
The reorganisation will provide a single hub for parent company BPCE’s employee savings and retirement services.
Vega Investment Management will be renamed Vega Investment Solutions (Vega IS) following the transfer. Its assets under management will grow to almost €70 billion. Natixis Investment Management will take a 51% share in Vega IS capital, currently entirely held by Natixis Wealth Management.
Marc Riez, general manager of Vega Investment Management, will continue to lead the business.
A spokesperson for Natixis declined to comment on the news.
Stuart Lawrence, Head of UK Equity Trading, UBS Asset Management.
UBS has confirmed to Global Trading that Stuart Lawrence has been named as head of European equities trading at UBS Asset Management.
Lawrence joined the firm as head of UK equity trading in June 2019.
His career spans both buy-side and sell-side positions, with roles including high-touch equity sales trader at Kepler Cheuvreux, senior equities trader at Principal Global Investors, and equity sales trader at Instinet.
Lawrence also held positions as head trader at Ennismore Fund Management and European market maker at ABN AMRO.
Tyler Sorba has left Morgan Stanley to join Citadel’s equity quantitative research team as head of trading.
Sorba has been with Morgan Stanley for more than 17 years, serving as head of trading, automated market making and equity derivatives since January 2021.
ESMA has published its final regulatory technical standards (RTSs) for consolidated tape providers (CTPs).
Three RTSs are considered under the mandate. The first addresses input/output data, the second the revenue redistribution scheme, and the third clock synchronisation. Amendments to the standards have been made following a market consultation by ESMA.
“We’re happy with the outcome. Those are some elements that are already very clear and where our different suggestions have been followed,” Eglantine Desautel, CEO of CTP bidder EuroCTP. “ESMA is working on a tight schedule but delivering.”
“The final text aligns with the industry consensus that the requirements should not be overly prescriptive or necessitate extensive development of new data feeds by contributing venues,” added Stephen Dorrian, head of market data and access for Cboe Europe and board member for CTP bidder SimpliCT.
Input/output data
Responses to ESMA’s consultation on the standards were broadly against the use of the JSON data format, citing issues with large file sizes and insufficient speed.
“We’ve seen quite some adjustments of ESMA’s position on input data formats. Now it’s more open and flexible, which is useful especially for equities and ETFs, because the volume of data is huge,” Desautel explained.
“After consulting the market, ESMA is offering flexibility for the inbound data while still being compliant with the ISO 20022 methodological approach. This way, we will be able to work with the data contributors to make sure objectives are met.”
Changes were also made to minimum requirements for transmission protocol quality, following industry demand for latency requirements to be outlined in the assessment framework. Following the consultation, ESMA has stated that pre-trade data should be transmitted from data contributors to the CTP within 50 milliseconds and with a 95% confidence interval from the order submission timestamp. Post-trade data is also subject to these conditions, both for on-exchange and over-the-counter trades.
“We want the tape to be usable for the maximum number of users, so the speed of data transmission was important,” Desautel commented.
“We have been transparent about the fact that it would be better if the tape receives the same data feed as everybody else, to see what the rest of the market is seeing. ESMA’s drafts should allow us to achieve this.”
Flagging
The new standards have also introduced flagging data quality issues rather than rejecting messages outright if they do not meet certain criteria. This allows for discussions with data providers and a cleaner tape.
“The initial text was pushing for potential rejections of messages if they did not meet a certain number of quality criteria.”
“Flagging allows us to say something is suspicious. We can also better calibrate the size of the market, either taking everything or removing what we consider as duplicates,” Desautel said.
Next steps
Overall, Desautel is positive about the updated RTS. “When you build a platform, the devil is in the detail. But at this stage, we don’t see any major roadblocks that will require us to break things that we have been working on developing,” she said. “There are some very positive points that are set in stone, which is good.”
Dorrian commented: “With the final requirements now in place, firms preparing their consolidated tape bids can design their solutions with confidence and prepare for their submissions.”
“Europe needs a stronger infrastructure. We spent a lot of time drafting responses to the consultation to help the community build a regulatory framework that allows us to meet the objectives of the capital markets and savings and investment union. Everything that can be done to boost the attractiveness of European markets has to be done,” Desautel concluded.
The final report has been submitted to the European Commission, which will issue a verdict on the RTS amendments within three months. ESMA will begin its selection process for the equity CTP in June 2025.
FCA
Meanwhile, the FCA has issued an update on its equity consolidated tape progress.
In the publication, the authority outlines options for data inclusion policy based on market feedback. These include prioritising a post-trade data only tape, with the potential for including pre-trade data at a later date or including pre-trade data for a limited set of instruments before implementing a broader rollout. Another possibility is the use of pre- and post-trade data for all instruments, with pre-trade data determined by the best bid/offer or the top five bids and offers.
“Before we determine a position for consultation, we consider that there is more work we need to do with industry to fully assess the likely demand for an equity tape with these permutations in data, considering the strength of the associated benefits and scale of the related costs,” the FCA said in its report.
January discussions with market participants and trade associations will inform the FCA’s decisions on how the tape will be designed. The authority has invited potential CTPs to contact them before 10 January in order to participate in these. It will also be running an equity market participant survey to determine the cost-benefit analysis of an equity CT.
LSE Head of Market Structure & Quantitative Analytics Jessica Morrison discusses how market structure and transparency help market participants make informed decisions.
Jessica Morrison, Head of Market Structure and Quantitative Analytics, London Stock Exchange plc at LSEG, within the Capital Markets division, discusses how LSEG supports market participants by offering diverse trading venues, promoting transparency, and analyzing regulations, costs, and liquidity to keep the market adaptable.
This video clip is from the recently released Global Trading / LSEG documentary Life Cycle of a Trade: Joining the Dots.
Broadridge Financial Solutions has appointed Ashima Ghei as its chief financial officer (CFO), effective immediately. Ghei has been serving as interim CFO since the 1st of July.
Ghei has been CFO of the investor communications business at Broadridge since January 2022. Before this, she spent 18 years at American Express, most recently as vice president of merchant pricing for the Americas.
In her new role, Ghei is responsible for supporting Broadridge’s financial management and long-term growth plan.
Ghei is a strategic leader with a proven track record of delivering results,” said Broadridge CEO Tim Gokey.
On her appointment, Ghei stated: “I am thrilled to help lead Broadridge through our next phase of growth and deliver on our strategic and financial goals.”
While approximately two-thirds of Broadridge’s revenues are derived from its investor’s communication services (proxy material processing and distribution), its Global Technological and Operations division, encompassing capital markets and wealth management front-to-back solutions, revenues grew 1% to USD $407.2M in the business year closing September 30, 2024.
Simon Walls, interim executive director of markets, FCA
The Financial Conduct Authority has published proposals for the Private Intermittent Securities and Capital Exchange System (PISCES) trading platform.
PISCES has been developed at a time when the number of listed UK companies is shrinking. The system will allow private companies to trade their securities on a controlled basis, temporarily going public to gain access to a larger funding and liquidity pool, before going private again.
The platform combines both public and private market infrastructure, offering multilateral trading and allowing for greater discretion around company disclosures. The Treasury is expected to deliver a statutory instrument to Parliament by May 2025, after which the legal framework for a PISCES sandbox will be released.
Such an environment will allow the Government and regulators to ensure the system is working successfully before a permanent regime is implemented.
Alongside the new market’s framework, the FCA is also consulting on risk warnings for investors.
Simon Walls, interim executive director of markets at the FCA, commented: “[The] new private stock market that could transform how private companies access funds and grow. It will offer investors more access and a greater confidence to invest in private companies and could act as a stepping stone to public markets for those firms.”
The UK Government ran a consultation on PISCES in March, publishing its response in November outlining a proposed design for the project. In the Chancellor Rachel Reeves’ Mansion House speech last month, the new platform was recommitted to.
The London Stock Exchange, which developed PISCES, has voiced its support for this latest development. CEO Julia Hoggett commented: “We welcome the FCA’s proposals for PISCES and this next step in bringing to the UK an innovative and tailored framework that supports the funding continuum across public and private markets. We look forward to working with the FCA, HMT and other stakeholders in the coming months to deliver further opportunities for companies to access the liquidity they need to support their growth ambitions.”
PISCES forms part of broader market reforms by the FCA, introduced to improve competitiveness and investment in the UK economy.. Other agenda items include reforming the prospectus regime to make fundraising in the UK cheaper and easier, introducing flexibility around asset managers’ investment research purchases, developing a crypto regulation roadmap and launching the digital securities sandbox.
George Rosenberger, head of NYFIX, Broadridge Trading and Connectivity Solutions
Broadridge has launched an AI-led tool to support buy-side firms’ execution decisions for its NYFIX order routing network.
FIX-based order routing networks are offered by a number of companies. Bloomberg, LSEG’s Autex Trade Route, FlexTrade and Trading Technologies are among Broadridge’s competitors in this space.
To differentiate from the market, “what we’ve built in essence is the Waze of trading,” George Rosenberger, head of NYFIX at Broadridge Trading and Connectivity Solutions explained to Global Trading.
“It’s a navigation tool, to set the user on the optimal execution path and keep them out of trouble. It sees things we can’t, and just like with Waze, if something changes along the journey, we will notify the trader via a liquidity alert.”
“Traders have so many algo choices available to them. It can be information overload. This tool will provide insights into the specific strategy to use for the name they are looking to execute,” he noted.
“While traders often assume stocks with similar traits trade alike, our research reveals that liquidity demands are the true performance driver. Our tool maps the algorithmic landscape based on a stock’s liquidity characteristics and market environment,” added Linda Giordano, who is consulting with Broadridge and is founder and CEO of Babelfish Analytics.
This tool aggregates public, private, historical and real-time data from across the industry, “which we stitch together using AI to create a time series that gives us a complete view of market liquidity,” Rosenberger said. “Then we make a recommendation on which strategy to use.”
Traders receive real-time alerts and in-trade analysis, with updates provided to allow for amendments throughout execution. The tool aims to reduce outlier trades to 10% or below, improving overall costs for the buy side.
The service can also identify where dark pool liquidity is developing. “Mapping the appropriate algo to where the dark pool activity is bubbling up has a substantial impact on performance,” Giordano explained. “It’s something that traders have been trying to get a handle on, and we finally have the technology to do it.”
Executing in the dark allows for anonymity and lower implicit trading costs, however the tool does not automatically favour dark pools. “If there’s not any liquidity there, then it will tell you the opportunity cost and send you to the appropriate exchange. Traders can be a little cautious, but if you have to make that decision you want to make it at the appropriate time. This model will tell you when to pull the trigger.”
The service follows last year’s launch of NYFIX Fill Matching, a service designed to support real-time reconciliation for high-volume trading. Fill Matching was developed to address market demand for synchronisation between brokers and asset managers and provide an end-of-day processing solution for the T+1 environment.
“We’re not supplanting traders’ gut instinct – there’s a reason why they’re the best traders,” Giordano continued. “But having a decision-making tool confirms that they’re doing the right thing, and can give them new ideas.”
“Broker algos are highly differentiated, however one of the key similarities is that they all contain a liquidity sourcing mechanism. We have developed a proprietary system that identifies where a security is likely to trade best under specific market conditions.”
However, Rosenberger clarified, “we are not an algo switching engine, we are not an algo wheel. We’re simply making a recommendation to traders based on the expertise and data that we’ve assembled.”
The service is currently available to NYFIX Order Routing customers in US equities. Broadridge has shared its intentions to expand the offering to other asset classes and regions, and to clients on other order routing networks.
Andreas Burner, CTO and Head of Product Management at SmartStream
Data may be today’s gold, but for some firms it is still a burden rather than a blessing. Andreas Burner, CTO of SmartStream, believes that intelligent automation transforms data from an encumbrance into a valuable strategic asset.
Data has become the lifeblood of the financial industry and capitalising on it is critical if firms want to win the battle for market share. Yet for some companies, what should be a treasure trove undermines their competitiveness rather than contributes to it.
So why has data become such a double-edged sword?
Andreas Burner
Information now flows around in vast quantities and dealing with the sheer volume of it has become a challenging task. Data circulates in many different formats, including unstructured ones such as PDFs, making it difficult for institutions to ingest it into their systems and process effectively. A lack of standardisation in the way financial information is communicated adds further complexity – consider, for example, the varied methodologies used by individual data vendors to identify financial instruments.
Low quality data is another pain point. Businesses are constantly hindered by inaccurately captured, incomplete, out-of-date, inconsistent, duplicated or redundant information. This is not just troublesome to deal with but significantly affects firms’ earnings. A recent Gartner survey found that it costs organisations an average of $12.9 million per year, while earlier research (MIT Sloan Management Review) put the bill at 15% to 25% of revenue for most companies.
This also creates other side effects. It prevents businesses from understanding market trends and customer preferences, denying them the opportunity to offer new products and services. It also hampers regulatory compliance, while negative customer experiences resulting from incorrect information are likely to engender mistrust towards an organisation and damage its reputation. Furthermore, operational efficiency is affected – tackling shoddy or missing data involves huge amounts of wasted staff time.
In addition, inaccurate data impacts decision-making, resulting in flawed insights and bad strategic choices. There are huge implications for risk management, too: risk models built on faulty data, for instance, can lead to financial institutions losing millions of dollars.
Air, SmartStream’s cloud-native, SaaS, data automation and intelligence platform, has been designed to address these challenges. It provides financial institutions with a low cost, scalable and secure environment in which they can manage their data effectively. It offers firms the potential to lower operating overheads, alleviate their technology burden, reduce risk, improve accuracy and enhance customer trust, enabling them to increase competitiveness, and to become more resilient and adaptable in the face of future change.
The platform, which is built on the latest technologies, harnesses AI and machine learning to process data from multiple sources. It ingests information in a variety of formats, including unstructured ones such as PDFs, and deploys AI-based techniques to enrich, cleanse, aggregate and match inflowing details. A co-pilot feature assists users to manage any resulting exceptions.
Importantly, Air takes a very different approach to traditional systems, which depend heavily on the quality of the data they receive. Once information has been fed in – which can be done quickly and easily by business users, allowing self-service – Air employs AI-based techniques to address flaws rapidly, preventing faulty data from entering other applications and causing exceptions downstream.
Using intelligent automation to redress data inadequacies represents an attractive alternative to current practices. At present, firms expend vast amounts of effort carrying out manual validation, correcting errors and searching for accurate information. The bill for these activities has become immense – experts estimate that handling data quality issues costs companies between 10% and 30% of revenue – meaning that finding a more cost-effective way of working is now imperative.
Air utilises AI-driven algorithms to reconcile any data structure, permitting rapid pinpointing of exceptions and removing the need for laborious manual file comparisons. Air makes use of Affinity, SmartStream’s observational machine learning technology – which learns from the way human reconcilers correlate records – to further enhance matching.
Advanced reporting provides detailed, real-time management information, allowing managers to promptly assess operational health, rebalance workloads and address inefficiencies. Sophisticated analytical tools also empower firms to achieve valuable business insights, enabling them to unlock the hidden potential of the data they hold.
Two powerful modules, Air Data and Air Cash, automate activities that would otherwise require significant time and manual effort. Air Data automates time-consuming cross-checking between different systems, while Air Cash is designed to handle a wide range of cash reconciliations, from simple to highly complex cases, with speed and ease.
In addition, the solution is highly scalable, fast, cost-effective to operate, and capable of adjusting rapidly to fluctuations in business volumes. It also offers an extremely secure environment in which to operate.
In conclusion, financial institutions are often unable to exploit their data effectively, and so fail to extract the operational and commercial understanding needed to improve efficiency, control costs and raise profitability. To fight back, firms must take a new and more pre-emptive approach to managing their data, seeking out innovative, low-cost ways of improving its quality.
Sophisticated AI-based technology can be particularly helpful in this respect, enabling firms to clean up, enrich, aggregate and match information before it enters downstream applications and creates exceptions. Importantly, the management information and business insights yielded by intelligent automation has the potential to transform institutions’ data into a valuable strategic asset at a far earlier stage than is currently possible, offering firms a vital lifeline in their efforts to lower overheads, boost efficiency and raise competitiveness.
Change in data management practices is also essential if the industry is to prepare for the future through digital transformation exercises and, more specifically, by taking advantage of technological advances in AI and machine learning. The effectiveness of AI-based tools rests squarely on the data they have access to and, if the information they have available to work with is flawed, their value is impacted. Given that AI-driven technology surely represents the future for the finance industry, it makes more sense than ever for the sector to put its house in order and improve the accuracy of its data.
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