FX was criticised for being slow in its tech uptake but Covid-19 has forced the industry to up its game. Gill Wadsworth reports.
Post financial crisis the industry described every miserable working condition as the ‘new normal’. It would have to adapt to a world where interest rates were near zero, governments had to print money to keep economies from a continuous freefall, and certain reputations were forever tarnished.
Twelve years later and it is not just the financial industry that finds itself struggling to find a new normal. The true impact of the coronavirus pandemic on individuals, society, economies and politicians is yet to be seen, but what we do know is that the markets are decimated and a global recession is upon us.
Looking across this bleak landscape, it is clear that the financial landmarks traders and analysts once used to help navigate their way are – at least for the time being – far less reliable. Tried and trusted data points – GDP and PMI for example – take on all the useful attributes of a chocolate teapot.
Olivier Konzeoue, FX sales trader at Saxo Markets, says attention must switch to the political and fiscal action taken at national and international level. “The focus is instead going to be on the various exit strategies as well as the stimulus initiatives put in place by governments and central banks to counter the negative effect of coronavirus,” he says.
To be fair, traders have always looked at a dataset to guide them to best execution but with so much additional noise in the market and with much of that noise so unfamiliar, the financial sector will need a whole new way of sorting, sifting, analysing and applying data.
Rowland Park, founder and CEO of fintech Limeglass, says: “The FX markets are not immune to data but they need different data. Most of the data [used now] is retrospective and that’s no good. Looking at GDP for the first quarter is useless. Topical real time indicators are more important.”
For example he says traders and analysts are looking at sources including the Google mobility report, which charts movement trends over time by geography and use, which will likely influence government and economy policy.
Yousaf Hafeez, head of business development at BT Radianz, agrees, adding, “FX data remains a key asset for FX traders, with data appetite continuing to grow and more and more sources of data being accessed. What we see is traditional FX data being supplemented by different sources of data to help form trading decisions.”
The value of data
The importance for FX is, of course, the rapidity with which the data can be received and analysed, which makes smart data and artificial intelligence key for filtering out the intelligence from the babble. All rather fortuitous for those fintechs specialising in data management.
Jack Jeffery, chairmain of the board at Mosaic Smart Data, says that while the impact of Covid-19 is disastrous for many industries and sectors, fintech is not one of them. In fact, he believes that tech spend will advance more rapidly than ever following the outbreak.
“We will be more in demand [post-coronavirus]. People will see that the long-term benefits of investing in tech and streamlining their processes will be what differentiates them [from the competition]. In terms of customer activity [data management] is going to be more important in six months or a year’s time than it has ever been,” Jeffrey says.
Limeglass is one company likely to profit from such invigorated interest in tech since it focuses on condensing vast swathes of data into relevant and digestible formats. Park says the company can ‘atomise’ documents, which essentially translates to pulling the most relevant information from them and presenting it in neat paragraphs for FX traders to analyse.
“Each document contains loads of atoms,” he says. “We atomise information by taking PDFs and breaking them down into component parts. For example, if you are searching for ‘US monetary policy’, wouldn’t it be great if you could extract just the paragraphs that relate to that?”
Park adds that the system will also include synonyms for any searched terms; a useful addition for an industry jampacked with jargon and nuance: “It is getting harder to find the specific information you want, and we need to help save time and speed searches up,” he says.
“There is demand for this type of innovation and not just from the [financial] industry. We all need to learn how to react and work differently; we are not going to be working in the same way going forward.”
Keeping pace
Yet before Covid-19 struck, there were those who argued the FX markets were making limited headway when it comes to implementing tech. The Bank for International Settlements (BIS) was just one institution that expressed disappointment with asset managers and banks for failing to adopt the FX Global Code.
The FXGC was introduced in 2017 and while it imposed no legal requirements on the FX industry, it set out 55 best practice guidelines designed to improve market efficiency and fairness. Following the scheduled three-yearly review of the code, in January 2020 Jacqueline Loh, deputy managing director of the Monetary Authority of Singapore, warned participants to adopt the code or risk undermining the market.
In a letter written on behalf of BIS to Guy Debelle, chair of the Global Foreign Exchange Committee, Loh said: “Only a fraction of the largest buyside participants, such as asset management firms, have adopted the code. As their share in global FX trading increases further, it is important that they adopt the code to ensure a fair and effective FX market for all.”
In particular Loh said: “In addition, guidance relating to disclosures on algorithmic trading or aggregation services can also be enhanced in terms of their breadth, quality and consistency.”
In the months that followed – and particularly since coronavirus hit – there is evidence that participants have made greater use of the adaptive algos that make life easier for traders during choppy markets.
JP Morgan’s electronic trading desk, which trades $6.6trn a day and is therefore seen as an informal marker for the wider FX market, reported that over 60% of trades for ticket sizes of $10m plus were executed in March via algorithms compared with less than 50% a year ago.
Technology, then, has proved invaluable during a catastrophic second quarter this year, and has reinforced everything the code stood for: integrity and effective functioning of the wholesale foreign exchange market.
As the industry moves into the second half of the year, there is some hope for calmer times ahead but that will do little to help those individuals, companies and economies as they come to terms with the harm done by Covid-19. As organisations emerge from lockdown, they can start to assess just how important technology – or the lack of – was in insulating from the worst of the chaos. But whatever the outcome, it is now clear that smart data and the use of algorithms have never been more important for FX.
By Patrick Flannery, Co-Founder and CEO, MayStreet
For as long as there have been markets, there’s been a demand for information about them. In the US, the rules that govern equity market data were built in the 1970s, and it’s time for an upgrade to them. Not only is it long overdue, but doing so will empower modern technology to provide market participants the information they need while minimizing risks and abuses.
But before we focus on where we need to go, let’s take a look at where we are and how we got here.
In the early 1970s, the Securities and Exchange Commission decided that the patchwork of different exchanges providing different quote and trade information meant that market participants didn’t know where to get the best prices. It then began to adopt rules that would later become the CTA/CQ and UTP Plans, which ultimately paved the way for the introduction of the SIPs. The purpose of these “public” market data streams – both then and now – is to provide market participants with a real-time view of essential information about quotes and trades at a reasonable cost.
Through them, market participants were able to easily view the best bid and ask from each and every US equity exchange in a single, easily consumable data feed, creating a level of transparency and efficiency that was unheard of at the time (and remains the envy of other advanced markets around the world). But today – nearly 50 years after their introduction – the SIPs face major questions about their relevancy.
Simply put, the public market data streams no longer serve as intended. They are too slow (at least in relation to the proprietary data feeds provided by the exchanges). They don’t provide sufficient information to meet the needs of many investors. They are expensive, and their fee structures are extraordinarily complex. None of that’s an accident, as the exchanges generally profit handsomely from the current system.
As mandated under the first CTA Plan (and reaffirmed with the passage of Regulation NMS in the mid-2000s), the SIPs are run by the SROs, which include FINRA and the growing number of exchange operators (NYSE, Nasdaq, Cboe, IEX and now MEMX, LTSE and soon MIAX). Each of the exchanges offers their own data feeds, which compete with the SIPs. Some of these “proprietary data” feeds offer more information, faster, and for a hefty price. Further, in addition to overseeing the SIPs, NYSE and Nasdaq have business units that also serve as administrators and technology processors for the CTA/CQ and UTP SIPs, respectively.
Voting powers over the SIPs are allocated based on the number of exchange medallions held – given the nine combined markets operated by NYSE and Nasdaq, those companies have 50% of the total votes on the Operating Committees that supervise the performance of their administrator and processor businesses. A tangled web for sure.
The SEC has spent the last three years focused on how to best modernize the SIPs from a variety of perspectives. The SEC’s October 2018 market data and market access roundtable organized a wide swath of market participants who nearly universally agreed that reforms to the SIPs are long overdue. Perhaps as a result, Trading and Markets Division Director Brett Redfearn – who, given his previous job as J.P. Morgan’s Global Head of Market Structure, arguably understands the intricate details of the SIPs as well as anyone – has made it a priority to address many of the SIPs’ problems.
Earlier this year, the SEC has issued an order directing the exchanges and FINRA to modify the governance structure for overseeing the SIPs. In particular, the SEC is pushing on the SROs to give investors and brokers a say in how the public market data stream that they use and pay for is run. The order went into effect in May and the SROs continue to work on the mandated changes. When finally implemented, which could take some time, it will make the SIP governance more balanced. But it is not a panacea. The SIPs themselves need to be better.
As Mehmet Kinak, T. Rowe Price’s Global Head of Systematic Trading and Market Structure, bluntly put it when speaking on one of the market data roundtable panels in 2018: “If a broker is routing using SIP data, they are not routing my flow. They can route someone else’s, but they’re not eligible to get my flow, period.” In our experience working with the largest banks and buy sides on the Street, Mr. Kinak’s view is not unique.
To help address the concerns expressed by Mr. Kinak and many others in the industry, the SEC in February proposed to fundamentally reimagine what the SIPs should be. The SEC’s SIP Proposal would add content to the SIPs, including several layers of depth-of-book, auction information and odd-lots (which are a large and growing segment of orders and trades).
It also, importantly, opens up the SIPs for competition. Despite the fact that the Plans are supposed to be competitively bid, they generally haven’t been. The SIP Proposal would, if adopted, allow competing providers to construct “SIPs” with different characteristics, which could perform the governmental functions of the current SIPs.
We at MayStreet whole-heartedly support this reimagining of the SIPs, and believe that—given today’s technology—the market can create a solution that’s better performing, lower cost to operate and consume and potentially paves the way for new delivery models (for instance, “near-time” data sent via the cloud as one lower-cost option). “Let the invisible hand of competition and market efficiency do the work of bringing down the costs of market data and, with proper regulation, competition will do it far better and faster than any centrally planned system,” was how Roman Ginis, a former buy-side trader and founder of IntelligentCross, characterized it in his comment letter on the proposal, and that’s a sentiment with which we certainly agree.
To be sure, there are legitimate questions a distributed SIP model raises that the industry must think through. For example, how should we handle the added complexity of potentially having multiple NBBOs? Or how do we ensure that data providers (whether exchange-related or not) all receive data at the same time, place and format to ensure a consistent starting line for all? Valid concerns, but in our opinion none are insurmountable and all can be solved with smart regulation by the SEC. The Healthy Markets Association, among others, provided suggestions for dealing with these issues that we believe are worthy of consideration.
So as the SEC sorts through the dozens of comment letters received on the February proposal, allow us at MayStreet to make a proposal of our own: let all of us in the market data trenches—the vendors, brokers and investors who pay for and work with the SIPs and direct feeds each day, as well as the exchanges themselves if willing—come together over the next few months and present to the SEC a serious proposal for how to move forward. We’re happy to pick up the mantle on this effort or work through existing industry groups like FIF, SIFMA, STA or Healthy Markets—as no doubt, many folks already are. But no matter what, we believe that the voice of market data consumers has been shut out for too long and that must be rectified.
With the benefits offered by today’s technology, the power of competitive forces and industry-wide participation, we believe significant change that can reduce the cost and improve the quality of market data is well within reach. While SIPs have generally served the industry well these past four-plus decades, everything has a shelf life. We’re excited about the potential to rethink this vital component of our market structure, and look forward to working with our colleagues across the industry to do so.
The International Swaps and Derivatives Association (ISDA) has launched the new Collateral Management Transformation Toolkit (CMT Toolkit) which builds on the recommendations of its Blueprint for the Optimal Future State of Collateral Processing, which was published in 2017.
The document was originally developed to provide a set of principles that the industry could work toward to meet the changing demands and challenges of the collateral management process. The framework defined objectives, scope, key principles and challenges in the collateral process.
It also looked at possible solutions that improved operational efficiency, reduced risk management and improved liquidity and capital measures for all market participants.
The toolkit is aimed at firms that are included in phases five and six of the initial margin (IM) requirements of the Uncleared Margin Rules. However, the derivatives trade group noted that this document is intended to be used more broadly for over-the-counter derivatives post-trade processes.
Earlier this year the Basel Committee on Banking Supervision and International Organisation of Securities Commissions (IOSCO), the umbrella group for global markets watchdogs, decided to split phase 5 and extend it over two years to give market participants as well as national authorities more time to prepare.
As a result, the rules will come into effect for firms with an aggregate average notional amount (AANA) of more than $50 bn by September 2020 while those with an AANA of over $8 bn will now be in phase 6 and have one extra year – until September 2021 – to get their operational houses in order. Although there are exemptions, UMR impacts interest rate, credit, FX, equity and commodity derivatives
ISDA sees dispute management and portfolio reconciliation as important parts of the “collateral management lifecycle” and the toolkit can be used to identify opportunities for improvement depending on the type of firm and maturity of its procedures.
It recommends that both buy and sellside firms adopt a holistic review of their current dispute management practices as well as conduct a cost benefit analysis to make strategic enhancements to their collateral management operations functionality over the longer term.
Moreover, ISDA advises firms to not only establish a governance framework for the dispute management process but also to use of distributed ledgers and perform regular trade and collateral reconciliations outside of margin call disputes.
While European authorities try to push more trading back onto stock exchanges, which have entered a period of consolidation, US regulators are angling for a more competitive exchange landscape and several new exchanges are set to launch this year.
That will potentially support more profitable trading in the US than in Europe as competitive pressure drives down fees.
These different environments were established by very similar models of regulatory enforced competition, actively encouraged by the sell side, over a decade ago. In the US, Reg NMS ruled in 2005 that orders must be routed to whichever trading venue offered the best price, pushing trades away from primary exchanges.
Justin Schack, managing director and partner, Rosenblatt Securities
“Reg NMS was designed to knit back together a market that was had become fragmented before – before the mid-90s we really only had NYSE and Nasdaq, then a number of things happened that broke down that duopoly with trading on alternative venues like electronic communication networks (ECNs),” says Justin Schack, managing director and partner at Rosenblatt Securities. “But the unintended consequences of Reg NMS ended up super-charging fragmentation.”
Off-exchange trading increased as firms – including brokers – were able to execute trades on alternative venues, which offered different trading protocols to the traditional central limit order book, such as not disclosing trade information ahead of execution, called ‘dark’ in contrast to ‘lit’ markets which had pre-trade transparency.
“Volume going to dark pools exploded in the years following Reg NMS, as brokers sought cheaper ways to execute those orders,” says Schack. “They could comply with the Reg NMS order protection rule by matching or beating prices off-exchange, which to my mind was a pretty major loophole and perhaps an unrealised one.”
In Europe, from 2007, the European Union’s Markets in Financial Instruments Directive (MiFID) allowed trading of stocks away from the national exchanges on which they were listed. This led to a proliferation of new platforms including broker dark pools and multilateral trading facilities (MTFs) the the most successful being Chi-X Europe, now part of Cboe, which rivalled Europe’s largest market, the London Stock Exchange, for market share of European trading volume.
Fast forward to 2020 and exchange operators in the two jurisdictions are facing different scenarios each with their own complexities. Liberated from trading on-exchange, brokers have routed orders to off-exchange venues on both continents, including their own in-house venues. Investment firms have taken advantage of dark pools’ lack of pre-trade transparency to execute large trades without alerting the market to them.
Exchanges have responded, but the net effect has been to push down the margin on trading, and the number of exchange operators has decreased.
US market today
Since 2005, the US has seen American Stock Exchange and ECN Archipelago absorbed into NYSE, now itself part of Intercontinental Exchange. Nasdaq acquired the ECN Inet in 2005, along with Philadelphia Stock Exchange and Boston Stock Exchange. The Chicago Board Options Exchange (Cboe) acquired National Stock Exchange in 2011, later selling it to NYSE. Other ECNs launched in the interim, increasing competition and with major players Bats and Direct Edge themselves merging in 2014, before being acquired by CBOE.
In 2020 US exchange operators have enjoyed a banner year, with heavy trading volume, effectively no significant technological outages or breakdowns following a massive sell-off in Q1.
Shane Swanson, senior analyst, market structure and technology, Greenwich Associates
“At times it felt maybe like it needed a little bit of duct tape and baling wire, but the system held up well, particularly in equities and options,” said Shane Swanson, senior analyst, market structure and technology for Greenwich Associates.
The S&P 500 lost about one-third of its value in the one-month period ending March 23, before clawing back most of that in the subsequent few months. The benchmark index plunged 12.5% on March 16, the third-biggest daily percentage loss ever and the kind of market action that can strain infrastructure. There were several other days with 9% moves.
This has led to continuing elevated trading volumes. Nasdaq said its second-quarter combined equities and options markets set a record, and electronically operated markets operated at high performance levels through periods of intense trading volume associated with the COVID-19 pandemic.
Its Market Services division saw net revenues of US$276 million, which was a 22% increase over the same period in 2019, led by higher cash equity trading and equity derivatives revenue. NYSE saw trading revenues increased 37% supported by a 61% increase in cash equity average daily volume (ADV) and a 44% increase in equity option ADV.
On the legal front, exchanges won two battles about market data fees, allowing for at least a temporary sigh of relief.
On 5 June court decision said that the US Securities and Exchange Commission (SEC) cannot challenge or dispute some fees that exchanges charge for trading data; a few weeks later, an SEC proposal to gather data on exchange transaction fees was struck down by a DC Circuit Court.
But while exchanges won those battles, the longer war goes on, potentially in a stepped-up way: on 22 June, the SEC and the Department of Justice’s Antitrust Division said they would work together for the first time, with a mandate to boost competition in securities markets.
The challenge for US exchanges is how to respond to increased competition, which is increasing this year. Members Exchange (MEMX) plans to launch in September supported by a large number of market participants, while the Long-Term Stock Exchange and a planned venue by Miami International Holdings wait in the wings. and off-exchange trading is carrying a cost.
“I expect that MEMX in particular, which has a strong ownership group of firms who control a lot of order flow, will be very successful and to take significant market share from other venues pretty quickly,” says Schack, emphasising the longer-term impact of off-exchange trading as well.
While there has been little in the way of headline-grabbing M&A in the US exchange sector, there continues to be a steady stream of deals involving exchange operators buying smaller businesses that are complementary to the core trade-matching function, or that represent new products or asset classes.
Just earlier this month, Intercontinental Exchange said it would buy mortgage platform Ellie Mae. Nasdaq’s acquisitions this year have included portfolio management firm Solovis and ESG data provider OneReport, and Cboe Global Markets bought Hanweck, FT Options, and Trade Alert.
Brad J. Bailey, Research Director, Capital Markets, Celent
“Exchanges have picked up a lot more pieces and are serving a lot more constituencies on the buy side and the sell side,” said Brad Bailey, research director with Celent’s capital markets division. “They’ve added a slew of pieces that provide different functionality.”
Currently, Bailey does not expect the US exchange M&A landscape to change in the foreseeable future, especially as the firms have been able to grow their transactions business amid high market volatility of 2020, with more volatility expected.
“One exchange adding another exchange, if done correctly, adds a lot of value in terms of operational cost synergies,” Bailey said. “Over time, the trend with exchanges is that they try to get bigger, but I don’t know if any [horizontal M&A deal] is immediately there.”
European exchange landscape
Europe’s market was inherently fragmented by the existence of national stock exchanges, many countries also having regional exchanges, with 43 in the European Union today. While MiFID created competition which pushed trading off-exchange, the European Commission balked at the launch of unregulated dark pools on the back of the Directive.
European exchanges found it harder to combine than their US rivals post MiFID/Reg NMS. The LSE managed to merge with Borsa Italiana, and Iceland Stock Exchange was bought by local exchange group OMX. Yet the LSE and Deutsche Boerse have tried and failed to tie the knot three times in the past 20 years, with the latest attempt being in 2017. The last effort failed due to disagreements over clearing in the post-Brexit referendum vote. A Deutsche Boerse-Euronext merger was blocked in 2012 on anti-trust grounds.
However, a multiplicity of smaller venues launched to steal the lunch of the exchanges post-MiFID and off-exchange trading has endured after MiFID II.
Under a revised set of rules, MiFID II launched in 2018, the EU sought to limit the use of dark pools and OTC trading, however research from Rosenblatt Securities shows that exchanges’ core business has shrunk considerably since MiFID II came onto the scene. Equity trading on displayed markets dropped to 36.55% of all turnover in Europe in 2019 from 42.18% in 2018 and 44.81% in 2017.
Hyder Jumabhoy, specialist M&A partner, White & Case
“MiFID II did not, in practice, result in the expected shift of most material equity trading activity onto stock exchanges” says Hyder Jumabhoy, a London-based financial services specialist M&A partner at White & Case.
Consultations held in 2020 on reducing dark trading in Europe are seeing considerable push-back from the industry across buy and sell side.
Recently there has been a wave of horizontal exchange mergers in Europe, most notably SIX’s acquisition of BME and Euronext’s purchase of Oslo Børs as well as vertical integration with post-trade utilities including Euronext’s 70% stake of VP Securities. Moreover, digitalisation and innovation has been high on the agenda with Euronext snapping up Finnish regulation technology companies Ticker Software and Sidonnaisuusrekisteri.fi.
The LSE has also had a busy time strengthening its clearing, indexes and fixed income operations although it has recently made the headlines with its US$27 billion bid for market data and infrastructure company Refinitiv, which is currently under regulatory review.
There are, of course, always question marks as to whether the LSE and Deutsche Börse will rekindle their relationship.
Market participants believe that a more likely scenario will be the German based group engaging in a bidding war with Euronext over Borsa Italiana which will probably be put on the auction block for the Refinitiv deal to get the green light.
The LSE is thought to be engaged in exploratory discussions to either sell MTS, Borsa Italiana’s bond trading platform, or the entire group.
The European Union’s antitrust regulators expressed concern in June about the combined company’s large market share in the trading of European government bonds because both MTS’ trading venue and Refinitiv’s Tradeweb are already market leaders.
“The LSE may be required to sell off bits of its business, and these assets are likely be hoovered up by other financial market infrastructure players,” says Jumabhoy “The major exchanges have little choice but to engage in a follow-the-leader game of scale and volume.”
The dealers
Exchange consolidation ought to reduce competition, and potentially increase ongoing costs for brokers. Fragmentation creates up-front costs for brokers in managing the additional complexity.
“Fragmentation does require an investment of time and effort to ensure you understand market structure and how orders are routed, but by and large fragmentation is not a bad thing for investors and issuers. Having three new exchanges coming online with new rules and order types when you already have 13 exchanges and a few dozen dark pools in the US already probably won’t make things dramatically worse.”
Anish Puaar, Rosenblatt Securities
There are also potential scale benefits to users as well as the cost savings by market operators, says Anish Puaar, Rosenblatt Securities, “Exchange mergers can help to reduce broker fees through the use of common technology platforms,” he notes. “BME being bought by SIX is an example of where this may occur and Euronext now runs five markets on its Optiq platform, with Oslo Børs soon to be added. The use of common platforms can also broaden the mix of exchange members, which may lead to more diverse flow.
For the 15 investment banks tracked by data provider Tricumen, cash equities trading revenue for the first half of 2020 was US$9 billion, a 28% rise over the same time period. The increase in cash equity revenues was driven by US banks –
North American banks grew total equities revenue by 30%, while the Europeans suffered a 22% drop.
Tricumen said in a report: “Much of this was due to French banks’ losses in structured derivatives in the first quarter of this year which extended, albeit to a smaller degree, into the second quarter. That said, North America banks also continued investment in their franchises and were much more generous with comp accruals: their operating costs grew 30% year-on-year, while EMEA banks cut costs by 9%.”
By contrast fixed income, currency and commodities (FICC) revenues were far more profitable at US$60bn, 56% ahead of the first half six months of 2019.
Analysts at Berenberg, the German financial services group also noted that US banks had exceptionally strong investment banking revenues in the second quarter of this year, with the five largest US banks increasing 67% year-on-year, primarily driven by FICC as well as revenues from macro products and underwriting, which support exchange businesses.
The increase was smaller among European banks who have a lesser focus on FICC revenues. Berenberg said: “In addition, we estimate that European banks’ share has fallen by 190 basis points during the past year to 31%. The loss of share in equities, particularly among French banks, has been notably large.”
With equity trading margins cut to the bone, there is little room to reduce exchange fees. Therefore pressure on other revenue streams such as data are increasingly being pushed, an issue MEMX is targeting.
Octavio Marenzi, co-founder and chief executive, Opimas
Octavio Marenzi, co-founder and chief executive of consultancy Opimas, noted that while investment banking revenues have been under pressure over the last decade, exchanges’ data revenues have grown at a phenomenal rate, reaching $6bn last year. A number of exchanges now generate far more from data than they do from trading and clearing, including London Stock Exchange Group and SIX in Switzerland.
Marenzi said: “Exchanges have tried to move away from cyclical volume-based business to a subscription model.”
Europe’s failure to introduce a consolidated tape of equity trading data, which exists in the US, creates demand for data products. Equally the European Commission’s efforts to reduce dark trading may lessen the commercial pressure on its exchanges. However, it should be remembered that the last decade’s battles have had a positive outcome for investors.
Schack says, “End investors, asset owners, have never had it better in terms of transaction costs.”
Announcement : London, New York, Hong Kong, 17 August 2020
FIX Trading Community, the non-profit, industry-driven standards body at the heart of global financial trading, announced today their submission of the FIX session layer standard and the FIX tagvalue encoding standard for standardization, to the International Organization for Standardization (ISO) via Technical Committee TC 68 – Financial Services, Subcommittee 9 – Information Exchange (ISO TC 68/SC 9). The submission is currently being balloted by national member bodies of ISO TC 68/SC 9.
The FIX Trading Community is built around clear standards and is committed to interoperability with open standards. FIX is considered the de facto global standard for electronic trading and it seemed appropriate to be considered as an ISO standard which is recognized and accepted globally. The FIX session layer and tagvalue encoding standards have served as the basis for electronic trading for 25 years. These standards have been adopted by tens of thousands of market participants and in over one hundred countries around the globe.
FIX session layer standard: The session layer provides reliable and recoverable messaging for electronic trading. The FIX session layer standard has been integrated into a single refactored volume with multiple session profiles, which describe specific realizations of the FIX session layer.
FIX tagvalue encoding standard: The tagvalue encoding is used by both the FIX application and the FIX session layer. The encoding uses an integer number known as a tag to identify the field, followed by the “=” character (hexadecimal 0x3D), then the value of that field encoded in the ISO 8859-1 character set. Each tagvalue pair is separated by the Start of Heading control character <SOH> (hexadecimal value 0x01), which is defined by ISO 6429:1992.
FIX Trading Community participants will recognize an immediate benefit from the higher quality standards documents that should lead to improved interoperability between implementations. Adopters of the FIX standards will benefit from the certainty of the ISO standardization process and the value of ISO branding.
Jim Northey, FIX Global Technical Committee co-chair who also serves as the ISO TC 68 Chair, commented, “The process we pursued to improve the quality of our specifications prior to submitting to ISO by both refactoring and moving to a machine readable format based upon FIX Orchestra should provide immediate benefit to the FIX community. The FIX Trading Community continues to actively participate and provide leadership within ISO TC 68. Most people don’t realize that the FIX standard itself relies upon and uses over twenty ISO standards.”
Richard Evans and Lee Saba, FIX Global Steering Committee co-chairs, commented, “We recognize the importance of pursuing ISO standardization of FIX. FIX is how the world trades, and as global regulators move towards requiring ISO standardization, we want to ensure that we continue to provide operational efficiencies for FIX adopters. The FIX Trading Community is committed to ISO participation and provides resources for ISO TC68 SC8 and SC9.”
Eric Saraniecki, Co-Founder and Head of Product, Digital Asset
Eric Saraniecki, co-founder, Digital Asset
Exberry, the exchange technology provider and Digital Asset, the creators of the open source DAML smart contract language, launched an end-to-end exchange infrastructure for the trading of virtual assets.
The project combines Exberry’s matching engine with Digital Asset’s smart contract language DAML to fuel the registry functions, which include the tokenisation of assets, creation of users, and the settlement of trades in near real time.
The cloud-deployed exchange infrastructure also addresses limitations of current exchange technologies that typically lean heavily on message-based connectivity.
Overall, the flexible modular structure means Exberry’s clients will technically be able to start rolling-out a new exchange location within a number of weeks, rather than months or years, and enables global operations to be run from a single location, according to Magnus Almqvist, head of exchange development at Exberry.
Magnus Almqvist, head of exchange development, Exberry (photo courtesy: Marcus Perkins).
He adds, “We will provide businesses with the flexibility to issue, trade, and settle any type of asset and asset pair, coupled with the added security to audit your exchange’s transactions with complete ledger immutability through the DABL interface,” he says. “This is a one of a kind approach that allows clients to scale with ease from micro markets to large global installations and connect to a growing ecosystem of 3rd party APIs and services.”
Eric Saraniecki, co-founder of Digital Asset, says they are seeing increased demand from traditional investors who are being pushed into new asset classes due to the structural changes in the fixed income and commodities markets.
“You’ve seen massive growth in the venture capital and private equity communities as a good indicator of where the larger investors are choosing to make higher yield investments,” he adds.
He also notes that for the new, smaller investors, “they don’t have any safe investment vehicles anymore. They are being pushed into the riskier marketplaces. As that group comes online, I think there are new models that should grant better access to those private placement markets to the common investor.”
Looking ahead, Almqvist believes that “new exchange structures that are now possible with Digital Asset and Exberry will just explode the creativity in this area and make markets fairer, more transparent and more easily accessible. Why is this important? Well, a skewed or incorrectly priced market creates imbalances and stymies innovation and is bad for the real economy.”
Archax has been given the green light from the Financial Conduct Authority to become the first regulated digital securities exchange and custodian in the UK. It also scored another first in receiving its FCA crypto asset registration to be a fully compliant VASP (Virtual Asset Service Provider).
This FCA registration was introduced earlier this year as part of the amended Money Laundering Regulations (5MLD) and is now mandatory for all crypto asset firms.
David Lester, former Chief Strategy Officer of the London Stock Exchange Group and Advisor and Non-Executive Director at Archax, said, “In the current global economic climate, providing new, efficient ways for small and medium sized businesses to access capital is key. The launch of the Archax exchange will help bring the institutional and digital asset communities closer together and open up a new era for the global financial markets space.”
Archax, which has been regulated by the FCA as an SME Growth Market, will be a primary channel for capital raising, as well as a secondary market for digital instruments to trade. The company believes that the FCA regulated exchange status will also give institutions the confidence that all the controls and processes needed and expected are in place.
The authorisation covers three key areas: MTF permissions, in order to operate the first ever regulated digital securities marketplace in London; CASS custody permissions to offer a regulated custody service for both digital assets and client cash; and brokerage permissions, to cater to the widest range of participants.
Graham Rodford, CEO at Archax, said the company has been in discussions with the FCA for a while and that the application process was “a tough journey.”
He added that the exchange which will launch later this year, will be targeted at institutions. It” has a pipeline of 35 digital issuances in place, and we are signing up global brokers and market makers ready for go-live,” he said. “This is an exciting moment for Archax and a great step in the evolution and legitimacy of digital securities globally.”
The exchange is using matching engine technology and market surveillance from Aquis, and R3’s private, permissioned Corda blockchain for post-trade, Archax can integrate into existing trading workflows and delivers instantaneous real-time settlement.
Jay Clayton, Chairman of the Securities and Exchange Commission
The following article first published on Traders Magazine as FLASH FRIDAY, a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet.
It is said that the longest continual war in history was the Iberian Religious War, between the Catholic Spanish Empire and the Moors living in what is today Morocco and Algeria. The ‘Reconquista’ conflict spanned 781 years before ending in 1492.
Could the market data war between exchanges and sell-side brokers break that record? Probably not. But sometimes the notion doesn’t seem entirely far-fetched.
As the U.S. Securities and Exchange Commission mulls a ‘Reg NMS II’ redesign of equity market structure, and the SEC and Department of Justice put their heads together to try to enhance competition in the securities industry, the data wars are front-center in 2020 in terms of what changes may lie ahead.
But when have data wars not been front-center? They were an issue more than 20 years ago, as per Gene Finn, who was then outside director at Ameritrade. From a Finn-penned op-ed that appeared in Traders Magazine around the turn of the century:
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The current arrangement for sharing market data subscriber-fee revenues among SROs (exchanges and the NASD) is unfair, placing market makers and ECNs that are not SROs at a competitive disadvantage. It discriminates against small-investor clients, who unlike institutional investors, are dependent upon the ability of retail brokers, market makers and ECNs to achieve the revenue and cost efficiencies derived from the aggregation of small orders into a large flow.
Such discrimination appears to violate the spirit of the NMS 1975 Amendments to the Securities Exchange Act of 1934. Congress was explicit regarding its intention that the SEC apply rigorous utility-type regulation to insure the competitive neutrality of the NMS facilities characterized by exclusive SRO processor control. Through regulatory oversight, the NMS plans have allowed the NASD to retain the market-maker share of subscriber-fee revenues for both Nasdaq and New York Stock Exchange-listed stocks.
Similarly, the discriminatory impacts of subscriber fees and sharing deficiencies on individual investors, investing directly, have been overlooked.
Clearly, the costs of the central processor need to be covered. But subscriber-fee revenues, not required for the receipt and redissemination of the information to vendors, should be apportioned among the generators of the information in relation to their contribution to the value of the information stream. A method is required for non-SRO trade-execution centers to capture their proportionate share of market-data revenues. For one thing, the SEC could require changes in NMS plans that enable non-SRO quotation and last-sale reporting centers to participate on the revenue-sharing side. For another, market makers could explore ways to route their quotation and last-sale information through an SRO that agrees to share revenues, or is set up to accomplish that objective.
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Some of Finn’s key points will sound familiar to anyone who follows the market-data debate today — “unfair”, “discriminates against small-investor clients,” “appears to violate the spirit of the NMS,” among others.
So, it’s safe to say that in 20+ years, there has been a lot of talk about the accessibility, cost, and makeup of market data. But has anything really changed? It seems not really, other than an incremental here and there.
Will this time be different and result in a system that most stakeholders can agree is mostly fair? It still seems like a longshot, but there does seem to be as much or more momentum now than there has been in a number of years. So maybe the great market data war will see an armistice sooner rather than later.
In attempting to address longstanding issues around equity market data costs, the U.S. Securities and Exchange Commission may have bitten off more than it can comfortably digest before the regulator’s current leadership has to leave the table.
Observers suggest reform proposals could prove too unwieldy to make meaningful progress ahead of a changing of the guard, heralded either by November’s presidential election or the end of SEC Chairman Jay Clayton’s tenure next year.
The challenge stems largely from the Commission’s willingness to take on multiple complex and contentious issues so late in its lifecycle. In short, it proposes to enhance public market data feeds provided by the Securities Information Processor, the industry data utility, by introducing competition, expanding content and overhauling governance.
To serve institutional clients effectively, intermediaries have been compelled to supplement core national best bid and offer (NBBO) data for Nasdaq and NYSE-listed stocks from the SIP with faster, more granular and expensive proprietary feeds from exchanges. But reviving the relevance of SIP data after years of neglect is no picnic.
According to a snap poll of market participants conducted by Rosenblatt Securities, the SEC’s SIP governance order has stronger backing (59%) than the infrastructure proposal issued in February (48%). But Rosenblatt Managing Director Justin Schack says the extent of the SIP governance changes may not be widely appreciated. “It isn’t just giving new players a voice. By diluting the big exchanges’ voting power – giving votes both to non-exchanges and new exchanges controlled by big banks and brokers – the order effectively transfers majority control,” he explained.
Several aspects of the infrastructure proposals are sparking controversy. The decision to include odd lots and sub-100-share round lots in the expanded SIP universe without extending protection from trade-throughs – partially repealing Regulation NMS’s Order Protection Rule – has concerned many. Only a fifth of respondents to Rosenblatt’s poll back the proposal and almost half (46%) say any changes to OPR should be handled separately.
Justin Schack, Rosenblatt Securities
Schack acknowledges the tight schedule the SEC has set itself. “Time may be running out to implement the Commission’s agenda. I would not be surprised to see a strong effort to get these proposals in place sooner rather than later. But it’s also possible the major exchanges could turn to the courts to block some aspects of SIP reform, as they’ve successfully done with the SEC’s Transaction Fee Pilot and other proposed market-data reforms,” he observed.
Exchange consultation responses suggest they are keen to defend their proprietary feed revenues, but it’s not clear the current proposals would draw users back to SIP data. The SEC envisages 12 competing consolidators of SIP data, but the framework for providers and users fall short.
“As it stands, the SEC proposal solidifies the advantage of the exchanges’ proprietary feeds over SIPs, by explicitly allowing a latency advantage to the former,” says Tyler Gellasch, executive director at the Healthy Markets Association. “And by failing to set minimum data quality standards for competing SIPs from new providers, there is an increased risk of investor harm, for example if a broker deliberately choses an inferior feed when benchmarking executions for investors.”
Patrick Flannery, CEO of market data solutions provider MayStreet, says his firm is well-positioned to be a competing consolidator, but he remains cautious. “There is a question over whether it can become a final ruling, given we’re in an election year. The SEC may feel getting something done is better than getting nothing done, though an imperfect ruling might not go far enough to really allow true competition,” he said.
Xignite founder Stephane Dubois has ruled his market data firm out and says others will be put off by legal and regulatory costs. “This therefore reduces the value of opening the SIP to competitors significantly.”
The SEC proposals frequently run up against well-known problems unaddressed since Reg NMS mapped out the current market structure in 2005.
Adam Inzirillo, head of US equities at Cboe Global Markets, says failure to extend the OPR creates a distinction between the NBBO and a protected best bid and offer for quotes of 100 shares or more. “The proposal effectively creates a two-tier market, but with no guidance on when to use the NBBO or the PBBO to achieve best execution for clients,” he said.
Inzirillo recommends a focus on eliminating geographic latency via a distributed SIP model and enhancing content. Even these first steps would take 12-18 months for the industry to implement and reassess the case for SIPs vs proprietary feeds, he says, leaving regulators time to develop updated guidance on delivering best execution.
By focusing on geographic latency, Cboe is flagging a long-debated bone of contention among market operators and participants. This also applies to the group’s calls for reforms to boost exchanges’ ability to compete for order flow, around tick sizes and sub-penny pricing.
As Gellasch observes, a regulatory failure to act in the past is causing indigestion in the present.
Tyler Gellasch, Healthy Markets
“The SEC has sat by for decades letting exchanges charge ever-increasing fees for market data, then use those revenues to subsidise trading. Exchanges are now dependent on that model to compete for order flow, and both parts – the data and the trading fees – give rise to significant market distortions, and discriminate against smaller traders.”
“The question is whether the SEC has the political will to challenge exchanges’ data revenues and the wherewithal to withstand the pushback from exchanges when it comes.”
Chris Hall is a Senior Correspondent for Traders Magazine, a Markets Media Group publication. Chris can be reached at cmehall@btinternet.com
It has been an eventful year to date for Clearpool Group, as the trading-technology provider was acquired by BMO Financial amid a global pandemic.
While COVID-19 still has most employees working from home and yet to meet face-to-face, Clearpool continues to forge ahead on the innovation that has been its ethos since launching in 2014. The firm has already completed three software updates to its signature Algorithmic Management System (AMS) since the spring, and it expects to unveil major new strategies in the near future, according to company executives.
Ray Ross, Clearpool
“We have been out front on transparency, on execution quality, on analytics. We plan to stay there,” said Ray Ross, managing director and co-head of electronic trading. “We have the right structure to do that — if anything, we’re accelerating the pace of change and the pace of innovation.”
Launched in 2014, Clearpool was acquired by BMO this past April. At the time, Clearpool CEO Joe Wald said the deal would “fuel our strategic growth and provide our partners with a more robust AMS that will continue empowering them to achieve better-quality executions.”
Normally a business deal closing might be celebrated with in-office Champagne and dinner out; BMO-Clearpool had to be fêted virtually via Microsoft Teams. Closing the transaction amid the sudden focus on employees’ health and safety and transitioning to work-from-home was a “surreal” experience, Wald told Markets Media on July 30.
“It was a really unique and scary and exciting time to get a deal done,” Wald said. “There was also incredible volume and tremendous volatility in the markets. Our technology performed exceptionally well, and the infrastructure of the marketplace really stood the test of that challenge.”
Wald said BMO’s approach to Clearpool — let it do what it does best while providing the necessary resources — fosters intrapreneurship and has enabled the firm to continue its growth among broker-dealer and buy-side clientele.
“BMO has been very thoughtful and strategic with the acquisition and with the integration,” Wald said. “Large institutions can learn from this, as a model for marrying financial technology companies that have innovation mindsets and creative abilities, with an environment of maturity and structure, as well as incredible opportunities for distribution.”
Joe Wald, Clearpool
Outside BMO’s virtual four walls, there is no shortage of market-structure developments Clearpool is monitoring, foremost among them what transparency initiative(s) regulators may come up with in lieu of the recently scuttled transaction fee pilot. There’s also U.S. Securities and Exchange Commission Rule 606, which provides more transparency around order routing; the long-delayed Consolidated Audit Trail; and developing rule changes in Securities Industry Processor governance and content.
“That transaction fee pilot is not going to happen, but the effort to drive transparency and fairness and make sure that institutional and retail clients are getting best execution is going to continue,” Wald said. “There are a lot of things that continue to move forward.”
Ross likened Clearpool to an “innovation intrapreneurial pod” within the Equity Trading Products group at BMO. We’re continuing to look at expansion in regions and asset classes. We’ve continued to grow and add to the R&D and sales teams,” Ross said. “The structure that BMO has set up has really put us in a position to accelerate our pace of innovation.”
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FX was criticised for being slow in its tech uptake but Covid-19 has forced the industry to up its game. Gill Wadsworth reports.
FX was criticised for being slow in its tech uptake but Covid-19 has forced the industry to up its game. Gill Wadsworth reports.
The International Swaps and Derivatives Association (ISDA) has launched the new Collateral Management Transformation Toolkit (CMT Toolkit) which builds on the recommendations of its Blueprint for the Optimal Future State of Collateral Processing, which was published in 2017.
