With Lynn Challenger, Global Head of Trading, UBS Asset Management

How would you characterize the state of the buy side / sell side relationship?

I would characterize the relationship between the buy side and the sell side as healthy and constructive. Fortunately for me, UBS Asset Management is a top-tier client to all of the major brokers, so our service levels have remained very high.

What does the broker community do well in terms of meeting the buy side’s needs?

There are at least three elements that brokers are doing well:

• Creative risk management – Given the reduction in the size of balance sheets, I think the brokers have done well to optimize how they use their own balance sheets so that they are able to provide risk to the buy side. This includes the development of central risk books, integrated financing teams, and enhanced communication on axes.
• Consultation – The buy-side trading desk has been growing its ability to automate workflows and perform more meaningful quantitative analysis on orders. The sell side has been doing this for years and have been very willing to offer their expertise and experience.
• Cost reduction – Understanding our need to remove costs from the market. This is primarily being driven by index mandates as we work to take out any structural cost that reduces our ability to track an index. However, it is also benefiting the active managers as the efficiency generated benefits all market participants. 

What does the broker community do less well, i.e. what are the buy side’s ongoing pain points?

The broker community, and to some extent the buy side, do not work as efficiently as we could to create more common standards and utilities. 

How has the buy side / sell side dynamic evolved over the course of your career?

That is a great question. I think the role of the traditional broker/sales trader has migrated over to the traditional buy-side trader. While the broker is still responsible for the best execution of the child order, the buy side has assumed full responsibility for the execution of the parent order. 

What have been the buy side’s unique needs amid the volatile markets of recent months?

I would say since the COVID-19 crisis hit Europe, the needs of the buy side have not changed, but rather been amplified. 

Where we have seen brokers step up is in their ability to dissect the market and keep us informed on liquidity, capital constraints, and regulatory/central bank responses.

Relatedly, how have brokers distinguished themselves in 2020? 

Our primary brokers have done an amazing job focusing their efforts on keeping clients informed on market changes and general crisis knowledge. We have seen a significant increase in market and liquidity analysis, we have heard from topical speakers and pandemic specialists, and we have read about trading and risk views, regulatory change expectations and new issuances. These insights and information are being delivered in reports, virtual meetings and conferences, and phone calls.

The smaller to mid-tier brokers who do not have the same resources or access to specialists still stepped up and kept crossing opportunities and ability to source liquidity readily at hand. 

One other amazing thing is that we have not seen significant system outages from the brokerage community. Their technology has been stable and robust through the high volume and volatile times.

How does UBS Asset Management optimize broker relationships?

The most important thing we do is recognize that brokers are our partners. Of course we cannot be the optimal client for all brokers, but we can be transparent by communicating with them where we think they are strong, why we use and don’t use certain services, and how we think they can improve. 

Perhaps even more importantly is that we listen to our partners and respond to their needs. The client needs to understand where it is being difficult or operating at a high cost of service and adjust its behaviours and processes to enable that optimal relationship. 

A true partnership is bilateral.

How has regulation impacted the buy side / sell side relationship, perhaps by mandating more transparency?

Speaking as an institutional asset manager, I have seen limited benefit in attempts to improve the transparency between the buy and sell side. We were already in a position of knowledge and experience to command the transparency we required even before some of the recent regulatory requirements. 

I would say that, over the past 10 years, regulatory attempts to improve markets have encouraged the buy side to be more active in the development of regulations in partnership with both the regulators and the sell side.

What do you see as the future of the buy-side / sell-side relationship? 

I see a future much the same as today. There are products and services that the sell side will always be able to provide at a lower cost than the buy side attempting to do it on its own. An example of this is the ability to warehouse risk in their central risk books. Asset managers are not always able to execute orders at an optimal pace because the duration risk is too great, and to trade faster would incur unreasonable impact costs. A broker can inventory this risk, hedge it and manage it at a macro level. This enables the broker to exit their risk in a more optimal fashion than the asset manager. Some of the reduction in cost is passed back to the asset manager in the form of tighter spreads. In the end, both parties are able to benefit.

It will be through this kind of tight partnership and transparent feedback that our industry will continue to evolve with the markets and best serve our clients.

With Ferris Kwan, Senior Vice President & Head of Trading, Securities Financing & Treasury Technology at GIC, and Janette Shim, Regional Director, Sales & Relationship Management, Trading Solutions at FactSet

In 2020, in the span of a few short months, the COVID-19 pandemic has brought about radical changes in the ways we live and work,and the business of Institutional Asset Management has had to pivot quickly to adapt to this new normal. Buy-side trading desks are trading a higher volume of orders that need to be handled with greater care and discretion than ever, given high market volatility, amidst a rapidly changing environ-ment and heightened uncertainty.

In Asia, and specifically Singapore, the first wave of COVID-19 occurred in early February. In response, some organizations went into a partial Business Continuity Planning (BCP) mode by splitting teams to operate in different sites, or by having a portion of the workforce work from home (WFH). While it is likely that few Business Continuity Plans have been crafted with a once-in-a-century global pandemic in mind — having a well-tested BCP process is essential for an organization to ride through this difficult period.This quickly-escalating threat has forced much of the world into potentially months of “Working from Home” as countries around the globe drastically limit the mobility of their workforces. This has in turn forced Asset Managers to enact full-blown BCP measures to enable entire organizations to work from home.

Switching Into Full BCP Mode 

However, executing a firm’s mission-critical, real-time trading operations while under full BCP, is extremely challenging. It takes teams across Business, IT and Risk Management functions to come together to analyze contingency requirements, implement infrastructure upgrades (such as VPNs, network bandwidth,etc.) and making unplanned purchases of IT equipment at short notice to provide for a surge in remote access. Policies have to be reviewed to allow sensitive functions to be carried out from outside office premises. All these are needed to allow entire operations to be run reliably and securely from employees’ homes.Prolonged WFH arrangements and choppy market conditions necessitate a firm to review and change its firewall configurations and entitlements to enable trading applications and their full suite of features, to be made available to teams trading from home or at the office. As such, simplicity in the integration layers between platforms is very important to ensure entire operations can failover from production to disaster-recovery environments quickly.

Ferris Kwan, Senior Vice President and Head of Trading, Securities Financing & Treasury Technology at GIC, explains “Having an EMS which is able to deal in multiple asset classes definitely enables a buy-side firm to switch to WFH mode with relatively little hassle, compared to if one were to have multiple applications for different products and multiple pipes to switch over. We also need experts who understand our business and workflows well, and thus better able to cater to our trading technology needs. This will make the BCP mode transition much easier.” 

Janette Shim, Regional Director, Sales & Relationship Management, Trading Solutions at FactSet, adds “As a service provider in trading technology and solutions, the stability of Enterprise EMS is of utmost importance to our clients, who all need to make BCP transitions as a result of the COVID-19 crisis. For example, in the initial stages of this transition, we incorporated system change freezes voluntarily to maintain our systems’ steady-state, providing maximum reliability to withstand the volatile markets and trading volume spikes globally – a situation that persisted for weeks,” explains Shim.

“It is paramount for EMS stability, that service providers have the appropriate internal tools in place, accessible on BCP mode, to monitor system stability and performance closely, and provide comprehensive support, around the clock” said Shim.

For traders, the ability to process and render data, both structured and unstructured, and the connectivity of a trading platform to traditional exchanges and alternative liquidity venues is extremely important, particularly during prolonged periods of high market volatility. This is driven by the following considerations:

• Capacity to compute and ingest data. Valuable insights can be learnt, and back-testing using these datasets can lead to more robust algorithms and more automated workflows.
• While pre-trade analytics may or may not be relevant in such extraordinary trading conditions, in-trade analytics is unquestionably vital for the trader to have an accurate read of the markets and employ the correct approach to the trades. Post-trade TCA validates the results.
• Access to liquidity as well as the quality of this liquidity. Very often, the depth of a buy-side/ sell-side relationship defines the quality of the liquidity. This is especially true for OTC products and illiquid securities. 

Kwan adds: “As GIC has invested heavily in fostering meaningful relationships with our counterparties, we have been managing well in a financial system in a state of distress. Widened spreads point to a degradation of liquidity in electronic trading for many instruments, suggesting weaknesses in pricing engines, while there have also been unprecedented anomalies such as negative prices in WTI Crude Futures. This is where continuous investment into technology and innovation makes all the difference. Regardless of experience, traders need tools and analytics to navigate such turbulent market conditions.”

The New Normal for Buy-side Trading after COVID-19

After experiencing a global pandemic that has deeply changed lives and how the industry communicates, many buy-side firms will be looking at their current infrastructure and the associated costs to evaluate if they are well positioned to handle a similar crisis going forward. 

The Technology teams across the Asset Management industry will have to look at what needs to be improved and fine-tuned in their current technology stack to support the “new normal”, post COVID-19 of trading desks. Likewise, vendors need to continuously innovate and serve the needs of increasingly tech-savvy customers – Distributed architecture to distribute the risk and increase resiliency; open technology stacks that allow customers to integrate with existing systems; and APIs and developer interfaces to build customizations.

Asset managers that have consistently invested in technology to achieve scale and operational efficiencies, will undoubtedly continue to enjoy the benefits. “Trading desks that invest in their technology are not nearly as exposed to common human errors or the operational risks that come from trade breaks and compliance breaches. This is especially true during BCP times. The system needs to be nimble so that it can provide adjustments on-the-fly, as the market changes.” explains Shim. 

Kwan sees this also as a golden opportunity for asset managers, vendors and brokers who have invested in Machine Learning, to get a better understanding of the continuously evolving financial markets: “R&D from the data collected from this COVID-19 triggered recession can lead to more robust trading strategies, workflows, pricing engines and algorithms.”

“For traders, the EMS is like their cockpit. Access to cutting-edge tools and technology will allow a single point of access to all required analytics and liquidity. It also fulfills its role as a co-pilot, of sorts, in its ability to deliver powerful automation to many aspects of the trade execution cycle. We’ve seen an increasing proportion of our clients’ investment going into trade automation powered by technology living in the EMS in recent years.” said Shim. 

Shim explains that “Going forward, we see ourselves increasingly solving clients’ challenges by offering a full Portfolio Lifecycle solution, or in the broadest terms, the process of executing an investment idea: Everything from researching the idea, testing a scenario, generating an order, running it through compliance, then down to trading for execution, settlement, and tracking performance attribution. Our technology-driven approach to assist buy-side firms across the portfolio lifecycle is to offer a comprehensive solution, enabling a firm to leverage the benefits of a “one-stop-shop”, while at the same time allowing for flexibility and modularity in our implementation. This would allow firms to take a “best-of-breed” approach, as every buy-side firm has its unique challenges and needs, not to mention, software refresh cycles.”

Buy-side traders are more than ever in need of the best tools and analytics to navigate increasingly complex and volatile markets. Trade automation and optimization will continue to be important aspects of EMS development. Consolidating multi-asset class workflows into a centralized EMS, and hence rationalizing a variety of complex trade processes into a single trading platform, will be key, especially as trading teams are forced to work for extended periods under BCP arrangements. 

By continuously embracing innovation and investing in technology and systems, firms are starting to reap sizable benefits, such as minimizing human error, achieving economies of scale with data and trading volumes, and better capacity for remote access. This could be the crossroad where such decisions will differentiate the buy-side players who have been advancing their trading technology alongside their long-term strategic goals.

By Ryan Pierce, Consultant and Co-chair of FIX Digital Asset Working Group

The FIX Trading Community empowers individuals and firms to collaborate and ensure the work of the community is complete, robust, and fit for purpose, for the entire industry. This has been achieved by FIX Protocol being supportive of nearly every conventional class of financial instrument, so it only follows that FIX should also support digital asset trading.

 Just as FIX has reduced costs for the traditional financial industry, a FIX standard for digital assets would significantly reduce the technical friction and cost for traditional financial industry participants to interact with newer crypto exchanges. Pre-trade efficiencies in market data and quoting, and post-trade efficiencies in trade reporting and settlement would be possible, serving market data vendors, buy-side institutions, and custodians. Regulators could more easily track the new digital asset landscape if they could leverage the same reporting infrastructure employed within traditional asset classes.

The FIX Digital Asset Working Group (DAWG) is well positioned to advance this goal. FIX Trading Community began its life in 1992 as an equities protocol, but since then has expanded to include equity options, fixed income, forex, listed derivatives, and a wide range of OTC products. FIX already has a modular data model for assets and parties, and a rich message catalog for transaction workflows, including orders and executions, market data, reference data, and trade reporting.

In 2018, the DAWG began a gap analysis process to produce a recommended practice guidelines document for trading digital assets between Buy-Side and Sell-Side firms, with the intention that an Exchange recommended practice guidelines document would follow. While Distributed Ledger Technology and blockchain may be groundbreaking, very little in the FIX Protocol actually needs to change to support digital assets.

1. Crypto exchanges can trade digital assets priced in terms of fiat currency (e.g. Bitcoin vs. USD), however they can also trade digital assets priced in terms of other digital assets. (e.g. Bitcoin vs. Ether) Even though digital assets do not meet the definition of a “currency”, FIX can still represent these trades similar to forex spot transactions.
2. Participants may need to identify their crypto wallets for settlement purposes. This may need simple extensions to the FIX data model for parties.
3. Crypto exchanges need identifiers. Fortunately, the ISO 10383 Market Identification Code (MIC) standard exists, and crypto exchanges are eligible to apply for MIC codes.
4. Digital assets need a security type. Creating a taxonomy for digital assets is a highly complicated problem. Assets may be currency-like and intended for payment, security tokens, utility tokens, or some other novel use case. Asset issuers can disagree with regulators over the categorization of their assets, the users can disagree amongst themselves, and regulators don’t always agree with each other, or may decline to take a position. The easiest solution is to punt the issue. Create a single FIX security type for “Digital Asset” and watch what other standards, such as the ISO 10962 Classification for Financial Instrument (CFI), do.
5. Digital assets need unique, unambiguous identifiers.

This last issue presents the single largest obstacle for standardized trading. Most traditional assets have a known issuer, who may list them on an exchange. Exchanges then assign ticker symbols, and national numbering agencies assign an ISIN utilizing the ISO 6166 standard. But Bitcoin, with a market capitalization of over $180 billion, was created by the anonymous Satoshi Nakamoto. It has no authoritative governing body; miners govern it based on their relative computing power and the software version they run. Anyone can “hard fork” Bitcoin to create a new digital asset, and people can disagree over which fork is the real Bitcoin. This radical decentralization creates challenges for digital asset identification. Meanwhile, exchanges frequently disagree on digital asset ticker symbols. Is Bitcoin “BTC” or “XBT”? This creates a headache for anyone in the financial industry needing authoritative reference data.

FIX Trading Community is a liaison member of ISO, the International Standards Organization. ISO tried tackling this issue in 2016 by investigating whether Bitcoin and other cryptocurrencies should receive an ISO 4217 currency code. (Existing currency codes include USD, GBP, EUR, etc.) The answer, unsurprisingly, was no. The ISO TC 68/SC 8/WG 3 working group was formed and tasked with creating a second-tier registry for cryptocurrencies. FIX appointed me as an expert member of WG3 in June, 2018, and I took an active role in the architecture, authoring, and editing of its draft standard.

ISO WG3 quickly realized that it needed to expand its scope from cryptocurrencies to the more general category of digital assets. It chose to focus only on those that are fungible, hence could be traded in a two-sided market. Non-fungible digital assets, such as a digital deed for a specific parcel of real estate, could easily become too numerous, so they are excluded from scope. WG3 proposed creating a registry, assigning a Digital Token Identifier (DTI) that is a unique, random, and fixed-length.

WG3 completed the work of drafting language for ISO 24165 in December 2019. Because digital assets may lack a defined issuing authority (such as a board of directors who authorize stock issuance), WG3 chose to focus on the token representation of the asset, using objective technical attributes of the blockchain itself to tie an assigned DTI to a digital token. Considerable effort was invested to develop a process to differentiate digital tokens created as a result of blockchain forks.

The ISO registry will assign a DTI linked to the unique technical attributes.  Anyone can submit a request to register a digital asset, such as an exchange, custodian, regulator, or investor; the applicant need not be the issuer. Issuance of a DTI just confirms that the token exists; it does not confer legitimacy, nor does it identify an issuer or tie the token to a specific digital asset.

SC8 recently published an RFP to select a firm to act as the Registration Authority that will administer the DTI registry; responses are due June 30. Assuming successful vendor selection and balloting, the target for DTI registry operation is mid-2021.

The DTI will close this last remaining gap, allowing FIX to publish a comprehensive guide for using FIX to trade digital assets. 

The FIX Trading Community open source Project CONGA is a demonstration project of a fully functional exchange running JSON or SBE over the FIXP session layer over Websockets, which could immediately be adopted by existing and new markets. (https://github.com/FIXTradingCommunity/conga

If you would like to get involved in the FIX Digital Asset working group or FIX Trading Community, please contact fix@fixtrading.org.