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Sell Side Questions Need to Limit Dark Trading

By
Siobhan Brownlow
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MiFID II aimed to increase trading on lit venues in the European Union but the sell side argue this will harm best execution and want the share trading obligation and double volume caps removed from the regulation.

The European Securities and Markets Authority last week published the responses on certain aspects of the regulation.

The Association for Financial Markets  in Europe, which represents banks and other significant capital market players, said in its response that enforcing increased lit market trading would not necessarily improve price formation and may harm execution for end investors.

“Therefore, AFME supports the removal of the share trading obligation and the double volume cap mechanism“ said the response. “Neither of these policies advance positive outcomes for end-users, but further increase complexity in market structure.”

AFME continued that price formation in Europe is healthy as shown by spreads on lit markets remaining stable or tightening post-MiFID II.

Spreads in European indices. Source: AFME

“The emphasis on an incumbent stock exchange as a central source of price formation is outdated and is a symptom of market failure rather than an argument for preservation of the status quo,” added AFME. “Breaking this cycle would lead to more open, resilient and deeper capital markets in Europe.”

Virtu Financial, the electronic market maker, also asked in its response why there is a need to limit dark trading.

“The US markets function efficiently and have more dark trading than in Europe,” added Virtu. “The ability to trade on dark venues provides benefits to the end investor – it reduces market impact of orders which would otherwise raise execution costs for investors.”

Liquidnet, the institutional dark pool, argued in its response that trading away from the exchange has always been an important element of equity trading in order to reduce market impact.

“Toxicity in the lit market remains the main inhibitor to the institutional trading community supporting lit continuous trading due to information leakage, market impact and price reversion,” said Liquidnet. “As a result, asset managers would rather seek alternative methods of execution in their such as anonymous block trades in their search for liquidity.”

Liquidnet recommended that regulators should focus on improving trading quality on lit venues by introducing a code of conduct and improved standardisation of data through a European consolidated tape.

“Without fixing the lit, regulators risk forcing asset managers to elect to trade on the lit over what is in the best interest of end investors,” said the response.

The Federation of European Securities Exchanges said in its response that the Market Model Typology industry-led initiative  should be applied to all trading venues, execution venues and over-the counter transactions in order to improve data reporting standards and facilitate consolidation. “Moreover, MMT should be brought under the governance of Esma,” said the federation.

Double volume caps

MiFID II introduced caps on trading in dark pools with the aim of shifting volumes onto lit markets. AFME supported their removal.

“The mechanism does not result in positive outcomes for end-users and unnecessarily increases the complexity of European market structure,” said the trade body.

The Federation of European Securities Exchanges proposed a simplified market structure in its response by using the large in scale (LIS) threshold to differentiate between lit and dark trading.

“Above LIS trading constitutes a legitimate dark space in which trades are not subject to pre-trade transparency and benefit from delayed post-trade transparency,” said FESE. “There would therefore no longer be a need for a double volume cap mechanism in such a scenario.”

Frequent batch auctions

Virtu said it does not agree with the proposal to require the disclosure of orders submitted to frequent batch auctions. The firm continued that its own research found that executions in frequent batch auctions have a higher quality of executions in the form of adverse selection relative to lit executions on primary and MTFs.

“FBAs help investors by reducing market impact – that benefit would be undermined by requiring the disclosure of all orders submitted to FBAs,” added Virtu.

The London Stock Exchange Group operates Turquoise Plato Lit Auctions, an example of a frequent batch auction system. “Any new measures need to be proportionate and measured so as not to risk jeopardising pools of liquidity that can assist end investors obtaining best execution,” said the exchange in its response.

Closing auctions

FESE said closing auctions have been increasing volumes as it is one of the few times in the day when investors truly receive the benefit of centralised liquidity, as well as the growth of passive management which references the end of day price.

The exchange federation argued that the centralisation of liquidity in the closing auctions guarantees that the price formed is dependable since it is protected by the rules established by exchanges.

“Dispersing trading across a large variety of venues and execution modes will come at the cost of deterioration of price formation,” added the response. “Hence, FESE believes that Esma shall not take any action be it by limiting the participation into closing auction or by intervening in the existing competitive landscape.”

However Virtu said Esma should closely monitor the pricing practices of the primary exchanges who have a monopoly on the close given the significance of auction as the biggest daily liquidity event and its significance as a reference price.

“There is nothing about matching during an auction that costs an exchange more to implement that during continuous trading,” added Virtu. “If anything, it is likely cheaper for an exchange to run an auction than a continuous matching process from a technological point of view.”

Nasdaq said the current regulatory framework regarding auctions, including closing auctions, seems sufficient and there is no need for further changes. “We still however underline the importance of a harmonised supervisory approach to auctions across the EU,” added the exchange.

Cboe Europe said in its response that a concerning aspect of increased closing auction volume growth is its impact on price volatility.

The exchange continued that a comparison of closing auction prices and the volume weighted average price of continuous trading shows that there is a consistent difference across Europe’s exchanges of around 50 basis points.

“This is particularly concerning when we note that over 23% of multilateral volume is taking place on the closing auction, and is therefore potentially taking place at a materially incorrect price,” added Cboe Europe. “In our view, this trend should continue to be closely monitored, and assessed thoroughly from a systemic risk and best execution perspective.”

Euronext noted in its response that the increased market share of closing auctions has sparked allegations that their centralised nature gives primary exchanges too much power.

“However, it is important to recall that there are currently approximately 170 equity execution venues in Europe, which shows evidence of a highly competitive market,” said Euronext.

Euronext added that it is important that regulators and policymakers consider the range of price formation delivered by trading venues and acknowledge the core value of price formation on exchanges.

European Women in Finance : Vernita Exum

By
Lynn Strongin Dodds
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Vernita Exum, head of index equities in Europe at Vanguard Asset Management explains how the firm is navigating the current environment as well as the regulatory and technological landscapes.

What measures is Vanguard taking in response to the coronavirus and the current market environment?

To ensure Vanguard can continue operations during a significant regional or global event (such as a pandemic), we routinely perform many of our mission-critical business functions in more than one location. This practice provides geographic diversity for our operations and helps ensure our most critical resources and employees are available to clients during an emergency.

Complementing our multiple campus locations in the US, we also leverage Vanguard locations outside the US to provide additional layers of operational options, and to facilitate a 32-hour trading day. Our global locations are leveraged to transfer trading between regions as necessary.

Furthermore, our Business Continuity Teams have worked across the company to ensure that teams can work remotely when needed. Our investment teams regularly practice contingency scenarios including alternate work locations. And the global nature of our investment teams ensure that our investment professionals regularly work together across regions to manage our portfolios.

MiFID is two years old and how has it impacted the equity world?

One of the main goals of MiFID II was to increase trading on lit venues, but this has not yet been achieved. In fact, figures show that continuous trading on traditional exchanges accounted for around 36% of all equities trades in Europe last year, down from about 42% in 2018. We have seen a shift in liquidity to systematic internalisers (SI) as well as closing and periodic auctions. We have also seen changes in research coverage under MiFID II in that there seems to be less research being conducted on small to mid-cap stocks. This potentially impacts all investors by creating mispricings in the market which in turn results in the possibility of higher trading costs.

What issues do you see the MiFID refit addressing?

As an industry we have learnt to live with a certain amount of imperfection and tend to be experts at workarounds. We are also expected to deal with constant change, but too much change, too fast, and too often can be majorly disruptive – it is expensive, increases complexity and risk, and distracts from our purpose of focusing on achieving good results for our investors. From a broader standpoint, I think we all hope the refit will result in a reasonable amount of stability. Cost benefit needs to be carefully weighed and time needs to be given for safe and proper implementation for each consequential change.

 

We would like to see a focus on MiFID II’s Share Trading Obligation. The STO puts restrictions around venue access (it requires trades to be executed only on regulated markets, MTFs or systematic internalisers) which can potentially lower available liquidity and increase market fragmentation. We also are supportive of the prospect of a true EU consolidated tape since this could improve trade execution if it provides a comprehensive, trusted benchmark to monitor transaction cost analysis. Finally, we think there is more work to be done around the reference price waivers associated with crossing stock, and usage of continuous auctions.

What other regulation do you think is having a dramatic impact?

I would say that the CSDR (Central Securities Depositories Regulation) could have a bigger than anticipated impact (see p.78). The regulation, whose implementation has been delayed until 1 February 2021, aims to strengthen settlement discipline by imposing daily financial penalties for failed settlements and mandatory buy-in provisions. Although we support the regulation’s objective of improving the settlement processes of stocks in Europe, we have some concerns that the aggressive buy-in regime could be challenging to manage and result in additional costs that will be borne by end investors.

There is also the potentially unintended consequence of the regulation making it more difficult to short stocks so that cross-border trading strategies and hedge derivative trades will be more challenging to implement. As a result, although not immediately obvious, the CSDR could have a negative impact on the ETF primary market. There remain a number of open questions associated with the implementation of this initiative and I hope that regulators and the industry can use the extended implementation period to address and resolve them.

In terms of industry trends, do you see the migration towards passive investing continuing?

Passive investing has been a long-term trend and I expect it will continue because index-tracking strategies are a cost effective, transparent and easy to understand way to build a portfolio that aligns with an investor’s goals. If you think about a customised portfolio, index-tracking products can be seen as building blocks that offer inexpensive, broad and diversified exposure to markets.

Looking at the future of equity trading – how has sourcing liquidity and volumes changed? How is the industry addressing these changes?

All things being equal, I would generally prefer to source liquidity in one large block than to chip away at an order in an algo for several weeks, so I would say one key change has been the increasing fragmentation of our markets and liquidity pools. The industry has found it more complex and challenging to source liquidity across different venues in an efficient and cost effective manner. Some of this change has been driven by innovation, automation, regulation, as well as competitive forces and these are likely to be the same inputs that will resolve our current challenges. As the investment community targets this opportunity both the buyside and sellside continue to evolve innovative tools and enhance existing tools that can be used to maximise liquidity opportunities. Promising algorithmic trading enhancements, automated trading flow aggregators, and preliminary testing of AI related applications are exciting, but there remains much work to do for the industry and policymakers.

The quality of data is and will continue to be a hot topic. Is progress being made and what needs to be done to continue to improve the quality?

Though there is a long way to go, there has been progress in improving data quality, mostly because there is a big push from trading desks to leverage data for better decision making. We are not only better at tagging, collecting, and storing our internal data, but we also understand that ‘fit for purpose’ does not necessarily mean 100% perfect. There is a much better understanding by everyone involved – portfolio managers and traders – surrounding what questions can be answered by data and the focus is on how we can best use data sources to produce better outcomes for our clients. Of key importance is an industry-consistent approach in how we collect, store and utilise data that is shared between firms, exchanges, and regulators, etc. Industry-wide initiatives continue to try to tackle this (most recently the consolidated tape initiative). It is important that we continue to push forward on solutions for industry wide standardisation.

How is data science being leveraged by your department?

There is no doubt that the industry has adopted a more information performance driven approach and this is also true for our desk. In general, in the past we were more interested in historical data to look at patterns and trends, however as technology has continued to evolve we have shifted to focusing on more dynamic tools. Previously, buyside firms would rely on sellside firms or vendors for transaction cost analysis and other data analysis, but we have now integrated data analytics into our desk workflow, providing portfolio managers and traders with the real-time tools necessary to make data-driven decisions.

 

It is also a much more collaborative effort, as we have a data analyst on the desk who works alongside our team to analyse strategies, manage the algo wheels and evaluate the trade performance of everyone on the desk, as well as our broker trading partners.

What are some of the challenges with the new technology?

Technology can be a beautiful enabler or an endless distractor. It is very important that we control the tools rather than the tools controlling us. This means understanding our strategic objective and the problem we look to solve, then choosing the right tools that will be the most effective fit for our desk.

It is also key to have a consistent approach to problem-solving to ensure all of my team feel empowered to contribute so that the best ideas are surfaced and heard. If there are benefits to internal development of a new tool, we will carefully consider that route versus an ‘off-the-shelf’ solution.

We believe it is important to continue to invest in R&D, not only to produce innovative ideas and solutions but also in terms of creating a more agile way of working which can produce results much more quickly.

How has your department and industry responded in general to the different regulatory and market trends?

Strategically Vanguard strives to be a leading influencer in the industry and we spend our time working with regulators, index providers, and industry groups to provide ideas, input and guidance. We may work with an index provider, for example, before they implement a particular country in an index to look at the regulation, execution and settlement practice to ensure the market is investable.

If we have concerns, we will help with actionable recommendations for improvements and provide regular feedback. Overall, it is about taking an interest, sharing best practices, and producing successful outcomes for all investors.

I see you were scheduled to be on a panel at TradeTech – do you think progress is being made on the D&I front? How can the buyside build the teams of the future?

I have been in the financial services industry for my whole career in differing roles, and right now the momentum is strong and there is greater awareness that increasing diversity and inclusion is not only the right thing to do but it also has a material impact on the bottom line.

We have to think out of the box such as hiring people from a non-traditional background because they have strong growth mind-sets that will provide us with new opportunities and ideas – we value the ability of these individuals to both learn the business and teach us new things. Also, we have to change how we think about work and how we define productivity (no more office face-time) and create the best overall environment for both business and personal success.

Progress is being made but we have to also recognise that it will still be hard to make big changes, change the status quo and create the optimum workplace of the future. We are very interdependent in the investments and trading community, so firms are rightfully hesitant to take bold steps alone for fear of disruption.

We have recently seen market leaders take brave bold steps such as the London Stock Exchange’s recently published consultation on shortening its trading hours. Steps like this will create better work life integration for all markets related professionals.

Biography: Vernita Exum, is the head of index equities in Europe at Vanguard Asset Management. Exum was previously a portfolio manager in the Vanguard Equity Index Group involved in the daily trading and portfolio management of Vanguard’s international index funds. Before joining Vanguard, she was an equity market specialist for Bloomberg LP and a director on Bank of America Merrill Lynch’s global portfolio trading desk. Exum received an MBA in finance from The Wharton School of the University of Pennsylvania and a BS in accounting from Norfolk State University. She is a CFA charterholder and is a licensed CPA in the Commonwealth of Virginia.

IF YOU’D LIKE TO NOMINATE VERNITA (OR SOMEONE ELSE) FOR ONE OF THE EUROPEAN WOMEN IN FINANCE AWARDS PLEASE CLICK HERE

©BestExecution 2020

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FSB issues consultation on CCP resolution resources and tools

By
Lynn Strongin Dodds
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The Financial Stability Board (FSB), the G20 supervisory body, has launched a consultation for public authorities and crisis management groups (CMGs) to evaluate whether existing financial resources and tools are adequate for central counterparties’ (CCPs) resolution.

CCPs have played a major role as systematically important market infrastructure providers while Covid-19 has wreaked havoc on markets. Figures from the International Swaps and Derivatives Association (ISDA) show that cleared interest rate derivatives accounted for 91.2% of the $87.4tn total traded notional in the first quarter. CCPs have activated continuity plans enabling remote working and working from secondary sites to keep the proverbial wheels turning during the pandemic.

However, there is a general concern over systematic risk, underscored in a recently published paper – A Path Forward for CCP Resilience, Recovery, and Resolution. Market participants such as Allianz, Blackrock, Citi, Goldman Sachs, Société Générale, JP Morgan, State Street, T Rowe Price and Vanguard stated that “although regulators had made progress in enhancing a minimum level of CCPs pre-funded resources and setting risk management standards [to protect against default], several gaps in CCP resilience remained.”

They noted that these institutions had become ‘too important to fail’ and highlighted the lack of a market-wide consensus on their recovery and resolution frameworks.

The FSB is recommending five steps to successfully resolve any issues at a CCP in an orderly fashion and without exposing taxpayers to loss. These include identifying hypothetical default and non-default loss scenarios as well as conducting a qualitative as well as quantitative assessment of the existing means to handle an event if it occurs.

Also, on the list is the ability to evaluate the different types of expenses that could arise and pinpointing the potential shortfalls or gaps that need to be filled and the associated costs.

The draft guidance, which is available for feedback until 31 July 2020, is based on the concepts included in a discussion paper the FSB published in 2018. It takes into account the comments received in that earlier public consultation and feedback from the resolution authorities of CCPs.

©BestExecution 2020
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European Women in Finance : Anne Giviskos

By
Lynn Strongin Dodds
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Portraits chez EURONEXT PARIS

Anne Giviskos, Chief Risk and Compliance Officer at Euronext talks about how compliance has been transformed in the post 2008 world and the lessons that can be applied to coping with Covid-19.

Will the MiFID review have any impact on market infrastructure?

There are key topics in review. The first is on the market data side regarding reasonable commercial basis and related disclosures. The second relates to the discussion on consolidated tape in Europe. The other issues we are keeping our eyes on are the share trading obligation as well as the pre-trade transparency waivers. At the moment there are certain grey areas because of Brexit and the issues of equivalency between the European Union and UK. Establishing a level playing field on the tick size regime was an important evolution post MiFID II, so that systematic internalisers and exchanges apply the same rules.

What regulation in general over the past ten years has had the most impact?

We have always had internal processes, oversight and monitoring in place to ensure that we are compliant with regulations. However, MIFID II had the most far-reaching impact and required a large change programme including adapting our trading system, including market data and building in controls. The additional reporting, and the volume of data required to meet the various regulatory technical standards was a significant undertaking, not just for Euronext but for the industry as a whole.

And what about other regulations?

The General Data Protection Regulation and EU Benchmark Regulations (BMR) have also had an impact from an industry perspective. (The latter aims to improve governance and controls over the benchmark process, including the quality of input data and methodologies used by benchmark administrators). The BMR requires additional reporting. Euronext’s blue-chip indices are considered significant within the definition of the regulation, and we have a strong franchise of other indices (over 500), particularly in the ESG space. Euronext has deep experience in governance, creation and related maintenance of benchmarks. We have a benchmark oversight committee in place that I chair.

Given the regulatory landscape, the compliance function has changed enormously over the years – how has it changed in a market infrastructure context? 

The focus for us has been on end-to-end processes and it has also meant having the right people in place. We have supplemented our teams with people who have specific knowledge of the regulation and have dedicated interlocuters who liaise with the regulators. We work closely with the regulators during implementation in order to have real-time feedback and clarity on their expectations. Euronext also has unique access to a college of regulators, which helps to streamline communications concerning the implementation of different regulations and also provides a central forum where we can have discussions and input.

There are several new developments at Euronext in terms of new markets such as Ireland and Norway as well technology and services such as Optiq? How does that impact risk and compliance functions?

Last year, Euronext announced its new three-year strategic plan to continue to diversify the business through organic and inorganic growth. We have demonstrated our ability to expand in 2018 and 2019 related to acquisitions of Dublin and Oslo Bors respectively.

A key component of these migrations is moving to our proprietary trading platform Optiq, which launched updated platforms for market data, cash equities and derivatives, and completed in November 2019. The result is that Euronext cash and derivatives markets are now operating on one platform, which from a compliance perspective means that we have a consistent level of control and centralised processes within one model. Optiq has demonstrated its robust nature throughout the unprecedented high volume/volatility environment we are experiencing as a result of the Covid-19 crisis, again supporting our compliance with related regulations, keeping the markets open and managing risk in peak periods, including effective circuit breakers.

We also acquired 66% of Nord Pool (the second largest power market in Europe) and are also looking to expand Euronext FX into other products and geographies, including Singapore.

There are so many solutions on the marketplace to facilitate compliance, what are the challenges in integrating them? 

There are a significant number of regtech solutions regarding risk, compliance and control on the market. One of the questions we ask is how can we leverage the tools in the market to optimise our efficiency and add value. For compliance, market abuse and post-trade analysis are critical. We are exploring things such as artificial intelligence and how we can use technology to support and build more efficient and effective outcomes. In addition, we leverage InsiderLog to monitor compliance from an issuer perspective. It has helped to streamline the process. It is important to remember that technology is an enabler and will not solve all the problems, but if it is leveraged in the right way then it can facilitate analysis, improve data quality and provide us with a better end-to-end processing. Our team is critical in this approach. You can’t fully automate experience.

In terms of choosing the right solutions, we are pragmatic and look for a fit into our organisation. We are growing so we also want technology that will grow with us. Security is critical and we have to ensure that the right cyber and information security framework is in place before we make a selection. We have deep internal experience and consult experts as needed who help us choose the right tools.

There is a lot of emphasis on the value that machines can add. What about people?

Administration can be a burdensome task and technology frees people to add the value. For example, with post-trade analysis, we can focus on the meaningful cases. It enables the team to better support in preventing market abuse, and to have more time to be proactive with stakeholders and plan for the future.

Looking ahead what do you think are the biggest challenges as well as opportunities?

Covid-19, while a challenging moment, should be leveraged as an opportunity. We have led the organisation from a risk and business continuity perspective to date, and we have learned about ourselves, our organisation and the environment around us. We will all be different after this, change is happening. We will seize the moment to adapt and become stronger.

From a compliance perspective we will continue to integrate the acquisitions we have made. One of the good things is that the implementation of multiple significant regulations has given us different perspectives on how we can think and improve our compliance programme.

Biography: Anne Giviskos is the Chief Risk and Compliance Officer at Euronext NV with teams in Europe and the US. She is a member of the Oslo Bors VPS Board and Interbolsa Board, both Euronext subsidiaries, the Chair of the Euronext Benchmark Oversight Committee and member of the Risk Committee of LCH SA. Giviskos has over 20 years of experience in financial services and technology including nearly 15 years at NYSE/NYSE Euronext/ Euronext. She began her career at PricewaterhouseCoopers in the assurance function. She graduated from the University of Michigan with a Bachelor of General Studies, with a focus on psychology and business.

©BestExecution 2020

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News : People : Philippe Ghanem

By
Ian Rycott
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Philippe Ghanem re-joins SquaredFinancial to create a new generation one-stop solution for traders and investors.

London 4th May, 2020 – SquaredFinancial has announced today (4th May 2020) that Philippe Ghanem has re-joined the firm to oversee ambitious plans to expand both its services and geographical footprint, as it offers a new one-stop solution for traders and investors looking for secure, regulated and technology led access to global markets.

Mr Ghanem was one of the original founders of SquaredFinancial Group, and has returned to take-up the position of Executive Chairman, with the objective of making SquaredFinancial a global firm and a significant market contributor.  Known for his vision and insight he has been responsible for developing a number of very successful companies.  One of his first moves has been to bring in Husam Al Kurdi as Chief Executive Officer, who will focus on expanding the brokerage and market access side of the business.
Mr Ghanem commented: “This is the optimum time to relaunch SquaredFinancial, as the world faces an unprecedented crisis and needs innovation and change to move forward.  We are developing a fintech based financial services company which combines the best technology with the best people to deliver for a new generation of clients.  Investors today want to be able to build a long-term relationship with an accessible, proactive and trusted partner.  They want a secure, easy to use and flexible solution from a firm they can trust to manage their access to global markets.  This is why we are launching SquaredFinancial at a time when everyone knows that change has to happen.”

Under the new leadership, SquaredFinancial is targeting exponential growth as it increases its presence in main markets and opens new offices in jurisdictions which offer strong and respected regulation.  Growth will be achieved organically as well as from the acquisition of financial institutions, banks or fintech companies.  Results will be delivered by a team which understands the investment drivers of a generation who are tech literate, market savvy and acutely aware that from global warming to pandemics the world is changing.

The target markets include Europe, Asia, Latam and Africa where a range of brokerage, wealth management and asset management will be offered.  At all levels, technology will be fully integrated to provide trading solutions with the highest levels of security, as well as managing KYC and AML commitments, so that clients are given the support they need whether they are looking to construct or preserve wealth.

“Over many years we have seen the development of financial services, mainly driven by new regulation or technology, however the needs and views of the clients were often overlooked.  It is now very clear that Generation X to Generation Z investors and traders are looking for new options, which can only be delivered by a fintech led financial services company.” added Mr Ghanem.

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UK regulators extend Libor deadline for loan transition due to Covid-19

By
Lynn Strongin Dodds
-

The deadline to end the use of the Libor interest rate benchmark in new loans is being extended until the end of March 2021 due to the coronavirus pandemic, according to a joint statement by the UK Financial Conduct Authority (FCA), the Bank of England and the Working Group on Sterling Risk-Free Reference Rates.

They said that, within sterling cash markets, transition to the Libor replacement – the sterling overnight index average or Sonia rate – in the bond market had been largely completed, but full transition in the loans market would not be possible by the third quarter of this year because of the disruptions caused by Covid-19.

Libor is the rate used by companies in most of their short-term and floating debt and interest rate hedging with contracts maturing up to 50 years into the future.

The replacement of Libor is tied to the spate of scandals over the manipulation of the benchmark which is still used in financial contracts worth up to $400tn globally. They came to light in 2012 and some of the biggest investment banks and interdealer brokers have paid almost $10bn in fines to regulators around the world, while a handful of traders have gone to jail on Libor-rigging charges.

Although it has been widely recognised that the process of ending Libor is a complicated and challenging process, the FCA is adamant that “it remained a central assumption” that companies cannot rely on Libor being published after the end of 2021.

“There will likely be continued use of LIBOR-referencing loan products into Q4 2020 in particular, to maintain the smooth flow of credit to the real economy,” according to the UK watchdog. It added that by the end of the third quarter, lenders should include in all new and refinanced loans clear contractual arrangements to transition to Sonia or other alternatives ahead of the end-2021 Libor deadline.

©BestExecution 2020
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Index providers join forces to launch new fixed income products

By
Lynn Strongin Dodds
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Leila Fourie, CEO, JSE

S&P Dow Jones Indices (S&P DJI) entered into a strategic collaboration with IHS Markit while London Stock Exchange Group’s FTSE Russell extended its long-standing partnership with the Johannesburg Stock Exchange (JSE) to launch a series of co-branded of fixed income indices.

S&P DJI will construct new multi-asset benchmarks using its own and IHS Markit’s leading indices, including the S&P 500 and IHS Markit’s iBoxx bond indices and CDX and iTraxx credit indices. The first phase will see the two firms design a liquid multi-asset allocation strategy, expanding S&P DJI’s broader multi-asset index strategies globally. These indices help meet investors’ growing demand for portfolio allocation, diversification and risk management solutions especially in times of market volatility.

“We are excited to collaborate with IHS Markit in developing innovative multi-asset solutions vital to investors,” said Jamie Farmer, Chief Commercial Officer, S&P Dow Jones Indices. “S&P DJI has had great success with indices such as the S&P MARC 5% ER Index and we are confident that together with IHS Markit, we will enable additional index solutions with just as much potential.”

Sophia Dancygier, Head of Indices at IHS Markit adds, “Our collective range of indices and associated financial products are the liquidity cornerstone of the global investment community, and they continue to act as a solid gateway into equity and fixed income markets.”

S&P DJI is an independent equity index provider, offering a comprehensive array of indices that serve any investment strategy while IHS Markit’s indices underpin some of the world’s most liquid fixed income financial products, including credit default swaps, total return swaps, exchange-traded funds, futures and options.

Separately, FTSE Russell and the Johannesburg Stock Exchange (JSE) will launch a series of co-branded of fixed income indices. Under the agreement, FTSE Russell will act as the benchmark administrator for JSE’s fixed income indices and provide daily index calculations on the FTSE/JSE All Bond Index Series, as well as the FTSE/JSE Inflation-Linked Index Series.

Dr. Leila Fourie, CEO, JSE

The new indices represent the performance of South African government, state-owned and corporate bonds, which both parties said offer investors multi-asset capabilities across South African capital markets.

“FTSE Russell aims to be the world leader in multi-asset indexing and now, domestic and overseas investors in local South African debt are able to benefit from FTSE Russell’s robust, transparent and objective approach to managing fixed income benchmarks,” said Waqas Samad, group director of information services at LSEG, and CEO of FTSE Russell.

Dr Leila Fourie, CEO, JSE, added, “Our partnership with FTSE Russell has seen local and foreign investors in stocks listed on our markets benefit from the expertise of an independent global index provider for almost twenty years. Today’s launch extends these benefits to corporate and government bond investors and will improve international access to our debt markets.”

FTSE Russell and JSE have been working together on providing equity indices since 2002, and agreed to branch out into fixed income indices in 2017.

©BestExecution 2020
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BMLL builds Derived Data desktop application on OpenFin

By
Lynn Strongin Dodds
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Paul Humphrey, CEO, BMLL.

Paul Humphrey, CEO, BMLL

BMLL Technologies, the data engineering and analytics firm, announced its collaboration with OpenFin, the operating system (OS) for finance, to build their Derived Data desktop application on OpenFin’s OS.

The Derived Data application, which will be available in the second quarter, will provide buyside users with access to market metrics created from the  granular Level 3 order book data. Additional metrics such as execution analytics, market impact and trading costs as well as tools to visualise the order book will be added during the year.

Traders, portfolio managers, risk and compliance officers will be able to analyse and visualise their portfolios over time, giving them a deeper understanding of the liquidity and risk profiles of their portfolio and associated trades. It will enable them to screen for, highlight, view and compare market quality metrics to measure and improve their execution performance and best execution oversight.

BMLL’s Derived Data desktop app will be fully interoperable with other third-party applications built on OpenFin’s OS and easy to integrate into existing client workflows.

Adam Toms, CEO, OpenFin Europe

Data visualisation and the ability to deliver data in an interoperable way has become increasingly important, especially in the current environment., according to Paul Humphrey, CEO of BMLL. “We have seen unprecedented levels of volatility and trading volumes recently, so it is more important than ever for the industry to understand what’s going on in the markets, be able to analyse trading activity and improve execution performance,” he adds.

Adam Toms, CEO of OpenFin Europe, agrees that “data is the name of the game” and the Derived Data app will provide more detailed and predictive information embedded in pricing data for pre- and post trade to optimise their trading strategies.

Globally, OpenFin is used to deploy over 1,200 applications across more than 225,000 desktops at 1,500 institutions, in more than 60 countries. Interoperability comes as standard for all applications built on OpenFin OS, allowing them to share information, intent and context with third party apps in a permissioned manner.

©BestExecution 2020
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VIX may be stabilising but it is not the end of volatility

By
Lynn Strongin Dodds
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After a tumultuous March which sent the VIX*, or fear index, to record highs, world stock exchanges have recouped around half of this year’s coronavirus-linked losses as investors gamble on a strong recovery in 2021. However, industry experts and academics warn not to be complacent as the future is unclear and volatility is likely to be a hallmark of this year’s trading.

Katie Kolchin, SIFMA

According to analysis from Katie Kolchin, director of research of trade association SIFMA, the year started in a benign environment, with the VIX at 12.47 on January 2 and a January average of 13.94, both below 2019 average levels (15.39). Volatility started increasing in February, with an average of 19.63 and high of 39.16, rising to an average of 57.74 and a peak of 82.69. The April average is down to 44.12, with a peak of 57.06.

She said, “What is interesting is that we thought the VIX was on a downward trend, with levels dropping below 40.00 at the end of last week. Yet, we ticked back up this week, with the significant decline in the crude oil futures contract (actually pricing negatively on West Texas Intermediate), as oil demand cratered under this Covid-19 related stay-at-home environment. As we continue to uncover new macroeconomic dislocations, we can expect additional volatility spikes.”

Analysis conducted by London Business School academics Elroy Dimson, Paul Marsh and Mike Staunton also note that this economic crisis differs from the financial crisis of 2008-09 due to the biological component and the ambiguity as to when large parts of the economy might be allowed to restart. As a result, current volatility is here to stay and the VIX could remain much higher than the long run average.

Oscar Jorda, University of California, Davis

Alan M. Taylor, University of California, Davis

The uncertainty is only fuelled further by research from Oscar Jorda, Sanjay R. Singh, and Alan M. Taylor from the University of California. They took a much longer view and looked at the long-term economic impact of 15 major pandemics dating back to the Black Death in the 14th century. They found that the economic effects tend to persist for years accompanied by below-average asset returns. However, today’s ageing populations could alter outcomes.

They wrote that “the global economic trajectory will be very different than was expected only a few weeks ago. If low real interest rates are sustained for decades, they will provide welcome fiscal space for governments to mitigate the consequences of the pandemic. The major caveat is that past pandemics occurred at time when virtually no members of society survived to old age. The Black Death and other plagues hit populations with the great mass of the age pyramid below 60, so this time may be different.”

*Source Investopedia: The CBOE Volatility Index (VIX) is a measure of expected price fluctuations in the S&P 500 Index options over the next 30 days. The VIX, often termed as the “fear index,” is calculated in real time by the Chicago Board Options Exchange (CBOE). The key words in that description are expected and next 30 days.

©BestExecution 2020
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Buy Side Defends Off-Exchange EU Trading

By
Siobhan Brownlow
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MiFID II aimed to increase trading on lit venues in the European Union but fund managers argue that systematic internalisers, dark venues and periodic auctions have saved money for end-investors and there are other ways to increase transparency, such as introducing a consolidated tape.

The European Securities and Markets Authority last week published the responses on certain aspects of the regulation.

Richard Worrell, head of EMEA equity trading for Janus Henderson, said in the asset manager’s response that the industry’s responsibility is to save clients’ money by encouraging innovation.

“Therefore, I do not believe restricting venues, removing mid point or price improvement is sensible at all,” he added. “Systematic internalisers, dark venues and periodic auctions are examples of innovation that saves clients money and they should be encouraged.”

Norges Bank Investment Management, responsible for investing the country’s sovereign wealth fund, said in its response that large-in-scale venues efficiently facilitate block trading between institutional investors. The venues offer a good balance between order size and fill rate and their mid-point execution feature is important in contributing to fair pricing.

“Although these venues are exempted from pre-trade transparency requirements, they do contribute to price discovery through timely post-trade reporting,” added NBIM. “We have welcomed innovation in this space as it offers tailored solutions to the needs of current market participants, especially in light of the increased institutionalisation of asset management in recent years.”

NBIM continued that any disruption of LIS mid-point execution would harm market liquidity making European markets less attractive to large institutional investors.

BlackRock also said in its response that it is wrong to assume that all trading that takes place off-exchange detracts from price formation or market quality.

“Concerns that ‘dark’ venues detract from transparency and price formation would be best addressed by having a real-time tape of record that consolidates the information from all venues operating in the marketplace – ‘dark’ or otherwise,” added the fund manager. “The same is true for pre-trade transparency, which is best addressed by developing a European Best Bid or Offer.”

The European Fund and Asset Management Association added there is no need to artificially incentivise lit trading versus other execution methods.

“This will not result in a positive outcome for investors and will remove optionality for firms and result in a detrimental impact on end-user objectives and strategies,” wrote EFAMA.

The association continued that the quality of lit markets could be enhanced by reducing the number of order types that a venue may offer to four types of orders, as most of these order types only exist to facilitate latency arbitrage. “We consider that this will enhance the quality of the execution of transactions and reporting,” said EFAMA.

Consolidated tape

Esma has recommended a real-time consolidated tape for equity markets in Europe. There is no consolidated tape in the region to provide an overall view of the market so investors have to rely on data from third-party vendors which increases the cost of trading.

BlackRock said in its response that a successfully governed European consolidated tape would be transformative for markets and for investors.

“It would bring clear benefits; increasing transparency and strengthening best execution, while simultaneously improving competitiveness of European capital markets and contributing to the delivery of Capital Markets Union,” added BlackRock.

In addition, BlackRock said Esma should eventually extend the tape to pre-trade information, creating a consolidated European Best Bid or Offer. “The EBBO would be equally important to enhance market quality and to open-up best execution data to all investors, large and small,” added the fund manager.

Invesco agreed that an EU consolidated tape, including for exchange-traded funds, would incentivise lit trading.

The response said: “Invesco believes that the provision of an EU consolidated tape is a utility to the market and therefore is unlikely to emerge without some regulatory intervention to support it.”

Systematic internalisers

MiFID II banned broker crossing networks and required broker-dealers to set up systematic internalisers in order to provide principal liquidity to clients. The Esma consultation asked if SIs should stop being eligible execution venues.

BlackRock said systematic internalisers should remain as eligible execution venues as they are an important execution channel for investors seeking principal liquidity from broker-dealers for block trades, but should be tailored more specifically to the provision of risk capital.

“There is understandable concern around the volume of trades taking place on SIs, and whether they are appropriate to the venues,” added BlackRock. “This debate would be better informed by the data and transparency provided by a consolidated tape.”

Janus Henderson agreed that SIs, particularly for large in scale blocks, are a crucial part of the trading landscape. The fund manager gave the example of recently trading approximately three days volume of a German stock at a 2% discount which would have taken five to six days to execute without an SI.

“Instead, less than two days, after we traded, the stock was down more than 5%.Therefore we helped preserve significant alpha of ~3% for our clients,” added the investment manager. “As importantly, we used the proceeds to reinvest in existing European names and a new idea, so the market is still seeing the volume.”

Invesco added that the MiFID II best execution obligations are often met by trading on SIs, rather than exchanges or other authorised venues.

“As such, given that Esma’s analysis does not present a holistic view of the use of SIs, and concentrates only on the volume of trading which takes place on SIs, we cannot be convinced of the proposal to remove SIs as eligible execution places for the purposes of the MiFIR share trading obligation,” said Invesco.

NBIM said a level-playing field for SI activity is required and further analysis on their contribution to price and liquidity discovery is needed.

“Ensuring banks/brokers’ intermediation activity is not hindered remains important for the less liquid segment of the market, since there may not be other feasible liquidity sources, added NBIM. “Reducing available liquidity from these banks/brokers would be to the detriment of these listed firms and to the market more broadly.”

Double volume caps

MiFID II introduced caps on trading in dark pools with the aim of shifting volumes onto lit markets. Esma asked in the consultation whether they should be extended to  cover illiquid markets.

“We believe there are fundamental questions about the effectiveness of the double volume caps that should be addressed before considering smaller changes or refinements,” added BlackRock. “Regardless, we do not believe that the DVC should be extended to cover illiquid markets.”

Janus Henderson said the double volume caps have not worked so continuing to use them “let alone extending them without evidence seems slightly mystifying.” The fund manager continued that exchanges need to innovate to increase volumes, for example, by offering a midpoint, hidden order type.

The European Fund and Asset Management Association also asked for the removal of the caps. “The mechanism does not result in positive outcomes for end-users and contributes to complexity in European market structure,” added EFAMA.

Auctions

Regulators have expressed concerns about the increased volume of trading in the closing auction as intraday volumes have decreased.

BlackRock said the trend was driven by regulations making broker-dealer risk taking more costly, causing them to unwind more of their positions in the close; technology making it easier to access closing auction liquidity; index funds referencing the market close price as a benchmark and the ETF create/redeem mechanism.

“Ultimately, it is at this point unclear whether an increase in closing auction volume has any impact – positive or negative – on volatility and on price formation,” added BlackRock. “As such, it is too early for regulatory intervention, although initiatives like shortening market hours could help concentrate more liquidity into intraday trading.”

Venues have also introduced intraday frequent batch auctions which Janus Henderson said had been a success.

“They are an innovation which offers mid point liquidity and therefore should be encouraged, said Janus Henderson. “Some measures could be put in place to simplify the system and make all work in the same way. For example, we do not believe it is fair to fix the price at the start of the auction.”

Janus Henderson noted that frequent batch auctions are still only around 3% of total volume and so not really worthy of further scrutiny. “Let’s not stifle innovation that helps price formation and also save investor’s money,” the fund manager added.

NBIM said closing auction liquidity needs to remain accessible to all market participants, with an appropriate level of transparency.

“Innovations linked to closing auctions, such as market-on-close crossing mechanisms offered outside of the primary exchange, should be assessed for potential unintended consequences, including the risk of further market fragmentation,” NBIM added.

The Norwegian fund manager continued that frequent batch auctions are promising venues for sourcing natural liquidity and have the potential to improve execution quality for long-term investors as they take place in parallel with continuous trading.

State Street Global Advisors added that closing auctions are a valuable source of liquidity but highlighted the monopoly pricing power exerted by the exchanges.

“While we agree with Esma’s statement that “liquidity attracts liquidity”, we observe that the cost of transacting at the closing auction is increasing, which will ultimately be to the detriment of the investor,” added SSGA. “We encourage Esma to continue to monitor these developments closely.”

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