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Equities trading focus : Industry viewpoint : Babelfish Analytics

By
Ian Rycott
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ROUTING ANALYTICS COME TO EUROPE WITH PLATO-CLARITY.

By Jeff Alexander, Founding Partner, and Linda Giordano, Founder & CEO, of Babelfish Analytics.

In the same way that race car drivers tweak and tune their cars to push for maximum performance, traders need to ensure that their tools are working at maximum efficiency. While traditional Transaction Cost Analysis (TCA) is useful for understanding high-level trends and general hindsight guidance on improvement, it doesn’t contain the necessary granularity to provide direct causal linkages to cost. Routing analytics provide the diagnostics that enable traders to cut through marketing hype and comprehensively understand what is working and what isn’t. An algorithms’ basic description usually does not deliver ‘professional race car’ level performance. Just as Lewis Hamilton couldn’t win a Grand Prix in an off-the-lot Mercedes AMG GT R, traders using off-the-shelf algos often feel frustrated with performance. Evaluating trading performance without analysing route level data is akin to evaluating a race car without ever opening the hood.

Clarity was the first product to address the need to analyse routing behaviour and offers the only platform that takes into account every action in the life of an order. Data that resides in Order Management (OMS) and Execution Management (EMS) systems is generally sufficient to perform traditional TCA, allowing a trader to understand portfolio manager instructions and market conditions to determine a trading strategy. However, TCA is neither comprehensive nor granular enough to measure the efficacy of the tools used to implement that strategy. Both unfilled routes, which indicate venues where routes were sent and includes information such as size, limits, and order types used, and filled routes, with properly granular timestamps, along with risk factors and accurate strategy categorisation, are necessary to evaluate an algorithm. This data only resides with the broker.

For example, some algorithms that are labelled ‘aggressive liquidity seeking’ may have built-in features that attempt to capture the spread or rest at midpoint prior to aggressive taking. In fast markets, this will create a tremendous amount of opportunity cost, which will convert into realised impact. Volume-Weighted Average Price (VWAP) algos may also rest in venues that offer economic benefits to the brokers, rather than seeking out the best liquidity sources, which can also result in excess realised impact cost.

Without the ability to collect all the underlying data associated with their broker algorithms, a trader cannot understand where inefficiencies lie, where costs are coming from, and which strategies provide the best experience. Much like parent-TCA, routing analysis is also a ‘multi-metric’ process, which requires a comprehensive dataset. Depending on the objective, it may be necessary to evaluate algos with different metrics. A focus on reversion is useful for algos with passive objectives, however, it is myopic for aggressive algos or even in fast markets, resulting in missed liquidity and excessive opportunity costs. Fill rate can be deceptive if constraints like minimum fill quantities and limits aren’t taken into account. These are just a few examples, but the bottom line is that traders often make the mistake of approaching routing analysis with the same template as traditional TCA. Routing analysis is not a ‘one benchmark fits all proposition’, but inefficiencies are not something that traditional TCA captures, and without reviewing routing data, trading costs will be higher than they should be.

In Europe, MiFID II mandates that investors institute a process to evaluate their algorithms to achieve best execution and to ensure that algos are sound. Currently, Plato-Clarity is the only commercial platform that can collect both the unfilled and filled routes and trades, process the data, and deliver these crucial transaction-cost analytics and warehoused data. Babelfish Analytics, the creator of Plato-Clarity, has teamed up with Plato Partnership to offer the platform across Europe to both the buy- and sellside, and to create a new standard for routing analytics.

One of the biggest challenges that any analysis operation faces is gathering, normalising, and processing data. For traders attempting to understand and integrate their broker’s routing activity into larger optimisation or performance models, this has been a frustrating and fruitless project that almost always results in endless cost, wasted resources, and inaccurate outcomes. In order to produce the Plato-Clarity application and consulting analysis, Babelfish has established a solid broker network and collects historical data in Babelfish’s standard, comprehensive format, which is already commonly in use. This data is normalised, priced, and processed into an easily digestible format and delivered using a variety of secure formats to an authorised destination to offer a comprehensive data warehousing solution.

The Plato-Clarity consulting platform is a fully functioning analytical solution. Subscribers alert brokers that they are participating and Babelfish will take care of the rest. The processed data is delivered in a series of highly customisable ‘tableau’ dashboards that illuminate aggregated venue and sequencing activity, internalisation, transaction fees and rebates, momentum and signalling, comparative broker scorecards, and proprietary metrics that enable traders to understand the trade-off between liquidity sourcing and information leakage control.

Additionally, if desired, periodic written consulting reports are available that contain actionable steps on how to customise algorithms to maximise performance. Babelfish analysts have decades of experience understanding market microstructure, transaction cost analytics, and algo engineering, which they can apply to your specific trading needs. They will help you work with your brokers to oversee controlled experiments and develop customisation plans. The ability for firms of all sizes to access a fully resourced ‘outsourced’ research team is invaluable.

While routing analytics are still in their infancy in Europe, Babelfish has been working with US-based investment managers for almost five years and has had significant impact on the industry. Early client-driven research resulted in the significant curbs in detrimental practices, such as the overuse of single-dealer platforms, which increased signalling, and vast broker internalisation, which led to missed trades and higher impact costs. Additionally, algo providers and venue operators now routinely mitigate the impact that price feed latency has on midpoint prices because Babelfish proved the relationship between stale midpoint prices and venue toxicity. Because of Babelfish’s influence and inspiration, these practices became more heavily scrutinised, and findings were validated by academics and regulatory bodies around the globe. Equally as impactful, however, are the firm specific benefits that are identified through regular and rigorous venue and routing analysis.

©BestExecution 2020

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Industry viewpoint : The Consolidated Tape : FIX Trading Community

By
Ian Rycott
-

WHATEVER CONSOLIDATED TAPE YOU WANT, DATA STANDARDS ARE ESSENTIAL.

The Regulators have wanted an industry led Consolidated Tape, but it hasn’t happened. Neena Dholani, Global Marketing Programme Director, FIX Trading Community explains why.

Some of the reasons why Consolidated Tape providers have not emerged include the lack of financial incentive for running a consolidated tape, the overly complex and strict regulatory environment, competition among non-regulated entities such as data vendors, and last but not the least the lack of mandated clear and open data standards. All of these are significant hurdles that must be considered in order for a consolidated tape to be successful.

But nevertheless, one of the main objectives of MiFID II was to increase transparency and it is still immensely difficult for market participants to get a complete picture of trading across venues. Known as the ‘what, where & when’ conundrum it is now clear that regulators are definitely going to do something about the consolidation of European data. The debate today is more around the type of consolidated tape and ensuring how the industry comes together to implement some of the points raised by ESMA in their consultation paper released late last year.

So, what type of tape do we need? Should a consolidated tape service be real time pre and post trade data, a real time post trade tape of record, or an end of day tape of record? There are strong supporters for each of these three options but whatever the selected choice the application of open, clear and harmonised data standards is essential for successful implementation.

In order to address the questions surrounding data standards, the FIX Trading Community launched its Consolidated Tape working group last summer, to consider the data standards element of the Consolidated Tape consultation paper. Given the difference in the operation of the Equity and Non-Equity markets two groups were established. The working groups are focusing on Equity and Fixed Income cash bonds, but leveraging use cases and trade scenarios for each of the asset classes. The group’s objective is to look at where the existing data provides challenges for market transparency; then to work towards new technical flags of how the data should be identified to aid in the creation of a consolidated tape. We are calling on the industry, the buysides, sellsides, technology firms and venues to join us and get involved with this initiative.

“Implementation of new OTC and SI data flags agreed by the experts in the FIX Trading Community should have an immediate impact on improving market transparency” remarked Graham Dick, co-chair of the FIX Equity Consolidated Tape working group and Chief Executive of Aquis Exchange Europe. “Industry experts have worked proactively to deliver technical solutions and we look forward to sharing our recommendations in 2020 with ESMA and the European Commission” he added.

The Equity working group kicked off its initial meeting in December last year and spent most of its time focusing on OTC and SI trade reporting where the current data requirements leave an element of ambiguity in the understanding of the circumstances of the trade. The group has also focused on market interpretation of what is “addressable and non-addressable” liquidity. In order to come up with an agreeable definition the working group have drawn out detailed workflows defining touch points on where a new FIX flag is needed.

The Fixed Income working group started in March this year with the same objective to deliver better quality data standards. This is to be achieved by looking at the detail of Fixed Income post trade transparency which has a much wider and diverse product range. Solving the problem at the source of publication should resolve this issue when the data is published. The working group will mirror the approach taken by the equity working group by capturing trading scenarios but very much focused on a Fixed Income outcome. The ultimate goal for the working group, collaborating with other industry associations, is to produce best practice guidelines outlining the correct way of completing trade reports that makes sense for the regulators and the industry. The output of this will be taken into the full suite of the FIX family of standards. Should this newly created blueprint be mandated throughout the industry we can then deliver a Consolidated Tape which maintains robust industry standards which work for the entire Financial Sector.

 

“The Consolidated Tape for Fixed Income needs to recognise the very different way that this asset class works. By taking time to go back to first principles, we can ensure that we can create a dataset that adds value to this sector” said Alex Wolcough, Co-Chair of the working group and founder of GreenBirch Group.

The Consolidated Tape working group endeavours to deliver its stated aim and will succeed as the industry continues to work together with guidance and co-operation from EC, ESMA and other trade associations.

The success of the FIX Trading Community working groups is a direct result of the commitment of the industry experts who bring knowledge, skills and practical experience into the mix. This can only strengthen the goals that the working groups are looking to achieve and ensure the industry have enriched data and reliable standards.

In order to work towards a consolidated tape that will provide true value to the industry, more than ever, we need the widest possible industry collaboration and engagement.

Representation from across the industry is essential and as a result all sectors will benefit.

Why should the buyside get involved in the working groups?

As a buyside trader, trading performance is becoming ever more critical to your role. The more illiquid the asset class, the more incomplete and possibly inaccurate the current dataset. Being engaged in the working groups will enable you to ensure your vision of the core data attributes and potential workflows are implemented into the standards going forward.

The provision of a robust consolidated tape with accurate standardised data will provide you with the best opportunity to optimise your transaction cost and best execution analysis.

Why should the sellside get involved in the working groups?

For the sellside it is critical to understand the data that the buyside are using to feed into their performance analytics. Being engaged in the working groups will enable you to hear directly from the buyside and understand their core concerns around data quality and also the workflows they use. This will turn enable your firms to process data which is tied into your client’s perspective.

Why should the Trading venues and APA’s get involved in working groups?

For Trading venues and APA’s, with unambiguous data you will have a better understanding of OTC flows directly from the buyside and sellside. This will ensure that your workflows and data processing are in line, and will allow you to be well positioned with the ability to implement robust future regulatory directives.

Why should technology firms get involved in the working groups?

This will give you the opportunity to engage with all your clients, and ensure your products fit their needs, it will also give you the opportunity to feed into the process, and ensure the processes that are developed do not hinder any future technical innovation.

For technology firms this critical data will form the core of your products that allow continued innovation. The access to a reliable data source will assist in enriching products in order to further improve your service.

Now is the time to get on board:

  • To learn more about the Consolidated Tape initiative, please contact EMEA co-chairs Rebecca Healey and Matthew Coupe on
    emea.cochair@fixtrading.org.
  • To learn more about the breath of work within the FIX Trading Community, please contact the Program Office on fix@fixtrading.org.

 ©BestExecution 2020

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Viewpoint : The subscription economy : Craig Campestre

By
Ian Rycott
-

WHY THE SUBSCRIPTION ECONOMY WILL BE YOUR COMPANY’S FUTURE.

By Craig Campestre, Chief Revenue Officer, IPC.

Over the past decade, businesses and consumers have undergone a seismic shift in the way that they transact with one another. It’s actually a change so fundamental that it is impacting the very way in which we as individuals think about and relate to the concept of ownership and possessions. It has the potential to completely revolutionise the way that businesses operate, and upends traditional thinking around permanent fixed costs in critical infrastructure. Firms that fully embrace this change can totally transform their approach to innovation and to delivering customer value. It’s the subscription economy – and it’s going to be your company’s future.

The way we were…

As recently as ten years ago, if you or the CTO / CIO of your firm needed access to a certain software application in order to run your business, you would buy as many licenses as you needed. These would be valid for a specific version of the software. When the software required upgrading, you’d be notified, and required to pay an upgrade fee or – in the worst case – to purchase a new license. The new software would need to be downloaded and installed, and then retroactively tested against all of your existing core systems and applications. Inevitably, there would be compatibility issues, with key features your systems had long depended upon being dropped from the latest iteration, or else certain new features not being “backward compatible”.

New and expensive hardware and servers would be required to support the “enhanced features” used by the supplier to justify higher fees. Your in-house systems would need to be migrated across to the new servers as well. The entire undertaking could require mobilisation and deployment of huge teams of consultants with all their attendant cost overheads. New business initiatives could be put on hold for months, pending completion of the upgrade, and costing you valuable time to market and customer satisfaction. And all this, just to end up pretty much where you had been at the beginning but running on the latest version and with new bugs to patch and fix along the way.

I don’t need to spell out the many ways in which this expensive cycle spelled disaster for agile financial markets participants with forward-thinking approaches to innovation and market access. This is self-evident.

A paradigm shift in service consumption

Fast forward to 2020, and let’s take the case study of an innovative challenger – a market maker, for example – wanting to come to market. The CTO / CIO’s first action will be to identify the set of hosted infrastructure providers that they will use. This could be a combination of cloud providers, such as AWS, Microsoft Azure and Google Cloud. They will start off using the minimum resources possible, secure in the knowledge that, as they grow, they can easily and cost-effectively scale their resource requirements upwards on the cloud. There’s no need to know upfront what their maximum capacity will be; in this way, they can grow without limit.

They will also want to on-board to a networked community through which they can easily connect to and access other market participants – whether they be clients, counterparties, market data providers, trading platforms, exchanges… the list goes on. For their in-house toolset to support operational functions, such as CRM, they’ll choose Software-as-a-Service (SaaS) offerings off the shelf. Again, they can scale up and down as they need to. When the time comes for these SaaS packages to be upgraded, the experience will be seamless. As nothing is locally installed, it’s the SaaS provider’s responsibility to ensure that all data is migrated and that all required functionality is backward compatible.

This even extends to office space and office equipment. Rather than making an initial outlay on an expensive multi-year lease, uncertain of longer-term capacity requirements, our challenger can take flexible office space from one of the many suppliers on the market. These will come with the basic amenities and equipment that they need – nobody needs to waste their time managing the printer and water cooler leases any longer!

What’s changed?

What does this mean for our challenger? It means that their barriers to entry are drastically lowered, along with their set-up costs and time to market. Their focus can be on their core business, and on hiring and retaining the right people to drive that core business forward, without the distractions of managing non-core systems. They can scale up and down flexibly on demand and have shorter innovation cycles, with new features launching more quickly and inexpensively. They have an enormous and extraordinary advantage over their incumbent counterparts. This is the future, and we all need to embrace it.

Ownership is a great model for assets that appreciate in value over time. In the case of technology, whether it be hardware or software, these are assets that depreciate in value over time. Subscribing to these as a service therefore eliminates exposure to the downside of depreciation and gives all the upside of continuous improvement. The subscription economy – of which SaaS, PaaS, IaaS and cloud are all enablers – is transforming the way in which we consume services. The benefits that it brings to subscribers cannot be understated.

What can IPC offer?

At IPC, we understand that, in the brave new subscription economy, the key differentiators for providers are the strength of our relationships with our clients, and the quality and responsiveness of our services. Our customer-focussed culture means that we are continuously seeking opportunities to improve our offerings. We recognise the importance our clients place on market access and speed to market. We combine the power of a subscription-based model with an ever-growing and evolving networked community of global financial markets participants, to create a powerful and market-leading value proposition for our clients.

©BestExecution 2020

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Viewpoint : Managed services : Simon Byles

By
Ian Rycott
-

MANAGED SERVICES COME OF AGE.

Lynn Strongin Dodds talks to Simon Byles, Global Head of Business Development, Managed Services, SmartStream about how managed services can help organisations navigate change especially with Covid-19.

The use of managed services is not a new phenomenon but one that has continually gained momentum as financial service institutions have looked to cut costs, improve quality, meet the growing needs of regulators, markets and clients, while maintaining risk and control. This trend is only expected to accelerate as Covid-19 sharpens the attention on maintaining and/or enhancing operational performance, whilst continually adding value for clients.

“The reality is that with the vast challenges and associated volatility in the markets due to the global pandemic crisis, sellside firms, for example, have to ensure that their traders are fully operational, analysts are doing their research and that clients are being serviced,” says Simon Byles, Global Head of Business Development, Managed Services, SmartStream. “The question, never-more relevant than now, is do they want to be focused on the operating performance of a 1,000+ back-office staff, spread across the world, with the business and human capital challenges this holds, or would they be better positioned having in place a global managed service, whereby they can rely on the expertise and technology of a proven provider, operating in its area of excellence, delivering to the agreed service-level metrics, no matter the circumstances in which we all are operating?”

Exponential growth

Byles believes that there could be exponential growth in managed services as those in the ‘C-suite’ will more than ever want to outsource the management of applications and processes that fall outside their core strengths and in activities that don’t provide competitive advantage. Under a managed services model, a strategic partner takes on, and runs business operations and processes to continuously improve operational quality and efficiency on a long-term basis. It is also often the route to successful business transformation and digitisation. It works particularly well for processes, people, and locations that are increasingly expensive to maintain and are not competitive differentiators.

Byles also sees barriers to outsourcing being further broken down as the current experience with people in lockdown and working from home demonstrates that employees do not have to sit next to each other in an office to deliver objectives and cater to client requests. “With some organisations, historically, there has been some resistance to outsource services because they like the implied comfort of internal engagement and proximity,” he adds. “However, there is even more proof during the global pandemic that people can work remotely and effectively and teams can be virtual and across organisation structures. This will lead to financial service firms raising the watermark in terms of the number and depth of services being bought.”

The sea change though started long before Covid-19 appeared on the scene. Over the past few years, financial service organisations have been under an increasing myriad of pressures that have impacted the bottom line. These range from the steady stream of new regulations being introduced since the financial crisis to tightening margins and greater client demands. In addition, technology is accelerating at such as pace that it is difficult for firms to update, integrate and maintain the new systems. Although increased automation through new technologies such as automation and artificial intelligence/machine learning are now transforming services, only the larger organisations can afford to create innovation hubs, and according to research these currently have a low success rate. Building internal capabilities is expensive and time consuming for many firms, plus it is not always easy to find the right people with the requisite skillsets and experience and for organisations to remain focused on the objective.

“Investment banks have been continuously looking at commoditised activities that were essential to run operations but were not core to client engagement or revenue generation. In the past, in my experience, this would often have meant moving hundreds of roles for example from Europe to Asia but you continued to manage the day-to-day processes and employees,” says Byles. “Today, it means looking at how many processes can be automated and how the business can be future proofed for tomorrow. It is not only about cost but also improving operational performance – driving for excellence.”

Improving KPIs

Byles points to one global investment bank as an example. It was able to reduce its IT application support resources by 50%, simply by allowing SmartStream to provide a managed service to the organisation. The solution resulted in the enhancement of the team’s actual performance, significantly improved key performance indicators while ensuring timely accurate enhanced reporting.

SmartStream’s managed service IT platform offers expertise across a wide array of back-office services including reconciliation, corporate actions, collateral and cash management, fees and expenses and security reference data. It recently launched SmartStream Air, an AI-enabled reconciliations platform designed to allow users to manage their reconciliation needs on an ad hoc basis in the Cloud, while simultaneously significantly reducing reconciliations processing and configuration times.

Artificial intelligence and machine learning will continue to be key drivers behind managed services, according to Byles. For example, “These can optimise the workflow in the back-office, including the reconciliation process, where you capture, transform and match the data as well as manage the exceptions. Understanding the root causes, the actions required and taken, the anomalies across large data sets, can be quickly assimilated into revised workflows and processes. Truly managing (removing) these exceptions is where the step-change efficiencies can be achieved,” he adds. “We had a top asset management company approach us as their existing technology could no longer handle the transactions volumes which had increased significantly. As a result, we deployed a hybrid model, leveraging our latest cloud based technology and providing the business solutioning and support experts with considerable success.”

Byles points out that AI is also a big component in the decision-making process of investment banks because it can provide informed business insights and less exposure to processing failures. The technology leverages identification of patterns that could provide customised offerings to customers as well as alert and learn from unusual transactions. Moreover, it provides a competitive edge through the adoption of new algorithms and better human capital deployment – as the staff are able to direct their focus and resources on more insightful value-adding tasks.

Against this backdrop, it is imperative that managed service providers stay one step ahead of their clients and dig deep into their collective pockets to ensure that their platforms offer the latest cutting-edge tools. SmartStream, for example, has made significant investment into its own innovations lab which was launched three years ago. This has enabled the company to form partnerships with many of its clients as well as leverage the knowledge of our data and computer scientists. The teams work together to develop tools and case studies in the deployment of AI to enhance customer experiences as well as significantly improve the efficiency of their operations.

Lessons to be learned

If the corona virus has taught the industry anything, it is to be prepared for the most unexpected black swan event, while keeping the client front and centre. To achieve this, ensuring your full service and support model can deliver and maintain excellence throughout vastly changing and challenging times is key. Choosing the fastest track to this sustainable excellence, can be attempted through internal build/transformation, but as importantly, and increasingly, through proven expert managed service providers, which is going to be one of the more common executive table agenda items post this global situation. Already we’re seeing that the firms succeeding in these times are the ones already deploying sustainable digital strategies.

©BestExecution 2020

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Equities trading focus : Trading landscape overview : Russell Dinnage

By
Ian Rycott
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TRENDS IN EQUITIES TRADING: THE JUICE RUNS DRY FOR THE SQUEEZED SELLSIDE MIDDLE

Russell Dinnage, Head of the Capital Markets Intelligence Practice at GreySpark Partners.

In 2020, global capital markets consultancy GreySpark Partners observes Tier I to Tier IV investment bank cash equities and listed equities derivatives franchises globally facing new commercial and post-financial crisis regulatory adaption pressures that are, subsequently, incentivising many institutions to structurally and technologically evolve their historic trading and market-making businesses in one of two possible directions:

•          The pursuit of on-exchange / on-brokerage platform volume; or
•          The pursuit of niche instrument type, markets or services specialisation.

Banks that reject this binary choice and, instead, continue to defend a cash equities trading and services business capable of competing at the same level of depth as Tier I universal institutions for buyside client market share continue to face a redefinition of their historic role within the asset class’ hierarchy.
Specifically, GreySparks’ observation in 2014 of the development of a so-called squeezed middle in sellside cash equities trading is the result of the concentration of buyside client services provision within a very small handful of Tier I banks or across an extremely long tail of niche specialists.
Consequently, GreySpark believes that investment banks still active in cash equities and listed equities derivatives markets must in 2020 and out to 2022, choose the characteristics of the business model for their franchise going forward in accordance with their buyside client base characteristics and technological capabilities:

•          Flow monster; or
•          Niche specialist.

The resulting industry change linked to strategic decision-making regarding the selection of one of those two possible business and trading model paths involved a protracted period of bank retrenchment from historic universal models during which investment bank business lines consolidated in home markets and core markets.
Specifically, through to 2022 – and over the long-term – GreySpark believes that key sellside cash equities business and technology decision-makers will coalesce their thinking around two simple truths:

•          High-touch execution services will become unsustainable for all but the highest value buyside clients, and can be offered only for the facilitation of block-size risk trades and for programme trading; and
•          All other equities executions services will transition to low-touch channels.

Successfully executing on these objectives will require banks to support the development of cash equities trading technology sophistication within the buyside client base, and also to re-imagine the traditional role of the bank’s own equities sales-traders such that they become highly adept at creating competitive advantage, regardless of whether the products traded are fully liquid and executed on a low-touch basis or are less liquid and thus require some level of high-touch manual intervention.

Supporting the development of equities trading technology sophistication within the buyside client base
GreySpark believes that the future of the sellside cash equities and listed equities derivatives business model can be found in the creation of a depth of low touch-centric buyside client equities trading services founded on buy and build technology decision-making.
The current vendor-provided technology landscape supports this transition through the use of platforms or solutions wherein the out-of-the-box functionality is commoditised and standardised for all users, and where the need to create competitive differentiation by collaborating with a vendor-provider to build additional functional capabilities in-house – typically via the integration of existing in-house built OMS or EMS using APIs – is accepted as a given (see Figure 1 and Figure 2).

For the investment banking cash equities and listed equities derivatives franchise, the transition to low-touch, automated trading-centric buyside client franchises inverts the historical technology paradigm. Specifically:

•          Historically, low-touch and automated trading functions were added to core trading technology stacks focused on high-touch functionality.
•          Going forward, technology deployment decisions must prioritise low-touch and automated trading as core features, with limited high-touch functionality available for the select business workflows in which they persist.

Bloomberg LP’s decision in April 2019 to decommission its long-standing cash equities order and execution management system SSEOMS – which was widely utilised by the small-to-medium-sized asset management, investment management, hedge fund and wealth management buyside community globally, as well as by a wide range of inter-dealer and non-bank brokerage firms – exemplifies the opportunities available to investment bank equities traders now to incentivise changes in long-standing client behaviour. Despite the fundamental shift in the buyside cash equities trading technology landscape represented by the SSEOMS decommissioning, GreySpark believes that many investment banks remain unwilling to capitalise on the opportunity presented to them to become the new, preferred cash equities order and execution management technology vendor partner needed by their small-to-medium-sized-by-AuM buyside client base.
Specifically, the transition away from SSEOMS offers an opportunity for sellside agency brokerage franchises to undertake a fundamental re-imagining of their equities trading technology stack and front-office personnel.
The current vendor-provided technology landscape supports this transition best through the use of platforms or solutions wherein the out-of-the-box functionality is commoditised and standardised for all users, and where the need to create competitive differentiation by collaborating with a vendor-provider to build additional functional capabilities in-house – typically via the integration of existing inhouse built OMS or EMS using APIs – is accepted as a given.
High-touch vendor-provided equities trading systems still offer investment bank buyers and their buyside clients a wide array of functionality in 2020 and with increasingly prevalent levels of functional capabilities commoditisation. These systems also overwhelmingly meet investment bank requirements to execute trades electronically, albeit with significant manual intervention. However, in transitioning these sellside equities franchises and their associated technology stacks to low touch-centric flow business models, bank decision-makers commonly acknowledge in 2020 that successful buy and build implementations require a technological shift from narrow but deep functionality – prevalent in systems such as Fidessa – to wide but shallow functionality, particularly in terms of high-touch depth of functionality.
The breadth within a given functional area of the low-touch equities trading technology stack remains, in 2020, less commoditised than electronic functionality available in high-touch systems. For investment bank equities franchises refreshing their technology stack with a view toward highly automated low-touch services, the selection of best-of-breed low-touch solutions thus provides significant scope for competitive differentiation.

Re-imagining the role of the sellside equities sales-trader
GreySpark believes that flow and, particularly, super-flow monster sellside cash equities franchises must fundamentally re-imagine the role and responsibility of buyside client-facing front-office trading staff in order succeed over the medium-to-long term. This transition requires shifting the focus of equities sales-trader activity from execution on behalf of the buyside client to empowering and educating the client in the use of the full breadth of self-service services on offer to them – particularly within the realm of bank-provided pre- and post-trade low-touch services. In this manner, investment bank front-office personnel become amplifiers of the capacity inherent in the technology-driven services offered to buyside clients across a range of electronic channels.
Since 2017, global Tier I and Tier II sellside equities franchises are in the third equipment wave, wherein they are replacing existing in-house built, legacy systems with new, fit-for-purpose vendor-provided offerings in the period out to 2022. More specifically, Tier I institutions are now observed as seeking to replace legacy in-house built platforms, while Tier II institutions are implementing fit-for-purpose platforms specifically designed for low-touch trading to replace existing systems that frequently originated in the high-touch space but which were subsequently augmented and expanded to provide low-touch services in the post-crisis period.
Consequently, investment bank equities trading technology investment programmes currently underway in 2020 or commencing in the near future should be an inflection point that allows serious consideration of the nature and function of the client-facing trading salesforce. The equities trading sellside salesforce of the future must be highly adept at providing value to buyside clients and in creating competitive advantage, regardless of whether the products traded are fully liquid and executed on a low-touch basis or are less liquid and thus require some level of high-touch manual intervention.
Enter the role of so-called Smart Data analytics. In 2019, the global financial services industry spent an estimated USD 50bn on the raw, historical markets and transactions data inputs required to fuel a broad spectrum of daily trading activities across all major asset classes, according to GreySpark analysis (see Figure 3).

This estimated level of spending on the externally-sourced data inputs sold to asset managers and investment banks, for example, by exchange groups, inter-dealer brokers and specialist vendors such as Bloomberg, FactSet and Refinitiv comes at a precarious time for the industry at-large.
At issue is the growing electronification of cash equities, fixed income and currencies markets and the availability – or lack thereof – of the granular, real-time intelligence required to support meaningful, daily decision-making processes and workflows across a range of front-, middle- and back-office functions. GreySpark believes that these types of real-time intelligence data inputs are set to become more important from a client performance analytics and competitive differentiation value creation perspective to buyside and sellside markets participants over the medium-to-long-term.
Specifically, by:

•          Creating an actionable, real-time overview – Tier I to Tier III CIBs typically use different trading platforms and systems on a desk-by-desk, region-by-region basis, making it difficult for sales-traders to pull all the data consumed by all relevant systems together in a meaningful fashion such that they can then act on client order or trade crossing or pricing opportunities in a more informed, real time or near-real time fashion.
•          Evidence-based decision-making within an agency trading business model – Tier I to Tier III CIB cash equities and cash FX market and trade data spend fell from pre-crisis historic heights to settle in 2017 at roughly 30% to 40% of total annual spend on execution technology. And while the majority of institutions in each tier still provide a global buyside client base with access to the historic pricing data, liquidity and market-making services required to facilitate agency trading, the profitability of their trading franchises are nonetheless increasingly undercut by a raft of new, non-bank liquidity providers utilising the same algorithmic trading business models originally pioneered within the CIB arena to arb both bank and non-bank competitor pricing on a tick-by-tick basis. As such, the use of Smart Data and Smart Data analytics toolkits by CIB trading desks to provide their buyside clients with optimised data insights creates competitive advantage through its ability to derive client type- and market conditions-specific insights that can be used to directly inform evidence-based, block size trade or transaction decision-making on an order-by-order basis.

The inclusion of Smart Data analytics capabilities into the institution-wide data strategy equation can create new opportunities over time to not only offset the depreciation of data assets, and they can also drive the uptake of cultural understanding that Smart Data is an investment class in and of itself – one that is capable of creating distinct markers as to how ITO expenditure on overall data quality maintenance can act as an engine for commercial growth.

©BestExecution 2020
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Investment Association launches cyber security dashboard

By
Lynn Strongin Dodds
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Chris Cummings, chief executive of the Investment Association
Chris Cummings, chief executive of the Investment Association

The Investment Association (IA), the UK asset management trade group, has launched a cyber threat intelligence platform to help buyside firms bolster their defences against rising cybercrime triggered by the COVID-19 induced lockdowns, remote working and uncertainty.

The IA Threat Intelligence Alert Network (IA TITAN), which was developed by Anomali, a provider of intelligence-driven cyber security solutions, has a real-time dashboard bringing together alerts from law enforcement, government agencies and other relevant authorities, on cyber hazards and risks, within the asset management community. The alerts cover a range of dangers including: malware, ransomware, and software vulnerabilities.

Last month, the Financial Conduct Authority (FCA) published insights from its Cyber Coordination Groups which includes different facets of the financial services sector such as fund management, brokers, trading venues and benchmark administrators. It warned that “threat actors are using the COVID-19 pandemic to cause greater business disruption by targeting front-line organisations across industries with cyber-attacks, phishing scams, fraudulent schemes, and misinformation.”

However, although there has been a spike in cyber activity in the current environment, there was already an upward trajectory with the UK financial services industry particularly in the firing line. The FCA reported a dramatic 480% year-on-year hike in the number of regulated firms targeted in 2019. In addition, the latest figures from the National Fraud Office show that in general, the number of offences jumped from 273,598 in 2017 to 306,126 in 2018.

“Cyber security and operational resilience are a board-level focus for the investment management industry, which is why we need to tackle head-on the threat cyber espionage and financial crime can pose to members’ operations,” says Chris Cummings, chief executive of the Investment Association. “The ever-changing nature of these online threats goes right to the core of IA TITAN, which will provide industry-specific insights into cyber security threats, helping to keep customers and businesses safe.”

According to Hugh Njemanze, chief executive of Anomali, “The problem of how to address cyberthreats is compounded by the overwhelming volumes of data about them, confusion over which security solutions re effective, and shortages of cybersecurity professionals.

©BestExecution 2020

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Technology will be a key differentiator in risk management

By
Lynn Strongin Dodds
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Audrey Blater, Aite

Digitalisation of risk technology will be a key differentiator in the monitoring and management of risk during periods of volatility and continuing market uncertainty triggered by Covid-19. according to findings by Aite Group, a global research and advisory firm and Torstone Technology, a post-trade processing and risk management group

The White Paper ‘The Digitalisation of Sellside Risk Management‘ found that firms will need a sharper emphasis on the requisite upgrades and requirements in order to weather the current and future storms. In addition, they will also have to be able to identify synergies across regulations and optimise the use of data in risk management and other business areas, which in turn will lead to lower costs in the long term.

Audrey Blater, senior analyst at Aite Group

The report notes that banks must prioritise business areas that are most exposed to increased data volume and complexity, such as trading, risk management, and regulatory compliance. Those that continue to rely on legacy processes and architecture will not be able to keep up with increasingly rigorous risk calculations.
As Audrey Blater, senior analyst at Aite Group put it, “The boundaries of existing risk management technology are being tested more intensely now than ever before. Ongoing market volatility necessitates rigorous calculations as well as increased data management and consumption. The shift to digitalisation will continue to find its way into various parts of banks as technology creates common threads across business areas.”

In terms of technology, the report found that for half of the firms polled, the cloud is an area of focus for risk analytics because of the computing-intensive nature of the function. It predicts that hosted deployment will continue to replace on-premises risk systems as cloud-native solutions become increasingly commonplace. In addition, it expects cloud bursting or hybrid set-ups to continue to grow in popularity. This is an application that runs in a private cloud and ‘bursts’ into a public cloud when the demand for computing capacity spikes.

Anthony Pereira, Head of Torstone’s Risk Platform

As for artificial intelligence and machine learning, practical use cases have been slow to develop although this technology will eventually equip chief risk officers with a better toolbox of analytics and capabilities. However, getting the right modern risk platform in place will be critical to take advantage of these technologies as they evolve. The main challenge according to Anthony Pereira, Head of Torstone’s Risk Platform is that AI engines require vast amounts of data in order to operate which requires banks to have firmwide data sets that are clean, monitored and maintained.

However, it is not just about technologies’ impact on processes and systems but also on organisational structures needed to achieve scale while reducing cost of ownership. For example, take XVA or valuation adjustments for derivative contracts. In the past activities may have been siloed but half of the firms canvassed have established a centralised and coordinated desk which pools together the requisite skillsets needed for the credit, capital and pricing functions.

Looking ahead, looking ahead, Pereira believes that centralisation of the risk function across different teams will continue to be a key theme and also expects the decisions for cloud based technologies to move up the agenda for front office and across business lines. At the moment, 82% of firms still rely on IT to pull the trigger on investment in a cloud.

With new regulations coming through the pipeline, “sellside firms that have invested in upgrading their risk systems will have a clear advantage over those who have not,” he adds. “Reviewing the existing inefficiencies and identifying areas for improvement would be a key first step. Always-on, centralised, cloud-based risk technology that is scalable in times of volatility is the foundation for robust risk management in the years to come.”

©BestExecution 2020

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Information Services Boost Exchange Valuations

By
Siobhan Brownlow
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Exchange stocks are the currently the most attractive area of financials and their long-term value will be driven by information services according to analysts at German financial services group Berenberg.

Berenberg analysts Chris Turner and Panos Ellinas said in a report that volatile financial markets favours exchange stocks, at least on a relative basis, so investors should remain overweight the sector.

“We expect the mix of capital destruction in the near-term and slower economic progress in the medium term to slightly slow the earnings growth next year of the exchange stocks that we cover,” said the report. “With no operational disruption, strong cash generation and no exposure to credit or underwriting activities, the exchange stocks are, in our view, the most attractive area of financials right now.”

Berenberg reiterated their Buy rating on London Stock Exchange Group and upgraded Intercontinental Exchange to Buy.

Kyle Voigt, an analyst at financial services boutique KBW, said in a report last month the share prices of exchanges could continue to outperformance if the risk-off trade and high volumes continue.

Voigt said that US exchanges –  Intercontinental Exchange, Nasdaq, CME Group and CBOE – had outperformed the S&P 500 index by 10.4% since 19 February. In addition, European exchanges had outperformed their relevant benchmarks by 5.5% over the same time period.

Increase in volumes

In the short-term exchanges have benefitted from a spike in trading volumes across the majority of asset classes in the first quarter of this year as volatility increased. For example, the Berenberg analysts noted that equity index volumes at Deutsche Börse jumped by 58% year-on-year; interest rate swap-clearing activity at London Stock Exchange Group rose by 26%; ICE’s energy derivatives increased by 57% and CME’s suite of US Treasury futures grew by 36%.

“To the industry’s credit, this step-change in activity was smoothly handled by the existing trading infrastructure,” added Berenberg.

In Europe last month equity average daily trading rose 94% year-on-year , corporate bond trading increased 31% and foreign exchange trading rose 61%  according to a report from the Association for Financial Markets in Europe.

“The rapid increase in securities trading and post-trade activity has been carried out without any major disruption from a business continuity perspective,” added AFME.

In addition, issuance of investment grade corporate bonds surpassed €50bn in the first week of this month which was the highest weekly amount ever issued in Europe. In contrast, initial public offerings on European exchanges has declined 83% compared to a year ago according to AFME.

The European exchange-traded fund industry also had record outflows last month due to the coronavirus pandemic.

Detlef Glow, head of EMEA research at Lipper, said in a report: “The European ETF industry faced estimated net outflows for March (€3.2 bn) which marked the highest outflows in the history of the European ETF industry.”

Information services

The Berenberg analysts continued that derivatives are better placed than cash products in the medium term.

Over the long term, the analysts expect exchanges to benefit most from the recurring, compounding revenues generated by information services activities.

“These activities remain well positioned to deliver structural growth, regardless of cyclical market trends,” they said.

Theodor Weimer, Deutsche Börse

For example, Deutsche Börse said in its 2019 results call that it wants to make acquisitions that can add capabilities to its analytics and index division which was formed last year. In September last year the German exchange group created Qontigo as a new company through combining index businesses Stoxx and Dax with Axioma, a company it had acquired in 2019 and which provides tools for portfolio construction and risk analytics. Deutsche Börse said Qontigo can address trends that are reshaping investment management including the growth of passive investing and smart beta and the modernisation of the investment management technology infrastructure.

London Stock Exchange Group said in its 2019 results call that the acquisition of Refinitiv will accelerate the group’s growth strategy of becoming a leading global financial markets infrastructure provider; increase its global footprint; and add data, analytics and multi-asset class capital markets capabilities.

David Schwimmer, LSE Group

David Schwimmer, chief executive of LSEG, said on the results call that detailed integration planning is underway and the exchange remains on track to close the transaction in the second half of this year. He continued that the group is actively engaging with EU competition authorities who are reviewing the deal. “There are no surprises,” he added.

Information services revenues

Exchanges have seen significant growth in their information services revenues from just over $1bn (€890m) in 2005 to more than $6bn last year according to a study, Exchanges and Market Data: How Much Money Is Being Made?, from consultancy Opimas.

Octavio Marenzi, Opimas
Octavio Marenzi, Opimas

Octavio Marenzi, founder and chief executive of Opimas, said in the report: “The profitability of market data at exchanges is impressively high, and we estimate that exchanges are able to achieve an average operating margin of 76% in this line of business, significantly higher than the rest of their activities.”

He continued that exchanges’ profit margins are more than twice as high as market data vendors such as Bloomberg or Refinitiv, and more than three times as high as large investment banks.

However regulators in both the US and the European Union, are increasingly looking at exchanges’ market data revenues.

“They are preparing significant changes to regulation and market structure that will see exchanges’ market data revenues come under pressure,” warned Marenzi.

Is Fixed Income Ready for Pre-Trade Analytics?

By
GlobalTrading
-
Friday, March 27, 2015. Photographer: Jason Alden Photographer: Jason Alden www.jasonalden.com 0781 063 1642

By Mike Googe, BTCA Product Manager, Bloomberg LP

Mike Googe, Bloomberg

Over the past few years, regulatory and competitive pressures have driven a steady rise in the adoption of transaction cost analysis (TCA) in the fixed income space. Market participants are under increasing scrutiny to demonstrate best execution, manage outliers and review their own performance.

Primarily, participants have turned to post-trade analytics to accomplish these goals: capturing and analyzing data following a trade’s execution. Can this same data, however, be employed to provide insights pre-trade? The migration of TCA to earlier in the trade cycle is still in its infancy, but as it matures, it could provide tremendous value for trading desks in all areas of fixed income. What pre-trade analytics are possible? One of the most encouraging—and self-evident—use cases for pre-trade TCA is giving traders the tools to help them predict what their expected execution costs will be. Predictive modelling has been prevalent in equities for many years, but its implementation in fixed income is challenged by the fundamentally less-predictable nature of the asset class. Liquidity shifts alter perceived order difficulty based on size and price availability. It is much harder to model exact predictions for thinly traded instruments.

However, predictivity does not need to be exact to be useful. Having a relative target implementation cost is attractive to traders, as it allows them to manage expectations right from the inception of the order by putting the achieved costs in context.

Fixed income traders are beginning to build predictive models based on a growing array of post- trade observations but out of a sea of data, which should they choose? The micro-structure of fixed income makes this a tricky question. Models predicated on specific instruments where precise volume data is available might work for equities, but in fixed income—where maturity and seasoning change the liquidity profile of a bond throughout its life—the opportunity is emerging to implement pre-trade models based on a new, fixed income specific approach.

The best models will blend client-specific observations with more general factors such as maturity, rating, age and duration. Although there is no single instrument context, thorough back testing indicates it is possible to achieve a strong signal, and this is key. Applying transparency through use of signal strength scoring will allow users to evaluate reliability of predictions against achieved results. This will in turn provide increased confidence for those users to select them and defend their use in post-trade review.

In addition to making predictions, pre-trade TCA can also feed off post-trade insights to create a virtuous cycle. Every day, traders are confronted with basic questions such as: Who do I route RFQs to? How many should I send? When should I send them? Many traders are used to relying on instinct and experience for these decisions, but by analyzing how these decisions turned out for previous trades, they can help traders prepare for the next order.

While previous performance does not guarantee future results, traders need to be mindful not to get too granular or vague when analyzing their prior trades. Aggregating data is a balancing act between not being so general that the signal is weak, and having so many characteristics that the signal is strong but is based on too small a sample of data to be significant. Challenges to implementation

Even armed with these use cases, implementing pre-trade TCA is much easier said than done. Traders will need to overcome one (or more) of three key challenges to successfully implement a pre-trade TCA program:

1. Simplicity: It is important to have a pre-trade TCA model that is understandable and whose value proposition is easily communicated. When it comes to pre-trade, as the complexity of a model grows, its utility decreases. Decision-makers on the trading desk must be able to understand what factors go into a model, as well as the circumstances under which it is strongest and weakest. To grow this confidence the key is to conduct thorough back testing. Being able to illustrate quantitatively these results will deliver transparency which will help speed pre-trade TCA’s adoption among even the most skeptical traders.

2. Discoverability: Even the most insightful data is useless if it is buried in a table or report and impossible to find. The key is to integrate the pre-trade analytics directly to the trading workflow, so as new orders arrive, the OMS and EMS can automatically update the pre-trade analytics.

The trader’s dashboard should be able to see an order and give traders answers based on current market conditions. How long will this trade take to complete? Which dealers have given us the best results in the past? What is my expected leakage from RFQ to execution? Integrated pre-trade analytics will allow traders to make these determinations quicker than they ever have. This can be taken to another level if pre-trade analytics are used to route an RFQ directly or flag it for high-touch treatment.

3. Actionability: As with all analytics, there is a symbiosis between pre-trade and post-trade. You trade, you analyze the result, you implement improvements, and then you trade again. In addition to building the workflow to ensure pre-trade support is presented at the right time, traders must make sure a true feedback loop is in place to maximize the value of TCA.

Feedback can be implemented manually, but your system can also recalibrate models automatically if observations are “tagged” to link results directly to the pre-trade tool. The clearer the identification, the easier it is to isolate areas for improvement in models and decision support algorithms. That said, traders need to strike a balance, as recalibrating too quickly can create volatility in their results. The adjustment process should be gradual and thoughtful.

A long road ahead

Like post-trade analytics, pre-trade TCA will not arrive on fixed income trading desks overnight. Finding the right models that demonstrate clear value, while being easy to use and understand, will take time and experimentation.

However, as the broader fixed income world deepens its embrace of electronification and technology, attitudes will change. Small steps to gain trust among market participants will drive adoption. As users see more value, there will be an impetus to change market processes and improve data quality to support improved analytics. This in turn will drive up the quality of observations and create a positive feedback loop.

If you’re a fixed income trader wondering how TCA can make your desk better, now is an exciting time to make the leap.

Flexibility is Key at VoxSmart

By
Siobhan Brownlow
-

Fintech may seem like a new word but Adrienne Muir, chief operating officer at VoxSmart, the UK fintech for surveillance of capital markets communications, explains that she has been in the sector for more than two decades.

In 1998 Muir moved from New Zealand to London and began working at the London International Financial Futures and Options Exchange on a project to transition LIFFE from open outcry to electronic trading.

Adrienne Muir, VoxSmart

She told Markets Media: “I have been in fintech since I was 23. Experience of project management, operations and testing of market infrastructure is a great place to start, even today.”

Muir joined VoxSmart as chief operating officer in 2017, when the firm only had 10 people.

“I have been able to create a strong culture with support from Oliver Blower, group chief executive,” she added. “At VoxSmart we have female developers and I am in the privileged position where I can push for diversity, which is one of the firm’s strengths.”

Muir continued that another of the firm’s strengths is it’s technology, as VoxSmart aims to be the single source that allows financial institutions to capture all types of communication for surveillance purposes – including on mobile phones, via chat, email, Bloomberg or apps such as WhatsApp and WeChat.

Last month Natwest Markets, the UK bank, invested £5.5m ($6.8m) in VoxSmart and demand has increased as the Covid-19 pandemic has led to financial institutions needing to monitor staff working from home for regulatory purposes.

“In the current environment firms are reassessing if they need big offices and working from home is becoming more acceptable,” said Muir.

She continued that flexibility of working was one of the attractions of joining VoxSmart, and is important in recruiting staff. In a recent blog Muir said the firm has, for example, people working 7-3 or 10-6 to accommodate needs including travel times, sport commitments, and childcare.

“Flexibility is important but you should also not forget boundaries,” added Muir. “The family unit is critical and it is really important for me to pick my son up from school and he is really pleased to see his mum.”

For example, in the evening Muir will focus on the family for a certain time before going back to checking emails.

“There will be testing times negotiating pregnancy, maternity leave, miscarriage or the death of a child,” she added. “We can look to policy but it is important for the firm to do the right thing for people we care about.”

Career background

Five years after arriving in London, Muir returned to her roots and had senior roles within  the IT and strategy department at New Zealand Exchange as the firm demutualised and listed.

“I was part of a new team at NZX with a new strategy,” she added. “It was an exciting time as we enabled electronic trading and built markets out.”

New Zealand women were among the first in the world to get the right to vote in 1893 and Muir said the team at NXZ was more diverse than those in London at the time.

“I called a woman at the Australian exchange who was doing a similar job and we built a bridge,” she said.

Muir credits her ‘operational’ family background with her ability to think laterally and get things done as her father was a senior police officer and her mother was a nurse. “You also need emotional intelligence, common sense and passion,” Muir added.

In 2008 Muir returned to London to join Trayport, a commodities trading technology firm, as head of the exchange business unit within the executive management team, and went on to become chief of staff.

“I knew that I needed experience outside exchanges in order to be become a chief operating officer,” Muir added. “I was there for seven years during which the firm grew from 61 to more than 200 staff.”

WILD

Muir has been chair of the board of directors for Women in Listed Derivatives (WILD) for more than nine years.

“When I was at Trayport I realised I needed a network,” she added. “WILD offers a lifeline to women who want leadership roles and to increase their visibility.”

The organisation has a network of young women – WILDlings – and offers advice in areas such as how to ask for a pay rise and mental health.

“It is critical that we work with organisations such as Innovate Finance who are more women to get into STEM (science, technology, engineering and mathematics),” Muir added.

She is optimistic about the number of women joining fintechs, especially start-ups that are more flexible.

“The situation is much better than 25 years ago,” Muir added. “More firms are realising that staff do not have to work nine to five , for five days a week.”

Muir’s advice to women who want a career in fintech is to not be too blinkered about their roles.

“I have had so many different roles but have always wanted to learn more,” she added. “You need to ask lots of questions.”

She explained that the best project managers are not formally trained but need to be across all the necessary detail, have a strong communication style and drive change.

“I love innovation,” said Muir. “I get a ridiculous buzz when a product goes to market or a bug gets fixed.”

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