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Goldman Sachs Open Sources Data Modeling

By
Rob Daly
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Computer source code programmer script developer. Modern technology background. Web software.

Goldman Sachs has made another open-source contribution with the donation of its visual model tool Alloy and Pure logical modeling language to the Fintech Open Source Foundation.

“Alloy lets you design, build, and publish data pipelines,” said Neema Raphael, co-chief data officer at Goldman Sachs, at Open Source Strategy Forum hosted by Finos in Midtown Manhattan. “It’s a platform that lets you run those reliably at a quite high volume and as a hosted service.”

If a firm wanted to share data, such as trade data, with broader audiences internally or externally, Alloy lets users take various data attributes, define them as business processes, normalize the data, and publish the normalized data via APIs, he added.

Pure-based models should reduce system integration costs in bilateral and multilateral trading scenarios as well as lower compliance burned and complexity for banks and regulators, noted Gabriele Columbro, executive director at Finos, in a prepared statement.

Goldman Sachs and Finos have had an ongoing discussion regarding the Alloy and Pure donations for the past six months, Rob Underwood, director of programs at Finos, told Markets Media.

Finos leadership learned that its Financial Object Program, which is led by J.P. Morgan and Citi, was looking for a visual modeler to help the project’s object modeling.

“It was then when we first started chatting with Goldman Sachs about its interest in contributing Pure and Alloy,” he said. “It made a ton of sense since we already knew that there was a demand.”

The industry body plans to roll out the new code in three phases. In the first phase, which is taking place currently, FINOS has set up a testing sandbox while Goldman Sachs decouples the code from other systems within the investment bank and adds in a bit more abstraction into the code.

“The sandbox is pretty much ready at this point,” said Underwood. “It uses GitLab on the backend to do the source control of the models.”

In the next phase, which is slated to start in January 2020, Finos will invite organizations to get their feet wet with the modeling code.

Finos expects the final phase, in which it makes the code available to everyone with an internet connection, sometime around mid-2020.

For those that want to contribute code back to Alloy and Pure, they will need an executed contributor license agreement, which is common in the open-source ecosystem, according to Underwood. “As long as people have executed contributor license agreements, they can contribute code for consideration to be included back into the project.”

The Problem With Legacy Software

By
Markets Media
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Perhaps the most prevalent theme in the capital markets business in the past decade has been the rapid advance of technology. But that begs the question, what about the old stuff?

Unlike for an individual laptop user who only needs to click ‘Update’ and perhaps wait a few minutes for new software to download, an institutional brokerage or investment firm faces a heavy lift. Old systems have been in place for years, if not decades, and the path of least resistance is always to nurse it along for another year rather than commence an expensive and time-consuming upgrade.

Kirat Singh, Beacon Platform

Kirat Singh spent 16 years in technology development at three large global banks before co-founding fintech Beacon Platform in 2014. He said from his experience, he said that the true cost of legacy software is that its day-to-day resource consumption crowds out investing for the future.

“Nobody sets out to create legacy software,” Singh told Markets Media. “But you just end up supporting old technology, and before you know it 80% of your tech budget goes toward keeping the lights on.”

“A large firm can have hundreds of applications, all built-in silos, each with its own little tech stack,” Singh continued. “You spend all your time maintaining those just to keep current. So you have no money, no time, to actually build new things in support of the business — to innovate.”

As software ages, it’s typically found on fewer and fewer desktops, and support is harder to find. This reduces the flexibility of the system and the ability to adapt to client needs.

“The moment you need to add a new feature or need to improve your model, you start running into issues,” said Vahagn Minasian, Co-Founder and CTO at Matthews South, an advisory and software firm. “The code is in some dev environment that current quant/tech teams aren’t as familiar with, so that adds meaningful overhead. Even after you have made the necessary improvements, the changes need to propagate through the entire system which often has many convoluted components that talk to each other in complicated ways.”

Vahagn Minasian, Matthews South

Minasian said sometimes the problem is with the technology itself. “Say the platform was set up 30 years ago, when the amount of data was orders of magnitude smaller than it is now. So what worked well back then is now clunky and hard to manage.”

The problem with legacy technology was broadly illustrated by a recent Government Accountability Office report that showed the U.S. government spends $337 million per year to operate and maintain just its 10 systems most in need of modernization. “As they age, legacy systems can be more costly to maintain, more exposed to cybersecurity risks, and less effective in meeting their intended purpose,” the GAO said in June 2019.

Singh of Beacon Platform noted that much of the legacy software on Wall Street was developed in the 1990s, and any edge gained has long since dissipated.

He cited derivatives trading as an area where efficiency is held back by legacy software. “Every trade is bilateral, so both sides have the same shared pain of having to maintain the infrastructure to be able to agree on a price,” he said. “That has become an enormous cost.”

One vestige of old technology is proprietary data centers, which seemed like a good idea as recently as the early 2010s, but have become white elephants amid the rise of cloud computing.

“Banks should not be in the business of managing data centers,” Singh said. “You should be running on Amazon Web Services or Google Cloud or Microsoft Azure, but you need the right abstraction and the right technologies for that.”

Cloud isn’t the only remedy for legacy software, but the flexibility, agility, and cost-effectiveness of the technology provides a blueprint for what the end result of an upgrade should look like.

“There’s no silver bullet,” Singh said. “One thing we really believe is that it should be cheap to iterate, because if your iteration cycles are short and inexpensive, you can be more innovative. For a quant or a data scientist or a technology person, it’s all about making a change and having a business person be able to use that change.”

‘Semi-Transparent’ Equity ETFs Expected To Grow

By
Shanny Basar
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Semi-transparent equity exchange-traded funds, which do not disclose holdings on a daily basis, have been approved by the US Securities and Exchange Commission and are expected to eventually come to Europe and Asia.

Frank Koudelka, global ETF product specialist at State Street, said at a media briefing in London yesterday that the SEC approved ActiveShare ETFs in May and proxy baskets last week. Both models are known as semi-transparent ETFs, since they disclose holdings with the same frequency as mutual funds. They still need exchange listing approval, so he said the ETFs could go live by the first quarter of next year.

Frank Koudelka, State Street

“We expect them to grow significantly as transparent active ETFs have gathered $90bn (€81bn) in assets under management, primarily in fixed income,” added Koudelka. “The products will travel the globe and eventually come to Europe and Asia.”

Brown Brothers Harriman said in a blog in May that Precidian Investments’ ActiveShares ETF structure was the first SEC approval for a pure ETF product where managers were packaging active strategies in a non-transparent manner.

The Exchange Thoughts blog said: “Active managers who have hesitated to venture into ETFs may now make their strategies available to a wider audience of investors without revealing their ‘secret sauce.’ Until now, active managers have been entering the ETF market through smart-beta indexed funds or actively managed transparent ETFs.”

Precidian said in a statement in May that the ActiveShare structure had been licensed by asset managers including Legg Mason, BlackRock, Capital Group, JP Morgan, Nationwide, Gabelli, Columbia, American Century and Nuveen.

Investors would like to see more active ETFs in the market according to the BBH 2019 Global ETF Investor Survey in February.

“This suggests the debate between active and passive isn’t necessarily a binary choice – ETF investors may still find active management attractive; they just want it in a lower cost wrapper,” added BBH. “Although the Precidian structure is currently only licensed in the US, as the global ETF market continues to mature, we expect that the structure could be the blueprint for non-transparent ETFs in Europe and Asia.”

BBH also said in a blog this month that the SEC gave contingent approval for new semi-transparent active ETF structures from Natixis/New York Stock Exchange (NYSE), T Rowe Price, Fidelity and Blue Tractor Group that use ‘proxy baskets.’

“These new ETF structures introduce the concept of a representative proxy basket, which enable managers to camouflage or shield the underlying securities held in the ETF,” added BBH. “The new ETF structures could herald a new era of active ETFs.”

Ciaran Fitzpatrick, head of ETF servicing Europe, at State Street said in the briefing yesterday that it will take time for these new structures to come to Europe despite the SEC approval.

“The Central Bank of Ireland and the UK Financial Conduct Authority are working with IOSCO on transparency of ETF holdings as most European markets require daily disclosure,” added Fitzpatrick. “There could be a shift in the next 18 to 24 months but that needs a lot of approvals first.”

The International Organization of Securities Commissions’ 2019 work program commits to working on ETFs from both an investor protection and market integrity perspective. The body for global regulators is also collaborating with the Financial Stability Board on potential financial stability risks from ETFs and they held a joint workshop for industry participants in June this year.

Growth areas

Fitzpatrick also expects ETFs for environmental, social and governance strategies to grow in Europe and for more US issuers to launch ETFs in the region.

Ciaran Fitzpatrick, State Street

“All the key issuers are entering the ESG space and there are also new entrants,” Fitzpatrick said. “We are just at the start of the road in Europe and ESG will be a significant player in years to come.”

He continued that State Street is regularly engaged with US issuers who want to globally launch ETFs, as well as European issuers who want to distribute ETFs in South America, Asia and Israel.

“They need to have a niche product such as ESG, factors or a theme and the challenge is that the big players are already in those spaces,” added Fitzpatrick.

For example, Goldman Sachs Asset Management announced the launch of a European ETF business in September this year after offering ETFs in the US since September 2015.

GSAM’s first European ETF was the Goldman Sachs ActiveBeta U.S. Large Cap Equity UCITS ETF which listed in London. The fund is a European version of its flagship ETF in the US, which has more than $6.5bn in assets and which GSAM said is the largest multi-factor equity ETF in the world.

Nick Phillips, head of the international retail client business at GSAM, said in a statement: “The funds will be relevant to both retail and institutional clients. This is a significant addition to our international product offering and we are tremendously excited to enter the fast-growing European ETF market.”

GSAM said in September it was planning to launch a range of ETFs over the next six months. Last week the firm became a new issuer on the Swiss exchange by launching three smart beta ETFs.

Koudelka also expects growth in the European ETF market to come from the launch of more robo-advisors. “In the US there is $275bn in assets under management in robos and a lot of that is in ETFs, and that will expand around the globe,” he said.

Data

In Europe the introduction of MiFID II regulations at the start of last year mandated reporting of ETF trading for the first time in the region. ETF flows have increased since MiFID II went Iive but Fitzpatrick argued more is needed to improve transparency.

“A consolidated tape for Europe would be a game changer in increasing transparency and giving a clearer picture of ETF volumes and liquidity across the market,” Fitzpatrick said.

Koudelka added that State Street is looking to provide more data in order to boost demand. “In conjunction with Global Markets we are developing reporting of custody data such as the type of investors buying ETFs, and their location, which will help lead generation,” he said.

Fitzpatrick continued that next year State Street will release standardised machine readable confirmations for Authorized Participants (APs), who present a basket of securities to create ETF shares or  receive a basket of securities to redeem ETF shares, and provide liquidity in the market.

“We are investing heavily as part of a three-year plan and it will benefit the whole European market and the wider ETF ecosystem,” added Fitzpatrick. “We will also launch an AP Portal in our proprietary primary market dealing portal  Fund Connect to allow APs, and issuers, to access relevant ETF data such as AP confirmation, net asset value data, portfolio composition files, and pricing baskets.”

Swaps Missing From MiFID II Reporting

By
Shanny Basar
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At least €800bn (€750bn) of notional in vanilla cleared euro/US dollar interests rate swaps is missing each week from MiFID II transaction reports according to derivatives analytics provider Clarus Financial Technology.

The European Union’s MiFID II regulations went live at the start of last year and introduced new reporting requirements across asset classes with the aim of increasing transparency. MiFID II mandated the use of ISINs, International Securities Identification Numbers, for over-the-counter derivatives for the first time which have been difficult to use.

Clarus analysed interested rate swaps reported for September and said there was little real-time reporting.

“Everything appears to be deferred,” said Clarus. “Post-trade transparency 15 minutes after execution is a myth at the moment.”

The review found that only 11% of notional in vanilla euro interest rate swaps are reported in real-time and almost all volume, 89%, is reported with a four-week delay.

“This is because so many trades are either deemed ‘illiquid’ or are above the ‘SSTI’ threshold for euro IRS,” said Clarus.

The SSTI, size-specific to the instrument threshold, determines whether a trade needs to be reported as certain large trades would expose liquidity providers to undue risk.

Clarus continued that trades are not being published by Approved Publication Arrangements because MIFID II only mandates publishing off-venue OTC derivatives if the transaction is considered “traded on a trading venue (TOTV)”.

“We estimate that approximately 90% of off-venue volume in vanilla EUR IRS is missing from the APAs,” added Clarus. “This is based on the fact that over half of all EUR IRS in the US are transacted off-Swap Execution Facilities.”

In order to improve MiFID II reporting, Clarus recommended that the deferral regime is removed and that all transactions are made available within 15 minutes (most within two minutes). In addition, every transaction should be reported, not just those deemed TOTV.

Poor data

PWC said in its financial services risk and regulation blog that the UK Financial Conduct Authority processed an average of 30 million MiFID II transaction reports on each working day last year but found that the data submitted by firms was poor.

“The FCA has continued to find shortcomings in firms’ approaches to reporting, sanctioning inadequate controls through fines and communicating widely to the market on its expectations,” said PWC. “With a wider range of similar reporting obligations coming in, firms can expect continued scrutiny on how they report transactions to regulators and need to be on the front foot in how they respond.”

PwC continued that the FCA’s Market Watch in March and October 2019, which considers firms’ implementation of MiFID II reporting, highlighted inaccurate trade times, incorrect party identifiers and failure to submit instrument reference data.

“The FCA’s friendly ‘nudge’ in Market Watch should not be ignored, nor taken lightly,” said PwC. “This is a key focus of the FCA, and with the additional weight of SFTR and EMIR reporting to contend with too, firms must act now.”

Deloitte said on its financial services blog that the UK ’s Prudential Regulation Authority published a Dear CEO letter at the end of last month to remind banks, building societies and designated investment firms that they are required to submit complete, timely and accurate regulatory returns

“The fact that the PRA has seen the need to issue a reminder about such a core regulatory obligation reflects its concern about errors in regulatory reporting (both public and identified by the PRA in the course of its supervision) and what it sees as the need for appropriate investment in both data quality and processes to ensure the accuracy and completeness of reporting,” added Deloitte.

Buy-side client reporting

Consultancy Aite Group said in a report, Trends in Institutional Client Reporting: Delayed Transformation, that client reporting is ripe for transformation at investment management firms.

Paul Sinthunont, analyst at Aite Group, said in the report that change is being driven by the development and availability of digital tools and analytics that build upon traditional reports, offering new ways to engage with institutional clients, and, subsequently, improve client experience and overall efficiency of reporting teams.

Paul Sinthunont. Aite Group

“The state of automation within the industry has progressed toward exception-based workflows for client reporting,” added Sinthunont. “However, progress has been mixed, and little progress has been made in deploying new technology, such as natural language processing (NLP), as part the reporting process.”

Regulation has changed the content and structure of client reports. For example, one client reporting head said a report they provided to institutional clients has grown from three to 30 pages.

“Some firms have exceeded standard practice by beginning to provide some interactive dashboards for institutional clients, but the overall buy-side feedback and implications of such a service suggest an industrywide move is unlikely to become the norm but will remain the exception over the next few years,” added Aite.

OSTC Correlates Biometrics With Trading P&L

By
Shanny Basar
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Chief executive Lee Hodgkinson said OSTC is in the vanguard of the fourth industrial revolution as the futures prop trading and education firm uses technology to monitor traders’ physiological outputs against their performance.

The firm has developed a biometric app to help traders measure performance and maximise efficiency.

Lee Hodkinson, Euronext
Lee Hodgkinson, OSTC

Hodgkinson told Markets Media: “ZISHI Elite brings the science and technology of elite sport into the trading room. We want employees to reach optimal levels in all aspects of their life including their minds and bodies.”

ZISHI is OSTC’s central knowledge suite and ZISHI Elite measures physiological signals to determine each trader’s optimal heart rate variability state as well assessing sleep, mood, anxiety and stress levels. The data is analysed against volume, P&L and the level of order activity to find their personalised optimal zone.

The firm developed the technology over two years with a trial group of 30 traders and more than 100 traders have now voluntarily signed up to the scheme.

“We work with sports psychologists at Bangor University to correlate biometrics with trading P&L so traders can manage their energy, mood and mental health to be more productive and have longer careers,” added Hodgkinson.

OSTC took the ethical decision to prevent management having access to an individual’s data, but they can see from aggregated data that performance has improved.

Hodgkinson said: “Even if P&L stays the same but traders have a better quality of life, then we have been successful.”

The next version of ZISHI Elite will provide bespoke content. For example, if a trader is not sleeping well they will be automatically sent videos and written content on how to improve sleep or eat more nutritiously.

Future versions will be also immersive. For example, if a trader needs to be in a state of calm to make the best decisions, virtual reality goggles may put them in a beach setting to calm their brain waves before trading.

“What we are doing is pretty unique and we are in the vanguard of the fourth industrial revolution,” added Hodgkinson. “ZISHI can be used in any data driven environment where decision making is critical.”

OSTC is already in discussions with other financial services firms and in adjacent broader industries about using the technology.

Exchanges

Prior to joining OSTC last year Hodgkinson had been at Euronext for more than nine years and his last role at the pan-European exchange operator was head of markets and global sales and chief executive of Euronext London. During his 30-year financial career he has also been chief executive of SmartPool and worked at SIX, NYSE Euronext, LIFFE and the London Stock Exchange.

This experience will prove useful as he joined the board of data provider BMLL Technologies as chairman last month, having been appointed a non-executive director.

Hodgkinson said: “BMLL normalises T+1 data from all the exchanges around the world across all products. This data is deployed in the cloud to democratise access for quant services and other cases such as transaction cost analysis.”

Johannes Sulzberger, BMLL Technologies

BMLL has recently launched a derived data service which allows users to consume granular message-by-message exchange data directly into their trading systems at speed and scale to optimise their strategies.

Johannes Sulzberger, chief executive of BMLL, said in a statement: “I am delighted to welcome Lee to the BMLL team. He will be instrumental in BMLL’s mission to democratise access to granular market data and advanced analytics at scale.”

Hodgkinson continued that the trading business of exchanges has been commoditised while the listing business has also changed.

“Their traditional revenue streams remain under pressure from technological changes and regulatory change,” he added. “Exchanges need to seek out new value creation through more sophisticated products, clearing, data and risk transfer so Refinitiv is a great deal for LSEG.”

David Schwimmer, LSE Group

In August London Stock Exchange Group said it has agreed definitive terms with a consortium, including Blackstone and Thomson Reuters, to acquire data business Refinitiv for $27bn (€24.5bn).

David Schwimmer, chief executive of LSEG, said on the exchange group’s third quarter results call that company has begun the process of obtaining regulatory approvals and is on schedule to complete the deal in the second half of next year.

Education

In addition to prop trading, OSTC provides education and trading through its ZISHI program, which was a reason for Hodgkinson joining the firm.

“I joined OSTC because of its vast potential,” he added. “The firm has a vision that anyone, anywhere, can learn to trade and that makes me want to get up in the morning.”

Hodgkinson explained that OSTC only hires traders for whom this is their first job and focuses on diversity in all of its forms, doing its utmost to prevent people recruiting someone like them.

“We have 500 people in 12 offices and 80% of our staff are under 40, with 50% under 30,” said Hodgkinson. “We could add another six offices over three years, but growing our education franchise is critical, and helps us diversify our top line.”

He continued that there are 1.8 billion people aged between 10 and 24 who need education and jobs outside the traditional financial centres of New York, London and Tokyo. As a result OSTC has partnered with exchanges in developing markets to offer accredited qualifications through ZISHI’s educational platform, Cornerstone.

Last month OSTC announced a collaboration with SGX, the Singapore exchange, for Asia’s first official employer-led accredited trading programme.

Immersive courses will be delivered over five weeks in Singapore from next year. The courses are fully accredited and OFQUAL regulated, while receiving recognition at associate level by the UK Charted Institute of Securities and Investments. Applicants successfully completing ZISHI programmes can begin careers in finance including trading, financial analysis, portfolio management, risk management.

In September OSTC also announced an education collaboration with China’s Dalian Commodity Exchange for its top ten high-ranking officials.

ZISHI Cornerstone gave the ten officials hands-on immersion into trading and market-making over two weeks with the aim of supporting the development, management and growth of the Chinese exchange.

Hodgkinson said in a statement: “This is further evidence that our expansion in mainland China is gaining traction and underscores our reputation as a first-class provider of knowledge and education in the global financial marketplace. The development of OSTC’s non-transaction revenue stream is progressing well and we are well-positioned for further growth.”

Electronic Fixed Income Trading: Act II Ahead

By
Terry Flanagan
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The ascendance of multi-asset trading has given more momentum to electronic trading in fixed income, as traders with screen-based equities and FX backgrounds probe what is possible in bonds.

John Adam, Global Director of Portfolio Management and Trading Solutions at FactSet, said the electronification of fixed income trading to date — which has seen most liquid and some less-liquid debt securities move from the phone to the screen — can be considered Act I.

John Adam, FactSet

“Further electronic trading of fixed income is all but inevitable because of the demand for, and the shortage of, liquidity,” Adam said. “And as desks go multi-asset, you have traders who are more familiar with different styles of electronic trading, and they are asking why the same functionality and workflows aren’t available when trading fixed income instruments.”

Electronic government and corporate debt markets have developed to the point that it may now (or soon) be suitable for a fixed income execution management system. Historically, most fixed income liquidity was sourced over the phone, which undercut the EMS’s value proposition as a centralized, data and market-access hub on a trader’s desktop.

“2017 might have been a little early to have that conversation, but now the trading venues themselves are opening access to their systems through trade automation and APIs,” or application program interfaces, Adam said. “So it’s possible to level multiple sources of liquidity and consolidate various RFQ (request for quote) mechanisms into a single workspace for traders.”

About 6% of buy-side technology spend was directed to EMSs in 2018, double the previous year’s allocation, according to a Greenwich Associates report published in the first quarter of 2019. “This growth is driven primarily from fixed-income and FX desks, where EMSs did not exist previously,” the report stated.

Equities is the trailblazer asset class in electronic trading, with upwards of 90% of transactions executing via point-and-click, according to industry data. That compares with roughly 60% in U.S. Treasuries and 30% in corporate bonds. Liquidity constraints, more stringent ‘best execution’ reporting mandates, and the buy side’s need to cut costs are moving fixed income’s electronic representation higher, unlocking functionality and capabilities along the way.

“Buyside traders are starting to use auto-quoting systems and aggregators to check prices from multiple venues in one centralized place, a shift that is streamlining previously manual processes and helping to unlock more turnover in hard-to-trade securities,” BNY Mellon Capital Markets said in a Sept. 2019 whitepaper. “Telephone negotiations for trades in more esoteric corporate debt securities are still common, but automating trading in the more liquid securities has continued to increase.”

By way of background, Adam noted that five to ten years ago, the typical institutional trading desk was siloed by asset class, a structure that was “enforced” by different technology stacks for each. “But now over the past five years, trade automation has been consolidating those into multi-asset EMSs, because you want to have the same workflows, processes, automation and trade analytics no matter what asset class you’re trading.”

FactSet is adding fixed income / FX buy-side clients at about the same rate as equity clients, whereas a few years ago the ratio was 3:1 or even 4:1 in favor of equities, Adam said. The #1 pain point cited by investment firms is the inefficiency of manual and voice trade processes, a problem an EMS can solve by pulling in liquidity from trading platforms, bank broker-dealers and other sources.

“Rather than having a trader cycle through three different user interfaces, pull an order into the OMS (order management system) and back it in and out in each one of those venues, the EMS provides a staging area for liquidity from all sources.”

Adam likened the latest fixed income trading tools to digital ordering systems in fast-food restaurants, in that they both enable staff to work on higher-value activities. “Electronic trading and trade automation in fixed income is here to stay,” said Adam. “There are efficiencies to be gained and alpha to be retained.”

Muni-Bond Trading Evolves

By
Markets Media
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Slowly but surely, change is coming to municipal bond trading.

For brokers, tech providers and trade-venue operators seeking to modernize transactions, the $3.8 trillion muni-bond market has all the challenges, in spades — small issue size, little standardization, and a highly dispersed network of buyers and sellers. When a local savings and loan needs to buy a municipal bond backing a toll road on behalf of a wealth management client, the S&L representative historically has picked up the phone to do so.

Electronic trading has gained traction in government and corporate bonds, so technology providers and trading-platform operators are looking to export advances in those markets to their fixed income cousin. It is expected to be a long path with incremental gains, very much an evolution rather than a revolution.

Amanda Meatto, Tradeweb

“It’s not going to be an overnight change where all the tools and protocols that happen over voice will appear on a platform on day one,” said Amanda Meatto, Head of Sales and Relationship Management at fixed income marketplace Tradeweb Direct. “The wide range of securities and deals in the municipal marketplace make it more complex.”

“What we see happening in munis is a phased approach, where step one is enhancing liquidity, connecting people with as many broker-dealers as possible, and automating small workloads that are very manual today,” Meatto continued. “Those are the simpler parts of electronifying a product. There will be multiple stages of innovation from there, driven by the needs of buy-side and sell-side institutions.”

While only 12 to 15 percent of municipal bond trading volume is conducted electronically, uptake by financial institutions is moving the needle. In 2018, 62% of buy-side firms traded munis on a screen, up from 51% two years earlier, according to a Greenwich Associates report published in 2Q 2019.

“Investors — primarily asset managers and hedge funds — are increasingly looking to e-trading platforms for order execution,” Greenwich wrote. “The largest institutions are a leading indicator of technology adoption.”

One unique characteristic of the muni market is a comparatively small average trade size, in the order of $100,000-$200,000. High net worth individuals are an important presence in the muni market, especially via the $6.8 billion parked in separately managed accounts; Tradeweb is aiming to better connect institutions with this retail order flow.

Last month, the platform operator announced a partnership with InvestorTools, a provider of portfolio management and credit analysis systems for institutions, to enable straight through processing for municipal bond trades executed by Tradeweb Direct clients.

“The portfolio manager sits in InvestorTools to make decisions, and the next part of the workflow is execution,” Meatto explained. “It was a natural progression for us to link up to streamline the PM’s or trader’s pivoting from choosing bonds, to looking for liquidity and then executing.”

Meatto noted that the muni-bond market lends itself to electronic trading in the sense that buyers often search on criteria, such as duration and coupon, rather than coming in to buy one specific issue as is often the case in corporates and Treasuries. As there were an estimated 1.02 million different muni issues as of February according to Greenwich, electronic platforms can make inventory searches manageable.

Going forward, the challenge for electronic trading is to move beyond just the smaller, so-called odd lot trades and make headway in deals north of $1-$2 million. “How do we electronify two people speaking to each other to agree on a price?” Meatto asked. “That is going to be a huge part of electronifying the round-lot marketplace for muni bonds.”
​

Repo Voice Trading Falls To All-Time Low

By
Shanny Basar
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The volume of directly negotiated repo through voice brokers has fallen to an all-time low as incoming regulations encourage a shift to more efficient electronic trading.

The International Capital Market Association’s latest European Repo Market Survey said directly-negotiated repo recovered sharply, despite increased electronic business transacted over automatic repo trading systems. “This was largely due to a drop in the volume of business through voice-brokers to a new all-time low,” added the survey.

SFTR

Trading has become increasingly electronic as the European Union’s Securities Financing Transactions Regulation goes live for broker-dealers in April next year and introduces challenging reporting requirements.

SFTR requires all securities financing transactions including repos, securities lending and margin lending trades, to be reported to an authorised trade repository the day after a trade using a unique transaction identifier. The data, consisting of approximately 150 fields, should allow supervisors to monitor market developments such as the build-up of leverage in the financial system. In addition, there are new disclosure obligations and collateral reuse obligations.

Tom Harry, product manager at MTS Markets, the fixed income execution platform owned by London Stock Exchange Group, said at a media briefing on SFTR last month that cleared inter-dealer repo trades are being executed electronically. However, he continued that many exotic trades are still executed manually.

“Dealer-to-client trading is typically executed by voice, so SFTR is a significant hurdle for many participants,” said Harry. “To help facilitate the transition, MTS is offering an SFTR blotter for both bilateral and cleared trades which includes the required reporting fields.”

Harry explained at the briefing that MTS was also seeing changes in customer behaviour, particularly with regard to processed trades. “These are negotiated bilaterally but then executed on a venue to allow straight-through-processing and reporting,” he added.

Tim Martins, product manager for money markets and derivatives at MTS Markets, said on the firm’s blog that better electronic repo markets, along with sponsored repo clearing and standardization of legal agreements, could result in a new trading business model.

Tim Martins, MTS Markets

“It is rapidly becoming the norm that all commoditized trades be conducted over an electronic platform, as anything else simply takes up too much time with little benefit,” added Martins. “Applying a straightforward rules based approach allows both sell-side and buy-side firms to take advantage of new efficiencies such as axe sharing and price discovery that are driving capital markets as a whole.”

He continued that dealer-to-client repo trading is still in the first 30% of automation that could be achieved with relatively little straight-through processing – but this is being changed by SFTR.

“Market trends suggest that electronic repo trading would grow without SFTR, but SFTR will speed up the process,” said Martins. “The aggregation of more trades, and hence more data, on electronic platforms will lead to a taming of the Wild West of repo.”

Electronic trading also generally means that more trading is possible as smaller trades and trades with tighter spreads become more cost-effective.

“Adding automated settlement to tri-party agents and central securities depositories extends this value-add of electronic platforms,” said Martins. “While repo may never be as standardized as foreign exchange or equity trading, the potential for greater alignment across clients means that repo dealers could look at new business models that combine standardization and sponsored repo to further reduce internal costs.”

ICMA survey results

The total value of the repo contracts outstanding on the books of the 55 institutions in the survey was €7,761bn ($8,544bn), a 5.6% year-on-year rise.

ICMA continued that the survey suggests that the recovery of the market that has been in progress since 2016 has paused, albeit close to its record level.

“The slowdown in the repo market may have reflected the impact on financial markets of increased uncertainty in the global economy and the effect of inverting yield curves on fixed-income trading,” added ICMA.

One exception was Italian government bonds, which have been favoured by investors in their search for yield. In contrast, German securities suffered from increasingly negative yields.

“The end of quantitative easing in the eurozone at the end of 2018 may have boosted the recovery of tri-party repo, which is a source of general collateral funding that has suffered from the plentiful supply of central bank money,” said the survey.

TRADERS Q&A: Magnus Almqvist, Aquis Technologies

By
Creating Digital
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For the stock exchanges, business has become more about technology than actual executions.

Magnus Almqvist, Aquis Technologies

How to best use it. How to create it. How to refine, etc. But one thing for sure is that exchange technology is modernizing at a rapid clip. Of course, it has to. It has to adapt and grow up to be smart enough to provide low latency, high-performance flexible technology for the brightest, smartest fintech companies now entering the market. Also, it has to do this while providing robust and reliable technology that existing successful exchanges require — a tall order, especially given the years existing legacy systems have been in place.

Traders Magazine editor John D’Antona Jr. recently spoke with Magnus Almqvist, Head of Technology Sales, Aquis Technologies about how his firm, Aquis Technologies, is providing low latency, high volume matching engines and high-performance surveillance technology that is cost-effective and will take the market into 2020 and beyond.

TRADERS MAGAZINE: Tell us about Aquis Technologies?

Magnus Almqvist: Aquis Technologies is part of the global exchange services group, Aquis Exchange PLC.  We provide modern, robust and cost-effective matching engine and high-performance surveillance technology services for capital markets exchanges, banks and brokers. With an exchange consultancy, SaaS and live production services, we provide our technology on a flexible and adaptable basis for our clients’ needs. Our technology has been built from the best traditional exchange principles, yet is fit for contemporary market models, including our own FCA and AMF regulated modern and disruptive market for equities trading, Aquis Exchange, which itself has used it since November 2013. Now being licenced and adopted by exchanges and market participant innovators around the world, we believe this reflects an appetite for modern exchange technology and services.

TM: What are the challenges faced by the exchange industry?

Almqvist: The exchange industry is challenged with regulatory implementation requirements and the pace of innovation. Incumbent processes are fast becoming redundant, and new methodologies and market models are emerging to challenge the status quo and to take advantage of the opportunities that cloud, artificial intelligence, tokenisation (to name but a few) can offer. At the same time, incumbents face pressures in the historically very low vol. environment. We enable both new and incumbent exchanges to navigate this rapidly changing world, align with their competitors and in many cases, even leapfrog their offerings. We see ourselves as agents for change, helping the industry to stay ahead and, ultimately, delivering better returns for end investors and exchange shareholders.

TM: Who are your clients?

Almqvist: We are proud to support a broad and widening spectrum of clients from traditional exchanges and alternative venues. Our clients come from sectors such as infrastructure bonds, futures and options, oil derivatives, stock exchanges, MTFs, SIs, dark pools and reinsurance to name some. New technologies – such as cloud, blockchain, artificial intelligence and machine learning – are challenging exchanges and trading venues, like never before. We help determine how they can align – even leapfrog – the best in the field. We believe in client choice. Some firms prefer to install Aquis Technologies on their hardware and/or infrastructures and handle their own full integration. Our technology team can design, develop and deliver a fully outsourced ‘licence only’ exchange for a firm to run by themselves. Alternatively, we can host and operate a client’s hardware and software on physical hardware or in the cloud, and even provide first-line surveillance operations.

TM: What makes Aquis Technologies different?

Almqvist: Our exchange technology includes a complete trading platform offering of matching engine, surveillance system, market operations and data services. Aquis Technologies provides highly flexible yet consistently rigorous modern proprietary systems. We are called upon by leading exchange champions who recognize the potential for new asset classes, market and liquidity models. They acknowledge the role that modern exchange and surveillance technology must play, and we are pleased to act as their change agents, design advisors and technology providers. We do this by delivering scalable and high-performance exchange, market data, market operation and real-time surveillance technology and services ideally suited to exchanges, MTFs, Systematic Internalizers, OTFs and broker crossing networks. Our technology is ideal for order quote-driven markets or for lit or dark books.

TM: Tell us more about your technology?

Almqvist: Our technology was developed entirely in-house by an experienced, UK-based team with a track record of building stable exchange systems. Take, for example, our Aquis Market Gateway (AMG) product… Our hub and spoke AMG, enables multiple bilateral message connections essentially in highly complex multilateral markets. We provide both a fast and consistently low latency service around the world with our Aquis Matching Engine, with port-to-port latencies of 17 microseconds or less for 99.99% of all messages, processing 170,000 messages per second, sustained and processed – the lowest in the industry.

TM: And what about surveillance technology?
Almqvist: We provide real-time multi-asset class surveillance, available as part of the complete exchange solution, or as a stand-alone offering. We offer transparency, insight and control empowered by visual graphic interfaces highlighting market and trading anomalies with real-time alert and notifications. It is designed to comply with major market abuse and conduct regulation. Easily scalable to handle cross-asset and cross-border trading requirements, our surveillance system will identify all the potential misdemeanors, including quote stuffing, wash trading, layering, pinging, and front running to mention a few.

TM: Can you give us some specific examples of how you are helping the industry?
Almqvist: With the increasing challenge the sector faces of how to tackle the huge data sets, combined with a landscape that is becoming more complex with margins shrinking, our clients often have to understand a lot more about IT using a lot fewer people than ever before. Added to this, investors’ timescale expectations on market returns have shrunk, wanting to see faster progress on their investments. We help our clients understand this more complex world and help businesses get a new asset class or new order type up and running very quickly.

Aquis is ramping up an R&D initiative in 2020, for example, with a well-known UK based university to investigate the capabilities of artificial intelligence and machine learning mainly within the surveillance and compliance space, and see if it can support compliance officers making faster and more accurate decisions when analyzing trading patterns. This is hugely exciting and can generate efficiencies and also increase the work satisfaction of compliance officers when supported by their tools in a much better way than with traditional technology.

We are also working with “applification” of complex mission-critical components, such as trading engines. That is, clients are expecting to be able to connect to the non-custom product, run in the cloud and accessed via public internet, within weeks of signing a contract; indeed they want early adopter clients to be live on the platform a few weeks later. For incumbents used to year-long delivery projects of matching engines, this is quite a shock to the system. It fits hand in glove for Aquis Technologies, and we’re excited to engage with prospects where we actively prototype and showcase using a standard cloud run matching engine for prospects to connect to and familiarize themselves with our technology, and they can comfortably go live as and when they feel ready.

CryptoCompare September Exchange and Currency Report

By
Creating Digital
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double exposure image of stock market investment graph on stacks of Bitcoins,concept of business investment and crypto currency.3d illustration

CryptoCompare, the global leader in digital asset data, recently released its September 2019 Exchange Review which provides analysis of key developments in the cryptocurrency exchange-traded market.

CryptoCompare’s Exchange Review evaluates the consistency and quality of cryptocurrency exchange data, assessing exchanges on the basis of spot 24-hour volume and pricing data. The review covers: exchange rankings by volume; predominant fee types; derivatives data; derivative products; fiat, bitcoin and stablecoin volumes. It also analyses how volumes have developed for the top trans-fee mining and decentralised exchanges.

Key September highlights:

Deribit options volumes surpass $1 Bn

In September, options represented approximately 11% of Deribit’s total volume ($1 Bn+). In August, this figure was closer to 9% (~$0.95 Bn).

OKEx still dominates overall crypto derivatives volumes

OKEx was the top derivatives exchange in September, trading a monthly total of 90.34 billion USD (down 14.9% from August). In second place was Huobi with volumes of 84.52 billion USD (down 7.3% from August).

Volumes for the higher-rated AA-graded exchanges decreased by 31.6% while exchanges graded D-E continued to attract the lion’s share of market volume.

Exchanges graded AA represented 3.0% (14.87 billion USD) of total aggregate volume in September, while those rated A and B represented 14.3% (71.98 billion USD) and 4.7% (23.86 billion USD) respectively.

E-rated exchanges gained significant market share

Volume across E-rated exchanges (representing 179.06 billion USD) increased nearly 31.5% since August.

Institutional Bitcoin products continued their decline

Volumes in CME’s bitcoin futures product decreased from 5.9 billion USD traded in August to 4.82 billion USD traded in September (down 18.3% from August). Meanwhile, Grayscale’s bitcoin trust product (GBTC) saw volumes of 713.6 million USD (down 37.5% from August).

Macro Analysis and Market Segmentation

Exchange Benchmarking Analysis – Based on CryptoCompare’s Exchange Benchmark grading methodology, AAgraded exchange volumes decreased 31.6% while Lower-tier exchanges graded D-E, still represented the market majority at 71% (347.2 billion USD). Exchanges with grades AA represented 3.0% (14.87 billion USD) of total aggregate volume in September, while those rated A and B represented 14.3% (71.98 billion USD) and 4.7% (23.86 billion USD) respectively.

On aggregate, volume from Top-tier exchanges (AA-B) decreased 15.0% while volume from Lower-tier exchanges (C-F) decreased 29.7%. Aggregate top-tier exchange volume still only represents 21.9% of the total market ($111Bn). Last month, top-tier exchanges represented 19.6% ($130 Bn).

2 Trade Data Analysis – Lower-tier exchanges Coinsbit, LBank and P2PB2B had the largest trade sizes relative to other top exchanges at an average of 8.7, 2.1 and 1.2 BTC respectively. D-rated exchange Coinsbit saw an average trade size 21.7 times higher than AA-rated Bitstamp. In terms of trade count, Coinsbit traded an average of 2,526 trades per day, while Bitstamp traded an average of 14,638 trades per day.

Among the top crypto exchanges, Digifinex had the largest average daily trade count (400k trades) combined with a low average trade size (0.177 BTC). This was followed by Binance (300k trades and 0.114BTC) and OKEx (226k trades and 0.09BTC). Other trans-fee mining exchanges such as EXX, CoinBene and BitForex showed relatively high average trade sizes at 0.81 BTC, 0.48 BTC and 0.98BTC per trade respectively.

Among the top fiat exchanges, Liquid had the largest average daily trade count (575k trades) combined with a low average trade size (0.038 BTC). Exchanges itBit, Gemini and Coinone traded a significantly lower number of trades per day (1.68k, 5.2k and 13.9k respectively) combined with higher trade sizes (0.4, 0.27, 0.12 BTC respectively).

3 Predominant Fee Type – Exchanges that charge taker fees represented 66% of total exchange volume in September, while those that implement trans-fee mining (TFM) represented 32%. Fee-charging exchanges traded a total of 358.2 billion USD in September (up 1.4% since August), while those that implement TFM traded 174.92 billion USD (down 53.4% since August). The remaining volume represented trading by exchanges that charge predominantly no trading fees, at 4.26 billion USD.

4 Institutional BTC Products – Regulated bitcoin institutional product volumes are still dominated by CME, whose total trading volumes are down 18.3% from August at 4.82 billion USD. CME’s bitcoin futures product volumes decreased from a total of 5.9 billion USD traded in August to a total of 4.82 billion USD traded in September.

Meanwhile, Grayscale’s bitcoin trust product (GBTC), decreased in terms of total trading volume with 713.6 million USD traded in September (down 37.5% from August).

5 Crypto Derivatives Total Monthly Trading – OKEx was the top derivatives exchange in September in terms or total monthly volume, trading a total of 90.34 billion USD (down 14.9% from August). This was followed by Huobi with total monthly trading at 84.52 billion USD (down 7.3% from August).

4

September 2019 Exchange Review

6 Derivatives (September Daily Volume Overview) – During the month of September, OKEx represented the

majority of daily derivatives volumes trading at $3.0Bn per day (33.7% market share) followed by Huobi (2.82Bn,

31.6%), BitMEX ($1.88 Bn, 21.1%) and bitFlyer ($797 Mn, 8.9%). Smaller exchanges Deribit and CryptoFacilities (FCAregulated) represented ($334Mn, 3.7%) and ($74Mn, 0.83%) of the market respectively on average.

In September, the most traded derivatives product by trading volume was BitMEX’s perpetual BTC futures – trading a total of $41.7 Bn. Other top products included BTC futures products (Exp. 27th Sept) by Huobi ($23.3 Bn traded) and OKEx ($17.4 Bn traded).

In contrast to other derivatives exchanges, CryptoFacilities (owned by Kraken) is FCA-regulated. The majority of their volumes are generated from their BTC and ETH perpetual futures products. CryptoFacilities BTC perpetual products generated $1.44 Bn in volume in September, while their ETH perpetual products generated $298 Mn.

Deribit’s volumes, like those of CryptoFacilities, originate predominately from their BTC perpetual futures product trading a total of $7.4 Bn in September. This was followed by Deribit’s BTC futures product (exp. 27th Dec) ($763Mn). In September, options represented approximately 11% of Deribit’s total volume across the month ($1 Bn). In August, this figure was closer to 9% (~$0.95 Bn).

7 Fiat Capabilities – Trading volume from exchanges that offer only crypto pairs represented 84.4% (453.45 billion USD) of total trading volume in September, while fiat to crypto exchanges represented 16.0% (83.93 billion USD).

Volume from crypto to crypto exchanges decreased 28.57% in September, while volume from exchanges that offer fiat pairs decreased 17.83%.

8 Bitcoin to Fiat Volumes – In September, 47.82% of all Bitcoin trading into fiat was made up of the US Dollar. BTC to USD volumes decreased, from 1.33 million BTC in August to 1.07 million BTC in September (down 19.0%).

Meanwhile, BTC trading into JPY represented 621,000 BTC in September (down 40.0% from August), while BTC trading into EUR represented 255,000 BTC (down 9.0% from August).

9 Bitcoin to Stablecoin Volumes – In September, BTC trading into USDT represented 70.95% of total volume (traded into fiat or stablecoin). BTC trading into USDT totalled 6.22 million BTC (down 21.29% from August). USDT continues to be the most popular stablecoin for trading with Bitcoin, followed by USDC and PAX.

Exchange Volumes

1. Top Crypto to Crypto Exchange Volumes – BitMax (D-rated) was the top crypto to crypto exchange by total volume in September at 28 billion USD (down 87.8% since August). This was followed by ZB (E-rated) and Binance (A-rated) at 26.9 billion USD (down 4.26%) and 26.19 billion USD (down 7.9%) respectively.

2. Top Fiat to Crypto Exchange Volumes – Bithumb (A-rated) was the top fiat to crypto exchange by total volume in September at 17.17 billion USD (down 5.02% from August). This was followed by P2PB2B (Not Graded) and Coinsbit (D-rated) at 12.89 billion USD (down 2.92%) and 6.64 billion USD (up 101.38%) respectively.

3. Trans-Fee Mining Exchanges – BitMax was the top TFM exchange by total volume in September at 28.0 billion USD (down 87.88%), followed by CoinBene at 26.14 billion USD (down 6.66%) and Bitforex at 23.37 billion USD (down 3.14%).

4. Decentralized Exchanges – DDEX was the largest DEX in September trading a total of 30.98 million USD (down 9.31%), followed by IDEX and BitSquare trading 14.28 million USD (down 34.97%) and 10.78 million USD (down 56.24%) respectively. DEXs represent only a small fraction of global spot exchange volume (0.01%), trading a 1monthly total of 61.17 million USD in September.

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