Crypto assets : Finding liquidity : Jannah Patchay

October 22, 2019

NAVIGATING THE CRYPTO LIQUIDITY LANDSCAPE.

Jannah Patchay looks at the progress being made and the gaps to be filled.

When it comes to the burgeoning, fecund crypto-asset landscape, it is near-impossible to avoid discussions of liquidity. There are typically two directions – evangelical visions of a future in which the combination of distributed ledger technology (DLT), fractional ownership of tokenised assets and an enthusiastic army of global investors inject life into the previously parched deserts of illiquid assets; or a more sober and usually pessimistic view of the well-known challenges of growth markets and new products.

The true picture, it appears, may lie somewhere between these two extremes. While technology innovation in DLT and the digitalisation of assets via security tokens may not immediately open the gates to a promised land of mass accessibility, they certainly do herald the beginning of something new. The most likely outcome is that they will evolve in directions that cannot yet be comprehended.

In the European Union (including, for now the UK), adoption of tokenised securities – has been tentative. Olaf Ransome, Chief Commercial Officer of Fnality, describes the pre-requisites for widespread adoption in terms of a “Holy Trinity.” In other words, there must be a means of creating tokenised assets, exchanges and price discovery venues where trading can occur and an appropriate payment mechanism.

Currently, several firms are engaged in creating and managing tokenised assets to both issuers and investors. They may have a different spin but there are certain common threads such as recognition of the wider structural issues in small-to-mid cap markets, and an aim to put control of assets firmly in the hands of issuers, with as little intermediation as possible.

These platforms also typically include core functions for issuers including offer documentation, know your customer (KYC) processes and the issuance of securities and payment processes. Also, on the list are the ongoing management of the securities and any corporate actions. While their focus is primarily on the initial issuance process, they are also laying the foundations for secondary markets trading.

Secondary markets

To date there has been little activity in secondary markets because tokenised securities are categorised as MiFID financial instruments and must be traded on approved venues such as an MTF or OTF. They have not been that welcoming to these crypto-assets in general but having different trading models for different levels of liquidity per asset has been key to moving the industry forward.

Changes are afoot with Archax’s plans to launch an institutional-grade exchange for trading asset-backed tokens and digital securities. The company is in the process of applying for authorisation from the UK’s Financial Conduct Authority (FCA) as an MTF.

The aim is to offer periodic auctions for less liquid assets, and a full central limit order book for those traded more frequently.

Graham Rodford, CEO of Archax, visualises a “liquidity spectrum”. At one end are highly illiquid assets such as property and private equity. Tokenisation adds benefits in terms of making the primary issuance process more operationally efficient and easy to manage, alongside the potential to access a wider investor base. Although having the ability for investors to exit a position is useful, these assets are not expected to trade on a frequent basis.

At the other end, are the more liquid blue-chip companies such as Apple and Vodafone. Rodford believes that there is an inevitability to the adoption of tokenised issuances by blue-chips, and once this occurs, they will enter the mainstream. However, he is keen to stress that the new market structure must be allowed to diverge from its traditional predecessors. “Part of the whole movement, of what it’s all about, is decentralisation, direct access and the removal of intermediaries, and we don’t want to fully replicate the old world,” he adds.

New offerings

There are also other initiatives being introduced on the operational side. For example, Tokeny Solutions, a Luxembourg-based fintech company, has been building out their technology to support the full transferability of both OTC and exchange traded digital securities. The issuance process includes the creation of smart contracts that validate compliance criteria, such as the jurisdictions of investors and KYC requirements.

The technology is built on the Ethereum T-REX (Token for Regulated EXchanges) standard, allowing for the compliant transfer of tokenised securities, not only in the initial issuance, but also in secondary markets. These tokens can be held in almost any wallet on the Ethereum blockchain (enabling self-custody) and are tradable on any compatible exchange.

Tokeny’s objective, according to CEO Luc Falempin, is “to be the white-label toolbox for market infrastructure when it comes to tokenised security issuance.” There is clearly support from the traditional exchange sector in this goal: Euronext has recently invested Ä5m in return for a 23.5% stake in the company. “The liquidity is a key component that’s been missing in the industry, by partnering with the eurozone’s largest stock exchange we are striving to solve this problem,” he adds.

Tokenisation can also open up investor access on a more global scale. “Right now, if you want to have securities listed on different exchanges around the world then you need to create ADRs (American Depositary Receipts), GDRs (Global Depositary Receipts) or something equivalent,” says Myles Milston, CEO of Globacap, a UK blockchain-based platform that enables direct equity issuance. “By using tokenised securities, you could actually have a block chain-based security listed in one venue in one region and then listed on another venue in an entirely different region.”

He adds, “Those securities could be completely fungible and in the longer term could improve both access to capital, and on-going liquidity, by having more investors accessing essentially the same security, globally.”

Asset servicing hurdles

Progress is also being made on the settlement front with Fnality’s Utility Settlement Coin (USC), which when it goes live, will enable delivery versus payment (DVP) on the blockchain, which will help facilitate the process. At the moment, the operational benefits of immediate and direct security settlement are nullified if there is no instantaneous capability for settlement of the cash leg on the transaction.

The safekeeping of assets, though, is more problematic. Institutional investors will be reluctant to trade assets unless there is a convenient, reliable and safe means of custodying them, with full connectivity to all the venues and mechanisms by which the assets are traded.

Francesco Roda, Chief Risk Officer at Koine, an institutional-grade, segregated, fully regulated digital currency and asset custodian, summarises the situation: “Liquidity is primarily a feature of the market in which the asset is traded. It is driven by the interest and the demand that the asset can attract, the ease with which the asset can be converted into cash and the barriers to entering the market in which the asset is traded. So, bringing down the barriers to accessing assets is a way of creating liquidity.”

He adds, “Liquidity is made by market makers – but in traditional markets, market making is costly in terms of capital. Digital assets can lower the operational barriers to entering the market, potentially allowing new types of player – which may have a lower cost, or a surplus, of capital – to become market makers.”

©Best Execution 2019
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Data management : Market data : Heather McKenzie

Ian Rycott

October 22, 2019

THE MARKET DATA CONUNDRUM.

Heather McKenzie assesses the market data landscape and the persistent bumps along the road.

For nearly a decade, European regulators and securities industry participants have grappled with the thorny issue of the cost of market data. They are still forging their own path although it is diverging from their US counterparts.

While reviewing MiFID in 2010, the European Commission indicated that the prices for trading data in the region were too high, particularly when compared to the US. The regulation, which was implemented in 2007, had contained a clause that market data should be offered on a “reasonable commercial basis”. At the time of the review, banks and buyside firms called for market data prices to be fixed, while trading venues argued that their pricing schemes were fair.

Roll on the years and market data costs continue to rise. The revised Directive, MiFID II, aimed to ensure that market data was available to market participants in an easily accessible, fair and non-discriminatory manner. It also intended to decrease the average cost of market data and make it available to a wider range of market participants.

In July, the European Securities and Markets Authority (ESMA) issued a comment paper, MiFID II/MiFIR review report on the development in prices for pre- and post-trade data and on the consolidated tape for equity instruments. It invited users of market data and trading venues and other market participants including trade associations and industry bodies, institutional and retail investors to respond.

The paper stated, “Both trading venues and market data users acknowledge that, in an environment driven by technological development, the demand for market data and its value is increasing. This is for instance reflected in a shift in the consumption from display to non-display data. Furthermore, MiFID I and II resulted in increased competition in equity markets and in a wider choice of execution venues.”

It added, “Since market data can address the adverse effects of a more fragmented trading environment, demand for market data increased. Both groups also concur that market data vendors play an important role in the value chain of market data and that the discussion on the price of market data should include the assessment of the role of data vendors.”

Opinions diverged about the cost of market data, however. ESMA cites two studies, one by Copenhagen Economics and released in November 2018 and the other by Oxera from March 2019. The Copenhagen report, commissioned by the associations of security dealers in Denmark and Sweden, stated that trading venues have a monopoly on the market data generated on their trading platform.

“This provides the major trading venues with extensive market power in selling their market data,” according to the report. “Consequently, without effective regulation in place, there is a risk that trading venues will exploit the situation and charge market data fees significantly above the costs of producing such market data.”

Despite the original provisions in MiFID and subsequent review to ensure reasonable pricing of market data, this had “yet to be transposed into workable, effective mechanisms”, stated the Copenhagen report.

The Oxera report, The design of equity trading markets in Europe, was prepared for the Federation of European Securities Exchanges (FESE). Unsurprisingly, it has a different take on market data pricing. “Market data is the outcome of a dynamic price formation process and is a joint product with trade execution… it is not possible to generate one without the other, and most activities undertaken by a stock exchange deliver both trading and price formation. The economics literature suggests that, in the case of joint products, it is efficient to generate revenues through fees from both products.”

Counting the cost

The share of revenues coming from market data services ranges between around 20% and 50% of joint (trade execution and data) revenues across exchanges, argues the report, and has been “relatively stable” over time; on average 31% in 2018, unchanged from 2017 and compared to 32% in 2016 and 30% in 2015. Aggregate market data revenues (of stock exchanges that are members of FESE) amounted to about Ä245 million in 2018 and increased in recent years by around only 1% per year in real terms.

Steven Maijoor, ESMA chair, said on the release of the comment paper, “Discussions on the cost of market data in the EU have been to the fore for many years with differing views expressed by trading venues selling this data and market data users buying it – MiFID II aims to change this landscape.” The new consultation would form an important part of the reviews of MiFID II.

In the US, says John Ramsay, chief market policy officer at IEX Group, an equity trading venue owned by buyside investors, the Securities and Exchange Commission (SEC) has helped to “reframe the debate” over the past year by insisting that exchanges “fully justify fee increases, rejecting fee hikes that aren’t fully justified, and refusing to take at face value the premise that exchange data fees are constrained by competition.

My sense is the SEC understands the burdens many participants face in needing to pay for fast data directly from exchanges to meet best execution responsibilities and stay competitive,” he adds. “It is clear that regulators in Europe are increasingly focused on the issue.”

ESMA’s public consultation is welcome because at present there is no real constraint on what a monopoly provider of data can charge, says Peter Moss, chief executive of SmartStream Reference Data Utility. “If you own a trading venue and you have data available, no one can compete, you have a monopoly and therefore there are no constraints on what you can charge. As a result exchanges and trading venues are charging more and more to access their data.”

In such a monopoly situation, the most effective constraint is a regulatory one, he adds. “Already in the US, regulators have ordered a reduction in the prices that are being proposed by one or two of the exchanges. Similar action by ESMA would be helpful.”

The ESMA paper is also consulting on the establishment of a consolidated tape in the EU, a topic that has been discussed for many years. Maijoor said “it is time to decide if and how we want to go ahead with this ambitious project and ESMA is ready to provide support to the co-legislators on the right way forward”.

Moss says it is very difficult to get a complete consolidated trade history for the European market. “Technically, it is doable and any of the major vendors could do this, but commercially it is prohibitive. For real-time data, the cost of acquiring all of the trade history from the various sources means that any commercially developed consolidated tape would be more expensive than firms are prepared to pay. Regulator intervention is required to remove the commercial barrier.”

Riccardo Lamanna, head of Global Exchange EMEA, at State Street, says the investment management space is in the early days of big data relative to other areas of financial services and other industries. “There are also a lot of companies in the industry struggling to manage the data they have. Firms are now processing and generating data for analytics, regulatory reporting, client reporting and research purposes.”

This is happening while regulators globally are requesting more data through regulations such as MiFID II, Solvency II, EMIR, etc. Regulators are also “setting a higher bar” with respect to the quality and governance of the data that is sent to them. “Financial institutions must not only apply new data and analytic techniques to the search for alpha, but they also must do so with respect to regulatory compliance,” he says. “No firm wants to be in a position where the regulators uncover malfeasance from their data when they themselves did not.”

While the cost of data is increasing year on year, Moss argues that the biggest problem for the market is a lack of standards, the disparity of data models used and the fact that every firm that charges for data has different commercial models and different constraints. “This results in a significant hidden cost to consume and manage the data, the associated entitlements and the usage rights. This applies across trading venues, exchanges, vendors and data processors.”

From a regulatory perspective, the European approach is to try to solve this problem for regulatory reporting by defining the standards and data formats down to a microscopic level with clearly defined rules. At the other extreme the US takes a much more hands off approach, for example, in Dodd Frank, regulators did not define the format for collecting OTC derivatives data, they just stated it needed to be published. “The best approach probably lies somewhere in between,” says Moss.

©Best Execution 2019
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Fixed income trading focus : Overview : Dan Barnes

Ian Rycott

October 22, 2019

THE TRANSFORMATION OF THE BOND MARKET.

Europe had led the race to electronify credit trading, but the US has overtaken on automation. Dan Barnes reports.

Automated trading of corporate bonds is coming; look busy. Thanks to the sophisticated price streaming activities of both traditional and electronic market makers, buyside desks can potentially move to low- or no-touch execution for certain liquid assets.

The potential of streaming prices in this context may be to shift trading of small ticket, highly liquid orders into bilateral execution. For buyside traders seeking validation of best execution that will require a stable source of pricing in order to certify such trades, where price is the best execution parameter.

“Maybe, when we get the consolidated tape [of bond prices in Europe, a report on which will be presented by 3 September 2021] we can get one aggregated provider of all data, and I think the costs will then come down,” says Stuart Campbell, head of trading, BlueBay Asset Management. “There is a push now for direct connectivity between myself and the banks, and I think the fallout from that will be, I don’t need to use one of the big three platforms to trade, if I can have five or six direct feeds.”

The caveat is that these developments are largely found in US investment grade credit, reversing a long bias towards greater electronification in the European markets.

Paul Reynolds, head of fixed income at execution management system provider, TradingScreen, says, “The US buyside is racing ahead, investing in technology, very clear of what they want, why they are doing it and what the outcome will be. European clients are perhaps less clear in their minds about what the future is. Yet when we describe what the Americans are doing, Europeans see the sense in that approach.”

Certainly, European banks are stepping forward to offer similar services to their buyside clients. Where electronic trading had once referred largely to the request-for-quote model, which migrated the voice trading workflow to an electronic format, the potential now exists for asset managers to fully automate some of their execution, and dealers see this as a game changer.

Describing UBS’s development of streaming prices for the European market at a briefing in April 2019, Chris Purves, head of the bank’s Strategic Development Lab in FX, rates and credit said, “It is the ‘Blockbuster’ moment; some people are still selling videos while others are streaming.”

However, this exciting development and the promise it harbours should not outshine the reality that much of fixed income trading is still an over-the-counter market for large block trades. Whether trading via voice or electronically, execution quality is still beholden to many additional factors than more flow instruments like G10 currencies or blue-chip equities.

Therefore, most buyside trading desks will find they are still fighting hard to manage execution quality in markets with limited available liquidity, a challenging price formation process and limited numbers of available counterparties.

Kate Karimson, head of fixed income product for Europe at BrokerTec, says, “No-one solved the perceived liquidity crisis, which was a big focus a few years ago, when it comes to corporate bonds execution. In the EGB space there have been relatively few disruptors. I wouldn’t say there are any particularly effective risk transfer mechanisms for block trading in either of those markets. There is a lot to be done on both.”

Motivation to electronify

Having seen many efforts to use equity-like models to solve bond trading experiences, fixed income practitioners have pushed back. They are seeking to electronify both rates and credit along lines which suit the asset class, with Europe taking a lesson from the US market. That will require an investment in technology and an evolution of market structure in order to reap the rewards.

“The electronification in benchmark US treasuries has helped from a pricing perspective, by narrowing bid offer spreads, and helping to facilitate a wider participation with different types of trading interest and flow in the liquidity pool,” says John Edwards, Global Head of BrokerTec. “Compare that to EGBs where you have a very different overall market structure created around primary dealers and recognised venues for trading and compliance, and although a significant amount of that flow is executed electronically, it’s a very different type of market trading experience for a trader looking to manage risk or put on a position.”

The first step on trading desks is to develop or buy order and execution management systems
(O/EMS) that will enable traders to engage with new trading protocols, access market data sources and provide a feedback loop of post-trade information to inform and improve the investment and trading process.

However, this has proven challenging, in part as many O/EMS systems struggle to match the workflows that bond trading desks need them to provide.

Christoph Hock, head of multi-asset trading at Union Investment says that after a very in-depth due diligence assessment for third party EMSs the firm decided to build its own. “Our conclusion was that no EMS was able to fit perfectly into our own portfolio construction and trading workflow processes,” he adds “The decision to go for an in-house solution fully takes care of our traders’ specific needs in day-to-day business. Additionally, it gives us a maximum degree of flexibility to further implement upcoming requirements in the future.”

A number of vendors are also re-engineering their own products to ensure that they offer a dedicated fixed income toolset that can deliver meaningful support to traders.

“We completely redesigned our transaction cost analysis (TCA) products a year ago and we have our first clients using it,” says Reynolds. “We realised that fixed income TCA was a very poor copy and paste of equity, futures and FX TCA, and was never ever going to work no matter who did it. So, we started with a clean sheet of paper, looking at the entire lifecycle of an order from the moment it’s received, to the moment it is executed.”

Disconnected

The trading venues themselves have also adapted to provide a range of trading protocols that can better support bond traders as well as to deliver connectivity to the trading desktop in order to minimise the screen real estate that is taken up by interfaces and tools.

“The ideal state for a buyside trader is not to have multiple windows and applications running simultaneously on the desktop, however, trading multiple assets at similar times using the same infrastructure can be very hard, given the nuances and differences in each asset class,” says Jonathan Gray, head of fixed income EMEA at electronic block trading specialist, Liquidnet.

“[We have] a very open architecture in terms of who we integrate with, so we would be all for encouraging anything that makes the trading process more seamless and efficient for our clients.”

The challenge for sellside firms is ensuring they are still relevant when they must commit balance sheet far more selectively while facing greater intermediation from e-trading platforms.

“Dealers are not done with this market, but they need to find a new model for selling to the buyside where their expertise lies, being selective with any particular client regarding the balance sheet that is available,” says Reynolds. “They don’t want the world to turn up and expect the same thing. They will provide balance sheets on a very bespoke basis related to clients they feel they want to prioritise.”

Equally, the buyside looking to utilise these streamed prices must feel comfortable that they can use new trading protocols – such as price streaming – to support automation on the trading desk to best effect for their end investors.

“I wouldn’t ever automate purely for the sake of trimming costs and reducing head count, or of making processes more efficient, if it comes with a burden on the very high level of execution quality which is our standard, we deliver to our clients, to our end investors,” says Hock. “For me it’s not acceptable at all that we have potentially a lower execution quality to achieve a much higher level of automation.”

©Best Execution 2019
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Industry viewpoint : Diversity : Nathan Fuller : Kite Human Capital

Ian Rycott

October 22, 2019

TAKE A WALK ON THE WILD SIDE.

The logic of tapping into a highly motivated and capable pool of talent can sometimes be frustrated by a firm’s internal culture or antiquated decision-making framework. Nathan Fuller recounts his own journey of enlightenment.

Nathan Fuller, Managing Director, Kite Human Capital

Until a few years ago I was, in hindsight, quite remarkably unaware of the inequality and resulting lack of diversity across the financial markets. This, despite a long recruitment career in the City briefing and filling assignments across Capital Markets. I could argue this is because I have a pure soul, oblivious to the prejudice and social imbalance that has plagued our species; naive in my outlook and seeing people only for who they are and not what they are or where they came from. My mother would like that argument. In reality I suspect the reason is far simpler and less spectacular – I’m a white, middle class, public school educated man – I wasn’t truly aware of prejudice in society, because I’d never truly experienced it.

In 2016 one of my favourite customers asked if Kite would consider sponsoring the annual WILD (Women in Listed Derivatives – do check them out) lunch. I explained that we would have loved to but could not as I had committed budget elsewhere. This particular customer can be a little persistent. She asked that I think about it, mull it over, consider the importance of what we would be supporting. I explained that I didn’t need to think about it, we didn’t have the budget, end of subject.

As it turned out, a few weeks later I had a dinner in the diary with the very same customer. Sitting down at our table, her eyes twinkled with at least a touch of malice.

“Have you had time to think about sponsoring the WILD lunch?” she asked.

“I haven’t needed to,” I replied firmly. “The answer’s still no unfortunately – can’t be done.”

“I understand.” She replied. “You keep thinking about it.”

I laughed, nervously, knowing that in reality I could never be turned. Budget was budget and that’s that. You can’t just change a budget because someone keeps asking you to. Did she really think I’d change my mind? Honestly, some people.

Displaying resolve

A couple of weeks down the line I received an email from said customer, explaining that I really should reconsider my position. She explained that the annual luncheon is an important event in the year for WILD and all its members, not just to celebrate their accomplishments but also to support the many women who turn to them for advice. Firm and resolute I replied declining, explaining again my reasons and wishing them my best.

Then, the phone rang. This time I wasn’t asked, I was told. I was sponsoring the annual WILD lunch.

I’ve worked with lots of customers in my time in the City. Some, you help because you like them, you enjoy working and socialising with them; they become more than a customer and something closer to a friend. Others you fear, because you know if you set a foot wrong or disappoint them in any way, then you’ll take a whistle-stop tour to the fiery pits of hell with no passing ‘Go’ and no collecting $200. The individual in question is relatively unique in that she occupies both positions, with equal vigour, simultaneously. Needless to say, I caved. Kite sponsored the lunch. What I didn’t realise at the time, is just how much influence this one event would have on my views as an individual, and Kite’s offering to the City.

Having broken the budget and lost at least a smidgen of personal pride, I then discovered that as sponsor I was not only expected to attend – as the only man – this 100% female event. Moreover, as sponsor I’d also been awarded the privilege of being the opening-speaker. Wonderful.

As the walls closed in around me, I began to think about two things. Firstly, what possible message or value could I give to a group of attendees who have experienced and quite possibly suffered from, a prejudice and mistreatment to which I can never truly relate or empathise? Secondly, this really sucks, I’m going to be eaten alive.

I couldn’t have been more wrong. Firstly, I wasn’t the only man, my worries were for nothing. One of the waiters was also male, although he disappeared after the first course.

Secondly, and far more importantly, I was humbled not only to hear the stories of how gender and racial perceptions had hindered highly capable people in their careers; but even more so by the grace, decency and level-headed manner in which the subject was tackled. There were no “man-haters” here. There was no anger, no spite. This was a group of highly professional and often extremely successful people who were determined to help the industry rebalance gender perception for no other reason than it was right to do so. The room was driven by a desire to help each other and build a better future for the next generation. Not only was I treated fairly, it is rare that I have felt more welcomed and more accepted than I did, despite sitting in a room full of people many of whom had every fair reason to resent me.

Realisation dawning

As I sat, drank, talked and learned about the people on my table and in time others in the room, I was hit by a real sense of purpose – but probably not for the reasons you think.

It is right and good that women’s rights in the world, the workplace and the board are defended and progressed. It is equally right that we work towards repairing the flaws in corporate culture and particularly City life, that prevent females of all walks of life from enjoying the same opportunity and success that their male counterparts take for granted. I believe in all of this, but I’d be lying if I claimed this as my primary motivator for rallying diversity in financial markets.

I believe If you can improve your probability of hiring great people, then chances are you’ll succeed against your competitors. Companies are, after all, 99% people and 1% brand. As I sat at the WILD annual lunch, drinking my fair share of the alcohol my precious budget had paid for, I couldn’t shake the thought that gender inequality wasn’t only wrong, it was also stupid. Why on earth would any commercial business reduce their chances of making a great hire? What sensible firm would ever allow their internal culture or decision-making framework to actively decrease the probability that their workforce and leadership be more effective than their competitors’?

Getting it right

I am passionate about solving issues of hiring diversity, be that gender, race or any other flavour of ignorance. Not only because it is right to do so, but because a great hire is a great hire, irrespective of demographic. Because the companies who get this right will tap into a wider, more versatile talent pool and a stronger resulting commercial culture than has ever been truly realised in the square mile or any global financial centre. I am passionate about it precisely because it is not only the right thing to do, it is also the right commercial decision.

And so, thanks to everyone at WILD, to the many talented women employed at Kite and to the countless top performing females I have known in my career, I found myself with a bit of a project on my hands.

How can we help the City to hire awesome female talent?

Let’s start with the obvious; we can’t keep hiring the same way we’ve always hired and expect a different result. Whatever we do has to address the commercial realities of attracting and hiring talent in the financial markets.

Broadly speaking, industry has moved from a position of not caring about gender diversity, to a position of passive acknowledgement of the wider issue, to a new era in which over 300 FCA regulated companies have signed public declarations to repair gender imbalance, often with a focus on leadership and technology appointments. The UK’s largest bank, HSBC; largest exchange, LSEG; largest insurer, AXA UK and largest investment manager, BlackRock, have all committed to specific, tangible hiring and leadership targets.

As these 300+ businesses race to the finish line, we face some difficult truths. Firstly, the imbalance of yesteryear delivers a harsh reality: in some cases, there are simply not enough women in a specific hiring category for everyone to meet their goals. Many firms are turning to their graduate and entry-level hiring as a long-term strategy to build more inclusive company profiles. This is valid, but it cannot be the only solution lest we wait a generation to realise the benefits of gender-balanced leadership and execution. We need a strategy that works now, today.

Let’s be clear, there are three possible ways this story ends for businesses in financial markets and further afield.

Don’t solve the problem. Demonstrate you’ve tried, produce some statistics, but ultimately don’t balance your workforce. If so, be prepared for problems ahead. The financial markets have already lost the bullet-proof appeal of previous years, with much of tomorrow’s leaders already opting for what they see as more progressive, balanced careers providers. Take away the social, commercial and cultural benefits of a blended workforce that your competitors will realise, and good luck being relevant in tomorrow’s world.
Hire the demographic. Hire and appoint women, because they are women. Treat the challenges as a quota-exercise and risk hiring the wrong people for the wrong roles. As a result, risk lowering the calibre, capability and commercial effectiveness of your business. For those who care about the future of women in the workplace, hiring women into the wrong roles unhinges your efforts and damages so much of the efforts to get the journey moving in the first place.
Hire and promote talented, capable high calibre women. Hire great people, because they are great, and expect great things from them. Let’s be clear, the question of capability and suitability doesn’t go away when you hire female talent. There are fantastic, highly capable female candidates from all walks of professional life, from IT to board room; there are also less capable, lower calibre female candidates who – just like their male equivalents, we should avoid wherever possible.

Hiring is usually a race to the finish line, be it due to corporate deadline, regulatory requirements, evaporating budget or a myriad of other reasons. In truth, irrespective of the internal reasoning, when a hiring requirement hits the market and your recruiting agencies, it’s a bloody race to the finish line whether you like it or not. Why? Because capitalism says so. Because there is no second place in recruitment, either you get the hire or someone else does. Agencies get paid when they are the first to find a suitable candidate, irrespective of demographic.

In many ways this makes sense, but it does create a problem when solving gender diversity. If the winner is the first person to find a capable candidate – and the market is mostly male – then basic probability tells us that we will hire man after man, time and time again, and this is precisely what we have done. Not because the female talent isn’t there, but because traditional hiring actually decreases the likelihood of hiring a woman into any position in which they are not already the majority gender.

So, what can we do?

Rig the race – You don’t need Kite to do this. Begin a process of assigning a two-week lead time to your agencies, rotating them role by role. This gives the selected agency a huge commercial advantage and duly motivates them. However, there’s a catch: for this role said agency is only permitted to deliver female candidates. By doing so we create a circumstance by which the agency only wins if they truly align to your diversity strategy, and we rig the race to give them the time to do it right. You’ll soon find out who is motivated and capable of finding top performing female talent for your business, and no doubt you’ll show preference to those who can.
Update your hiring with video and online assessment – Part of the historic hiring problem is that whilst technology has radically changed the way we access, execute and settle our trades; we still make initial hiring decisions based on a piece of paper. By integrating two-way video screening and online capability assessment into your hiring process, you begin to measure candidates based on their knowledge, performance and capability, rather than their gender race, age or even education. Far from highlighting differences in candidates, correctly managed video evaluation ensures that everyone has a platform to demonstrate their suitability, irrespective of demographic. It also saves a bundle of time. Your hiring managers set the video questions and choose the areas for assessment; the video is recorded on your behalf with the candidate. Hiring managers review the CV, watch the video on our dashboard and review the skills assessment. One of the great benefits is the ability to measure something your recruiter doesn’t understand, pricing up an interest-rate-swap for example. Kite is currently the only supplier to offer this service, available as a standard for all clients using our hiring services, or for direct sourcing teams via our Clarity platform. If you’d like to know more just drop me a note.
Outsource your diversity targets to us – Our most powerful strategy for ensuring quality of hire whilst meeting your goals for a blended workforce. Based on your gender-diversity goals, outsource a project of hiring across the relevant job categories over an agreed length of time, probably 6 to 12 months. We then work to strict SLAs concerning not just the diversity of your shortlists, but the actual success you have in building a gender diverse workforce via our model. If we don’t hit the SLA, we face financial penalties. Moreover, we align our goals by guaranteeing every hire for 12 months. This doesn’t just change the race; it removes it altogether. We have more time than ever before to work our network to find and assess the most suitable talent, whilst you – our client – can be assured that your move towards a diverse workforce will be a successful one.

Times are a changing

Whatever happens, we all need to get better at hiring great people without always hiring the same kind of person. Ultimately this comes down to the way we access and assess the talent market. The industry is changing. Years of effort from organisations such as WILD, Dress for Success and Women Returners have sought to challenge broken perceptions and empower women in every step of their careers.

Those who get this right will attract the best people, build the best products and ultimately realise the most success. It’s going to be a lumpy journey and not everyone will want to get on board. For those who do, rest assured that there are solutions that can get you to where you need to be.

Nathan is Managing Director at Kite Human Capital and Clarity: nathan.fuller@kitehumancapital.com

www.kitehumancapital.com

www.welcometoclarity.com

WILD, Women in Listed Derivatives can be found at www.womeninlistedderivatives.org

Dress for Success at dressforsuccess.org and Women Returners at womenreturners.com

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Industry viewpoint : RFQ platforms : LSEG

Ian Rycott

October 22, 2019

LONDON STOCK EXCHANGE REQUEST-FOR-QUOTE.

Scott Bradley, Head of Business Development,
London Stock Exchange and Turquoise

What is different about London Stock Exchange automated Request-for-quote?

London Stock Exchange’s auto-complete request-for-quote (RFQ) is a fully automated platform designed to fit within existing smart order routing protocol. The platform sits neatly inside electronic workflows allowing brokers to utilise existing connectivity already in place with London Stock Exchange thus requiring minimal additional workload to onboard to the service.

London Stock Exchange is committed to a culture of innovation, in partnership with customers. A great example of this innovation is our fully automated, centrally cleared RFQ platform which requires no manual intervention. The platform also enables efficiency and aggregation of liquidity provision as well as Best Execution.

Being an on-exchange platform, the mechanism provides central counterparty clearing. This is an important feature of the protocol because it removes the requirement for participants to maintain multiple bi-lateral relationships in an over-the-counter (OTC) environment. It also allows for the instrument universe to incorporate not only equities but depository receipts and exchange traded products which are currently cleared today. A key aim of MiFID II was to promote on-venue activity. Following that regulatory implementation and with other regulatory change expected in late 2020 in the form of Central Securities Depositories Regulation (CSDR), having a centrally cleared model offers increased levels of efficiency and provides potential settlement risk control to the broker community.

Easy access to the service and central counterparty clearing means this RFQ protocol is the ideal opportunity to search for liquidity. By operating on London Stock Exchange, the mechanism offers the broadest aggregation of liquidity counterparts in a trusted environment, on-exchange. Not all market participants are able to build out bi-lateral connectivity and manage associated compliance relations with a range of counterparts. As a result, new segments of the trading community can access the quality and diversity of the London Stock Exchange membership through the new auto-complete RFQ.

How does it work, what is the mechanism?

The auto-complete RFQ is a sell-side member-to-member trading platform. Control is afforded to the requestor in the form of either nominating whether to be in a named or unnamed workflow. Requestors can also take control over the duration of the RFQ session window and they have the ability to manage counterparty selection. This allows for requesting firms to create somewhat of a tailored experience that fits within their existing trading workflows. This is a model specifically designed for smart order routing decision logic that already sits within a broker’s electronic trading offering.

When a requestor enters an order in the RFQ mechanism, London Stock Exchange sits in the middle of the process and removes the side and the limit price of the request which effectively then becomes an automated request-for-market. Therefore, there should be comfort that the responding market makers and liquidity providers are encouraged to make their best price in the full size required (either one-way or two-way as there is no obligation to price quote). This is due to a “winner takes all” single counterparty fill construct. If suitable liquidity is provided on the platform, then a single fill (or a nothing done if not) is sent back to both the requestor and the winning liquidity provider at the same time, thus preventing unnecessary information asymmetry. Where a fill is achieved it passes as on-book, on-exchange through to central counterparty clearing and settlement.

With resource constraints often a concern, is the auto-complete RFQ simple to integrate?

As the specifications for the London Stock Exchange auto-complete RFQ fundamentally utilise the existing connectivity that member firms already have in place currently for their order book trading, it is an incredibly easy platform to integrate within existing electronic workflow. Being a direct member-to-member protocol, it affords the efficiency of bringing together one of the broadest ranges of liquidity provision, to participate and interact through the service. This provides a platform which becomes an ideal opportunity for brokers on behalf of their end clients to search for meaningful liquidity and a Best Execution outcome complete with supporting electronic audit trail.

We see the auto-complete RFQ as a liquidity proposition which can sit within the trading landscape. We see it in a position between the average fill sizes one might expect from interacting with Periodic Auction style constructs and the extraordinary liquidity often sourced from above large-in-scale Conditional block trading venues such as Turquoise Plato Block Discovery™. This means the nature of this RFQ complements the use of valued liquidity destinations whilst equally maintaining an environment designed for electronic smart order routing. In fact, minimum order submission size for auto-complete RFQ on London Stock Exchange is set at 25% of large-in-scale, maintaining an important distinction between existing central limit order book activity and the search for meaningful sized liquidity which works complementarily to existing automated channels.

All trades are conducted on-exchange under the rules of London Stock Exchange with RFQ activity being monitored by market surveillance. Where requestors choose to submit orders under the named model (where sell-side member transparency is provided during the RFQ session), an automated report highlighting counterparty interactions is provided which allows for brokers to conduct their own robust Best Execution analysis and for direct conversations and relationships to be maintained. Where an unnamed model is preferred then full anonymity is provided throughout the lifecycle of the trade. Under both the named and unnamed models, the identity of the underlying client remains anonymous.

Working closely with members, vendor platforms and directly educating the end investor community on the mechanics of the platform remain priorities for London Stock Exchange as adoption of the RFQ protocol for equities trading gathers momentum. Understanding the true positioning of this proposition within the smart routing landscape allows for it to be used most effectively in the search for liquidity.

www.lseg.com

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Regulation & compliance : SFTR : Lynn Strongin Dodds

Ian Rycott

October 22, 2019

THE LONG AND WINDING ROAD OF SFTR.

Lynn Strongin Dodds looks at the state of play and whether firms are ready for the new regulation.

There have been several twists and turns in the Securities Financing Transaction Regulation (SFTR) journey but the finishing line is in sight. There are still kinks to be ironed out but the general view is that the legislation will see the light of the day next year. This means that market participants, many of whom are not ready, need to put their collective foot on the pedal.

Their level of unpreparedness was highlighted by a recent study conducted in August and early September by regulatory service provider Cappitech and Kaizen Reporting. Canvassing 87 banks, asset managers, trade repositories, agent lenders, brokers and non-financial entities, it found that two-thirds did not expect to be fully ready by the April 2020 deadline.

The study noted that banks, who are due to go live in the first wave, were in a better state although 56% were still only in the pre-implementation planning stages. Overall, only 37% of the securities lending industry had started or completed SFTR implementation and expected to be ready in time for the launch date. Around 11.5% though had not even begun to get their SFTR houses in order.

Drilling down into greater detail, the study revealed that 40% are also still undecided regarding which trade repository (TR) they are intending to use. While tier 1 firms often decide based on board seats and shareholdings, market pricing will be key for the rest and most TRs have not yet published detailed pricing data. As for the thorny issue of unique trade identifier matching, 54% of respondents believe they need to integrate UTI matching, with another 33% still considering it.

Déjà vu

This seemingly indecisive stance may not be as surprising as it sounds, according to the study, in that the industry went through a similar scenario with MiFID II and the European Market Infrastructure Regulation. Many firms were not prepared nine or six months before the launch date of these regulations but it did have an impact on the quality of the data being reported.

In the SFTR case, the situation has been exacerbated by the uncertainty regarding some of the requirements. The regulation was first mooted in 2014 to foster greater transparency and introduce, among other things extensive transaction reporting requirements. The regulatory technical standards outlining the rules were published in March 2017 by the European Securities and Market Authority (ESMA) but the European Commission did not ratify them until the following July.

In the meantime, ESMA provided a number of iterations of its Q&As in order to clarify the original technical specifications, in the hope of avoiding issues that arose with EMIR. Fast forward to today, and the regulator launched a consultation paper in May with responses published in July. However, as Jonathan Lee, senior regulatory reporting specialist at Kaizen Reporting, points out, there are still a few fundamental questions that need to be clarified in order to support a timely build for SFTR reporting.

According to Lee, some of the key outstanding questions include whether to provide full reports or the delta of changes for modifications and corrections. In the consultation, respondents overwhelming voted for full reporting. He adds that there are also concerns about the availability of data for reporting and some confusion about the reporting of settlement fails. “The general consensus was that perfect settlement would be assumed unless both parties chose to modify a transaction to reflect a default or extended fail,” he adds.

Unique trade identifiers have also raised issues in terms of what to do if a counterparty who is responsible for providing the UTI does not do so in a fast and efficient manner for reporting. Lee says “The real question is how the party subject to late notification of the UTI by their counterparty can be excused from their obligation to submit timely reports.”

The clock is ticking

The challenge for the industry is that the answers to these questions are not expected until later in the year. “ESMA is not expected to publish its final report on the SFTR reporting guidelines until the fourth quarter and firms are concerned that if they move ahead with their plans, they may need re-working and re-testing if there are changes,” says Mark Steadman, executive director at The Depository Trust & Clearing Corporation (DTCC).

He adds, “there is still time to prepare but it is fast running out. Some firms are further along the way than others. We have several firms testing with us already seven months prior to the go-live date; however, we also have clients who are still responding to RFPs (request for proposal). “

Brian Charlick, risk and regulation, financial services at CGI, concurs, adding, “There are still a few final touches that need to be confirmed and although people know the general direction of the regulation, the devil is always in the detail. Part of the problem is that the regulation is so much more complicated than EMIR and Dodd Frank.”

Overall, the SFTR mandates 155 data fields, compared to 129 required under EMIR for OTC derivatives and 65 for MiFID. The problem is that although the fields may be more in line with EMIR, 40% of the 155 are not readily available today and firms will have to conduct an audit to locate the data. Also, the reporting will have to be submitted in a specific format – ISO20022 – to trade repositories for the first time and reconciliation will be required across 96 fields. The regulation places a significant emphasis on data reconciliation by trade repositories and publishing aggregated reports on a daily basis.

Collaboration

While many market participants may not be ready for SFTR, vendors and clearinghouses have taken up the mantle and have been busy developing new solutions individually as well as together. “Although ESMA’s reporting guidelines have yet to be fully finalised, there are partnerships in the industry who are working to cover as much as of the reporting headache as possible,” says Peter Moss CEO, SmartStream Reference Data Utility (RDU), which recently launched a cloud-based security reference data service to simplify and enable firms to meet the SFTR requirements.

He adds, “the trade repositories are the most advanced because they are a foundation of the SFTR service. From our perspective we provide reference data, which is an awkward set of data to pull together because it comes from half a dozen different places. Our goal is to remove the complexity from sourcing high-quality reference data and enabling firms to focus on managing their business.”

Trade repositories are also collaborating. DTCC recently signed a partnership with Delta Capita to implement an SFTR testing pack for its trade repository on top of its earlier alliances with fintech firms Catena Technologies, Finastra and Compliance Solutions as well as service providers such as EquiLend, Trax, IHS Markit, Pirum, Broadridge, FIS Global, Murex, RegTek.Solutions and SimCorp.

Meanwhile, UnaVista part of London Stock Exchange Group, has recently extended its Partner Programme to include consulting firms. Launched in 2017, it played a significant role in helping firms prepare for MiFID II. It has since been rolled out to SFTR as well as further upcoming regulations and amendments to existing regulations. The current roster includes 53 software firms or ‘independent software vendors’ and 19 consulting firms.

“We are working with the industry in an open access model and also run training courses to help clients understand the nature of the regulations,” says Mark Husler, CEO, UnaVista. “There are several industry challenges such as reference data, unique trade identifiers and the ability to capture all lifecycle events which in some cases such as evergreen trades are quite complex.”

Looking ahead, as with many of the post financial crisis regulations, the SFTR offers firms the opportunities to automate processes, generate greater efficiencies, improve overall end-to-end pricing. “We’ve seen a significant move towards electronic trading on our platform in the last few years, and I think that will continue both for efficiency and regulatory reasons,” says Tom Trott, repo product manager at Tradeweb. “The client-to-dealer repo market was almost exclusively traded via voice, a highly manual and error-prone process. However, now with SFTR even more clients are looking at ways to automate their repo workflows.”

Viewpoint : ESG Investment : Serafino Tavoletti

Ian Rycott

October 22, 2019

SUSTAINABLE, GREENER FUTURES.

Serafino Tavoletti, Market Hub Brokerage & Execution, Banca IMI

Incorporating environmental, social and corporate governance (ESG) factors in investment strategies has become a distinct service for many providers of investment products. ESG investing is an approach that focuses on several non-financial dimensions of a stock’s performance, including the impact of the company on the environment, a social dimension and governance. This investment philosophy has been gaining momentum, not only in Europe, but across the globe, becoming the most widely used strategy by SRI investors and there is rising interest by “millennials funds”. Let’s have a look at these 3 factors.

Environmental criteria look at a company’s energy use, waste, pollution, natural resource conservation and animal treatment. They also evaluate which environmental risks might affect a company’s income and how the company is managing those risks.

Social criteria look at the company’s business relationships. In other words, it is about the impact that a company can have on their employees and on society: diversity and inclusion policies, safe and healthy working conditions, labour standards across supply chains, and good relationships with local communities.

Governance factors focus on corporate policies and how companies are governed. Responsibilities, rights, and expectations of stakeholders are considered, so that interests are met and a consensus on a company’s long-term strategy is achieved. Illegal behaviour or the use of political contributions to obtain favourable treatment are among the screening criteria.

For each of these dimensions, a lot of information on the firm’s practices is being collected and analysed. ESG investing relies on the belief that both investors and society benefit by including ESG information. This means that capital is being invested to ensure that today’s investment needs are met without endangering future generations.

It’s still early days and challenges remain over the different definitions, lack of standards and varying market structures, but the adoption of this approach is spreading rapidly and increasing amounts of money are flowing into funds that consider ESG factors in their investment process. Morningstar estimates that Ä34.4 billion flowed into European ESG funds in 2018, bringing the total assets under management to Ä684 billion at year-end.

It was just a matter of time before the ESG movement moved from the equities sphere across fixed income and listed derivatives. This is well reflected in the product range of index providers and derivatives exchanges. The most recent examples are in Europe, where two leading exchanges have launched futures on stock market indices that meet ESG standards. Nasdaq was the first exchange to move into this new sector in October 2018; the exchange launched futures on a version of the OMX Stockholm 30, the main benchmark for Swedish stocks, that excludes companies that fail to meet ESG standards. Plans are also underway for a corresponding ESG index of the OMXC25 in Denmark and the OMXH25 in Finland.

In February, Eurex introduced the Stoxx Europe 600 ESG-X Index, a version of the large-cap Stoxx Europe 600 that screens out companies with low ESG rankings and the Euro Stoxx 50 Low Carbon Index based on the Euro Stoxx 50. It also launched the Stoxx Europe Climate Impact Index, a group of roughly 260 European corporations that disclose the environmental impact of their businesses and excludes companies in industries such as coal, aiming to help market participants address the challenges and opportunities of sustainable investing. Eurex also gained CFTC approval to make these products available to US investor and is working to expand the product range to cover more regions together with the introduction of options to support market participants with efficient derivatives instruments and meet the requirement to incorporate ESG into their investment strategies.

Open interest in the Nordic exchange has been relatively stable with an average of 27,500 contracts, the equivalent of Ä415 million. Eurex on the other hand has seen a growth since its birth, showing in 7 months an average open interest of 40,000 contracts, around Ä570 million. However, it’s still too early to see consistent volumes and regular activity. Despite this variability, the books are liquid, showing decent bid /offer spread thanks to liquidity providers.

The introduction of listed derivatives has been crucial because it gives asset managers more flexibility to hedge their portfolios, create synthetic positions, manage unwanted sustainability risks and meet investment mandates in a cost-effective way, compared to capital intensive products like ETFs or structured products.

One aspect to consider though is the fact that ESG can be confusing for investors who are familiar with the classic socially responsible investing (SRI) methodology. ESG investors choose companies because of impressive environmental, social and governance attributes; conversely, a traditional SRI investor focuses on excluding certain industries (tobacco, alcohol, weapons, gambling). ESG offers more flexibility and depth of research to define a comprehensive corporate initiative and management’s patterns. Moreover, ESG is also a stakeholder-centric theory, which means how companies treat all their stakeholders will impact their long-term success or failure.

Despite the proliferation of sustainability indices and ESG agencies, there is no standard methodology for the evaluation of companies. Recent work done by the European Commission to develop a ‘taxonomy’ aims to develop a ‘universal understanding’ of what is environmentally sustainable, shared by scientists, governments and industrialists. A proposal for a regulation has been brought forward to introduce disclosure obligations on how institutional investors and asset managers integrate environmental, social and governance factors in their risk processes. We expect this to become mainstream in the coming years, with positions slowly shifting from traditional benchmarks to more sustainable alternatives.

Through its 2018-2021 business plan, Intesa Sanpaolo, which is already a leading bank in corporate social responsibility, aspires to become a world-class reference model on social and cultural responsibility. Furthermore, Market Hub, the brokerage & execution team of Banca IMI, provides to its clients full access to trade ESG-related financial products, giving the opportunity to exploit these increasingly relevant products.

Viewpoint : Neena Dholani : FIX Trading Community

Ian Rycott

October 22, 2019

THE CONSOLIDATED TAPE – IT’S NOT EASY BUT WITHOUT STANDARDS IT IS IMPOSSIBLE.

Neena Dholani, Global Marketing Programme Director, FIX Trading Community.

Earlier this year at the FIX EMEA Trading Conference, Keynote Speaker Verena Ross, Executive Director, ESMA, discussed the fact that ESMA would be reopening the discussion around the need for quality market data and data standards. Since no consolidated tape provider had naturally emerged, ESMA would revisit the subject and if necessary, would look to mandate the provision of a consolidated tape. These discussions are nothing new as the debate around a European Consolidated Tape has been ongoing for a decade, and as MiFID II settles down, the spotlight is now shining on the finer details of the reported trades. In addition, the ability of the market to interpret those trades for analysis and the sheer explosion of data has moved this topic to the front burner.

On 12 July, ESMA asked the industry for their feedback for a European Consolidated Tape (CT). The consultation paper sought industry feedback on ESMA’s initial assessment on the development in prices for pre and post-trade data and on the consolidated tape for equity instruments. The FIX Trading Community has been involved in the roundtables hosted by ESMA, and the discussion of the use of FIX’s MMT (Market Model Typology) was featured during those discussions. FIX has recently started a Consolidated Tape Working Group where the initial objective was to respond to ESMA’s consultation paper on the areas that are relevant to the provision of clear and unambiguous standards.*

Currently, it has become apparent that multiple vendors provide different quality of data and calibrating that data across the different venues is not streamlined, which results in diverse interpretations of data. A data source from one venue could be defined very differently from another venue. Therefore, there is a clear need to standardise the definition of how to interpret the required data across different venues.

Also, of importance is where to connect to access the data. In most cases, both the Buy- Sides and Sell-Sides are connected to several venues to collect the data where some parts of data are available on one venue, and another part is available on a different venue, creating further complications. The ultimate goal is to have access to a complete set of accurate data. To date, it has not been possible to access all the data from one venue and involves collecting multiple data fields from different venues, all of which takes a lot of time and resources and can add further connectivity costs.

Several firms have been investing in new technology such as machine learning and AI to help calibrate the data across trading venues and to help constitute trade analytics and best execution analysis. The underlying challenge will continue to depend on the key source of data and how these are to be defined through a common open standard which the industry will need to adopt.

With all these challenges it is clear to those who have been working with the FIX Trading Community during the consultation period that at the heart of a successful consolidated tape will be clear and unambiguous standards that define the terms under which a trade has been executed.

Huw Gronow, FIX Trading Community, Co-Chair EMEA Investment Management Subcommittee, commented, “A Consolidated Tape is necessary to give the buy-side an accurate view on data for the purpose of running trade analytics for optimisation of portfolio construction, and currently the data is inconsistent and not standardised. FIX can help to create a set of standards and best practices in identifying the data which is required to differentiate between, for example, risk trades, SI trades and other trades or liquidity which could be non-addressable.”

Central to the FIX Trading Community’s work is the continuous development and promotion of the FIX family of standards, including the core FIX Protocol messaging language, which has revolutionised the trading environment and has successfully become the way the world trades. Over recent years, FIX has promoted a new standard in support of efficient data aggregation – known as the Market Model Typology (MMT). Through FIX Trading coordination with the financial industry, MMT has been broadly adopted and has become the de facto standard to enable the usability of consolidated equity data as a means of enhancing the transparency in European equity markets.

Guidance on the consultation makes it clear that ESMA’s ambition is to have a CT that would cover both pre and post-trade across all asset classes. While FIX supports this ambition, for the first phase, it would most likely be more effective to leverage the work the FIX Trading Community has accomplished in enabling equity post-trade transparency. The current MMT v3.04 covers both equity/equity-like and non-equity instruments and supports consistent trade flagging across all asset classes under MiFID regulation.

In our experience, industry-led solutions are a good way to provide the industry what they need, however we recognise that in order to meet the needs of the markets and the regulators, the most effective solution would be an industry-led initiative in cooperation and with guidance from the regulators. The industry is continually evolving, and any adopted standards must be flexible to adapt to those changes and continually create and develop best practices. The aim of the CT should be to provide good quality data and a comprehensive view across markets based on as close to 100% contribution as possible.

Matthew Coupe, FIX Trading Community EMEA Regional Co-Chair, commented, “From a FIX perspective we are exceptionally happy and humbled by ESMA having recognised MMT into their paper, and we are excited to work with ESMA and EC to help drive better quality data. The only way we get better quality data is through free and open standards and with Vendors, Buy-Sides and Sell-Sides, and other Trade Associations coming around the table to discuss what we should deliver and putting the right context onto trading activity.”

The introduction of CT should leverage the work FIX has done to date and take advantage of FIX’s developmental work going forward. Other commentators to the consultation paper supported the use of FIX/MMT for trade reporting.

The debate will continue around whether or not a consolidated tape is a good idea, whether it will achieve its stated aim, but the one undeniable thing is that it will never be successful unless the industry works together with guidance and cooperation from the regulators. The FIX Trading Community is positioned to extend the FIX / MMT standard to support the Consolidated Tape objective.

If you would like to be involved or learn more about the FIX Trading Community, please contact fix@fixtrading.org

*https://www.fixtrading.org/packages/esma-consolidated-tape-consultation-paper-fix-response/

Viewpoint : RFQ : Ben Stephens

Ian Rycott

October 22, 2019

RFQ viewpoint

Agency broker Instinet was the first to launch an RFQ platform in European cash equities with Blockmatch MTF in March 2018. Ben Stephens, head of EMEA business development at Instinet assesses their impact.

Has the buyside warmed to the need for RFQs for cash equities rather than seeing them as suitable only for illiquid asset classes?

The value of the RFQ model has started to make itself clear to buyside users; it offers a level of control over not only the order parameterisation and information footprint, but also for the engagement of counterparties. It serves as a powerful complement to other conditional order types when a trader is looking to execute larger blocks.

This means traders can manage exposure of their intentions in a way that is appropriate for the order. It also provides clients with an opportunity to find a match at a price other than a simple midpoint of the displayed quote. It can serve as an efficient means of price discovery for very large orders, where no quote is available.

Competition is growing and more platforms exist for RFQs for cash equities, what has this meant for your business?

The greater the usage of these new order types, the better for everyone. When we launched our equity RFQ offering, we knew that it would begin a trend and we welcome that level of competition. Competition is very good for the market overall. The critical thing is to offer our clients informed choices – it’s what liquidity aggregation is all about.

Why do RFQ platforms lend themselves well to the post MiFID II world?

One of the key objectives of MiFID II is to bring more trading onto centrally cleared venues. By adding ‘all to all’ RFQ functionality on BlockMatch’s CCP cleared platform, trading interactions that used to be primarily done over-the-counter can now be executed in our regulated venue. We believe this fits well within the spirit of MiFID II and MiFIR share trading obligations, while at the same time giving our clients and members opportunities to benefit from automating the management of their liquidity.

How can clients avail themselves of a variety of platforms to access liquidity, without increasing their risks of information leakage?

Our liquidity aggregation philosophy has been about leveraging Instinet’s broker neutral, agency status as a sort of clearinghouse of liquidity. Our buyside clients can choose to remain anonymous, or be attributed, based on their preference.

We can use our good relationships with Liquidity Providers and SIs to optimise trading opportunities for our clients as the liquidity landscape changes.

Our bilateral liquidity relationships with an array of SIs gives liquidity providers an ability to provide meaningful liquidity to a wider set of counterparties across Europe. This gives a liquidity provider wider “distribution”, if you will, which gives them more innovative ways to reach and benefit end investors.

And by managing our clients’ interaction with many sources of liquidity in an anonymous manner, we can essentially personalise their access to the right counterparties in the most efficient way possible. It’s a win/win – this is good for Instinet’s clients and good for liquidity providers, alike.

What influences will continue to shape the market in the future?

We’ve seen several trends:

Complexity of rules, and the number and diversity of trading venues has continued to grow. It’s the sellside’s role to smooth this out for their clients, in our view.
Sources of order flow have shifted away from bulge brackets toward electronic market makers, which have different revenue models. This requires a new set of tools and new ways of interacting with counterparties.
Execution consulting – i.e., insight that is closer to the live execution time horizon – that is actually part of the trader’s workflow – will really begin to differentiate broker offerings. Clients need to be able to apply the intelligence that big data analytics are making possible in real time.
Conditional order types will become more ubiquitous – clients need this level of nimbleness and discretion in their automated strategies. The reliance on simple, schedule-based, single-strategy algos is becoming a thing of the past.
The wider adoption of more complex workflow automation, augmented by machine learning, will happen more quickly than many people currently believe. These capabilities will not make human traders obsolete, but rather, will allow the trader to give these automated solutions increasingly sophisticated tasks, and enable them to take better advantage of the benefits of big data, speed and scale.
We will see an evolution of the technologies used by the most advanced firms, including platforms such as FPGA, microwave and multi-colocation to gain a technology based trading advantage in a world where efficient information processing, and smart adaptation, is key.

News : Charles River Development and Tradeweb extend partnership

Ian Rycott

October 22, 2019

CHARLES RIVER AND TRADEWEB EXPAND PARTNERSHIP.

Charles River Development and Tradeweb have extended their partnership to provide mutual clients with access to fixed income liquidity via the Charles River Investment Management Solution (IMS).

According to both companies, the collaboration enables institutional and retail investment firms to seamlessly source cross product liquidity available on Tradeweb from the Charles River Inventory Hub and Order and Execution Management System (OEMS) for global fixed income securities. They note that the benefits range from enriched pre-trade inventory to the certification of new products including the recently launched direct-to-Freddie Mac Exchange path. The integration to support trading of Chinese bonds through the Tradeweb Bond Connect platform is also on the list.

Clients will also be able to take advantage of the connectivity and ongoing advancement of Tradeweb’s cross product Automated Intelligent Execution (AiEX) tool, allowing increased speed-to-market and reduction of both cost and operational risk. It will enable them to leverage new trading opportunities through increased reactivity to market conditions and events, with greater speed and efficiency of execution.

The expansion of the Tradeweb partnership is the latest addition to Charles River’s growing ecosystem of trading venues, enabling buy-side clients to access global liquidity using their preferred execution protocols. In July, the firm forged a similar partnership with fixed income trading platform MarketAxess to provide clients with access to global credit markets. Charles River’s OEMS was integrated with MarketAxess’ Auto-X tool for trading in investment-grade credit, high-yield, emerging market bonds and Eurobonds.

“Our growing collaboration with Tradeweb is based on their impressive track record of technological innovation and the breadth and depth of their institutional trading solutions,” John Plansky, CEO of Charles River, commented. “Expanding that collaboration provides our clients with more transparent, streamlined and intelligent ways to trade efficiently across asset classes and geographies.”

Lee Olesky, CEO of Tradeweb adds, “We welcome the opportunity to expand our relationship with Charles River for the benefit of our mutual buy-side clients. We remain focused on providing cross asset liquidity to help investors mitigate operational risk, realise greater efficiencies across their trading desks, and gain the benefits of trade automation.”

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NAVIGATING THE CRYPTO LIQUIDITY LANDSCAPE.

Jannah Patchay looks at the progress being made and the gaps to be filled.

THE MARKET DATA CONUNDRUM.

Heather McKenzie assesses the market data landscape and the persistent bumps along the road.

THE TRANSFORMATION OF THE BOND MARKET.

Europe had led the race to electronify credit trading, but the US has overtaken on automation. Dan Barnes reports.

TAKE A WALK ON THE WILD SIDE.

The logic of tapping into a highly motivated and capable pool of talent can sometimes be frustrated by a firm’s internal culture or antiquated decision-making framework. Nathan Fuller recounts his own journey of enlightenment.

LONDON STOCK EXCHANGE REQUEST-FOR-QUOTE.

Scott Bradley, Head of Business Development, London Stock Exchange and Turquoise

THE LONG AND WINDING ROAD OF SFTR.

Lynn Strongin Dodds looks at the state of play and whether firms are ready for the new regulation.

SUSTAINABLE, GREENER FUTURES.

Serafino Tavoletti, Market Hub Brokerage & Execution, Banca IMI

THE CONSOLIDATED TAPE – IT’S NOT EASY BUT WITHOUT STANDARDS IT IS IMPOSSIBLE.

Neena Dholani, Global Marketing Programme Director, FIX Trading Community.

RFQ viewpoint

Agency broker Instinet was the first to launch an RFQ platform in European cash equities with Blockmatch MTF in March 2018. Ben Stephens, head of EMEA business development at Instinet assesses their impact.

CHARLES RIVER AND TRADEWEB EXPAND PARTNERSHIP.

Charles River Development and Tradeweb have extended their partnership to provide mutual clients with access to fixed income liquidity via the Charles River Investment Management Solution (IMS).

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Scott Bradley, Head of Business Development,
London Stock Exchange and Turquoise