Markets Media caught up with Jeff Kimsey, Vice President and Head of Global Product Management at Nasdaq, to discuss the regulation of market data. Kimsey will speak on a panel addressing the topic at the World Financial Information Conference, Wednesday morning in Vancouver. 

How would you characterize the state of market data regulation currently?

It is an interesting time in market data regulation to say the least. Today, the SEC and the exchange data providers have conflicting visions of how regulation should operate, especially when it comes to fees and prices of proprietary products. Regulation also is slow to adapt to change, and we think there are some reforms that are overdue. Specifically we have put out a TotalMarkets agenda to address many of these reforms including changes at the Securities Information Processor (SIP) to give the industry a voice, support infrastructure changes and lower costs to consumers. The SEC put out some proposals last month to make changes at the SIP, but we do not believe these proposals are the right path forward. The SEC proposals are a solution in search of a problem, and do not address issues created by long delays by the SEC in evaluating prior filings. We think it’s important to note the improvements that have been made to the SIP and to the arena of market data as a whole. The SIP is faster and more transparent than ever before and most of the investing public can access quality market data at little or no cost.

What are the specific public policy and regulatory issues arising from the SEC and ESMA?

The issue we are facing in the U.S. is how changes in data fees are approved by the regulator. It’s a serious point of contention right now and sits with the courts again, after the SEC Commission overturned a judge’s ruling that found that proprietary data products are part of a competitive, free market. Lobbying groups have essentially asked for government price controls in place of a free market; and we believe that would be bad for the industry. ESMA is facing a similar issue in Europe. ESMA has consulted the industry on the price of market data and whether the current regulatory framework is fit for its purpose. In the same consultation, ESMA has asked the industry on what an EU consolidated tape could look like. ESMA is to deliver a report to the European Commission on both topics at the end of the year; in turn, the European Commission is expected to propose measures to the co-legislator (European Parliament and Member States) in the second half of 2020.

What are the challenges and opportunities in market data regulation for exchanges like Nasdaq?​

From a regulatory perspective, the challenge is asking regulators to be nimble and responsive enough to respond to the industry. Many of the things that are creating pain points for our customers can be traced to outdated or unclear regulations such as the Vendor Display Rule and the definition of professional and non-professional. Simple, common-sense reforms that already have a lot of consensus could go a long way. We also think there is a lot of misinformation and misconceptions around exchanges’ data businesses, and we’ve been working hard to dispel myths that have been prevalent. And the issues with market data regulation provide us with an opportunity to seek to address our customer concerns on our own. We are faster than the regulator, and we’ve been doing things to address market data costs such as expanding our enterprise license program and create new products that will alleviate pressures on our clients.

How is Nasdaq working with its clients, who may have different motivations, on the issue of market data regulation?

Our focus first and foremost is on addressing issues with our clients. Apart from any regulatory issues, we’ve been working to help our clients save money. For example, Nasdaq Basic has saved users more than $250 million since its launch, and we’ve driven forward with enterprise license programs that enable cost savings on a large scale. We also work with our clients on the regulatory front by working to make sure their voices are heard by regulators and that they are involved in the process. We proposed last year that advisors be more involved on the operating committee for the SIPs, and we’re glad to see that becoming a reality. And our TotalMarkets agenda released earlier this year was devised after extensive talks with clients on finding pain points in the marketplace and how markets could be made better.

What is happening in the area of consolidated tapes in the US and Europe?

In the U.S., we see strong demand and a certain level of consensus. Some of the exchanges’ most outspoken critics agree with us on creating a consolidated tape in the U.S., and we’re proposing a consolidated tape plan in the U.S. that will lower cost to the industry. There is a lot going on in the U.S. and there have been significant improvements in the SIP over the last decade. The exchanges have increased SIP transparency around operations and revenue and the SIP is faster than it has ever been and promises to be even faster. We have made progress in giving advisors a bigger role and including odd lots in the SIP. There is a consensus around the consolidated tape in the U.S. and there are great signs of further improvements still on the way. In Europe, we have not seen the same level of customer demand for a consolidated tape, and the lack of viable use cases has meant that a tape has failed to materialize. In its recent consultation, ESMA is looking to get more information before making any decisions. We believe that an end-of-day tape of record will meet the needs of the few use cases that have been presented.

What is the future of market data regulation? Is there an endgame or will this area continually evolve?

To a certain extent regulation will be continually evolving because technology and the needs of the investing public are continually evolving. Free markets, like democracy, require constant vigilance on all sides. Our TotalMarkets and Revitalize agendas, if enacted, will put us in a better place from a regulatory perspective. So there’s a short-term endgame of sorts there. These issues have been discussed for the last 20 years and will continue to be discussed for the next 20 and we will never be aligned on every topic, but there is significant change we can make in the short term that sets us up for long term success.

Tradeweb is expanding portfolio trading to its institutional marketplace in Europe as the electronic marketplace for fixed income, derivatives and equities also enhanced this trading protocol for corporate bonds.

Portfolio trading at Tradeweb allows institutions to package a number of bonds into a single basket, negotiate a portfolio level price for this basket and execute in a single transaction.

From Tradeweb's Iseult Conlin at #FILS: "We made our #portfoliotrading solution flexible for a variety of trader workflows that span geographies. We’ve already had success in the US, where we saw $21bn in volume, and we’ll soon extend the tool to Europe.” https://t.co/rF27Gqmcqv pic.twitter.com/JixZjue6Bf

— Tradeweb (@Tradeweb) October 9, 2019

Conlin, US institutional credit product manager at Tradeweb, said in a blog that portfolio trading was launched due to the availability of new sources of liquidity in fixed income.

She explained there are now numerous dealers and liquidity providers who can algorithmically price thousands of bonds in real-time thanks to the growth of fixed income exchange-traded fund assets; the entrance of non-traditional market makers into fixed income as banks have reduced their balance sheets; and the increase in all-to-all trading, which allows the buy side to make prices.

Coming up at #FILS: panel on the future of the #fixedincome ecosystem with Tradeweb’s Iseult Conlin. Read her blog on how our #portfoliotrading tool satisfies the demand for complex block trading & speedy risk transfer for corporate bonds. https://t.co/ftjdTnCTgI @FixedincomeGuru pic.twitter.com/DdFgJiT3zR

— Tradeweb (@Tradeweb) October 9, 2019

Portfolio trading is more efficient than trading securities one by one, or using a list request-for-quote protocol to trade many bonds at once, which may impact prices. She added that trading with an individual portfolio trader at a bank can also minimize information leakage.

“Designated portfolio traders are versed in the fixed income ETF ecosystem and can leverage the create-redeem processes to smartly price baskets of risk,” Conlin wrote. “This has been common in the US, and is becoming more common in Europe.”

Another key theme at #FILS 2019 was #fixedincome #ETFs. Tradeweb’s @enricobruni elaborates on the differences between the U.S. and European ETF markets, and also on how ETF activity is driving liquidity in #portfoliotrading. @FixedincomeGuru pic.twitter.com/MZ8UXxEics

— Tradeweb (@Tradeweb) October 10, 2019

In addition, the ability to view aggregate basket portfolio-level statistics and pricing for the trade in its entirety can be used for best execution and transaction cost analysis.

Ted Husveth, US institutional credit product manager at Tradeweb, said in an email to Markets Media that any corporate bond can be included in a portfolio trade.

“That’s one of the great benefits of doing portfolio trades: because you’re effectively shifting risk on a consolidated basis across line items, you can actually get more competitive pricing, including for more thinly-traded securities,” he added.

Portfolio trades can be integrated with Tradeweb’s Ai-Price tool which provides real-time reference pricing for more than 18,000 corporate bonds.  Tradeweb’s post-trade service, net-spotting, can also compress interest rate risk through hedging on the firm’s US Treasury marketplace, giving clients the opportunity to reduce the costs of their portfolio trades.

Volumes

Tradeweb said in a statement that portfolio trading for corporate bonds has facilitated more than $20bn (€18bn) since launching in the US at the start of this year, with single trades as large as $1bn in notional value. Husveth said that activity might have been expected to be a little more sporadic given the chunkier size of portfolio trades.

“While it was certainly the case for those very early first trades, we were very pleasantly surprised by the extent to which clients came to rely on it as an entirely new liquidity source, and how quickly volume traded picked up,” he added.

Some clients are executing portfolio trades with Tradeweb every day.

“It’s those participants we consulted when we went about adding new functionality that allows them to submit trades to multiple liquidity providers, and balance the potential for best execution and price improvement with limiting information leakage,” said Husveth.

The new functionality allows institutional clients to submit a portfolio trade to multiple liquidity providers simultaneously. Clients choose the number of liquidity providers for each trade, which allows them to balance the potential for price improvement and limiting information leakage. In addition, clients can include both buy and sell orders for individual bonds within the same portfolio trade.

In the first eight months of 2019, we facilitated $21bn in electronic corporate bond portfolio trading.

Now, we’re enhancing access to competitive liquidity globally.

Read more: https://t.co/L4Lu1BDcKl pic.twitter.com/JPuC8EFzLc

— Tradeweb (@Tradeweb) October 8, 2019

“We’ve gone from zero to more than $24bn in portfolio trades on Tradeweb in only nine months, so clearly our participants are growing increasingly confident in using the protocol to support their trading and investment strategies,” added Husveth.

Conlin said on her blog that electronic portfolio trading is only in its infancy but has the potential to span assets and currencies.

“In time, portfolio trading specialists at banks could price corporate bonds, government bonds, ETFs and derivative products all in one package trade,” she said.

From this month, clients can execute multi-asset packages on Tradeweb, which streamline the simultaneous execution of interest rate swaps, inflation swaps and government bonds in a single transaction.

Fintech startups may find that Initial coin offerings could be a difficult route to raise initial and early capital.

“There was a discussion at the firm this week regarding one of our companies that did an ICO at some point, and we discouraged it,” said Kamran Ansari, a venture partner at venture capital firm Greycroft during a fireside chat at the Empire Startup Demo Day.

Navigating an ICO through regulatory waters is challenging, Donna Parisi, a partner and the global head of fintech at Shearman & Sterling, told Markets Media after the fireside chat.

“Recent enforcement actions are going to make it even more challenging,” she said. “The Securities and Exchange Commission is taking a pretty strict approach as to when something is a security offering.”

The emergency injunction against messaging-platform provider Telegram Group and TON Issuer by the SEC to prevent their planned sale of $1.7 billion of token to US investors by the end of October is the latest example of ICOs that have gone wrong.

It is doubtful whether ICOs would replace the typical Series-A funding rounds, according to Ansari.

“I don’t want to say that it is a fad,” he said. “I’m not sure if it is going to be a sustained thing that would have a meaningful impact on the Series-A investing.”

For fintech startups that seek to raise subsequent capital, Ansari also recommended that the firms avoid taking their companies public.

In its 13 years of existence, Greycroft only has had only on exit in which the company conducted an initial public offering, he noted.
“There are few VC-back companies that have the scale, sophistication, and systems in place to forecast a quarter,” said Ansari. “It is a rare few companies that can do that.”

Instead, startups should develop relationships with additional venture-capital investors before the company has to resort to additional pitch sessions.

“There are fewer firms as you get to the later stages,” he said. “The funnel narrows. There are not as many firms doing Series-C rounds as there are doing seed rounds.”

Companies that chase these funds also should be prepared to cast their nets much broader than they might initially plan.

Although there is roughly the same number of Series-B and Series-C institutional venture-capital firms, there are also corporate venture arms, private equity firms, hedge funds, and family offices that could be a source of funding for later-stage companies.

“We are seeing a trend where family offices are becoming more sophisticated and active investors,” said Parisi. “They really want to be a partner [with startups] and can bring things to the table, such as distribution channels.”

The International Capital Market Association, a trade body, said a low or minimal cost consolidated tape of raw transaction data would benefit the cash bond market in the European Union.

In its latest quarterly report ICMA said data quality and accessibility are arguably the biggest challenges arising from the implementation of MiFID II, which came into force in the European Union at the start of last year.

The latest Quarterly Report is now published and available on the @icmagroup website. It covers a wide range of market topics -the risks of global capital market fragmentation including Brexit, the Common Domain Model and benchmark reform. Read more here https://t.co/hNA58sPDXo pic.twitter.com/WH7BRaRmLt

— ICMA (@ICMAgroup) October 10, 2019

“Our recommendation is that a low or minimal cost consolidated tape of raw transaction data would benefit the cash bond market,” added ICMA. “We also provided detailed reflections on a governance structure which would permit an appropriate level of official sector oversight.”

In July the European Securities and Markets Authority launched a consultation on the cost of market data and the launch of a consolidated tape for the region, which ended last month. ICMA’s consolidated tape working group and task force involving the buy side, sell side, trading venues and data providers, submitted a response.

“While the consultation focuses specifically on the development of a consolidated tape for equity products, ICMA views this as a valuable opportunity to highlight market considerations with respect to a consolidated tape for EU bond markets, which, in many respects, are quite distinct from those of equities,” said ICMA. “There are approximately 33 times more listed bonds than listed equities.”

ICMA’s response said a cash bond consolidated tape should be the  “golden source” for reliable, trustworthy, good quality post-trade data in the market. As a result, market participants would benefit from robust transaction cost analysis and improving best execution analysis.

“The greatest benefit of a European cash bond consolidate tape is the protection it would provide for smaller or retail investors who may not have (or be able to have) access to several systems or the ability to pay for an aggregator,” added ICMA. “Finally, a European consolidated tape promotes a unified view across European cash bond markets for all market participants, large or small, professional or retail, making Europe more competitive and facilitating the goals of the capital market union initiative.”

The taskforce also said it may be useful for Esma to explore and analyse Trace, the consolidated tape for bond markets in the US, which has resulting in a better understanding of trading activity and execution costs.

“It is important that Esma understands that an equity consolidated tape (which is solving for different problems and has a different operational market structure) should not be used as a precedent for a cash bond consolidated tape,” said ICMA. “Trace should be the precedent to analyse.,”

ICMA will produce a discussion paper for the European Commission on a cash bond consolidated tape and meetings are already taking place to present early findings to regulators.

📃 Responses to ESMA's Consultation on cost of market data and consolidated tape are available

👉 https://t.co/jeh0c1djob#MiFIDII #MiFIR pic.twitter.com/z5fyyeJE9I

— ESMA – EU Securities Markets Regulator 🇪🇺 (@ESMAComms) September 11, 2019

Citadel said in its response to the Esma consultation that the US has successfully implemented a post-trade consolidated tape in both equities (e.g. the SIP) and non-equities (e.g. Trace for corporate bonds, Emma for municipal bonds, and the DTCC DDR for over-the-counter derivatives), which are comprehensive, real-time, and low cost, or free.

“In the US corporate bond market, for example, academic research has found that post-trade transparency has improved liquidity and has reduced transaction costs,” added Citadel. “Post-trade transparency has benefited not only retail investors, but also institutional investors transacting in larger size, as customer bargaining power increases and liquidity providers can be held more accountable.”

The response continued that post-trade transparency has caused “trading costs to decline significantly for the entire bond market.”

The Federation of European Securities Exchanges wrote in its response to the consultation that there may be merit in considering that what becomes the norm for equity and equity-like instruments should potentially become the norm for fixed income.

“Enhanced transparency and competition in European bond markets could be instrumental in attracting non-European investors to the EU, fostering CMU and making the euro more attractive,” added FESE.

Secondary market research

ICMA also said in the report that it has almost completed research for its third study into the European investment corporate bond secondary market.

“Intended to update on the seminal 2016 report, the new study seeks to address three key questions: (i) What is the current state and expected course for market liquidity? (ii) How is the structure of the market evolving? (iii) What are the expectations for future market developments ?”added ICMA.

The report is due to be published in this quarter.

Artificial intelligence (AI) is the buzz-phrase these days – especially in finance.

How can the buy side better utilize it in making smarter and more efficient trading decisions. For the sell side, the question is how can AI help them create better automated tools that can attract order flow and buy-side business.

Enter Google, which has been employing AI for years making life easier outside Wall Street – helping ordinary people find the best price on travel to arcane information.

Recently, Scott Penberthy, Director of Applied AI at Google, spoke with Traders Magazine’s editor John D’Antona Jr. about AI and the capital markets. Penberthy discussed the future trends in AI projects, the kind of AI project more financial institutions will take on and best practices for evaluating said projects.

TRADERS MAGAZINE: How do you see AI evolving? 

Scott Penberthy: Think of AI like databases from the 1980s. Back then, databases were new, fresh and cool. But today, we don’t ask whether an application or system is “database-powered.”  Databases are just a tool — a powerful and necessary one — in building software systems.

AI is moving that way, too. Systems powered by AI will handle more inbound data than humans, make better predictions than we could by ourselves, and often generate novel experiences for our customers. AI-powered software will get better with use, as it learns and adapts. This will map to business processes, which will continuously improve.

TM: What AI projects do you predict financial institutions will tackle next?

Penberthy: Financial institutions have leveraged machine learning (ML) and quantitative analysis for years, and we’ve already been working with financial institutions for quite some time to leverage AI for many different business cases. The global financial institution ING infused AI into its early warning system for credit risk analysts to vet potential risk exposure for clients. Canadian data company Flinks created a risk scoring engine with AI so that its customers could present best credit offers to users. And Grasshopper, a tech-based trading company out of Singapore, has leveraged our Cloud Machine Learning Engine to power large machine learning (ML) tasks.

What’s new is that computers can now see, read, hear, write and speak — improving exponentially with compute power and advances in algorithms. Computers can make predictions with incredible speed and accuracy.

We’re seeing core business problems reframed as predictions, especially in areas where a shortage of talent impacts customer experience. For example, contact center AI can handle inbound customer inquiries via voice, chat, email and imagery, augmenting with machines that predict customer intention. In another area, companies suffer from data being trapped in scanned documents, PDFs, and unstructured text. With document understanding AI, computers can read these documents and predict the data to extract.

TM: Who is driving these projects  – the banks? Investors such as large pension funds and money managers?

Penberthy: It’s really the entire industry. Investing in AI is a hallmark of leadership in financial services, in addition to other industries.

TM: What are the best practices you recommend to financial firms when evaluating AI solutions?  

Penberthy: Start with core business. How can you reframe your biggest challenges as a prediction problem?  After that, figure out what data you’d need to make the prediction — where you think the “signal” sits in giving you sufficient insight to make the prediction. Use that insight to pull relevant data into the cloud, clean it and create dashboards. Then, begin iterating on AI that automates predictions. BigQuery, BigQuery ML and AutoML tables are a great place to start on Google Cloud Platform.

TM: Are we at a point where AI will replace employees? 

Penberthy: AI can empower — not replace — employees by relieving them of some of the more mundane tasks and freeing them to focus on more impactful efforts. AI can automate some tasks and handle the data, without the need to increase a workforce. Additionally, AI can help employees become upskilled and as a result have more meaningful jobs and long-term careers. AI is a tool to be leveraged, rather than a new workforce.

TM: Are the benefits of AI being transferred to consumers or does it benefit financial institutions? 

Penberthy: A growing number of financial institutions are applying AI to customer advice and interactions, laying the groundwork for self-driving finance. Customers will vote with their wallet, preferring businesses that adapt to their changing needs, faster, and more accurately than others.

TM: What does the future look like for Google Cloud and AI, particularly in the financial industry? 

Penberthy: Our mission has always been to make the world’s information universally accessible and useful and now, we’re turning this focus to the world’s business information as well.

Financial services are replete with written documents and time series data. Reviewing documents is tedious and error prone, yet is a necessary task in regulation compliance, customer service, call centers and many business processes. We see these tasks as a perfect use case for AI, reducing tedium, improving accuracy, and improving the user experience at a lower cost.

We’d also like to make predictions and find anomalies in time series data. This mitigates financial crime, improves compliance, and reduces risk.

Go West young man.

And in this case, Korea’s Mirae Asset Financial Group has expanded West to Wall Street from its home base in South Korea. Mirae Asset Financial Group is South Korea’s leading non-bank financial services group.  As of December 2018, the group’s asset management businesses had approximately $379 billion of total assets under management. Its various broker-dealer subsidiaries and affiliates had approximately $7.5 billion in equity capital.

According to Robert Akeson, Co-Head of Prime Brokerage, Correspondent Clearing & Agency Execution at Mirae Asset Securities (USA) Inc. (“Mirae USA”), who spoke with Traders Magazine, the Mirae family of companies operates in 14 country markets. These markets, in addition to South Korea and the United States, include: Australia, Brazil, Canada, China, Colombia, Hong Kong, India, Indonesia, Mongolia, Singapore, the U.K. and Vietnam.

According to Akeson, “in late 2016, the Mirae Asset Financial Group placed $250 million of permanent capital with Mirae USA, to launch its self-clearing Broker Dealer in the US”.  Akeson continued: “with this capital, in 2017 we entered the correspondent clearing, prime brokerage, securities lending, repo, agency execution, and foreign research distribution businesses in the US. Currently, we work with nearly 200 counterparties, hedge funds and broker-dealers, and our customer financing balances are approximately $70 billion.”

What makes Mirae unique?

“Mirae is very focused on building synergies with its various affiliates as well as with our broker-dealer and hedge fund customers.” Akeson added: “Mirae’s goal is to build a leading global institutional services firm built around high-touch servicing, while leveraging the vast resources of the Mirae Family of affiliates”.

According to Keith Wright, Head of Securities Lending, “a good example of such synergies is our perspective on cannabis stocks, many of which are hard to borrow in the securities lending market.   This perspective is a by-product of our relationship with Canadian affiliate,  Horizons ETF, manager of the Horizons Marijuana Life Sciences Index ETF”.  According to Wright, “the index is one of one of the largest in terms of USD value in the world.”

Since Mirae is in the asset allocation business, these resources include the ability to “potentially introduce investment capital to professional investment managers,” according to Akeson. He went on to say that “Mirae is now arranging a trip to Korea to introduce U.S.-based hedge fund managers to Korean institutional investors”.

Akeson notes that “since Mirae does not roll-up to a bank holding company, Basel III and other new regulations do not directly apply to Mirae.  Thus we have more flexibility in how we can deploy our balance sheet and have significant capacity to offer highly competitive rates. With this flexibility we are well positioned to service various counterparties, broker-dealers and professional investors such as, emerging and smaller hedge fund managers”.

Another area Mirae has been quite successful in building out has been the agency execution and outsourced trading. “We provide anonymous executions, with no shopping of orders and no prop trading, which otherwise may give rise to conflicts. Also, clients have access to multiple broker routes and algos,” according to Stephen Bombardiere, Managing Director – Head of Agency Trading at Mirae USA. Bombardiere went on to say that “Mirae (USA) provides customized coverage to suit each client’s trading need and style and access to markets around the globe, including Shanghai/Hong Kong Connect.”

Mirae USA’s traders also provide access to ETF market makers for block trades in thinly traded issues. The desk offers both high- and low-touch trading options. The low-touch offering is based on a Rules Based Order Routing methodology as opposed to a more DMA-like capability.

“Each team members acts as an execution consultant while monitoring all low-touch activity,” Bombardiere said. “And all algos are available on a high-touch basis and are not proprietary.”

And what about its prime brokerage offering?

According to Akeson, “the firm has focused its technology efforts on establishing a leading-edge institutional platform to support clients’ diverse, complex and shifting needs.  Our primary objective is to offer the most secure and stable technologies while maintaining flexibility for customers.”

“There are so many exciting technologies now that didn’t exist a few years ago that Mirae USA takes advantage of, thereby distancing itself from its competitors,” according to Brandon E. Angus, Chief Technology Officer.  Angus went on to say: “the technology platform’s core emphasis is on providing clients with easy access to bespoke data. By offering clients real-time interfacing, multi-currency, dual entry, streamlined clearing and custody processing, efficient recordkeeping and reporting to Portfolio Accounting and Trading Solutions, Mirae’s platform sufficiently scales to support the most demanding full-service customers as well as those that may only require limited solutions.”

Mirae USA’s centerpiece technology platform is the MIRAE Prime Portal, which offers a centralized tool utilized by clients to access a robust set of information regarding their accounts.  This global portal provides a real-time view into account holdings, activity, balances, P&L, financing & interest Accruals, as well as portfolio reporting suite and Customized Data.

So, who is Mirae targeting with its offering?

According to Akeson, “Mirae USA is attracting a broad base of broker dealers and start-ups, as well as small and emerging hedge fund managers.  More recently, several large hedge funds have begun to use Mirae USA’s trading desks. Mirae USA started its business in the U.S. ‘de novo’ but is now supporting over 20 prime brokerage and clearing relationships it acquired during the last 18 months.”  He went to say that “Mirae USA is committed to building a significant US-based franchise and is here for the long-haul”.

So, what’s going on in the crypto and digital asset markets?

As these infant markets develop, how can liquidity be maintained or provided? That’s a question Scott Freeman, co-founder and partner at JST Capital looks to answer daily. Freeman is one of the select few professionals who calls himself a market maker in cryptocurrencies and liquidity providers.

And unlike some equity market markets, Freeman doesn’t earn a rebate from the exchanges he trades on.

Freeman has more than 20 years of experience running systematic trading businesses. He is one of the first market makers in the crypto-asset industry, starting to make markets in crypto in 2014. Prior to co-founding JST, he co-founded and was the Managing Partner of Tachyon Capital Management, a quantitative hedge fund. Previously, Scott was a Managing Director at Bank of America, overseeing the firm’s electronic Foreign Exchange trading business. Earlier in his career he worked as an attorney with the Federal Reserve Bank of New York and worked for several years as a prosecutor with the Manhattan District Attorney’s Office.

Freeman recently sat down with Traders Magazine editor John D’Antona Jr. and discussed the state of the crypto market, making markets in the asset class and pitfalls to avoid.

Traders Magazine: Describe the state of the crypto market.

Scott Freeman: The Crypto market continues to evolve quickly. Clients are more comfortable with digital assets today than they were 3 months ago and will be more comfortable 3 months from now. Many investors did not want to be the first to enter this space. We’ve now seen first movers enter this space with investors now looking to invest in crypto as a diversified, uncorrelated investment. We see a clear increase in the number of investors starting to see crypto as another asset class that should be a part of their portfolios. We see this, in particular, from Macro investors, who look to larger macroeconomic trends to inform their investments, something we see as an encouraging sign of wider institutional adoption. We also see a broader adoption of blockchain technology with more projects coming to production. All these factors will in turn increase adoption and acceptance of crypto assets.

TM: How is being a market maker in crypto different than say, FX or equities?

Freeman: Trading cryptos is very similar to trading in the FX markets. Like FX, there is a robust OTC market where clients trade directly with each other instead of having to trade on exchanges.

TM: Is becoming a crypto market maker difficult – say compared to equities?

Freeman: As compared to equities, there are many challenges trading cryptos, in particular to custody and security. Fortunately, we’ve been operating in the crypto space for over 5 years and have been able to leverage that experience to provide great service to our clients.

TM: What cryptos do you make markets in? Or how many do you make markets in?

Freeman: We actively trade the top six cryptos. We do have the ability to trade other assets when there is demand for it, but an overwhelming majority of our trading takes place in BTC, ETH, and XRP.

TM: On what exchanges do you operate?

Freeman: We don’t disclose this information publicly. We trade on many of the top exchanges and with many OTC providers.

TM: Is one crypto – such as Bitcoin – easier to make a market in than say Litecoin?

Freeman: Not necessarily. We find that all of the cryptos behave in their own unique way, but we wouldn’t say that one is any more difficult than the other.

It ain’t over til it’s over.

That’s what Hall of Fame baseball catcher Yogi Berra has been quoted as saying – and the same can be said of the Investors Exchange (IEX). While some in the market are opining that the exchange which brought the modern market structure the speed bump is down and out after exiting the corporate listings , Brad Katsuyama and Co. are alive and well.

In a recent conversation with Traders Magazine’s editor John D’Antona Jr., IEX President Ronan Ryan said the exchange was continuing to focus on its core strengths- technology and trading. A sound strategy to be sure given the speed bump technology it brought to the marketplace three years ago has now been duplicated by several of its competitors. And if that can serve as a proxy for success, then there is more to come.

“We’re far from struggling,” Ryan told Traders Magazine. “We are 100 employees strong and enjoying our third year as a public exchange. What we’re focusing on now is our strengths and using technology to institutionalize fairness.“

And now that the listings business has been shuttered, Ryan said that the exchange is now looking at predictive analytics as the next frontier – and when coupled with its existing speed bump can further protect client orders from not only getting a stale quote “picked off” but help clients predict a market move and prevent a quote from ever becoming stale.

Say what?

As Ryan explained it, the push into predictive analytics has yielded the Discretionary Peg (“D-Peg”) order type. In IEX, the D-Peg order type emulates HFT strategies and then adjusts the bid or offer automatically.

“The D-Peg runs similar to an HFT strategy in that it makes a determination when the market is going to tic,” Ryan said. “Then we can make the prediction and protect the client by keeping them pegged 1 MPV (minimum price variant) away from the bid or offer.” D-Peg seeks to trade at the midpoint during all other times.

For More on the D-Peg and trading at the midpoint, please click here

In essence, IEX either backs up a bid or raises and offering (bid the best or offers at the best in bond parlance). The technology observes the market and as bids reduce or disappear altogether, IEX prohibits a buyer from trading at a midpoint that will soon be stale. The order remains resting in the book, 1 MPV behind the bid. Ryan said IEX only places this functionality on a symbol for 2 milliseconds at a time per symbol, but the aggregate impact is profound: 95.8% of IEX’s midpoint volume in August executed while the quote was stable (defined as outside of the 2 millisecond window prior to an NBBO change), as compared to 55.7% and 60.0% on NASDAQ and NYSE respectively (source).

“We all know people are running these predictive strategies – but we are here to protect the resting order and clients on IEX,” Ryan said. “Quants and brokers are embedding this technology into their algos now to help offset thinning liquidity. Other exchanges might choose to pay a rebate – which to us is like making an apology for an inferior fill.”

To hear Ryan tell it, the firm is now “doubling down on technology and growth” as the D-Peg order is now in its 5th iteration and the sixth is set to come out of IEX market lab by the end of the year or early in the first quarter of 2020. All have been developed with machine learning.

The market data lab – a tapestry of engineers, quants, cryptographers and technologists – break down the market data feeds and break them down to examine the idiosyncrasies. They then bring in the brokers and get their feedback on how the technology works or can be improved.

“We are solving complex problems with data,” Ryan said.

So, what’s next?

Ryan said that IEX is now looking to not only protect the buy-side and its order flow but that of companies – and how they buyback their shares.

“There are very strict guidance on how companies can buy back their stock. They can’t cross the spread when buying,” Ryan explained, “and disclosure is required. This is where companies can be gamed.”

To meet this need, IEX has now introduced the C-Peg order type, which it has filed with the SEC just a few weeks ago for immediate effectiveness.

“Our sweet spot of using tech to institutionalize fairness for issuers was set even before we left listing business,” Ryan explained. “Brokers can use this C-Peg when using their buyback algorithms.”

The C-Peg uses the same predictive analytics as D-Peg to execute buyback orders at the midpoint as long as the midpoint is not above the last trade. Normally, this wasn’t easy to accomlpish as executing at the midpoint could be on an uptick in the stock. But with the C-Peg, brokers are better equipped to comply with Rule 10b-18 safe harbor, while allowing for more executions at the midpoint during a stable quote.

“We are expecting more midpoint executions,” Ryan said. “The brokers – whether they be agency or bulge, wanted us to build this and we’re excited to roll it out in Q4 2019.”

At the end of the day, clients, whether they are investment managers or corporations, don’t want an inferior fill at a stale price. We’re here to help put an end to that,” Ryan said.