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 5^th 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.

Cyber threats continuously evolve, and those firms that take a reactionary approach and relying on a standard cyber-security checklist likely will be attractive targets for hackers, according to Jerry Perullo, the chief information security officer at the Intercontinental Exchange

A hacked organization’s initial response is often to throw money at the problem, hire consultants, and implement a draconian security model that affects productivity, he noted during an interview on the ICE House podcast.

“The problem of bad controls is that they get torn down,” said Perullo. “You get a lot of exceptions and over-securing is a lack of securing at the end of the day.”

Security teams should be more like startup incubators where the staff challenges pre-set ideas and try to develop better ways to secure access to enterprise and its data.

When reviewing user accounts and passwords, Perullo’s team sought to find a more secure method than the standard model of an eight-character password that includes a sprinkling of capitals and special characters and has been in use for more than 20 years.

The team wanted to lengthen account passwords to 15 characters and omit the complexity of including special characters. They tossed all of the necessary calculations on to the whiteboard and the math held, according to Perullo.

“Then the National Institute of Standards and Technology released an updated standard that said that length was king,” he said. “You can get rid of that stuff as long as you look and block out commonly used passwords.”

The team tested the new password format against its internally developed Kraken engine that attempts to crack the passwords of all ICE user accounts daily and found the new format was secure. Kraken’s success rate also dropped steadily over the 90 days it to ICE to deploy its new security policy.

“Having that machine that constantly red teaming us has exposed a lot of other things around cleaning up accounts, visibility, and looking across acquisitions and geographies,” said Perullo.

Implementing a red team strategy, in which an internal team acts as an adversary, as well as security information shared amongst the industry also helps ICE develop a threat matrix based on the likelihood of an attack and its potential impact on the business.
“There is nothing more important than being close to the business and understanding the business and partnering with the business to understand what the impact would be,” he added.

Perullo also noted that having a red team deliver its findings to the IT team improves productivity when they can provide a video of a hacker trying to hack an exploit rather than giving a list of security-related tasks without context.

“People will get up and go out of the room to fix it,” he said. “There is no more back-and-forth.”

The delayed Saudi Oil Giant Aramco’s Initial Public offering may finally be coming to the market with JP Morgan talked as the lead bookrunner.

According to CNBC, J.P. Morgan Chase is close to winning the lead advisory role for the initial public offering of Saudi Aramco, according to people familiar with the situation. A final decision is expected soon and could still change, the people said.

The oil company could sell upwards of $25 billion worth of shares domestically on the Tadawul Exchange and then globally in New York and London afterwards.

An IPO was delayed last year by Mohammad bin Salman, as Saudi Aramco pursued a $69 billion takeover of a Saudi chemical producer. At the time, Saudi officials said that they wanted to raise $100 billion by selling a 5% stake in Saudi Aramco, valuing the company at $2 trillion. That would far outstrip the $25 billion raised in the 2014 IPO of Chinese e-commerce company Alibaba.

Now, encouraged by the strong reception to a $12 billion bond offering in April, MBS is keen to push ahead with a listing as early as November, according to the people, CNBC added.

But the latest attack on the refiner where drones, believed to have originated from Iran or Syria, damaged production facilities and forced a 50% cut in production might cause a delay in the IPO until the end of the year. Reuters just reported that Aramco has secured some support from native sovereign wealth funds that could boost the IPO’s valuation to over $2 trillion.

Also, the firm just named Yasir Othman al-Rumayyan, governor of the kingdom’s Public Investment Fund, to head the company, replacing Energy Minister Khalid al-Falih. The change has been widely viewed as an effort to speed up preparations for the oil giant’s planned initial public offering.

The Securities and Exchange Commission today announced that is has voted to adopt a new rule and form amendments that are designed to modernize the regulation of exchange-traded funds (ETFs), by establishing a clear and consistent framework for the vast majority of ETFs operating today. The adoption will facilitate greater competition and innovation in the ETF marketplace, leading to more choice for investors. It also will allow ETFs to come to market more quickly without the time or expense of applying for individual exemptive relief. In addition, the Commission voted to issue an exemptive order that further harmonizes related relief for broker-dealers.

“Since ETFs were first developed over 27 years ago, they have provided investors with a number of benefits, including access to a wide array of investment strategies, in many cases at a low cost,” said SEC Chairman Jay Clayton. “As the ETF industry continues to grow in size and importance, particularly to Main Street investors, it is important to have a consistent, transparent, and efficient regulatory framework that eliminates regulatory hurdles while maintaining appropriate investor protections.”

ETFs are hybrid investment products not originally allowed under the U.S. securities laws. Their shares trade on an exchange like a stock or closed-end fund, but they also allow identified large institutions to transact directly with the fund. Since 1992, the Commission has issued more than 300 exemptive orders allowing ETFs to operate under the Investment Company Act. ETFs have grown substantially in that period, and today there are approximately 2,000 ETFs with over $3.3 trillion in total net assets. Investors use ETFs for a variety of purposes, including core components of long-term investment portfolios, investment of temporary cash holdings, and for hedging portfolios.

ETFs relying on the rule and related exemptive order will have to comply with certain conditions designed to protect investors, including conditions regarding transparency and disclosure. To help create a consistent ETF regulatory framework, one year after the effective date of the rule, the Commission is rescinding exemptive relief previously granted to certain ETFs, including those that will be permitted to operate in reliance on the rule. The rule and form amendments will be effective 60 days after publication in the Federal Register, but there will be a one-year transition period for compliance with the form amendments.

Korean investors’ appetite for exchange-traded funds (ETFs) show no signs of slowing down despite the global sell-off in 2018 and the uncertainties surrounding the trade war. In fact, innovative product ideas are being launched, and assets grew to US$35.5 billion in 2018, a 15.2% increase year-on-year.

From 2014 to June 2019, ETFs recorded a 112.3% asset growth. The number of ETFs jumped from 172 to 430 during the same period, adding to the market’s diverse range of products, including leveraged and inverse (L&I) ETFs.

Managers are coming up with innovative niche ETFs to win clients’ assets. In July 2018, three managers—Samsung Asset Management, Mirae Asset Global Investments, and KB Asset Management—listed three ETFs that invest in the video game industry. In December 2018, NH-Amundi Asset Management launched the first agriculture-themed ETF in Korea, the Hanaro Agriculture Fusion and Convergence ETF.

In July 2019, Samsung Asset Management launched three target risk ETFs, namely the KODEX TRF7030, KODEX TRF5050, and KODEX TRF3070. More recently, two onshore ETFs—Arirang U.S. Short-Term Credit Corporate Bond ETF and the Arirang Long–Term Credit Corporate Bond ETF—made their debut on the Korea Exchange in August.

Managers in Korea continue to look at building and expanding their ETF product range. According to Cerulli’s survey, two thirds of managers already have ETF capabilities, while 40% of them are looking to hire ETF specialists to grow their product line-ups. Moreover, 40% of the asset managers surveyed shared that they are planning to work with digital advisory platforms to promote ETFs.

Amid the competition to raise assets, managers in Korea have been slashing fees to as low as 0.001% on new product listings. Korea’s ETFs already have the lowest average management fees in key Asia ex-Japan markets, at 0.26%, according to Cerulli’s analysis.

One way for foreign managers to grow their marketshare in Korea, and for local managers to capitalize on global managers’ expertise, is to form product partnerships. “Foreign managers who want a slice of Korea’s fund market may want to explore setting up local offices targeting institutional clients that are increasingly shifting toward passive investments such as ETFs,” said Siau Kean Yung, Associate Analyst with Cerulli Associates. “Subadvisory and product partnerships with Korean asset managers are other ways of tapping the market. As for the retail segment, the industry will need to increase awareness about the use of ETFs as investment rather than trading tools.”

Will there be some upheaval in the retail brokerage space as a result of some major players reducing trading commissions to zero?

There could be, said one prominent analyst.

According to Jessica Rabe, Co- Founder at DataTrek, the decision to cut trading commissions to zero has had a definitive impact.

To recap, Charles Schwab announced that it will no longer charge commissions on online stock trades, effective Oct. 7. TD Ameritrade followed suit, saying it would also offer zero-commission trades.

Founder and Chairman Charles Schwab said, “From day one, my passion has been to make investing easier and more affordable for everyone. Beginning October 7, every Schwab client can trade U.S. stocks, ETFs and options commission-free. Eliminating commissions ensures my ultimate vision is realized – making investing accessible to all.”

Schwab CEO and President Walt Bettinger emphasized, “This is our price. Not a promotion. No catches. Period. Price should never be a barrier to investing for anyone, whether an experienced investor or someone just starting on the investing path. We’re proud to provide clients with a full-service, modern investing experience that delivers on our no trade-offs combination of service, simplicity and superior value – backed by a satisfaction guarantee2. In support of the valued independent investment advisors we serve, the same pricing will apply to their clients when trading at Schwab.”

In sum, beginning October 7, 2019, the company will reduce U.S. stock, ETF and options online trade commissions from $4.95 to zero.

Shares of Schwab fell more than 10% on fears the change will hit margins. The broker said commission fees make up 3% to 4% of net revenue each quarter.

Rival brokerage firm TD Ameritrade responded by also dropping its charged commission rate to zero on trades which resulted in its stock dropping more than 26% for its worst day in 20 years right after the announcement. It previously charged customers $6.95 per trade.

TD clients trading options will now pay $0.65 per contract with no exercise and assignment fees.

“We are committed to giving our clients the best possible investing experience, with cutting-edge technology and award-winning investor education and service teams. And now, that experience just got better,” said Tim Hockey, president and chief executive officer of TD Ameritrade. “We’ve been taking market share with a premium price point, and with a $0 price point and a level playing field, we are even more confident in our competitive position, and the value we offer our clients.”

Rates will be effective for TD Ameritrade retail clients, as well as clients of independent registered investment advisors that utilize TD Ameritrade Institutional. A final pricing schedule will be available on Oct. 3, 2019.

E*Trade too dropped its trading fees to zero. It estimates a quarterly revenue impact of $75 million from dropping fees.

But DataTrek’s Rabe said that others were hurt by the news. She reported that these moves cut $1.7 billion of market cap from ETRADE Financial, as well as $6.6 billion from TD Ameritrade and an undeterminable amount from the values of private companies like Fidelity and financial conglomerates that offer retail stock/bond/options trading. She added that old timers will recall that the trend to lower retail trading costs actually started in 1975, when the SEC first allowed negotiated commissions.

“Charles Schwab itself was an early entrant in the discount brokerage space on the back of that regulatory change,” Rabe said. “But it took the Internet, mobile computing, and venture capital backed brokers targeting millennials to get commissions to zero. And here, we suspect, they will stay.”

So, what can we expect next?

Consolidation among the brokers.

“The bottom line here is that M&A is a natural result when an industry goes through a disruptive shift that makes its products/services cheaper, better, or more responsive to customer needs,” she said. “Scale may not return an industry or its participants back to returns on capital that existed before the disruption came along. But for many of its competitors, mergers will be better than the alternative.”

Lance Uggla, chief executive of IHS Markit, said the data provider is in a good position to grow as more firms are using advanced analytics to inform their decisions.

Uggla was interviewed at the Sibos conference in London today.

Great to speak with @FrostTim at #Sibos about #data, #advancedanalytics and the ways in which we now use #technology to interpret, visualize, and transform #data. https://t.co/5ovTBMSBNa

— Lance Uggla (@LanceUggla) September 23, 2019

The chief executive said that since he had the idea to launch an information provider 20 years ago the quality and quantity of data has improved. In addition, types of data have changed with an increase in unstructured data such as satellite imagery and drone photography.

“More information is being used in decision making so we are in a good place to grow,” Uggla added. “The speed of calculations and output is changing so firms are using advanced analytics to look for patterns and signals.”

Natural language processing can discern patterns more quickly and is less prone to errors.

Uggla gave the example of IHS Markit’s Commodities at Sea analytics suite which provides data-driven intelligence to help determine prices. Commodities at Sea uses trade data and ship movements to provide an indicator of supply and demand in the market.

“We use satellite imagery to determine the size of storage facilities and the size of ships,” he added.

Other analytics also provide risk scores for countries  and events such as geopolitical turbulence.

IHS Markit has also partnered with Caixin in China to calculate  the country’s General Manufacturing PMI (Purchasing Managers’ Index).

“We have a great opportunity to expand in Asia,” said Uggla. “China has a more digital economy than any other country I have visited.”

Fund managers use of data

Research provider Morningstar said in a report that asset managers are increasingly using big data to get an informational edge.

How Fund Managers Are Using Big Data. https://t.co/hEq2fn2uYO

— Morningstar, Inc. (@MorningstarInc) September 23, 2019

Linda Abu Mushrefova, manager research analyst for Morningstar, said in the report that about one third of the signals used to forecast stock prices in asset manager models are now based on non-traditional data. In comparison, a decade ago none of these signals used alternative data sources.

However she also warned that a large quantity of data introduces additional noise.

“Having access to a large and unique data set isn’t like finding a bag full of magic market-beating beans,” said Mushrefova. “The ability to access, test, validate, and implement this unstructured data into an investment process is critical to making the data useful.”

As a result, buy-side firms now have to attract quantitative researchers with programming experience and data science backgrounds in addition to strong investment talent.

Mushrefova continued that crowding and signal decay are risks, especially as more investors pile into the same factors or exposures.

“While the use of new data and tools is exciting, it is also untested over a full market cycle, and while we are optimistic on some of the benefits, we also maintain a healthy level of skepticism,” said Mushrefova. “Specifically, it is not just the availability of the data but what is done with it.”