Broker-dealers have until the new year to comply with mandates to step up routing disclosures.
The U.S. Securities and Exchange Commission is giving a bit more time for broker-dealers to comply with new rules that mandate more transparency in trade routing.
SEC again delays dates for updated broker order handling disclosures under Rule 606 to January 1 and April 1, 2020 Details- https://t.co/P0WoSYggxe
The Commission “is granting a temporary exemption from reporting obligations under Rules 606(a) and 606(b)(3) to provide additional time for broker-dealers to complete the development of systems and processes necessary to begin collecting the data required by the rule,” the SEC said in a Sept. 4 order.
The SEC voted in November 2018 toamend Rule 606, which requires broker-dealers to disclose to investors new and enhanced information about the way they handle investors’ orders. Rule 606(a) pertains to ‘held’ order flow, for which a trader is held to the duty of best execution, while 606(b) covers ‘not held’ order flow, for which broker-dealers have price and time discretion.
Broker-dealers now have until January 1, 2020 to comply with Rule 606(a); broker-dealers who self-route have until the same date to comply with Rule 606(b)(3), while broker-dealers who self-route have until April 1, 2020 to comply with Rule 606(b)(3). The effective date had been Sept. 30, 2019, which itself was pushed back from May 20.
The SEC, through its Division of Trading and Markets, noted that the Financial Information Forum and Security Traders Association had requested the delay, on the premise that the industry wouldn’t be ready for Sept. 30.
There are challenges “with the Rule 606(b)(3) requirement that (a broker-dealer) provide customer-specific reports of data regarding its handling of customers’ not held NMS stock orders,” the SEC noted, citing the FIF and STA.
In addition, “these challenges are greater when a broker-dealer must report the information required under Rule 606(b)(3) for orders handled using the order routing systems of another broker-dealer than they are for orders handled using a broker-dealer’s own systems.”
Deadline for #compliance w new rules related to handling of #stock orders by #brokerdealers is 10/1 after extension granted by SEC. Extension for amendments to Rule 606 of Reg NMS was made to give BDs time to make changes to electronic order-routing systems, test for #compliance.
As liquidity begets liquidity, scale is increasingly important for trading clients.
Now that summer is over and Wall Street is back to business, let’s talk mergers and acquisitions.
Lance Lonergan, Piper Jaffray
Think Piper Jaffray and boutique brokerage Weeden & Co. The deal was originally announced back in February and has now closed as has summer and Traders Magazine had the opportunity to discuss the acquisition with both Tom O’Kane, co-head of Global Equities and Lance Lonergan, Head of Global Equity Execution (formerly head at Weeden).
The combination of Weeden & Co. and Piper Jaffray, along with the recently announced merger with Sandler O’Neill, creates a market-leading equities business, according to the leadership of both firms.
Tom O’Kane, Piper Jaffray
The acquisition significantly strengthens Piper Jaffray’s position as a top institutional equities trading platform, diversifying and expanding its client base while adding specialized execution capabilities and proprietary technology. The transaction will complement Weeden & Co.’s existing business, through Piper Jaffray’s added research and equity capital markets capabilities.
“Together, we will be able to offer our combined client set the full breadth of an expanded product suite including Weeden & Co.’s highly ranked agency execution platform coupled with Piper Jaffray’s industry-leading deep sector research making our offering far more robust and relevant,” said Deb Schoneman, president of Piper Jaffray back in February.
The combined trading platform will be led by Weeden & Co.’s current CEO, Lance Lonergan, who will join Piper Jaffray as the firm’s head of global equity execution. Lonergan told Traders Magazine editor John D’Antona Jr. that Weeden benefits on numerous levels – beginning with mindset.
“First and most important, our cultures are compatible; that was clear after we first met them about three and a half years ago,” Lonergan said. “We’re like-minded firms, our teams enjoy what they do, we work hard and put our client interests first. Piper Jaffray has made significant investments in research and our capital markets business. But, in an increasingly MiFID II-focused world we needed to be able to have an industry-leading execution platform. Weeden has that.”
Also, Lonergan pointed to the scaling its operations in an increasingly competitive environment.
“Increasingly scale is important to our clients. It’s important internally from an expense control perspective —trading is a high fixed-cost business,” Lonergan said. “Even more importantly, scale is important externally; we’ve now significantly increased the breadth and depth of liquidity for our buy-side clients.”
So, this was good for Weeden?
“From Weeden’s perspective, as we got to know the Piper team, we were comfortable with their leaders and the role that we would be able to have at a larger firm to affect a better outcome for both of us,” Lonergan explained. “At Weeden, we built a very high-quality, client-execution focused platform. With the addition of the Piper Jaffray products we’ve got more to monetize — liquidity begets liquidity. This allows us to reach the next leg of revenue, of sophistication, basically to get to the next chapter of what we can offer clients that much sooner.”
Lonergan was referring to the research aspect of Piper Jaffray and the breadth of its offering. The firm offers 36 senior analysts covering 650 companies, research distribution partnerships in Europe and Canada, conferences and corporate access. It also gives Weeden access to new issue product. In 2018, for example, Piper Jaffray raised $16.1B across 85 new issue offerings, serving as bookrunner on 58 transactions.
What can Weeden’s clients expect of the new firm?
“I don’t expect too much will change, meaning, our clients will continue to experience the same culture, the same approach they had before, they won’t experience a disruption,” Lonergan assured. “On the positive side they’ll get the benefits of broader sales and trading capabilities, the products and resources of a full service firm, and a larger, more efficient trading platform.”
Was there a lot of client overlap?
Tom O’Kane, Co-Head of Global Equities told Traders Magazine that much is made of the overlap issues with Wall Street mergers but Piper Jaffray learned during our initial analysis that our two client bases have some distinct differences.
“Weeden did very well in program trading, low or no-touch algorithmic trading, and developed an expertise in difficult liquidity high-touch block trading,” Kane said. “The only place we overlap is with Piper Jaffray’s largely high-touch client business.”
Lonergan added that 45% of the revenue at Weeden was with clients that Piper Jaffray didn’t previously have open. “So to Tom’s point, the overlap was much less than one would think.”
“And with the accounts where we did overlap, there was surprisingly little revenue dis-synergy,” Kane said.
Is this acquisition a reaction to MiFID II?
“I wouldn’t say it’s a reaction to it. But at the same time, it positions us better if MiFIDII type policies move to the U.S.,” Kane said. “We feel like we now have a best-in-class offering on both sides of the aisle, research and execution.”
While Lonergan’s new role at Piper Jaffray has been much documented, Kane explained that he was going to continue to manage sales and be Co-Head of Equities with Mike Cox, who heads up research. Jim Fehrenbach, who did a lot of work with this transaction, will remain COO.
“The trading leadership going forward will resemble what it looked like at Weeden. Lance will manage that for us, as Global Head of Equity Execution,” Kane said.
Additionally, Lonergan said that the firm has now centralized all of the sector trading desk in one hub to increase its ability to source liquidity. The sales trading desk, 40 strong, will be managed by Bill Foster and the sector trading desk will be located in in Greenwich, Connecticut and managed by Josh DiMarzo.
How is Piper Jaffray going to brand the combined firm?
Kane explained that the answer is getting more interesting.
“The Weeden name will fold into the Piper Jaffray brand, so we’ll be known as Piper Jaffray,” Kane began. “But with our acquisition of Sandler O’Neill, Piper Jaffray will change its name to Piper Sandler in 2020. Herman Sandler, one of the founders of Sandler O’Neill, was also one of the 66 firm members they lost on September 11, 2001. As the leadership teams worked through their negotiations, they felt the right thing to do was to acknowledge Herman Sandler and the Sandler O’Neill legacy. I think everyone’s excited to go forward with the employees, the values, and the history of such great Wall Street firms.”
Other nations can learn from The Marshall Islands’ cryptocurrency experience.
There is a wonderful experiment regarding digital currencies backed by central banks that will provide other central bankers with tremendous data.
The Republic of the Marshall Islands plans to release its sovereign (SOV) digital currency, which will be legal tender for the mid-Pacific nation along with the US dollar that the country has used as its currency since its independence.
Unlike other nations that already issued digital currencies, such as Venezuela and its moribund petro, the environment in the Marshall Islands reflect an almost perfect laboratory experiment.
The scope of the experiment is relatively small since the country’s $212 million GDP in 2018 ranked 193rd out of 196 nations and which is roughly one-one-thousandth of bitcoin’s current market cap.
The mid-Pacific nation intends a phased release of 24 million coins of which the independent and not-for-profit SOV Development Fund will receive 30 percent of the coins for the support of the SOV’s infrastructure.
The biggest question remains likely what will they be worth when launched. If the Marshall Islands go the route of a pure commodity currency, the value will be left up to the speculators.
It’s doubtful that it would be as high as bitcoin but likely to be higher than the petro as long as the Marshall Islands decide not to peg its value to a larger currency or a basket of currencies and turn the digital currency into stable coins.
No matter how successful the sovereign is domestically or abroad, its performance will give other central banks reams of data regarding the behaviour and performance of dual-currency regimes.
The largest economies in the G7 or the G20 could never act as quickly as the Marshall Islands have in developing and preparing the deployment of a digital currency backed by a central bank. Their economies are too large and the creation of unintended economic shockwaves are too great.
Just as the Italian city states led to the development of capitalism in the 16th Century and the invention of the joint-stock company by the Dutch in the 17th Century, innovation belongs to the small and nimble economies.
• More active asset managers are marketing international and global equity strategies to institutional investors based on valuations and the value they could add, particularly in emerging markets and international small-cap equities. Cerulli finds that institutions are increasingly open to international and global equities, though managers continue to face competition from passively managed strategies, particularly in larger, developed markets.
• Mutual funds added positive net flows of $6.1 billion during July, amounting to organic growth of 0.04%. Total mutual fund growth was 0.4%, as assets climbed to just less than $15.5 trillion. ETF assets closed July 2019 above $4 trillion, marking the first month end the vehicle has exceeded that threshold. Investors added flows of $21.6 billion during July, equal to organic growth of 0.5%.
• An area where asset managers are realising value from technology is investment in technologies that centralise data and automate reporting for their sales and client services groups. In conversations with Cerulli, request for proposal (RFP) managers have often mentioned the need for centralised databases so they can limit the amount of lag time required when pulling data from various sources throughout the firm. Technology platforms are also employed as a service tool for clients, particularly by managers operating as an outsourced chief investment officer (OCIO). A technological platform that gives clients greater access to their portfolio and streamlines the communication between the two organisations can be a key tool for an asset manager to retain that client.
By Scott Bradley, Head of Sales and Business Development, London Stock Exchange, Cash Secondary Markets and Turquoise, London Stock Exchange Group.
Through initiatives such as Shanghai-London Stock Connect, and the soon-to-be-launched Global Equities Segment, London Stock Exchange is cementing its role as the world’s most international stock exchange. Scott Bradley, London Stock Exchange
Sitting in a time zone at the centre of the global business day, London Stock Exchange (LSE) recognises the importance of this positioning for both investors and traders alike. As a result, we continue to engage with the market to develop a number of global initiatives for customers looking to access our global pools of liquidity. Over 70% of global revenues of FTSE 100 stocks derive from commercial activities outside of the UK, and 37% of all London-listed companies are of international origin. This demonstrates LSE’s continued ability to attract diversified and global demand for products available to trade on the market.
LSE’s International Order Book (IOB) offers a dedicated service for investors to trade global depositary receipts (GDRs) denominated in US dollars and following an internationally respected T+2 settlement discipline. This order book, a segment of LSE’s Main Market, offers cost-efficient, secure and transparent access to invest in companies operating in some of the world’s fastest growing countries. With more than 130 GDR issuers representing over 30 countries, the IOB connects worldwide investors in one time zone and marketplace.
The majority of trading activity on the IOB relates to Russian listed depositary receipts. In fact, London represents the largest secondary market for Russian securities outside of Moscow. We are also seeing increased investor appetite for trading securities from other geographies. For example, in the first half of 2019, trading in Indian securities rose by over 7% (by value] year-onyear. More specifically, the GDR of Samsung remains the most actively traded Asian security on the market with an average of 9% global activity in the stock trading on IOB. Across all securities, total daily value traded across the IOB in the first half of 2019 averaged around US $300m. The IOB represents the world’s largest GDR market, positioned to provide optimal geographical reach and time zone overlap across 27 underlying markets (based upon countries where Londonlisted GDRs are incorporated).
China connection
In June, LSE launched ShanghaiLondon Stock-Connect, in collaboration with Shanghai Stock Exchange. This initiative represents the first two-way depositary receipt mechanism between China and the UK, allowing foreign companies to list in mainland China whilst also making available securities fully fungible with Chinese A-shares to be traded outside of China. This exciting new platform has been developed with the full support of the UK and Chinese Governments and regulatory authorities, further highlighting the international opportunities available on London Stock Exchange.
Chinese-A share depository receipts are traded on a dedicated Shanghai Segment within the established IOB. Huatai Securities was the inaugural Chinese issuer to list via Shanghai-London Stock Connect and we expect further issuers to follow. With T+2 settlement in US dollars, no pre-delivery requirements and trading during regular London market hours, initial trading activity has been very encouraging with Huatai Securities consistently featuring in the top 10 securities traded on IOB since its listing (based upon average daily value traded).
Trading global equities on the world’s most international exchange
In response to demand from retail investors in Asia as well as trading members LSE is due to launch a new Global Equity Segment by the end of the year.
The Global Equity Segment will bring 50 of the most actively traded US securities and 30 liquid Chinese ADRs to be admitted for trading on the MTF (MIC code XLOM) operated by LSE and available during regular London trading hours. The development leverages our members’ world leading expertise in market making and liquidity provision capabilities allied with London’s unique time zone positioning. The new segment will provide global investors (including retail) the opportunity to reduce time zone risk, as well as providing the efficiency of a real-time valuation management platform whilst accessing exposure to global securities.
The Global Equity Segment will utilise a well-established CREST depository interest (CDI) workflow, efficient settlement and realignment through existing Central Securities Depository (CSD) linkages between the UK and US (Euroclear UK & Ireland and Depository Trust & Clearing Corporation). This means investors can trade and settle the international security like a domestic instrument: quickly, cheaply and efficiently. This is because the CDI is merely a representation of the underlying security in an alternative CSD and shares the same ISIN.
The ability to move CDIs quickly and easily between markets allows for cross-border execution and settlement within a T+2 settlement cycle in US dollars. This could allow, for example, an investor to buy securities in London during regular London trading hours and to sell in New York on the same day. Both trades would then settle T+2 in the respective markets.
As a newly created segment on LSE, members will be able to simply utilise existing connectivity protocol. Post trade, the segment will support clearing interoperability, in line with LSE Group’s Open Access approach.
The Global Equity Segment is yet another example of LSE’s innovation to meet the evolving needs of an increasingly global customer base, enabling access to more international trading opportunities.
From October 2018, LSE Group launched an Asian promotion, waiving Asia retail end clients’ fee for real time data for an initial 12-month period. This promotion of LSE Group listed companies through market data initiatives for Asian retail customers combined with efforts to work with local partners, both trading relationships with brokers and marketing strategies with platform providers has fuelled interest in being able to bridge that time zone gap between Asia and the US.
Subscriptions to UK and international markets data through LSE Group increased over 900% in the first half of 2019 and more than a dozen new trading and or marketing partnerships established reaching new audiences for the first time. This represents greater awareness and visibility of choice, convenience and opportunity for investors looking for increased portfolio diversification in one single marketplace.
London’s time zone, overlapping with Asian and US market hours allows for real-time access to global exchange traded products
Diversification and international exposure to securities is core to the Exchange Traded Product (ETP) market on London Stock Exchange. Over 1,700 ETPs are listed in London, with 23 registered market makers providing continuous ETP pricing and a high-quality pool of liquidity. There are some 32 ETP issuers on London Stock Exchange, who offer exposure to global geographies including the US.
In total, there are approximately 300 ETFs available on LSE which provide investors with exposure to underlying US securities, and currently 25 with exposure to China. This is further testament to the international opportunities available to investors trading in London. LSE supports trading in six different currencies (including USD, EUR, CHF, HKD and CNY), providing further choice and flexibility in the pursuit of global access and exposure. With no stamp duty payable on ETF trading (and no withholding tax when investing in Irish domiciled ETFs that invest in US equities) this offers another benefit for the international investor looking for truly global trading opportunities.
As financial markets become increasingly global, LSE continues to play a role in supporting customers around the world in its trading activity. Through initiatives such as Shanghai-London Stock Connect, and the soonto-be-launched Global Equities Segment, LSE is cementing its role as the world’s most international stock exchange.
By Daniel Schlaepfer (@danschlaepfer), President and CEO of Select Vantage Inc.
US and European regulators need to collaborate about the future of MiFID II’s research unbundling provision.
As Congress orders a study into the possible effects of MiFID II-style policies in the US, the SEC would be better off building bridges with their European counterparts to achieve equivalence than following the EU’s lead, argues Daniel Schlaepfer. Daniel Schlaepfer, Select Vantage
Eighteen months ago, the EU’s ‘MiFID II’ regulation made it mandatory for asset managers to ‘unbundle’ research costs from the overall sums they charge to investors. The aim, said regulators, was to increase transparency. However, the move has caused a major headache for companies who also operate in the US, where SEC regulations expressly prohibit fund managers from directly charging for research unless they register as investment advisers. To avoid market participants getting caught between conflicting jurisdictions, the SEC issued three no-action letters in 2017, offering exemptions to firms taking hard dollars for research. Now, with these set to expire in less than a year, a long-term solution is required.
The SEC is facing a dilemma about what to do next. To many, the answer seems obvious: adopt EU-style unbundling policies in the US to establish equivalence and stop the subsidising of research used by European asset managers. However, to accept unbundling wholesale would overlook its negative consequences. In Europe, we have seen a serious plunge in the volume and breadth of research produced since the implementation of MiFID II. With investors finding out just how expensive research really is, and raising their eyebrows, fund managers have cut their research budgets by as much as 20-30% – and despite recent comments by FCA chief Andrew Bailey, this is not a good thing.
In cutting their research costs, firms have vastly reduced the number of analysts they employ. In turn, this has seriously impacted the volume of research conducted on smaller stocks, with remaining analysts focusing their attention on the largest stocks. Both institutional and retail investors, as well as companies like my own, Select Vantage, need research at their disposal if they are going to trade in smaller stocks– and in Europe, it is getting increasingly hard to come by. This also has knock-on effects for overall capital formation and GDP growth. Unbundling was never intended to have this impact, and the SEC must remember this in seeking a solution for achieving equivalence.
EU unbundling policies are also inadvertently disadvantaging smaller firms. As investors have grumbled over research costs, several larger players, including JP Morgan, have opted to absorb these costs rather than pass them on to clients. Small and medium companies, however, cannot afford to do this, and are consequently losing business to their bigger rivals. Long-term, this will create monopolies and consolidation in the market. The SEC should recognise this – the United States is a country which prides itself on fair competition, and the adoption of unbundling policies would likely undermine that.
The US regulator should also consider the cost and compliance issues which would inevitably arise from a mandatory unbundling policy. In Europe, regulators did not effectively prepare the market for MiFID II. Guidelines for compliance were ambiguous and minimalistic, and all market participants, big and small, were left to foot the bill for the expensive teams of compliance professionals they needed to make sense of the regulatory requirements. The whole situation was messy, ill thought-out – and fundamentally unnecessary.
“If it ain’t broke, don’t fix it” – the soft dollar policy for research payments has worked well in the US for a long time. Putting aside the issue of equivalence with Europe, it would be a mistake to get rid of soft dollars in exchange for the significant downsides of MiFID-style unbundling. Indeed, a Congress-ordered study into the possible effects of such a change suggests that US lawmakers have considerable reservations. Transparency for investors is obviously a good thing, but there are other less damaging initiatives a regulator can pursue for achieving this objective.
So how does the US achieve regulatory equivalence with mandatory unbundling in Europe? Currently, there is a communication problem between the two sets of regulators. Unbundling of research is one of several issues over which the US and EU authorities do not see eye to eye, and defensive and at times confrontational attitudes from both sides mean that ESMA is in no mood to be flexible. If both sets of regulators took on a more collaborative mindset, however, this may change.
It would be naïve to suggest that US regulators could ever persuade ESMA to entirely drop its unbundling policy. However, the negotiation of just a little more flexibility would make a big difference for achieving equivalence. A non-compulsory unbundling policy, for instance, would allow firms to operate in both jurisdictions with less disruption, while also giving market participants the all-important choice in how to run their businesses. Already, there are voices from within the EU, notably from the AMF, who are calling for a less stringent application of MiFID II. If change is in the air, the SEC needs to make itself part of that conversation.
The firm combines internal data with external market indicators across asset classes for use in the machine learning model.
Dane Fannin, head of global securities lending at Northern Trust, said the firm is discussing further applications of machine learning across the trading function in the business as it launched a pricing engine using the technology. Dane Fannin, Northern Trust
Northern Trust announced this month that it has developed a pricing engine that uses machine learning and advanced statistical techniques in the securities lending market to forecast the rate to loan securities.
Fannin told Markets Media: “This is the first iteration of machine learning within securities lending as we saw an opportunity to improve the efficiency of pricing. We look at technology as a tool to accelerate our objective in helping clients optimise their portfolios in pursuit of increased alpha or driving out costs.“
An algorithm estimates the demand for equities in the securities lending market. Northern Trust global securities lending traders can use these projections, with their own market intelligence, to automatically broadcast lending rates for 34 global markets.
Northern Trust held approximately $1.2 (€1.1) trillion in lendable assets for more than 450 clients worldwide at the end of June this year. Fannin said that maintaining optimal pricing on all of these at point of trade and continuously through the life of the loan is intensive.
“Deploying machine learning helps to replicate and enhance the manual decision making process traders use to project the demand for a subset of securities, which can then be leveraged to optimize and sustain efficient pricing to drive increased revenues,” he added.
Chris Price, data scientist at Northern Trust, told Markets Media that the firm gathers internal data and mixes it with external market indicators across asset classes for use in the machine learning model.
Chris Price, Northern Trust
“That is our secret sauce,” said Price. “We track results against internal benchmarks and make necessary adjustments.”
Fannin continued that Northern Trust has created an infrastructure and analytical framework that can intelligently adapt to changing market conditions.
“Having already invested time and effort to automate our trading process, we are in a strong position to benefit from increasingly automated borrower demand,” he added. “We continue to discuss a roadmap for further applications of machine learning across the trading function, where it makes sense, to allow traders to focus on high touch, value-added transactions.”
Importance of data
Matt Wolfe, vice president of business development at the US OCC, said on the options clearing corporation’s blog that there is a growing emphasis on data collection in securities lending.
“Decisions are being influenced by data analytics,” added Wolfe. “In my view, the future of securities lending will be data-driven and the leaders will be those that make the most effective use of data.”
He continued that one of the catalysts for the increased importance of data is the European Union’s Securities Financing Transaction Regulation that will mandate regulatory reporting within specific timeframes.
Matt Wolfe, OCC
“An increased quality and breadth of data enables advanced data analytics, such as machine learning,” wrote Wolfe. “There’s little doubt that such a lucrative business (driving nearly $10bn in revenues according to a recent DataLend announcement) is going to attract advanced data science.”
Wolfe predicted that the use of machine learning and distributed ledger technology will benefit beneficial owners over the coming years.
“For example, programs that can anticipate changes in the demand for securities enable firms to make more informed decisions about when to lend and rerate securities,” he added. “Similarly, distributed ledger technology has the potential to not only improve the transparency for beneficial owners, but also to potentially enable them to take a more active role in their lending programs.”
Fannin agreed that there are a lot of exciting ideas about using new technology in securities lending to drive greater efficiencies. He said: “We are being disrupted for the right reasons.”
Capital markets need to change the speed of software development and cut the length of time to market for new services.
Amazon engineers are said to deploy new code on the technology company’s website every 11.7 seconds. This flexibility was achieved after moving to the Amazon Web Services cloud and a microservices architecture.
Microservices breaks a problem into small components of functionality, while ensuring that the data they use is consistent in real-time. Firms can stop using monolithic architecture which is difficult and expensive to change without building a new version of the whole application.
Stephen Murphy, chief executive of genesis, launched the company with James Harrison in 2015 to build a microservices framework for capital markets which allows software to be developed up to 80% faster and cheaper.Stephen Murphy, genesis
genesis has completed a $3m Series A financing round from Illuminate Financial Management, a UK venture capital firm specialising in institutional financial services, and Tribeca Angels in New York. The firm has also partnered with OpenFin, the operating system which provides interoperability for applications across desktops in financial services.
Murphy previously held senior roles in firms including Goldman Sachs, Merrill Lynch, HSBC & BTG Pactual in London, New York, Hong Kong & São Paulo. He spoke to Markets Media about the changes in capital markets since genesis launched, providing a platform as a service, citizen developers, the winners that will emerge from the digitisation of capital markets and the skills that will be required in this new world.
MARKETS MEDIA: Why did you launch genesis ?
STEPHEN MURPHY, genesis: We started genesis because it was critical for capital markets to change the speed of software development and cut the length of time to market for new services. Capital markets needed to change the old paradigm of either building applications internally or buying a black box solution from a vendor.
MARKETS MEDIA: How have capital markets technology changed in that time ?
STEPHEN MURPHY, genesis: There has been adoption and acceptance of the cloud. Firms not only cut costs but can find extra alpha from crunching more data without having to permanently change their technology stack.
MARKETS MEDIA: How have capital markets benefitted from microservices ?
STEPHEN MURPHY, genesis: Microservices and the ability to develop software with low code or no code has resonated with our clients so they have been able to build scalable and resilient applications more quickly and cheaply .
For example, in May we launched Creative Studio, a platform as a service (PaaS) for capital markets. Creative Studio allows client to develop and deploy scalable and interoperable products over the web on the OpenFin operating system without needing to write any code. Applications can be delivered in hours, instead of the usual weeks and months.
There has also been a lot of client interest in Automated Quoting System (AQS) which is a complete multi-asset class ‘bank in a box’. The application can automate workflows, including post-trade, for treasury, broker dealer and wealth management clients over the web and also directly onto OpenFin’s operating system.
We have changed market perception and shown that software can be developed at low cost while meeting the requirements for resiliency of a capital markets platform.
MARKETS MEDIA: What trends do you expect in capital markets technology ?
STEPHEN MURPHY, genesis: There will be continued acceptance of the cloud. It is not just a pure infrastructure cost play but will be used by clients from end-to end: from gathering requirements for new applications to deployment in a new environment like we do at genesis. We will be launching a service for clients to manage their cloud environment.
The type of people working in capital markets is already different from when I started in 1991, but is now ripe for change. Outside finance, organisations are using citizen developers who analyse businesses and build low- or no- code solutions. The type of resources needed in capital markets will change and will not just be coders.
The mindset has changed as participants have realised they need to be part of the wave, rather than resisting. For example, ex-traders are coming to us who want to change the municipal bonds market as it is ripe for disruption and we are working with a European client on changing syndicated loans.
Legacy technology will eventually be transformed into state of the art microservices but this could take up to 15 to 20 years.
MARKETS MEDIA: Who will emerge as winners as capital markets become increasingly digital ?
STEPHEN MURPHY, genesis: Capital markets have reached and inflection point and the winners will be innovate technology firms who are embracing disruption. Incumbent vendors need to change as financial firms are investing in fintechs and strategic partnerships as they recognise that it is critical to transform.
The initiative could simplify the collection and aggregation of fixed income data to enhance trading.
Bloomberg has launched Early Alerts, which predicts changes in US dollar corporate investment grade and high yield securities, and aims to expand the machine learning model to other currencies and securities.
Early Alerts, which was launched this month, uses Bloomberg’s proprietary library of fixed income data with machine learning models to develop predictive insights for more than 16,000 US dollar denominated investment grade and high-yield corporate bonds. The model generates scores over 1-day, 5-day, and 20-day horizons. The higher the score, the greater the probability that a corporate bond will have a significant credit spread tightening or widening. Brad Foster, Bloomberg
Brad Foster, global head of enterprise content at Bloomberg, told Markets Media: “We would like to launch one or two more currencies before the end of the year.”
The model could also be extended to other securities such as government bonds or municipal bonds.
Foster continued that Bloomberg has deep and unique datasets, including pricing service BVAL, that enable a robust back-testing process to test the accuracy of the signals produced.
“As an example of Early Alerts’ demonstrated out-of-sample historical accuracy, bonds and dates with scores of 0.4 and above have seen 80% or more accuracy in identifying spread widening vs. spread tightening over the following five days from the beginning of 2015 through second quarter of 2019,” he added.
Early Alerts is available to Bloomberg Enterprise Data clients. Foster said the model is easy for both buy-side and sell-side clients to use and enables more efficient trade execution, warehousing of risk and rebalancing of portfolios.
Foster added that the model feeds into Bloomberg’s “one data” proposition.
“We want to be the one-data provide for our clients,” he said. “We want to offer simplified distribution with data that is ready to use by humans or machines.”
Transforming fixed income data
Foster added: “Fixed income markets, including corporate credit, are primed for the type of quantitative modeling, tooling and predictive power already available in other asset classes.”
Defining Fixed-Income Data, a report from consultancy Greenwich Associate, said a complete view of any fixed-income market is not likely soon but more can be done to simplify the collection and aggregation of the required data.
Kevin McPartland, head of research for market structure and technology at Greenwich Associates, said in the report aggregating both pre- and post-trade data will increase transparency. Kevin McPartland, Greenwich Associates
“Trading venues such as Bloomberg, MarketAxess and Tradeweb have proven to be particularly adept at providing their clients with unique pre- and post-trade information based on that client’s trading activity and anonymized activity from the entire venue,” he added. “However, one is unlikely to share data with the other, and as such, a complete view remains elusive.”
Bloomberg Enterprise, which produced Early Alerts, is separate from the firm’s trading platform.
McPartland continued that over the last year some platforms have opened up to allow third parties to ingest their market data, allowing those end users to both aggregate and analyze multiple data sources in one environment.
“This enables portfolio managers and traders on the buy and sell sides to run more robust transaction cost analysis calculations, counterparty analysis and risk assessments of their portfolios,” he said. “The result of such analysis is often more trading, which is then directed back to the underlying platforms, leaving everyone better off. This process, of course, is much easier said than done.”
Delays continue for FINRA approval of crypto trading platforms.
Throughout 2018, almost all business briefings with crypto trading-platform providers ended with the vendors acknowledging that the startup looked to partner with a broker-dealer or planned to file for broker-dealer status with the Financial Industry Regulatory Authority. However, that bullet point disappeared from the presentation deck in 2019.
One industry source estimated that more than 400 crypto-asset broker-dealer filings await FINRA’s approval. That equates to approximately 11 percent of existing FINRA-registered broker-dealers according to FINRA and Investment Advisor’s 2019 Broker-Dealer Reference Guide.
Only two things are keeping the approval sluice gates closed, and they are two crucial things: the determination of what is a digital security and the ability to custody them properly.
On April 3, SEC’s FinHub released its Framework for “Investment Contract” Analysis of Digital Assets, which added roughly 70 more granular questions to the four-question Howey Test.
Three months later, the SEC’s Division of Trading & Markets and FINRA issued their Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities, which enumerated the regulators’ concerns regarding custody while passing part of the regulatory hot potato to the Securities Investor Protection Corp.
Each release is a step in the positive direction, but small steps in a positive direction. The Analysis and Framework are staff opinions that come with boilerplate disclaimers that they are on rules, regulations, guidance, or statements from the respective regulators.
When the SEC and FINRA eventually approve the necessary regulations, guidance, and statements, expect a rapid bloom of broker-dealers specializing in digital assets before they disappear as rapidly as they came when the entrenched broker-dealers build or buy their digital asset trading desks.
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