CryptoCompare, the global cryptocurrency market data provider, published its February 2019 Exchange Review, offering institutional and retail investors insights into the cryptocurrency exchange industry.

The February Monthly Review provides the latest exchange rankings; an evaluation of spot vs futures volumes including both crypto exchanges (BitMEX and BitflyerFX) and traditional exchanges (CBOE and CME); and an evaluation of volumes for the top trans-fee mining and decentralised exchanges.

New charts include an overview of derivatives exchanges with volume data from OKEx, CryptoFacilities and Deribit. In addition, a short trade data analysis for the end of February covers a selection of exchanges that trade either BTC to USD or USDT.

The complete February Exchange Review can be found here.

Highlights of the macro analysis and market segmentation include:

Top Exchange Volumes—Bithumb was the top exchange by total volume in February, followed by Binance and ZB. Bithumb’s total trading volume in February was 26.8 billion USD (up 2.8% since January). Meanwhile, Binance traded a total of 18.9 billion USD (up 8%), followed by ZB at 18.1 billion USD (down 7.8%).

February Trade Snapshot Analysis—Among a selection of top exchanges that trade BTC to USD, Coinbase traded the most at the end of February with over 40,000 trades in a day followed by Bitfinex (23,000) and Bitstamp (11,800). Among the above exchanges, Coinbase also traded the lowest average trade size at 600 USD while other exchanges (Bitfinex, Bitstamp, Kraken, itBit) traded between 1500–2600 USD.

Country Analysis—Malta-registered exchanges represented the majority of trading volume, followed by those legally registered in Hong Kong and South Korea. Monthly trading volumes from Malta-registered exchanges increased 8% since January, while those of Hong Kong and South Korea-registered exchanges increased 12% and 6% respectively.

Predominant Fee Type—Exchanges that charge taker fees represented 84% of total exchange volume in February, while those that implement trans-fee mining (TFM) represented 14%. Fee-charging exchanges traded a total of 186 billion USD in February, while those that implement TFM traded 31.4 billion USD. The remaining volume represented trading by exchanges that charge no trading fees, at 3.1 billion USD.

Futures Trading—Total futures trading volume from exchanges bitFlyerFX and BitMEX totalled 54.8 billion USD in February, while volume from spot exchanges totalled 220 billion USD. Meanwhile, CME’s average Bitcoin futures contract trading volumes increased from 79.9 million USD in January to 98.9 million USD in February while those of CBOE decreased from a daily average of 8.1 million USD to 5.6 million USD in February. According to a mid-March volume snapshot, OKEx traded the highest daily derivatives volume (swaps and futures) at 1.76 billion USD, followed by BitflyerFX (1.15 billion USD) and BitMEX (708 million USD). Exchanges Deribit (67 million USD), CryptoFacilities (27 million USD), CME (61 million USD) and CBOE (13 million USD) still represented only a small proportion of this.

Fiat Capabilities—Trading volume from exchanges that offer fiat pairs did not change from January to February (63 billion USD), however that of crypto to crypto exchanges increased by 20% to 157 billion USD. Following this increase in crypto to crypto trading volume, fiat to crypto trading volume represented 29% of total spot volume, down from 33% in January.

Bitcoin to Fiat Volumes—In February, 46% of all Bitcoin trading into fiat was made up of the US Dollar, down from 48% in January. BTC to USD volumes decreased from 1.47 million BTC to 1.24 million BTC in February (-15.3%). Bitcoin trading into JPY formed 33% of Bitcoin into Fiat in February, up from 30% in January; volumes remained stable at ~0.9 million BTC. Meanwhile, BTC trading into EUR and KRW decreased by 22% and 14.6% respectively. In February, USD, JPY, EUR and KRW made up 95% of total trading from Bitcoin into fiat.

Bitcoin to Stablecoin Volumes—In February, BTC trading into USDT represented 70% of total volume (fiat or stable coin), totalling 6.24 million BTC. USDT continues to be the most popular stable coin followed by PAX, USDC and GUSD. USDT represents 98% of the total Bitcoin trading into these stablecoins.

Charles Hayter, CEO of CryptoCompare, said:

“We continue to see great interest in our monthly reports and are pleased to introduce new charts and features for our users. Real-time, accurate cryptocurrency market data is crucial to our universe of retail and institutional investors and a reliable basis for their investment decisions. Our monthly report safeguards data accuracy and integrity, to ensure consistency and confidence in the market”

The Methodology: CryptoCompare’s Monthly Exchange Review evaluates the consistency and quality of exchange data, which is incorporated into CryptoCompare’s real-time Aggregate Index Methodology (the CCCAGG), used to calculate the best price estimation of cryptocurrency pairs traded across global exchanges. It aggregates transactional data from more than 70 exchanges using a 24-hour volume weighted average for every cryptocurrency pair. Constituent CCCAGG exchanges are reviewed and amended each month to ensure that the most representative and reliable market data is used in CCCAGG pair pricing calculations.

CryptoCompare assesses exchanges on the basis of spot 24-hour volume and pricing data. The current process operates as follows: for each exchange, the 24-hour volume and price of every live trading pair is recorded. Each pair volume is compared to the total market volume for that specific pair and assigned a market share ranking. Pricing for each pair is then compared to that of the CCCAGG pair, and a percentage price difference is calculated. Finally, a 24-hour volume weighted % price difference per pair is calculated to produce a figure for how close the overall exchange pricing differences are to that of the CCCAGG.

As a general guideline, CryptoCompare assumes that exchanges with an overall percentage pricing difference of under 10% is within acceptable boundaries. The reasons for pricing differences across exchanges may be related to a number of factors that include exchange fees, jurisdiction, tax considerations among a series of other factors. It is however, the first indicator of acceptability within the CCCAGG exchange list.

Cannabis and the credit markets.

In what can be described as one small step for users, one giant leap for an industry, companies that deal in cannabis are about to get access to the U.S. credit markets to help fund their businesses. And without prejudice, thanks to a bipartisan group of lawmakers that has proposed a measure to allow U.S. banks to work with firms in the cannabis industry without fear of legal or regulatory sanction. The measure has support from commercial banks and would enable cannabis firms operating in states with legalized marijuana to tap U.S. credit markets to expand their businesses.

It might have just gotten a whole lot easier to inhale.

Currently on the legislative docket from The House Financial Services subcommittee is the Secure and Fair Enforcement Banking Act of 2019 or SAFE Banking Act. SAFE would protect banks and their employees from punishment for providing services to cannabis businesses that are legal on a state level.

Is it time to get out the lighter?

Perhaps. As Cowen analyst Vivien Azer noted in her most recent commentary, pro-cannabis measures are gaining support and steam at the state level. First, 12 members of Congress wrote a letter to FDA Commissioner Scott Gottlieb, requesting updated CBD regulations by February 22. Secondly, New Jersey Governor Phil Murphy (D) and Democratic legislative leaders reached an agreement on adult use cannabis taxation and regulation. West Virginia’s House of Delegates approved a bill that would provide state protections for banks that service the medical cannabis industry – think SAFE Act. Vermont’s Senate Judiciary Committee approved a bill that would create an adult use cannabis market and Maryland General Assembly members formed a bipartisan group to study the possibility of legalizing adult use cannabis in 2020 via legislation or referendum. According to The Baltimore Sun, the working group’s formation indicates that the state’s previously introduced legislation is not likely to pass this year.

Azer observed that according to Gallup data, polling from 2013 to 2018 showed that 81% of liberal Democrats favor cannabis legalization, compared to 62% of moderate Democrats and 44% of conservative democrats. Moreover, Gallup indicated that 46% of Democrats identify as liberal, compared to 17% conservative.

With things looking up for cannabis to go mainstream, Azer took note that Canopy Growth Corp and Sequential Brands Group (WEED) announced that Martha Stewart has joined them in an advisory role. Similar to Tilray’s partnership with Authentic Brands, WEED is leveraging established, branded partners to expand its reach with CBD products and assist with developing and positioning a broad new line of CBD product offerings across multiple categories. According to SQBG (who promotes, markets and licenses the Martha Stewart brand), approximately 70 million households contain Martha Stewart products. In addition, the brand has a retail presence in “thousands” of locations and reaches close to 100 million consumers across media platforms each month. The partnership between WEED and Stewart likely originates from WEED’s relationship with Snoop Dogg in conjunction with WEED’s LBS product line (formerly “Leafs By Snoop”) as Snoop Dogg and Martha Stewart co-host a television show together.

Stay tuned for more…

Institutions are making more use of both e-trading and sophisticated tools that help them evaluate execution results—and non-bulge bracket brokers are frequently besting their bigger rivals on this fast-evolving playing field.

Between 2017 and 2018, there was not a single change in the rank ordering of the Greenwich Share Leaders in U.S. Equity Trading, the industry-standard ranking for top brokers. However, that stability masks a huge and increasing level of turnover. Over the same 12-month period, the median institutional client was reallocating a third of their U.S. equity trading volume among brokers and that median volume allocation increased by 50% between 2014 and 2018.

For large firms with broad client bases, many of the individual reallocations are canceling one another out, dampening the aggregate effect. Nevertheless, it is becoming clear that the “stickiness” of the service-driven relationships that have long provided the foundation of bulge bracket business is being eroded.

“Our data shows that broker-client relationships are becoming less stable. In fact, the historic stability advantage enjoyed by the bulge bracket firms almost has evaporated almost completely in just four years’ time,” said Ken Monahan, Senior Analyst for Greenwich Associates Market Structure and Technology and author of Customer Retention in the Age of Electronic Trading.

Execution Results Trump Relationships
For firms looking to either defend themselves against reduced client loyalty or to lever it to capture share, it’s important to know what is driving the reduction. Increasing turnover levels are driven by three interrelated factors: 1) The expanded use of electronic execution and the implicit ease with which electronic execution flow can be programmatically re-allocated, 2) The increasing sophistication with which institutions are evaluating their sell-side brokers, and 3) The surprising fact that by some measures non-bulge brokers are doing a better job than bulge-bracket firms at meeting clients’ e-trading needs.

The increasingly universal use of tools like transaction cost analysis has now made it possible for institutional investors to collect transaction data over time on a per-broker, and even per-algorithm, basis. This data is then used to determine the execution quality and to reallocate their flow accordingly.

“When it comes to e-trading client satisfaction, non-bulge bracket firms has pulled ahead in the rankings,” said Ken Monahan.

Looking forward however, the bulge bracket sits at the nexus of client trade flows and data that enables them to use data science and machine learning to rebuild their competitive advantage. For example, it’s possible that discernable changes in client message traffic could reveal nuances in execution outcomes that may presage a future reduction in that client’s volume allocation to them. “With data as a guide, timely interventions by salespeople can reduce the level of client volatility, bringing the technological revolution in trading full circle—by enhancing the importance of relationship management,” says Ken Monahan.

Hear from our advisory board members of the upcoming Women in Finance Awards Asia, planned for May 3rd in Hong Kong, about their experience with mentoring, giving back and keys to success.

What have been the keys to success in your career?

Carrie Cheung, BNP Paribas: One of the most important factors has been to be passionate about what I do, which has driven me to keep learning and developing. The other has been to be collaborative, both internally within my organisation and externally with the broader industry; I believe more can be achieved when we work together.

Azila A Aziz, Kenanga: I have had a career built on the long game – I play chess, not checkers. I relate to the game of chess where each piece has a unique role, unique abilities, and unique limitations, just like the ecosystem of the workplace. My technical expertise, functional skills and industry experience were the elements that had elevated me to a Management role. I have progressively improved on my approach and today, I embrace and practice mindfulness and authenticity in my leadership style.

Jacqueline Loh, AIA: I’ve never ever thought hard about the keys to success. I’m a natural optimist, I really like people and I have a technical mind. The rest just happened.

What has been your experience as a woman in finance, historically a male-dominated field?

CC: While finance is still a male-dominated field, it is encouraging to see more and more women in the industry and in senior leadership roles. There is increasing momentum behind the push to create a more gender balanced world; certainly in our firm there have been many steps taken over the years, not least signing the Women in Finance Charter, which showcases our commitment to increasing representation of senior women in the bank. In my experience, it is about leadership – inclusive leadership – that values the benefits of a diverse workforce, as we build a common purpose and focus on delivering results.

AAA: So much has been written about why women are under-represented in the financial world let alone in senior leadership positions – from poor childcare provisions to institutional bias. But what can be agreed upon are the common traits of great leaders, and that women tend to have a high level of emotional intelligence and that has a profound impact on the way they run companies. Being able to thrive in the face of adversity is necessary to be successful long-term. I am always motivated by opportunities to grow and improve. I continuously improve on being emotionally smart, reminding myself to be self-aware and to have an executive presence before I dive into developing others.

JL: It’s been a very positive and enriching journey. I’m a trader, which is historically male dominated. Over the past few years, the interest in trading analytics, liquidity and impact costs management has made trading more transparent to the outside world. As traders’ performances could be measured quantitatively, it became easier to demonstrate good performances in numbers. This benefitted women who, in the past, might not have as vocal in communicating their capabilities.

Have you had any especially notable mentors/role models who have helped you along your career path?

CC: I have been fortunate to have worked with managers that have offered me a lot of support and encouragement to advance my career. Their belief in me was and continues to be a great motivator for me to keep pushing the envelope.

AAA: One of my early bosses was a tough mentor. He hired me being the only female at the futures trading desk which tells me he was clearly the catalyst for change, challenging structures that disadvantage women while at the same time remaining committed to the success of the organization. However the most influential person in my life and my go-to person is my mother. She encourages and enlightens me towards fresh perspectives on matters that I could not have understood if not for her allowing me to see them through the eyes of another.

How do you “give back”, in terms of for example charitable causes or mentorship?

CC: I volunteer as a mentor through BNP Paribas’ Mentorship programme in the field of finance, and also outside of the industry, as I find it crucial to promote the importance of women in leadership. I am currently developing my skills to this effect through a formal executive coaching course, to help me become a more effective mentor.

AAA: I trained myself to get comfortable with coaching which promotes active learning and creativity. Along the way, it helps foster healthy working relationships between a leader and those who work with them because they know they can count on each other.

JL: I have been fortunate in that the vast majority of my bosses (both men and women) have been supportive and gave me invaluable professional guidance. Apart from that, I really like Margaret Thatcher. She was ahead of her time, and brought her own indomitable style into the world of British politics. I spent a lot of time with new graduates, helping them align their strengths, their career choices with the opportunities available in the market. I wish someone had done that for me when I was starting out.

What would be your advice to young women considering a career in finance?

CC: Young women entering finance need to know where their passion lies, be willing to take on challenges, be confident and, last but not least, remember to keep a work-life balance by finding interests outside of work.

AAA: Have courage, passion and tenacity.

JL: Be grown up about the choices you make, know yourself and don’t be afraid to take the path less travelled.

How has the cause of women in finance evolved/advanced during your career?

CC: The finance industry has been paying more attention to this over the past 10 years, and there are now more programmes supporting diversity in the field. It is incumbent on firms like BNP Paribas to drive positive change, be it by signing the Women in Finance Charter, the UN’s Women Empowerment Principles in 2011 or implementing gender targets for participation in leadership programmes to ensure there’s a strong pipeline of female talent for key roles. I’m proud to say that 43% of our global Board of Directors are women.

AAA: Today it is encouraging to note of the growing number of women involved in the financial world as compared to twenty years ago. However, women in leadership positions remain under-represented. In Malaysia, the government has urged companies to have at least 30% of women in leadership positions in the corporate sector by 2020. In the context of the financial services industry, I’m proud to say that Malaysia has consistently seen women taking up important leadership roles.

JL: I started off my career as a derivatives trader in London. At that time, there were few derivatives traders and few women. I was one of 2 women in a team of 10 people. Now I’m happy to see more women pursue their passion in STEM (Science, Technology, Engineering, Maths) subjects and have the skillsets to take on a wider set of roles. I’m sure the ratio of most trading desks these days will be closer to 50/50. That’s what it is at my firm!

What is the importance of an event recognizing top women in finance in Asia?

Joel Hurewitz, Instinet: Diversity has to be actively cultivated in every industry; Financial Services is no exception. Diverse management teams have been proven, in research study after research study, to be more productive and perform better than those that are not as diverse. It was an easy decision for us to be an active participant in an event specifically geared to celebrating the powerful contribution that women play in finance across Asia. Nomura and Instinet have a global employee organization called “WIN” (Women in Nomura). The upcoming Women in Finance Awards event aligns very well with the goals of our longstanding gender diversity program.

Kevin Rideout, HKEX: I think in general it’s just always good to recognize continuous achievements. Whilst I feel the world has much more attention on equality, the journey still continues and recognizing top women in finance particularly in Asia is a significant catalyst in getting to the destination.

David Rogers, MD, Head of Trading, Asia-Pacific, State Street Global Advisors: Because it serves to recognize the key role women play in our industry. Although under-represented, there are supremely talented women in very important positions. Further, it provides an example of why younger women should consider a career in the financial industry, that recognition can be achieved, and the industry is being inclusive and progressive.

How can the industry encourage even more gender diversity in the Asia marketplace?

JH: There are several ways the industry can increase diversity, such as actively promoting and recognizing top talent among the female workforce in events like WIFA, broadening the way the industry recruits new hires, and evolving and expanding senior networking opportunities. Greater transparency and access should result in a continuation of this positive momentum.

KR: My view on this is that we need to be striving for equality. The equal weighting of an array of voices across gender, background and experiences is of unquestionable value.

DR: Having balanced teams – which include people of different backgrounds – makes a huge difference to the intellectual output produced, the creative flair, as well as the day-to-day, operational output in a practical sense. Women add a completely different perspective/approach when it comes to problem solving, idea generation and help foster a more rounded (and grounded!) culture to any team.

What can men do to further support the advancement of women in finance?

JH: There are a lot of “unconscious bias” behaviours that may get in the way of encouraging a more diverse workforce. Raising awareness of those behaviours can go a long way. Once we become sensitive to how certain activities may be inadvertently biased in some way, we can stop doing them. Nomura Group’s WIN organization has a “Male Mentors” program that provides education and encourages active participation from men around the firm – particularly senior managers — in activities that promote diversity and the advancement of women. Those with management responsibility can try to develop a habit of actively seeking out diversity — whether it is diversity of thought, experience, gender, ethnicity, style, etc. — when we’re hiring new employees, staffing new initiatives, or assigning important projects. If we put a higher premium on seeking different perspectives, fresh thinking, and challenging the status quo, we will be more likely to see greater diversity.

KR: The whole world needs to take a view of equality. It is not necessarily about the advancement of women, it is the levelling of the playing field and having the natural mindset choices and decisions are made irrespective of sex. So in short it’s a reset of the mindset.

DR: It is critical men provide support. In my experience, men are not the sole ‘problem’ in terms of why women are under-represented, but as the majority group in the financial industry, they have an enormous responsibility to provide the right environment in which women can thrive and perform. It has to be a collaboration! Leading men in the industry should be advocates for all the great work women do, demonstrating this through active involvement, hiring policy and public viewpoints about the issue.

Learn more about Women in Finance Asia Awards here: marketsmedia.com/women-in-finance-asia

Are artificial intelligence and machine learning best applied to automate existing poor processes or to transform the process by avoiding the task in the first place? SimCorp thinks the latter.

By Anders Kirkeby, Technical Fellow, Vice President – Enterprise Architecture, SimCorp

Machine learning and artificial intelligence (AI) will transform our lives in the decades to come. But machine learning also has a role in the more near term to address concrete problems users currently face on a daily basis. This article explores how SimCorp is looking to exploit these opportunities.

At SimCorp, we have set up a dedicated research function, SimCorp Technology Labs, to pursue our ambitions in the machine learning space as well as in high performance computing. Together with clients, we have developed a list of machine learning-based product ideas, which we are busy qualifying. The most promising ideas will be turned into prototypes and verified by our clients.

Robotic process automation and disparate systems
There has been a lot of talk about robotic process automation (RPA) in the last couple of years and often in connection with machine learning. The two can certainly be combined. But too often the good intentions based on acquiring shiny new toys are misplaced. RPA makes it easier to create automated workflows in an organization with poorly integrated systems. If on the other hand, you consider a platform like SimCorp Dimension, which is integrated across functional areas, you are better off using more of such a platform than using RPA as a band aid to solve integration challenges. That being said, there are use cases where RPA is the right tool, particularly around frequently changing client-facing tools.

When RPA and machine learning are mentioned together, it is typically about letting the machine learn to perform a poorly described series of manual tasks and thus automate the execution of the tasks. Imagine that a settlement break is raised by a post-trade processing system and demands manual intervention to resolve a data issue that prevents it from going through automatically. With enough data, you can train a machine learning component to identify the root causes. But we are not yet at a stage where the resolution is handled by a computer calling your counterparty to negotiate who got the nominal wrong. As a result, we are only automating the easy part of the process, i.e. the root cause analysis within the data you can see, not the external interaction. The human operator will still have to perform that part of the task and his or her day-to-day experience is not vastly different.

Machine learning’s potential with integrated software
Within the integrated system SimCorp Dimension, we offer both the underlying investment book of record and the portfolio and order management tools to support the full lifecycle of a trade. In other words, our integrated software solution has visibility of any post-trade effects resulting from specific choices made pre-trade. In one of our recent prototypes, we leverage that access to allow the system to tell the user creating the trade that with the current combination of key trade attributes like counterparties, instrument and currency, it is likely to fail straight-through processing. Ideally, the front office user is able and willing to take the big picture view and will gradually learn to listen to the guidance provided by the machine learning-based component system. The gain is to ultimately save manual processing downstream, which will fundamentally change processes and reduce overall costs.

Traditionally, traders are perhaps not overly concerned about post-trade processing costs. If that remains unchanged, the functionality can still be used very early in the post-trade processing. Here, the aim is to identify a set of settlement or matching breaks before they become known to the system via subsequent attempts to process the trades. If trades are processed continuously, this may not make much of a difference, but many settlement and matching processes are run in batches or at least when users aren’t around to investigate. This leads to processing delays and in the worst case you may miss a reporting deadline.

Attacking friction in otherwise automated processes by preventing an issue from appearing in the first place is a bit like the crimes detected and prevented before being committed in the science fiction movie Minority Report, if anybody remembers that one. But contrary to a Tom Cruise of the future, our everyday hero users can get their hands on this functionality today via our prototypes.

Note: The mentioned functionality is still in a prototype stage since we would like to get more feedback from hands-on users before we finalize this as product features

More than half of asset managers have seen no improvements in transaction cost analysis in fixed income despite more data being reported under MiFID II.

A survey from Liquidnet University, Alpha in Execution: Fixed Income Trading, found that 56% of respondents have not seen any improvements in TCA since MiFID II went live in the European Union at the start of 2018. Liquidnet, the institutional investor block trading network, interviewed 37 firms with total assets under management of $13.9 (€15.8) trillion between December 2018 and January 2019.

Rebecca Healey, head of EMEA market structure and strategy at Liquidnet, wrote in the report that the buy side still finds it hard to find the data needed to enhance the execution decision-making process.

“Widespread industry frustration remains at the perceived lack of data quality available from Approved Publication Arrangements (APAs) today, alongside the challenges in interpreting best execution reports,” she said. “Participants complain of incomplete and inaccurate data, unnecessary complexity in terms of different fields to be reported and a lack of industry standardisation leading to the need to allocate valuable resources to clean up datasets before they can be used to derive real value.”

MiFID II extended best execution requirements from equities into other asset classes and mandated new transparency and post-trade reporting in fixed income for the first time. However, one quarter of respondents said they have yet to see any benefit from greater transparency.

Healey continued that the need to access alternative datasets from standard TCA remains a considerable challenge.

“45% of respondents acknowledge the greater availability of pre and post-trade data, but the lack of standardization complicates the ability to aggregate and analyse the output,” she added.

As a result, fund managers need to invest in technology to manage increase amounts of data and the trading desk will need to learn new skills. Three quarters of respondents said collating accurate data is the priority to validate successful implementation of their best execution policy.

Liquidnet’s @_RebeccaHealey shares her thoughts on the increased automation within the execution process for fixed income trading and what this means for the market; https://t.co/T65YH0Jzrz pic.twitter.com/UojAUAulZq

— Liquidnet (@Liquidnet) March 13, 2019

“Traders must be more IT aware and data driven in their approach, utilising available technology to feed analysis back into the pre-trade selection process,” said Healey.

Automated trading

One EU asset manager said in the Liquidnet report: “Automated trading will become much more important and there will be a shift to exception trade handling from the desk. Relationships and expertise of where to trade what and what data becomes available will become increasingly important.”

Chris Concannon, president and chief operating officer at MarketAxess, told Markets Media last month that fixed income is at the start of evolutionary change as  investors are looking to increase their use of algorithms and other electronic products.

He said institutional investors can get better pricing, and better meet their best execution requirements, with electronic trading. However, it is harder to define best execution in fixed income than in equities, which are traded via a central order book on an exchange.

“MarketAxess is in the process of  defining best execution, the equivalent for VWAP [volume weighted average price] in bonds, and has provided huge cost savings in its Open Trading product,” he added.

Open Trading is MarketAxess’ all-to-all trading model which allows the buy side to also supply liquidity, rather than the traditional model of only banks supplying liquidity to investors.

Buy-side spending 

A report from consultancy Greenwich Associates last month said that TCA is already ingrained in the equity workflow, but usage will increase in foreign exchange and cash fixed income this year. In 2018, 88% of equity desks globally performed TCA, compared to only 38% of fixed-income and 60% of FX desks.

“As firms continue to place even greater importance on efficiency driven by insights from data, making sure traders are armed with the right technological tools will be even more critical,” wrote Greenwich. “Regulation and other compliance requirements will further drive the importance of data and analytics on the trading desk, such as TCA and other best-execution metrics. Firms should use this period of rising budgets to invest in technology.”

Institutions are making more use of both e-trading and sophisticated tools that help them evaluate execution results—and non-bulge bracket brokers are frequently besting their bigger rivals on this fast-evolving playing field.

Between 2017 and 2018, there was not a single change in the rank ordering of the Greenwich Share Leaders in U.S. Equity Trading, the industry-standard ranking for top brokers. However, that stability masks a huge and increasing level of turnover. Over the same 12-month period, the median institutional client was reallocating a third of their U.S. equity trading volume among brokers and that median volume allocation increased by 50% between 2014 and 2018.

For large firms with broad client bases, many of the individual reallocations are canceling one another out, dampening the aggregate effect. Nevertheless, it is becoming clear that the “stickiness” of the service-driven relationships that have long provided the foundation of bulge bracket business is being eroded.

“Our data shows that broker-client relationships are becoming less stable. In fact, the historic stability advantage enjoyed by the bulge bracket firms almost has evaporated almost completely in just four years’ time,” said Ken Monahan, Senior Analyst for Greenwich Associates Market Structure and Technology and author of Customer Retention in the Age of Electronic Trading.

Execution Results Trump Relationships

For firms looking to either defend themselves against reduced client loyalty or to lever it to capture share, it’s important to know what is driving the reduction. Increasing turnover levels are driven by three interrelated factors: 1) The expanded use of electronic execution and the implicit ease with which electronic execution flow can be programmatically re-allocated, 2) The increasing sophistication with which institutions are evaluating their sell-side brokers, and 3) The surprising fact that by some measures non-bulge brokers are doing a better job than bulge-bracket firms at meeting clients’ e-trading needs.

The increasingly universal use of tools like transaction cost analysis has now made it possible for institutional investors to collect transaction data over time on a per-broker, and even per-algorithm, basis. This data is then used to determine the execution quality and to reallocate their flow accordingly.

“When it comes to e-trading client satisfaction, non-bulge bracket firms has pulled ahead in the rankings,” said Ken Monahan.

Looking forward however, the bulge bracket sits at the nexus of client trade flows and data that enables them to use data science and machine learning to rebuild their competitive advantage. For example, it’s possible that discernable changes in client message traffic could reveal nuances in execution outcomes that may presage a future reduction in that client’s volume allocation to them. “With data as a guide, timely interventions by salespeople can reduce the level of client volatility, bringing the technological revolution in trading full circle—by enhancing the importance of relationship management,” says Ken Monahan.