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CAT Faces More Delays

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GlobalTrading
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By Rob Daly

Two significant events in the development of the SEC-mandated Consolidated Audit Trail took that place during the last week of January could lead to further delays.

On January 29, the SEC appointed Manisha Kimmel as senior policy advisor for regulatory reporting, or more informally the “CAT Tsar,” and who reports to SEC Chairman Jay Clayton. Kimmel most recently was the head of regulatory compliance, wealth management at fintech vendor Refinitiv and served on the CAT NMS LLC’s Advisory Committee.

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“SEC Commission Kara Stein pushed for a CAT Tsar who would report directly to the SEC chair to make sure that it would make it over the line,” Tyler Gellasch, executive director at the Healthy Markets Association, told Markets Media. “Frankly, for the first time, we have one in January 2019. Not only do we have one, but we also have someone who is deeply experienced on the issues and has the expertise instead of having a group of people where each one is one-tenth a project manager and not necessarily incentivized for success.”

Two days after the SEC’s announcement, the Wall Street Journal reported that the consortium of self-regulatory organizations, exchange operators and FINRA, decided to switch plan processors from Thesys CAT, which the consortium of SROs selected in January 2017, to market regulator FINRA.

“It’s not surprising that those two announcements came roughly at the same time,” said Gellasch.

The SEC must have been well aware that something was happening, speculated James Angel, associate professor of finance at Georgetown University’s McDonough School of Business. “They would be the dumbest critters on the regulatory planet if they did not inform the SEC.”

The project has been plagued with delays since the SEC adopted Regulation NMS Rule 613 that mandates the SROs develop and implement the market surveillance platform on July 18, 2012.

The SEC granted the SROs two extensions that permitted them to submit the original plan for the CAT on September 30, 2014, 519 days from the original date. The SROs then submitted three amendments to the plans on February 27, 2015, December 24, 2015, and February 8, 2016.

Under the original plan, the project had a three-phase rollout that should have gone live on November 15th of 2017, 2018, and 2019. However, the consortium requested an exemption that would allow the project to push the launch of the project’s first phase to November 15, 2018, citing delays in the platform’s development, which the regulator did not grant.

In August 2018, Brett Redfearn, the director of the SEC’s Division of Trading and Markets, issued a statement that his division “does not expect to make enforcement referrals concerning industry members for failure to report data to the CAT if the CAT is not sufficiently developed to receive that data.”

At the same time, the Division of Trading & Markets expects industry member to works with the SROs and make a good faith effort to implement the platform “as promptly as practicable.”

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Georgetown’s Angel expects that there will be additional delays. “When you are changing vendors this late in the game, it is obvious that it is going to cause delays,” he said.

Whether it is an issue of changing the database or the published specification to which the broker-dealer community has been coding their systems, Angel is unsure. “It could be the matter of going back to the drawing board, which is a common occurrence with major IT projects like this.”

However, James Toes, president and CEO of the Security Traders Association, does not assume that the change in plan processors with equate to another significant extension to the deadline.

“I would caution people not to think like that because we do not have enough information,” he said. “Maybe these conversations were taking place in October and November, and we do not know.”

Moving Beyond Cost Cuts

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GlobalTrading
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By Shanny Basar

Cost-cutting by the financial services industry has not led to an adequate increase in return on equity and firms need to look to use technology to raise productivity according to a report from PwC.

In a report, The productivity agenda: moving beyond cost reduction in financial services, PwC said many banks are still struggling to earn their cost of capital, typically 8% to 12%, and even in asset management there is downward pressure on margins and profitability.

“Managed funds, in particular, are under competitive threat from lower cost exchange-traded funds, and asset owners are increasingly refusing to pay the fees historically commanded by private equity firms,” said PwC.

The report continued that cost-cutting measures have not been enough to combat the downturn, despite institutions shutting down whole businesses, reducing their geographic footprint, and ‘firing’ clients.

PwC identified six areas where firms should focus:

More than half, 52%, of respondents in the PwC survey believe that new productivity-based measurements and initiatives would be implemented in their organisations in the coming year. The report acknowledged that measuring productivity in the front office is complicated because tasks tend to be less systemic and people are usually more resistant to being monitored.

“But how senior bankers and relationship coverage people or top insurance agents and wealth managers spend their time can determine a financial institution’s success,” said the report. “In our experience, most of the industry is simply running blind in terms of what employees are actually doing at a task level. And if you lack baseline information, it’s tough to figure out how to measure productivity or how a transformation is progressing.”

Digital workforce

PwC said most firms own tools and technologies to create a productive digital workforce but successful execution has proved challenging. “Quite often, the issues that arise — and their solutions — are profoundly human,” added the report.

The survey found that that nearly three quarters, 71%, of respondents cited poor implementation and 59% cited a lack of a co-ordinated strategy as reasons for not achieving success in using tools such as robotic process automation and artificial intelligence.

In the case of artificial intelligence, most institutions said that the main challenge is not the technology itself but proper governance.

“Proper selection of applications for conversion, the management of regulatory challenges to the use of the cloud (particularly the public cloud), strategic decisions around cloud provider redundancy, a careful approach to data privacy issues, and thorough evaluations of which new applications can most benefit by employing the cloud are most often the determinants of success,” said PwC.

Accenture

Accenture said in a report last year, Capital Markets 2022 – How are Capital Markets being Reshaped by Digital Disruption, that three digital trends will transform capital markets – changes in discovering prices and providing liquidity leading to a shift in power between sell side, buy side and market infrastructure providers; advances in cutting-edge technologies such as AI and distributed ledger technology; and digitalization of value chains.

Markus Boehme, Accenture

Markus Boehme, managing direct in Accenture Capital Markets Strategy, said in a video on the consultancy’s blog: “Despite two decades of electronic trading, there’s still a lot of ground to cover – both in sales and in post-trade. On the latter, we think there could be as much as $150bn dollars of costs which digital transformation could reduce—or close to fully eliminate.”

 

 

Post-Trade Investment Continues To Rise

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GlobalTrading
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Server racks with telecommunication equipment in server room

Brian Collings, chief executive of Torstone Technology, which provides post-trade securities and derivatives processing technology, said the trend for increased post-trade investment has continued this year as firms review their medium-term strategies after MiFID II.

Collings told Markets Media: “Last year MiFID II consumed a lot of resources. This has led industry participants to re-assess their medium-term strategy and seek more flexibility and agility.”

MiFID II went live in the European Union at the start of 2018 and the scope of the regulation, which covered multiple asset classes, consumed budgets and effort as the industry prepared to be ready in time.

Brian Collings, Torstone Technology

“The trend for increased post-trade investment has continued this year,” added Collings. “Activity in Asia is also picking up as firms look to consolidate across the region.”

He continued that total cost of ownership continues to impact firms’ operational processes, and there will be more margin pressure, which may lead to further consolidation. For example, last month Shore Capital acquired rival Stockdale Securities to create London’s fourth-largest corporate broking firm.

Collings said: “Last year one client consolidated companies they had acquired across multiple asset classes. We adopted a phased approach to bringing their securities and exchange-traded derivatives processing onto one post-trade system to give a joined up view of their portfolio.”

Automation across asset classes has significantly improved according to a white paper in September last year from  Torstone and Celent, a research, advisory, and consulting firm. The report said: “As more asset class trading electronifies and adopts electronic trading platforms in the front office, they will need to be complemented by automated workflows in the post-trade arena.”

Arin Ray, Celent

Arin Ray, senior analyst at Celent and author of the paper, said in a statement: “Improving automation levels in post-trade will require modernizing back office systems with new technology based on latest standards and frameworks, and simplifying the complex patchwork of systems accrued over the years. New technology such as cloud, process automation, and engagement models such as managed services will be important levers for improving efficiency in the next phase of this journey.”

Expansion

Torstone Technology said this month that it is doubling the size of its London office after growing  revenue by over 50% last year from 2017. The firm said in a statement that it increased staff by more than 50% last year and signed two large European clients in the last quarter.

“We aim to continue growing through geographical expansion in Europe,” added Collings. “We are also very much looking to make progress in North America and Canada over the next three to six months.”

Torstone currently has clients in the UK, Germany, the Netherlands and Norway, and is looking to expand further into Scandinavia as well as France, Belgium, Spain, Italy, Portugal, Luxembourg and Switzerland.

Collings said the expansion strategy also includes focusing on brokers who trade futures and options. “Our platform has several securities modules and so can provide a unified view across asset classes which is an attractive option,” he added.

In addition the platform provides transactional data. “We are also in the Big Data space and can combine structured and unstructured data to provide analysis back to the front office,” Collings said.

M&A

Last year was very busy for mergers and acquisitions of financial technology providers and 2019 is set to maintain the same pace according to consultancy Aite Group.

For example, SS&C Technologies acquired Eze Software; custodian and asset manager State Street Global purchased Charles River Development, the front and middle office platform; and Nasdaq has completed its deal to buy Sweden’s Cinnober Financial Technology.

Virginie O’Shea, Aite Group

Consultancy Aite Group’s report, Top 10 Trends in Institutional Securities & Investments, 2019: More M&A Ahead, has predicted that that this year is likely be just as busy as 2018 for technology acquisitions.

Virginie O’Shea, research director at Aite, said in a webcast to discuss the report: “Custodians and market infrastructure providers want to expand into data services and and get involved in the full end-to-end trade life.”

Torstone also faces increased competition from new fintech providers.

Collings said: “There is a high barrier to entering post-trade in securities and derivatives processing and accounting. But although our company is relatively young, our product is mature.”

 

Conquering Fear in Trading

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GlobalTrading
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double exposure business concept with magnifying glass zoom and focus on coins idea for finance,stock graph and banking background

By Storm Copestand

You’ve been studying and learning how to trade for months, maybe even years, you know the markets and you have solid technical skills. When you trade on demo you do well and your account is profitable. Then why can you not replicate this in your live trading account? Why do lose, or remain at break even?

The difference is what is happening in your brain when you begin to trade with your own capital.

When a trader is suffering from fear, these are normally the outcomes:

Closing winning trades short in fear of giving profits back
Hesitate to pull the trigger because you fear a loss
Hanging on to losing trades because you fear taking the loss
Taking unplanned trades because you fear leaving money on the table
As soon as you enter a trade, your emotions begin to impair your ability to make rational decisions. If a few of your positions go against you, you start to feel uncertain and this discomfort gradually changes into stress.

Stress triggers the amygdala, located in the limbic brain. It’s primary function is to keep us alive at any cost – and this is where the fight or flight response comes from. The issue here is that our brain cannot tell the difference between real danger to life, such as a man eating tiger approaching, or an imagined threat, such as a 1% loss on your trading account.

When stress is high cortisol is released, the neo-cortex, or thinking brain, starts to shut down and we have trouble focussing on small tasks. Extended periods of stress leads to our physical health deteriorating and ultimately burn-out.

The fact is, that in trading we cannot eliminate fear or uncertainty, but we can learn to manage and reduce it.

We can retrain our mind to manage fear by learning how to regulate our emotions. Using mindfullness, breath control and relaxation methods, you can learn to manage the emotions, and stop the fight/flight response before it begins. You will start to notice that you are no longer being taken over by your emotional responses to fear and uncertainty when your capital is at risk.

Reducing fear and uncertainty can be done simply by having a watertight trading plan, and sticking to it.

Your mind is adaptable . By learning the potential of your mind, and it’s potential to change and combining that with your own determination to learn how to work with your mind and emotions you can develop your mind from short-term survival instincts to long-term probability management. Are you ready to make the necessary changes?

Storm Copestand is a qualified Rapid Transformational Therapist, and Certified Hypnotherapist specialising in helping traders overcome mindset and psychological blocks.

Turquoise And Plato Extend Partnership To Lit Auctions

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GlobalTrading
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Turquoise Plato set records for large-in-scale trades on the London Stock Exchange’s trading venue last month, continuing on from a record 2018 and after extending their partnership to Lit Auctions at the end of last year.

Dr Robert Barnes, chief executive of Turquoise, told Markets Media that Turquoise’s Lit Auctions functionality went live in December 2017 and the cooperation with Plato Partnership was extended to this offering at the end of last year.

He said: “We also removed rebates on our lit book last November, so with the new tariff structure and hardware refresh this provides further opportunities for investors to achieve best execution.”

Plato Partnership is the not-for-profit industry group representing asset managers and broker dealers which aims to improve market structure and achieve better results for end-investors. In September 2016 Plato announced the creation of Turquoise Plato in collaboration with pan-European multilateral trading venue which brought together the buy side, sell side and a trading venue for the first time in a formal agreement, in order to increase efficiencies and reduce costs in anonymous European equity block trading.

Turquoise rebranded its dark trading venue as Turquoise Plato and the two partners agreed to jointly promote the service  and co-develop anonymous European equity block trading services.

Barnes said: “Turquoise Plato Lit Auctions is pre-trade transparent and offers potential price improvement to half of the bid-offer spread. Turquoise Plato Lit Auctions is differentiated from other mechanisms because it is fully multilateral and offers trading in the full range of sizes from small to above large in scale – with more than €10m as the biggest trade to date.”

Turquoise Lit Auctions are triggered when the venue receives matching orders from its members. Members then have a 50 millisecond window to submit any further orders to the auction before a further 50 millisecond randomised uncrossing period begins.

MiFID II, which went live at the start of last year, introduced double volume caps on equity trading in dark pools in order to increase transparency and shift trading to lit venues. However large-in-scale trades above a specified size and trades in periodic auctions on lit venues are both exempt from the caps, so their volumes have increased and are expected to continue to rise.

Barnes continued that activity in periodic lit auctions grew in tandem with the introduction of MiFID II and the double volume caps.

Robert Barnes, Turquoise
Robert Barnes, Turquoise

“After the first suspension of stocks under the double volume caps was lifted in September last year, there was a surge in Turquoise Plato continuous midpoint activity,” he said. “We observed at the same time that volumes via Turquoise Plato Lit Auctions did not return to zero, which demonstrates that investors value the benefits of midpoint services and that periodic lit auctions are not a substitute for midpoint dark pools.”

He added that investors can also include Turquoise Plato Lit Auctions within lit order book algorithmic strategies. “This adds potential to trade at midpoint and outperform instances without Turquoise Plato Lit Auctions that would require the lit algorithm to cross the full bid offer spread to complete the order,” said Barnes.

He continued that Rosenblatt Securities’ analysis of 2018, after the implementation of MiFID II,  shows a reduction in dark pool trading but a bigger concentration of activity in Turquoise Plato.

More than €800bn ($908bn) has been traded by investors achieving price improvement at midpoint using Turquoise Plato services including Turquoise Plato continuous midpoint, Turquoise Plato Block Discovery and Turquoise Plato Lit Auctions since launch according to Barnes.

“To put this in context, Turquoise midpoint volumes grew from €39bn in 2013 and to €213bn for the full year 2018,” he added.

Barnes continued that Turquoise Plato had a record 2018 and the growth of LIS orders and Turquoise Plato Block Discovery shows the confidence of active asset managers in being able to trade in larger size before the closing auction.

“In January one LIS trade was €17m and many were in excess of €10m which is 1,000 times larger than the average trade size on continuous lit and dark order books,” he added. “On January 31 2019 Turquoise Plato Block Discovery traded a record €653m in a single day, for context this compared to a total volume of €10m in the first month of launch.”

Plato Partnership said on its website that Turquoise Plato Block Discovery had a record weekly euro value traded in the week ending 1 February 2019 of €2.6bn, 5% more than the previous high in February 2018.

The website said Turquoise Plato Block Discovery has traded €164.5bn between launching in 2014 launch and the end of last month, of which 97% has traded since the cooperation agreement was announced in September 2016.

Esma review

The European Securities and Markets Authority issued a call for evidence on periodic auctions in November last year as the regulator said there are concerns that frequent batch auctions may be used to circumvent the double volume caps.

However, one third of investors said innovations such as periodic auctions and new block crossing platforms have improved their ability to source block liquidity according to a survey from consultancy Greenwich Associates. MIFID II Transforms European Trading, the study commissioned by Refinitiv, found that 33% of investors agreed that block liquidity has improved under the MiFID II regulations. One fifth disagreed.

Buy side responses to the Esma review backed up the view that investors find periodic auctions useful.

London Stock Exchange Group wrote in its response that periodic auctions offer a new execution channel for participants to meet their best execution requirements, which is an integral part of MiFID II.

“Some academic experts argue that frequent batch auctions provide a potential solution to latency arbitrage due to the discrete-time matching mechanism, implemented by a random end time, provides improved execution analytics and this is demonstrable with data from independent analytics providers which shows that with continuous matching this can cause the price to move immediately after the trade takes place,” added LSEG. “Best execution is optimised when price formulation is maximised (and potentially undermined if there is zero price formulation).”

The exchange continued that Turquoise data also shows an extremely low amount of self-matching – just 0.02% of trades are self-matching of orders of the same size arriving within the 100 milliseconds, the maximum duration of an auction call period.

ETF Flows Dominated By Fixed Income

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GlobalTrading
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screenshot-2019-02-13-at-12-34-50-amBy Shanny Basar, Markets Media

Fixed income exchange-traded funds listed in Europe gathered three-quarters of the total ETF inflows in the region last month as traditional managers look to enter the market.

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Antoine Lesné, head of SPDR ETF strategy & research EMEA at State Street Global Advisors, said at a briefing last week that fixed income flows into European ETFs last month were $6.7bn (€5.9bn), out of a total of $8.9bn.

Lesné said at the briefing: “There has been a good start to the year for ETF flows and one of the best for fixed income. Investors favoured sovereign over corporate risk.”

SSGA’S flash flows report for European ETFs for January said all fixed income sectors saw positive flows. The report said: “Government was the main driver, gathering $4.3bn last month and continuing the trend we saw through 2018.”

Flows were also evenly spread between investment grade and high-yield, which gathered $586m and $438m respectively.

Hector McNeil, co-chief executive of HANetf, Europe’s first independent ‘white-label’ Ucits ETF platform, said in an email that fixed income has traditionally lagged the growth of equity strategies in the passive and ETF space. However, there has been a considerable increase in new products which have increased assets under management.

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“Alongside classic beta, smart beta and active strategies have emerged and added value to the ETF world, none more so than for fixed income, where it has had a positive effects on returns,” he added.”

McNeil continued that classic bond indexes based on market capitalisation do not work so well for investors as they could get exposure to high yielding, riskier bond issuers.

“Eventually active ETFs will be the largest segment in fixed income over time,” he said. “At HANetf we are having a significant number of white label ETF discussions with traditional fixed income asset managers looking to enter the ETF space.”

Last month Tabula Investment Management, a new European fixed income ETF provider, launched a fund giving beta exposure to credit default swaps through positions in the European iTraxx crossover index.

Michael John Lytle, chief executive of Tabula, said in an email that existing fixed income ETFs are mainly tracking credit (investment grade and high yield), government bonds (G7), emerging markets, inflation and money markets.

screenshot-2019-02-13-at-12-35-33-am

“There are over 400 fixed income ETFs but 30 have half the assets so there are many products that have not gathered appreciable client assets,” he added. “Investors are looking for new funds that compliment the existing top 30, providing them with differentiated exposure and performance.”

He said the growth in assets for fixed income ETFs in Europe could be faster than was seen in equities.

“The fixed income asset class is bigger and the overall space is already highly developed thanks to almost two decades of equity ETFs in Europe,” Lytle added. “The investor base is large and growing and market making support is well established, both on exchange and over the counter.”

Equities
Equity ETFs in Europe had inflows of $1.6bn last month according to Lesné. He said emerging markets benefitted the most, gathering nearly $2.8bn of net inflows in comparison to US and Europe which had endured net outflows of $2.2bn and $1.2bn, respectively

Passive funds secured a comprehensive victory over their active counterparts for relative performance last year according to Jake Moeller, head of Lipper UK & Ireland research at Refinitiv.

As a result, Lipper data shows that European funds had outflows of €129.2bn last year, the first after six consecutive years of net inflows. This is a reversal of 2017 which was a record-breaking year for pan-European fund flows, with €760bn of estimated net inflows.

“Only 8% of active funds in the Lipper UK Equity classification beat the highest ranked broad-based tracker fund in the same classification in 2018,” said Moeller in a report.

In addition for each of the three- and five-year time periods, the data found that in aggregate for each of the three classifications, investors would have been better off in a tracker fund.

“We may soon enter a period which may be more conducive for active funds in aggregate but concede there is much room for improvement in 2019, and I will not be making any Oracle-like predictions this year,” he added.

Anatomy of the Perfect Trade

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GlobalTrading
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Abstract business chart with uptrend line graph, bar chart and diagram in bull market on dark blue background.

By Jack Miller

What does the perfect trade look like in 2019?

Two hundred years ago, it might have been two guys under the proverbial buttonwood tree, calling out bids and offers and exchanging hand-written pieces of paper. Today trades take place in the blink of an eye (faster, really), and mostly on a server in a data center in a New Jersey swamp.

jack_miller_newest_onlineBut in spite of all this progress, surveys consistently show that a significant percentage of the buyside is unhappy with the electronic trading tools, venues and routing options that are available to them. Algorithmically-driven automation would seem to offer a way to streamline and simplify trading, but comes with its own set of complications. Algos can process more information faster than a human ever could, but are only as good as the instructions they are given. They may emphasize urgency or caution; act carefully or aggressively; attack liquidity or avoid impact; be opportunistic or stick to the schedule – all appropriate behaviors depending on the situation, and all factors which impact the outcome of a trade. They don’t act in a vacuum, they don’t by themselves guarantee best execution, and they don’t always provide the level of accountability demanded by the buyside where control and detailed transparency in order routing are paramount concerns.

A “one size fits all” approach to the use of algos has taken hold in some areas of the market, reflected in the tendency to plug the parameters of a trade in and let it run. This rarely leads to an optimal outcome. Market conditions can change quickly, and no single algo can account for all the potential variables. You need another algorithm to decide which algorithm to use – or input from a human being.

To that end, a 2013 survey showed a keen interest on the part of the buyside in combining high and low touch approaches. Six years later the interest is still there, but there is recognition that the implementation has often been imperfect. The question of how and when a human trader should intervene continues to be debated, while in some shops technical and human expertise remains effectively siloed making interaction difficult.

The reality is that too many options are leading to a kind of paralysis. As electronic trading and market structure become more complex and advanced technologies allow for more detailed customization, it’s increasingly challenging for a desk from both a level of understanding and a workflow perspective. The problems the industry is trying to solve end up manifesting themselves again due to information overload – the paradox of choice. In practical terms, traders end up using the wrong strategy for the current trading situation. Best execution remains out of reach.

The “perfect” trade is still out there to be had, however. When it’s achieved, it will look something like this: A trader knows the stock being traded and the prevailing market conditions of that trading day. There is a deep knowledge of the tools at their disposal and a deep understanding of the client’s trading intentions. The trader selects the configuration that best fits the situation at hand. The trader has the instrument panel needed to monitor his progress in real time – and the dials and knobs needed to course correct in real time if the objectives aren’t being met. The trader is in constant dialog with the client and is providing color on what is being seen – how are we performing, where are we finding liquidity? An algo does the heavy lifting, but the trader sets the course. The trader isn’t replaced with technology but is empowered by it.

Predatory traders, leakage, adverse selection, conflicts of interest, fragmentation and the emerging impact of Artificial Intelligence (AI) will continue to cause challenges for traders. There are a lot of options, and more on the way, but this does not necessarily bring with it understanding of how to use the available resources. The irony around electronic trading is that it’s only with the addition of human insight and expertise that the technology can truly produce the best outcome on a consistent basis for clients. Somewhere in that balance is where you’ll find the perfect trade.

Jack Miller is Head of Trading at Baird. He oversees the execution function within Baird’s Institutional Equities group and is responsible for driving Baird’s strategic priorities in electronic execution services and related technologies.

Trading Via On-Demand Auctions is Better for Buy-Side

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GlobalTrading
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Businessmen keep the chart profitable

By John D’Antona Jr.

When it comes to better executions and trading, blocks are better. And so are on-demand auctions.

Says who?

don_ross Don Ross, chief executive officer of PDQ Enterprises LLC, the parent company of CODA Markets, for one.

Ross has long argued that block trading via auction is one of the best ways to improve executions – getting larger size, while minimizing information leakage and adverse selection. He explained to Traders Magazine that CODA’s philosophy is straightforward: to produce better trades by taking the time dimension out of execution.

“Much of the inefficiency in trading today comes from the need to be a nanosecond faster than everyone else in order to avoid being ripped off,” Ross said. “But if you do price discovery and order-matching multilaterally, as we do, costs go down and returns go up. For everyone. Our systems are complex and state of the art, but our concept is simple.”

But it’s not just Ross singing the praises of on-demand auctions. Recently, Greenwich Associates conducted a study on auctions and stated they are a “time-tested, proven market model and are the workhorse for price discovery in the U.S. financial markets.”

The market consultancy quotes one buy-side trader as saying on-demand auctions (like CODA Block) are a unique liquidity source and as such have improved his executions. Furthermore, it was reported that only 1 in 10 buy-side traders currently have access to this kind of liquidity, and many more are not even familiar with them. However, Greenwich states that given auction’s proven ability to source liquidity will spur future adoption.

And more recently, ViableMkts, a strategic advisory firm that provides business analysis, research and guidance to institutions, supported and advocated the usage of on-demand auctions, especially those conducted at CODA Markets.

The firm conducted a study observing trading via CODA Block for the 12 months starting October 1, 2017 and ending September 30, 2018. Among the report’s findings:

¦ 97% of all executions took place at or better than the NBBO despite a share-weighted fill quantity of 441% of the NBBO order size.

CODA Block delivers strong hit rates and unique liquidity

¦ 10% of all initiated auctions resulted in a trade.

¦ 11% of all small-cap auctions resulted in trades.

¦ 12% of all mid-cap auctions resulted in trades.

¦ CODA Block auctions result in minimal leakage and impact

On average, CODA Block post-auction mark-outs moved:

¦ Only 7% of the Spread at 30 seconds (post auction)

¦ Only 12% of the Spread at 60 seconds (post auction)

¦ Average spread width for CODA Block trades was 11.5 bps. Data is consistent throughout the year.

“Initiating auctions on CODA Block could be a valuable tool for trading institutional size with little downside and potentially large benefits,” said David Weisberger, Head of Equities at ViableMkts, pointing to the data. “Auctions which result in trades are beneficial to the initiator, particularly when attempting to trade substantial quantities relative to the displayed market.”

Furthermore, Weisberger added the metrics for both market impact and information leakage with the auctions can be judged benign.

He explained the report separates out auctions that resulted in trades vs. those that did not and measures both the execution quality of trades as well as the movement of the National Best Bid and Offer (NBBO) before, during and after the auction.

“Based upon the analysis, we have concluded that, based on statistically significant data, initiating auctions does not create significant information leakage and that auctions which result in trades are beneficial to the initiator, particularly when attempting to trade substantial quantities relative to the displayed market,” Weisberger said.

“The data shows that using CODA Block generally did not create adverse market moves when initiating an auction, and, when successful, the liquidity found by the process was both incrementally valuable and did not suffer post trade adverse selection on average. These statistics represent the overall numbers, but it is also worth noting that they have been quite consistent on a quarterly basis as well.”

When it came to the examination of adverse election, use of on-demand auction was deemed beneficial for the user.

“In the second quarter, across large, mid and small cap stocks, the data shows little to no adverse selection for trades from initiated auctions,” the report noted.

“Overall and in most cases, the data shows that the market moved positively when fills were received by CODA Block initiators and the adverse moves that occurred were small.”

And lastly is the question of information leakage. Again, usage of on-demand auctions was supported by the ViableMkts analysis of CODA Markets data.

“For the past 12 months, we see no evidence of significant information leakage from initiated auctions. While 75% of the auctions did attract responses in the latest quarter, the movement after the auction, when auction initiators were not fully filled, was only 12% of the spread during the auction, 8% of the spread at 30 seconds after the auction and 12% of the spread at 60 seconds after the auction,” Weisberger said.

To see the full report, please click here: https://www.pdqenterprises.com/wp-content/uploads/2018/11/ViableMkts-CODABlockAnalysis-Oct-17-Sep-18-final.pdf

In the end, CODA Markets’ Ross concluded on-demand auctions are the perfect product for a frustrated buy-side, who find themselves with few to no tools that allow them to safely go active with an order.

“The data clearly shows those who adopted block (on-demand) auctions see improved executions,” Ross said. “Anyone working an order for size sees the value immediately.”

OMS/EMS Vendor Consolidation Raises Questions Among the Buy Side

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GlobalTrading
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Business and growth concept.

By John D’Antona Jr.

While 2018 was a banner year for M&A bankers specializing in the OMS/EMS space, the wave of consolidation has left some concerned, according to several industry executives. After three notable independent OEMS vendors got snapped up by much larger industry players in the second half of the year – State Street acquired Charles River Development, SS&C’s picked up EZE Software and Virtu is in the process of acquiring ITG – many of their buy-side clients have been left with a range of questions and concerns around conflicts of interest, data privacy and the future of these software platforms.

“Many of the fund managers I speak with are watching how the coming months play out very carefully,” said Guy Cirillo, an industry consultant who for many years served as Credit Suisse AES’ head of business development, a role that saw him manage all the firm’s vendor relationships. “That’s not to say there’s distrust on anyone’s part, but given the tremendous amount of critical data that flows through these systems, caution is the watchword.”

It is this concern that has Virtu working to head off any issues of perceived conflicts already. In November, CEO Doug Cifu noted that the trading technology and execution services provider will build a committee of global clients to oversee the firm and ensure that data is protected.

But some remain skeptical. One buy-side trading executive, who asked to remain nameless, expressed reservations about Triton becoming a part of Virtu. “There are all kinds of real and perceived conflicts on the Street these days. But integrating a formerly independent OEMS platform into one of the industry’s largest market makers does raise legitimate questions. Ultimately, I don’t think a firm as established as Virtu is short sighted enough to do anything nefarious, but that reality is certainly in the back of my mind.”

Been There, Done That

Concerns over neutrality and data privacy when an OEMS provider gets acquired by a trading firm is nothing new. As industry veterans will recall from 2006, when ITG acquired Macgregor, there were immediate concerns about whether the then-leading OMS would remain a broker-neutral platform as ITG integrated its own trading algorithms and TCA software into it.

At the time, ITG officials said they were aware of these concerns and would create a corporate structure that would keep the Macgregor OMS business separate from the trading business, recalls Cirillo.

“The concerns today, and response from the acquirers, are not too dissimilar to the situation a decade ago with ITG’s acquisition of Macgregor. In my opinion they handled the integration, transition and potential conflicts around Macgregor very well,” he said.

Support and Development Questions

Another source of concern for clients of these acquired OEMSs is the lack of commitment to continued platform development and client support, say rival executives.

robert-dykes

According to Robert Dykes, CEO of TORA, an independent provider of a cloud-based OEMS platform, the ultimate demise of the Macgregor OMS is a prime example of what can happen.

“Almost always, the acquirer is focused on strategic platform integration plans and their ‘core’ business, so it’s easy for the acquireree’s planned product upgrades and client enhancements to get pushed off, sometimes indefinitely,” he said.

Efficiencies of scale – otherwise known as “synergies” – will also start to take their toll on the level of client service the OEMS clients will receive, which can manifest itself as slower response times and less knowledge of the product, according to Dykes.

“The senior relationship managers and others who know the clients’ business priorities intimately are often redundant to their counterparts at the acquiring firm. No matter how thorough the notes in the CRM may be, this will leave a gap in client knowledge, especially when a less experienced team on the support desk is left to pick up the slack,” he added.

Opportunities Knock

Spencer Mindlin, an Aite Group Analyst focused on capital markets technology, noted; “It’s the uncertainty that the market should be focused on, because when companies get acquired, they often go through long periods of change which tends to impact day to day business performance. That said, these acquirers all have deep pockets, so it’s possible that these OEMS vendors could get an injection of resources. The question is whether the acquirers see these firms as businesses they wish to grow, or merely as pillars in a grander business plan, which is typically the case,” Mindlin noted.

All in all, the consolidation that occurred in the OEMS space last year presents opportunities and challenges for all OEMS vendors and their clients, notes TORA’s Dykes.

“Clearly these last six months have shown what a competitive space this is,” he said. “All I can control are the commitments I’ve made to my clients to advance our platform and service levels. Ultimately they will hold us accountable for delivering and will select the platform that best meets their needs, which is all we can ask.”

MEMX Eyes More Backers

By
GlobalTrading
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financial stock market graph on technology abstract background

By Rob Daly

The industry-backed Members Exchange may triple its number of backers, according to Doug Cifu, co-founder and CEO of Virtu Financial.

“There were 25 to 30 other institutions behind us that gladly would have been part of this, but we had to cut it off,” he said during a recent webinar hosted by industry analyst firm Greenwich Associates. “If we have to do another round of financing, you will see another 10 or 20 institutions whose name you know, including some buy-side folks who have expressed interest.” [iMGCAP(1)]

Bank of America Merrill Lynch, Charles Schwab, Citadel Securities, E*TRADE, Fidelity Investments, Morgan Stanley, TD Ameritrade, UBS, and Virtu announced their intention to launch the venue in response to high exchange market-data and connectivity fees on January 7 and expect to file the necessary paper for exchange status before the second half of the year.

doug_cifuCifu scoffed at SRO claims that the new exchange’s raison d’être is to bring high-frequency trading and retail order flow closers together. “Nothing can be further from the truth,” he said. “It is them trying to make up for the fact that they really have pissed off their customer base.”

Its goal is to prove that the emperor has no clothes regarding market-data and connectivity fees, according to Cifu. “There are SEC statutes that govern fee requests, which need to be ‘fair and reasonable,’” he added. “I’d argue that they are not.”

Cifu noted that firms that want to remain competitive in regards to best execution had no choice but to purchase the direct feeds from the exchange operators.

Only two percent of respondents to a Greenwich Associates survey stated that they would trade with a broker-dealer that just used the consolidated tape, added webinar host Kevin McPartland, managing director, market structure and technology at Greenwich Associates.

The new exchange’s backers plan to use the new exchange as a case study of how to provide the same functionality at a fraction of current costs.

“Setting up an exchange and producing market data and having virtual and physical connectivity is not rocket science,” said Cifu. “We do it at Virtu every day. We have infrastructure all over the world. It’s not dissimilar to what the exchanges do.”

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Global Trading is an industry-leading news service for the global equities capital markets: providing information, education, insights and analysis for senior professionals working within trading and execution across Europe, the UK, North America, APAC and other emerging markets. With a focus on the intersection between the buy and sell-sides, Global Trading covers all industry elements from technology and trading strategies to regulation, best execution, market structure and liquidity.

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