Buyside focus | Relationships | Dan Barnes

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January 21, 2019

BUYSIDE INDEPENDENCE INCENTIVISES BROKER SERVICE BATTLE.

Relationships are being renegotiated as services evolve to match new landscape. Dan Barnes reports.

MiFID II has disrupted the relationship between buy and sellside firms more deterministically than any other regulation in history. It has set clear rules around the payment and valuation for sellside services, as well as the review of performance. Additionally, it has segregated trading venues between multilateral and unilateral offerings which overall has fundamentally changed sellside revenue models, and buyside responsibility.

When considering the effect this has had on buy- and sellside relationships, MiFID II should not be viewed in isolation, says Nicholas Greenland, global head of broker/dealer relations at BNY Mellon Investment Management, as relationships evolve over time where capabilities and requirements on both sides are changing. “Whilst unbundling has had an impact on how relationships are looked at, for most firms, this is not the only change that has happened over this period,” he says.

As the changes wrought by MiFID II have taken effect, other rules have been bedding down. Capital adequacy requirements have already reduced the balance sheet that banks can commit to risk trading. Derivatives trading regulations across the European and US markets have imposed margining for both cleared and uncleared trades, to reduce the potential for a systemic impact from default. At the same time, automation of trading has increased across asset classes, albeit with very different levels of adoption, led in part by the maturing of technology and its application. The economics of the asset management business has also been changing, driven by customer and regulatory pressure.

“The buyside is seeing fee compression, loss of assets from active to passive funds, and now in many cases greater pressure on how they spend their own money,” says Mark Pumfrey, chief executive officer at Liquidnet Europe. “So, their focus on getting the best possible value from sellside service has gone up significantly.”

Greater service, tighter bonds

With service divided across two lines, the first thing that changed was budgets. In the research space, that has led to an estimated drop in spend of at least 20-30% this year-to-date, based on consistent industry reports.

For banks the budget reduction is only part of the issue. As research previously had no commercial model, they are having to negotiate new approaches to getting their information into the right hands at the right price.

“The inducements rule means that often research providers have to go to a procurement team rather than individual fund managers,” says Vicky Sanders co-CEO of research distribution platform, RSRCHXchange. “They may have previously worked in broker communications but they might have worked in data procurement and bought market data. So some research firms are finding it very hard to describe why a fund manager might want their research to the procurement team, where a fund manager might understand more easily.”

Asset managers and brokers outside of Europe will also have to assess what effect these rules might have upon them. The Securities and Exchange Commission (SEC) in the US wrote no-action letters in 2017, in order to overcome rules which state anyone paid for research is considered an investment advisor. The overspill for effects of MiFID II outside of Europe is expected to continue.

“Anecdotally, I have heard of some buyside firms planning for the day when the impact of MiFID II is felt more globally as regards how they pay for research,” says Greenland. “The sense is that this will be client demand /commercially driven. For example, from what I can see the use of soft dollars in the USA has reduced steadily over recent years. Financial services are a global business, and with global investors/asset owners, it would not be unexpected to have broader global pressures to adopt some of the practices seen as a result of MiFID II.”

Better execution

Payment for execution has also changed. Agency broker ITG found commissions paid to brokers for trading fell from 6.9 basis points (bps) in Q4 2017 to 5.2 bps in Q1 2018 in Europe (ex UK) and from 7bps to 5.9 bps in the UK over the same period, during which MiFID II came into force. By Q3 2018 they had fallen further to 4.9 bps in Europe and 5.3bps in the UK.

This increases the competitive pressure on broker/dealers which have consistently cut front office headcount over the last five years, falling by 12.7% since 2013, according to analyst firm Coalition.

Moreover, where sellside firms were once a trusted supplier of buyside execution technology, that service provision has become commoditised, and in some cases even superseded by home-grown tech.“ Some of the more systematic investment managers have even taken the algos upstream and are using a DMA service to get to market, so they are taking control of their execution and only using the sellside for access to the market,” says Chris Monnery, regional head of Electronic Execution Product Marketing, at trading platform provider, Fidessa.

To reintroduce a differentiated service at the point of execution, banks are fighting to offer consultancy and guidance on electronic trading. “Low touch services used to just be about getting access to the algos; there is now a requirement for a higher level of service,” says Monnery. “Now it’s a new battleground with greater customisation and defining, in agreement with the client, how a suite of algos is going to be combined forming how the broker differentiates their offering.”

A new vision of service

Where firms can offer both market access and execution venue, they are using that advantage to link connectivity with the technology and integration with order/execution management systems to provide more colour around low touch, thereby providing a better quality of execution.

Pumfrey says the recent integration of OTAS Technologies with Liquidnet’s frontend, called ‘Liquidnet Discovery’, fits this description, by boosting the capabilities of human traders managing low-touch desks. “If you have a blotter with 200 names on it, that is difficult to manually manage, so Discovery powered by OTAS can alert you to events on individual shares that really matter and will likely cause you to adjust and change trading strategies,” he says.

In some senses, this is taking the same level of automation that occurred in the choice and application of trading strategies across the equities execution in the mid-2000s and bringing it up a notch.

“OTAS technology taps into the indications of interest or watchlists and effectively ‘technologises’ what high-touch sales trading does, with advice and colour around market activity using statistically significant and back tested alerts,” he says.

However, buyside firms are no longer sitting back and waiting to see how their service providers are going to improve business; the considerable pressure to deliver change for all stakeholders is driving a concerted push for efficiency and growth.

“Asset managers, in my experience are being relentless on how to innovate and add value to their clients across as much of the value chain as they can; this is broader than just product returns,” says Greenland. “This means that partner sellside firms who can deliver bespoke and unique services to their partner clients can continue to differentiate themselves and embed themselves ever more deeply.”

For broker/dealers, agency brokers and research houses, faced with smaller budgets and more demanding clients, structural change is inevitable in order to match the new reality.

“I think we’re starting to see an inflection point,” says Sanders. “There will be consolidation and changes in market structure on the sell side, and we have seen some evidence of that happening already, but we are just nine months in. As we hit year end, and firms become clearer in their strategy, we will see some who decide to stop providing research, some who buy other firms. The next six to 12 months will be quite active on that front.”

©BestExecution 2019

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FX trading focus : FX post-trade : Neena Dholani

By

Ian Rycott

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January 21, 2019

Neena Dholani-FIX — Neena Dholani, FIX Trading Community

INNOVATIONS IN FX TRADING

Neena Dholani, Global Marketing and Programme Director at FIX Trading Community explains the evolution, from integration technicalities to tools, data and analytics, of FX trading.

For decades, there have been improvements in technology which target front end FX trading. Trading FX, however, is largely bespoke in its implementation, and presents an integration hurdle. Furthermore, the lack of standardisation is time-consuming and costly; broad changes such as MiFID II were adapted across a sea of implementations costing tens of thousands of dollars for buysides, sellsides and platforms alike.

Additionally, regulatory and market pressures have created a more fragmented FX market, which already has a variety of liquidity sources adhering to a number of different standards, making it difficult for market participants to measure the effectiveness and value of their sources.

When speaking with my colleague Melissa Marquis at FIX Trading Community who is co-chair of the FX post-trade working group and Managing Director at Wellington Management, she said, “MiFID II and the Global Code of Conduct have been important forces to drive the conversation around transparency and efficiency, but there is still a lot of work that needs to be done to create a harmonious FX post-trade landscape.”

It is true that the Global Code of Conduct, which officially launched in May 2017, offers 55 principles which address major issues from ethics, governance, execution, information sharing, risk management, compliance, confirmation and settlement. The code is an extensive set of guidelines which market participants have been working hard to adhere to. As one of the leading Code of Conduct principles under confirmation and settlement states, “Market Participants are expected to put in place robust, efficient, transparent, and risk-mitigating post-trade processes to promote the predictable, smooth, and timely settlement of transactions in the FX Market.”¹With the increased electronification of FX Spot, Forwards and Non-deliverable Forwards (NDFs) trading moving away from traditional voice trading, the FX landscape is advancing into a new era of transparency.

In 2018, a new FIX Trading Community group, the FX Post-Trade Subgroup was formed with two primary focus areas; 1) standardisation of the new order through to allocation flow, and 2) standardisation with an eye on efficiency for post allocation through to settlement and clearing. The working group includes major buyside and sellside firms who came together in three full-day, face-to-face working sessions at Wellington Management and Goldman Sachs.

Marquis reported back that, “The outcome of these meetings was a new standardised FX FIX specification taking the best of breed across the industry to standardise and enrich the electronic data exchange. This demonstrates how important and effective it can be for the industry to work together on initiatives that benefit the financial community as a whole. The working session discussions between the buyside to sellside illuminated important operational aspects of trading block FX directly with the dealer community, creating a deeper understanding of the complexities on both sides and resulting in approaches to resolve them. One of these approaches was the introduction of a new message type for trade aggregation.”

The purpose of the FIX Trading Community Post-Trade working group and its subgroups is to define industry practices for common usage of the FIX Protocol for post-trade processing for all asset classes, between the buysides and sellsides, that can be used bi-laterally as well as through intermediary facilities. The FX Post-Trade Subgroup recently released a Post-Trade Processing Recommended Practices document to define the trade workflows for FX spot, Forwards and NDFs. The document defines the workflow from the point of execution to trade aggregation and post-trade allocations. The workflows are defined as bilateral workflows directly between investment managers and bank/brokers.

Of course, improving FX post-trade processes does not come without challenges. When speaking with Lee Saba, FIX Trading Community FX post-trade working group co-chair and Managing Director at Wellington Management, he said how one important gap was, “the time it takes to overcome the process of aggregating the trades which often occurs right after execution but prior to the trade allocation.”

Saba added, “Sellside banks often have to wait for the instructions from the buysides to effectively ‘block up’ the individual trades in order for the allocations to take place.” Buysides have the option to specify their calculated average price for the entire trade aggregation, but Saba also mentioned, “Often this is optional and dependent on whether they are able to run the calculation.”

As soon as the sellside receives an aggregation request this is either accepted or rejected and if rejected this must be resolved manually. Then, the post-trade allocation instructions are provided only after the execution and trade aggregation is completed. At times trades are only partially filled but would still need to go through the allocation process and the remaining unfilled trade will undergo the process again once the trade is executed. Saba concludes, “This illustrates the different loops which are currently taking place that could lead to potential inefficiencies and operational risks.”

See Figure 1 to illustrate the various stages of the post-trade allocation.

There is no doubt in my mind, and many would agree, the industry is faced with the challenge of improving operational efficiencies, adhering to regulatory requirements and reducing risk while operating on bespoke implementations. The new FX Post-Trade FIX specification will bring the industry a long way towards standardisation and will help evolve market participant discussions to more innovative and compelling solutions.

¹. www.globalfxc.org/docs/fx_global.pdf

To receive a copy of the FX Post Trade Processing Recommended Practices: www.fixtrading.org/packages/fx-via-fix-recommended-practices.

©BestExecution 2019

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Post-trade | Euro clearing | Lynn Strongin Dodds

By

Ian Rycott

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January 21, 2019

THE EURO CLEARING CONUNDRUM.

As the UK teeters on the edge of a ‘no-deal’, regulators and industry players are making contingency plans. Lynn Strongin Dodds reports.

It is near impossible to predict the outcome of Brexit amidst the political posturing and wrangling. Those in the City of London are holding their breath as markets sink and sterling plummets. One of the most contentious issues is the fate of clearing in the UK. There have been temporary measures put in place but the operative word is temporary.

“It is difficult to know what will happen,” says Andrew Simpson, Advisor to BME (Bolsa y Mercados Españoles). “Every time there is a modicum of stability, someone puts a spanner in the works. UK clearing houses have been granted equivalence if there is no deal but it is only for a year and no more than that.”

As the UK was teetering on the brink of a no-deal at the end of last year, the European Commission confirmed that it would adopt contingency measures. In regulatory parlance, equivalence is a judgment that a non-EU country’s rules and supervision are as robust as the EU’s. It is part of the procedure the bloc uses to grant foreign firms access to the single market. Firms must also gain ‘recognition’ from the EU markets regulator.

The recent reprieve came as a great relief to UK clearing houses such as LCH, ICE Clear Europe and LME Clear who had to decide last December whether to tell EU customers to shift derivatives positions. They, along with central banks and brokers, had been putting European regulators under pressure to provide clarity on clearing access. The main concern is that there would be no alternative venue for some types of contracts and that transferring positions in derivatives portfolios would take months.

Trade groups also called for action to be taken. The International Swaps and Derivatives Association (ISDA), Futures Industry Association (FIA), Association for Financial Markets in Europe (AFME), and International Capital Markets Association (ICMA) combined forces to warn that “abrupt cessation of access to UK clearing houses has the potential to introduce widespread disruption for European Economic Area markets”.

LCH and ICE Europe wasted no time after the contingency announcement to apply for equivalence with Europe’s regulatory watchdog to continue doing business on the continent in a no-deal Brexit scenario. The latter also applied to the Bank of England as an overseas derivative clearer.

The wrangling over euro clearing had been going on long before Brexit was on the drawing board. London managed to keep hold of this coveted prize because it was part of the EU but that will no longer be the case, although business will by no means disappear overnight. The City has a tight grip, handling the bulk of the Ä660tn market with LCH, part of the London Stock Exchange Group, accounting for a hefty 90% of euro-denominated interest rate swaps.

Bank of England figures show that around £45tn of swaps positions held by EU banks and brokers were at risk from a no-deal Brexit. The absence of an equivalence deal would have meant that European firms would not have been able to use UK venues to trade derivatives which could have translated into higher trading costs as well as an inability to hedge their market exposures.

The Swiss benchmark
Although an extension was expected, market participants were surprised that it was double the six months given to the Swiss who will have to renegotiate in June 2019. “The Swiss and EU was being closely watched as it was seen as a proxy for the UK and European Union situation and how equivalence was going to be handled,” says Steve Grob, director of group strategy at Fidessa. “However, in fairly typical style the Swiss deal is fudge as it is only for six months.”

He adds that one of the problems in the UK is that even if there is a second referendum, firms are starting to move out of London. According to press reports, 16 banks including Deutsche Bank and Commerzbank, recently tested moving interest rate swap positions from London to Frankfurt, and Union Investment, Germany’s second largest asset manager, is the first European fund manager to close its existing euro-denominated swaps trades at LCH.

“At the moment it is just a trickle of firms shifting clearing to Paris and Frankfurt but it could end up being a self-fulfilling prophecy,” says Grob. “It is hard to put the toothpaste back in the tube once it has been squeezed out.”

Simpson also believes “LCH could struggle if the ECB forces a euro-denominated policy, although more LCH IRS (interest rate swap) business is from the US and not Europe and so location needs to be considered carefully. LCH CEO Daniel Maguire had indicated [Oct 2017] that it could move business to New York because US has recognised status in Europe, although he has not yet exercised that option. We have though seen them moving RepoClear to Paris. European firms may need a European back-up option for some of their current London based clearing”

The other threat to LCH is Eurex. As Christian Lee, partner at consultancy Catalyst put it, “Brexit offers a great opportunity for them to grab a portion of the business. They have been forthright about their objectives and have launched various initiatives including member incentive schemes. In the past there used to be a significant gap between LCH and Eurex but it is being reduced because volumes have increased due to these schemes.”

Over the past year, the German clearinghouse launched a partnership programme, supported by large global and regional banks who share the revenues generated from clearing swaps with the clearing house. The most active participants – JP Morgan, Deutsche Bank, BNP Paribas, Landesbank Baden-Württemberg – were also granted seats on the German CCP’s supervisory board as an added incentive.

Although it has a long way to go to catch up to its London rival, the German CCP is making significant progress. At the end of November it broke through the €10.5tn mark of notional outstanding, a substantial hike from the €1.8tn the same period a year ago. The increase translated into a market share of 15% in forward rate agreements (FRAs), 1% in overnight index swaps (OIS) and 3% in rate swaps by average daily volume.
“Since the summer, the industry has been looking at how it can have a future-proof model in the event of a hard Brexit, says Eurex Clearing board member Matthias Graulich. “We are doing all we can to support our customers to ensure a smooth transition to a post-Brexit world. This is not a sprint though but a fundamental change in the way the industry is operating and it will take time.”

Sellside take up the gauntlet
Sellside players are also taking matters into their own hands. For example, Societe Generale, which is one of the biggest middlemen in the derivatives industry, opened a new clearing hub that will cater to EU customers to clear both listed derivatives on exchanges, and over-the-counter products. It will run in parallel to its UK operations. In addition, the new entity has applied for memberships of exchanges, trading venues and EU CCPs such as Eurex, Nasdaq OMX and LCH in Paris.

Meanwhile, ABN Amro, another heavyweight player, has applied for UK licences to establish a new London-based unit of its clearing business that will operate alongside the London branch of ABN AMRO Clearing Bank. The unit handles over 20 million securities and derivatives trades a day on behalf of customers – many of whom are based in the Netherlands – such as high-frequency traders and market makers.
“In a hard Brexit scenario ABN AMRO Clearing Bank might not be able to access UK exchanges and CCPs out of the Netherlands due to EMIR (European Market Infrastructure Regulation) legislation,” says Robbert Booij, head of ABN Amro Clearing Europe.

“From a contingency perspective, ABN AMRO Clearing Bank has decided to set up a subsidiary in the UK and we are discussing this with the UK authorities. This subsidiary will ensure the ongoing access of ABN AMRO Clearing Bank to UK exchanges and CCPs by acquiring memberships locally.”

©BestExecution 2019

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Regulation & compliance | Unbundling | Gill Wadsworth

By

Ian Rycott

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January 21, 2019

UNINTENDED CONSEQUENCES.

Unbundling has been a long time coming but as Gill Wadsworth explains, it may not level the playing field as hoped.

It took fewer than six months for a financial regulator to investigate how institutions were responding to MiFID II, but opinions are divided as to whether it has raised or lowered the bar.
In June, the UK’s Financial Conduct Authority revealed it had cause for concern over some organisations’ failure to get behind the spirit of the new rules on research unbundling. In its 2018/19 business plan, the FCA announced that it would “focus on ensuring that firms are complying with these changes and assess if the rules are working as intended”.

The unbundling element of MiFID II was paramount in achieving the Directive’s aim of improving transparency and fairness across the industry. Rather than receiving reams of research – much of it spurious and unused – from the sellside as part of long-established relationships that involved many other services, the buyside would be required to pay for this information separately.

Research would be a distinct service, for which asset managers would not only need to pay but demonstrate how they paid. The aim was to improve research quality, level the playing field between independent research providers (IRPs) and potentially standardise the costs.

Russell Dinnage, managing partner at consultant GreySpark, says: “The reasonable expectation, commonly held within both the sellside and IRP investment research industry, is that these MiFID II-generated requirements on consumers will naturally lead to a more competitive, commoditised, price-agnostic landscape for content and services.”

Dinnage says MiFID II was designed to foster a ‘race for quality’, where only providers of genuine, valuable research would exist. “Some of the historical bulk providers of investment research content and services [will be] challenged to justify the quality of the value-add of their product to their client’s investment decision-making workflows and processes,” he adds.

“In some cases, the end result could see banks and non-bank brokers lose clients and subsequently no longer be able to justify the marginal costs associated with manufacturing and distributing their content, potentially abandoning the line of business entirely.”

Yet in reality the interpretation of MiFID II by some organisations has meant that rather than a race to quality, there has been a race to the bottom. In August 2017, JP Morgan Chase was the first investment bank to reveal it would charge a fixed fee – $10,000 – for entry level equity research. This was heralded as the start of a ‘land grab’ as investment banks realised that under MiFID II they would be forced to compete for previously captive clients.

Rather than risk losing a client to an IRP, many investment banks have chosen to cross-subsidise the cost of their research to keep costs low. Arzish Baaquie, managing director, UK at Smartkarma, an IRP, says over the past six months more banks have followed the JP Morgan route. “In my view this will continue. Some might say it is not fair but it is difficult for the regulators to clamp down on since there is nothing illegal going on. If you are a large investment bank with deep pockets, it makes sense to cross-subsidise,” he adds.

Shallow pockets
The challenge though is for IRPs without deep pockets to keep pace with their multi-billion-dollar banking competitors. The result, Baaquie warns, is that as prices plummet so too will research quality. “We could see a race to zero,” he says.

Figure one shows that rather than unbundling research, the majority of buyside consumers are still paying an all-inclusive fee. “So-called premium equities and fixed income research packages – in which clients are provisioned with access to both content and analyst access – typically remain priced on a per annum, per client enterprise-wide subscription basis,” says Dinnage. “These packages are typically vended in a manner similar to a retainer paid to a consultancy or law firm in which clients pay a fixed minimum amount that can be drawn down over time.”

In other words very little has changed, or rather not enough has changed. Indeed, under these persistent arrangements it might be argued that it will be difficult for buyside firms to provide EU regulators with a ‘clear audit trail of payments made to research providers and how the amounts paid were determined with reference to the quality criteria’, which is demanded by the European Securities and Markets Authority (ESMA). It is understandable then that the FCA is taking another look at compliance in this area.

A further complication for the market dynamic comes from asset managers’ preference to pay for research from their P&L rather than using the research payment account (RPA) method. Baaquie says this makes sense, describing RPA as “clunky”. However, he says there are consequences for research providers. “Favouring P&L over RPA is a catalyst for change,” he adds. “Research budgets have been cut on average by about 20-30%, leading asset managers to ask what research they really need. They are a lot more particular about what they buy.”

A fork in the road
The question then is whether asset managers will be willing to move outside of their low-cost relationship with investment banks, to find demonstrably high-quality research from elsewhere.
The challenge for IRPs, according to Chris Turnbull, co-founder of Electronic Research Interchange, is getting in front of the buyside. He says investment banks enjoy an established relationship with asset managers outside of research provision, working together across many areas. IRPs, meanwhile, are much more limited.

“A bank has lots of different touch points with fund managers and they speak with the buyside constantly. A small independent research provider doesn’t have those interactions and may not have the opportunity to get in front of the buyside. As a result they may not be trialled, tested and looked at,” Turnbull says.

The danger is that small IRPs may start to go out of business as they fail to amass the client base necessary to survive in a post-MiFID world. Baaquie says consolidation in his space is already apparent.
Smaller asset managers are struggling, too. A global poll of 418 managers by RSRCHXchange published in June revealed the unbundling regulation ‘has hit smaller asset managers and small cap companies hardest with 82% believing it would result in reduced coverage for small and midcap stocks’. Nearly half (45%) of respondents from the smallest asset management companies feel worse off as a result of reduced research access.

The ultimate impact of unbundling regulations in MiFID II are far from clear. As Turnbull says the repercussions will be felt for many years, not all of which will be desirable.

A clearer view of research, its importance and value are important outcomes, but there are unintended consequences too. If research providers pull back from providing data on smaller markets such as the emerging or small cap, then investors will suffer. If larger firms dominate both the buyside and sellside, it is again to the detriment of the consumer.

The FCA review is welcome but the watchdog will need to iron out numerous challenges, none of which are obviously dealt with. Ultimately action needs to be taken swiftly before the industry changes irrevocably and potentially for the worse.

©BestExecution 2019

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Viewpoint | Research unbundling | Rebecca Healey

By

Ian Rycott

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January 21, 2019

RESEARCH UNBUNDLING – ONE YEAR INTO MiFID II.

Rebecca Healey, EMEA Head of Market Structure and Strategy, Liquidnet.

The central aim of MiFID II has been to improve transparency over costs and charges related to financial instruments and services to deliver greater value to the end-investor. However, as we reach the first anniversary of implementation, it has become apparent that the industry is still evolving as it adjusts to unbundling research, particularly when taking into account different jurisdictions across the globe.

The discussion about the need to separate the provision of research and execution is not new – first coming to prominence nearly 15 years ago with the publication of the Myners report in 2004. But the value in research is evolving, spearheaded not only by regulation but also by the introduction of technology in the research process which has lead to significant changes in its production and consumption.

It is in this context that we spoke to 62 market participants performing a variety of roles across the globe – portfolio managers, traders, sellside, buyside and independent research providers – between August and November 2018 to try to better understand the implications of MiFID II on the unbundling of research and execution. It’s perhaps not surprising to learn that less than a year after the launch of MiFID II a key finding was that unbundling is already a global phenomenon, with 53 percent of buyside respondents having implemented a global policy and a further 20 percent planning to do so in the next five years.

Critics claim that unbundling research from execution will negatively impact research provision, particularly small- and mid-cap companies, threatening listings and secondary trading volumes in Europe. On the other hand, supporters believe this offers an opportunity to open up the research market and challenge the status quo regarding the implementation and execution of investment ideas.

The ability to access value-add research continues to matter. Headlines regarding the slashing of research budgets and culling of broker lists detract from the fact that as pricing becomes more transparent, firms are becoming more discerning regarding the type of research they consume, as well as their method of access. For example, we found that 77 percent of firms are using alternative sources of research to traditional written research.

Bulge brackets still dominate the top 10 research and broker lists with 69 percent of respondents choosing global investment banks over regional specialists or independents. However the future sustainability of their business model appears to be called into question. As the buyside revisit budgets and conduct broker reviews to select future providers of research, the sellside is having to make decisions regarding where to invest scant resources and which clients to continue to service.

Bulge bracket brokers are still assessing what they can expect to earn from the continued provision of research; attempts to lower the minimum waterfront entry point appear to have been underestimated in the hope of continued higher revenue analyst access. As transparency over cost and quality of research emerges, portfolio managers are not only becoming more selective regarding which analysts they access and what they are willing to pay, they are exploring new methods of accessing investment ideas as firms come under increasing pressure to lower operational costs.

Corporate access is a case in point where some asset management firms are now being excluded from broker roadshows as a result of declining commission payments. In response, these firms are now electing to engage directly with company investor relations departments. By altering how firms gain access, new challenges emerge; consumers require servicing and the companies that they invest in need to develop new methods on how to engage with investors, whether that is self-funded research or utilising new portals. The increased use of data via companies and quantitative tools to match investors with assets owners, rather than relying on a broker to act as an intermediary.

All of which is leading to changes in the production, access and distribution of investment ideas – and not just in Europe. While there is currently a split between payment from P&L for MiFID firms and clients’ money for non-MiFID business, as our research suggests the increasing focus on end clients is seeing a gradual adoption of research unbundling practices globally. Irrespective of their regulatory obligations in the US and APAC, some of the largest asset managers are looking to demonstrate their firm’s capability as a protector of client assets and are electing to pay for research from their own P&L, creating a knock-on effect for other non-EU managers and their providers of research.

Our conversations with the industry show that in a highly competitive environment, asset managers need to adapt investment strategies in response to factors such as globalisation, growing political risk and changing investor profiles. As part of this, the ability to access value-add research will continue to be critical. However, it is how this research is accessed, from whom, at what price point and in what format which is of critical importance. Maintaining the status quo is no longer an option as the industry looks set for a period of wholesale change. A point emphasised by Mike Bellaro, CEO of Plato Partnership, who supported our research. He said that as industry participants seek to differentiate in today’s competitive asset management industry, new alternatives emerge which will challenge the traditional provision of research and construction of investment ideas, and the emphasis on supplier differentiation and move to quality over quantity is now firmly underway.

Research unbundling is just the first step – the canary in the coalmine if you like – in achieving significant efficiencies for the buyside. As it becomes the norm firms are likely to start deriving significant benefits from the data they gather. The ability to track research providers, the type of research they provide and at what cost unlocks possibilities that weren’t previously available, all leading to increased value for end-investors.

This article is excerpted from Liquidnet’s December 2018 report “Canary in the Coalmine”

©BestExecution 2019

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Viewpoint | The impact of regulation | Peter Moss

By

Ian Rycott

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January 21, 2019

MIND THE GAP!

Peter Moss, CEO of the SmartStream Reference Data Utility (RDU), takes a look at the gap in the MiFID II regulatory reporting framework filled by the Systematic Internaliser Registry, an industry collaboration between a group of APAs and the SmartStream RDU. As well as bringing clarity to the industry in this area, he believes the registry potentially offers buyside firms commercial advantage through the data it generates.

MiFID II has consumed the financial industry for the last two years. Its introduction has resulted in the generation of a vast amount of new data and this information – which has been created through twenty-eight national regulators and by several hundred registered institutions – is now flowing through the markets.

At the heart of MiFID II, which came into force on January 3rd 2018, lay the desire of regulators to inject greater transparency, notably in the fixed income and OTC derivatives markets. To achieve this end, financial authorities focused on the part played by systematic internalisers (SIs), imposing new pre-trade, post-trade and transaction reporting obligations on this group of firms.

Registering as an SI was, initially, voluntary but from September 1st 2018 it became mandatory for qualifying firms dealing in equities and fixed income. In these areas, financial institutions trading a volume of an instrument or a group of instruments in excess of a limit set by ESMA must now act as a systematic internaliser in that instrument or group of instruments. A breathing space has been given to the OTC derivatives markets, with regulators allowing the voluntary opt-in period for SIs to run until March 1st 2019.

The incoming rules have caught a large number of firms in their net. Prior to September 1st, roughly seventy-five companies had chosen to become SIs. Currently, more than one hundred and thirty firms are signed up with ESMA, although at the moment perhaps some ninety of these are operating as SIs. By the middle of next year, as many as one hundred and fifty financial institutions are likely to have registered as SIs.

Problematically for the financial sector, the SI regime contained a gap at its core – one which it fell to the industry to fill. MiFID II transparency rules determine that where a counterparty to a deal is an SI in the instrument being traded the SI has the reporting obligation. This leaves firms facing a tricky question – how do they know whether a counterparty is a systematic internaliser or not? Herein lies the difficulty for, while ESMA set up a register of SIs, it did not provide a listing of the instruments for which SIs offer their services.

And the difficulties did not stop there. With no central database of instrument-level listings set up by regulators, Approved Publication Arrangements (APAs), which are responsible for managing trade reporting on behalf of the market, could not operate effectively – it was impossible for APAs to report accurately if they could not understand precisely which companies were acting as systematic internalisers for which instruments.

Stepping into the breach came a group of seven APAs and the SmartStream RDU, which worked in collaboration to create the Systematic Internaliser Registry. The registry is a centralised repository which captures, stores and distributes a listing of SIs and their associated financial instruments.

The SI registry operates by gathering data, on a daily basis, from the APAs and their SI customers. Systematic internalisers are able to contribute information in three different formats – ISIN, Issuer, and COFIA. Typically, instrument classification determines which format is most appropriate.

The RDU aggregates this input and, importantly, also validates it, thereby ensuring a high standard of accuracy. The cleaned, consolidated data is then distributed to participating APAs and SIs for use in their regulatory reporting mechanisms. The information can also be made available to other market participants. Distribution takes place via file – either by delta file or in the form of a master file which contains all the active records contributed by SIs – or by API request service. The API, which can be tapped into on demand, is particularly useful for firms which simply wish to access data relevant to specific securities of interest.

At present, the registry collects data from over ninety SIs – a group which constitutes almost all of the larger brokers across Europe. The registry is open to all APAs and SIs and operates on a “give to get” basis, encouraging the broadest possible participation. It offers a reliable, accurate set of listings at a granular, instrument and instrument class level, enabling APAs to report correctly on behalf of SIs, and allowing trading counterparties to identify where they have MiFID II reporting obligations. The registry has brought a much-needed dose of clarity to the industry in this area, and now plays an essential role in supporting the day-to-day process of trading in Europe.

Turning more specifically to the buyside – the registry gives buyside participants the ability to understand whether they are required to report or not, and can also potentially help them achieve more cost-effective regulatory compliance. For example, by carefully selecting SIs with which to trade, it may be possible for a buyside firm to avoid the obligation to trade report.

Importantly, the registry creates a clear picture of who is trading what – in fixed income and OTC it shows which brokers deal in particular instruments – improving the buyside’s understanding of the markets in which they are doing business. It is a good indicator of best execution capability and points to where liquidity can be found, making it a valuable tool for broker selection, especially in less mainstream products.

Finally, it is worth keeping in mind that the SI Registry is built on very solid foundations – The SmartStream Reference Data Utility (RDU). Set up by the industry, the RDU offers a complete set of reference data for MiFID II compliance purposes, full global coverage of securities reference data for futures and options, and a managed security master service that dramatically simplifies enterprise data management strategy.

©BestExecution 2019

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Fintech : AI & robotics : Chris Hall

By

Ian Rycott

-

January 21, 2019

FROM DEALER TO ROBO-TRADER IN THREE STEPS

Chris Hall looks at how the industry is preparing for the next generation of trading.

The pace of automation is relentless on the trading desks of large asset managers, fuelled by cost and compliance concerns. However, how close are we to replacing the trader’s gut instinct with a more statistically reliable and data-driven combination of logic and analysis? The robo-trader could arrive at a desk near you soon. Many institutional investors are already preparing, prioritising coding skills over trading smarts, encouraging junior traders to work with data scientists to systematise and optimise workflows.

There are perhaps three distinct steps from automated execution to handing over the entire investment process to the machines driven by artificial intelligence (AI). The first, automation of order placement, has been in motion for two decades; today, even large rates and credit orders are being channelled to the auto-execution facilities of fixed-income trading venues. This has brought greater speed, scale and accuracy to routine orders, delivering incremental performance and consistency benefits.

As the scope of auto-execution encompasses more instruments and protocols, phase two sees traders working to streamline and accelerate pre- and post-trade investment processes. This is a work-in-progress, focusing on improving the quality and aggregation of inputs into the investment decision, and leveraging outputs to create a feedback loop that gradually improves the options presented to human traders by rules-based machines. These are similar to the recommendation engines that offer consumers targeted purchase options based on past browsing history and other data inputs.

As automation extends across the wider investment process, new workflows are emerging. “Traditionally, traders have gone out into the market to implement the investment ideas of their portfolio managers as efficiently as possible. Now it’s becoming possible to reverse this flow, bringing ideas to the portfolio based on the opportunities afforded by prevailing market conditions,” says Kristian West, global head of equity trading and equity data science at JP Morgan Asset Management.

The firm’s equities trading desk uses a platform that leverages machine-learning techniques to recommend trades based on available liquidity, historical trading outcomes and known portfolio preferences and priorities. STARS (Systematic Trading and Recommendation System) was developed partly to increase predictability of trading outcomes to meet MiFID II’s best execution rules. West estimates a performance improvement in the “high single-digit basis points” through use of STARS for roughly 60% of JP Morgan Asset Management’s equity order flow across the course of 2018.

“The interpretation of a portfolio manager’s wishes by a human trader is not easily scalable or repeatable. Through STARS, we can use what we’ve learned to improve performance on an ongoing basis. In the longer term, the capabilities we are developing will enable us to access specific investment themes more quickly and cheaply, compared with waiting for liquidity to emerge in particular names,” says West. “Ultimately, size and liquidity will become less important to our ability to execute trades on an automated basis.”

Alliance Bernstein has invested in several proprietary technologies in recent years to streamline and accelerate fixed-income investment, including ALFA, a liquidity monitoring and analytics tool, and Prism, its fundamental credit research platform. The firm recently upgraded its Abbie virtual portfolio assistant to offer trading recommendations in US high yield and investment grade markets. Abbie 2.0 works alongside the firm’s other systems to flag potential trades based on inputs including pricing, liquidity, credit scoring and risk appetite. Over time, Abbie 2.0 will take account of feedback, refining suggestions according to how human traders and portfolio managers respond to proposals as well as the performance of implemented trades.

Despite the feedback loop, the new iteration of Abbie sits at the robot process automation end of the AI spectrum, rather than machine learning. According to Jim Switzer, Alliance Bernstein’s global head of fixed income trading, the scope for use of more sophisticated AI techniques in fixed income is determined partly by data availability. “At first, the sellside was reluctant to share direct fixed-income feeds with their buyside clients, but we’re now seeing a greater level of collaboration as firms adjust to prevailing liquidity conditions,” he explains.

Switzer predicts a bifurcation of trading in which machines are handed more responsibility for low-touch trades, with AI eventually playing its part in tandem with other technology innovations. “We’re now seeing more API-based interaction between buy- and sellside, as well as AI-driven pricing platforms,” he says. “Increasingly, trading will be split between alpha-generating, high-touch desks staffed by humans and low-touch, asset class-agnostic desks assisted by machines.”

Sellside AI nous

Meanwhile, sellside firms are using AI techniques to better leverage and aggregate data inputs to improve execution outcomes. For example, UBS is rolling out an FX routing tool – ORCA, or optimal routing control algorithm – which factors in the cost implications of the different protocols offered by competing trading venues. ORCA systematises the trader’s evaluation of the pros and cons of alternative execution choices across the FX universe, with a rigour, speed and scale beyond human capacity. “With so many dimensions to consider, this can really only be achieved via machine learning,” says Giuseppe Nuti, global head of central risk book and data analysis at UBS, noting that ORCA ‘learns’ via a feedback loop and provides statistical evidence for its trading decisions.

Separately, UBS has developed a recommendation engine which matches its corporate bond inventory to the needs of fixed-income investors. According to Nuti, the tool is able to identify connections and circumstances that might lead to client interest in a particular bond that would not necessarily be apparent to a sales trader. He says the tool is improving the efficiency of sales trader interaction with clients, but nevertheless suggests we’re still in the early stages of applying artificial intelligence to trading.

“Clients are generally happy to buy an alternative bond which gives them a similar exposure to the one they actually wanted, but they still need to be aware of the circumstances in which correlations may break down,” he observes. “The possibilities of AI are boundless, but they rest on a lot of assumptions, not least data quality. It’s an iterative, long-term process.”

But few have reached the third phase, deploying machines that can think for themselves, trading efficiently and calmly enough to achieve consistent high-quality outcomes regardless of market conditions, i.e. like the best human traders, but on a more scalable and dependable basis. This is not only difficult to achieve, it is also problematic in a complex and highly regulated environment.

One way forward is suggested by an implementation shortfall (IS) algorithm launched in the US in Q2 2018 by ITG, which makes the leap from a sophisticated algorithm to an intelligent one. According to Dave Fellah, ITG’s head of quantitative execution analytics, the algo has been systematically trained on historical data to make its own decisions on how to carry out the user’s instructions, rather than being led mechanically by the rules laid out by human designers or coders. Like any new algo, the IS AI algo has undergone development, testing and certification in line with appropriate change management controls prior to release.

Even a sophisticated ‘traditional’ algorithm might need to be tweaked or recalibrated to trade effectively in unexpected market conditions, or might respond deterministically to rising prices. In contrast, faced with unusual market events, an AI-based algo systematically evaluates the outputs of the machine-learning models within its optimisation library, effectively selecting the approach most likely to deliver the best results in the circumstances.

“When training the algo, we provide boundaries similar to those it would face in the live market. As such, the algo learns to avoid the actions that lead to contact with those boundaries, similar to how a drone might be trained to avoid the actions that might lead to a collision. It’s about providing the algo with all the solutions to trade any security in any circumstances,” explains Fellah.

According to Duncan Higgins, head of electronic products in Europe at ITG, buyside traders are increasingly willing to allow their algos a little more discretion at the tactical level – with child orders being filled away from the desired price, or the trade taking longer to get done – if the overall deal beats its benchmark. “There is no reason why machine learning cannot be adapted to deliver on any set of execution benchmarks or tactics,” he said.

©BestExecution 2019

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FX trading focus : Overview : Lynn Strongin Dodds

By

Ian Rycott

-

January 21, 2019

THE UNDERCURRENTS IN FX MARKETS.

Lynn Strongin Dodds assesses how FX markets are responding to the latest macro, regulatory and technological trends.

The winds of change have certainly blown over the FX markets this past year. Interest rate policies diverged, trade wars erupted and Europe’s long and winding quantitative easing programme finally wound down. This is not even mentioning MiFID II, Brexit and the myriad of geopolitical tensions swirling above. The reverberations are expected to continue into 2019 which could spell a bearish picture for FX.

The ING 2019 FX outlook report (entitled ‘Peak Dollar‘) forecasts a negative dollar narrative to develop as US rates come off the boil by the end of the year and a subsequent slowdown in the economy that could impact the rest of the world. The forecast for Europe is no brighter. Although sluggish growth has been blamed on a relentless stream of ‘one-off factors’ last year it is hard to see a significant pick-up in activity in 2019. The European Central Bank is not expected to raise rates in any meaningful way and the European Parliament elections in May will divert attention.

The report sees a more mixed picture for emerging markets. A weaker dollar would be a boost but they would take a hit by declining world trade volumes and rising late cycle volatility. However, a great deal of the bad news has already been priced in and if these markets can survive the first half, modest rallies should be seen later in the year.

As for the nuts and bolts of trading, there are two pronounced trends, according to James Wood-Collins, CEO of Record Currency Management. “We are seeing more price determination from non-bank market makers and we are moving away from a world where forwards are being set by mechanical rate differentials,” he adds. “The close lock between markets has been broken.”

Non-bank participants such as US based Citadel Securities and London based XTX Markets first made their debut about five years ago and have been gaining ground ever since by competing on price and speed. Figures from consultancy Aite show that average daily non-bank trading volumes in the spot market rose to $575bn last year, up from $200bn in 2015. The Boston-based consulting firm projects that it could hit the $675bn mark in 2018 based on broader forex trading volume growth.

A separate study by Euromoney also depicts the non-traditional players making bigger inroads. They nabbed six of the top 50 places on its 2018 FX Survey, an annual ranking of market-makers in currencies. XTX more than doubled its market share to 7.3%, making it the third-biggest player behind JP Morgan and UBS. The US and Swiss banks, along with Citi and HSBC, have maintained a tight hold on the market that will be difficult to break. Over the years, they have built global franchises with integrated risk management, price discovery and execution tools that enable them to manage client flow effectively and cater to a wide range of trading strategies and order types.

By contrast, many of their larger regional and medium sized contemporaries do not have the deep pockets to make the required investments in the post financial crisis era. More stringent regulation such as Basel III capital requirements has caused an aversion to taking too much risk on their balance sheets.

Losing its voice

The other ongoing theme which is evident in other asset classes is that traditional voice traders are increasingly being usurped by their electronic counterparts. Although the FX market is still mainly OTC, with only a small percentage being cleared and exchange-traded, there has been a plethora of venues coming to the market offering a variety of routes to trade.

“Around 75% to 76% of FX is being traded electronically and we only see this continuing because it increases efficiency and reduces transaction costs,” says Tod Van Name, Bloomberg’s global head of foreign exchange electronic trading. “It is mainly in the spot market but I see it spreading to other FX instruments going forward. We also think MiFID II has been a driver in pushing more buyside firms to trade electronically because they now have to substantiate where and how they trade and whether they have achieved the best price.”

Although buyside firms are turning to e-trading, hedge funds, particularly in the US, have been the most active on a volume weighted-basis. Globally, they increased their share to 82% in 2017, up from 64% the year before, according to Ken Monahan, a senior analyst on market structure and technology at Greenwich Associates and author of a study on e-FX. At the same time, they reduced their usage of single-dealer platforms by a more than half, from 13% to 5%.

As with any industry the forces of competition have been blowing and there has already been a wave of mergers over the past three years with platforms such as Hotspot and 360T being bought by Bats Global Markets (which is now part of the Cboe) and Deutsche Börse respectively. Many in the industry are predicting more consolidation. Innovation and cutting-edge technology will be the key differentiators, but this requires scale.

“The technology is changing faster than the platforms and there is always a cycle of development followed by a wave of consolidation,” says David Clark, chairman of The European Venues and Intermediaries Association (EVIA). “This will only continue because the major objective of these platforms is to build a better service. “

The same philosophy applies to the development of algos and transaction cost analysis tools. Research from Greenwich Associates shows the use of algorithmic execution in FX is in its early days. Only 10% of firms in FX employ algos versus 50% in equities – but that number is growing. “In many ways, FX is getting closer to equities in terms of fragmentation of participants and liquidity, says Vikas Srivastava, the chief revenue officer of Integral. “Algos and smart order routers for spot trades were at the genesis, but that is changing and we are seeing greater innovation across the spectrum – spot, forwards and non-deliverable forwards.”

Christopher Matsko, head of FX Trading Services at FactSet, also believes there will be more progress on the algo front. “We are seeing an uptick in artificial intelligence used by banks for routing within the bank’s own strategy suite,” he adds. The question is, how can a platform provide a holistic view of the market when it is fragmented and complicated. The objective is to empower traders with useful, actionable data points such that their trading decisions are more informed and thus more strategically executed within the market.”

There is also a great deal of work on automating the back and middle office functions. Blockchain is expected to play an important role but at the moment there is more talk and pilot programmes than actual solutions. The decision by CLS, a key settlement house, to water down a two-year blockchain project amid security concerns raised by the world’s main FX dealers is a reflection of the challenges.

Alan Marquard, chief strategy and development officer, CLS, believes the technology “has the potential to significantly improve efficiencies and reduce operational risk in the FX market if applied to certain post-trade processes. Our focus is on delivering market-wide solutions through open-source initiatives and industry consortia. This will ensure DLT-based platforms and applications are effective, interoperable and suitable for the broadest range of financial market participants.”

However, he adds that “new technologies like DLT will only transform the market when they are deployed to solve real business problems. That requires a deep understanding of business processes and platforms and for activities currently undertaken by FMIs (Financial Market Infrastructures), the right levels of oversight, governance, credibility and trust.”

On the regulatory front, the key initiative of the last 18 months has been the FX Global Code of Conduct, a voluntary set of principles launched in May 2017 to restore trust and curb bad behaviour in the wholesale foreign exchange market. Views are divided on whether it will have the intended impact on behaviour, and currently, sellside firms have signed on but their buyside colleagues have been slow in their adoption. “The Code is one of the topics that has triggered a lot of comment,” says Wood-Collins. “To me, the challenge with regulation and the Code is having to collect, store and report on the different areas in the business. They shine a brighter light on every aspect of the market and it becomes clear who is doing the right things and who isn’t.”

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Analysis : Equity markets in Europe : Winter 2018/19

By

Ian Rycott

-

January 21, 2019

LiquidMetrix analyses consolidated performance figures for equities and ETFs traded in Europe in the previous quarter.

The charts and figures below are based upon LiquidMetrix’s unique benchmarking methodology that provides accurate measurements of trends in market movements. We have seen many changes in market microstructure over the last year, and here we present statistics based upon Q4 2018 market data to provide some insights on current trends.

To give an overall indication of the market trends in blocks in the last quarter of 2018, we compare the value traded in Europe against the % traded LIS. Although DVC will have an impact on LIS, we can see a continuing trend and desire for block trading, but the Q4 figures indicate that there was a slight decrease in the overall % of LIS across all flow towards the end of the quarter that may indicate a lack of liquidity due to market volatility.

One criteria to assess Venue quality is the % of times the Venue has the Unique Best Price in the market. This is a measure of how competitive the Lit markets are, as it is based upon the major index constituents of each market.

The Lit markets have altered characteristics over the year, with Aquis now ranked third in Best Prices on all markets having replaced Turquoise and Bats over the third place ranking they had previously. The range of %Best Prices increased on most venues from the previous quarter indicating an increase in price updates across all markets , a symptom of the increased volatility.

The market liquidity picture corresponds with the figures seen on the Best Prices, in that increased volatility has led to less liquidity actually being made available on Lit venues.

Taking a 10 basis point measure from the mid price, we can see that liquidity dramatically reduced on the DAX, with significant decreases on CAC and SMI; the MIB and FTSE also decreased, but to a lesser extent. All MTFs had corresponding reductions in liquidity, but relative to the values previously available.

The tables below give one method of how to assess performance of Dark Pools in Europe. For trades in each major index constituent stock we review the value traded during the period, the average trade size and the relative impact on the lit market using as a measure the % of times there is a corresponding movement on the lit market.

We can observe that there are different characteristics across the various market centres and these differences will be interesting to review in Q2 2019 for the pre-/post Brexit trends

The Average Trade sizes give the clear advantage of Liquidnet and the corresponding very low correlation with Lit market movements.

For Q4 2018, we can see that on most markets Turquoise (with the Plato Blocks) traded the largest value in the period, but this was not the case on DAX and MIB.

The same methodology can also be used to assess performance of Periodic Auction Venues, as by their nature they will have behaviours similar to the Dark Pools.

Using the same measures and ranking by Value traded, the clear leader is Bats Periodic Pool, although we note there are larger average Trade sizes on other less Traded Venues.

The same picture of relative performance appears across most markets with SGMY in second ranking, apart from DAX where AQXA ranks second, but with a much smaller average Trade size.

Overall, the Periodic Venues do very well in relative impact performance on the lit market, with much lower figures (around 20%) of correlation than the Dark Pools (40 to 50%).

ISS LiquidMetrix are pioneers in the measurement of European Fragmented markets, and provide research,TCA best execution and Surveillance for financial market participants and regulators – www.liquidmetrix.com

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FX trading focus : Swissquote : Muamar Behnam

By

Ian Rycott

-

January 21, 2019

FROM LITTLE ACORNS…

Muamar Behnam, Head of Global Sales HQ at Swissquote Bank spoke to Best Execution about their operations and development from a regional to global player.

Can you please tell briefly about your company and its offerings?

Swissquote Bank is more than an FX Broker. Our online bank was founded in the late 90s, and started to offer online trading on various exchanges. We also went public early, our IPO was done in May 2000, and since all our financial information is accessible to the public, they can see we are solidly capitalised. The fact that we do not pose any counterparty risk is one of our major selling points with institutional partners. On the traditional trading (stocks, funds, bonds, derivatives, etc…) side of the business we have the most comprehensive online offerings for banks and brokers with more than 2.8 million tradable instruments across over 30 markets worldwide.

We came quite late into FX. It wasn’t until 2008 that we entered this market. We then acquired two of our main competitors in Switzerland – ACM (Advanced Currency Markets) in 2010 and MIG Bank in 2013. The acquisitions completely changed the profile in that we went from being very Swiss-centric to a much more globalised bank, with regulated entities in London, Malta, Dubai and Hong Kong. Our client base now is 90% international on the FX side.

How have the FX markets changed over the past year in light of regulation in Europe and geo-political events?

Regarding geo-political events, the uncertainty around Brexit has definitely created good levels of volatility that has helped us generate increased volumes. We think that 2018 will probably be better than 2017 on that aspect. As to new regulations, specifically ESMA leverage limits, our London entity got an initial hit by the 1:30 figure, but they are now almost back to their previous levels.

Other entities (Switzerland, Dubai and Hong Kong) were not impacted as they don’t deal with business from EU territories. The London office is important to Swissquote and will continue whatever the outcome of the Brexit negotiations (deal/no-deal, etc…).

What were the drivers behind your acquisition of Internaxx and how do you plan to develop the business?

We have strongly developed our FX business outside of Switzerland, but not much was done on the traditional trading business in recent years. Our management identified Internaxx as an entity with similar DNA as ours and therefore decided to acquire the Luxembourg-based broker. It will be our entry door to address EU business and more.

How have you used technology and innovation to improve your execution and service?

Technology and innovation are part of our DNA. Our founders, Paolo Buzzi and Marc Burki, are both fiercely technology driven and graduates of the Polytechnical Institute of Lausanne. Therefore, technology is at the heart of everything we do at Swissquote. Most of our tools and client platforms have been developed internally. Out of the 600 plus headcount at Swissquote Bank worldwide, over 60% are engineers, developers and IT people. This is quite an unusual ratio for a bank but that is also what sets us apart in the Swiss banking landscape.

What difference will the move from Gland to LD4 in London make?

In a business where every millisecond can be subject to debate, you can easily imagine that relocating our FX infrastructure closer to our liquidity providers is a necessary and fundamental move. The project which has lasted a year is now being finalised. As we did a progressive migration, we have seen our execution improve step-by-step over the past year and we should be at full speed in early 2019.

How are you building and managing sustainable relationships with a pool of liquidity providers (LPs)?

It’s a job that our Head of FX Dealing, Ryan Nettles has been doing for the past 10 years. Not a single day passes without him or his team being in contact with our LPs (liquidity providers). And I must say the quality and depth of our liquidity has been improving quite strongly over the past years as we have become a more important player in this industry. Recent addition of non-bank liquidity has also allowed Ryan and his team to enhance further our offering.

What does your retail expertise bring to the institutional marketplace?

Our institutional business has started to pick up these past two years. It was almost non-existent and static before the acquisition of MIG Bank. It really took off seriously in 2016 but it took us time to find the right external service providers, develop the right tools for our institutional partners and to put in place a solid risk strategy. So it was more about internal organisation than our retail expertise that helped us strengthen this side of the business. And of course, once all was ready we had to identify the right relationship managers and sales people to deal with this specific profile of client.

What are the biggest challenges when it comes to managing multiple liquidity flows?

The main challenge is to customise the flows (both layers and depth) in order to customise and offer the best (the closest to tailor-made liquidity) to all our customers. We have now totally separated the teams dealing with the retail flow and institutional flow. We also have two teams managing the flows with LPs and there are specialists on both sides. We restructured the business and the situation is much healthier now than it was before.

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BUYSIDE INDEPENDENCE INCENTIVISES BROKER SERVICE BATTLE.

Relationships are being renegotiated as services evolve to match new landscape. Dan Barnes reports.

INNOVATIONS IN FX TRADING

Neena Dholani, Global Marketing and Programme Director at FIX Trading Community explains the evolution, from integration technicalities to tools, data and analytics, of FX trading.

THE EURO CLEARING CONUNDRUM.

As the UK teeters on the edge of a ‘no-deal’, regulators and industry players are making contingency plans. Lynn Strongin Dodds reports.

UNINTENDED CONSEQUENCES.

Unbundling has been a long time coming but as Gill Wadsworth explains, it may not level the playing field as hoped.

RESEARCH UNBUNDLING – ONE YEAR INTO MiFID II.

Rebecca Healey, EMEA Head of Market Structure and Strategy, Liquidnet.

MIND THE GAP!

FROM DEALER TO ROBO-TRADER IN THREE STEPS

Chris Hall looks at how the industry is preparing for the next generation of trading.

THE UNDERCURRENTS IN FX MARKETS.

Lynn Strongin Dodds assesses how FX markets are responding to the latest macro, regulatory and technological trends.

LiquidMetrix analyses consolidated performance figures for equities and ETFs traded in Europe in the previous quarter.

FROM LITTLE ACORNS…

Muamar Behnam, Head of Global Sales HQ at Swissquote Bank spoke to Best Execution about their operations and development from a regional to global player.

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