Industry viewpoint : Plato Partnership

January 21, 2019

Robert Barnes & Mike Bellaro

TURQUOISE AND PLATO PARTNERSHIP DEEPEN RELATIONSHIP WITH NEW LIT AUCTIONS PARTNERSHIP

Dr Robert Barnes, CEO, Turquoise & Mike Bellaro, CEO, Plato Partnership

In September 2016 Plato Partnership, the not-for-profit industry group representing the buy- and sellside with a vision to improve market structure in Europe and reduce transaction costs, announced its collaboration with Pan-European MTF Turquoise to create Turquoise Plato™.

The partnership represented the first time that the buyside, sellside and a trading venue had joined forces to deliver increased efficiencies in anonymous European block trading. It marked a significant milestone for the industry and created the most effective dark trading venue in the market.

A great deal has changed since 2016, but the relationship between our two organisations has continued to grow from strength to strength, as both have striven to increase transparency, reduce trading costs, simplify market structure and act as a champion for end investors. The next stage in our development is the launch of Turquoise Plato Lit Auctions™, a pre-trade transparent matching mechanism that provides high quality liquidity with an efficient design.

The announcement builds upon the success of Turquoise Plato Block Discovery™, which now has a value traded exceeding €150bn, 98% of which has occurred since the September 2016 announcement of our co-operation agreement. The relationship with Plato has proved highly successful in supporting the growth of Turquoise Plato Block Discovery™, ahead of and following the implementation of MiFID II.

The Lit Auction initiative caters for trades of all sizes in more innovative and collaborative ways. While average trade value is approximately €10,000, trades above €500,000 weren’t uncommon. The largest single trade via Turquoise Plato Lit Auctions™ stands at just over €10m, reflecting the growth and strength of the two brands.

We are both immensely proud of our track record in delivering tangible improvements to the market and Turquoise Plato Lit Auctions™ is yet another example; providing high quality execution in a MiFID II-compliant fashion. If the example set by Turquoise Plato Block Discovery is anything to go by, we expect the next year to be one of exponential growth for Turquoise Plato Lit Auctions.

Growth of Periodic Auctions

When MiFID II went live in January 2018, the adoption of periodic auctions added a complementary liquidity channel of execution for both the buy- and sellside. Their growth is because these mechanisms allow for greater price protection while exhibiting very low toxicity of liquidity and reducing speed advantages of some market participants that are prevalent on lit Exchanges. We also believe some of the increase can be attributed to volumes that had previously been executed OTC prior to MiFID II, as a number of buyside firms remain hesitant of the use of Systematic Internalisers.

As the quality of executions in the Turquoise Plato Lit Auctions™ is exceptional, with consistently lower price reversions [only 10% of trades displaying any movement in the underlying primary BBO midpoint +200ms] after a trade than on continuous dark pools, the extension of the collaboration between Turquoise and Plato Partnership will bring exceptional rewards for market participants who are seeking best execution rates and lower affiliated costs. This combined with the truly multi-lateral nature of the service, as evidenced by a mere 0.03% of trades occurring where the same counterparty has submitted orders of the same magnitude into the auctions within a 100ms time period (maximum time duration within which an auction can occur), further highlights this quality.

Looking to the future

Well-functioning markets are essential for the buyside, sellside, end investors and other market participants and, as both Plato and Turquoise continue to deepen their relationship and fully support initiatives that seek to make markets work better, the new Turquoise Plato Lit Auctions™ will provide investors access to new sources of liquidity and best execution rates.

The lit auctions is a natural choice for both parties as they work towards their goals of enhancing the fairness and robustness of future markets, as well as reducing complexity in the marketplace. We must continue seeking to address any element of market model inefficiencies, and an initiative such as Turquoise Plato Lit Auctions™ provides a solution to current and future problems affecting markets around the world.

In 2019 the market will continue to go through significant changes – the largest we’ve seen since the Big Bang in 1986. In the future, as now, Plato Partnership will continue to improve trading for end investors across the globe. We look forward to the challenge.

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Market Opinion : The impact of regulation : Silvano Stagni

Ian Rycott

January 21, 2019

CHANGING RELATIONSHIPS.

Silvano Stagni, Managing Director of Perpetual Motion Consulting and Research, asks whether we have the data to navigate the changes to the relationship between making the investment decision and executing it.

New rules, new reports, and changes to business processes stand out when financial regulations are implemented. They represent the visible part of the iceberg and we all know that the largest and most dangerous part lies beneath the surface. The separation of the investment decision from the execution decision was brought about by a combination of the unbundling of research from execution charges, best execution, market abuse regulation, an increase in transparency levels and the consequent empowerment of the client.

It does not matter if one person decides what to invest in and where to execute the relevant transaction. One must rely on publicly available information and the other must be based on the best possible combination of a) price, b) total cost of the transaction, c) likelihood of execution, and d) speed of execution. Research provides the information to make the decision to invest in a way that must not be connected with the decision of where and how to execute the relevant order.

MiFID II transaction report shows the code of the investment decision maker, the code of the trader, and the code of the venue. If there is an unusual market movement it will be possible to conduct an insider trading investigation. The trader identification code combined with the code of the execution venue, will feed into reports that assess the quality of the execution.

MiFID II and MAR strictly limit the inducement to promote order flow. This is the basis of the separation between the two decision-making processes. Broadly speaking the decision to invest is based on research and the decision on where to execute the relevant order is based on market data, venue charges and liquidity information.

What information needs to be captured to manage this separation of roles? And, 12 months into MiFID II, are we making use of the data that is available?

Nobody is asked to document why they have made an investment decision unless there is a doubt whether a decision to invest or disinvest was the result of publicly available information. If that is the case, it helps to show the relevant research. MiFID II rules on unbundling research have generated data on the usage of research for the whole of 2018, which is a large volume of data. The majority of available research portals either collect all the information relative to a research provider – everything used by a specific company, or research user, irrespective of the source – or everything available by a specific research provider, irrespective of who downloaded it.

In the summer of 2018, GreySpark published a paper called “Living with MiFID II: Accessing Unbundled Research” where it indicated that they only found one portal – Substantive Research – that “offers asset managers analytics that suggest a series of alternative pieces of research content related to the reports or notes that have already been consumed by the firms”. This is very valuable because it allows investment managers to narrow their field of vision to the specific content providers that ultimately meet their specific demands for specific pieces of research on a per-topic basis, and enable a way to document their investment decision.

MiFID II has potentially provided traders with reports that allow them to investigate all the possible execution venues for a specific instrument. The venue execution quality report (commonly known as the RTS 27 report, based on the number of the MiFID II regulatory technical standard that describes it) features too much data to be easily digested quickly. It consists of nine different tables, and some of them need to be repeated for every day in the quarter where transactions associated with a specific ISIN code were executed. The purpose of this report is to prove the ‘quality of execution’ of a specific venue, for a specific instrument in a specific trading mode (RFQ, auctions, etc). One of the general complaints is that the RTS 27 report is too big to be of any use. Execution venues and investment firms have a (smaller) yearly report (commonly known as RTS 28) that states the five most used execution venues for each instrument and explains the criteria used to choose execution venues.

So, do we have enough data to navigate the changes in the relationship between making the investment decision and executing the investment decision? Probably yes, but only when things go well and those decisions are not questioned.

The success factor of an investment decision is quite straightforward: either making a profit or stop a loss from getting worse; but it could be questioned (for instance) by:

• The regulator during an insider trading investigation;

• A client of the portfolio manager if the investment decision leads to a loss.

In both cases it would be convenient to have an audit trail documenting the sources used as a way to prove good faith, and that the decision to invest was reached based on publicly available information.

A client has five years to query the quality of execution of a specific transaction, but the evidence is buried in very large reports. There is also a mix of structured and unstructured information that is used to navigate both decisions and to show how one led to another. So, although technically the data is available, it may be unwieldy to use if one only relies on traditional query methods for sequential databases.

Software tools that capture and correlate both structured and unstructured data, possibly used in conjunction with big data software, could be used to substantiate those decisions when required. MiFID II is 12 months old, and making use of the vast volume of data generated by complying with its rules will be the next challenge. Navigating the relationship between making the investment decision and executing it in a way that allows you to stay away from ‘troubled waters’ is a prime example of the need to analyse large volumes of data in a straightforward way. There are tools available to do it but they require lateral thinking to start using them as there is no current ad hoc implementation of such tools at the moment.

©BestExecution 2019

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FX trading focus : Technology is key : Mathieu Ghanem

Ian Rycott

January 18, 2019

HOW LONG WILL CONSUMERS OF FINANCIAL SERVICES WAIT?

Mathieu Ghanem, Global Head of Sales and Marketing for ADSS.

Through 2018 there was a lot of talk about the role technology will have in financial services. When cryptocurrencies were increasing in value the cry was for the faster implementation of tech, but as soon as digital assets lost value the ‘bears’ appeared to tell us that any changes would damage the industry.

What these opposing views failed to understand is that consumers, the financial services clients of the future, are embracing technology and they are the drivers for change. This audience has quickly and easily assimilated technology into all parts of their lives, and will do the same with investments and trading products. The new customers have completely different digital expectations.

Whether they are taking an Uber, ordering from Amazon or watching content via Netflix, the consumers have adopted new ways of accessing products and services. Blockchain, AI and algorithms are making the same changes to the world of finance. There are still a few people in the industry who stand at the side of the road and wait for a taxi, go into town to shop, or rush home so they do not miss their favourite TV programme, but they are not the people who will take the financial services sector forward.

The customers you are working with want and expect technology to provide them with an improved experience. They expect to be able to share data with you and for this to be used to provide the service they want. Failing to offer this will damage your business. In simple terms you will be left behind.

At ADSS we understand that the implementation and use of new technology is absolutely essential to the future of investment and trading. For eight years, from the formation of the company, we have been investing in technology and know that this is the way forward. We have always been customer-centric and now, more than ever, this means that clients expect us to be able to capture appropriate sets of data and apply sophisticated analytics to obtain the best insights to guide their trading.

The issue for our industry is that no-one is one hundred per cent certain which technology will succeed. We all know that change is going to happen but the final form this will take is still unknown. In a recent survey Fujitsu suggested that the levels of uncertainty around future technology means that business leaders around the world favour a co-ordinated, global approach led by intergovernmental bodies and governments. This is the message we are hearing from the large global retail and investment banks. They understand the amazing levels of change the new technology gives, but want to invest in the right systems.

The call for governments to be involved is obvious as they would be responsible for developing the regulations which control the use of the technology and through this standardise the systems, or the way systems interact. Across all of our operations we have always advocated strong regulation to create a level playing field for firms, and can see the advantages of having national involvement in defining how new fintech should be introduced. However, we also know that we cannot wait for this to happen, consumers need us to keep investing in our systems.

For us we have looked at the introduction of technology based on our own requirements and criteria. Next generation technology has to provide four interlinked deliverables – security, access, transparency and advantage. The tech has to do everything we expect today and a lot more. It has to be informed, fast and safe giving genuine trading benefits to the people who use it and, because this is a very competitive market, it has to be able to reward loyalty.

Cryptocurrencies have changed peoples’ approach to investments. They are now trading digital assets, and want the same access, control and visibility applied to traditional markets. This means that technology has to change the products and services they are buying.

Trading will always be very personal but the new breed of investors want AI and algorithm-based intelligent platforms. They trust these to provide them with the investment options they want. They require fast and easy access to markets from intelligent apps, with access to the latest assets. Social marketing and information is 24/7 and firms need to provide services which meet the demands of these new clients who understand how to make technology part of their decision-making process.

This approach is leading to the democratisation of trading. Many new investors have the required skills and want to trade direct to the market, they do not want to go through an intermediary. If they cannot directly handle the trade themselves they want to know that, through the latest technology, they still have the best options to place an order. This new audience will not sit around waiting for a broker to call them back. They will trade when they want, where they want. And, they will need to be rewarded for their loyalty.

Putting in the necessary regulation for AI through to blockchain may be the preferred option and the way we would all like to see this sector develop. However, the new audience which is trading today and in the future will not sit around waiting for the relevant authorities to decide what is best. They are already online, accessing the information in the way that they want, and looking for firms to provide the assets and services they require.

©BestExecution 2019

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OCC Launches Renaissance Initiative to Modernize Technology Infrastructure

GlobalTrading

January 15, 2019

Capabilities of Risk, Clearing and Data Systems will be enhanced to better serve market participants

To better serve its stakeholders and the users of the U.S. equity options and futures markets, OCC, the world’s largest equity derivatives clearing organization, today announced the Renaissance Initiative, a multi-year investment to comprehensively redevelop and modernize the company’s risk management, clearing and data systems.

“Last year was a turning point for OCC in terms of improving our risk and control environment and our ability to demonstrate compliance with our heightened regulatory responsibilities as a Systemically Important Financial Market Utility,” said Craig Donohue, Executive Chairman and Chief Executive Officer. “While we have more work to do to strengthen our foundational capabilities, we also must modernize OCC’s technology to better serve market participants.

“The Renaissance Initiative is perhaps the most important project undertaken by OCC in the past 20 years. When completed, it will enhance OCC’s resiliency, improve our compliance posture, and help us operate in a more effective and efficient manner. It also will make OCC a more nimble organization that will deliver transformational business capabilities to better serve the users of our market.”

John Davidson, President and Chief Operating Officer, added, “The Renaissance Initiative will provide OCC with the ability to operate clearing, data and risk applications based on a modular architecture. It will improve our real-time and extended hours risk management capabilities, drive operational efficiency through process engineering and automation, improve information transparency and service to clearing firms, and increase product development agility.”

OCC’s Renaissance Initiative will enhance the capabilities of its Risk, Clearing and Data Systems.

For Risk Management, the internally developed risk platform elements of the Renaissance Initiative build upon the program already underway at OCC with many features operating on Cloud infrastructure. The Renaissance Initiative will provide an environment for intra-day risk management, intra-day computations, pricing and re-valuation. It will enhance the efficiency and speed of margin, stress-testing and back-testing capabilities. The Renaissance Initiative also will increase transparency and insight for clearing members into exposures via ad hoc queries and real-time processing.

With respect to OCC’s Clearing Systems, following a lengthy and rigorous analysis, OCC has decided to use a combined approach, pairing internal work with the adoption of the TRADExpress Real Time Clearing (RTC) solution developed by Cinnober, which is being acquired by Nasdaq following completion of its successful tender offer. The solution delivers several benefits for OCC and its clearing members and participant exchanges, including enhancements to: ad-hoc reporting with new filtering functionality, control mechanisms throughout systems, application programming interfaces (APIs) that will make it easier to procure and submit data to and from the system, a functionally easier process to introduce new products, enhanced industry-standard futures processing (including Average Price Reporting and give-ups), and processing of clearing member trade agreements.

The development of OCC’s Data platform, which will be independent from its clearing and risk systems, will comprehensively address OCC’s historical data limitations. The Renaissance Initiative will build a proprietary data model to support OCC’s business that is separate and distinct from its current technology solution. OCC will have self-service capability for data discovery, search, and historical analysis. It also will have a scalable and secure centralized enterprise repository that can serve data to concurrent processing needs, including report generation, back-testing, and stress-testing.

“OCC’s Management Committee and Board of Directors determined that integrating our internally developed risk and data platforms with the clearing system and leveraging the commodity components available through a vended solution offers significant advantages to OCC,” Davidson noted. “This includes field-proven technology that has been deployed successfully in large scale operating environments like OCC, along with highly refined business applications and flexible plug-in architecture that will allow OCC to have full control over new product development. And by being scalable and resilient, it will support straight-through processing, real-time risk management and public cloud deployment.”

Donohue added, “The Renaissance Initiative is an exciting project for all of us at OCC. The successful execution of the Renaissance Initiative will provide OCC with a flexible technology infrastructure and enhanced capabilities to serve the investing public and to grow as an organization.”

Members Exchange Set to Open But is it Needed?

GlobalTrading

January 9, 2019

By John D’Antona Jr.

With the New Year upon the equities market, there will also be a new equities marketplace.

Members Exchange, or MEMX, has been announced by a consortium of nine financial services firms, including retail-focused powerhouses Fidelity, Charles Schwab and TD Ameritrade. The U.S.-based MEMX will be owned entirely by its founders: Bank of America Merrill Lynch, Charles Schwab, Citadel Securities, E*TRADE, Fidelity Investments, Morgan Stanley, TD Ameritrade, UBS and Virtu Financial.

“The founding members of MEMX represent leading retail brokers, global banks and financial service firms, and market makers – a diverse array of market participants organizing for the common goal of improving markets for retail and institutional investors,” said Douglas Cifu, CEO of Virtu Financial, in a released comment. “The launching of MEMX is a testament to the market-wide demand for competition, innovation, and transparency.”

The new exchange looks to crack into a market already dominated by the U.S.: Intercontinental Exchange (ICE), Nasdaq and CBOE as well as IEX.

MEMX will file for SEC approval in early 2019, the press release said.

In a statement, Members Exchange said its goals include lowering costs, increasing competition, boosting transparency and simplifying the trading process. In its announcement, MEMX said it will offer a “simple” trading model and a “low-cost” fee structure.

But does the equities market need yet another exchange?

In this era of fragmentation, internalization, off board trading and dark pools totaling over 40 venues in which to trade, can MEMX add something to the current market structure?

Aite Group capital markets analyst Spencer Mindlin recounted that over the past 20 years the market has been through two major arcs of modern market fragmentation and consolidation in the U.S. exchange industry. Demutualization kicked it off by thrusting exchanges at odds with their members. The first round was fought in the late 1990s and early 2000s, and pitted ECNs with electronic markets like Island against the incumbent exchanges.

Then, in the mid- to late-2000s, BATS and DirectEdge gained significant market share by offering market models that catered to the next generation of market makers, high frequency trading firms. Each time a new entrant was successful, it was in part because its interests were in line with their members and also because they had members represented in their cap table. The market has now consolidated itself down to three major exchange groups, with one independent exchange and a load of ATS and dark pools, all competing for market share.

So, is it déjà vu all over again?

Given the IEX exchange application approval, the introduction of a new exchange application should be no surprise. Faced with declining trading revenues and increased competition, exchanges have turned to price gouging the costs of data and technology.

“So, their customers have become very price conscious and vocal,” began Mindlin in a conversation with Traders Magazine. “The SEC has often found itself forced to referee law suits and administrative proceedings brought by firms filing suit against exchanges over unfair and unreasonable charges. And while it seems like the issues with access fees are mostly behind the industry and the upcoming access fee pilot will stick a fork in them, this most recent debate is more focused on market data and technology fees. The nuances and complexities of the fee schedules can get complicated, despite the best efforts by some CEOs to dumb it down through show-and-tell of networking equipment and an explanation of their cost during recent SEC-hosted industry roundtables.”

It may look like a rinse-and-repeat exercise when a consortium of banks, brokerages and high-frequency trading firms band together to launch a new U.S. exchange like MEMX, he continued. But the market’s structure is very different than it was the last two times. With round one, the government was intervening to break up of a monopolistic market structure that lacked technological innovation. The marketplace had a kaleidoscope of participants providing supply of and demand for order flow. During the second round, during a period of rising markets and volume there were dozens of new and sophisticated liquidity providers looking for a platform to trade since the incumbent exchanges couldn’t keep up. The contour of participants have continued to change since then. There are now less banks, and the ones that remain have almost all exited primary market making businesses. The HFT industry has changed too; profits have normalized and there are only a fraction of firms that remain with the speed and scale to survive.

Can MEMX work?

“I think MEMX has a good chance of winning market share from the incumbent exchange groups,” he said. “This new consortium-owned exchange by nine firms is very much being led by Virtu and Citadel, who together control about 40% of order flow in US markets. He who controls the market’s liquidity, controls the market. So, with the members as owners of MEMX, the exchange should be able to build the market and fee structures in their image. On the surface, it seems like the owners are in good positions: start a new exchange, route your order flow to it; maybe you exit, maybe you don’t. Still, MEMX might really just be a bluff by its owners to try and force the exchanges’ hand and come to terms with reduced pricing – a metric that would also allow the members to declare victory.

But, Mindlin cautioned that the market has seen other consortium-owned exchanges and venues try to enter and fail. While it’s not expensive to build exchange technology any longer, it is risky to run an exchange and can get costly to manage over the long-term, he noted. Large competitive financial institutions almost always find it very challenging to collaborate. And the exchanges have gotten much more savvy than they were when they found their market shares picked off by DirectEdge and BATS.

“I suspect the exchanges will be much tougher this time and are better prepared to defend their positions,” Mindlin said. “Cost pressure is being felt all around, but some firms in the supply chain just refuse to budge. This is not the first attempt by the banks and brokers to lean in on the supply chain around them. We’ve seen the large consortium play with banks firing shorts across the bows of incumbent providers before. One recent example that comes to mind is Symphony, also consortium owned, vs Bloomberg.”

One senior trading head at New York-based broker-dealer told Traders Magazine that a new exchange was always welcome in that new entrants can stimulate competition and lower data fee costs. But again, a new exchange means new costs to connect.

“It’s great to have another venue out there. We have not seen revenue dropping with regards to connection costs and data fees on their standpoint,” said the trading head. “What you could wind up seeing is ICE and Nasdaq change their models and allow for the buyside to connect in without using a broker dealer like MEMX is proposing. This, in effect, could increase pressure on the brokers margins.”

Kathryn Zhao Winner of Excellence in Electronic Trading

GlobalTrading

January 7, 2019

Hi, my name is Kathryn Zhao, and I’m the Global Head of Electronic Trading at Cantor Fitzgerald. I’m truly honored to be nominated and rewarded with this Excellence in Electronic Trading award. It’s a recognition of my contributions and dedication to electronic trading, and I really think that this award marks a milestone in my career.

I have worked in bulge bracket firms both as a portfolio trader and as a global head of electronic trading quantitative research, which form a unique and advantageous foundation for my electronic trading career. In 2017, the unique opportunity of building out a brand new electronic trading platform drew me to Cantor Fitzgerald. These type of opportunities do not come along often.

I’m very proud of what we have achieved so far. Within the last six to seven months, we’ve not only finished building out the Precision Algo Platform, but also wrote out a set of differentiating algos. As we roll out our next-generation Precision Algo Platform, we want to help shape the industry standard for algo development.

I have a lot of advice, but just to name the top three, the first one would be to build your own brand. It needs to be rock solid. One example would be you want to be referred to as a person who always delivers on time, and with high quality.

Second, you want to be the most prepared person in the room. This will enable you to be more confident, and more assertive in your message.

Last, but not least, you want to seize the opportunity. Don’t be afraid to step out of your comfort zone. You want to disrupt life as you know it — if you do that, remarkable things will happen.

MiFID II Boosts Electronic Fixed Income Trading

GlobalTrading

December 18, 2018

By Shanny Basar

Electronic trading has grown between 77% and 56% across bond asset classes since the introduction of new regulation in the European Union this year.

MiFID II went live in the EU at the beginning of this year and aimed to shift trading volumes from over-the-counter markets, such as in fixed income, to more transparent regulated markets and trading venues.

The International Capital Market Association described MiFID II as the most significant development to impact European bond markets in memory. The trade group said in a report last week that while European bond markets have been ‘electronified’ for more than two decades, MiFID II has provided “a slight but discernible nudge.”

ICMA latest report shows European bond markets are still waiting to experience the benefits of MiFID II implementation https://t.co/hZTkH6U4qB… pic.twitter.com/nfL0HgyEph

— ICMA (@ICMAgroup) December 6, 2018

“The survey responses suggest that while the increase in electronic trading is not significant, it is prevalent (77% to 56% across bond asset classes) and perhaps more noticeable in the relatively more commoditized supranational, sub-sovereign and agency; and investment grade credit markets,” added ICMA.

The association continued that some firms are opting to move most, if not all, of their trading onto venue.

“It would further seem as if much of this incremental shift to more electronic trading is through the use of ‘move to venue’ protocols (sometimes referred to as ‘processed trades’), whereby the original pre-trade negotiations take place off-venue (via messaging, ‘chat’, or over the phone), but the final execution takes place on-venue,” said ICMA.

Consultancy Greenwich Associates said in a new report that although MiFID II has not caused a sea change in electronic fixed income trading volume yet, but year-over-year growth was meaningful. Electronic trading accounted for almost 40% of client activity, up from 33% last year.

“The MiFID-driven shift to electronic execution is real,” said Greenwich.

The report added that the increase was most pronounced in interest rate swaps, where electronic execution jumped from 20% of total volume to 33%, and in cash investment grade credit (59%, up from 52%).

Tom Jacques, a consultant at Greenwich Associates, said in the report: “In the long run, the biggest impact of MiFID II on fixed income might have less to do with changes in research payments and more to do with a shift toward electronic execution, with innovative technology becoming an increasingly critical competitive advantage.”

Transparency
ICMA continued that liquidity and market functioning appear to have been maintained since MiFID II went live. The report cited market data provided by Trax, the MarketAxess reporting subsidiary, which showed that traded volumes (and trade count) this year in European investment credit, high yield credit, and sovereign bond markets are very much in line with last year.

However, there are ongoing issues with respect to the transparency regime and the accessibility and quality of pre- and post-trade data. Nearly all, 86%, of respondents, said they find it ‘difficult’ or ‘very difficult’ to access data. In addition, nearly three quarters, 73%, said less than 10% of the available data is ‘usable’.

Martin Scheck, chief executive of ICMA, said in a statement: “Despite the resource commitment to meet the obligations of MiFID II our members, both buy and sell-side, are not yet seeing the benefits of this regulation although they do understand that it will take time for the many challenges to be addressed and for benefits to accrue. Data quality and accessibility were cited as particular concerns.”

The association said although this will improve over time, the regulators “missed an opportunity” to provide a utility-based consolidated tape for fixed income.

As a result, public best execution reporting is challenging and expensive to produce, as well as barely used. Firms said they already had robust best execution policies in place before MiFID II, and 90% said the regulation has not had any material impact. In addition, 95% said the best execution data reporting requirements, under RTS 27 and 28, are “challenging, time and resource draining, and of little or no value.”

More concentration
Greenwich said regulatory changes and difficult market conditions have led to increased consolidation across the market, which may lead to lower levels of liquidity and greater volatility in times of market stress.

*New* A Challenging and More Concentrated European Market https://t.co/bWMP98fRDM via @GreenwichAssoc Congrats! #GreenwichLeaders @Barclays @BNPParibas @citi @GoldmanSachs @HSBC @jpmorgan and #MostHelpfulTraders pic.twitter.com/6paaM38GMt

— Greenwich Associates (@GreenwichAssoc) December 10, 2018

The top five dealers in the market capture almost half of European trading volume, the highest level since 2014.

“Based on what we see in the United States, where the top three dealers capture approximately 40% of notional share, these three dealers may still have scope to grow further,” said Greenwich.

In addition, trading volume is also coming from a shrinking group of investors. Nearly two-thirds of overall European fixed income trading volume comes from just 25 buy-side institutions.

Satnam Sohal, consultant at Greenwich Associates, said in the report: “This is not the picture regulators had in mind when they enacted these rules—fewer players, less liquidity, and systemic risk growing in step with increasing market concentration.”

Women in Finance Awards Announced

GlobalTrading

December 18, 2018

At a gala event Thursday night in midtown Manhattan, Markets Media announced its 2018 Markets Choice Awards — Women in Finance.

Congratulations to all the winners!

LSE To Launch Equities RFQ

Shanny Basar

December 11, 2018

By Shanny Basar, Markets Media

London Stock Exchange’s pan-European request for quote for cash equities is due to launch in the first quarter of next year, highlighting the increasing convergence in trading between asset classes since new regulations went live in the European Union.

Brian Schwieger, global head of equities, co-head equities, exchange-traded funds and fixed income, secondary markets at the LSE, told Markets Media: “Our technology to use RFQs in equities is ready and a number of brokers are working on their systems so we should see customers live and using the product in the first quarter of next year.”

He continued that asset managers have also expressed interest in the order type as new liquidity will be brought into the market, including through ETF market makers.

RFQs have traditionally been used in less liquid asset classes, such as fixed income, where the buy side sends an RFQ for prices to a number of dealers. The LSE’s new order type will be automated so that the RFQ automatically matches to the best price, making it compatible with electronic trading. The exchange is also introducing a central counterparty so market makers can reduce use of their balance sheet.

Brian Schwieger, LSE

“Ultimately, in the long term, all asset classes will trade in a more standardised fashion which will allow economies of scale and reduce cost in the market,” added Schwieger.

MiFID II went live in the European Union at the start of this year and included fixed income in the best execution, transparency and trade reporting requirements for the first time.

“MiFID II will be increasingly applied to fixed income as more instruments will come under the umbrella of being liquid,” added Schwieger. “This will lead to greater transparency, as well as new ways of trading such as auctions and new crossing platforms.”

The LSE faces competition in using RFQs for cash equities. Agency broker Instinet was the first to launch an RFQ model in European cash equities with Blockmatch MTF in March this year. Tradeweb Markets, which provides electronic trading for fixed income, derivatives and ETFs, and Plato Partnership have also announced a strategic partnership to deliver Tradeweb Plato ‘eBlock.’ 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.

Tim Cave, analyst at consultant Tabb Group, said in a report this year that many challenges need to be overcome for a widespread adoption of the RFQ protocol in cash equities.

“However, through well thought out designs and buy-side support it is likely to become an additive source of medium-sized block liquidity over time, displacing some traditional high-touch/voice trading,” Cave added. “RFQ’s regulatory palatability compared to certain other MiFID II venues may prove critical to its success. In the longer-term, it could become the buy-side’s entry point to a much bigger portion of the equity market, allowing them to take back greater control of their order flow.”

Periodic Auctions
One of the aims of MiFID II was to boost volumes of equity trading on lit venues by introducing double volume caps on trading in dark pools.

“Lit volumes of equities trading on London Stock Exchange have increased by between 7% and 9% year-on-year while in the rest of Europe they have broadly remained flat,” said Schwieger.

However, MiFID II has also led to an increase in volumes of block trades and periodic auctions as there are waivers for large-in-scale (LIS) orders and trading in auctions. Last month the European Securities and Markets Authority issued a call for evidence on periodic auctions which last for very short periods of time during the trading day and are triggered by market participants, rather than the venue.

?Press Release

ESMA launches call for evidence on periodic auctions for equity instruments

?▶️https://t.co/AdI2WFBQ55

?Call for evidence open until 11 January 2019#periodicauctions #equity #MiFIDII pic.twitter.com/m2QjkEeqnl

— ESMA (@ESMAComms) November 9, 2018

MiFID II also increased regulatory reporting to make markets more transparent and Schwieger said the increased data has made the equity market more transparent.

“Firms have not had a chance to research this data as there has been focus on other areas such as preparing for Brexit,” he added. “However, this data presents a huge opportunity and we expect firms to be making a lot more use of the data by the summer of next year.”

Unbundling
MiFID II also requires fund managers to either pay for research themselves or set up a research payment account, where the budget has been agreed with the client. Most asset managers have opted to absorb research costs, which has led to a drop in research budgets.

“Some regulators have expressed concerns about unbundling of research and there has been a recent consolidation amongst smaller UK brokers,” said Schwieger. “The combination of unbundling, the Central Securities Depositories Regulation (CSDR) and the Capital Requirements Regulation (CRR) means that some firms may focus more on liquid names.”

Rebecca Healey, head of EMEA market structure and strategy, at Liquidnet, said in a statement that maintaining the status quo with current research providers is no longer viable and the production and consumption of investment ideas will undergo wholesale change. She continued that research unbundling is just the first step in achieving significant efficiencies for the buy side.

Rebecca Healey, Liquidnet

“As it becomes the norm, firms are likely to start seeing significant benefits deriving from the data they have gathered,” she added. “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 an increased value for end-investors.”

Liquidnet, supported by Plato Partnership, conducted a new survey of more than 60 market participants, including 55 global buy-side firms which collectively represent $18.3 trillion of assets under management, to determine the impact of MiFID II on the research industry.

The study found that more than half, 53% of buy-side respondents have already implemented a global unbundling policy and one fifth will do so within the next five years due to investor demand. Healey said it unsurprising that unbundling has become a global phenomenon.

“Across the world there has been a growing demand from end-investors to be assured that they are getting value for money, and a need for greater transparency is a direct consequence of this,” she added.

The bulge bracket banks currently continue to dominate the top 10 research broker lists but the study found that change is underway. More than three quarters, 77%, of asset managers are using alternative sources of research to traditional written research and 59% of buy-side firms are now investing in quants and data scientists as execution of investment ideas moves from the sell-side to the buy-side.

“We’re already seeing asset managers marry traditional research with insight derived from data analytics,” added Healey. “That also means that sell-side services are not going to be used in the same way that they have been in the past, with buy-side firms only selecting services that truly add value.”

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TURQUOISE AND PLATO PARTNERSHIP DEEPEN RELATIONSHIP WITH NEW LIT AUCTIONS PARTNERSHIP

Dr Robert Barnes, CEO, Turquoise & Mike Bellaro, CEO, Plato Partnership

CHANGING RELATIONSHIPS.

Silvano Stagni, Managing Director of Perpetual Motion Consulting and Research, asks whether we have the data to navigate the changes to the relationship between making the investment decision and executing it.

HOW LONG WILL CONSUMERS OF FINANCIAL SERVICES WAIT?

Mathieu Ghanem, Global Head of Sales and Marketing for ADSS.

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