LEIs : To trade or not to trade.

By

Lynn Strongin Dodds

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July 24, 2018

Volker Lainer,Goldensource — Volker Lainer, vice president of product management and regulatory affairs, GoldenSource.

LEIS: TO TRADE OR NOT TO TRADE – WHAT ARE THE CONSEQUENCES?

By Volker Lainer, VP of Product Management at GoldenSource

When it comes to MiFID II – time really does wait for no man. It only seems like yesterday that the industry was busily beavering away in preparation for January 3rd. 6 months in, and chinks in the regulatory armour will inevitably start to crop up.

As to be expected with such some a seismic directive, it’s the fiddlier, more technical requirements causing immediate difficulties, as opposed to any dramatic shift in trading or liquidity levels. From July 2nd, as a case in point, market participants will need to ensure that Legal Entity Identifiers (LEI) must be documented before executing any trades. Failure to do so will leave firms in breach of the much-maligned transaction reporting rules.

It is tricky to say just how many firms will be fully ready. Those that aren’t could be caught between a rock and a hard place. Either don’t do the trade and lose out on making money. Or conversely, risk doing the trade without an LEI and face the wrath of the regulator. Clearly, tough decisions as to whether the value of the trade outweighs the financial penalty of trading without an LEI will have to be made.

But as so often is the case, it is not the larger institutions likely to be troubled by the deadline. More the smaller, less well-resourced investment firms, who are much less likely to have LEIs in place. These niche investment houses may not be fully up to speed with the requirement in question. After all, it is nigh on impossible not to leave a few MiFID II stones unturned.

For example, when it comes to transaction reporting, this needs to be carried out by both the buyer and seller of the trade. The likes of the FCA then match up what, in theory, is the same information which then goes into a trade repository. If one side is missing crucial information, then it needs to be flagged. In this situation, the broker, in theory, would have to pull the plug on the trade. The broker in question will need to make the decision as to whether they want to risk missing out on business or not. In the case of whether or not to execute a trade for a smaller client without an LEI, many may decide it is not a transaction reporting risk worth taking.

It is far too early to say just how big a problem the LEI D-Day is likely to be. Questions are sure to arise. For example, if a firm’s client has applied for an LEI only to access it a couple days after the trade has been completed, is it still fine and dandy to report late? Not according to the ESMA statement of June 20th, but will the punishment be lighter when a positive intent is proven? Decisions will have to be taken on a case by case basis. It’s unlikely that every National Competent Authority will have the resources to chase every infringement. Of course some firms will have to be called out for their failure to comply, because this will prompt the remaining non-LEI firms to apply for one. This next wave of applications should subside within several weeks. From then on, the ‘no LEI, no trade’ rebuff will no longer be needed.

Best Execution’s Viewpoints are a place for thought-provoking views and debate. These views are not necessarily shared by Best Execution.

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MiFID II’s Unintended Consequences

By

GlobalTrading

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July 24, 2018

By Gianluca Minieri, Deputy Global Head of Trading, Amundi

Connectivity between communities and venues is the key to exploiting the scale, breadth and the depth of the European trading market.

When in 2007 the European Union (EU) regulators decided to implement Markets in Financial Instruments Directive (MiFID) I, they did it with the intention of laying the foundation for a comprehensive, single regulatory framework for European financial markets, which would help develop and enhance market-based funding of European economies.

The main principle underlying the legislation was that the European economy was getting insufficient funding from the financial markets due to the high cost of transactions, such as commissions charged by trading venues. According to this theory, these transaction costs were impeding the development of secondary markets, which, in turn, could be detrimental to market liquidity.

The primary purpose of MiFID I was therefore to bring down the transaction costs for investors and secondly to facilitate the creation of a large secondary market which could eventually enhance liquidity by promoting and incentivising competition among trading venues.

With hindsight, our view is that MiFID I missed the objective of enhancing the level of liquidity in lit markets and reducing the cost of trading for investors. In fact, its effect on liquidity was the fragmentation across a plethora of trading venues, which made it more difficult for the buy-side to understand where to find liquidity.

Therefore, when during the long road that led to the birth of MiFID II the EU authorities launched a consultation process on the proposal to target dark pool trading and clamp down on access to dark liquidity, we (the buy-side) were very vocal on these topics. A group of buy-side asset manager representatives travelled to Brussels a number of times to provide evidence (through empirical statistics) to the regulators to show that restricting dark liquidity would not lead to any enhancement in the price formation process nor would it lead to a shift of liquidity from dark to lit venues.

Buy-side consensus
During those meetings, I remember how little conflicting views there were among the asset managers consulted. At the end of the day, our shared concern focused on ensuring that we did not lose the ability to invest money efficiently in the best interest of our clients.

Our opinion was very clear on this topic: capping dark pools might have led to suppressing rather than encouraging liquidity formation, with the risk of impacting negatively on long-term institutional investors, the very firms that are meant to be protected.

Our experience as large size traders was that trading on the primary exchanges could be significantly more expensive than in dark pools, especially in large size blocks, given the decreased market impact that dark pools offered compared with trading in lit markets. Dark liquidity was criticised for obscuring price discovery but yet we had not seen any evidence supported by robust statistical analysis showing a negative impact on price formation from dark trading. In fact, a higher level of trading in dark pools had been associated with improved lit market price quality.

As widely predicted by many professional investors, MiFID II remains challenged in its aim to bolster liquidity on traditional stock exchanges. At the end of the first quarter following introduction, MiFID II has led to:

An almost instantaneous move from broker crossing networks (BCNs) to Systematic Internalisers (SI). Although both buy- and sell-side firms are still familiarising themselves with the SI regime, SIs are certainly among the biggest beneficiaries of the new MiFID II requirements. Liquidity previously exchanged in BCNs has de facto moved to SIs, where investors feel they have the advantage of tailoring their liquidity needs more appropriately than BCNs, given the greater transparency requirements of SIs vis-à-vis BCNs (”Trading Under MiFID II: Initial Impressions from ITG”, The Trade, January 2018);
An increase in block trading. Fidessa’s Top of the Blocks report shows that the proportion of dark traded as Large In Scale blocks reached a record 28.7% on 12 January compared to 12% in January last year (“Moving towards the light”, The Trade Magazine, 22 March 2018). This is a trend that existed well before MiFID II and that was strengthened by the implementation of the regulation. Venues that offered Large-In-Scale (LIS) trading experienced significant growth and confirmed the scepticism of real money investors towards the capacity of lit exchanges to absorb large size trades while protecting them from predatory strategies. Platforms like Turquoise Plato, CBOE LIS and Liquidnet have all experienced a rise in volumes given the interest of buy-side players to keep trading in size and get their blocks done;
Exchange operators such as CBOE Global Markets set new records on their periodic auctions book, recording double-digit growth in their average daily notional value traded. The new record was set on 12 March and was 20% higher than the previous record of €488 million seen on 6 February (“Cboe Periodic Auction sets periodic auction record as dark caps arrive”, The Trade, 13 March 2018). The ban of BCNs acted as a boost for periodic auctions, where investors find a cheap, transparent way of matching their orders.

It is clear that MiFID’s latest incarnation is no closer to forcing liquidity to lit markets and that this comes mainly from an oversight of the needs of real money investors. And these needs can all be linked to a very simple concept: institutional long-term investors keep the interests of their clients at the core of their investment decisions.

They represent the interests of a wide variety of clients, from institutional to high net worth individuals to pensioners. They trade large blocks of assets with the primary objective of doing it in the best market conditions and with the appropriate level of confidentiality in order to protect their investors and generate performance. The choice of trading venue is first and foremost driven by the opportunity to execute their clients’ orders with the best possible conditions.

A skewed playing field
That is why rules aimed at forcing to trade on a particular category of venues can be counterproductive to liquidity. Today the reality is that, even after MiFID II, if a large trade is spotted entering the market, that order is open to abuse by speculators. It is like a game of cards where the other players can see your hand.

In our view, block trading venues will keep growing in popularity until institutional professional investors will be satisfied that they can trade on a level playing field where their trading data are protected and transparency rules are consistent with the liquidity level of the asset being traded.

Until that time, block trading will not only grow in volume but will be key to unlocking greater levels of liquidity directly from the buy-side to execution venues, although at this stage it is unlikely a wholesale shift from lit to dark trading venues.

Connectivity between communities holds the key to exploiting the scale, breadth and depth of the European trading market and is one of the most important drivers in establishing a sustainable future for block trading.

Buy-side professional investors are and remain in favour of regulation and indeed suggest a greater role for market supervisors to create and maintain a trading environment in which best practices are encouraged through greater transparency, comparability and choice between service providers.

However, a lot of work still has to be done in creating a level-playing field for safe standard trading protocols, which will determine the way trading data are transmitted and published and, consequently, the willingness of buy-side investors to confidently show their orders on lit markets.

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Digital Transformation: Emergent Fintech Trends 2018

By

Ian Rycott

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July 16, 2018

This report assesses the changing nature of the relationship between investment banks and fintech vendors since the onset of the financial crisis, which marked the start of a period in which banks faced increased constraints – both internal and external – on their ability to fund in-house solutions development. As a result, the locus of innovation in fintech has shifted away from the ability of banks to develop solutions in-house and toward their ability to successfully engage with fintech vendors.

Digital Transformation: Emergent Fintech Engagement Trends 2018

Widening The Net To Devise Sophisticated Trading Algorithms

By

GlobalTrading

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July 10, 2018

By Stuart Baden Powell, Head of Asia Electronic Product, Macquarie, and Professor Dan Li of Hong Kong University

The only constant in algorithmic trading is change and continual improvements are necessary to evolve with innovation in both technology and market dynamics.

There is a major change underway within the trading industry as the focus shifts towards a more sophisticated and advanced quantitative and scientific execution logic. At Macquarie we have embraced this move, and increasingly, a similar approach is evident among several of our buy-side counterparties.

This shift has parallels in other industries. For instance, the airline industry offers a historical similarity where, over the years, human pilots have obtained new skills and adapted to shifting cultures in response to technological change. Most importantly, the value of human agency has diminished as automated processes have superseded an individual’s experience skill and intuition for functions such as landing an aircraft. Yet, humans retain a role that is skilled in a different way, namely an ability to understand and interpret complex technology. This developmental “human in/out of the loop” process is what we are seeing on the buy- and sell-side trading desks.

Sourcing algorithm complexity
With skillsets from diverse academic and industry backgrounds and wider computational improvements built-in, Macquarie has pre-positioned for this change and sourced algorithmic logic not only from within finance, but also by looking to more sophisticated industries. Opportunities to map across aero/astronautics, or Silicon Valley firms provides tried and tested logic in similar non-linear environments.

A crucial advantage from a multi-disciplinary approach is the ability to develop more complex algorithms and strategies to enhance trade execution performance, and differentiate a firm’s capability from the overcrowded and commonplace.

Indeed, in a recent paper co-written by Dan Li, entitled “The Competitive Landscape of High-Frequency Trading Firms” *, the authors found that the majority of computerized trading in the Canadian market even in recent years is still concentrated in fairly simplistic algorithmic trading strategies. Just three major, basic strategies generate a large amount of trades, and even more orders. These algorithms respond to market conditions and trading signals in a similar fashion, and pursue near identical profit/cost reduction opportunities.

More importantly, this similarity leads to heightened competition within each strategy space. The market is crowded and it is becoming increasingly difficult for any generic algorithm to stand out. One particular strategy investigated concerns posting or supplying liquidity. It was found that strategies primarily providing liquidity generate lower trading revenues, regardless of whether the market is going up, down or staying flat.

Limitations of simple strategies
A natural question to ask is how the increased competition affects the market in general. For the most part, the research focuses on volatility over various intraday horizons, because volatility management is central to trading performance. In a marketplace where algorithmic traders tend to employ similar strategies, short-term volatilities are dampened. A further investigation suggests that the fall in market volatility is driven by the portions of short-horizon volatility related to both the permanent and temporary price impacts of trades.

On one hand, competition among traders could lead to faster revelation of hard-information signals, and a reduction of adverse selection costs. On the other hand, competition in provision orders might also lower the compensation posting algorithms earn, which in turn explains the reduction in volatility that stems from the temporary price impact.

At Macquarie, we have uncovered similar usage patterns in Asia. Although it varies by market and by client the majority use a small handful of algorithmic strategies. Away from the people side and onto the product side, our research suggests that we are only at base camp for algorithmic practices, so that many current segments of underlying logic could quickly be deemed legacy.

For example, we have done extensive work around prediction. If we are aiming to predict short-term direction and magnitude yet the majority of the sample is VWAP algorithms, results are rarely profound; this is amplified if we work off a fixed time constraint. In fact, predictive logic using a fixed “finish time” is actually largely superfluous. A far superior logic is time-flexible start and finish intervals leaning on specific market conditions.

We also dig into machine learning; a crucial element given that our dynamic market is prone to high impact, fat-tail exogenous events. How does “a decision process” loosen itself and adapt when the statistical and sensory feeds are far from static? Similar to computational map-making using a LIDAR and Feature Space, it could learn by creating a feature vector or some form of training set. Alternatively, an algorithm can also use “deep reinforcement learning” or a materially simplified one or two layer approach, more correctly termed “shallow learning”. In fact, we see this shallow learning in place today.

The next stage in algorithmic modelling
Our work tells us that many problems can be formulated using supervised or reinforcement learning but several considerations exist to reach optimal solutions. If you start with a tabula rasa, you need a substantial amount of repeatable examples to guide the algorithm and this is where reinforcement learning can struggle. Alternatively, the widely-known “greedy algorithm” can lock into a suboptimal action loop, often referred to as the “optimization versus exploration” dilemma, and can lead to best execution challenges. At Macquarie, we think algorithmic logic has moved beyond these processes.

These difficulties can be acute where some market participants use simple algorithms and some use more advanced models often manually switching in high or low volatility conditions. The ability to automatically adapt to what can be bid/ask bounce, flutter, volatility, momentum or reversion reinforces the needs for more sophisticated algorithmic modelling.

Overall, these findings call for more sophisticated buy-side algorithms that build on recent, wider developments in machine learning and strategic design.

* Boehmer, Ekkehart, Dan Li and Gideon Saar, “The Competitive Landscape of High-Frequency Trading Firms” in The Review of Financial Studies, 2017.

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News : Aquis IPO (with a little help from Ed Sheeran)

By

Ian Rycott

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July 3, 2018

AQUIS LAUNCHES IPO.

Aquis Exchange made its successful debut on AIM with shares soaring by 38% on the first day of trading giving it a market capitalisation of £101m.

The pan European equities trading platform, which was founded in 2012, aims to use the newly-acquired funds to invest in its sales and marketing divisions, as well as to increase its software licensing capabilities.

The company is hoping to capitalise on MiFID II, a set of sweeping reforms designed to increase market transparency and investor protection. Investors are normally charged a percentage of the value of each trade but on Aquis they pay a monthly subscription fee based on their average number of transactions.

Aquis is looking to increase its share of the European market from 1.9% to 3% by the end of the year. It claims that the model “should materially reduce” costs for its customers, which includes asset managers and big traders.

The company, which was founded in 2012, also differentiates itself from other trading platforms by banning “toxic” high-frequency trading, which attempts to profit from making a large number of transactions rapidly.

There is a clear regulatory drive for greater transparency in trading and a requirement for market users to show they are using the best possible venue,” Alasdair Haynes, founder and chief executive, said. “Aquis is ideally positioned to capitalise on these trends in the years to come.”

Congratulatory messages don't come better than this. pic.twitter.com/zIIds0qr75

— Aquis Exchange (@Aquis_Exchange) June 15, 2018

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News : New bond platform under development

By

Ian Rycott

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July 3, 2018

BANKS JOIN FORCES FOR NEW BOND PLATFORM.

Leading banks are joining forces to keep their collective grip firmly on the lucrative market for debt issuance. It has been reported that Goldman Sachs and Wells Fargo, BNP Paribas and Deutsche Bank have signed on to a new bond platform under development by the top three debt underwriters – Bank of America, Citigroup and JP Morgan.

Bank of America, Citi and JP Morgan have been working together for the past several months to enhance what is often a disjointed and labour-intensive process for sourcing pricing and other information to potential bond investors. The addition of the four new banks means that six of the top 10 debt underwriters are now involved in the consortium.

The platform will be used to announce new bond sales, communicate pricing information with investors, share credit ratings, prospectuses, and term sheets and other documentation, process investor orders and ultimately allocate bonds to would-be buyers.

Underwriting debt is a relatively stable source of billions in annual revenues that could come under threat from tech start-ups and financial data companies investing in the market.

In an interview with the Financial Times, Peter Aherne, the head of North American capital markets at Citi, said, “We get calls literally daily from other market participants seeking to be involved in this project. We have agreed it is far better for our technology to be on the desks of our clients than to have another provider’s.”

Financial institutions generated a record $23bn in fees underwriting debt last year, a high water mark spurred by low interest rates and a surge in borrowing by companies, according to data provider Dealogic.

However, their fortunes reversed in 2018 as fees slipped due to slowing debt sales and intensifying competition. The top 10 debt underwriters this year captured 48.6% of the commissions generated on bond sales, the second lowest level over the past nine years and down from 55.2% in 2010.

In an interview with the FT, executives at the three founding banks on the project said the new venture would be housed in a third-party entity and it would be owned by the financial institutions that use the platform. The exact ownership structure has not yet been decided.

This consortium is not alone in trying to tackle the cumbersome process tied to the initial sale of debt. Over 30 banks have signed on to a competing bond syndication platform from Ipreo, which was initially backed by 11 firms including Goldman and BNP, as well as HSBC, UBS and Societe Generale.

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News : First trades for automated trade processing platform

By

Ian Rycott

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July 3, 2018

JP MORGAN AND CITADEL ADOPT truePTS POST TRADE SOLUTION.

The automated trade processing platform for derivatives, truePTS, has generated its first buyside trades with JP Morgan and Citadel.

truePTS aims to offer a lower cost digital alternative to legacy confirmation providers. With electronic execution becoming standard, the need for physical confirmation has been replaced by demand for automated, real-time matching and front-to-back trade flows. Its ‘no-touch’ processing environment claims to process trades at greater speed than legacy platforms, enabling auto-matching, direct clearing and removing manual steps that represent one of the largest sources of errors, revisions and operational risks.

The platform uses innovative technologies such as robotics and artificial intelligence (AI) for post-trade affirmation and matching, as well as facilitating confirmation and reporting workflows, incorporated into trade repositories, central counterparties, and buyside platforms. Its matching and validation engine determines an instrument’s eligibility reporting requirements based on liquidity and size, which are continuously updated to support the latest regulatory revisions

This could be beneficial for voice trades, lowering costs and risks while increasing operational efficiency. Under MiFID II rules, voice trades are obliged to be passed to a clearinghouse within 10 minutes of execution and reported within 15 minutes.

The system also synchronises parts of the processing chain that had not previously been linked up, such as matching new and terminated trades in compression activities.

“In recent years, derivatives trading has migrated to electronic venues which has significantly improved execution workflow, but post-trade processing for many of these instruments still relies on legacy technology resulting in inefficiencies downstream,” said Dan Dufresne, Global Treasurer at Citadel. “We are excited about the truePTS offering, which will improve post-trade efficiency, decrease costs, and reduce operational risk.”

“New regulatory requirements have shifted responsibilities and fees once paid by the banks to the buy-side,” said Zohar Hod, CEO of truePTS. “We will be the catalyst that provides transparency, mitigation of needed resources, and lower costs for our clients by leveraging the most progressive technology to automate workflows and comply with regulatory change.”

Commenting on the truePTS solution, Dan Dufresne, global treasurer at Citadel, says: “In recent years, derivatives trading has migrated to electronic venues, which has significantly improved execution workflow, but post-trade processing for many of these instruments still relies on legacy technology resulting in inefficiencies downstream. The truePTS offering will improve post-trade efficiency, decrease costs, and reduce operational risk.”

The buyside launch follows the announcement of strategic relationships with JP Morgan and Citi in December 2017. Hod says there are more than a dozen large dealers coming onboard and “that the more people on the network, the more efficient the post-trade environment will be.”

“This is an exciting development in the post-trade industry,” said Kieran Hanrahan, Global Head of Markets Middle Office at JP Morgan. “Buyside firms’ participation will be critical to the scalability of the truePTS platform.”

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News : Global exchange revenues hit record high in 2017

By

Ian Rycott

-

July 3, 2018

GLOBAL EXCHANGES ENJOY BUMPER YEAR.

A surge in trading and strong demand for information services drove global exchange revenues to a record high in 2017, according to a report by Burton-Taylor International Consulting. Overall, total revenue rose 8.1% last year to $30.7bn with Intercontinental Exchange retaining the top spot in terms of revenue, followed by CME Group and Deutsche Börse. Meanwhile, the LSE edged ahead of Nasdaq to nab the fourth spot with $2.52bn revenues while Nasdaq managed $2.43bn.

Margins were strong across the industry with an average 53.6 % EBIT (earnings before interest and tax). Their performance combined with rising trading volumes helped boost revenues by 6.4% in trading, clearing and settlement (TC&S) – the largest segment. It generated $18.1bn in industry and 63.4% of all exchange revenues.

CME remained the largest exchange for TC&S followed by Deutsche Börse and ICE which had the biggest market share in the US. Deutsche Börse dominated the Europe, the Middle East and Africa (EMEA) region while Hong Kong Stock Exchange was the strongest in the Asian market.

In terms of regional market share, the Americas accounted for 38.9% of global revenues in 2017 with EMEA comprising 36.6% and Asia 24.5 %.

‘Market data & index’, which is the second largest industry sector, accounted for 19.18% of total global exchange revenues, and saw a compounded annual growth rate of almost 12% since 2011. Market technology and access revenues totalled $1.5bn in 2016, rebounding 4.97% after two years of revenue declines. Nasdaq led the segment in terms of both total revenues and year on year growth, with an 11.8% hike to $541m.

By contrast, listing and issuer service revenues stagnated as the weak IPO environment resulted in a mere 1.29% increase to $2.3bn. Deutsche Börse and the Japan Exchange Group bucked the trend, reporting revenue rises of 7.75% and 6.98%, respectively.

“The global exchange industry continues to undergo a steady transformation, as exchanges evolve their models to diversify away from a dependency on transactional businesses. The combination of weak trading volumes and emerging competition is forcing incumbent exchanges to dramatically expand their focus on new business segments,” says Andy Nybo, Director at Burton-Taylor.

“Market data and index businesses are the current target of these expansion efforts but exchanges are constantly searching for new opportunities to expand their offerings, especially as new competition threatens to erode existing operating margins and profitability.”

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Profile : Sam Priyadarshi : Vanguard

By

Ian Rycott

-

July 3, 2018

LESS IS MORE.

Dr Sam Priyadarshi, Head of Portfolio Risk and Derivatives at Vanguard explains how his small team is leveraging technology to meet the increasing flow of business.

How has the derivative landscape changed?

The Dodd Frank regulation significantly changed the derivative landscape and asset managers and market participants had to adjust in terms of reporting, trading and clearing. One of the aims was to have a more robust infrastructure and to reduce counterparty risk. We adapted to the new regulations and have moved almost entirely to electronic execution for all futures, swaps, and Treasuries because there is enough liquidity in these markets. We clear almost everything – interest rate swaps, futures of course and our index credit default swaps. The only product we trade that is not cleared is single name CDS. We can take advantage of the efficiencies brought through straight through processing and the fact that there is very little human intervention and manual errors.

What about OTC trading?

The regulation is pushing towards more centralised clearing and margin on uncleared derivatives so we have opted to hedge with more standardised products. Bilateral transactions have become more difficult and inefficient. The problem is you can incur a credit valuation adjustment as well as have multiple line items in the portfolio. If you do a bespoke trade, you have to manually pick up a phone, agree terms, sign an ISDA (International Swap and Derivatives Association) agreement with the counterparties and then make sure there are no breakages. Now, if I go on a SEF, I can trade with any dealer or non-bank dealer. We are no longer facing counterparties, but the clearinghouse. Also, we can trade a whole list of swaps in a matter of minutes whereas before it could take half a day.

What impact do you think MiFID II has had?

EMIR and MiFID II followed on from Dodd Frank and we already had the operational framework in place for the reporting, central clearing and trading. There are new angles compared to the US but a lot of the changes we understood and already made especially on the reporting, central clearing and transparency obligations. Also, as a large global asset manager that manages around $5tn, it is our responsibility to be ahead of the regulations. This is why we were compliant and trading on SEFs before the deadline and also had an operational framework in place before MiFID II came into effect. Overall, we think regulations’ push towards greater transparency has led to improved price transparency and a more stable market. One of the main differences under MiFID II is the best execution requirement, which is not mandatory under Dodd Frank although there is a fiduciary responsibility to achieve it.

What changes did you make?

While the best execution requirement under MiFID II is unique to Europe, we are applying a global best execution standard across all our funds. This is because we are a client-owned global fund manager and regardless of jurisdiction, we want to comply with the most stringent best execution obligations. We distinguish between index and active funds and harness technology to capture the beta or alpha. The beta is highly automated but we will leverage machine learning, unstructured data and fundamental research to understand events, price movements and liquidity to produce alpha.

Speaking of technology, there has been a lot of hype about artificial intelligence – what do you think is the reality versus the hype? What technology are you employing?

There is definitely a lot of hype about AI but to date most of the progress has been on the machine learning and predictive analytics side. This is particularly the case in terms of unstructured data rather than structured data, which has a limited capacity.

Today, we can look at much richer data sets that include social media and, sentiment analysis to source assets and sectors that seek opportunities to add value and will generate alpha. We also use robotic process automation (RPA), which aims to automate anything that can be done in a routine manner. In other words it targets the low hanging fruit.

Where do you think that blockchain or the distributed ledger technology can be applied?

There is a groundswell of effort happening with asset managers looking at the DLT for settlement and transaction processing. However, there may also be some value in having certain derivative contracts on a platform, and I think the landscape will change significantly over the next three to five years.

I have read that you have five people handling a significant and growing order flow. How do you handle the flow with such a small team?

We still have five people and in the first quarter of 2018, we handled over $300bn in derivatives trading. We have a small high performing group of experienced traders who understand regulation and market infrastructure. Also, we are heavy users of algos to find the most liquid venues at the best price. The bulk of the creation and trading of orders is done electronically, which explains why we can do so many with so few people. There is very little manual entry or correction is needed throughout the lifecycle of the transaction.

What do you see as a challenge?

Some of the biggest challenges in the industry are the lack of liquidity margins on uncleared derivatives and credit management. We are also concerned about the lack of regulatory harmonisation. Trading is done on a 24-hour basis between APAC (Asia-Pacific), Europe and US and while we comply with all the regulations we think it would be more efficient and easier to transact if there was regulatory equivalency. We are compliant with global regulations as well as with each jurisdiction. However, if, for example, you have a block trade, you have to break it down jurisdiction by jurisdiction, which is not easy to do.

And the opportunities?

We have seen a lot of growth in our assets under management both in the US and globally and we think that is where our main opportunities lie. We want to continue building upon our low cost, high quality service and to take as many clients as jurisdictions will allow us to.

Biography:
Dr Sam Priyadarshi is Head of Portfolio Risk and Derivatives at Vanguard and is chair of the Technology Steering Committee and a member of the Market Structure Committee. Prior to joining Vanguard in 2009, he worked at the Lincoln Financial Group for 12 years, where he was Vice President, Derivatives and was responsible for hedging insurance products and portfolios. He was a member of Lincoln’s Derivatives Committee, Insurance General Account Assets Committee, and Alternative Investments Screening Committee. Priyadarshi holds a Bachelor of Science in Mechanical Engineering from Birla Institute of Technology, Ranchi. He holds an MBA from the Indian Institute of Management, Calcutta, and has a Ph.D. in finance from Virginia Tech. He is an active participant in many industry panels and working groups related to derivatives and fixed income markets.

Profile : Doug Cifu : Virtu

By

Ian Rycott

-

July 3, 2018

SUNRISE, FL - JUNE 25: 2015 NHL Draft at the BB&T Center Sunrise, Florida. (Photo by Eliot J. Schechter/NHLI via Getty Images) *** Local Caption ***

WHEN ONE PLUS ONE EQUALS THREE.

Best Execution speaks to Doug Cifu, CEO of Virtu.

Last year Virtu bought KCG. What were the drivers behind it, how have you restructured the business and how does it fit into your overall strategy?

Yes, we acquired KCG, the old Knight Capital business last year. Our theory was that, if we could apply Virtu’s operating rigour and discipline, and our technology, to what KCG did – it could be a powerful combination… and that’s what we’ve done.

The acquisition provided us an opportunity to further scale our technology across complimentary businesses, specifically, to leverage Virtu’s order routing technology and risk controls to improve KCG’s wholesale market-making and agency client franchises, and to deploy KCG’s quantitative style strategies and research and simulation environments to legacy Virtu’s bid-ask market-making business.

As most folks know, we started integrating the firms immediately and within just months we saw early benefits from combining operations. More recently, we began rolling out enhancements to our agency clients and early feedback is overwhelmingly positive.

Will there be any further mergers or acquisitions and if so what areas?

We will always consider strategic opportunities, and of course, one of the reasons we went public was to have a currency that would empower us to pursue the right deals, if they come along.

There are certainly other businesses out there that could become attractive to us. Perhaps there will be an opportunity in a particular business line or product or asset class where we’re underrepresented; where we think we can learn something.

Ultimately, we want to be excited about it and see some clear ‘one plus one equals three’ logic. I think there will be opportunities in the next five years; although we don’t know who it will be, it should be strategic and accretive to shareholders.

What differences do you see between institutional agency clients in the US and Europe?

The US and European capital markets are more alike than many people appreciate. The biggest topic today is transparency – the buyside in the US and Europe want more transparency into order routing, venue selection, and now more investors are asking to know ‘why’ something happened with their order.

Virtu has the technology and expertise to help investors understand the conditions that drive every trade – other brokers tell investors where their orders were routed and traded, but Virtu can show investors ‘why’ and give them the tools and algos to optimise their experience.

What requests are you getting from institutional agency clients and how is Virtu responding?

I know there is the impression that clients are very demanding, but I have to tell you what I’ve found, over the past few years, is that our clients’ demands are quite reasonable. All they want is really good technology, differentiated liquidity, and a ton of transparency around trading decisions. Basically, they want good information, so they can make good decisions.

And we really got lucky in the agency space because our market-making technology, which is really deterministic, was exactly what clients were looking for. They didn’t want to hear that some 10 factor model, created a “fair value” at which to trade – without an explanation as to why that decision was reasonable. With us, we can tell clients exactly what we did and why. Period. No long drawn out conversations, just simple answers.

What many people don’t know, is that we’re the only firm with a central risk book of retail order flow, a principal market-maker, and institutional agency clients. This gives us a unique opportunity to allow institutional clients to expose their orders to natural retail investors in tens of thousands of shares of large, medium and small cap companies and ETPs. We can be a true internaliser between the buyside and retail.

More generally, what impact do you think MiFID II is having on trading and the industry?

While MiFID II really underscores the industry’s heightened focus on transparency on everything from order routing to costs of research, the buyside can be more effective than any regulator could ever be – by voting with their wallet and moving business when a broker provides insufficient transparency or execution quality. And we are increasingly seeing this phenomenon spread globally – where clients are simply applying their MiFID approach to global operations.

Unbundling is a popular topic, and to me it’s a great opportunity for Virtu. We already see buyside folks prioritising the brokers that provide best execution and the transparency they expect. Our tools let us show buysides, here, this is why your order got routed where it got routed, in real time.

What were the reasons behind the decision to become a systematic internaliser?

Under MiFID II, a systemic internaliser, or a Single Dealer Platform (“SDP”) as we call them in the US, allows us to stream customisable market-making prices directly, on a transparent and disclosed basis, to known counterparties. Virtu operates one of the largest SDPs in the US; effectively, Virtu and KCG have been operating an SI for the last 5-10 years.

Often the liquidity we provide over our SDP – we call it “VEQ” and “VEQ-Link”, short for Virtu Equities and a rebrand of the old Knight Link SDP – is for significantly more size and better prices than liquidity displayed on lit exchanges. Last year, Virtu’s wholesale market-maker provided over $1.2m per day in price improvement to end investors.

How has high frequency trading changed?

Over the last couple years, it’s become clear that speed is not a viable differentiator; that lasting businesses in this space are going to be the ones that have scale, provide a meaningful service, and operate with expense and capital discipline. We’ve seen that technology has enabled competition and the number of platforms where market participants can transact has grown significantly. All of this has forced out less efficient players and created sustainable opportunities for electronic market-making firms like ours.

Doors continue to open to Virtu as more investors adopt a data-driven approach to routing and counterparty decisions. I think our ‘open-door, ask us any question’ policy has helped us earn investors’ trust, and the change we’ve seen in the Street’s attitude toward Virtu is a great example of how transparency and data can be used to alleviate doubts about the benefits that technology brings to investors in today’s markets.

What are your future plans?

Virtu’s goal remains to be the best bid and best offer in the 25,000 instruments we trade for as long as possible on the over 235 venues and markets across the 36 countries where we trade. This has been our mission since the day Vinnie (co-founder Vincent Viola) and I started Virtu.

While the US equity market is arguably the most liquid and transparent market in the world, we are all aware of other markets in need of improved transparency and efficiency. Until recently, these less transparent markets and asset classes had been slow to evolve, but we are seeing this evolution accelerated by technology and regulation, such as MiFID II requiring reporting of ETP trading in Europe and FINRA requiring real-time TRACE reporting of trades in the US Treasury market.

Because understanding market microstructure and driving efficiency is in our DNA, the opportunities for Virtu, to provide risk transfer and routing services, are aligned with investors’ growing demands for transparency, efficiency and competition across the products and markets where we trade.

Biography:
Douglas A. Cifu has been CEO and a member of the board of directors of Virtu Financial, Inc since November 2013 having previously co-founded the firm in 2008. At Virtu, he has led and managed all key strategic and operational decisions, including its initial public offering that closed in April 2015, the acquisition of KCG Holdings in 2017 and various public and private financings. Cifu frequently speaks on global market structure issues and concerns at industry conferences and in private settings. Prior to co-founding Virtu, Cifu was a partner at the international law firm of Paul, Weiss, Rifkind, Wharton & Garrison LLP.

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LEIS: TO TRADE OR NOT TO TRADE – WHAT ARE THE CONSEQUENCES?

By Volker Lainer, VP of Product Management at GoldenSource

When it comes to MiFID II – time really does wait for no man. It only seems like yesterday that the industry was busily beavering away in preparation for January 3rd. 6 months in, and chinks in the regulatory armour will inevitably start to crop up.

AQUIS LAUNCHES IPO.

BANKS JOIN FORCES FOR NEW BOND PLATFORM.

JP MORGAN AND CITADEL ADOPT truePTS POST TRADE SOLUTION.

GLOBAL EXCHANGES ENJOY BUMPER YEAR.

LESS IS MORE.

Dr Sam Priyadarshi, Head of Portfolio Risk and Derivatives at Vanguard explains how his small team is leveraging technology to meet the increasing flow of business.

WHEN ONE PLUS ONE EQUALS THREE.

Best Execution speaks to Doug Cifu, CEO of Virtu.

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