Equities trading : MiFID II : James Hilton

April 19, 2018

OPPORTUNITIES AWAIT, IF YOU KNOW WHERE TO LOOK.

By James Hilton, Co-Head, AES Sales, EMEA at Credit Suisse.

In 2007, MiFID I brought significant change to the trading landscape in Europe. Regulation was introduced to encourage competition in the industry, leading to the evolution of Multi-lateral Trading Facilities (MTFs), the breakdown of monopolies, and ultimately more efficient markets. Buyside clients had more choice in terms of execution venues, and brokers became more differentiated by developing ways of sourcing the newly fragmented liquidity. Whilst a consolidated European “tape” was not mandated, the majority of buysides have had access to a consolidated view of the market. The market became more fragmented, but with some proactive and constructive efforts from industry participants, price discovery and transparency have not been significantly impacted.

Whatever your view on the objectives or outcome of MiFID II, the industry will inevitably adjust in a logical and commercial manner. Just as MiFID I resulted in new entrants to the market, we can expect the same thing to happen again. We anticipate several significant developments in the coming year.

One of these is the Systematic Internaliser (SI) construct. Whilst previously a choice, banks offering risk capital to their clients must now do so under this construct. This is not a particularly interesting development in itself, but the evolution of non-Bank SIs could drive significant change. The market-makers, who have been prevalent for so long on lit and dark venues, are finally being brought into the spot-light for all to see. Not only will market participants be able to specifically measure and monitor the experience of trading with market-makers, but we think there is a strong likelihood – assuming you have the right technology and intellectual capability – that trading with them could be very beneficial. By avoiding the fee for trading on an exchange or MTF, SIs have more scope to offer price or size improvements. Preliminary analysis doesn’t appear to show any degradation in performance when interacting with these venues versus traditional lit markets; in fact, we have seen the opposite so far.

Initial results at Credit Suisse have been very encouraging both on the parent and child order level. Average trade sizes on SI streams above SMS are multiples of primary and lit MTF venues (see Figure 1); frequently at significantly better prices. Certain SIs are offering significant size, with Credit Suisse achieving fills above $600k. It is clear that in many instances, SIs are able to offer unique liquidity unavailable elsewhere in the market, which make this venue category difficult to overlook from a best execution perspective. Even where SIs offer equivalent liquidity, their fill rates can be significantly higher than those of primary exchanges.

As the proliferation of SI venues continues, it is clear that a strong SOR and routing infrastructure is crucial to intelligently sourcing this type of liquidity. Now more than ever, brokers will offer different experiences depending on their setup. As the SI landscape is likely to become saturated, it is the responsibility of the brokers to decide which SIs are likely to be additive or unique. A strong framework for managing information and performing detailed venue analytics is therefore essential and will be a key challenge for brokers.

The second major development is the growth in periodic auction volumes. Whilst these venues have existed for some time, they became instantly more attractive upon the introduction of the double volume caps. Our research shows that impact when trading on a periodic auction venue is far lower than on a traditional lit market. As dark trading becomes significantly restricted it seems logical that periodic auctions will fill the void – but there is probably a limit to how successful periodic auctions will become. Investors have different urgencies, and there will always be a requirement to post and take liquidity on lit order books. We anticipate the market finding a natural equilibrium, just as we saw with dark trading after MiFID I.

Finally, we think there is scope for further change on the lit markets. Primary exchanges have been rampantly raising their prices: both trading fees, and also market data fees. This hasn’t gone unnoticed, and ESMA, “…shares the concerns expressed by some respondents over the recent increases in fees for market data” as stated in their recent report to the European Commission (26th March 2018). Intuitively it makes sense for the investment community to use the most cost-efficient means of trading and price increases have provided an enhanced incentive to identify opportunities to achieve best execution at alternative venues. Perhaps most challenging is the closing auction – which enjoys a monopolistic position – but as costs continue to rise, alternative solutions could potentially become more attractive to explore.

Every time there are changes to the rulebook, the market will adapt. Just as we saw new venues emerge after MiFID I, we will see new constructs and order types emerge in the coming year. More than ever, those brokers who have invested significantly in order routing technology, and who have broad market reach, are those that will succeed. We hope there is some value to all the change, but right now, the industry needs a period of stability in order to reflect on the changes and measure the impact, before any further rules are proposed.

©BestExecution 2018

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Equities trading : High and low-touch trading : Willis Bruckermann

Ian Rycott

April 19, 2018

SELLSIDE CASH EQUITIES TECHNOLOGY AND WORKFLOWS CONVERGE.

In 2018, the role of the sellside equities trader is still undergoing change, driven by regulation, technological progress and the utilisation of new business models. These changes are cascading through every tier of the investment banking equities execution franchise industry, affecting buyside clients and the structure of the equities market at large. Willis Bruckermann, GreySpark Partners Analyst Consultant, examines how high- and low-touch trading have changed in the past decade, and some of the implications thereof for the future structure of the flow equities market.

The shifting sands of equities trading desk risk-taking

The equities market, particularly cash equities and listed derivatives, has nearly completed its transition to a fully electronified state that is largely dependent on low-touch business models. This transition away from the dominance of high-touch order flows and corresponding business models was largely driven over the last 10 to 20 years by regulatory mandates, which have increased significantly since the onset of the financial crisis, as well as by the compressed margin environment faced by banks over the past decade that drove both business and trading model cost-cutting measures. In response, most Tier I-III sellside equities execution franchises retrenched away from attempting to offer the widest possible range of equities markets products and services to their clients to instead focus on the development of more niche business models; in some cases, banks have exited the flow equity markets entirely, leaving only a small group of banks offering full cash equities and equities derivatives instruments, products and related services coverage globally.

Concurrently, the rise of e-trading over the past decade, combined with the growing automation of e-trading services at the margins in light of continual cost pressures, has led to significantly lower front-office equities trading business headcounts in 2018 compared to headcount levels in 2010. We believe that the radical headcount reductions that took place over the past seven years have now largely concluded; however, some banks continue to seek out even more automation of their business and trading models – as well as their ancillary processes and workflows – and will thus likely continue to reduce headcounts gradually over the coming years, with staffing levels likely plateauing near 70% of 2010 levels (see Figure 1).

Sellside equities trader workflows are also shifting as proprietary or advantageous risk-taking is further moved off equities desks in response to post-financial crisis regulations. Specifically, in 2018, the majority of banks globally no longer trade cash equities on a proprietary basis, having shifted entirely to agency or riskless-principal business models in light of the US Dodd-Frank Act’s Volcker Rule and Basel III’s capital requirements. In anticipation of the Basel Committee on Banking Supervision’s (BCBS) forthcoming Fundamental Review of Trading Book (FRTB), risk-taking of any kind across any asset class will instead likely become concentrated within central risk desks (CRD) rather than remaining within the purview of individual trading desks. Consequently, equities trades now compete against those of other asset classes and business lines for access to the balance sheet.

Changing equities trading technology imperatives
In 2018, the drivers for maintaining separate high- and low-touch platforms to service equities clients are weakening. When full straight-through processing (STP) and equities market e-trading became possible in the 1990s, banks found that traditional high-touch solutions could not service the demands of clients seeking low-cost, high-throughput, low-latency execution services. In response, early-stage low-touch trading solutions were built in-house to run in parallel to bank high-touch systems. Later, entrants leveraged low-touch vendor solutions but continued to run parallel high-touch systems.

The historic drivers for banks to maintain separate high-touch and low-touch solutions are largely anachronous. Low-touch solutions vendors are starting to compete directly with traditional high-touch providers and are continuously enriching the functionality of their offerings to meet the needs of high-touch clients. Therefore, trading platforms are largely commoditised in 2018 (see Figure 2). As banks look to reduce costs, there are strategic incentives to simplify technology platforms and consolidate where possible. Over the next 18 to 24 months, GreySpark believes high-touch and low-touch vendor platforms will continue to converge from a functionality perspective, eliminating the need for a bank market-maker to maintain two separate platforms.

Nonetheless, some exceptions to this consolidation will persists among large multi-asset prime services providers that require multi-asset order and execution management system (OEMS) capabilities. These prime services providers still need a distinct order management system (OMS) and execution management system (EMS) to differentiate themselves from their competitors, but with cost implications. Also exempt from this change will be the remaining high-frequency trading (HFT) sellside players that will continue to seek out bespoke, low-touch platforms to compete in the market, and will not need high-touch solutions or OMS capabilities.

Forget high-& low-touch – in 2018, the focus is ‘how-touch’
There is little that universally differentiates bank high- and low-touch workflows in different regions and with different client types. Instead of set service offerings and workflows that are broadly applicable across many different types of equities trading banks, how bank traders interact with client orders is very situational and can take a wide range of forms.

Indeed, with the exception of DMA / SMA clients that send their orders directly to the bank EMS – often a separate ultra-low latency system, reserved exclusively for these clients – all orders take the same path and can be interacted with at the same points.

The difference between high- and low-touch traders in 2018 is the frequency and level of interaction with the orders, and therefore value-add, they are expected to have at different points in the trading lifecycle. High-touch traders are expected to review and, if necessary, bring their market knowledge to bear on client orders before they pass from the bank’s OMS to its EMS. Both high- and low-touch clients expect any electronic or algorithmic execution to be monitored in real time. Indeed, more technologically sophisticated clients may even demand that information about execution is streamed back to their buyside OMS or PMS during the execution process.

However, trader interaction during EMS execution is only necessary – or even acceptable – if the interaction serves to adjust execution parameters in light of unexpected market conditions, trading outcomes or other anomalous events.

Figure 3 depicts a generic cash equities workflow, demonstrating trader interaction and value-add in the order handling process.

The difference in expectation for how a sellside equities trader interacts with an order, and the level of value-add they contribute, varies by region. In Europe and North America, clients largely accept the dichotomy between high- and low-touch service models and accept that the cost difference between them is reflected in the service delivered.

In APAC, on the other hand, clients demand a greater level of service for low-touch orders than clients in other regions, creating further cost pressures for execution franchises. Although only charging for low-touch service levels, traders are expected to provide what is, functionally, high-touch service.

One order pathway, two types of traders
For the most part, today’s sellside equities traders fall into two categories: market traders and technology traders.

Market traders are traditionalists – they take risk when appropriate, or at least are comfortable with the idea that they could trade on their own book if permitted to do so. These traders have a deep understanding of the market, including counterparties, norms of behaviour both in the abstract and under specific market conditions and historic market performance. This understanding is both borne of and complemented by the close relationships traders build with their clients and other market participants. Consequently, market traders have the understanding and relationships to work an order manually and find a counterparty on behalf of their client, even for illiquid instruments, block-size orders or under adverse market conditions.

Technology traders are the new breed of traders that are primarily focused on electronic and, particularly, automated execution, i.e. the use of algos to trade. These traders understand the detailed ins and outs of e-trading systems and are highly adept at managing and monitoring algo execution in real-time. They do not trade outside of algo systems and are, in most cases, focused on attending to low-touch order flow. For these traders, the EMS is a necessary toolkit.

Some broker-dealers leverage the technology traders’ expertise in electronic trade monitoring, and they give them monitoring and intervention responsibilities for all EMS-only executed orders, even where these originate with high-touch clients normally attended to by market traders. Even in those cases, however, technology traders do not take on risk outside of the parameters set by their trading systems and the algo parameters therein.

So far, so good … or so we think
As the very nature of sellside equities traders continues to change due to risk-taking market traders being slowly replaced with technology traders, a question remains on how this profile shift will impact the structure of cash equities and listed equities derivatives markets. During equities’ long unidirectional bull run of the past few years, the shift in the nature of traders seemed rather innocuous in terms of the larger implications.

However, the equities market swoons at the beginning of February 2018 demonstrated that this new generation of technology traders, due to either a lack of ability or agency, cannot and will not backstop markets by absorbing risk when their algo execution retrenches in the face of unusual market behaviour or excessive volatility.

We observed that this effect stood in marked contrast to market traders, who perceived the swoon as an opportunity and, where permitted, deployed their balance sheet to soak up under-priced assets.

GreySpark believes that the implication of this shift to non-risk-taking traders for the equities market as a whole is that the return of any volatility to equities markets can become self-perpetuating over the short- to medium-term. This unstable market dynamic will persist until a different segment of market participants takes on the risk-warehousing, counter-momentum function that broker-dealers traditionally did by providing pricing signals and absorbing risk at the margins.

©BestExecution 2018

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Equities trading : The Johannesburg Stock Exchange : Donna M. Nemer & Merlin Rajah

Ian Rycott

April 19, 2018

AFRICA’S TIME.

The Johannesburg Stock Exchange is staying ahead of the pace required for a modern exchange, improving efficiencies through new trading solutions and colocation technology. By Donna M. Nemer, Director, Capital Markets & Group Strategy and Merlin Rajah, Senior Technical Account Manager, Equities & Equity Derivatives, Capital Markets, JSE.

The Johannesburg Stock Exchange marked its 130th birthday last November, extending its record as Africa’s largest and oldest existing stock exchange. But there was no time for cakes or candles: trades continued to be executed and decisions made in a microsecond environment, with the JSE proving to be faster and more agile than ever.

The JSE’s equity market, which has been on the Millennium IT platform since 2012, saw its central order book process some 67.7 million trades in 2017, with volumes of 85 billion and a value traded of USD463 billion. To stay ahead of the pace required for a 21st Century exchange, the JSE has implemented a wide range of technologies, replacing its trading systems while at the same time launching its own colocation service.

The JSE’s existing derivatives trading solution is a locally developed solution, built for a South African ecosystem. Its proprietary API is little known to global players, which has impeded the JSE’s global competitiveness in the derivatives arena due to concerns around latency and scalability.

The JSE’s new trading solution, ITaC, allows the exchange to compete on the global stage, delivering world-class levels of speed and latency while decoupling trading and clearing. The ITaC – or Integrated Trading and Clearing – project is a multi-year programme to introduce an integrated solution for the exchange’s trading and clearing services. On the trading side, all derivatives and cash bond markets will migrate to the MillenniumIT (MIT) trading platform; while on the clearing side all markets will migrate onto the new Cinnober Real-Time Clearing (RTC) solution, which offers a single, multi-asset real-time clearing platform. Phase 2 will be implemented later this year, as the equity derivative and currency derivative markets migrate onto this platform.

MIT, a globally recognised brand and part of the London Stock Exchange Group, will enable international investors to easily access the JSE through Direct Market Access (DMA). This trading software is provided to a number of leading exchanges, including the LSE and the Hong Kong Stock Exchange. The new technology will use MIT’s open API, with the new trading gateways expected to reduce bandwidth requirements across the board. The Cinnober technology, provided by another global player with customers from Sao Paulo to Bangkok, will introduce a real-time, multi-asset class solution across JSE markets.

On completion, the ITaC implementation will offer a range of benefits, including greater cross-market harmonisation; a faster and more stable technology platform aligned to international standards; more robust and flexible trading and clearing systems (with separate APIs for each); together with richer end-user functional capabilities, specifically in the clearing space. Clients will see additional efficiency in their risk management with the ability to allow more offset through reduced margin requirements.

ITaC will also allow the JSE to realise two of its major strategic objectives: integrated trading and integrated clearing. By introducing internationally recognised systems, the JSE strengthens its position as a global market player by providing clients with more stable and efficient trading and clearing services. In addition to offering the benefits already mentioned, the JSE intends to move to a value-at-risk based margin methodology as part of the ITaC project, supporting more flexible and efficient margin offset. The JSE will also introduce the ability to utilise non-ZAR cash collateral to fund margin payments, in a move that is expected to contribute to more efficient capital management across the South African market.

Meanwhile, the JSE has also launched its own Tier III Colocation data centre, building out 35 housing units in May 2014, with capacity to build a further 35 should the need arise. That need arose in 2018, and a further build-out is now underway to meet increasing demand from local and international clients. The colocation facility was built with the sole purpose of assisting the JSE’s trading community by providing a first-class trading venue, coupled with a robust trading engine and a solid, secure and latency-sensitive connectivity method. The JSE measures the network roundtrip latency at sub-100 microseconds or, quite literally, faster than the blink of an eye. Unlike other local data centres, the JSE does not intend to generate substantial profits from its colocation service. Rather, it aims to assist the market with a robust offering at a very cost-effective price point. Clients can take up a 3kVa rack, a latency sensitive patch panel with fully redundant primary and secondary ports and 2x10GB fibre cross connects for approximately USD3000 per month.

The colocation facility also provides fully redundant connections, which help to ensure uninterrupted connectivity. Clients are provided with a high quality, top-of-the-rack patch panel which offers multiple primary and secondary ports, in turn providing access to the various market gateways and services. These connections are all provided through laser cut 10GB fibre cross connects, and all connections from the client racks to the matching engines are of equal length ensuring that no client is at a disadvantage, no matter where they are located in the data centre.

Finally, the development of the Bond Electronic Trading Platform (ETP) for government bonds in conjunction with South Africa’s National Treasury and its primary dealers remains an important strategic initiative for the JSE. The ETP will allow the National Treasury’s nine primary dealers to transact government bonds on an electronic central order book platform. These transactions will be matched and sent to the Central Securities Depository (CSD) for settlement. The choice of the technology for the ETP for government bonds and the business model that would best enable that technology to be operated cost-effectively have been agreed, and MTS Spa has been appointed as technology service provider. The work to deliver the ETP is well on track, with user testing already started and all stakeholders deeply engaged. The project is expected to go live in 2018, adding in additional price transparency to the overall market for government bond trading in South African instruments.

©BestExecution 2018

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Equities trading : Overview : Lynn Strongin Dodds

Ian Rycott

April 19, 2018

THE DARK SIDE.

MiFID may want to shine an ever brighter light but traders are looking to avoid the glare. Lynn Strongin Dodds reports.

It is still early days in the post MiFID II world, but the clampdown albeit belatedly on dark pools has not unleashed a surge of trading into lit equity markets. Instead, there has been a spike of activity into alternative venues such as periodic auctions and block trading platforms where the dark pool caps do not apply.

“If you look at the trading landscape from a 30,000 feet view, the drive towards more lit market trading is not happening as intended” says Mark Pumfrey, head of EMEA at Liquidnet. “One of the drivers behind this is that institutions and hedge funds are keen to find the other side of their trades with as little market impact as possible. As a result, they continue to preference trading on dark MTFs above LIS, periodic auctions, and SIs, over the lit markets across Europe.”

Mike Horan, head of trading at Pershing Ltd adds, “The buyside trades in the dark because of the spread capture and the ability to curtail information leakage. One of the main reasons to trade on these platforms is cost. It has been so expensive to implement MiFID that the focus now is on saving money and looking at execution costs. The result is that we will see a continued move to periodic auctions and LIS type of trading. At the moment there has been trading in the higher bands but I expect to see more activity in the smaller bands as time goes on.”

The migration started last year as market participants tested the waters. The benefit of periodic auctions is that under MiFID II they enable traders to hide their orders until there is enough volume to trigger a trade. As for LIS, those who qualify for the waiver are exempt from both the calculation of the caps and any subsequent suspensions of dark trading. Thresholds have been set according to how much the stock has traded. For the least-traded, a block of just 15,000 euros counts as large in scale while for the most actively traded – shares with volume of more than 100 million euros a day – the threshold is 650,000 euros. In the past, the use of LIS was more mixed and depended on the algo strategy being employed.

The LIS boom

A study conducted last year by TABB Group shows that on-venue trades meeting the LIS thresholds in European equity markets accounted for 22% of all dark MTF trading in the third quarter of 2017, up from 12% during the same period in 2016. The value of LIS trades increased 108% over the same period, from €24bn to €50bn. The research consultancy predicts the market will double again over the next 12 months, accounting for half of all dark MTF trading by the fourth quarter of 2018.

The Thomson Reuters March Share Reporter reflects the continued direction of travel. Although the double volume caps (DVC) had just made their debut, trading in dark pools halved to 3.06% market share of on-book trading from 6.15% for the period between 2 March and 16 March. By contrast, periodic auctions doubled their share of on-book trading from 0.64% to 1.23% during the same time frame.

One of the biggest winners was Cboe Europe’s periodic auctions book which set a new one-day high of 582.8m in mid-March, surpassing its record month of volume in February where average daily notional value reached €353m. This represents almost a fifth more than in January this year. Overall volumes hit new highs on Cboe as well as Liquidnet, Turquoise and Euronext Block. Reports showed that the proportion of block trades to the whole dark trading volume rose to 44% the week of the 19th March from 42% the week before.

“We believe that block trading will become more popular because of the quality of the liquidity,” says Steve Grob, director of group strategy at Fidessa. “New entrants have doubled over the year and market participants have been retooling their machines to trade blocks in LIS sizes.”

The introduction of the DVCs was delayed for roughly two months due to a lack of complete and quality data from exchange operators to calculate effective caps. After the European Securities Market Authority (ESMA) crunched their own numbers in January and February, it published the names of 755 securities that were to be subject to the DVCs until 12 September 2018. Although that represents less than 5% of the total instruments traded in the European market, it covers some of the largest and best known names ranging from all of the FTSE 100 banks such as heavyweights, HSBC, Barclays, Standard Chartered, Royal Bank of Scotland and Lloyds as well as corporate giants Unilever and Nestle, British Tobacco.

Back in the game

Another potential game changer in the equities space is the arrival of the systematic internalisers (SIs), which do not have to publicly display prices for trades larger than the standard market size. They are not a new concept and were originally introduced in the original MiFID directive for all off-venue equities trading in the European Union. However, they never gained traction and only nine banks signed up with very few trades passing their way.

The preferred option became the broker crossing network which allowed the sellside to transact significant volumes internally and to match order flow. However, they have been eliminated under MiFID II and trading across asset classes is only eligible on a regulated market or traded on a regulated market, MTF or SI.

A report earlier in the year from ITG showed that roughly 100 banks and electronic liquidity providers (ELPs) have registered as SIs across different asset classes. Canvassing the European landscape, the agency broker found that out of the over 50 buyside institutional investors surveyed, the majority or 88% expect there will be fewer than 10 relevant ELP SIs in operation by the end of this year, while 42% expect there will be less than five.

The survey found that the most popular venues were likely to be bank run operations with around two thirds of traders anticipating interacting with bank SIs in the first quarter of this year versus fewer than 40% for ELP SIs. To date, most of the behemoth banks including Goldman Sachs, Credit Suisse, UBS, Deutsche Bank, Barclays, Bank of America Merrill Lynch – some of which have been listed on the register since MiFID I – started to operate SIs ahead of MiFID II.

“We think there will be eight to ten investment banks operating SIs for equities and half a dozen electronic market makers such as Virtu and Jane Street” says Rob Boardman, European CEO of ITG. “However, the issue is that some of the SI operators may see themselves as aggregators of liquidity and send the orders directly to MTFs so that their clients are not subject to trade reporting requirements.”

Horan adds, “If you look at the FTSE, off exchange was done on BCNs which accounted for around 40% of total volume. Around half of the flow or 20% will now flow to an SI. One of the questions going forward will be what market share will the high frequency trading firms like Virtu capture. If they are too successful, will new regulations come in to curb their activity? The conundrum is that while SIs will offer a decent source of liquidity, there is still a belief that more trading should take place on and not off exchange.”

Adam Toms, CEO Europe of OpenFin also believes that the SI regime will be one to watch for ESMA as well as the Financial Conduct Authority. For now, “I think that traders will look at the risks posed by the different venues before executing orders,” he adds. “In general I expect to see the next generation of tools as people are blending their high and low touch technology and services together to achieve the optimal best execution outcome.”

©BestExecution 2018

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Equities trading : Industry viewpoint : SIX Swiss Exchange

Ian Rycott

April 19, 2018

TICK SIZES, PASSIVE EXECUTIONS AND THE INNOVATIVE ORDER TYPES FOR SWISS EQUITIES.

By Adam Matuszewski, Senior Equity Manager, SIX.

Harmonisation means lower

MiFID II tick size harmonisation brought a new calculation methodology for equity price steps. The tick size depends not only on the security price but also on the average daily number of trades. For Swiss Blue Chips traded on SIX Swiss Exchange, the new tick size regime meant lower tick sizes for the most traded symbols. In Blue Chips, half of the securities saw a tick decline by at least 50%.

We focus in on the most liquid Blue Chips where the liquidity impact is most prominent and which are also the most traded equities in Europe. Stocks such as Nestle (NESN), Novartis (NOVN) and Roche (ROG) previously traded with no vacant ticks between best bid and offer. Hence, improving the spread for these stocks was close to impossible. As a result, we saw a large accumulation of orders at the touch with average values of between CHF 0.5m – 1.5m at the bid and offer. With the tick size change on the 3rd of January, liquidity remained strong but few notable changes could be observed.

The average spread in those Blue Chips securities halved to approximately 3bps in 2018 and this was matched by liquidity at the bid/offer that today oscillates between CHF 0.2m and 0.3m. On average the most liquid names continue trading 60% of the time at ‘one tick’.

Passive trading

These changes directly impact passive trading. On one hand, we observe that the queues on top of the order books have shortened by 50%. This subsequently reduced time to fill on average by 17 seconds across Blue Chip securities. It is important to note that reductions in time to execution for orders placed passively in the book are the highest for NESN, NOVN and ROG. We observe that the passive participation rate of brokers and Investment Banks has increased in the early months of 2018 to 51%, from a mere 43% in 2017. This leads us to a conclusion that the tick changes implemented on SIX Swiss Exchange facilitated the ability of these firms to execute client business passively and added value to them doing so. On the other hand, ‘the time to tick’ which measures the average time it takes for a symbol to change its price, has fallen. This indicates that the market moves faster and in theory following the best prices became more difficult.

Peg and dual representation

SIX Swiss Exchange’s next technical release introduces native ‘near-touch’ price pegging functionality that allows clients to more efficiently follow the best bid and offer prices. This functionality ensures that an order follows the best market price every time the market moves. Pegging is offered in conjunction with another new order feature that allows ‘dual representation’ of orders in both the central limit order book (CLOB) and the non-displayed SwissAtMid pool (see directory p116). Through dual representation, members benefit from capturing liquidity sitting at the midpoint whilst also interacting with orders in the CLOB (see graphic).

Iceberg Plus and Limit Plus

Iceberg Plus and Limit Plus are the two order variations featuring pegging and dual representation. Limit Plus is a unique new order type that allows participants to place their resting orders into both books simultaneously, allowing full visibility in the lit order book, but also total availability for execution in SwissAtMid.

Iceberg Plus is the enhanced version of the standard iceberg order with the visible tranche pegged to the bid/offer while the full quantity is available to trade in SwissAtMid. In addition, randomisation of displayed peak is new functionality added to iceberg orders offered at SIX Swiss Exchange. This will help members to control how much of their order is visible to the market to maximise execution opportunity while minimising information leakage.

©BestExecution 2018

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Equities trading : Utilising retail flow : John Owen

Ian Rycott

April 19, 2018

UNLOCKING RETAIL LIQUIDITY.

John Owen, COO of Stifel Europe, discusses the post MiFID II market structure and how retail liquidity offers new opportunities to enhance execution quality.

How has the UK equity market structure changed since MiFID II was introduced?
Over recent months, certain aspects of the regulation have challenged the market significantly. In particular the changes to dark trading rules have prompted our clients to require a lot more support to help navigate the new venues and interpret the new restrictions that have been introduced. In particular they need guidance on where to trade their passive, low-impact business.

What specifically has changed around the dark markets?
The UK market was more heavily impacted by the dark pool caps than anticipated – over 350 instruments were suspended as part of the double volume cap regime. Clients have been forced to re-evaluate their trading strategies to take into account new trading methods like periodic auctions. This is as well as navigating a plethora of new venues including bank and external SIs, all of which require the re-engineering of existing algorithms and smart routers.

How have clients adapted to this?
Early trends show that whilst there is evidence that the trading of large orders – sizeable large in scale (LIS) trading – is adapting to the new breed of dark pools, clients are still struggling to find the best ways to execute passive orders in sizes below the minimum threshold for LIS.

Brokers have adapted routing methodology to leverage auctions on existing venues for example, but interesting new opportunities to access previously untapped liquidity are still emerging.

When considering how we might help sellside clients to execute passively, we began to turn our minds to how we might enable them to hook into the unique retail liquidity we see flowing into our systems from wealth managers and retail investor platforms. That led us to develop a completely new platform to bring together our institutional and retail clients called SWIM – Stifel Wealth and Investment Management service.

So how does retail trade size compare to institutional trading venues?
Perhaps counter-intuitively, analysis shows that average trade sizes from retail executions compare very favourably against even dark pool venues. Average trade sizes of over EUR 8000 lend credence to our view of the existence of meaningful execution opportunities within a community that previously wasn’t accessed in this way. The question has been how to access this without significant technical development from the client’s perspective.

How might the market achieve this?
Historically the retail brokers have been served well by routing their retail flow to a specialist group of market makers. We have re-engineered this trading model to allow access from standard algorithms to this flow on an agency basis, bringing two valuable sets of market participants together in a safe and confidential environment. This is fully automated, with parameters from both sides, enabling complete control of trading limits and price improvement.

How does the quality of execution against this liquidity measure up against existing business?
Fortunately, with the availability of more pre- and post-trade transparency, it’s easy to benchmark the results of accessing new types of venues. TCA of our client orders in the first quarter of this year has proved that significant spread capture was achieved by institutional clients accessing retail order flow through our SWIM platform. Pre-trade signalling risk is minimal on the institutional side, and all trades are opaque to our proprietary trading activities. In turn, retail clients have achieved best execution through their existing Stifel Europe trading connections and we’ve worked hard to maximise efficiency gains like trade netting to optimise costs.

What about the instrument coverage. Is retail ownership concentrated in smaller and mid-cap instruments?
No. Whilst retail ownership does vary enormously between instruments across the board, there is no specific trend between large and small-cap stocks. As much as 70% of some FTSE 100 instruments are retail-owned, and trading using this mechanism is suitable to bluechip and mid-cap instruments alike.

How much have you had to consider compliance in such an innovative new model?
Compliance is obviously key. Our priority is to ensure clients are comfortable with new execution policies and agreements we’ve put in place. Close co-operation with the regulator has also been necessary.

Should brokers be looking to build out their retail client base to enable them to take advantage of the significant trading opportunities. Isn’t that fragmented and won’t it take time?
The majority of our clients on the institutional side see SWIM as a neutral retail liquidity pool that’s easily accessible from their existing algorithmic trading suites. We’ve done all the development work for them to enable access with limited technical change and in a cost-effective way. So in that regard, they need not build that community themselves – they can access an established retail base through our existing SELECT (“Stifel’s Electronic Service”) platform.

We don’t see it as building a new pool of individuals – we like to think of it as ‘strength in numbers’.

©BestExecution 2018

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Equities trading : Industry viewpoint : Turquoise

Ian Rycott

April 19, 2018

ENABLING FLOW.

By Scott Bradley, Head of Sales and Marketing, LSE Cash Secondary Markets and Turquoise.

We saw some very noticeable changes occurring to order flow being routed into Turquoise Plato™ in Q4 last year as clients were preparing themselves for the anticipated new liquidity landscape. Following what could justifiably be described as a ‘relatively’ smooth transition into a MiFID II environment, we saw a general increase in order size and the subsequent execution size growing on average by an incremental €100,000. This resulted in January posting a record month for Turquoise Plato Block Discovery™, with €9.25 billion traded (+22% on the previous record month).

The surprise announcement by ESMA on January 9th of the delay to the implementation of Double Volume Caps (DVCs) due to an incomplete data set also played its part. The new implementation date for the caps arrived on March 12th and instantly Turquoise Plato Block Discovery™ experienced a step change in client routing behaviour with the average execution size in the immediate weeks following DVC implementation increasing a further €150,000 to more than €620,000. This being inclusive of the fact that, where permissible for a security, orders over 25% Large in Scale (LIS) may still be submitted into the service. In fact, by value traded, over 85% of executions within Turquoise Plato Block Discovery™ were over 100% LIS, and trade sizes in European blue chip securities increased by 21% in Q1 compared to Q4 last year.

What is also interesting to note is that we have observed that the first half hour of trading is typically the busiest trading interval within the service, which further highlights the importance of Turquoise Plato Block Discovery™ when actively looking for liquidity in order to get your business done in size whilst saving half the spread. This complements the volume distribution observed by the primary venues where the closing auction accounts for such a significant proportion of the day’s liquidity.

Whilst the use of conditional order venues such as Turquoise Plato Block Discovery™ continues to provide important LIS trading opportunities, the DVC related pre-trade transparency waiver suspensions have led to innovations such as frequent transparent auctions becoming new liquidity destinations within the new MiFID II landscape. Competition for success within these constructs is developing rapidly with first mover advantage currently paying dividends. However, competition leads to innovation and creates choice and with this Turquoise Lit Auctions™ is growing strongly following regulatory approval in Q4 last year.

The new book (MIC code TRQA) was introduced following demand from our members who are looking for new liquidity channels and assistance navigating the execution landscape post MiFID II, looking to a trusted partner such as Turquoise with its proven track record for delivering innovation and quality executions. In total, 714 Turquoise instruments were impacted by the Reference Price Waiver suspension following the announced DVCs, so with Turquoise Plato Block Discovery™ successfully providing for above LIS business and Turquoise Lit Auctions™ being a venue to help achieve the best result on a continuous basis for sub LIS business, the very essence of best execution is being acknowledged.

Whilst the service was technically launched on 4th December 2017, it has really been since the introduction of a Minimum Execution Size (MES) functionality on 5th March (a week before the DVCs came into effect), that we have seen strong momentum in Turquoise members coming on-board and actively routing on a daily basis, with a doubling of clients and a significant increase in trading activity from that point to end of March. We see further considerable growth just around the corner with each new member participant bringing potential contra liquidity to the book.

The matching mechanism of Turquoise Lit Auctions™ determines the auction price as the price within the PBBO which maximises executable volume. The price and quantity can dynamically change during the auction phase up to the point of execution as participants add, remove or amend orders, or as PBBO midpoint changes, with the indicative price and aggregate volume market data message updating in real-time with each change.

Members can ‘opt-in’ to member priority matching which means once the Turquoise Lit Auctions™ price and volume is determined, a participant’s orders will first match against their own contra orders before attempting to match against other counterparties, maximising the matching potential with their own firm’s order flow before matching residual with others. Through Q1, ‘self-matching’ has been a reasonably low percentage of total volume traded within Turquoise Lit Auctions™ reducing as further participants join, something which highlights the workflow importance of the service for clients looking to find liquidity through their smart order routing logic.

Access to Turquoise Lit Auctions™ (MIC: TRQA) is straightforward and utilises existing Turquoise connections, fundamentally requiring only a change in target MIC code.

©BestExecution 2018

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Equities trading : Managed services : Ollie Cadman

Ian Rycott

April 19, 2018

AT YOUR SERVICE: A NEW MODEL FOR TECHNOLOGY IN THE FRONT OFFICE GAINS TRACTION.

By Ollie Cadman, Head of Business Operations, Vela.

Across a variety of industries, there are clear signs of increased spending on managed services. Whether it involves software-as-a-service (SaaS), infrastructure-as-a-service (IaaS) or platform-as-a-service (PaaS), a raft of reports and surveys show rising appetites for this new way of doing business.*

Financial market participants are among the most enthusiastic to embrace the new as-a-service model. And it’s not difficult to see why.

Whether the focus is on operations, market opportunities or broader competitive pressures, the as-a-service model offers financial firms more scalability and flexibility than they’ve known before. It allows trading firms to be more responsive to shifting customer requirements, to enter or exit markets more quickly and efficiently, and to address legacy IT issues with less pain. And all of that is before even counting one of the most significant drivers: the balance sheet advantages of shifting away from capex and towards opex.

What’s different now, however, is that the as-a-service approach is extending beyond the back and middle offices, where much of the early low-hanging fruit could be found for financial firms undergoing digital transformations. Historically, the front office – whether market participants have relied on third-party providers or have developed their own in-house solutions – has been based on self-owned and self-managed hardware and software. That is currently undergoing a revolution.

Coming to a screen near you

The idea is straightforward. Firms engaged in the trading business access and trade the markets through a set of APIs that cover the whole gamut of trading, from data to order and execution to risk management. Instead of using their own hardware and software, firms source and manage their trading platform and ancillary services from specialist third parties, and integrate them with their internal systems via APIs.

Arguments for managed services extend to both buyside and sellside market participants, although some factors will invariably weigh more for one side or the other, heavily depending on the size and nature of a firm. For instance, larger sellside organisations are likely to value the emphasis on opex more than smaller buyside groups. Similarly, the potential to trial new markets without making long-term investments will be a significant attraction to niche-oriented, buyside participants.

While much of the attention in terms of digital transformation recently has been focused on the sellside, given a number of regulatory drivers, the potential for trading-technology-as-a-service may be even more dramatic for the buyside. As these firms increasingly use multiple vendors, they still need to aggregate them into a single upstream application. Doing that over a series of APIs becomes a much more attractive proposition than traditional on-premises approaches. Smaller organisations simply don’t have the option of regularly deploying and managing trading stacks, so using APIs to move to an as-a-service model enables them to widen their market opportunities much more easily.

Simply put, in an API-driven world, trying new platforms – or trying new markets – is not the potentially life-changing decision it used to be. For the buyside, a plethora of choices opens up. Meanwhile, for the sellside, onboarding new clients becomes a relatively easy affair.

A matter of timing

Given all the benefits, why are managed services experiencing such growth in the trading technology scene only now?

Some of the answer comes down to time. As API-based approaches over the years have mushroomed in other sectors such as retail and heavy industry, financial sector participants have become emboldened to explore the new model.

Equally important, issues that had long concerned CTOs, such as security, have been addressed through technological progress. For instance, advances in encryption technology have made financial firms more comfortable with public and private cloud-based solutions, which are integral to managed services.

Latency is another example of a critical issue that has been addressed. Low latency is not just a consideration for high frequency traders. Best execution, particularly in markets with fragmented liquidity pools, simply demands a low level of latency. But some managed service providers have recognised this and are now able to provide latency statistics for every message transmitted.

For companies looking to adopt a platform-as-a-service approach, one factor that they invariably consider is the trading community. Buyside participants will only want to be on a platform if it has the brokers they need, while brokers will be attracted if they know the buyside is already on board. But this just puts the focus on choosing the right provider.

API revolution

One of the biggest factors behind the embrace of as-a-service models, however, comes down to the choices financial firms now have. API development for the financial industry has taken off in recent years as fintech competition has intensified and a host of smaller disruptors have looked to seize business from established players.

About a dozen years ago, there were fewer than 200 APIs in existence. According to programmableweb.com, which provides an online directory for APIs, there are nearly 20,000 now. The financial services sector has seen some of the strongest growth in API development. Between 2009 and 2013 the total jumped from fewer than 100 APIs to more than 500. The site currently lists more than 3,000 APIs in its financial category.

Such a strong focus on development opens the way for technology leaders to provide innovative solutions to firms looking to take advantage of the API revolution.

Taken together, these signs all point to rising interest in the as-a-service model for financial markets. The benefits have been demonstrated and the obstacles overcome. Whether the focus is on reducing costs or boosting business, the opportunities that an as-a-service model provide are hard to ignore.

*A report by CXP Group found that nearly 80% of organisations surveyed expected to increase or maintain SaaS, IaaS or PaaS spending in the coming two years. A separate survey by Ovum found that 50% reported an increase in SaaS spending in the past two years, 47% in PaaS spending and 46% in IaaS spending. Meanwhile, IDC FutureScape predicts that by 2021 IaaS spending will exceed on-premises spending by 15%.

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Fintech : Risks & rewards, Part 1 : Chris Hall

Ian Rycott

April 19, 2018

THE RISKS OF THE TECH REVOLUTION.

Innovation is encouraged but Chris Hall looks at why fintech may be doing more harm than good in some cases.

Ten years after the global financial crisis wreaked havoc in unpredictable ways thanks to poorly understood linkages, questions are now being asked as to whether the introduction of new technologies and services by non-traditional providers will add further risk and complexity to an ecosystem still weakened by self-inflicted wounds.

The potential risks of too rapid adoption of fintech innovations to the stability of the global financial markets were clearly highlighted by DTCC’s paper – Fintech and Financial Stability– Exploring How Technological Innovations Could Impact the Safety & Security of Global Markets.

Acknowledging anticipated upsides to client experience, critical infrastructure, process efficiency and operating cost, the DTCC paper noted risks ranging from cyber-security concerns to over-dependence on automated decision-making, warning: “Fintech is likely to have a greater systemic impact through key transformational mechanisms, such as the disintermediation of incumbents, disaggregation of financial services and decentralisation of networks.”

Regulators are also concerned. The Basel Committee on Banking Supervision is setting up a task force to monitor fintech adoption. A recent committee paper (Sound practices – Implications of fintech developmentsfor banks and bank supervisors) noted fintech’s potential to lower barriers of entry, elevate the role of data, and facilitate new business models. “The scope and nature of banks’ risks and activities are rapidly changing and rules governing them may need to evolve as well.”

The cracks show

Some of these risks have begun to emerge in the securities transaction chain, others less so. Whilst retail banks are menaced by alternative payment service providers and robo-advisors nibble at wealth managers’ margins, global broker-dealers, their buyside counterparts and securities market infrastructures have not yet faced significant direct fintech challenges, notwithstanding the plethora of fixed-income platforms launched post-Basel III. This is partly due to aforementioned complexity, as well as the recent pace of technology-enabled change within the sector. It’s also down to timing.

“Banks were weak in the aftermath of 2008, but the window for meaningful disruption from fintech rivals is now over,” says John O’Hara, formerly chief architect for global equities at JP Morgan, now CEO of Taskize, a startup that offers a standardised, automated platform for resolving settlement failures and exceptions across securities market counterparties.

He adds, “Banks and brokers are stronger than a decade ago and much less vulnerable to losing market share, at least to fintech startups. They’ve recapitalised, they’ve adjusted to Basel and their ROE is creeping up. This comparative rebound is tacitly recognised by both sides in the general shift in fintech/bank relations toward partnership rather than competition.”

Systemic stability may not currently be under threat in the securities markets, but new technologies and partners still pose significant risks. Taking its own medicine, the DTCC has adopted a high degree of due diligence in migrating its Trade Information Warehouse (TIW), which processes and reports credit derivatives, onto a platform that leverages cloud computing and distributed ledger technology (DLT).

A request for proposal (RFP) process was conducted in mid-2016, a relatively early stage in DLT’s maturity. “Risk mitigation was top of mind, meaning vendor risk assessments were a key priority, but we also needed a combination of different types of expertise,” says Jennifer Peve, co-head of DTCC’s Office of Fintech Strategy.

DTCC chose IBM as project lead, supported by DLT (distributed ledger technology) infrastructure and smart contract application provider Axoni, with R3, the finance sector blockchain development consortium, acting as solution advisor. The project team’s skill set balanced the desire to fully optimise DLT’s promise against the industry’s risk management imperatives. Trade-offs were inevitable, says Peve. Discussions were required with client CISOs, for example, on how much functionality to include on smart contracts, due to the limited availability of validation tools for the chosen programming language.

“There was a time when DLT was seen as disruptive to market infrastructure operators, but this evolved as clients expressed a desire to work collaboratively with incumbents and build risk mitigation into the implementation of this and other new technologies. In part, this was in recognition of the importance of governance and resilience measures put in place by market infrastructure providers,” she says.

DTCC started exploring DLT’s potential at the behest of users. The genesis and development of the project reflect the cautiously proactive approach of banks and market infrastructure operators. When budgets are still tight, margins, and revenues and fees still low, while costs and customer expectations continue to rise, incumbents know they must embrace change.

“Banks profoundly understand the risks of working with fintechs. The evidence is in their extensive due diligence and their reluctance to allow start-ups too close to core processes, keeping them at the periphery,” says O’Hara at Taskize, which has an investment agreement and marketing arrangement with European post-trade firm Euroclear. “That backing has been critical to banks’ willingness to accept the Taskize SaaS model.”

Taskize ‘sits’ on top of existing systems, helping back-office staff to fix breaks when STP fails, rather than replacing core kit. Nevertheless, clients are alive to new risks lurking within the emerging ecosystem. “So many fintechs run on Amazon Web Services (AWS) that it has been identified as a potential systemic risk. Banks ask us how quickly we could re-platform. If AWS went down tomorrow, we’d be back up within 48 hours,” says O’Hara.

Some sell-side firms are positioning themselves as safe conduits for fintech into the securities value chain. State Street has instituted a digital product development and innovation team which coordinates between fintechs, the firm’s main business divisions and their clients, to identify nascent technologies and solutions with the potential to improve process efficiencies and / or generate new revenues.

“Fintechs have some very interesting ideas and can develop them quickly, but they also value our assets, such as client relationships, domain expertise and deep data sets,” says Ralph Achkar, business partner, digital product development and innovation team, State Street. “At the same time, outcomes for clients can be better from a risk management and convenience perspective if they can access those ideas via a harmonised interface and a robust, secure and scalable infrastructure, rather than interacting with ten different fintechs.”

The AI evolution

DLT might be driving change in the back office, but artificial intelligence (AI) is making waves in the front office. Tabb Group head of fintech research Terry Roche says AI is the only way firms can handle regulators’ data requirements, but anticipates fundamental process change. “Much of the disruptive power of fintech will come through how it replaces existing human-orientated workflows,” he says. “If natural language processing and related AI innovations can work out which ideas to propose to clients daily, how does this change the future role of the sales trader?”

The buyside is experimenting with alternative data sets for possible integration into the investment process. According to Bill Stephenson, founder of the AIR Summit and ex-global head of trading at Franklin Templeton, the trading desk may initially prove more fertile ground for AI. Large asset managers have already invested in in-house quant capabilities to improve trade automation, with data scientists poring over TCA and related data sets.

“Buyside adoption of algorithms was a big change, but the trader retained discretion over how and when they were used. In the future, those decisions will be taken out of the trader’s hands, and this will lead inevitably to fewer traders,” says Stephenson. “Under incoming best execution obligations, it is safer from a compliance perspective for asset managers to allocate certain trades to brokers and strategies via a codified and automated process.”

For Stephenson, the biggest risk to the buyside is not having the resources to exploit the fintech opportunity. “Traders and portfolio managers don’t have the data science skill set to prove that alternative data sets are adding value to their processes. Some firms are building up their quant teams, but it is not easy to attract the required talent to the sector.” n

In the next issue of Best Execution, we’ll look at how regulators are managing the risks of fintech growth.

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Derivatives trading : Industry viewpoint : CurveGlobal

Ian Rycott

April 19, 2018

INNOVATION: THE REAL WINNER OF REGULATORY CHANGE?

By Andy Ross, CEO, CurveGlobal

Despite understandable complaints from customers about new regulation – higher costs, more cumbersome operations, additional paperwork – one apparent result of new rules is an increase in transparency. This is not just limited to whathas been executed but, under the new MiFID II requirement for best execution, it also extends to greater visibility as to how andwherebusiness was executed.

It is my belief that all the information needed to comply with new regulatory requirements, as well as the information the new rules generate, will spur innovation. As has happened previously in the equities, foreign exchange and fixed income spaces, the best execution standard is spawning new, more efficient and creative ways to measure and analyse transactions for futures. Inevitably, as has happened in other areas, the regulatory requirement for greater transparency – coupled with the innovation that follows – leads to a greater participation in trading overall.

As CEO of a new entrant in the futures space I hear considerable grumbling about the new rules, typically from clearing firms and trading firms. Many, however, don’t mention that execution and clearing costs under the old system were continually rising, which adversely affected the users of futures, including institutional investors.

‘Winner-takes-all’ hurts clients

Put simply, the route to both best execution as well as greater volume is not achieved through other venues adopting a winner-takes-all approach, but by healthy competition, as is the case in many other areas, especially for over-the-counter instruments, such as fixed income and interest rate swaps.

In these cases, no one platform achieves more than 50% of total volume traded; and a choice in platforms has kept pricing competitive, while pre- and post-trade transparency has benefited clients in a controlled but impactful way.

Without competition, price quality and best execution usually deteriorates. Said another way, the answer for best price, or best liquidity for futures trade execution lies not in users electing to use one venue or another, but in their being able to take advantage of all trading platforms that compete against each other and innovate to gain volume.

In the futures market, it’s not surprising that other platforms seek to maintain their flow. Unlike virtually all other major financial sectors, the futures space has remained relatively unchanged for decades. Renewed competition promulgated by new offerings, such as CurveGlobal, will promote competitive pricing, more transparency and client-driven innovation.

New entrants bring fresh approaches to attract order flow. Innovation, therefore, ignites competition and the result is better execution for clients across platforms. The analysis below, carried out by an independent market data analytic company, shows that the price of the different monthly contracts in CurveGlobal products are at times the “best price” in the market.

As you can see in the CurveGlobal Three Month Short Sterling Performance graph we are currently less competitive across the front contract, so as a result, we are introducing a half tick increment in the Three Month Short Sterling for all contracts across the curve from 23 April 2018.

Competition among trading platforms, of course, raises the issue of best execution increasing the complexity of position management. For example, market participants don’t want to open a position on one exchange if that trade would close out an existing position on another exchange. Of course, two positions can be held until expiry, and the maths to determine whether that makes sense is relatively easy. But if the costs of maintaining the two positions are too high, one could argue that it would be less expensive to consolidate the trades through a single trading venue.

A better solution is to use the innovative tools that have been spurred, at least in part, by regulation, to take advantage of customer choice. The technological tools to manage marketplace choices – combined order books, price checking and position management, for example – are available in Smart Order Routers built into in-house systems and, perhaps more importantly, from a number of software vendors.

Similar tools that meet the demands of users are now coming to futures trading vehicles as well. In benchmarks, for example, the market and regulatory forces driving the phasing out of LIBOR and the growing endorsement by market participants of the UK’s replacement benchmark, Sterling Over Night Index Average (SONIA)*, has prompted competitive innovation.

CurveGlobal and the Intercontinental Exchange (ICE) have launched SONIA futures contracts to meet expected demand for liquidity in the new benchmark. CurveGlobal has also created and soon will launch a simple native Inter-Commodity Spread contract (ICS) between the CurveGlobal® Three-month SONIA Futures and Three-month Sterling Futures. The ICS “spread” will eliminate the legging risk when trading the spread, with simultaneous fills in the underlying futures contracts. The ability to imply tradable prices in the ICS from orders in the outright markets as well as from orders in the ICS out to the constituent legs will enhance liquidity in the new products.

As with anything new, participants often ask themselves whether all the complexity is worth it. If we look at the experience in foreign exchange, T-bonds and equities, it’s clear that the answer is a resounding “yes,” in terms of both economics and the fiduciary duty of investment professionals to their clients.

Change is never easy, but putting customers’ interests at the centre of our efforts – which in the case of futures now translates into generating better executions – is not only the right thing to do, but also good for the long-term health of the business.

Can regulation be a spur to greater efficiency and innovation? As a dyed-in-the-wool free-marketeer, it pains me to say that sometimes such is the case.

CurveGlobal is an interest-rate derivatives platform that is a venture between London Stock Exchange Group, Cboe and several leading dealer banks.

*The “SONIA” mark is used under licence from the Bank of England (the benchmark administrator of SONIA), and the use of such mark does not imply or express any approval or endorsement by the Bank of England. “Bank of England” and “SONIA” are registered trademarks of the Bank of England.

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OPPORTUNITIES AWAIT, IF YOU KNOW WHERE TO LOOK.

By James Hilton, Co-Head, AES Sales, EMEA at Credit Suisse.

SELLSIDE CASH EQUITIES TECHNOLOGY AND WORKFLOWS CONVERGE.

AFRICA’S TIME.

THE DARK SIDE.

MiFID may want to shine an ever brighter light but traders are looking to avoid the glare. Lynn Strongin Dodds reports.

TICK SIZES, PASSIVE EXECUTIONS AND THE INNOVATIVE ORDER TYPES FOR SWISS EQUITIES.

By Adam Matuszewski, Senior Equity Manager, SIX.

UNLOCKING RETAIL LIQUIDITY.

John Owen, COO of Stifel Europe, discusses the post MiFID II market structure and how retail liquidity offers new opportunities to enhance execution quality.

ENABLING FLOW.

By Scott Bradley, Head of Sales and Marketing, LSE Cash Secondary Markets and Turquoise.

AT YOUR SERVICE: A NEW MODEL FOR TECHNOLOGY IN THE FRONT OFFICE GAINS TRACTION.

By Ollie Cadman, Head of Business Operations, Vela.

THE RISKS OF THE TECH REVOLUTION.

Innovation is encouraged but Chris Hall looks at why fintech may be doing more harm than good in some cases.

INNOVATION: THE REAL WINNER OF REGULATORY CHANGE?

By Andy Ross, CEO, CurveGlobal

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