Xetra : Twenty Years of Firsts

November 20, 2017

Deutsche Börse AG - Mitarbeiterporträts - Cash Markets - Andreas Heuer, Bernd Eschenbrücher, Christian Schürlein, Dr. Cord Gebhardt, Dr. Martin Reck, Michael Krogmann, Mirko Budimir

Xetra: Twenty Years of Firsts

Dr Martin Reck, Deutsche Börse AG

“A pioneer’s work is never done”: Dr. Martin Reck, Managing Director, Deutsche Börse AG, reflects on how one of Europe’s premier electronic trading platforms has been able to maintain its first mover status for two decades now.

Today, picturing the European securities trading landscape without Xetra seems virtually impossible. That was not always the case: While Deutsche Börse had played a leading role on the German stock market, the European angle first came into life with the introduction of the first fully integrated electronic trading platform for German equities operated by a regulated exchange in November 1997.

Right from the beginning Xetra has aimed to serve the needs of different kinds of clients ranging from institutional investors, prop traders, market makers to retail investors and issuers. Now, approximately 190 trading participants from 16 European countries, as well as from Hong Kong and the United Arab Emirates benefit from the highest liquidity in German equities and ETFs, leading to higher turnovers at more competitive prices in these securities than any other exchange worldwide can offer. This heterogeneous order flow coming from an international diversified clientele increases the price quality and results in an attractive international instrument portfolio. Xetra holds a market share of 90 percent in Germany, and 65 percent in DAX® constituents trading throughout Europe. Also, Xetra is not only world market leader in German Blue chips trading, it is the global reference market for German shares and the leading market in European ETF trading, too.

The trading platform owes much of its success to its superior trading technology which has been innovated on a regular basis over the last two decades. With each new Xetra release version, Deutsche Börse has not only aimed for faster, better and more reliable technology but has provided additional, in many cases exclusive benefits for market participants, making trading on Xetra safer and more efficient. Innovative trading functionalities for different types of securities, such as equities, ETFs, funds, bonds and structured products were created to answer particular requirements participants might have in certain trading situations in order to optimize the trading efficiency for everyone. Today, more than 1.6 million securities can be traded.

One of Deutsche Börse’s latest efforts to further optimize trading efficiency on Xetra is nothing short of a revolution: the migration to the powerful state-of-the-art trading architecture T7. T7’s cutting-edge technology delivers ultra-low latency, robustness and safe handling of very high throughput. The migration to T7 also means a comprehensive harmonisation of Deutsche Börse’s cash and derivative markets, and trading participants benefit from synergies resulting from the alignment on a common technology for the trading of cash and derivative products, as well as lower access barriers to the derivative market and vice versa.

Another first: Initializing the ETF boom in Europe
Only three years after starting Xetra, Deutsche Börse introduced ETFs to the European market. Right from the start, Xetra has been the pan-European trading venue of choice regarding ETFs. With a market share of more than 33 percent of all ETF trading throughout Europe and a product offering of nearly 1,500 ETFs and ETPs from 24 issuers, the XTF segment has managed to pool liquidity in ETF trading like no other European trading venue, with the tightest spreads and lowest transaction costs.

More than the sum of its parts
Trading on Xetra does include a cost-efficient and complete service chain. Thanks to Deutsche Börse’s integrated business model, straight-through processing includes not only clearing and settlement of each and every instrument traded on Xetra, but also the elimination of counterparty risk due to Eurex Clearing, one of the leading clearing houses in Europe, acting as central counterparty for every trade executed on Xetra. Additional safety and effective protection against potential disadvantages during highly volatile markets or fraudulent behaviour of other market participants are provided by Xetra’s protective mechanisms and Deutsche Börse’s market surveillance.

All in all: a cutting-edge trading technology, innovative functionalities, a vast, heterogeneous liquidity pool, and the fairness and transparency only a regulated exchange can offer – anyone can see the unique attraction of the Xetra experience – offered and provided for some 20 years now.

www.xetra.com

IEX Prepares To Launch Listings Venue

GlobalTrading

November 14, 2017

With Sara Furber, Head of Listings, IEX

An SEC decision removes one of IEX’s last remaining hurdles to becoming a primary listing venue and will encourage corporate issuers who demand a fairer, cheaper service.

IEX was launched more than four years ago to protect investors from unfair advantages enjoyed by predatory high frequency traders in the equities secondary market. Now, IEX is taking an initiative in the primary markets that should alleviate many of the problems encountered by corporate issuers with listings in other exchanges.

In early August, IEX gained approval from the Securities and Exchange Commission (SEC) to introduce opening and closing auctions. Moreover, the SEC also gave the go-ahead for IEX to enable the transfer of listings from other exchanges and hold opening auctions for initial public offerings (IPOs) on listing day.

The decision cleared one of the last significant obstacles for IEX to become a primary market venue for companies in mid-October, challenging the duopoly held by the New York Stock Exchange (NYSE) and Nasdaq.

For its operations, IEX will support security directory and auction information messages on its market data feeds, introduce dedicated IEX-listed test symbols and quote its listed securities on Network B data feeds, and generate and distribute daily list files.

The IEX auction process provides electronic price discovery mechanisms that match orders in IEX-listed securities at a single price using a double auction. These auctions enable IEX participants to execute against On-Open and On-Close interest at the exchange.

During the process, IEX will calculate and disseminate current price, size, imbalance information, auction collar information and other relevant information about future auctions. It will also introduce four new order types for use in auctions exclusively: two for the opening auction (Market-On-Open, Limit-On-Open) and two for the closing auction (Market-On-Close, Limit-On-Close).

Perhaps naturally, the incumbents would prefer that they retained their dominant position, but the SEC has clearly shown its preference for further competition and choice, and has been constructive during IEX’s application process.

IEX’s auction aims to broaden investor participation and prevent market manipulation, which is reflective of IEX’s core philosophy. In fact, IEX was first started to protect investors from predatory traders, and mitigate against speed advantages. Long-term investors in particular have been enticed by IEX’s protective innovations, superior execution quality, and their free-access, pay-as-you-trade pricing model.

When it launches its primary market capability, IEX initially plans to persuade companies to shift their listings from other exchanges, then later, after building a track record for successful auctions and accumulating a critical mass of listings, it will be in a position to attract IPOs.

IEX should also increase its share of secondary market trading because a company’s stock tends to trade more frequently on its home exchange at the open and close of trading. Moreover, between 5% and 15% of daily trading volume takes place at the opening and closing auctions, and these are the segments that IEX aims to tap.

Shareholder alignment
Arguably, NYSE and Nasdaq compete largely on branding and marketing. IEX believes it offers companies a service-oriented value proposition, that aligns itself with and takes responsibility for the interests of its shareholders. IEX intends to build and sustain relationships with its clients and provide them with a more supportive voice.

Just like IEX’s market data, IEX’s auction data will be free with equal access for all participants, which creates a level playing field for all investors. IEX will disseminate information every second, compared with longer periods by Nasdaq and NYSE.

IEX also plans to offer an alternative pricing model to its listed companies, that reflects it’s client-centric, service driven approach. In practice, this means a lower-cost, flat fee; a refreshing alternative to the complex array of additional levies are charged for corporate actions, such as mergers, rights issues or stock-splits. This reflects feedback from companies who felt they were being treated as products, rather than clients and sometimes faced surcharges in excess of their annual listings fee.

In order to compete, other exchanges will likely have to offer better services – although business models that rely on complex fee structures and by selling data might struggle to change.

Of course, there will be challenges. IEX will need to overcome some understandable inertia in order to attract listings by companies that are drawn by the apparent prestige of a NYSE listing and the glamour of ringing the opening bell, the ticker tape in Times Square and the CNBC market commentary.

However, ethical and fiduciary responsibility should prevail and listing choices are likely to be based on efficiency and cost, rather than branding.

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Best Execution Monitoring: Lip Service Simply Isn’t Enough

GlobalTrading

November 14, 2017

By Duncan Begg, Electronic Product Manager, ITG Asia Pacific

A data-driven broker selection tool demonstrates a process-driven, quantitative approach to execution performance measurement.

As the implementation date for Markets in Financial Instruments Directive (MiFID) II fast approaches, regulators are sending a clear message to the investment community: Make sure that you perform robust analysis of the effectiveness of your order execution arrangements.

This should come as no surprise. As part of the FCA’s 2014 Thematic Review TR14/13, the U.K. regulator expressed its withering assessment that “most firms lacked effective monitoring capability to identify best execution failures or poor client outcomes,” a requirement of MiFID II. The FCA went on to demand that “firms must take action to ensure that their monitoring is helping to deliver best execution for clients on a consistent basis.”

In short, the requirement to implement regular, effective monitoring is clear and unambiguous. The more pressing question, then, becomes one of approach—how to ensure that the monitoring process deployed will meet MiFID II’s standard of taking “all sufficient steps to obtain … the best possible result for their clients.”

To address these new higher standards, an acceptable monitoring process should combine at least the following aspects:

It should employ data-driven quantitative approaches
The data should be sufficiently clean and structured in a way that readily allows for analysis and consolidation
The data collected should be unbiased, allowing for direct comparisons of execution quality
The monitoring process should be ongoing and repeated regularly

Using a data-driven selection tool
One approach to helping meet the monitoring challenge involves decoupling the selection of an execution strategy from the selection of a broker. Under this method, a buy-side trader would retain focus on strategy selection (VWAP, VP, IS, etc.) while the choice of execution broker is determined by preconfigured allocation percentages.

Because the allocation a broker receives is driven by the broker’s target percentage of orders (and not other considerations), the execution sample should be less prone to bias in its composition. Assuming enough flow is sent, all brokers should receive a representative sample of orders spanning different liquidity profiles, volatility groups, spreads, industry sectors and countries. This would provide a better foundation for comparing execution quality among brokers.

A data-driven broker selection tool is designed to be the infrastructure component that manages the transmission of orders to execution brokers in line with allocation targets. It consists of a database of historical order allocations and fills, a network providing connectivity to execution brokers, and the algorithm for determining to which broker a new order will be sent. Additionally, by serving as a centralised hub through which order executions flow, this tool naturally functions as a repository for collecting the resulting execution data in a standardised format.

In the context of ITG’s data-driven broker selection tool, Algo Wheel, the allocation algorithm is driven exclusively by percentage targets explicitly set by the investment manager (e.g., 10% to Broker A, 8% to Broker B, etc.) These targets can be updated at any time, and it is up to investment managers to decide how often they wish to analyse execution performance and potentially update broker allocations within the algorithm.

A data-driven broker selection tool is not necessarily touted as a turnkey solution to automate and analyse all execution performed by an investment manager. Different orders require different levels of attention. In the case of illiquid securities or difficult markets, taking “all sufficient steps” may require a much more hands-on approach to order execution.

Instead, the selection tool is commonly used to assess the quality of execution for orders that do not require the careful attention of the buy-side trader. Depending on factors such as portfolio concentration, institutional versus retail client base, investment style and inflow/redemption activity, the proportion of orders that fit the mold for a selection tool will vary.

For some managers, appropriate orders will account for a small proportion of orders and the tool may be of limited benefit. However, for managers whose daily flows significantly feature uncomplicated orders, the broker selection tool potentially delivers better workflow efficiency and execution monitoring.

Moreover, its implementation demonstrates a process-driven, quantitative approach to execution performance measurement. Judging from the language surrounding MiFID II, that is something the industry can expect regulators to focus on beginning 3 January, 2018.

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Announcement : Swap market participants begin using DSB

Ian Rycott

November 9, 2017

It appears that swap market participants are beginning to use the service in increasing numbers as the Derivatives Service Bureau (DSB) reports a rise in registrations.

London, UK – 9 November 2017

Since the Derivatives Service Bureau (“DSB”) entered production on 2 October, the DSB has witnessed a steady rise in registrations, with rising numbers of firms looking to be on-boarded in time for the start of MiFID II on 3 Jan 2018. Given the DSB’s status as a new OTC derivatives market infrastructure utility, the DSB is publishing this report to inform the industry of its progress and performance and to inform market participants of timelines for guaranteed on-boarding before MiFID II go-live.

Rising Interest for Connectivity
As the industry’s first fully automated OTC derivatives reference data utility, there has been strong and rising interest for programmatic connectivity from swap market participants. Activity amongst technology vendors has also been strong, with many referring their own end-users to the DSB to discuss the best user model for each, including the use of the DSB’s free open-data.

In the first month of operations, the DSB has received executed contracts from 29 firms for programmatic connectivity, representing the majority of top-tier US and European swap dealers as well as some buy-side and trading venues. This pace of on-boarding is ahead of original expectations and with two months remaining to the end of the year, the DSB expects total numbers opting for programmatic connectivity to be at least the original projection of 100 contracts.

etrading_S.Danesh — Sassan Danesh, Management Team, DSB

“The initial operations of the DSB have run smoothly, showing no issues with the platform, nor our capacity to onboard new programmatic users within five days,” said Sassan Danesh of the DSB management team. “However, anticipating a continued rise in applications for connectivity, we strongly advise incoming programmatic users to submit their executed contracts by Tuesday 28 November as the DSB will guarantee production on-boarding for all such users by Monday 18 December.”

Registration for web search and file download have also been rising, with many users seeking information on the free to use end-of-day file download. Currently 90 market participants are using the DSB’s web GUI for ISIN creation and search, with another 700 in the DSB testing environment.

Interactions with users have also been steadily growing. Non-technical interactions through the DSB Secretariat have almost tripled from 30 queries a day in July, to 80 a day in October, with no sign of slowing. Technical support, which assists with connectivity and onboarding processes, has also experienced a similar growth in interactions.

Creation of OTC Derivatives Reference Data
The DSB is unique in providing a fully automated reference data service for OTC derivatives with reference data creation based on user interest. The initial group of users onboarded in October, have focused on Equity derivative instrument reference data creation, with additional instruments created for Credit, FX and Rates. As of 3 November, the following numbers represent the current archive of OTC derivative reference data:

• Equity – 116,014
• Rates – 13,017
• FX – 10,056
• Credit – 1,848
• Total – 140,936

Performance and Resilience
In the first month of operation, the DSB has met all its performance and resiliency targets, including surpassing the 99.9% availability rate of the Service Level Agreement (SLA), with zero outages in production. Similarly, the performance of the system has surpassed the 1000ms requirement of the Latency SLA, with the DSB processing 99% of all requests within 230ms.

“The resiliency and performance of the system was originally scoped for meeting the end of day reference data reporting requirements of MiFID II,” said Malavika Solanki of the DSB management team. “However, we have received rising interest from swap dealers to integrate the DSB into their critical front office trading flows and therefore we have designed the DSB to the much higher performance and resiliency requirements of real-time trading flows.”

Ongoing Developments
Additional product templates and updates for more complex OTC derivatives are being released on a near-weekly basis, with the current 49 products in production expected to be supplemented by an additional 34 products across all asset classes, including many exotic, non-standard products.

The DSB is also providing integration with European Securities and Markets Authority’s own instrument reference database, in order to provide market participants with the unified view of market and regulator instrument data that is required for determination of ToTV (Traded on a Trading Venue). Revised specifications and samples have already been released to allow industry preparations. The DSB will be hosting a webinar on this topic on 17 November, with speakers from ESMA and the DSB providing the latest information.

How To..
All use of the Derivatives Service Bureau requires registration. To register, to obtain the user agreement and related documentation, and to obtain technical support, please email your request to technical.support@anna-dsb.com.

To obtain non-technical information on the DSB including information on product templates, or to register for the 17 November ToTV webinar, as well as to subscribe to the DSB updates by email, please send your request to secretariat@anna-dsb.com.

For detailed information on pricing and user categories, technical principles of the DSB, and information about the DSB Product Committee and its activities, please visit the DSB section of the ANNA website.

About The Derivatives Service Bureau (DSB) Ltd

Headquartered in London, the DSB is a legal subsidiary of ANNA. Its core purpose is to serve as a global numbering agency, providing unique identification of OTC derivatives to serve the needs of market participants and regulators through allocation of the International Securities Identification Number (ISIN), as well as the Classification of Financial Instruments (CFI) and Financial Instrument Short Name (FISN), as OTC products are created. The ISIN, CFI and FISN are globally recognized and adopted ISO standards for identifying and classifying financial instruments.

More detailed information on the DSB and its development path can be found in the DSB section and related pages, as well as recent announcements at the ANNA website.

About ANNA

Established in 1992 by 22 founding numbering agencies, ANNA is the membership organization of national numbering agencies, which are operated by depositories, exchanges, government agencies, nationally central data vendors and other financial infrastructure organizations. ANNA also serves as the registration authority for the ISIN and FISN standards, under appointment by the International Organization for Standardization (ISO).

Under ANNA’s stewardship, the role of the ISIN in enabling global financial communications has been established worldwide. ISINs are issued today more than 200 jurisdictions worldwide. In addition, ANNA is developing the Derivatives Service Bureau (DSB), a fully automated global numbering agency to meet the operational and regulatory requirements of the over-the-counter derivatives markets. The number of national numbering agencies and nations working to establish national numbering agencies continues to grow each year, now surpassing 120 jurisdictions globally.

For information about ANNA, its members and activities, please visit anna-web.org.

©BestExecution 2017

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Announcement : Buyside favours large-in-scale venues over broker dark pools

Ian Rycott

November 8, 2017

LIQUIDNET STUDY FINDS DARK TRADING ADJUSTING AHEAD OF MIFID II.

Report finds buy side favouring large-in-scale venues over broker dark pools

LONDON, November 8, 2017

Liquidnet, the global institutional trading network, today published Shape Shifting: Accessing the Dark Post MiFID II research on how buy-side traders plan to trade in the dark once broker dark pools are no longer admissible. Today, 65% of respondents see buy-side crossing networks as their most effective venue for accessing the dark versus 20% who still prefer broker dark pools.

This is set for inevitable further change as MiFID II marks the end of the buy side’s ability to use broker dark pools from January 2018. In order to operate post MiFID II, sell-side brokers will either need to execute on a trading venue or register as a Systematic Internaliser (SI). However, over two- thirds of respondents remain uncertain as to how the SI regime will operate in practice and views remain split on whether the prevalence of High Frequency Trading market making activity within the SI space will deliver optimal execution. The majority of those interviewed for the report (67%) view the dark aggregation of SIs as a value-added execution service they will look to their brokers to provide.

Rebecca-Healey — Rebecca Healey, Liquidnet

“Understanding where and how to trade in this new complex landscape is the number one priority for over 60% of respondents. Some firms are already adjusting their behavior by switching from broker dark pools to alternative LIS venues to ensure they can achieve optimal execution,” said Rebecca Healey, Head of EMEA Market Structure at Liquidnet and author of the report.

Study results show that market participants plan to increase the proportion of large-in-scale (LIS) activity in order to benefit from the waiver on Double Volume Caps (DVCs). This change in behaviour could lead to a reduced number of instruments being capped out by DVCs. LIS volumes have increased in the last year from 5% to 10% of all dark volumes traded. Currently 51% of instruments will be impacted by DVC based on ESMA calculations¹and in Q3 2017, an additional 30% of instruments were within 1% away from the 8% threshold. If firms continue to change their trading behaviour in this way, there is an opportunity for them to avoid being impacted by the DVC.

“Now that the burden of demonstrating best execution has moved to the buy side, more traders are looking for an improvement in the quality of their dark executions. As a result, the number of respondents planning to focus on large-in-scale trading has increased to 72% in 2017, up from 43% the previous year,” Healey continued.

Additional highlights from the report include:

46% of participants have seen an improvement in the quality of their dark pool executions in the last year as the proportion of large-in-scale as a percentage of dark trading has also increased to 10% of all dark trading.
However, the future landscape remains very unclear, with 90% seeing inconsistencies in SI models and over two-thirds not confident about how the SI regime will operate post MiFID.
49% are less concerned with whom they execute provided they retain transparency and control over how executions occur.
48% of respondents plan to execute small- and mid-cap stocks with regional specialist brokers rather than the super bulge brackets once the DVC is introduced.

Be24_Liquidnet_MarkPumfrey — Mark Pumfrey, Liquidnet

“As control of execution shifts from sell- to buy-side, so too will information flows and the ability to successfully navigate a shifting liquidity landscape morphing under new regulatory requirements,” said Mark Pumfrey, Head of Liquidnet Europe. “Analysis of execution performance requires a new skillset on both the buy and sell sides. Dark trading will not flip back to the lit. It will shift shape into execution constructs that are more complex and dynamic, requiring alternative skillsets and greater technology to navigate successfully.”

Survey Methodology

Liquidnet’s Shape Shifting Survey was developed to understand how heads of dealing plan to access the dark post MiFID II, once broker dark pools are no longer admissible. The results from this survey are based on 51 detailed interviews with Heads of Trading/Dealing across Liquidnet’s Member network of asset management firms throughout North America and Europe. Participants were polled during August 2017, with 52% respondents from the UK, 24% from Continental Europe, and 24% from the US.

ABOUT LIQUIDNET – CLICK HERE

^{Footnote 1}Using the proposed 12-month backwardation of adjusted trading volumes against LIS bands and excluding non-interactable liquidity

For more information contact: Holly Finn, Consultant, Streets Consulting
T:+44 (0)20 7959 2235
M:+44 (0)7825 071 998
E: holly.finn@streetsconsulting.com
W: www.streetsconsulting.com
@StreetsConsult

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Announcement : Neptune embeds Symphony chat functionality for clients

Ian Rycott

November 8, 2017

Neptune Networks Ltd, the Fixed Income network for real-time “axe” indications, today announced that it has embedded Symphony chat functionality within the Neptune proprietary application.

London, 8 November 2017

The Neptune network provides a venue for investors to consume the highest quality bond axes/inventory data from their most trusted Bank counterparts. This enables institutional investors to be more effective and targeted when looking to execute large size orders in products such as corporate and emerging market bonds. The integration of Symphony’s collaboration platform will allow buy-side customers of both firms to communicate with their sell-side counterparts regarding the specific bonds axes they located on Neptune.

Twenty-five bond dealers are part of the Neptune sell-side participants, whilst there are over 50 buy-side firms with approximately $17trn in AUM. The platform now provides information in real-time with over 40,000 axes/inventory line items and over $170 billion in daily gross notional across 20 different denominations.

“Neptune integrating Symphony for chat is another positive step in adding more value to clients from both sides of the market. The ability for buy-side clients to seamlessly contact their counterparts as part of the Neptune workflow, similar to existing desktop solutions, is something both Investor and Bank partners have asked for. Symphony is also a perfect partner for us, given similar philosophy to enhancing market structure for the benefit of the main participants,” said Grant Wilson, CEO of Neptune Networks Ltd.

“We are excited to add Neptune to our growing network of partners,” said Jonathan Williams, Global Head of Partners, Symphony. “Our mutual customers will benefit from streamlined workflow via access to the Symphony community within the Neptune application.”

Neptune Networks Ltd is a market structure network which was incorporated in July 2016 with a mission to deliver the most accurate, timely data, which both informs and connects the bond market. Their vision is to become the destination for all bond market stakeholders, where reliable, relevant insight enables meaningful, transactional relationships between banks and investors.

Neptune focuses on delivery of real-time axe data from the sell-side to the buy-side via their order management systems (OMS) and execution management systems (EMS).

For more information contact:

Abby Munson/Lindsay Clarke, Streets Consulting
Tel: +44 20 7959 2235
Email: Abby.Munson@Streetsconsulting.com
Email: Lindsay.Clarke@Streetsconsulting.com

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Enabling Best Execution

GlobalTrading

November 7, 2017

By Damian Bierman, Head of Asia-Pacific, Portware

Trading systems need to incorporate new configurations and capabilities to meet the best execution requirements of MiFID II.

One of the most important themes of Markets in Financial Instruments Directive (MiFID) II is its “best execution” mandate. Investment firms must take all sufficient steps to obtain, when executing orders of any financial instrument, the best possible result for their clients.

Best execution is focused on achieving the optimum outcome on a consistent basis, and not simply on attaining the best price available at a given time for an individual trade. Several factors must be considered, including explicit costs such as fees and commissions and implicit costs such as those tied to signalling risk. In addition, transaction speed, order size, the likelihood of execution in prevailing market conditions and the certainty of settlement must also be taken into account.

Firms will be expected to show how they have incorporated each of these factors into their best execution procedures, and to support their conclusions with unbiased quantitative analysis, such as transaction cost analysis (TCA).

This emphasis on achieving best execution, and the incorporation of so many elements in its demonstrable realisation, means that unsurprisingly the efficiency and accuracy of a firm’s trading system has assumed paramount importance in the countdown to MiFID II’s implementation in January 2018. Both buy- and sell-side firms will need to comply with the tougher regulations, and helping them meet those requirements continues to be priority for vendor suppliers.

System upgrades
Systems will have to be upgraded in at least two fundamentals ways. First, they will require new configurations in order to capture substantially more identifying data than before. These include trader details, legal entity identifier (LEI) configurations and codes that explain the reasons for individual trades. Order entry screens must also be enhanced to secure a variety of relevant data points necessary at the time of the transaction.

Second, firms will need their trading systems to provide the tools and analysis capabilities that allow them to demonstrate compliance with objective TCA or other trade execution cost measurements. Broker analysis and scoring metrics, access to tick data, and even allocations will all become important for providing firms the level of granularity they need to ensure that their procedures and systems conform.

There are several ways vendors such as Portware can help institutions implement and maintain their best execution objectives. Broker analysis dashboards can rank counterparties’ performance by stock, sector, venue and algorithm, and also by order size and trade execution in specific market conditions. Relative performance can be gauged further by collating and storing indications of interest (IOI) and comparing them with actual broker transaction closure. Moreover, visual enhancements can add greater immediate clarity by showing broker scores and by displaying specific IOI-related reports.

Tick data can also be made available, which allows clients to measure execution prices against historical tick movements for performance measurements, such as interval volume weighted average price. In addition, allocation information can be stored in a data warehouse and made available for on-demand retrieval so performance at an account level can also be attributed.

Portware’s role is to help ensure that its clients are able to analyse and justify every decision that they make at each stage during the trade cycle. This means giving them access to data, organising it so it is easily auditable and providing the capability to adhere consistently to their best execution policies.

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Trade Automation: Panacea Or Placebo

GlobalTrading

November 7, 2017

Write-up by Rupert Walker, Managing Editor, GlobalTrading

Automation throughout the trading process is increasing rapidly, but there are roles for human agency, according to participants at a roundtable discussion in New York City.

Trade automation continues to be driven by regulatory requirements for best execution and stimulated by the rapid development of new technologies. It can help remove human bias, enhance surveillance, and explain trade execution in a systematic way and benchmark its performance.

Eventually artificial intelligence and machine learning will likely further reduce the role of human agency in the trade process, but now there is still demand for staff with quantitative skills, managerial expertise and even personal networks and market knowledge built on experience.

At its best, automation is about solving problems for clients, increasing trade execution efficiency and achieving scalability, agreed panellists at an Itiviti-sponsored roundtable discussion hosted by IEX at its office in the World Trade Center, Manhattan on 27 June.

One panellist recounted an anecdote from an electronic trading conference a few years ago when a speaker, with tongue in cheek (perhaps) predicted that soon dealing desks would be fully automated – and protected from meddlesome humans by a guard dog.

However, if automation goes wrong, problems can grow exponentially without human monitoring and override capability. In fact, financial firms have learned from experiences a decade ago and put in controls concurrent with technology installation since 2008, and the industry is now generally a safer place.

Third parties can be a better, more cost-efficient option for trade surveillance functions, such as identifying spoofing and front running, and making control adjustments. A lot of trading surveillance is already automated, but patterns are changing and bad behaviour is becoming more heinous and difficult to identify. In some markets, often the best that can be done is merely to flag a signal that a trader might be being spoofed or layered.

Technology transfer
Automation is well-established in developed equities markets, and is increasingly deployed in the operational processes of passive funds to match indexes and reduce tracking errors.

Algorithms are sufficiently different and can execute diverse strategies, which ensures trading is not homogenous and one-directional – at least in normal market conditions. For instance, smaller fund management firms often tend to be very active with distinctive strategies implemented by their own homegrown algorithms.

Dealing desks, especially at large asset managers, can tailor their trading strategies to match the diverse styles, such as momentum or value-driven, of their portfolio managers and automate the processes. Regulation increasingly requires buy- and sell-side firms to explain and justify execution, especially outlier trades, in a systematic fashion. One consequence of greater compliance costs in illiquid transactions might be to force some firms out of business.

Banks, fund managers and vendors are applying similar technologies to other asset classes, including fixed income and foreign exchange, but the transfer is far from easy. Markets have their own idiosyncrasies, levels of liquidity and dealing practices; fixed income, in particular, suffers from sparse data.

Buyside profile : Fabien Orève : Candriam

Ian Rycott

October 23, 2017

A MULTI-DIMENSIONAL APPROACH.

Fabien Orève, Global Head of Trading, Candriam Investors Group explains why trading desks need to be organised across the asset classes.

BIOGRAPHY:
Fabien Orève has been Global Head of Trading at Candriam Investors Group in Brussels since December 2010. The evolution of his desk towards a highly-efficient business unit has won awards for excellence in buyside trading. Prior to joining Candriam, Orève was a programme sales-trader at CA Cheuvreux in Paris. He graduated from Université de Caen Normandie, France, with a Master’s Degree in Banking & Financial markets.

How has the plethora of regulation changed the industry and what do you foresee as the challenge post implementation of these new rules?

Whether it is EMIR (European Market Infrastructure Regulation) or MiFID or any of the other post financial crisis legislation, the common focus has been on improving transparency as well as the different aspects of the business such as trading or execution. Looking at MiFID II in particular, the main impacts are twofold – the unbundling of research away from execution and the obligation for both the buy and sellside to report trades and transactions. That has been a big change for all of us and we will have to continue to invest in systems such as our OEMS (order and execution management system), enhance our qualitative and quantitative historical database and review our existing FIX connections to make sure all necessary information is transmitted to platforms and brokers.

Another change we are seeing, and expect to continue to see, is an increase in the number of questions that we are getting from existing and prospective clients on how we manage execution as well as TCA (transaction cost analysis) across the asset classes. This has led Candriam to invest more time and money into developing a larger database across asset classes. Having a multi-asset class OEMS has helped this process because it consolidates the order flows in one place. For example, the information can be extracted for TCA to analyse the post trade transactions, but if you continue the exercise and analyse the data in greater detail, it can also be used internally to improve the trading desk performance and provide more information to senior portfolio managers. Having more “ex-post” TCA across all asset classes will greatly help “ex-ante” TCA or pre-trade analysis.

How has TCA changed in light of the advent of the multi-asset class trading desk and regulation?

MiFID II has triggered the need to have post-trade analysis across different asset classes and we are seeing more convergence between equities, fixed income and FX. It is also one of the consequences, and interesting trends, arising from the increase in the multi-asset trading desk. The result is that large third party TCA providers now have to offer decent TCA packages across the three asset classes – equities, fixed income and FX. This is not only because it saves time and streamlines the processes but it also allows firms to have one central place where the data can be monitored on a regular basis and in a systematic way for compliance and business purposes. The one exception has been in the derivatives space although work is being done on OTC as well as futures, and I think we could see them integrated into multi-asset class TCA packages by next year.

Multi-asset trading desks are a feature at many buyside firms, when did Candriam establish its desk?

We built our multi-asset trading desk more than six years ago and innovations such as the multi-asset OEMS made the process much easier and has allowed us to on-board different asset classes. We take a horizontal approach and have leveraged the economies of scale to focus on productivity and synergy. From an organisational point of view, there are some buyside firms who restrict horizontality to small orders (across all asset classes) thanks to their OEMS’s filtering capacity. Other firms work on orders without differentiating between order size or underlying asset class. However, I think that excessive trading desk horizontality could be frowned upon by the active portfolio managers who invest in asset classes requiring expert execution and the need for liquidity. At Candriam, we have divided our central desk into specialists and generalists because there are certain asset classes such as fixed income, particularly corporate bonds and emerging market debt, that are more complex or illiquid and need people that have the experience and can work the order flow.

Liquid asset classes such as equities and foreign exchange are better suited to generalists and electronic trading. For example, there is a lot of programme trading in equities and that often requires a quantitative style of trading. If there are some small and mid- cap names in the baskets we would not split the order into different pieces but keep it together because that is the most efficient way to trade. This does not mean that our generalists work alone, they actually work in concert with their most experienced colleagues.

We have talked about regulations but how has market conditions changed trading?

Over the past few years, we have been in a low interest rate environment that has triggered two trends – investors have been on the hunt for yield to find additional alpha and have increasingly looked for opportunities globally such as emerging markets in Asia, Latin America and Africa. In some cases though this has led to an increase in voice trading which is the reverse of the regulatory push towards electronic trading and greater transparency. This is because trading, for example, in high yield bonds or emerging market debt, requires more expertise and a conversation over the phone.

The other consequence of market conditions as well as regulations is that we have seen significant inflows into listed derivatives, for example futures, which is why I think it is important to have people who have an expertise in derivatives. To this end, we have made two hires over the past year to strengthen our multi-asset trading structure. The most recent were Vincent Minichetti who will not only cover derivatives but also cash equity, FX and derivatives, and Cyril Batkin who also covers fixed income, FX and derivatives.

How has technology changed the industry and what do you see as the new developments?

It has been an interesting evolution with our trading desk talking about high, medium and low touch trading. However, despite the technological progress with low touch, trading is still monitored by both sides, brokers and ourselves. You hardly hear talk about ‘no touch’ although I think there is the potential for this to happen with small orders or retail order flow. I can see in three to five years’ time, putting an order in the OEMS, setting the appropriate RFQ (request for quote) to find the best price and then automatically executing the order.

How has the relationship between the portfolio manager and trader changed?

What we have seen around us is trading desks build new teams on the execution consulting or advisory side who work with portfolio managers to work through certain liquidity issues that they may have. Portfolio managers are increasingly asking questions about liquidity and, irrespective of how the buyside trading desk is organised, traders can provide additional information and colour on how they see the liquidity changing and the best ways to access it.

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