Trade Automation

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July 18, 2017

By Vaibhav Sagar, Senior Technology Consultant, Open System Tech

A tech consultant reviews JP Morgan Asset Management’s Curt Engler’s recent article about trade automation.

The article on “Automating the Trade Process”, by JP Morgan Asset Management’s head of equities trading (Americas) examines the gradual, systematic and incremental automation of different steps and stages of trade process for the buy-side.

Since this process involves replacing human touch and interaction with technology, the system needs to be constantly monitored and have fail-proof checks, according to Curt Engler.

These are required to better manage and mitigate technology related risks. Once a given incremental stage is tested and confirmed – both time and functionality wise – it becomes the foundation for the next iteration of development. Engler is spot-on when he points out that “at all levels, the technology is first used experimentally, tested and, if suitable, is then applied more extensively while constantly monitored and checked for any deficiencies.”

The article explains how the incremental approach is being used in the daily workflow by giving examples of the steps that have been replaced by carefully tested and gradually introduced technology. For the purpose of automation and efficiency, JP Morgan Asset Management synchronized OMS and EMS systems, and automated mechanical steps such as order acknowledgement and execution reporting.

Data based decision-making removes human biases and emotions and also helps to improve broker selection for different asset classes in different market conditions. Data collection leads to more data mining and predictive analysis which can help make smart trading decisions to avoid overall transaction costs (TCOST).

It would be helpful to know how, in practice, both broker selection and cost reduction is achieved. In addition, more details about performance matrices would be useful.

Significantly, Engler also highlights that although automation is clearly being adopted extensively, it is not completely replacing humans. More and more technology experts and quantitative developers are being hired by buy-side firms. This shows how man-power and machine-power can be combined to build efficiency, speed and competitive advantage in today’s high-speed trading world.

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Profile : Alex Sedgwick : T. Rowe Price

By

Ian Rycott

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July 16, 2017

THE CHANGING FACE OF FIXED INCOME.

Alexander Y. Sedgwick, Vice President, Head of Fixed Income Market Structure & Electronic Trading at T. Rowe Price discusses how the industry is evolving to meet the challenges and leverage opportunities.

How has regulation, and MiFID II in particular, impacted the fixed income industry and how do you see the industry preparing?

From a trading standpoint, the industry continues to focus on delivering best execution with traders using pre- and post-trade tools and transaction cost analysis (TCA) as these tools evolve. Having a strong governance structure is also a key component, along with a feedback loop at the desk level. The feedback loop ensures that traders use data about prior trades to improve future execution. At a more granular level this involves looking at execution across counterparties, different venues, and factoring this into future trading decisions.

Another key element is the ability to derive context, clarity, and actionable insights from market data. Greater transparency provides benefits including a better understanding of market flows while also supporting the price formation process. It helps buyers and sellers determine where a bond could potentially trade.

Aggregated pre-trade information across markets has become more important in an environment with increasingly fragmented liquidity and regulatory focus. How is the industry adapting?

This goes back to my point about the importance of extracting value from data. There are some buyside firms developing that capability by hiring data scientists but this isn’t yet pervasive. I do think there is a large value opportunity for both dealers and electronic trading platforms because they have already developed this expertise over the years in mining data to provide or deliver liquidity. It will be interesting to see how this trend plays out over the next several years and who looks to address this need.

The growth of electronic trading in fixed income has always been driven by efficiency, but it was predicted at the beginning of the year that data science and analytics would fuel new levels of smart trading this year. Has this materialised and how do you see it evolving?

I would say that this is more of an evolutionary rather than revolutionary process. I haven’t seen increasing levels of automated trading in credit, but that doesn’t mean progress isn’t being made. Artificial intelligence and impactful statistical analysis require large amounts of data as well as significant business knowledge. Cleaning the data alone can be a substantial undertaking – so I think it will be a matter of some time before this develops and is in widespread use.

However, there are plenty of examples of increased automated trading in other areas of the fixed income markets including treasuries and foreign exchange. While the opportunity set is smaller in less liquid parts of fixed income, there is certainly pressure on the asset management industry to be more operationally efficient and I believe that electronic trading also fits nicely into this niche.

I read you were discussing all-to-all (A2A) trading at a recent conference and wondered what your thoughts were on the concept and why A2A models failed in the past? Will they succeed now?

A2A platforms are not new. US Treasuries have traded on exchanges in the past and since the advent of electronic trading in the late 1990s there have been a number of credit platforms that were all-to-all. It is a useful protocol but used most effectively alongside other sources of liquidity such as traditional dealer liquidity. This is particularly true with the distressed or more illiquid end of the market, which is still traded on a request for quote basis. I do not think that an all-to-all platform alone could address the liquidity needs of the credit market, primarily because the majority of buyers and sellers do not come to the market at the same time. That said – if used alongside other protocols and platforms, all-to-all platforms do provide a complimentary source of liquidity.

How do you see fintech/regtech changing the face of fixed income in general?

While less visible, there has been a substantial impact on the mid and back office with the increased standardisation of messaging and connectivity. This is laying the groundwork for participants to connect to a variety of platforms as well as counterparties and data providers more easily in the future. I think that many market participants agree that everyone gains through upgrades in market infrastructure. As a result, there has been much more industry collaboration, with initiatives being launched by the buy and sellside as well as the vendors. Regulation has also been important here as the industry works to define best practices and outline a more standardized set of business practices – this requires greater co-operation across the industry.

What changes has T. Rowe Price made and plans to make in the current and future environment?

At the moment, one of the most important things that we are working on is transaction cost analysis for global fixed income products. TRACE has always been helpful in the US but as the quality of evaluated pricing has improved we are looking to standardise our TCA approach across products. As part of this effort we are actively looking at some of the visualisation and data aggregation tools that can pull information into a single place and assist traders in framing the market on a pre-trade basis.

There is a lot of press about the US deregulating. What rules do you see being rolled back and how will it impact fixed income markets?

I expect continuity in many of the regulatory efforts we have seen over the last several years. Many of these, and I am thinking of MiFID II and the reporting of Treasury trades, are focused on greater transparency for market participants and regulators alike. Outside of fixed income I expect to see some review of at least parts of RegNMS and rules that impact capital formation.

What do you foresee as the biggest challenges and opportunities going forward?

I think there are big opportunities in both market data and electronic trading. First and foremost, we are working to become more operationally efficient. So, the question is how best to engage with our trading counterparties and build the connectivity and infrastructure to do that.

The challenge is going to be how to use the information generated by more electronification to improve how we interact with the market. While I think we’ll continue to see increasing investment in this expertise at various firms, I also anticipate more vendor solutions coming to market as firms wrestle with the question of whether to buy or build this capability.

Biography:

Based in Baltimore, Maryland, Alex Sedgwick is Head of Fixed Income Market Structure and Electronic Trading in Global Trading at T. Rowe Price. Alex has over 15 years of investment experience, and prior to joining T. Rowe Price in 2014, spent eight years at MarketAxess Corp. in New York, where he was most recently Head of Research. He earned a B.A. in economics and politics from Washington & Lee University, and also has the Chartered Financial Analyst designation, and is a Series 7 and 63 registered representative.

©BestExecution 2017

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Profile : Geoffroy Vander Linden & Nick Moss : Trax

By

Ian Rycott

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July 16, 2017

LIFTING THE DATA BURDEN.

Geoffroy Vander Linden, Head of Transparency Solutions and Nick Moss, Regulatory Reporting Product Manager at Trax outline the major hurdles MiFID and other regulations are presenting on the reporting front.

What do you think are the biggest challenges with the implementation of MiFID’s trade and transactions reporting requirements?

GVL: The requirements are vast and clients will have different challenges depending on their businesses and existing technical capacity. However, MiFID II is quite fluid and while the regulator has provided information, including Q&As and guidelines throughout the year, there are still a number of unknowns which impacts everyone. For example, take reference data; the industry will rely on ESMA for reference data and transparency data to support their regulatory requirements. However, the industry is still waiting for ESMA to confirm which attributes and the format of the reference data and transparency data feed.

NM: Interestingly, firms are starting to think more proactively about the ongoing monitoring of transaction reports. So much attention has been placed on MiFID II implementation that the industry is starting to increase their focus on life after 3rd of January 2018. We’ve heard consistently from the regulators that they will be closely monitoring transaction reporting and the industry has taken note. In preparation for this, we have built a web-based monitoring and operational interface, which we call Trax Insight, which allows firms to not only submit reports but also monitor the lifecycle of a report, manage and resolve exceptions as well as view peer-benchmarking analytics.

The increased transparency will require additional identifiers and there has been a great debate about the use of International Securities Identification Numbers (ISINs). Has it been resolved?

GVL: We believe so, to a certain extent but we have six months before MiFID II goes live and everyone needs to get on with the implementation. I think the time for debates has passed. The industry is now making progress on generating ISINs in real time via ANNA-DSB (Association of National Numbering agencies-Derivatives Service Bureau) and we expect this to be ready before go-live of MiFID II.

Given the sheer scale of work to meet these new requirements, do you think that buyside firms will be ready to meet the January 2018 MiFID II deadline?

GVL: I think most of our clients will be ready on time but one of the problems they face is that they have to make assumptions on reporting obligations without knowing the full impact of certain aspects of the regulation. With regulators clarifying the requirements by issuing Q&As, this makes it difficult for them, and will have an impact on the development. But the important thing for clients is to prioritise their projects in order of relevance so that they can be as ready as possible for the deadline.

What other regulations are having an impact?

NM: Although there is a lot of attention on MiFID II, there are other regulations that investors are preparing for such as the GDPR (The General Data Protection Regulation) and Securities Finance Transaction Regulation (SFTR), both of which come into effect next year. Amongst other requirements, SFTR increases the scope of reporting securities financing transactions while GDPR will require additional checks and balances for the management of personal data.

Thinking again about MiFID II, because of the natural person data that is now included in the transaction report, there is now an additional layer of complexity across a firm’s reporting systems in order to source and maintain this data – this has implications on trading desks, middle- and back-office office support systems and HR teams.

As a result of this there are also real issues around data storage locations because some firms are uncomfortable having this sensitive data held in certain jurisdictions – we have a solution that helps firms with this issue but it’s something that the industry is still grappling with. Along those lines, firms will also have to make sure that they are able to handle their existing personal data and have processes that can send that information in a consistent and secure form due to the additional fields required for MiFID II transaction reporting purposes.

Are there differences between the buy- and sellside?

NM: The buyside are particularly impacted by MiFID II because, in a lot of cases, they are now being required to report, where they previously did not have to under MiFID I. The sellside typically has more experience with transaction reporting and has therefore been able to transition to the MiFID II requirements more easily. From what we’ve seen so far, the buyside are looking to report to ARMs directly rather than relying on help from brokers where they may have previously under other regimes.

GVL: Another key component of the regulation is the requirement to have policies and procedures in place to demonstrate best execution. This is demanding more scrutiny on trading desks to ingest and interpret market data, analyse transaction cost analysis and support investment decision-making.

Both sell- and buyside firms also want much more flexible, future-proof solutions that can not only handle the requirements of existing regulations but also accommodate the new regulations coming on board such as SFTR. They want everything in one place and on one platform. This is certainly something we have seen firms look into during the review process when selecting their MiFID II solution providers.

Trax has been around a long time but what changes have been made to respond to the many different industry challenges?

GVL: Our aim is to lessen the regulatory burden and offer a complete, central point to help industry participants meet the different pre- and post-trade transparency obligations across the different asset classes. Our services range from publishing trades in near real-time, post-execution, to determining systematic internaliser status, assessing whether an instrument would be classified as liquid or illiquid based on a consolidated MiFID II eligible instrument list, and applying pre-trade transparency waivers and post-trade transparency deferrals. Trax can also analyse clients’ trading activity to assess the impact of the MiFID II transparency requirements. Our connection to Bats for equities trade reporting also gives clients flexibility to route reports to either the cross-asset class Trax APA or the Bats APA for equities. This is particularly valuable for assisted reporting whereby broker-dealers can aid their buyside customers to concentrate their equity trade prints.

Providing complete regulatory reporting services is a part of our core offering and we will continue to enhance its services as regulations evolve and as clients review their regulatory obligations.

NM: To accommodate client desire to be a ‘one-stop shop’, we have also completely re-built our system architecture, ultimately allowing us to support our full suite of operational solutions in our client-facing environment, Insight. The Insight platform is incredibly user-friendly and allows firms to easily reconcile both trade and transaction reports as well as view industry-level peer benchmarking reports. This will allow us to be nimble and easily develop new solutions as demands evolve.

Biographies:

Geoffroy Vander Linden joined Trax in 2014 and is the Head of Transparency Solutions. Vander Linden previously sat on the Consultative Working Group of the ESMA (European Securities and Market Authority) Market Data Reporting Working Group, which focused on providing advice and recommendations to the European Commission on technical standards and guidelines. Prior to joining Trax, he spent over 10 years with Euroclear where he held a number of roles including Product Manager for liquidity management and clearing services.

Nick Moss, Regulatory Reporting Product Manager joined the company in 2007 where he worked in both sales and product development capacities in the Trax post-trade business across regulatory reporting and matching. Moss also worked for nearly four years in Trax’s data business unit, responsible for helping to develop and maintain the control processes around Trax’s fixed income reference data. Moss graduated from the University of Kent with a BSc in Economics.

©BestExecution 2017

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Brexit update : Gill Wadsworth

By

Ian Rycott

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July 16, 2017

WATCHING AND WAITING.

The City of London holds its breath as Brexit divorce proceedings begin. Gill Wadsworth reports.

June was a month of snaps and shocks. First the UK Prime Minister Theresa May called a snap election, which was shortly followed by a shock collapse of the Conservative majority. The result is that May’s idea to strengthen her negotiating position ahead of Brexit talks was doomed as her party went from strong and stable to weak and wobbly in a matter of weeks.

Even before the election the UK’s stance on Brexit was unclear. The electorate had been told that ‘no deal was better than a bad deal’ but there was no definition of what constituted a poor or positive outcome since targets and goals were not forthcoming.

The Brexit waters are now looking even muddier as it appears May is having to step away from her preferred ‘hard’ Brexit in favour of a more conciliatory position, although there is still limited information from government as to how it will proceed.

In the meantime, the financial services industry – one of the most important sectors to the UK economy and one that is heavily reliant on maintaining its place as a dominant force in Europe – must sit and wait.

Mike Amey, head of sterling portfolio management at fund manager Pimco, says he cannot discount the risk of yet another general election. “The main problem relates to governing with a minority, and the challenges of being held to ransom by small single policy focus groups,” he says. “There is a constant risk that the government fails and we face another general election.”

The major challenge is the immediacy with which May had to begin talks with Europe. Just 10 days after the election, Brexit negotiations commenced, leaving scant time for the UK to get its house in order.

Markets do not like uncertainty and that means fund managers are not happy. Noland Carter, chief investment officer and head of Heartwood Investment Management, says: “Before this election, the UK was on course for a hard but smooth Brexit. However, we may now be on course for a hard but rough landing.”

Silver lining

One positive outcome of the hung parliament and the suspected pullback from a ‘hard’ Brexit position, was markets behaving less erratically than they might have if the Conservatives had secured a majority. However, the outlook for the British economy, as managers predict a further fall in sterling, which means rising inflation, is bad news for consumers and presents challenges for domestically focused stocks.

“Understandably sterling has weakened amid all this uncertainty,” says Ariel Bezalel, manager of the Jupiter Strategic Bond Fund. “This additional drop in sterling would only serve to fuel inflationary fires, putting real incomes under further pressure. If you add the political uncertainty to the mix, retailers are going to feel the pinch as consumers cut back on their spending.”

Doom and gloom for consumers and some British business then, but the picture is no rosier for the financial sector which not only invests in the UK, but has headquarters in the country as well as large workforces and a regulatory regime that is almost irretrievably bound to the EU.

That regulatory interdependence though creates both challenges and opportunities. On one hand, a separation could enable the UK to build a regulatory framework that appears less onerous and more attractive for institutions. On the other hand, if the UK distances itself too much from the European regime it risks alienating itself and being seen as a rogue state.

PJ Di Giammarino, CEO of regulatory consultant JWG says, part of the UK’s strength is its harmonious regulation with Europe; any disruption messes with this equivalence. “The UK could be free to [invoke regulatory change] which makes eminent sense to the market but would that be equivalent? Whatever changes it makes, in theory, the European Commission could say that is anti-competitive and not equivalent,” he says.

Holding onto prized possessions

The UK is also battling a potentially hostile Europe, which holds all the cards, and some commentators are concerned that the EU may use regulation as a stick to beat the UK financial services sector.

“The EU should resist the temptation to punish the City,” says Rob Boardman, European CEO of equities broker ITG, says: “There needs to be interconnected and efficient capital markets, not artificial barriers to trade and investment. The EU should resist the temptation to erect a President Trump style wall around its Euro-denominated trading and clearing infrastructure.”

He adds: “The UK government and Brussels negotiators should plan specific measures to strengthen trade ties and promote financing for economic growth and prosperity.”

One hint that life could get harder is Brussels’ attention to Euro denominated clearing houses, which facilitate the trade of instruments such as derivatives between stakeholders. The City is a dominant player in this field employing some 100,000 people and clearing £1trn in transactions per day, and the European Securities and Markets Authority (ESMA) is anxious this dominance could be deemed inappropriate once the divorce is finalised.

ESMA stated: “When the United Kingdom exits the EU, there will therefore be a distinct shift in the proportion of such transactions being cleared in CCPs [central counterparty clearing houses] outside the EU’s jurisdiction, exacerbating the [regulatory] concerns. This implies significant challenges for safeguarding financial stability in the EU that need to be addressed.”

At the start of June, the regulator proposed a two-tier system which would allow smaller clearing houses to carry on their business uninterrupted, while larger ‘systemically important’ operations could be forced to move to the continent.

There is a looming threat that institutions – irrespective of their interests in clearing – may exodus the UK in favour of remaining part of the EU. Research from UBS Evidence Lab published in March found that in a survey of 600 financial businesses in Europe – of which 75% had operations in the UK – 10% would leave the UK entirely. Just over two fifths (41%) said they would ‘strongly reduce’ their UK capacity.

However, the European Commission is clear that it will not tolerate organisations simply building a shop front in the EU while maintaining operations on UK soil. Essentially, the message is you are fully in or you can stay out.

ESMA chair Stephen Maijoor said in a speech in May: “The EU27 have a shared interest in building a common approach to dealing with relocating firms that wish to continue to benefit from access to EU financial markets. Effective and efficient supervision by EU27 national authorities is not possible when relocated entities are empty shells.”

Just days before May and Brexit secretary David Davis were due to commence official talks with the EU, the UK still did not have an official majority government or coalition leaving it somewhat on the back foot.

With so much at stake for the financial services sector, an efficient, pragmatic and reasonable approach is called for on all sides, but since there is no precedent all the parties are feeling their way, and there is no escaping the sometimes fractious relationship between Britain and the EU.

As Pimco’s Amey concludes: “It may well be the case that British politics proceeds smoothly, but as we know, it has a habit of throwing up unexpected outcomes.”

©BestExecution 2017

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Buyside focus : The multi-asset trading desk : Frances Faulds

By

Ian Rycott

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July 16, 2017

THE MULTI-ASSET TRADING DESK MARCHES ON.

Frances Faulds looks at what is helping, and what is hindering, the move to multi-asset class trading.

The jury is still out on whether order management systems (OMS) and execution management systems (EMS) can, should or will, be integrated. However, there is agreement that the compliance capabilities they bring is driving the buyside’s demand for more sophisticated multi-asset trading solutions and that further automation will both drive down cost and fuel the next round of growth.

For some, the emergence of the OEMS, merging order and execution management systems, is driving greater levels of automation. Oren Blonstein, managing director, product management at TORA, which now offers an OEMS, TORA Compass, believes they should be closely coupled. “Automation in multi-asset trading is highly dependent on the integration between a firm’s OMS and EMS. To the extent these systems have been developed organically, and in tandem, the greater the chance of success.”

By contrast, Matthew York, product owner, fixed income, at Flextrade, thinks that the inherent inflexibility that creating an OEMS brings weakens both. “Clients should be able to select the best solution for both inward facing OMS and market facing EMS and should be able to decouple and replace either side as need arises,” he says. Flextrade which works with the OMS providers, was one of the first EMSs, and over 75% of its clients are equity shops. The firm has been looking at execution management to trade across the asset classes for the past four or five years.

Better together

John Adam, global head of client and product strategy at Portware, believes the distinction between OMS and EMS is fading and that integrated and combined solutions are becoming the expected norm. “This is because the buyside has a better experience, and reduces operating costs, if the order and execution management systems are entirely coupled. Streamlined OEMS workflows are what the buy-side is implementing now, whether from one or multiple vendors. The next focus is implementing AI, automating steps in the trading workflow, and unlocking operational efficiencies.”

Portware’s integration with FactSet means it can offer end-to-end management for every component of the portfolio lifecycle – from portfolio analytics and performance attribution, directly into generating the order in the order management system, compliance, portfolio modelling, then seamlessly connecting to the trader’s desktop and EMS. In November 2016 FactSet acquired Cymba and in less than a month integrated it to create an OEMS. Today, Adam says, for Portware’s largest customers, which are the furthest along with automation, it’s really a case of trader intervention by exception in a multi-asset trading environment.

He adds: “We have crossed that threshold where more than 50% of the orders going through our EMS today have no manual intervention because the traders have deployed automation and machine-learning to handle smaller orders. The trader’s attention is better used elsewhere: on larger and more difficult orders, where their skill and sell-side relationships generate alpha for their firms.”

Many larger buyside firms have built a single OMS for end of day transaction reporting, record-keeping, allocations and best execution, and are connecting this to the various EMS, for the different asset classes. However, as Michael Horan, head of trading services, at BNY Mellon’s Pershing, which provides an outsourced trading desk for buy-side wealth managers and mid-sized sell-side clients, points out this is not the case for smaller firms. They will just have an EMS, and they are now starting to ask vendors to build more OMS and middle office functionality into the EMS.

Horan says: “The creation of the OEMS has hit the nail on the head. A lot of the EMS providers are trying to move into the OMS space for the small to the medium sized firms, which cannot justify having an OMS or multiple EMS. There is definitely a growth area in the market for the expanding capabilities of a standard EMS platform.”

While he believes a MiFID II compliant, multi-asset class EMS is the most sought-after item by the buyside today, he also notes increased regulation has both changed and strengthened the role of the EMS. “There are a lot of compliance obligations and demands that are being placed on EMS providers now, a lot of technology and investment, and a lot of responsibility,” he adds. “Today, any EMS demo starts with the compliance checks and pre-trade controls and not with trading capability. That would not have been the case five years ago. The role of the EMS provider has changed.”

Fixed income stands apart

While high levels of automation are being attained in the equities and FX market – Flextrade clients have upwards of 50,000 orders per day – fixed income still lags behind in terms of automation. This is despite the recent strides that have been made in the provision of AXE aggregation, two-way streaming prices and increased automation of the more liquid end of the market.

In order to make the asset class more easily automated, FlexTrade’s York believes a major change is required at bond issuance level, especially in how corporate bonds are issued. “My view is what needs to happen is a change in the corporate bond issuance similar to what has happened in the global loans market, where a panel of banks creates a maximum underwriting for a company and then the company decides when to draw down those lines,” he says. “The issuance terms should be standardised and there needs to be flexibility to re-open bonds to further issuance. What this will mean is that they are made more fungible and the secondary market will have far more liquidity. Long-term this is what has to happen for fixed income issuance.

York adds that “interest rate and credit default swaps were completely customised and OTC but now trade on standard terms, standard tenors and are lot more fungible. As a result, there is a greater amount of electronic trading and it is much easier to price them. If we can get over the hurdles around issuance in fixed income, align terms with the swaps, the technology can take it from there. It is definitely a challenge of market structure over technology. Technology is not the blocker at the moment; it is the archaic structure in fixed income.”

Portware’s Adam though believes that a good EMS is designed to handle the lack of standardisation across the asset classes. While fixed income has a long way to go to catch up with the equities space, algorithmic and automated trading in equities is developed and mature and fixed income will go along the same lines.

“Of course, there are no standards but this is where EMS provides value,” he says. “There are mechanisms in a well-designed, multi-asset EMS to interface to and capture every one of those trades. Voice brokerage shouldn’t be an excuse for not offering a comprehensive solution in fixed income, we need to embrace it. There will be voice trading for a while, but there are other new technologies coming up that will supplant voice trading, just as it has in every other asset class. It is only a matter of time.”

With multi-asset trading becoming increasingly mainstream, EMSs are accelerating the use of machine-learning and artificial intelligence, helping traders to better align trading styles with portfolio managers. Moreover, as Adam notes, “the purpose of all of this is to introduce the technology that reduces the cost of trading and enable the buyside to scale the business in a way that they can compete with a passively managed fund.”

MiFID II is aimed at tackling transparency in the fixed income market by making it trade more electronically and making more post-trade data available, but for now, the OMS/EMS providers are helping to close the gaps.

©BestExecution 2017

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Market opinion : Regulation : Dan Simpson

By

Ian Rycott

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July 16, 2017

THE SURVEILLANCE CHALLENGE.

Daniel Simpson, head of research at JWG-IT, outlines the many hurdles presented under MAR and MiFID II in this space.

It is now a year since the Market Abuse regulation (MAR) went live and, therefore, as sensible a time as any to review and reflect on the progress that has been made. Implementation was fraught with complications based on how intertwined it was with MiFID II. Both regulations were drafted and passed through the European legislative process together and rely, to a large extent, on the same regulatory constructs, many of which will come into being, legally speaking, only with the implementation of MiFID II. One example is the new trading facility the OTF (Organised Trading Facility).

One of the issues was that many firms were implementing MAR as a workstream within their overall MiFID II programme. However, MAR became the centre of attention after the Commission announced a delay to the deadline date of MiFID II in March of last year. This led to a last-minute scramble to execute minimalist solutions, which, in some instances are currently being remediated in line with MiFID II implementation.

Surveillance is one of the areas in which MiFID II and MAR are particularly closely aligned and therefore an area in which this idea of remediating MAR alongside implementing MiFID II is particularly relevant. However, there are a large number of significant challenges which are still causing issues with this process.

Surveillance, and particularly communications surveillance, has significant impact for both regimes. There are new and more prescriptive requirements across trading, investor protection, reporting and governance workstreams. Firms will not only need to capture a much larger range of data across a wider scope of activities, but also store it for longer periods of time, apply more robust monitoring and real-time analytics, and then be much more effective and efficient in evidencing this process to the regulator.

Starting point

From an implementation perspective, the place to start will be to review the level of change from the requirements under the existing MiFID and MAD frameworks. Current standards require records to be kept including all services and transactions undertaken. This must be sufficient to enable the appropriate regulator to monitor the firm’s compliance with them with respect to clients. This is typically interpreted to mean communications regarding classification, suitability and appropriateness, product and service offering and best execution.

When analysing the new requirements there are four main areas of change:

• Activities to be captured: MiFID II and MAR greatly expand the list of activities which must be captured. They are more prescriptive and as such activities such as all telephone, electronic and marketing communications are now explicitly in scope.

• Data to be captured: The amount of data which must be captured about these activities is also greatly increased from current obligations. For example, for transaction reporting purposes under MiFID II the number of required data fields has expanded from 23 to 65. The net effect is a massive expansion in the necessary capture capabilities.

• Monitoring: The emphasis in both regimes shifts away from capturing records, in order to be able to retrospectively understand any problems or discrepancies, towards obligating firms to be actively monitoring and running analytics against live data to identify issues prior to their occurrence.

• Evidencing to regulators: Providing evidence to regulators will be much more invasive and will necessitate better retrieval and reconciliation capabilities than typically exist today. The focus of the new rules is on being able to demonstrate compliance to the regulator on request and on an ad hoc basis.

These key changes are certainly challenging enough to implement in isolation, with far superior capabilities being expected from firms ranging from trade and communications surveillance, recording, digitisation and analytics to data storage, reconciliation and retrieval. However, there are further complications that underline these hurdles.

Extra territorial obstacles

The application of MiFID II and MAR on an extra-territorial basis (i.e. outside of the EU) causes complications and conflicts with certain domestic data protection laws. This is the case with certain Asian jurisdictions which have data protection laws that clash directly with MiFID II data retention requirements for client data. Moreover, the rules are also difficult to interpret and can have different impacts. For example, communication recording rules apply in instances in which the investment firm is within the EU. This also extends to their EU branches and subsidiaries of non-EU investment firms.

In other areas of MiFID II and MAR, requirements that rely upon communications recording, such as monitoring for market abuse, apply globally to EU firms, and they capture any non-EU branches or subsidiaries of EU investment firms.

A particular challenge under MAR that many have been wrestling with for the past year is the monitoring for intent. MAR specifically widens the remit for trade surveillance beyond instances of market abuse to intent to commit market abuse. Even in an age of sophisticated analytics this has left many scratching their heads. So far, most have managed only partial solutions at best and it seems likely that post MiFID II implementation, when both regulators and regulated will likely have a little more time, the focus will be on honing both the requirements and the solutions in this space.

Ultimately, how successful firms are in overcoming some of these challenges and implementing new surveillance requirements may not become known until sometime after the MiFID II, 3 January 2018 deadline. This is despite the fact that the MAR deadline is now a year old. What is clear is that the nature of surveillance is being required to change significantly to something much wider reaching and ambitious than existed prior to MiFID II and MAR. Those firms best placed to understand the new landscape may well succeed in being the winners in the long term.

©BestExecution 2017

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Fixed income trading focus : Artificial intelligence : Dan Barnes

By

Ian Rycott

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July 16, 2017

THE SIX MILLION DOLLAR TRADER.

To achieve best execution in fixed income, artificial intelligence tools are being developed that can interpret massive data sets. Dan Barnes reports.

Like the ‘Bionic Man’, fixed income traders are being rebuilt through the smart application of technology. While there are truly automated chunks of the fixed business – 60% of volume in some liquid government bond markets is provided by high-frequency trading (HFT) firms – these are the exception rather than the rule.

For most bonds, parts of the trading process are having smart technology applied to them. Allowing traders to automate the more laborious portions of their work can reduce the complexity of market fragmentation and instrument breadth. Crunching data can create new pictures of the market. For example, as new trading venues are launched, their match rate for orders can be checked. Brokers’ order fills for the end of the quarter, when many perform poorly, can be reconciled against past performance. Buyside trading desks can qualify performance and reflect that in how they trade.

The starting point is to pull data together with as much detail as possible. That information can be used to support decision-making tools on the trading desk. Paul Squires, global head of trading and securities financing at AXA Investment Managers, has a longstanding project to aggregate the information dealers provide, for orders and trades.

“That data provides a virtual order book of all the bonds we’re interested in, which becomes a fantastic database for all sorts of purposes: the benchmarking of our execution; to supervise the reliability of prices that are fed through from banks; monitoring the difference between the prices they are indicating and the prices that they show us when we ask them to quote,” he says. “That’s very rich information and the longer you build up that data history the more you can rely on – and utilise – it.”

Pixelated vision

Using data has become necessary because the feedback loops that once existed have withered. This transformation on the buyside trading desk is a consequence of sellside inertia. “After the crisis, institutions with higher leverage and higher trading revenues have lower overall transaction volume while, prior to the crisis these same institutions had higher overall trading volumes,” wrote Tobias Adrian director of the Monetary and Capital Markets Department of the International Monetary Fund, Nina Boyarchenko and Or Shachar, economists at the Federal Reserve Bank of New York in a 26 May analyst note entitled ‘Dealer Balance Sheets and Corporate Bond Liquidity Provision’. “This pattern reversal is consistent with more stringent leverage regulation and greater regulation of investment banks reducing institutions’ ability to provide liquidity to the market overall.”

Asset managers relied on sellside activity for information on price, volume and depth of book. Since that has fallen away, new platforms have launched in corporate, municipal and government bond markets to try and facilitate liquidity aggregation.

However, until some of these have begun to aggregate a critical mass of activity, liquidity is being weakened as it fragments across these platforms. To avoid creating information leakage, the dealing desks at investment managers need to work out where liquidity is pre-trade, in order to minimise seepage by asking for prices in too many locations.

Several firms including Algomi and B2Scan have set themselves up to provide pre-trade insight into liquidity, by mapping axes, orders and inventories then providing that information to buy- and sellside trading desks in order to mitigate market fragmentation.

Pressure to converge

At the same time, commercial pressure on asset managers is driving firms to converge their trading operations. Where firms are merging, they are consolidating trading teams, forcing their traders towards more efficient, cross-asset desks. Regulatory pressure, largely from MiFID II, is also pushing firms to run similar processes across assets, such as transaction reporting.

Firms will have internal data used for reporting and subsequently the publicly disclosed information can be used to support market comprehensions. From 3 January 2018, MiFID II will create data sets, post-trade, for many European fixed-income instruments similar to the TRACE post-trade tape that is accessible in the US.

However, the potential this offers will need to be harnessed, notes Stephane Malrait, Global head of eCommerce for Financial Markets, ING Bank. “Market data will be free to use 15 minutes after it is reported to the market,” he says. “Suddenly you can have multiple free market data available to you, but in a sense, this could be too much when you are trying to find the relevance.”

Buyside firms are not reliant on in-house development. Where some firms have built, others are now able to buy, pulling themselves ahead without the need to engage with research and development.

Algomi recently acquired the intellectual property and reselling rights to buyside firm AllianceBernstein’s in-house pre-trade liquidity finder ‘ALFA’. It will provide this tool to other investment managers alongside its own technology and this will allow Algomi to pull together a detailed and comprehensive picture of the market pre-trade.

Both are powerful in their own right, although the next step in the process will be to automate some of these processes. In the equity markets, smart order routing (SOR) technology allows traders to automate the discovery process for liquidity and price.

Applying AI to FI

Once traders can identify where they repeatedly respond the same way to data provided by systems like Algomi’s Honeycomb and ALFA, it will be possible to automate some of that, creating the starting point for a smart order router in fixed income. Both the Algomi’s ALFA and Honeycomb tools let traders pick out instruments they want information on. The systems manage the flow of data and then pull the relevant parts together in a structured model, so the investment dealers can home in on relevant points to help them trade effectively.

Usman Khan, co-founder and chief technology officer of Algomi, says, “Helping people route orders in a smart way pre-trade; that’s absolutely what we are looking to do. Everything is set up to do that.”

ING is engaging with machine learning algorithms to support its operations in helping its clients to fill orders in the cash bond space. There are a lot of different data points for an instrument, and many instruments, some of which do not trade very frequently, which Malrait says lends itself to being resolved via artificial intelligence (AI).

Algomi Labs is also looking at the use of AI to provide a greater level of automation in handling large data sets so that traders can improve their capacity to execute more effectively.

“I am doing a lot of work around the use of machine learning to further enhance efficiency,” notes Khan. “The other point is relevancy; traders get flooded with data from different sources, so our system essentially acts as a filter to give them the information which is relevant to them.”

For the teams on the trading desk deciding whether to buy or build trader-enhancing systems, will depend on the data being gathered in order to populate them. Storing data in a traditional relational database requires that its elements are structured, i.e. have their relationships fixed. Queries that can be made of the data in the future are constrained by those relationships. By contrast, storing data in an unstructured way allows for greater flexibility in running queries, however the data first needs unpacking and then results must be structured in order to provide a quantifiable result.

Mark Watters, director at trading system provider AxeTrading says, “If you want to use unstructured data you need the tools to be able to make sense of it, to draw insight from it. And most people are moving towards artificial intelligence or algorithmic analysis of the data to draw these insights automatically. But if you are really trying to make trading decisions in the more liquid end of the bond spectrum, you might want to consider using more structured data because that’s obviously processed in a faster manner.”

©BestExecution 2017

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FinTech : Artificial intelligence : Heather McKenzie

By

Ian Rycott

-

July 16, 2017

AI COMES OF AGE IN FINANCIAL SERVICES.

Heather McKenzie looks at the clever ways AI is being deployed across the financial services industry.

Research into artificial intelligence (AI) is not new and in fact dates to the mid-1950s. However, huge increases in computational power have brought AI into the real world, as opposed to the theoretical. The number of software projects that use AI within Google, for example, increased from sporadic usage in 2012 to more than 2700 projects in 2015 and now the technology is also being taken seriously by the financial industry.

The technology has been a particular focus for research firm Celent, which last year produced two reports, Artificial Intelligence for the Buy Side: Vendors for the Trade Value Chain and From Big Data to Artificial Intelligence in Capital Markets: Code or Be Coded?. The report on the status of buyside implementation states that “firms that are not already using AI today in capital markets risk falling significantly behind their competition in the next two to five years.”

Big data and the technology that enables its usage for business optimisation or revamping are some of the tools available to the buyside to keep pace with technology advances and specifically with new competitors, according to the report. “Considering the sellside is an historical provider of automated trading strategies and research to the buyside, it will be interesting to see how they position themselves into providing that technology this time around,” says Joséphine de Chazournes, senior analyst with Celent’s Securities and Investments practice and author of the report. “More so as exchanges will likely want to join the party and disintermediate the sellside even more by offering such technology to the buyside firms that won’t be able to invest and reap opportunities from their big data.”

Celent identifies many areas of the trade lifecycle where AI can be deployed to improve processes and enable firms to use their data more intelligently, including index and ETF creation, asset allocation optimisation, market making and post-trade processes.

The research firm believes “extremely powerful” solutions for capital markets will be commercialised within the next five years. “AI solutions can lower the cost of many processes throughout the trade lifecycle, but also tackle the revenue side of the equation: research, sales and trading,” says de Chazournes. “The deepest solutions that will combine big data analysis, correlation and causal-based technologies on data, text, image and voice will be more powerful in the future.”

Celent’s enthusiasm for AI is echoed by financial industry research specialists Opimas. Its March 2017 report, Artificial Intelligence in Capital Markets: The Next Operational Revolution, says capital markets firms could improve their cost to income ratio by 28% by 2025 if they harness AI intelligence to automate routine processes currently performed by employees. “In 2017, we expect financial firms to spend more than US$1.5 billion on AI-related technologies and, by 2021, US$2.8 billion, representing an increase of 75%. This does not include M&A activity and investments in start-ups,” says the report.

At the same time, the full benefits of AI technologies may elude firms until they train machines to think properly, according to Opimas. Meanwhile, AI tools might offer traditional firms new ways to prosper. “We estimate that a third of the jobs lost to machines will be replaced by technology and data providers serving the industry’s new needs.”

Game changing

AI is emerging as a key enabler to drive greater efficiency, innovation and differentiation as financial firms face regulatory, technology and business model changes, says Neha Singh, vice-president, corporate strategy at investor services company Broadridge. “The technology helps them to cut costs and mutual expenses so that they can invest in areas that will differentiate them from competitors,” she says, adding by using machine learning organisations can find unseen patterns and become much smarter with their use of client, transaction and financial data.

Singh describes a recent and dramatic uptick in interest in AI, with enterprise budgets significantly expanded for all forms of the technology, including robotics, machine learning and intelligent process automation. “Machine learning is already being leveraged in areas such as fraud prevention, compliance, market surveillance and AML / KYC, led by specialised vendors,” she says. “Newer frontiers in trading strategies are also being explored. However, there are significant opportunities to take the ‘intelligence’ to the next level, and other areas to be explored, such as process optimisation.”

Data is also a key focus area with machine intelligence at the forefront of understanding data, according to Louis Lovas, director of solutions at OneMarketData. “It’s a next-generation technology to help sort, sift or otherwise glean value from large amounts of data,” he says. “AI and machine learning techniques can detect patterns in the data, breaking down the relevant information, allowing users to make more accurate, informed predictions based on seemingly unrelated/uncorrelated inference, saving time and lowering costs.”

Contrary to the belief that AI will decrease the need for humans in the process, Lovas believes AI will require more skilled and trained quantitative data scientists. “Humans are still needed to help with different strategies, skills, and goals of the firm.” Singh agrees: “While the industry will see powerful AI solutions being developed, the human touch won’t go away in the near term, especially when the ramifications of errors such as false positives and false negatives are significant. True cognitive capabilities that replace humans in aspects like creativity and innovation, subjective thought, emotion (in some cases) and mission critical tasks that require 100% accuracy will take longer to achieve.”

Henri Waelbroeck, director of research at Portware, which uses machine learning to predict order flow imbalances, algorithm performance and short-term alpha, says AI should enhance, not replace the trader. “When a stock is tanking and the portfolio manager has a question about an order he or she is not going to want to talk to a robot.” The Portware Brain powers an AI-assisted workflow: automation with ‘intelligent alerts’ at points where human intervention is likely to be most profitable. “A key to this workflow is to rank information based on forward volatility to bring forth the most important data points about an order. The trader should know what is happening and what is the likelihood of each scenario going forward.”

Singh says data is a critical element for machine learning and significant time is spent prepping and cleansing data for use, rather than on the model development itself. “The ever-increasing use of AI and machine learning will drive firms to invest in strong data management that speeds up modelling and reduces reputational risks.”

AI and machine learning will also help firms to better manage data. For example, firms are using machine learning to leverage the vast amounts of unstructured data generated by sources such as emails, social media, voice and chatbots. Broadridge has developed a solution that takes in client e-mails, converts them into structured data using natural language processing, feeds them into a machine learning model to categorise emails and then acts on them.

Opimas’ report contains two caveats: at this point in the development of AI tools and that it would be “extremely risky” to rely fully on such tools. “Human supervision is still crucial as the machines learn. In addition, a key element in successfully developing AI-related technologies is access to vast amounts of data in order to train the systems. Without it, you’ve just created artificial stupidity.”

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Artificial intelligence in the financial industry

Opimas clarifies the differences between AI and technologies that address firms’ operational efficiency and other needs. It believes the AI term is used quite loosely in the financial industry. AI tools are distinct, and include:

• Robotic process automation (RPA): The technology aims to replace manual handling of automated processes for repetitive and high-volume tasks.

• Machine learning (ML): A process on which most AI is being built. It requires using vast amounts of data to train a system and fine tune it.

• Deep learning (DL): A specific method of machine learning that has been a game changer in data-intensive, machine-learning processes.

• Cognitive analytics (CA): This approach mimics the human brain in making deductions from vast amounts of data.

The estimated improved cost to income ratios will come through a reduction of overall headcount. “Worldwide, by 2025 we expect AI technologies to reduce employees in the capital markets by 230,000. The asset management industry will shrink most, with around 90,000 people replaced by machines. However, close to 30,000 new jobs will be created at technology and data providers who respond to the financial industry’s new requirements and demands,” according to the report.

Regulation & compliance : Market Abuse Regulation : Heather McKenzie

By

Ian Rycott

-

July 16, 2017

BAD BEHAVIOUR UNDER THE SPOTLIGHT.

One year on, Heather McKenzie outlines the obstacles and solutions being presented by MAR.

A year since the European Union’s Market Abuse Regulation (MAR) came into effect, buyside and sellside firms are realising the importance of capturing data from all communications channels – including instant messaging.

MAR strengthened the previous market abuse frameworks across Europe by extending its scope to new markets, platforms and behaviours. It aims to increase market integrity and investor protection, enhancing the attractiveness of securities markets for capital raising. The result is that firms are having to create comprehensive trade reconstruction, analytics, compliance and archiving solutions.

Compliance with MAR is closely related to that of MiFID II, as both regulations address the competitiveness, efficiency and integrity of EU financial markets. The new MiFID rules contain part of the regulatory framework on which MAR is based and most firms are updating their compliance efforts in tandem to ensure they can support the objectives of both

The pan-EU competition facilitated by MiFID has given rise to new hurdles in terms of cross-border supervision. Harmonisation of the rules and competent authorities’ powers in relation to market abuse is therefore a necessary step.

Increasing trade automation has provided “fertile ground” for insider trading and collated market abuse, says Dermot Harriss, head of development of the OneTick Market Surveillance Service. The Service provides an integrated, real-time examination of order flow for regulated entities, supporting breach detection, alert workflow management and historical replay activities.

“With MAR reaching its one year mark in July, firms have become more understanding of its importance and benefits,” says Harriss. “Clients are beginning to see important factors in being MAR compliant, including an opportunity for revenue and among US firms, a realisation that MAR comes under best execution and MiFID II efforts and that they can monitor data with the same dashboard.”

A new direction

MAR represents a “significant shift” from the previous market abuse regulatory framework, according to Daniel Simpson, head of research at operations and technology consultancy JWG. “Several elements within MAR were challenging and significant departures from the current state of surveillance firms had established,” he says. “For example, a major shift occurred when regulators moved from expecting firms to monitor for market abuse to requiring them to monitor intention to conduct abuse. This required a reworking of trade surveillance systems.”

This changes the emphasis from trade and order analytics on to pre-trade data capture, including research information and recommendations. “There has to be monitoring on a more detailed level of what traders are doing before they actually do a trade,” he adds.

Although firms are gearing up, Simpson notes that given MAR was introduced during a period of heavy regulation, the response by most firms, particularly the large global organisations, has been tactical. Longer-term solutions and amendments to systems are likely to be made after MiFID II is rolled out.

Any solution will be data intensive and according to Simpson’s colleague and managing director Blythe Barber, will involve “masses and masses of data” The new entrants to the market surveillance system market are providing holistic systems that are focused on pulling together different variations of trade data communications and incorporating human resources data to control the number of false positives that are generated. For example, data on when the trader is most active will reveal any divergence from their usual behaviour and could indicate an intention to commit fraud.

Making your voice heard and stored

Barber says capturing and storing voice communications has always been a challenge for firms, but is now required by MAR. It may be the case, he adds, that no one vendor will be able to cover all the MAR requirements and firms will create a surveillance “ecosystem”.

Tackling voice communications is one thing, but an increasing trend among traders is the use of instant messaging to communicate, says Oliver Blower, chief executive of VoxSmart, the developer of the VSmart mobile call recording service. “Increasingly communications and transactions are done over instant messaging channels,” he says. “It is becoming the major form of communications while voice is losing importance.”

Blower believes it is important that systems are agnostic to the channel being used as this enables systems to be future-proofed against any trend that emerges. “If you look at how people interact with each other daily, much of it is through instant messaging. That trend is coming to the financial services industry, which is a relationship and communication-driven market.”

Voice recording is moving from an analogue to a very active, digital environment, says Blower. “In the past, it has taken up to three days to obtain a copy of a voice recording for surveillance purposes. In the digital world, we can deliver recordings in real time. This enables firms to build policies around individual traders, preventing them from conducting a conversation if an alert is triggered.”

The closer a firm can get to a trade, the more likely it can manage risk more effectively, he adds.

Another company that recognises the changing trend in trader communications is Fonetic, which integrates voice into its surveillance and trade reconstruction technology. In May this year, the firm partnered with Actiance, a communications compliance, archiving, and analytics company to combine their platforms for a comprehensive trade reconstruction, analytics, compliance and archiving solution.

“Our experience with banks and other financial institutions is that they have to do more with voice,” says Juan Manuel Soto, chief executive of Fonetic. “Often, they lack systems that can monitor these communications, but many are now working on this.”

The challenge for firms is to break down the silos that have been created with voice calls, instant messaging, emails and other forms of communication typically placed in different repositories. “Everything is disconnected, which creates problems for firms when they want to conduct surveillance,” he says.

Fonetic enables firms to connect individual trades with all the related communications which creates an automatic trade reconstruction system. “From that moment, firms can link trades and communications and use that combined data in many processes, including investigations and the generation of alerts.”

A wider range of MAR solutions

JWG’s Barber says the technology options for firms to comply with MAR are improving, with more choice emerging in the past year. “In the longer term, more technology choices will mean greater capabilities for firms. Some of the newer entrants to the surveillance systems market will have to build trust over time as they represent a big risk for some firms at present.”

Bruno Piers de Raveschoot, chief operating officer at the compliance division of data company Rimes, says fund management firms face “very specific issues” with MAR.

“The complexity of the data and the entity level for monitoring is very different than for the sellside, and the reasons for market abuse are not the same. The way portfolio managers are measured impacts the risk of manipulation. A typical sellside solution will not apply for that industry, which is why we developed a solution specifically for the buyside.”

The fully managed solution, RegFocus, uses algorithms and analytics to deliver a comprehensive review of all trading activity to buyside compliance teams. It monitors and detects behaviour across multiple exchanges and asset classes, including ETFs, benchmarks, indices and portfolio rebalancing activities. The result is an overarching view of all MAR regulatory obligations.

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Trading research : Unbundling : Lynn Strongin Dodds

By

Ian Rycott

-

July 16, 2017

STEALING A MARCH.

MiFID is shaking up the cosy world of broker research but independent firms and platforms will still have their work cut out. Lynn Strongin Dodds looks at what it takes to carve out a stake.

As the world of investment research stands at the MiFID II precipice, the landscape has become increasingly crowded with new platforms, independent research providers and top-ranking sellside analysts striking out on their own. Although it is still too early to determine the victors, it is no doubt that those with digital acumen and innovative investment ideas will be ahead.

Cost of course will also be a factor. A new report by US-based consultancy Integrity Research, which polled 161 research providers across the world, including 64 investment banks, shows there is a wide discrepancy with sellside firms levying an annual average $75,000 charge for complete access to their analyst research menu. However, this figure climbed as high as $1.5m and dropped as low as $1,500. Not surprisingly, independent research providers were at the lower end of the spectrum at around $40,000 for a yearly subscription.

The value add

“MiFID is pulling apart the whole structure and bringing the price of research into sharp focus,” says Jon Foster, co-founder at research platform SmartKarma. “Asset managers have to become more transparent and demonstrate efficiency. One of the biggest challenges will be how they value an individual piece of research because people will have different views on what reports are worth to them. I think the provision of research will become much more competitive, but I see asset managers increasingly turning to independent providers because there is a greater understanding that the traditional broker business model is inefficient.”

This is borne out by the recent report – Quantifying the Future, by Rebecca Healey, head of European market structure and strategy at institutional dark pool Liquidnet, and Niki Beattie, founder and chief executive of consultancy Market Structure Partners. Canvassing 18 fund managers, five brokers (three global, two large regional), one independent research firm and three international regulators, they noted that the historical ties based on written research and conversations between the buyside and sellside was unsustainable.

Drilling down, nearly two-thirds, or 61%, of fund managers said they found little or no value in sellside research, with over half the interviewees deleting or ignoring over 50% of the emails and phone calls they received from their brokers.

Unbundling will only accelerate this trend and lead to a levelling of the playing field, according to Vicky Sanders, co-founder of RSRCHXchange, a cloud-based marketplace for buying and selling investment research. “Producing research will no longer be just about supporting investment banks and driving flow but more about the quality of the research, whether it is substantial and adds value and is worth paying for,” she says. “We will definitely see a diversification in content; with a survey we conducted last year of over 200 asset managers showing that asset managers will use only a handful of global banks to provide waterfront coverage and then fill in the gaps with niche players or regional specialists. We conducted another survey in Q2 2017 involving 562 asset managers which confirmed this trend”.

This should fit nicely into the remit of most independent providers, according to a recent report from Quinlan & Associates. It noted that while a few offer the complete research package spanning multiple products, sectors, and geographies (akin to the global brokerages), the vast majority are specialists. They range from TS Lombard and Capital Economics who have both made a name in the macro and investment strategy space, to Credit Sights and Independent Credit View AG who have put their stamp on credit research.

Going forward, both the behemoths and niche players will have to make greater use of the growing array of digital techniques and expanded data sets that can seamlessly be plugged into the investment-making process. Although bigger firms are often criticised for being slow in adapting to change, BCA, the oldest and largest standalone independent house, saw the handwriting on the wall two years ago. It stopped churning out and sending static, lengthy reports via email and instead launched Edge, an interactive website which deconstructs its research into actionable insights and is overlaid with tools and apps. This not only enables fund managers to search for content semantically but also to visualise the relationships between themes, views, trades, charts and reports.

“The aim is to help asset managers make better investment decisions and not just send them thousands of reports,” says Brijesh Malkan, who leads the BCA Edge project. “I think in the future we will see an increase in the use of satellite images, for example to look at car parks of Walmart to determine how many people are shopping as well the consolidation of research analytics into a portfolio manager’s order management system.”

Platforms jostle for position

Cutting edge technology will also be a key differentiator for the plethora of independent research platforms such as Alphametry, Electronic Research Interchange (ERIC), ResearchPool, RSRCHXchange, SmartCube and Smartkarma that have come onto the market over the past two years. Although they all mainly provide a central hub for firms and individuals to showcase their wares, the data analytics, payment structures, benchmarking and other digital tools will set them apart.

“At least in the short term, I think we will see more providers, smaller independent firms and new platforms being launched,” says Daniel Simpson, head of research at JWG. “It will take time before the market works itself out and fund managers can figure out what works and what doesn’t but one of the most important things will be how they can refine data now required for compliance into useable components that can support clients and business processes.”

Platforms are, and have been, busy taking up the technological gauntlet by adding functionality organically or through partnerships. Take RSRCHXchange. It is among the largest, having amassed over 1,000 asset management firms as users and 200 research providers – roughly a quarter of whom are banks and brokers. Last year, it struck a strategic alliance with Substantive Research, an independent curator of daily macroeconomic investment research which is enabling its clients to move easily from research curation to purchasing subscriptions and reports.

ERIC (Electronic Research Interchange) is also in the process of fine-tuning and has recently released the latest iteration of its platform with a new research management dashboard which allows asset managers to better identify the worth of the research consumed within their organisation. It streamlines the process for submitting bespoke research tenders and adds an ‘Ask ERIC’ option, whereby asset managers can anonymously make specific requests to a host of research providers.

ERIC is designed to facilitate conversations between asset managers and research providers, according to Chris Turnbull, co-founder of ERIC. “We are aiming to offer a more bespoke process because every asset manager and their requirements are different. It is better to understand and fit into their needs versus dictating them. I think this will help make them be sticky on our platform.”

Emma Margetts co-founder of Alpha Exchange, the Techstars backed fintech company, echoes these sentiments. She believes asset managers need mechanisms to assess the quantity and quality of research being consumed as well as its ability to contribute to better investment decisions. “Completeness of capture is key,” she adds. “We offer an end-to-end integration research management solution which covers the wide spectrum of MiFID II requirements.”

The platform not only offers internal and external research but also enables asset managers to monitor research consumption across their firm and rate research and analyst interactions in real time. In addition, the toolkit includes research budgeting software and an integrated payment portal supporting research payment accounts and hard dollar payments.

The sellside challenge

Against this backdrop, life for the sellside research analyst will become harder, although they will not disappear. Brokers that successfully recognise their clients’ needs for high levels of diverse but consistent data streams, which they can digitally integrate and interrogate, will emerge the winners, according to the Healey and Beattie report.

The change will also not happen overnight, according to Healey. “Asset managers are still trying to figure out how to value research and what they consume, and this will take time,” she says. “The relationship with the sellside will change and the challenge for their analysts is that they have to be one of the three top-rated analysts in their sector or be a specialist to maintain market share. Those offering a mediocre service should be concerned. The focus now is on excellence – whether that be in research or execution”.

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THE CHANGING FACE OF FIXED INCOME.

Alexander Y. Sedgwick, Vice President, Head of Fixed Income Market Structure & Electronic Trading at T. Rowe Price discusses how the industry is evolving to meet the challenges and leverage opportunities.

LIFTING THE DATA BURDEN.

Geoffroy Vander Linden, Head of Transparency Solutions and Nick Moss, Regulatory Reporting Product Manager at Trax outline the major hurdles MiFID and other regulations are presenting on the reporting front.

WATCHING AND WAITING.

The City of London holds its breath as Brexit divorce proceedings begin. Gill Wadsworth reports.

THE MULTI-ASSET TRADING DESK MARCHES ON.

Frances Faulds looks at what is helping, and what is hindering, the move to multi-asset class trading.

THE SURVEILLANCE CHALLENGE.

Daniel Simpson, head of research at JWG-IT, outlines the many hurdles presented under MAR and MiFID II in this space.

THE SIX MILLION DOLLAR TRADER.

To achieve best execution in fixed income, artificial intelligence tools are being developed that can interpret massive data sets. Dan Barnes reports.

AI COMES OF AGE IN FINANCIAL SERVICES.

Heather McKenzie looks at the clever ways AI is being deployed across the financial services industry.

BAD BEHAVIOUR UNDER THE SPOTLIGHT.

One year on, Heather McKenzie outlines the obstacles and solutions being presented by MAR.

STEALING A MARCH.

MiFID is shaking up the cosy world of broker research but independent firms and platforms will still have their work cut out. Lynn Strongin Dodds looks at what it takes to carve out a stake.

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