Mastering MiFID II: Asia-Pacific Implementation & Compliance — An Assessment of the Challenges Facing non-EU Buyside Firms and Investment Banks

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May 2, 2017

Mastering MiFID II: Asia-Pacific Implementation & Compliance — An Assessment of the Challenges Facing non-EU Buyside Firms and Investment Banks

This report continues GreySpark Partners’ analysis of the impact of the second iteration of the Markets in Financial Instruments Directive (MiFID II) on the investment banking industry and on the buyside industry by focusing on the regulation’s impact on financial markets entities operating in Asia-Pacific (APAC). To enhance market transparency and strengthen consumer protection in financial services within the EU, MiFID II significantly broadens the scope of the types of non-EU financial institutions that will be subject to some, or all, of its mandates.

https://research.greyspark.com/2017/mastering-mifid-ii-asia-pacific-implementation-compliance/

Sophisticated Tools For Individual Investors

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GlobalTrading

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April 25, 2017

By Jon Evans, Head of BT Private Wealth Markets.

The next logical step in the evolution of execution services is to their application in private banking.

The progression of extracting value from trade execution has followed quite a remarkable course within a single generation.

In the mid-1990s, fund managers were grimly hanging on to their entitlement to place orders directly to broker sales desks. As the complexity and intensity of that role escalated and the increasingly burdensome requirements of risk and compliance took hold, this jealously guarded function was prised away.

The solution lay in specialist “central dealing” teams who interpreted and translated fund manager intentions into concise dealing instructions that were conveyed over telephone lines to sales trader desks for execution.

Paper tickets and spreadsheets gave way to order management systems and pre-determined broker panels. Physical time-stamps and manual recording of instructions and trade executions gave way to email and platform messaging.

The rate of change that followed was nothing short of breath-taking. By the end of that decade the finance industry was not only in the grip of the dotcom bubble but was looking for a connectivity solution of its own. The answer lay in the establishment of standard protocols by which machines could speak to each other.

Although there was widespread awareness, it was a struggle to grasp the magnitude of what had happened. For the first time, orders could be electronically routed from institution to broker and almost immediate updates flowed back to the buy-side trader. This development was a watershed.

With this enhanced level of oversight came greater responsibility. The buy-side trader began moving away from the fund manager’s clerk and started to add real value by executing well and preserving portfolio alpha. That efficacy previously provided by the sales trader swiftly moved to the institutional desk and, as their internal recognition grew, buy-side traders demanded more visibility and better tools.

What followed was unsurprising. Commissions and broker staff numbers declined, the reliance on automated trading technology grew. It was only a matter of time before the fully connected institution demanded direct access to the algorithms that had been provided by the sell-side and had made the magic happen.

This shift led to a rapid increase in the quality and level of specialisation on institutional desks as the more professional buy-side trader lobbied for solutions to the limitations raised by incumbent exchanges. The established model was broken and needed to catch up to a new world order of data-crunching trade cost analysis and rapidly declining latency. Expenses fell, leading to a proliferation of exchange traded funds, online retail platforms and, most recently, robo-advisers.

Migration to wealth management
Furthermore, individual investors grew more confident in their ability to access financial data and many decided to move away from their reliance on the professional fund manager and began more closely scrutinising whether the returns and fees represented good value. Those investors, who were wealthy and sophisticated enough, wanted to direct the nature and tempo of their investable assets.

Nowhere was this shift more apparent than in Australia where high and ultra-high net worth individual wealth amounts to over $1 trillion and the levels of superannuation per head are among the highest in the world.

However, investing your own money is not easy: it requires skill and patience, and when it comes to that point where your money meets the market, it requires a high degree of specialist knowledge. The upshot is that, arguably, the migration of those buy-side attributes has at least one more leg of the journey: the private bank.

Increasingly, wealthy individuals insist on the same level of execution capability from their private banker as the institutional fund manager had previously. Specialist trading desks that service these clients now seek to deploy institutional grade execution processes directly to the private investor.

Often these people run multiple entities: self-managed superannuation funds, family trusts, foundations and charities – so the size of their assets can often match those of an institutional investor. Naturally, they’ve done their homework. They demand access to an experienced execution specialist, algorithms, alternative venues, block trades and new issuances. And just as the institutional buy-side desk stood by their fund manager, private bank clients want un-conflicted market intelligence that’s delivered on their terms.

Nor are these requirements limited to equities. Increasingly they extend to fixed income, hybrids, foreign exchange, structured products and international markets.

Frequently, the investor seeks to reduce concentration risk in a specific instrument and requires bespoke protection or cash extraction derivatives written and delivered over the counter. Although the tilt to self-direction in the industry is clearly progressing, it’s not a matter of choosing automated services or bespoke services: it’s about getting the right mix.

It is common for a high touch service to be supplemented by online and ultra-low touch offerings such as robo-advice to satisfy client needs for personalised support and self-direction. Existing broker relationships are retained to complement the process.

However, one overriding consideration prevails: there really is no substitute for having access to high end execution capability. It is essential to have a trading desk with the best available people and processes if you’re serious about investment performance. Just ask any fund manager.

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If A Tree Falls In The Forest

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GlobalTrading

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April 25, 2017

By Chris White, CEO, ViableMkts.

Illuminating the true costs of corporate bond electronic trading requires expanding the criteria for evaluating platforms.

In the not so distant past, there was a lively debate regarding the usefulness of electronic trading in the corporate bond market. Gradually, as key developments like the introduction of List RFQs (request for quotes) by MarketAxess illustrated the potential market-wide benefits of electronic trading, the tectonic plates that upheld the traditional concept of corporate bond trading shifted. Currently, electronic corporate bond trading has not only evolved to become an essential component for secondary trading, eTrading is considered by many to be the panacea for resolving the perceived corporate bond liquidity crisis.

The $64,000 Question (needs adjustment for inflation)
The value proposition for corporate bond electronic trading has been most compelling for large, buy-side institutions. Therefore, it is no surprise that increasing eTrading adoption is a priority for many major asset managers. However, at the core of this strategy is a lingering question that grows more important with each year that electronic trading becomes more established:

What does it cost to trade corporate bonds electronically?
It is very surprising that as buy-side institutions laud corporate bond electronic trading, very few fixed income asset managers know the true details of their transaction costs. In other modernized markets like equities, asset managers must be intimately aware of transaction cost details for electronic trading for two crucial reasons: 1) Electronic transaction fees can have a material impact on fund performance 2) Finding the best possible price for electronic trading is a part of the “reasonable diligence” mandated by FINRA’s best execution requirements

For buy-side institutions to properly incorporate electronic trading into their long-term strategy for corporate bond trading, the current blind spot regarding the true costs of electronic trading must be resolved.

More electronic trading volume, more problems
On today’s most dominant corporate bond RFQ platform, the original cost model was simple. Dealers paid a subscription fee to have access to buy-side client inquiry, plus a per-trade transaction cost whenever their response to an RFQ resulted in a trade. Buy-side clients were only charged a very small subscription fee (normally waived if they performed a minimum volume of trades per month) and were charged nothing for sending and trading RFQs.

All was well in the early days, but as platform activity grew, a flaw in the pricing structure became obvious.

The more corporate bond dealers embraced electronic trading by responding to, and winning, buy-side RFQs, the more it cost them. Something had to be done to share the RFQ cost burden between dealers and buy-side institutions or the momentum in electronic trading would have come to a halt.
It’s so hard to say goodbye to yesterday Creating a model that shifted some of the RFQ trading costs to the buy-side was no small feat. Under the previous cost structure, buy-side institutions were absolved of any material fees, so naturally, there was tremendous push back to the concept of a buy-side transaction fee.

The second challenge was logistical. If an explicit buy-side transaction fee were to be charged on every electronic corporate bond trade, the executing asset manager would have to the transaction fee to the accounts they represent. It is common for a medium to large sized asset manager to represent 100s or even 1000s of sub accounts, which makes properly coordinating bond allocations a Herculean task. Adding more complexity to the account management process by including transaction cost allocations was (and remains) a non-starter for large buy-side institutions.

Ultimately, the solution that resolved the obstacles facing a buy-side corporate bond transaction fee is the current source of opacity in today’s market.

Hear No Transaction Costs, Speak No Transaction Costs, See No Transaction Costs
The solution was simple, but brilliant. Embed a transaction fee in the RFQ workflow, never make the cost visible to the buy-side client and collect the transaction fee from the dealer. Wait….what?

If a trade occurs without a visible fee, was it free?
Under the then new and now current corporate bond RFQ pricing model, two very interesting paradoxical questions arise:

1) Is this “price adjustment” a transaction fee or not?
2) Are buy-side clients paying?

Before we answer the first question, let’s first review the definition for transaction fee:

“A charge an intermediary, such as a broker-dealer or bank, assesses for assisting in the sale or purchase of a security”

In the example provided, the platform assisted in the sale of the WMT bonds. As compensation for this service, the bid for the buy-side client’s bonds is adjusted lower than the intended bid of $102.35, with the platform realizing the difference between the intended bid and traded bid ($102.35 – 102.25 = $.10 paid to the platform). This is most definitely a transaction fee. The buy-side not seeing the cost doesn’t change that.

As for the second question, from the perspective of the buy-side, the price adjustment inhibits their ability to trade against a more favourable price. This means the buy-side institution and all the clients they represent ARE paying to trade corporate bond RFQs, even if they don’t sign a check against a physical invoice.

Proponents of corporate bond electronic trading will tell you that there is “Growing evidence of the cost savings that can be achieved on electronic platforms may also be helping to align buy-side liquidity provision with Finra best execution requirements”.

This is based on a theory that simply building a network through electronic trading and expanding the network through broader adoption and open protocols realizes the best possible price. To a point, yes, having more participants responding to an RFQ can help improve pricing, but there is a saturation point where the cost benefit of more participants is de minimis when compared to a material reduction in the platform transaction fees.

The path towards achieving best-execution in corporate bond electronic trading starts with expanding the criteria for evaluating platforms. Strictly measuring the soundness of a platform based on the number of dealers and average daily volume is woefully incomplete.

Platform transaction fees, actively traded Cusips and quality of dealer participants are just a few of the areas that need to be included in the evaluation process. If done properly, any buy-side institution will be able to avoid significant waste and optimize their performance by finding the most appropriate electronic trading environment for their order flow.

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Dealing With Transition

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GlobalTrading

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April 25, 2017

By Ambrose Tan, Head of Central Dealing for Equities, Fixed Income, Treasury, Aberdeen Asset Management (Asia)

The role of buy-side traders is becoming increasingly important – and more fun.

What are the main factors now affecting the dealing desk function?
The rapid changes taking place in the regulatory environment and keeping up to speed with these developments are having the greatest impact. As a global fund manager, the inconsistencies in different jurisdictions means we face the additional task of adhering to local laws without breaching others, for instance Dodd-Frank and the European Market Infrastructure Regulation.

Is your task becoming easier, or are the benefits of more automation and more sophisticated technology outweighed by regulatory pressure, compliance monitoring and performance assessment?
Although advances in automation improve operational efficiency and price transparency, dealing is still bound by strict regulatory, compliance and performance requirements. Automation can address the science of dealing but not the art.

What are the best consequences of new technology?
The buy-side now has much better access to liquidity and tighter dealing spreads, particularly in foreign exchange. There is still a long way to go, especially in the credit market which remains a game of axes.

Do market knowledge and personal networks still have an important role for dealers?
They are absolutely relevant and, in fact, essential. An in-depth knowledge and understanding of markets gives the dealer an edge in decision-making for trade execution.

How is the dealing desk’s relationship shifting with your company’s portfolio managers?
While the portfolio managers make the investment call, the dealing team are their eyes and ears on movements within the trading environment. This relationship remains and is even more critical with increasing information flow these days.

How is the dealing desk’s relationship with vendors and service providers changing?
We are demanding more from them as a result of tougher and an increasing volume of regulatory requirements. Also, services and products supplied by vendors are easily replicated and have low-entry barriers – as long as you have enough cash for capital investment.

What can be improved or what would you prefer the market dialogue to focus on?
Public forums within the buy-side are few and far between – and I wish there were more of them.

Is your job becoming more fun or more stressful?
Definitely fun, but with it comes the stress. It keeps the dementia away!

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Announcement : Plato & Liquidmetrix

By

Ian Rycott

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April 24, 2017

24 April 2017.

Plato Partnership and LiquidMetrix Research to co-operate to assess block trade performance Plato Partnership Limited (“Plato Partnership”), a not-for-profit company bringing creative solutions and efficiencies to today’s equity marketplace, today announces its intention to enter into a cooperation agreement with LiquidMetrix, the best execution specialists and an operating division of Strategic Insight (SI). Under this new partnership, the two companies will research, design and implement a stronger methodology for assessing block trade performance.

Through this cooperation, Plato will work with the LiquidMetrix research & development team to jointly design and implement a consistent framework for assessing block trade performance. This will enable firms to assess the execution quality achieved by block trading both in absolute and relative terms between different block venues versus other execution options.

MiFID II will have a significant impact on many aspects of trading in Europe. Limits on dark pool trading and the disappearance of current BCN models are likely to drive innovations in how and where trades are executed. RTS 28 requirements on sell sides and buy sides will focus attention on how effective firms are in sourcing liquidity and achieving best execution for their clients in this new landscape.

Mike Bellaro, Plato Partnership Co-Chair, commented:

“If block trading is to become more widely adopted we need a comprehensive and universally accepted framework for measuring block execution quality. This is exactly what we are looking to develop with LiquidMetrix. To date, traditional Transaction Cost Analysis has not done a good job in allowing such relative comparisons to be made. Block trading analysis requires careful risk adjusted measurement of performance to allow fair comparisons with algo trading. TCA often focusses mainly on what is completed, ignoring or side stepping opportunity costs.

“We are delighted to be working with Strategic Insight’s LiquidMetrix team to bring a solution to the market. This cooperation again demonstrates our commercial focus and ensuring that we are delivering significant utility for our members and the market as a whole.”

Nej Djelal, Plato Partnership Co-Chair, commented:

“An industry standard form of Transaction Cost Analysis has long been recognised as a key opportunity for the industry, but to date has been challenging to achieve. Plato Partnership’s unique positioning as a body that brings together the intelligence and guidance of both buy and sell sides, underpinned by our not-for-profit ethos, means we are well placed to spearhead the move towards TCA standardisation.

“In anticipation of the market’s likely shift towards trading in larger sizes following the implementation of MiFID II, the logical first step is to focus on block trading TCA. This exciting development will enable objective performance analysis of block trading versus alternative approaches, as well as lay the foundation for further TCA standardization.”

Paul Squires, Plato Partnership Member, commented:

“There are a number of areas – including increased standardisation for reporting optimisation – where we want to see significant benefits brought to the market in delivering the regulatory expectations of MiFID II. Ensuring we get ahead of the curve to provide the market with solutions that will drive genuine utility is absolutely central to Plato Partnership’s values, and this cooperation is another example of this strategic approach.”

Sabine Toulson, LiquidMetrix Co-founder, Strategic Insight, commented:

“The LiquidMetrix mission is to provide leading edge analytics for all of the financial services industry including the buy-side, sell-side and trading venues. As regulatory and technological innovations continue to drive changes in market structure, the financial community must continue to adapt in order to provide meaningful best execution reporting.

“Block trading appears to be re-emerging as an increasingly viable trading option. At the same time, MiFID II requirements specify the need to justify the different execution strategies and policies used by a firm. There is a clear need for a new generation of meaningful block trading metrics that demonstrate execution quality for the industry. Strategic Insight is pleased to have the privilege of collaborating with the Plato Partnership, and in using LiquidMetrix experts to develop a modern platform that the entire industry can use for effective measurement of block execution quality.”

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News review : Brexit clock starts

By

Ian Rycott

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April 22, 2017

THE LONG GOOD BYE.

Prime Minister Theresa May officially launched the Brexit process, triggering Article 50 and started a two-year countdown before the country exits the European Union. The historic moment was encapsulated in a letter sent to the Brussels office of European Council President Donald Tusk, notifying him of the UK’s intention to leave.

The 27 EU member states and the UK will now begin an arduous process of negotiation to decide how they can disentangle their existing relations, while May must push a complex legislative programme through Parliament.

Given the scale of the task, UK diplomats and officials privately admit that negotiating and ratifying a trade deal will take longer than the two years allotted for the Article 50 exit process but say the parameters of a deal could be settled.

The EU’s draft negotiating text says that the “future partnership” could be part of the Article 50 process once “sufficient progress” had been made on settling an exit bill on citizens’ rights and on the Northern Ireland peace process.

According to Sigmar Gabriel, Germany’s foreign minister, finalising an agreement might take time. “Both sides must recognise that an agreement on a wide-ranging partnership will be quite a laborious endeavour.”

Although some had expected May to adopt a hard line and leave the single market, her tone has been more conciliatory in the past weeks with the letter emphasising the phrase “deep and special partnership” seven times and “economic and security co-operation” four times.

In Parliament, the message was similar that Britain was going to leave the EU, but still wants to work closely with the other EU member states. Tusk reacted to the triggering of Article 50 at a press conference, where he held the letter in his hand and expressed his sadness.

May has also subtly adjusted her language in recent days to bring her stance more closely into alignment with the EU negotiating position, which states that no trade deal can be concluded until after the UK leaves.

She conceded that the UK might have to comply with Tusk’s demand that the EU’s “core principles”, including those relating to immigration, would have to apply during any transition period.

Speaking during a visit to Jordan, May said, “Once we’ve got the deal, once we’ve agreed what the new relationship will be for the future, it will be necessary for there to be a period of time when businesses and governments are adjusting systems and so forth, depending on the nature of the deal – but a period of time when that deal will be implemented.”

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News review : Blockchain and bonds

By

Ian Rycott

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April 22, 2017

THE EMERGING BLOCKCHAIN BOND LANDSCAPE.

SIX Securities Services has developed a blockchain powered service covering the full bond trading life cycle from issuance to settlement. The prototype enables the issuing of bonds as smart contracts that specify at what dates coupon payments are made, for what amounts and when repayments occur.

The service also includes the connection of the smart contract to the chain where buyers can allocate money by paying in digitalised currency to the address of the bond.

Last September SIX Securities announced its partnership with Digital Asset Holdings to develop distributed ledger technology based solutions for the Swiss financial market.

However, the group also published research which showed that regulatory uncertainty and a lack of in-house expertise are proving major roadblocks to near-term adoption. It forecast a six-year timeframe before industry-wide applications of the technology would see the light of day.

Thomas Zeeb, CEO SIX Securities Services: “Though still some way off for market-wide adoption, we are firmly of the belief that the potential shown here is promising – for us – and for the industry as a whole. I am convinced that what we have achieved with this approach could revolutionise several processes used by the Swiss financial services industry while sustainably securing our role in the provision of services throughout the Swiss value chain.”

The bond markets are seen as fertile ground for the live production of digital ledgers, promising significant cost reduction through the removal of operational and reconciliation processes and the reduction of settlement/counterparty risk and associated capital requirements.

Interbank co-operative Swift has debuted a similar proof-of-concept for bond issuance across multiple geographies, connecting all participants to a trade on a single immutable network. Meanwhile, SBI Securities and IBM and the R3 consortium have also been working to develop similar applications.

In addition, UK based BlockEx (Digital Asset Exchange Platform) is developing a project for the issuance of digital assets including bonds, equities and syndicated loans. The full lifecycle platform aims to settle trades within 30 seconds and leaves a secondary market that generates an indelible history of buying and selling activity using distributed ledger technology.

“Our concept is to make it easy for institutions to issue an asset,” said Adam Leonard, CEO of BlockEx. “Our aim is to template as much of the process as possible. Whether it’s a US$10m or a US$1bn issue, a company can use the asset creation tool, pick documentation and get the money in just a single day.”

The firm is in the process of signing a partner law firm to automate the documentation process. Around a dozen potential issuers are queuing up, according to the firm. The first wave comprises small and medium-sized enterprises eyeing US$10m-$50m issue sizes, which are largely shut out of the capital markets due to syndication costs that average US$200,000-$400,000 according to BlockEx estimates.

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News review : LCH Reports Record Volumes

By

Ian Rycott

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April 22, 2017

LCH REPORTS RECORD VOLUMES AS EMIR TAKES HOLD

Clearing houses are experiencing record activity as banks and investors comply with the European Market Infrastructure Regulation and push their over-the-counter fixed income and foreign exchange swaps towards centralised venues that bolster risk management for the industry.

According to LCH, the world’s largest swaps clearer, March as well as the first three months of the year saw the processing of notional principal amounts of interest rates, inflation and non-deliverable forex forwards at record levels.

LCH processed $244tn of gross notional outstanding – a broad measure of all outstanding derivative positions globally – in interest rate swaps in the three months to March 31, a rise of 4% on the same period in 2016 and was boosted by investors like asset managers and institutional investors clearing swaps.

Over $100tn of that total was cleared in March alone, a year-on-year rise of 72% it added. It also cleared a notional $2.4tn in foreign exchange, from more than 330,000 trades.

The clearinghouse also noted that growth occurred in all markets, with new record nominal sizes in each. Nominal volumes rose 21.2% in the French sector. Belgian (38.6%), Dutch (53.2%), Italian (up 183%) and German (41.2%) as well as the UK gilts market (28%).

“The recent introduction of the uncleared margin rules has acted as a significant incentive for firms to direct more trades to clearing, while the upcoming clearing mandate for rates has encouraged buyside clients to clear more of their portfolios,” said Cameron Goh, global head, product management, rates and FX derivatives, LCH.

“The execution, risk management and operational efficiencies of clearing have resulted in significant take-up of clearing among participants that are not subjected to a clearing mandate,” he added.”We expect demand to continue as we roll out further products and services over the course of the year.”

Smaller rivals, such as Germany’s Eurex Clearing, have also recorded strong growth over the same period reflecting the reshaping of this vast market by post-financial crisis reforms. It boasted a 30% hike in the volume it processes, culminating in a notional outstanding of Ä1.2tn.

The boost in activity underlines the industry’s expectation that a March 1 milestone in derivatives regulation would fundamentally alter the behaviour of hundreds of asset managers, corporations, credit institutions and pension funds who use the OTC market to hedge their liabilities.

At the beginning of March global rules required investors to post more margin or collateral to backstop private swap deals. Historically the industry has supplied minimal margin, meaning there were less protected funds to cover losses if one of the parties defaulted.

The new regulations were expected to raise overall costs for the market, which had been blamed by policymakers for exacerbating the financial crisis. Authorities backed down from a hard-line introduction as hundreds of asset managers were unprepared and instead demanded “good faith” efforts to comply.

Separately, there are concerns over the future of London as the leading light in euro denominated clearing. Manfred Weber, the leader of the centre-right European People’s Party – the largest political group in the European parliament, to which both the German chancellor and the commission president belong – has said that euro-denominated clearing could no longer be undertaken in the City when the UK leaves the EU.

News Review : LSE – Deutsche Börse Merger

By

Ian Rycott

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April 22, 2017

THE END OF AN ERA.

The merger was being billed as third time lucky but the European Union competition regulator dashed the hopes of the London Stock Exchange Group and Deutsche Börse and blocked their £24bn merger.

Margrethe Vestager, EU competition regulator, ended the third attempt in 17 years to create an Anglo-German exchange after the two groups refused to meet her requests to offset concerns about market concentration in fixed income clearing.

Vestager said the deal would have created a “de facto” monopoly in fixed income markets. “The commission cannot allow the creation of monopolies, and this is what would have happened in this case,” she said. “How exactly these markets work and the products that trade, well it may seem like rocket science but actually our competition concerns with this merger are very simple,” said Vestager.

The LSE had agreed to sell its French clearing house to rival Euronext for E510m to assuage fears that a combination would curb competition in clearing of repo markets, which are used by banks to help fund their short-term lending. However, it refused to sell its Italian trading platform MTS to placate competition concerns. The main argument was that a sale could jeopardise its relationship with Italian authorities, dent revenues from its Italian operations and require approval from multiple jurisdictions.

Competition concerns were not the only hurdles. The finely crafted deal was also thrown off course by the UK’s surprise vote last June to leave the EU. It had been calibrated to allow for decision making in London, Frankfurt and Milan, where the main market infrastructure is also owned by the LSE. Brexit radically altered the public debate on key issues such as the location of the combined group’s headquarters, and clearing, which ensures trades are completed if one party in a deal defaults.

As the deadline for the regulator’s decision approached, it became clear that the deal would not be approved. The ruling brings to an end a 15 month chapter where the two exchanges tried to create an exchange powerhouse that the chief executives hoped would rival their US and Asian competitors.

Together they would have become the world’s largest exchange by total income, the biggest for equities listings and would control more derivatives trades than any other entity in the world.

In separate statements, the LSE and Deutsche Börse both said they regretted the decision. “The prohibition is a setback for Europe, the Capital Markets Union and the bridge between continental Europe and Great Britain,” said Joachim Faber, chairman of the supervisory board of Deutsche Börse.

Sellside profile : Sam Baig & James Baugh : Citi

By

Ian Rycott

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April 22, 2017

GETTING IN TOUCH WITH THE CLIENT.

Sam Baig (right), Head of Electronic Trading at Citi and board member of Plato, and James Baugh (left), Head of EMEA Market Structure at Citi and board member of Turquoise, explains how the industry and Citi are responding to the ongoing regulatory changes.

What impact will MiFID have on trading?

James Baugh: There has been a lot of focus on non-equity asset classes and the impact on the equity landscape has at times been overlooked, but there will be a fundamental change. The share trading obligation means that trading has to take place on a regulated market, MTF, Systematic Internaliser or a third country venue deemed equivalent. One of the main questions for us is not only how you provide liquidity, but how can we differentiate ourselves from our peers and optimise principal flow and central risk inventory.

Will there be a shift to block trading and do you see the emergence of many new platforms?

James Baugh: One of the unintended consequences of MiFID I was the fragmentation and atomisation of trade sizes in dark venues. For example, today we may have to slice a parent order five or six times to find liquidity. Next year this will change with the implementation of the dark pool caps (4% of the total amount of a stock being traded on an individual platform and 8% across the EU) and I think we will see a re-aggregation of liquidity which should be seen as a positive and will definitely increase electronic block trading. We are also seeing the buy and sellside come together to develop solutions and drive change. This was not always the case in the past but now we see them both joining initiatives such as Turquoise Plato™, which we see as a good development for the industry.

Sam Baig: One of the challenges will be in how to manage different block trading initiatives, which to date number around five to six. I think there are only so many block trading venues that the market can absorb and once you get beyond two to three it may be difficult. Venues will have to create their own solutions and be innovative if they want to keep their edge.

There has been a lot written about unbundling. How do you foresee the market changing?

Sam Baig: I think it will be better for the brokers because, in the past, clients might have chosen the brokers they were most comfortable with, but now they have to be more analytical and discerning as well as have a greater understanding of benchmark performance. Brokers for their part will have to become more detailed about how they can improve their performance and rankings. Also, the algos will have to be recalibrated as liquidity profiles change and we potentially see a move from dark pools to lit venues.

Can you provide more detail about equity electronic trading at Citi?

Sam Baig: A few years ago, Citi may not have been the first name in European electronic trading but we have invested heavily in our equity execution platforms to provide electronic access across all channels in order to capture market share. We have also been hiring in the quantitative space as we see the industry is moving towards more quantitative performance metrics. Previously, this may have been part of another job, and if a broker was not ranked highly there would have been a conversation to better understand what the client required. Today, it is much more detailed and it is important to have global quantitative analysts, forming part of our global execution advisory services group, who can gather and measure data across electronic trading – both high and low touch

James Baugh: It will be increasingly important for sales traders to be aware of the changing market dynamics and how to also access block liquidity through the electronic channels.

What technology, including artificial intelligence, is being used to meet the different challenges presented by market conditions and regulation?

Sam Baig: One of the areas that we have spent a lot of time working on globally over the past two and half years is artificial intelligence and machine learning. For example, last year we launched a new product called OPTiMUS which takes into account a number factors, such as volatility and market conditions, before determining in real time which is the optimal algo to use for that particular order and trading strategy. It then provides the post trade performance metrics about how it performed. The focus is on the characteristics and the completion curves so that we can find the optimal way to execute an order in real time, which is what will be required under MiFID II.

The next iteration will be looking at the best route to take during intra-day trading and not just at the start of the trade. This requires though a huge amount of data and processing in order to change direction if you think the market conditions are changing during the life of the order.

Looking beyond 2018, what challenges as well as opportunities do you foresee?

James Baugh: MiFID II will present opportunities for firms like Citi as evidenced by the investment we and others are and will continue to make into our electronic execution platforms. I think going forward, one of the themes may be that of consolidation, with smaller firms partnering with larger institutions like Citi for execution and custody. Those like Citi who have balance sheet and are able to provide a comprehensive service should be well positioned to succeed in the new post MiFID II environment.

Biographies:

James Baugh is European Head of Market Structure for Citi’s equity business, responsible for developing its liquidity strategy. Previously, he spent more than 11 years at London Stock Exchange, where as head of equity sales he was directly responsible for initiatives like Turquoise Plato Block Discovery™. Other roles included Head of Client management for Baikal, the dark book initiative initially developed in partnership with Lehman Brothers and was made Director of Client Management at Turquoise when LSE acquired the business in 2010. A graduate of Newcastle University, Baugh began his career as a commodity analyst before spending the next six years at Dow Jones in a variety of roles including the management of their European Power Index business.

Sam Baig, Head of Electronic Trading, joined Citi in 2014 from Goldman Sachs’ spin out Redi. He previously worked at Goldman Sachs as head of European electronic connectivity. In his current role, he is responsible for driving efficiency, consistency and optimisation across the company’s cash execution channels, inclusive of programs, electronic, and high touch. He joined the bank as head of liquidity strategy having previously run the European operations of Redi. Sam spent seven years at Goldman Sachs and five years at Morgan Stanley prior to that. He started his career as a commodities analyst specialising in precious metal prices.

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THE LONG GOOD BYE.

THE EMERGING BLOCKCHAIN BOND LANDSCAPE.

LCH REPORTS RECORD VOLUMES AS EMIR TAKES HOLD

THE END OF AN ERA.

GETTING IN TOUCH WITH THE CLIENT.

Sam Baig (right), Head of Electronic Trading at Citi and board member of Plato, and James Baugh (left), Head of EMEA Market Structure at Citi and board member of Turquoise, explains how the industry and Citi are responding to the ongoing regulatory changes.

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