Profile : Eric Böss : Allianz Global Investors

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April 22, 2017

Asking all the right questions.

Eric Böss, Global Head of Trading at Allianz Global Investors, speaks to Best Execution about the impact of MiFID II on the buyside.

How has MiFID II impacted your industry?

I think this is the biggest financial regulation since Glass Steagall and it is causing one of the biggest overhauls we have seen in the industry in decades. This does not come as a surprise as it has arisen out of the global financial crisis, which was one of the largest financial breakdowns in years. In many ways equities is the asset class least impacted by MiFID II, but the unbundling between research and execution, as well as the best execution requirements, are definitely two of the biggest elephants in the room.

How do you think these requirements will change the way the trading industry executes?

My personal view is that if you have had a good best execution process and a well-run trading desk that was quantitative, qualitative and holistic with feedback loops that could measure performance, then your firm would not have to make any major changes to meet the new best execution requirements. However, if it did not, then you might have a lot of work to do.

Unbundling though will require a new infrastructure because asset managers will need to be much more granular in their budgeting for research and execution. The process will be simpler for those that have only one type of client or strategy, but it will be a challenge for global firms that are running multiple and overlapping strategies.

What should traders be doing now if they haven’t had a holistic approach?

I think it will be important to take a step back and review the execution process from 30,000 feet. While there is a tremendous amount of data around execution out there, this is not necessarily helping set up trading processes in the right way. Data in itself has no answers, you have to ask the right questions. One of the most significant changes on the research side is that asset managers will have to determine an appropriate price for a particular piece of research. One of the issues is that regulators offer little guidance on this and it is difficult because the value-add of research will differ depending on the size, style and strategy of a fund manager. For example, think of a €1bn fund and a €10m fund run by a similar strategy, should they pay the same for a particular research report or paper?

How do you envision this will change your consumption of research?

We have our own in-house team of analysts, but that doesn’t mean we do not buy content from third parties. MiFID II forces you to contemplate what you want to buy and what adds value to your alpha generating process; as well as what the appropriate price is. In general, I am seeing the industry taking a similar path to the one the music industry took years ago, in terms of payment models. At one end you will see the large incumbents, such as a Spotify type of organisation, where you can consume as much as you like for a flat fee, while at the other end there will be platforms where you can buy bits and pieces of research separately – similar to the old iTunes model of 99 cents per song.

I also see the risk of certain teams spinning out of the larger sellside firms to create their own smaller shops, and they are likely to use one of the many platforms that are emerging that offer a pricing menu. Their development is still at an early stage, but you can see people using them as a sales channel. I am not sure though that you will find the large sellside firms using them in the near term.

Have you had to make many changes to the trading model at Allianz?

We have always been an active manager based on fundamental research and split portfolio management, research and trading in the early 1990s. We believe that trading should be aligned with our portfolio managers’ investment style, in the best interest of our clients, and we use transaction cost analysis as well as other analytics to ensure that we are adding value throughout the value chain. We also have strong feedback loops to constantly check that. The difference today is that there are new and better-documented governance structures around the trading process and we are required to show that they are an integral part of our policy.

Given the scale of MiFID II, what are some of the challenges with implementation?

The implementation deadline has already been postponed, but I think that in some parts it is still in an unworkable and partly unclear state.

This means that you need to make sure that you build a lot of flexibility into your plans and programmes so that you can adapt to any future changes and interpretations. The first step is to look at the systems and processes you have in place, your research consumption and best execution guidelines and see what needs to be changed. For example, if you a have a system that allows you to set up commission sharing agreements to feed the research payment account, should you also have a direct payment process in parallel? Also, there are many uncertainties around fixed income and the handling of macro research. We will have to make decisions with incomplete information because the regulators will not be offering enough guidance ahead of January 2018.

Decisions also have to be made as to what you want to outsource and keep in-house, because the industry is in a constant state of change. In our case, we want to focus on our core business, which is running money, and keep risk management in-house while outsourcing large parts of IT. We do not need to do the coding for the systems we use.

How prepared are the buyside for MiFID II?

I think 90% to 95% of what MiFID II wants to achieve is clear to asset management firms, so they have a good enough understanding of the direction of travel. One of the problems though is that people are holding back investments at the moment, waiting for more clarity, which means that there could be a rush closer to the implementation deadline, which will cause bottlenecks with on-boarding and implementation.

Biography: Eric Böss is Global Head of Trading with Allianz Global Investors, which he joined in 1994. He is responsible for the trading implementation of investment strategies across all asset classes. Eric was previously Global Head of Derivatives, leading the European Equity Derivatives team. He also traded fixed-income, equity and commodity derivatives. Eric Böss previously worked at Dresdner Bank. He is a CFA charterholder.

©Best Execution 2017

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Sellside Profile : Joe Gawronski : Rosenblatt Securities

By

Ian Rycott

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April 22, 2017

STEADY AS SHE GOES?

Joe Gawronski, President and Chief Operating Officer of Rosenblatt Securities talks to Best Execution’s Lynn Strongin Dodds about the path of regulatory change, both in the US and Europe, and whether there is a risk of divergence.

At the moment, it seems like the regulation in the US and Europe is diverging. How many changes do you think we will see in the US and what impact will this have?

We’ve been saying since the financial crisis that the US is unlikely to see a fundamental market-structure overhaul, despite repeated calls for one, particularly following the 2010 “flash crash” and the hoopla over the book Flash Boys – and we’ve been right. The changes have pretty much been limited to safety and soundness, greater transparency and pilots that do not have market-wide impact. In the immediate aftermath of the November elections, with anti-regulatory forces ascendant and Congress focused on other issues like health care, taxes and infrastructure, we thought the likelihood of sweeping change got even lower. And a much talked about Dodd-Frank rollback already seems a casualty of that.

More recently, however, there have been a lot of people in the industry – and in Washington – talking about the prospect of revamping Regulation NMS and, specifically, repealing the order-protection, or trade-through rule (Rule 611 of Reg NMS). A combination of longstanding ideological opposition from some people in Washington and an equally longstanding desire on the part of the brokerage industry for reforms that would reduce their operating costs are behind this. Big brokers are also pushing for a pilot programme to reduce the Reg NMS access-fee cap and for reforms to NMS plans that could trim exchanges’ market-data pricing power. These issues are likely to get a lot of airtime in the coming months and years.

And it appears likelier based on recent statements from Acting SEC Chair Piwowar that we’ll see an access-fee-cap pilot. But we see little likelihood of really big changes in the near term. Rule 611, for example, underpins so many other aspects of our market structure that simply repealing it in a vacuum is unlikely. And any reforms of this nature would take lots of time to debate, propose, comment upon, revise, approve and implement, so we’re talking years rather than months if they even happen. The real question we need to be asking ourselves is, “What about the current market structure, is it hurting investors or issuers?” And I think the answer to that is that the current market structure, although it could be tweaked in places, works pretty well and doesn’t need a wholesale revamping. Implementation costs are substantially lower for investors today than they were before market structure began a major evolution two decades ago.

What impact do you think MiFID II will have on dark pool trading in Europe?

European regulators have taken a very blunt approach to dark trading and the double-volume caps in particular seem particularly clumsy. We know that buyside traders value dark liquidity and you could argue that legislators put this to one side when crafting the MiFID II rules in this area.

The rules will require the buyside to reassess the way they interact with dark liquidity and will encourage a move to block trading, which is exempt from the double-volume caps. At the moment, there is a lot of talk about block trading and some platforms are enjoying steady growth. There may though be a natural ceiling because it is difficult to find the counterparty on the other side.

Our current estimates for dark trading – including the 19 venues that provide us with data plus estimates for broker crossing networks that do not report to us – is 8.5-9% of consolidated European turnover. This is likely to fall once the MiFID II volume caps come into force.

How do you foresee the landscape unfolding in terms of the switch from broker crossing networks to systematic internalisers?

There also has been a lot of discussion on the extent to which systematic internalisers will be able to replace BCNs. BCNs are popular because their operators have discretion over how the orders are matched. An element of this will be retained under the SI framework, but the key difference is that SIs can only be used for bilateral trades and cannot bring two client orders together. Nonetheless, SIs have some advantages – in that they only need to display pre-trade quotes up to a certain size and are not subject to the MiFID II tick size regime which means that they can offer quotes at better price increments compared with exchanges and MTFs. These benefits could make SIs an attractive source of liquidity and firms are gearing up for that.

Do you think unbundling will come to the US?

I’m glad you asked that as we’ve been following this issue closely for the past couple of years and our analyst in London, Anish Puaar has written about a half dozen reports analysing the soon-to-be implemented rules and their impact. Unbundling and the transparency it brings is a positive thing generally speaking, so we very much support the concept, though I’m not sure the regulators have thought through all the consequences of the new rules. With greater transparency and focus, the total amount of money being spent on research should shrink, but unfortunately will disproportionately affect research coverage of the smaller cap names – SMEs – that in other contexts the regulators say they are trying to help. It will also favour larger vs. smaller asset managers and give further advantage to more passive strategies vs. active management. It will also not prove to be the boon to independent research some pundits predict as the big banks will still get their pound of flesh in a shrinking research pie environment with managers needing access to the IPO and capital markets calendar that makes them a lot harder to cut, whatever the stated inducement rules.

As to the question of whether it will cross over the pond, I firmly believe it will. It won’t be driven by new regulations here, however, as the SEC and industry here seem content with our 28(e) soft dollar rules. Rather, it will be driven by market and competitive pressures. Not only will global asset managers want to adopt one set of rules for operational ease, but end clients will get used to the level of transparency they receive under the new regime in Europe and start to demand that level of transparency across their providers, and the big consultants will push them in that direction as well.

How has the relationship between the buy and sellside changed?

Brokers have always complained about increasing costs, but as exchanges moved from mutual to for-profit models and gone public over the past 15 years or so, the transaction fees, market data and technology charges they assess have grown as they try to hit their quarterly numbers and deliver growth.

Combined with declining commission rates from clients over that same period and the increasing costs of regulatory compliance since the financial crisis, we’re now at a point where the sellside is shouting louder than ever. And the buyside joined that chorus for the first time last year, becoming an ally in the fight to pressure exchanges on the cost front. Why? The big firms are tiering their clients and the buyside doesn’t want service levels reduced. If they can partner with the sellside in helping control their costs, they figure they can better maintain service levels, even if they can’t find a way to increase their commission wallet.

How is Rosenblatt responding and what things have changed?

While we have remained true to our agency brokerage roots, we have evolved with the markets. First, as always, we continue to look for ways to squeeze basis points out of performance for our clients. For instance, as others have contracted markedly on the NYSE floor, we’ve expanded – in fact, becoming the largest floor broker. Parity and other advantages give the floor demonstrable out-performance that make the extra investment in personnel worthwhile.

Second, as the markets fragmented and became way more complex, starting with the order handling rules in the late ‘90s, decimalisation in the early 2000s and Reg NMS in mid-2000, we invested heavily in understanding the new market structure and sharing our analysis with customers. We were really the first broker to do this. The research we produce, along with the execution consulting and transaction analytics we provide to customers, help them make better routing choices and improve their quality of execution.

Third, the fact that execution-only is how we grew up didn’t prevent us from entering the fundamental research space when we saw an opportunity created by conflicted, undifferentiated research and, again, saw others heading for the exit.

We’re used to competing in a wind in your face business and know that done right – with customers put first – there’s a good business. As usual, we don’t try to be all things to all people and instead pursue under-served niches, so our research is focused only on a sub-segment of financials – exchanges, where we have deep market structure and regulatory expertise that offers a differentiated viewpoint – and technology, media and telecom (TMT). And, while we continue to expand there, we’ve also partnered with about a dozen foreign banks and brokers in emerging and frontier markets to provide corporate access, research, blocks and capital markets transactions to under-served US investors. As a boutique, partnering with leaders in these markets has enabled us to punch above our weight on the research front.

Biography: Joe Gawronski is the President and Chief Operating Officer of Rosenblatt Securities. Joe was formerly a securities lawyer with Sullivan & Cromwell, a Vice President in the equities division with Salomon Smith Barney and COO of Linx, a block trading ATS. He received his B.A. in Public and International Affairs at Princeton’s Woodrow Wilson School and his J.D. from Harvard Law School. He is a member of the Advisory Board of the Journal of Trading and a member of the Board of the National Organization of Investment Professionals.

©BestExecution 2017[divider_to_top]

Post-trade : T2S update : Mary Bogan

By

Ian Rycott

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April 22, 2017

THE UPS AND DOWNS OF T2S.

Mary Bogan charts the progress and bumps along the way.

The recent migration of some big hitters in the central securities depository (CSD) world onto its platform, and the fifth and final migration wave scheduled to take place in September, Target2Securities (T2S) will soon account for 90% of settlement of European securities.

However, while some institutions report significant benefits from this costly initiative, there is also palpable disappointment that, nine years after unveiling a vision for a new European settlements landscape, in which a multiplicity of national platforms and post-trade practices would be replaced by a single, low-cost, borderless market with centralised liquidity and collateral pools, meaningful integration in the European clearing and settlement space is still light years away and could even be receding.

A long and winding road

Getting T2S off the ground has been a long and bumpy ride. A voluntary, rather than mandatory European Central Bank (ECB) initiative, securing consensus amongst over 20 CSDs has been one issue. But implementation has also been a challenge.

A higher-than-expected settlement fail rate in the earlier stages of the launch, requiring more fine-tuning and system testing, meant a few CSDs, including Monte Titoli, Clearstream and Euroclear, were forced to postpone their migration dates. With all three now safely onboarded though, and Spain and the Baltics expected to make the September deadline, T2S appears to be nearing the finish line.

“Technically speaking, T2S has been a huge and difficult project,” says Isabelle Olivier, head of clearing and settlement for SWIFT. “It is the first settlement platform to use ISO 20022 to any large extent and has presented major changes for CSDs and the entire community. But I think we can now say we have a pan-European platform for settlement and can expect to see the first benefits emerging soon. With Clearstream on board, we can also expect an increasing number of cross-border transactions and not just the migration of domestic flows.”

Originally designed to bring down the cost of cross-border settlement to domestic levels, the early benefits delivered by T2S are not the ones expected. Liquidity savings, resulting from the ability to use a central single pool of liquidity to settle over multiple markets, have become far more important to players.

“One of the key aspects of T2S is it eliminates an anomaly no other single currency bloc has,” says Swen Werner, regional T2S product and implementation director at State Street. “Up until T2S, settlement liquidity in euro central bank money was not freely usable for cross border settlement. But now you can buy in Germany and sell in Italy and the settlement liquidity you need to provide is a net figure. This is something that makes a big difference particularly to sellside institutions where intraday credit extension is key to their business model.”

Liquidity savings have also benefitted EuroCCP, currently the only equities clearer with an operational strategy to connect directly to T2S, thanks to auto-partialling, a particular T2S feature. “In markets where T2S has been successful in auto-partialling, we have seen a significant reduction in overnight positions. As we have no securities left in our account overnight, the liquidity required to fund those positions has dropped dramatically,” says chief executive Diana Chan.

Lowering the risk bar

In addition to liquidity savings, players also report T2S has simplified operations and reduced risk. “Instead of connecting to the seven CSDs we deal with, all using different rules and systems, we’ve consolidated them into just one connection to the shared settlement platform. The reduced complexity is a big operational benefit” says Chan.

At State Street, operational benefits are materialising too. “By locking European markets into a single infrastructure it means new service requirements or new regulatory requirements only need to be developed once instead of multiple times,” says Werner.

Meanwhile the rich settlement optimisation functionality of T2S is also reducing risk for State Street clients. “Clients can now take an active view on the settlement process and ensure settlement is completed in an optimal way,” says Werner. “For example, linking functionalities, allowing clients to make the settlement of one trade conditional on the settlement of others, is one way T2S can be used for risk management purposes going forward.”

More widely T2S, in tandem with the new CSD regulations, has been a catalyst for institutions to rethink strategy and market positioning, review their products and service and even embark on new collaborative ventures.

Forming alliances

A key trend has been a move away from the one-stop shop accompanied by an unbundling of services. “T2S has helped split the securities life cycle into pieces,” says Olivier. “Whereas before you could rely on a provider for all services – settlement, corporate actions, asset servicing and collateral management, now it’s common for different providers to offer different bits. So firms may use T2S for settlement and then cherry-pick the best asset servicing provider or collateral management service for their needs. That has stimulated increased innovation, competition and collaboration in the market.”

Announcements of new partnerships, heralding a reshaping of the post-trade space, are coming thick and fast. JP Morgan, for example, recently announced that it is to collaborate with BNP Paribas in an arrangement that enables JP Morgan to manage its own liquidity and settlement on T2S while relying on BNP Paribas for local market asset and tax servicing.

Meanwhile UBS recently became the first firm to use a new platform built by Clearstream and Citi under which UBS gets a single T2S access point and single integrated liquidity and collateral pool, Citi provides clearing settlement and asset servicing while Clearstream supplies the safekeeping, lending and securities financing solutions.

However, while the technical implementation of T2S is considered a success and early benefits look promising, there is still considerable disappointment and frustration that this lengthy and costly project, estimated to have cost the industry over E1 billion in infrastructure alone, has had only a limited impact.

“Coming out of the authorities’ frustration with fragmentation in the custody and settlement market, one of the original aims of T2S was to generate greater cross-border settlement efficiencies and encourage the standardisation and harmonisation of business rules,” says Roger Storm, head of clearing and risk operations at SIX x-clear. “And against this backdrop there is disappointment.

He adds, “As one of the first firms onto the platform, adopting the new ISO 20022 standards and supporting the new harmonised framework, we hoped to have more of a first mover advantage and be part of a faster consolidation and evolution story. This hasn’t played out. So, despite the hurrah that the platform is working as intended, the original aims have yet to materialise.”

Tom Casteleyn, head of product management for custody, cash and FX at BNY Mellon, also wants the project to push harder and focus on realising settlement efficiencies, collateral management opportunities and further standardisation.

“We should not lose sight of the fact that some of the markets that have already converted to T2S have not yet fully conformed to T2S harmonisation standards. Most of these loose ends relate to corporate actions and market claims and need to be tied up to generate some of the project’s expected efficiencies.”

There are also fears that the drive towards greater harmonisation and standardisation of Europe’s fragmented settlement market may even be running out of steam.

While some argue, for example, that national efforts to protect the independence of local CSDs is the prudent defence of a key piece of financial infrastructure, others suspect it is simply governments defending home turf. More worryingly, a new European zeitgeist may even be taking hold.

“One of the phrases that keeps recurring in industry discussions and conferences is, ‘currency protectionism’,” says Storm. “There seems to be a counter move in various markets, including those that have been fighting hard for an open Europe, to bring back clearing and settlement into the domestic space. If it’s a rising sentiment in the market, it’s one that cannot be good for liquidity, harmonisation or the future of pan-European settlement.”

©BestExecution 2017[divider_to_top]

Brexit update : Gill Wadsworth

By

Ian Rycott

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April 22, 2017

A LEAP INTO THE UNKNOWN.

Gill Wadsworth assesses London’s chances of remaining the financial jewel in the European financial services crown.

So, does Brexit really mean Brexit? The deadline, set by Prime Minister Theresa May, for triggering Article 50 has arrived and the UK has pushed off on its two-year walk to the outer reaches of the European Union. Yet even having passed that point of no return, the reality is that very few – if anyone – has a genuine idea what Brexit means.

Hard Brexit – a world in which the UK is entirely severed from its largest trading partner – looks the likely route but protocol stipulates that May must not forge any new relationships before Article 50 is in motion. This creates something of a challenge for the UK in that it has to plan for an entirely new future while having no clue as to what that comprises.

This is problematic for all business sectors but for the nation’s financial institutions the uncertainty of Brexit is particularly severe.

The financial services sector contributes 7% of Britain’s GDP and employs 1.1m according to an EU Brexit Committee report, London is currently ranked as the leading financial services centre in the world. The sector’s regulatory regime is intrinsically linked to its EU partners and in the last few decades financial institutions have committed millions of man hours and billions of pounds harmonising their operations with those on the continent.

Yet, in the space of two years they will be expected to adapt to a political and economic system of which there is no clear picture. Andy Nybo, analyst at capital markets research firm TABB, says: “Preparing for Brexit is like planning a building without knowing what it is supposed to look like.”

And that may be why getting the country’s financial institutions to talk about their plans for Brexit meets with a wall of silence.

Aside from HSBC, which has stated it could move thousands of employees abroad post-Brexit, few other players have been willing to make on the record comments about how they will manage operations once the UK goes solo.

A special case

All this uncertainty and threat of abandonment has not gone unnoticed by the government. A recent report from the EU Brexit Committee published by the House of Lords last December states: “It will be vital, in the interests of all parties, to provide certainty as early as possible in the process. Negotiations on financial services should commence as early as possible after notification under Article 50.”

The EU Committee expresses concern that “in the absence of clarity over the future relationship [with the EU] firms may pre-empt uncertainty by relocating or restructuring, for instance by establishing subsidiaries or transferring staff, even though such changes may ultimately prove to be unnecessary. This would not be in the interests of the industry or the UK”.

However, that still fails to actually provide any clarity and financial services must, like the rest of us, wait and see what happens after March.

Known unknowns

One advantage the financial sector has is its experience in dealing with uncertainty thanks to the chopping and changing to EU financial regulation – such as Solvency II – in recent history. In fact, there is some irony in that in adapting to be part of Europe, UK financial institutions will be better prepared to exit it.

Michael Wainwright, banking and finance partner at law firm Dentons, says: “Financial institutions are used to dealing with uncertainty to some extent. The amount of change in the regulatory system over the last 10 years, and in dealing with the financial crisis, has given them the ability to plan for a range of outcomes and manage difficult situations.”

There are those that think the time that has passed since last June’s referendum vote should have been long enough to start making plans for the plethora of Article 50 outcomes. As Paul Jackson, head of multi-asset research at ETF provider Source, says: “It’s been nine months since the vote so financial businesses should have a clear idea under different scenarios of what they need to do and have contingency plans in place.”

Jackson suggests that since there is unlikely to be any clarity on the UK’s future even after two years, some financial businesses may wish to ‘make concrete’ their early plans and wait for the fine detail to come through later.

This suggestion may seem logical if keeping the business in limbo is too painful to bear, but Nybo warns some of the UK’s financial juggernauts are not easily halted, never mind carrying out a U-turn if the government shifts its Brexit course. “A business needs to be nimble to be able to change a strategy when it doesn’t meet any unexpected changes to the mandates,” he says.

While financial institutions have become old hands at managing regulatory change, it does not mean it is any less of a burden. Post-Brexit businesses will have operations across a range of jurisdictions – domestic, European and global – that need to comply with a range of regulations.

Nybo says: “Institutions will need to take a hard look at the aftermath of Article 50 and plan out operational continuity under the different regulatory frameworks that will exist given that they have EU and non-EU operations.”

A February survey from consultant Duff & Phelps, which covered 200 financial institutions, found nearly two thirds (62%) agree Brexit will have an impact on their compliance arrangements. More than a third (35%) believe Brexit will have a short-term impact while more than a quarter (27%) expect the impact to be felt in over 18 months.

“Uncertainty reigns in most financial compliance departments today.” says Julian Korek, global head of compliance and regulatory consulting at Duff & Phelps. “Although the UK is expected to be in a good position in terms of third country equivalence, firms are looking for further stability from regulators.”

Long live the king

Uncertainty may be the Brexit watchword, but commentators show more confidence about the UK – notably London’s – ability to retain the world’s financial crown. According the EU Committee, New York is the only other real contender for global financial centre while ‘other European cities are far behind’.

The Committee argues that replicating London’s financial ecosystem elsewhere in Europe is ‘unrealistic’ and it hopes that the capital’s dominance in the sector will give the UK leverage in negotiations with the EU.

Andrew Gray, partner at consultant PwC, says the City of London will retain its financial dominance but it is likely some operations will start to shift across the Channel. “London will remain the most significant financial centre within Europe,” he adds “However we will start to see business activity migrating to other locations.”

For example, funds might opt for Dublin or Luxembourg where the legal structures and infrastructure are already in place. Securities and derivatives operations may transfer to Paris which boasts centres of excellence. This disparate kind of relocation of London’s activities across the rest of Europe suggests that while the City’s supremacy may be eroded no other European city will attract enough attention to steal its crown.

Nybo also questions whether Europe could attract the same concentration of financial skillsets, English language speakers and the overall financial infrastructure boasted by the UK. “You can say you are going to move business and operations but if you are a very large financial institution with thousands of employees who live in the UK, are you going uproot them and move them to Germany or France?” he adds. “London has a huge advantage of being home to a very well educated workforce with a deep and broad financial knowledge.”

As with any major change, there will be winners and losers. The fallout from Brexit will be felt long after Article 50 has been triggered and there will likely be both shock and anti-climax along the way. For now, the financial sector can only take each day as it comes.

©BestExecution 2017[divider_to_top]

Equities trading focus : Overview : Francesca Carnevale

By

Ian Rycott

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April 22, 2017

SHOW AND TELL: THE NEW SERVICE PARADIGM.

Francesca Carnevale offers insight into the ever-changing equity trading landscape.

This year could be an important watershed. The three super trends that have brought the trading desk to this point are well scripted: unbundling, regulation and technology. All promise to redefine the business set and all look, this year at least, to be bedding in relatively comfortably.

However, there’s a new round of market talk about paradigm shifts; or at least that 2017 will be a tipping point of some sort.

This time around, say commentators, any paradigm shifts are built on stronger precepts: extensive regulation, enhanced market governance and compliance; improved cross-border access and market harmonisation. This is not even mentioning cheaper and more responsive technology. It has allowed all segments of the securities trading market to work alongside each other on better terms, accommodating macro market shifts with greater ease; all in support of the adoption of best practice. “There are still aftershocks from the financial crisis,” says Stephen Anikewich, head of US compliance for NICE Actimize. “However, the dust is settling, giving both the buyside and the sellside more time to be proactive rather than reactive, particularly with regards to compliance.”

It has repercussions for both the front and the middle office. In this mix, technology is king suggests Andy Nybo, managing director, TABB Group, bringing much needed flexibility and efficiency. “Front end costs are down to a basic level,” says Nybo. “Matching engines, for instance, can be bought off the shelf for a fraction of the price ten years ago. Moreover, for the buyside barriers to entry for new strategies has never been lower. New and smarter strategies can be launched at low cost and quickly.”

In part, because it will be harnessed to analyse masses of data. At one level, is it about “those signals and alerts that can be useful to the trader,” he says. Moreover, it will help optimise the desk. “Right now, traders don’t have good enough systems that could allow them to ignore as much as 90% of the market and focus on the 10% that relies on expert knowledge and understanding,” he adds.

Front to back

It illustrates the growing convergence between the front and back office, as one seamless operation. In this regard, regulation has put the same onus on both the buyside and the sellside trading desk. It is not quite a level playing field though. As Volker Lainer, vice president, product management at enterprise data systems provider GoldenSource explains, the sell side has a wider set of compliance and governance demands upon it, including the rather onerous BCBS 239, which looks to potentially create all kinds of problems for firms even as they struggle to comply with the multi-dimensional MiFID II/MiFIR regulation set; not least around the management of data.

The problem, says Lainer, is that in response, “firms have looked to deploy individual solutions to meet different requirements. Unfortunately, this approach has only created silos of duplicated effort, data spend, infrastructure and governance. And there is a bigger problem around the corner if firms continue down this path. For example, under Basel 239, banks are required to house all their information in one place, with tight governance frameworks wrapped around the data. However, if at the same time, a bank is solving MiFID II issues through a separate data repository, they will be (by definition) moving further away from Basel 239.”

Help may be at hand. Advisory firm Deloitte in a recent paper deepens this discussion by distinguishing what it calls RegTech from FinTech (essentially legacy systems); a necessary bifurcation of definition if firms are to manage their risk exposure effectively (see pages 62 & 67). Deloitte acknowledges that existing (or FinTech) technology has been used to address regulatory requirements for some time, but like Lainer agrees that it has often resulted in siloed solutions.

Duncan Higgins head of electronic products at ITG puts another spin on the technology and regulation axis. He says this particular ticket is written on the tie-up between regulation and the commercial offering of the trading desk. “Regulators hold people to the standards they market to their clients, and technology helps them demonstrate it” he says. “It is the convergence of commercial practice with regulatory compliance. In other words, you must do exactly what you say you do, and show it, because both the client and the regulator can hold you to account. It applies to the buyside and their clients as well as the sellside and their clients. It is all very well that you say you are going to follow your best execution policy for instance; the issue is how do you show that you actually do it.”

Higgins says that it is an important service paradigm and one that distinguishes the prized players from the also-rans. “Regulation ultimately holds people to the standards they set,” he says, “Good technology keeps them there.” Anikewich at NICE Actimize describes this as a “holistic compliance and business approach,” based around intelligent analytics that can identify hidden risks via profiling, trending, behavioural deviation and predictive technology as well as the invariable trading skills on offer.

The sum of all the parts

The result is an enriched trading environment in which, in an ideal world, all bases are covered. Already there are signs of a more benign backdrop. For instance, continues Higgins, in the past, there was a clear and inverse relationship between block trading volume and market volatility. As he tells it: “We had two distinct volatile periods in the last year: Brexit and the election of Donald Trump as US president. On each occasion block trading volumes were higher, activity in our crossing networks was at record levels where both events signalled an interesting shift; illustrating the ability of buyside traders, backed by enhanced datasets and technology, to trade unencumbered, confidently even, in a volatile environment.”

Consultants GreySpark explained in a 2016 report on the evolution of the sellside trading desk, that the sellside’s rationalisation of the trading business would result ultimately in a more local-focused business model, with the buyside outrunning and outgunning it as a more globally-focused operation. That may yet play out; but the anchor of each is technology that allows firms to shift between appropriate business strategies, dependent on market dynamics, budgets, the underlying investment strategies and profits.

The reality is that the trading desk is still defined by infinite variety, based on strategies employed, size and location. As TABB’s Nybo says: no one size fits all. However, the new economics of the trading desk will continue to redefine operations in larger sellside institutions and among the larger buyside operations. Nybo explains the challenge of recent years has been felt most by smaller operations that don’t pay enough revenue to the larger broker-dealers for them to continue supporting the business; or which have had the resources to spend on compliance and technology; with the result that they may exit and divert resources to another trading segment. Equally, opportunities for high volume proprietary trades and even volatility trades have in advanced markets been few and far between as market investor sentiment has generally improved.

The pertinent question then for the larger bank-based broker dealer operations is whether regulation ultimately provides opportunity or continues to generate ties that bind their business model further. Lainer at GoldenSource and Nybo at TABB think the future might be constrained further for the cash equities sellside as it juggles already thin resources and operates in an environment in which volumes at best remain stable. Certainly, the pressure is on as unbundling and evermore exhaustive regulation threads through the sector and continues to impact revenue.

For independent brokers, the procession has in many instances however, been revitalising. Higgins, for his part, says that the shift by the bank cash equities trading desks towards their larger
buyside clients that can provide reliable and substantial flow through their platforms, has opened up new opportunities for sellside firms such as ITG, which now offers a two-handed strategy; the invariable customised service for institutional clients and “for those firms not in a position to undertake significant investment in people and technology and reporting, we can offer all that and offer trading algorithms which all rolls into best execution, enlarging and leveraging business across the value chain.”

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Buyside focus : The TCA challenge : Chris Hall

By

Ian Rycott

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April 22, 2017

THE TCA CHALLENGE.

Chris Hall assesses the changing face of TCA to help buyside firms achieve best execution.

In the ten years since the original MiFID codified the best execution obligations of European Union-based investment firms, the expectations of regulators and investors have steadily risen.

From January 2018, MiFID II and its associated regulation will raise the bar again – not least through its requirement for firms to take all sufficient steps rather than “all reasonable steps to obtain, when executing orders on behalf of clients, the best possible result”, as laid out in the original directive.

“Many of the best execution policies adopted by the buyside under MiFID remain too generic and are seen by some regulators as failing to ensure effective oversight, therefore missing the opportunity to improve client outcomes,” says Rebecca Healey, head of market structure and strategy at Liquidnet .

However, buyside monitoring of execution quality has not stood still, even if some best execution policies have gathered dust. Multiple regulatory initiatives, market structure developments and disruptive technologies – not to mention the occasional scandal – have heaped attention on how investment ideas are implemented by buyside trading desks and how orders are executed by their sellside execution brokers.

“The publication of Michael Lewis’ ‘Flash Boys’, for example, forced many on the buyside to understand market structure more deeply than previously,” says Mark Northwood, principal at Bips Global Limited, formerly global head of equity trading at Fidelity International. “Clients asked a lot more questions about the execution services asset managers were getting from their brokers.”

Meanwhile, regulators also made their feelings known. The Financial Conduct Authority issued a warning shot with its 2014 thematic review on best execution and payment for order flow, followed by a buyside-focused market study published last November. In March, the UK watchdog said it would revisit best execution throughout 2017, warning: “If we find that firms are still not fulfilling their best execution obligations, we will consider appropriate action.”

While the European Securities and Markets Authority is applying the finishing touches to MiFID II, its best execution rules are broadly clear. As well as the change to “all sufficient steps”, the obligation is extended to OTC instruments and there is a greater emphasis on fairness of price. Further, MiFID II mandates use of data from brokers and venues, outlines the clarity and level of detail required in best execution policies and demands procedures to identify and remedy “deficiencies”.

With so much attention on equities best execution since 2007, it’s inevitable that preparations for MiFID II will vary across asset classes. As Paul Collins, head of EMEA trading at Franklin Templeton Investments, notes, “For us, MiFID II represents an evolution in equities, but is more akin to a revolution in fixed income. A number of the projects we’ve implemented in recent years will help us meet our best execution obligations under MiFID II for equities, but we – and the market as a whole – are still in the request for information stage in terms of how we strengthen the monitoring and measurement of fixed-income trading performance: the products are not quite there yet.”

The TCA evolution

Transaction cost analysis (TCA) has had to evolve as scrutiny of outcomes has intensified and market structure has become more complex, but to support best execution it is increasingly used alongside a wider range of inputs within a framework geared toward identifying and addressing the causes of under-performance.

For equities, Franklin Templeton conducts its own ex-post TCA in-house using data collected from brokers and trading venues, but also benchmarks performance via a peer analysis service from a third-party provider. The firm uses services from OTAS Technologies to source real-time inputs that could influence trading strategy selection during the order execution process, which ensures responsiveness to market conditions and militates against outliers. Franklin Templeton is also in the process of implementing a new multi-asset class execution management system (EMS).

In an era of self-directed trading, buyside desks used TCA to demonstrate cost-effective implementation of investment ideas to end-investors. However, post-MiFID fragmentation of liquidity, diversification of trading venue models, and the development of smart order routers posed new questions. TCA can tell the trader how an order performed against pre-trade expectations, but did that router miss out on the best price by accident or design?

“You can only achieve best execution consistently if you have processes in place to ensure you’re choosing the right venue, algorithm, broker etc. That means having access to all the relevant data in a timely manner which will support a robust and multi-faceted approach to measurement,” says Collins.

TCA must lead to meaningful improvements in the trading process, says Northwood, rather than serving just as a monitoring exercise. “To improve, you must experiment. And to experiment, you must have a framework that measures the impact of any changes or tweaks on trading outcomes. You need a robust analytical approach to be able to draw conclusions,” he explains. “But it’s also important to step back and look at the big picture. The value you can add by executing an order on one venue versus another is marginal compared with identifying the most suitable trading strategy for implementing a particular investment idea.”

Collins asserts the central importance of technology in helping the buyside to improve oversight of orders, for example by alerting the trader if an order is straying outside the ‘bell curve’ of acceptable or anticipated limits and providing decision-support information. As buyside firms rely less on their brokers’ sales traders and more on their own selection and monitoring of trading strategies, Collins emphasises the ability of buyside firms to blend quantitative and qualitative analysis in pursuit of best execution. “We feel it is important to have a vendor-neutral trading infrastructure so that we can combine best-of-breed technologies,” he says.

It’s not just larger firms such as Franklin Templeton that have been exploiting greater access to more granular and more immediate data to improve pre- and post-trade analytics. “The buyside has been getting to grips with issues such as onward routing of orders, helped by the ability to track FIX tags 29, 30 and 851. They’re better able to challenge and query their brokers’ decisions and execution performance, especially in liquid stocks,” says Healey, who predicts MiFID II will shed further light. “With so much more data becoming publicly available under RTS 27 and 28, the regulators’ intention is that it will become easier for the buyside to compare the information provided by current execution partners against other brokers and venues to ensure they’re achieving best execution.”

Anish Puaar, market structure analyst, Europe at Rosenblatt Securities, suggests the buyside will have to be selective. “The value to the end-investor of some of the data that exchanges and venues must make available under MiFID II is questionable,” he says. ”The time delay is also an issue as some data could be as much as six months old by the time it is released.”

Shining a brighter light into fixed income

Although the new data requirements vary across venue types, it is expected that MiFID II will help boost price transparency in the OTC markets in the longer term. Nevertheless, differences between equities and fixed-income markets – notably in number of instruments and volume – warrant a different approach to TCA and best execution monitoring.

Platform operator Tradeweb, which provides electronic trading across a wide range of fixed income and derivatives markets, is leveraging proprietary market data that supports its price discovery capabilities to offer a new kind of TCA product. Based on price feeds from 40-plus liquidity providers, Tradeweb supplies live bid-offer composite spreads that can be used by buyside fixed-income traders to compare their own executions to prevailing prices in the market in cash terms, but also analyses orders as a proportion of the bid-offer spread. The firm also offers peer comparison on a quarterly basis.

“Our TCA service started off as a tool to help traders on the desk identify areas for improvement, but with MiFID II’s best execution requirements upcoming, it is increasingly being used by compliance teams, for example to help explain outliers as part of an ex-post process,” says Charlie Campbell-Johnston, head of business operations, International at Tradeweb.

Accepting that there are fewer data points available in the fixed-income market for comparison of execution outcomes versus for equities or FX, Alfred Eskandar, CEO of trading technology vendor Portware, argues that the process of using post-trade data to inform pre-trade decisions is transferable across asset classes. Moreover, he believes it can be more highly automated, with a broader range of data sources feeding into the decision-support process as the use of open APIs increases.

“Ultimately, the aim should be to support the buyside in the development of intelligent workflows,” says Eskandar. Portware’s latest EMS serves as a virtual trading assistant by recommending trading strategies for incoming orders, providing anticipated impact and duration assessments, based on up to 150 pre-trade inputs. With technology guiding and monitoring an ever higher percentage of orders, buyside desks will increasingly trade by exception.

“Some firms are already automating 65-70% of equity trades, which allows them to adopt new skills and contribute to the investment workflow in new ways. For buyside traders, differentiation will come through how they handle unique, complex and difficult trades,” says Eskandar.

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Data management : Governance : Heather McKenzie

By

Ian Rycott

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April 22, 2017

PAINTING THE WHOLE DATA PICTURE.

Heather McKenzie looks at the challenges of managing data across the regulatory landscape.

In less than a year, MiFID II and the Regulation on Markets in Financial Instruments will apply in all European Union member states while the main bulk of the European Market Infrastructure Regulation (EMIR) is under way, with initial margining requirements for non-centrally cleared trades is now applicable for the largest institutions. These regulations are putting data – and its management and governance – front and centre of the operations of buyside and sellside firms.

Cian Ó Braonáin, global lead of Sapient Global Markets’ regulatory reporting practice, says the regulatory pipeline has slowed somewhat recently, and firms now need to ensure that they understand the inner workings of the data process. “The Basel Committee on Banking Supervision’s BCBS 239 Risk Data Aggregation and Reporting Principles set the standard for what regulators will want to see in terms of reporting,” he says. “In our view, data management is everything because regulators require senior management to be accountable and that means knowing the data lineage – how it flows through the organisation and who does what to it.”

This knowledge is applicable to any regulation, he adds. “If a firm has completely accurate and timely information about data that is well documented, this will provide a clear and good structure for data governance, which will make data management easier. If that is in place for MiFID, adding projects or data elements will be quite straightforward for other regulatory requirements.

Lightening the load

Regulatory compliance need not be a burden though. A recent report from analysts Aite Group suggests it can in fact be a benefit as well as a challenge. Data Management Technology Trends: Law and Reorder by senior analyst Virginie O’Shea, says if senior management foster a strategic view of data requirements across regulations, compliance can be a source of funding for the data management function. However, if the executive team at a firm approach compliance as “tactical firefighting”, such projects can divert resources that may otherwise be spent on operational efficiency.

The buyside faces far fewer direct regulatory reporting requirements than does the sellside, so it is no surprise, according to Aite Group, that eight of the respondent asset management firms felt that no specific regulations had directly affected their routine tasks. This does not mean, however, that the post-crisis regulatory (and by extension the capital markets industry) focus on transparency has failed to affect them

More than half of the 24 financial institutions studied in the Aite report had a data governance programme in place, two were establishing such a project (in 2016 when the survey was conducted), and three were considering one. Those that had no plans were smaller asset managers and tier two brokers that were at an earlier stage in implementing securities reference data management programmes of work.

Firms face significant regulatory requirements, says O’Shea, which she characterises as posing an “unsustainable amount of work”. This is best illustrated in the report’s findings on chief data officers (CDOs). Just over one third of the top 100 investment banks and brokerage firms across the world have a CDO, however the average tenure of these executives is two years and three months. A handful of these banks have more than one CDO in place, which reflects the regionally or operationally siloed nature of these firms and the data fiefdoms that have grown up around the various business lines.

On the buyside the figures are even lower, with only 24% of the top 50 asset management firms boasting a CDO. Just under one third of Aite Group interview respondents had a CDO in charge of data management.

The short tenure of CDOs, says O’Shea, is due to the huge amount of work they face and the lack of support in terms of funding and time. “CDOs soon realise they have no money, no power and no one really cares about data within the firm,” she says. “There’s an element of panic among CDOs as they come to realise they cannot hope to deliver given the lack of a technology budget or enough time to develop data management and governance strategies.”

Being proactive

Active data management and quality assurance are required to ensure firms stay clear of regulator-imposed financial penalties and reputational damage caused by inaccurate reporting inputs, says the Aite Group report. Data aggregation, which effective risk management and reporting entails, requires a consistent manner of storing and managing data over time. This is a very difficult task for firms to manage across their entrenched operational silos and functionally specific data fiefdoms.

“The establishment of data governance programmes and the installation of C-level executives in charge of communicating and driving data management strategy are two ways in which both sellside and buyside firms have approached this challenge, but these teams have an incredibly difficult set of goals to achieve,” says the report. “Every data chief has and needs a code – a consistent taxonomy and ontology across silos, or at least a method of cross-referencing the existing data sets.”

Dermot Harriss, senior vice-president at OneMarketData, says many buyside firms are not storing data at all. “The regulations require them to go from zero to up to seven years of storage of transaction data – and that includes all parts of the order cycle,” he says. “Firms need to be able to reconstruct a trade and that requires storing context information which can include non-digital aspects such as telephone calls.”

There is no black box solution that will solve all the problems firms face, Harriss adds. Rather, any approach to data management and governance must be strategic and questions to ask include how should data be stored, how much will that cost, can data storage be outsourced, and how much context information also needs to be saved. “All of the transparency regulations are pushing in the direction of requiring the storage of more detailed information,” he adds.” A solution is required that stores everything once along with a mechanism that enables firms to ask questions of the data – and that anticipates the questions regulators might want answered in the future.”

Some of the large sellside firms are building central repositories and Harriss believes the initial focus for firms should be on storage. “Many firms are creating data lakes because they aren’t sure what format to use but realise they need to store it and will try to figure out the best approach later. More sophisticated firms are looking at time series databases, which use time stamps that will help when reconstructing trades,” he adds.

Harriss believes firms must focus on understanding the structure of data from the very beginning. “Regulatory compliance can be a revenue opportunity. As soon as these transparency regulations really take hold customers can evaluate a firm’s business more accurately. There will be standard metrics and clients can quantify the performance of firms. There are ways firms can use regulatory metrics to gain a competitive edge.”

Peter Moss, chief executive of SmartStream’s Reference Data Utility also stresses there should be a focus on getting data right at the very beginning of any data management project. Good quality securities master data will be “absolutely critical” for meeting regulators’ requirements, he adds. “We think having a good quality source of reference data is a critical part of getting data governance right,” he says. “Increasingly the financial industry is recognising the value of the utility approach to some complex issues such as reference data.”

FinTech : RegTech : Dan Barnes

By

Ian Rycott

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April 22, 2017

THE RACE IS ON.

The pressure to hit deadlines is enabling regtech firms to grow, but most importantly their clients are getting wiser and more agile. Dan Barnes assesses the scene.

The rise of independent financial technology start-ups (fintechs) has been phenomenal. In its 2016 report ‘Fintech and the evolving landscape: landing points for the industry’, consultancy Accenture found that investment had grown by 75% to $22.3 bn over the previous year, outpacing the 29% growth found in venture investment as a whole over that period. In the capital markets space, trading, risk & regulation and asset management are each notching up a compound annual growth rate of over 30% investment.

Expectations are highest for regulatory technology (regtech) firms, based on the pressure that financial firms are under to comprehend and comply with an enormous volume of new rules as well as different and changing deadlines. The opportunity regtech businesses typically address is not purely based on new technology; it can also be a new approach to dealing with problems that regulation throws up both for financial institutions and regulators.

“I am not sure I have seen a lot of genuinely new technologies being applied to MiFID or off the back of MiFID specifically,” said Rob Howes, co-Founder and chief operating officer at pre-trade data provider Algomi, speaking to Best Execution at the European Market Liquidity Conference on 27 February 2017. “I think there are some opportunities, but I would say I have not really seen anyone doing anything that is genuinely I would say emerging technology.”

As an example of an opportunity that needs addressing, he cited the requirement to capture pre-trade information in markets which are largely illiquid and voice traded.

“If the first time a sellside firm receives an enquiry on a particular International Securities Identification Number (ISIN) is over the phone, why can’t we have chat that picks that up, time stamps it, recognises that the enquiry has happened, then runs it into the voice infrastructure that is prevalent at most large financial institutions?” he asks. “I have not seen anyone doing that and it is genuinely an emerging technology.”

MiFID II is a good example of a modern regulatory challenge; like Basel III and the Dodd Frank Act it captures a broad range of activity. It allows firms to make choices about how their business should be categorised and it sets out quantitative parameters that firms need to run in order to work out where or how their business will change. It will transform capital markets in Europe and as a knock-on effect hit firms trading into Europe, affect global capital markets more broadly.

It is the scale and complexity of the rules that create opportunities for businesses to step in with point solutions to tackle specific issues. Joshua Satten, at Sapient Global Markets says, “Often a company is looking to get enhanced supervisory capacity for compliance; they want a better understanding overall of where they could be with regard to the rules, and on the flip side they want enhanced regulatory compliance, ensuring that they are submitting all their reports and doing all the reconciliations.”

In the detail

One major challenge under MiFID is the unbundling of research and commission payments. For asset managers getting to grips with this fundamental reorganisation of how they pay for services is hard. For brokers and research providers who have to price a service that has largely been implicitly paid for via execution, the challenge is an existential one.

Vicky Sanders, co-founder at RSRCHXchange, a marketplace for institutional research, says, “I think regtech is often an application more than it is about it inventing something new.”

She observes that research aggregation has been conducted for decades, but where the major terminal businesses within the sector have aggregated research, the legacy technology that they were built upon makes it then difficult for them to adapt.

“And they have yet to adapt,” she says. “It took us about a year to build our platform which is called RSRCHX, and we took inspiration from things that we see elsewhere, technologies that are pretty commonplace in other areas yet have never been applied to the research space before. A lot of features we have added in to RSRCHX, most people outside of the world of fund management or heads of research would have thought were always there, because they just exist in everything else that we do as individuals.”

Rather than developing new technology firms like this are applying tried and tested technology to a space in which it has not existed before. The obstacles are not only for the firms seeking to comply with rules, but also for the regulators wanting to enforce rules. In the US, the Treasuries market is being brought under control after a chaotic flash event revealed a total lack of regulatory oversight. If existing plans are carried through under the new administration, US treasuries trades will be reported to regulators, with further plans to make them public.

“That is given any transaction globally we can actually classify who has to report that transaction under what regulatory regime globally, because any filled transaction could be scoped in by multiple regimes,” he says. “And that’s a fairly common occurrence these days.”

Getting ahead

The level of introspection and target hitting to which firms are subject as a result of regulation is not an end in itself. One of the positives that has come out of all this legislative change has been the opportunity for banks to gain more visibility over their own internal workings and data.

“They are using this as an opportunity to clean their data and streamline their processes,” says Lloyd Altman, partner at trade and transaction reporting specialist, RegTek Solutions. “Without the regulatory stick they might put that as a secondary issue. Now they have to be able to say, here is evidence that we are complying, here is our data it’s all clean, here are the processes that we are following, here is the architecture, here is the programme. That way if they are being audited, and some clients of ours have actually brought us in because they are being audited and they need to show that they are putting controls in place that they didn’t have before, they can demonstrate compliance.”

There is also a sense of urgency, which is willing along the growth potential of regtech firms, even where a firm may need to hinge critical business risk upon a relatively new or small service provider.

“Asset managers and global banks are getting used to working with start-ups,” says Sanders. “There is a willingness to outsource, with a race to a deadline that will now suddenly appear, there is a cost angle because regulation just costs, fact. And then there is also the security and data protection; they need all the elements they would expect if they built a service in-house. We need to be able to provide for them as well.”

Equities trading focus : Trade transparency : Per Lovén

By

Ian Rycott

-

April 22, 2017

IN EQUITIES AND BEYOND.

Per Lovén, Commercial Director at TRADEcho outlines the impact of MiFID II on trade transparency, and explains how this will differ between equities and other asset classes.

MiFID II brings rather dramatic change to the trade transparency space. How will this affect the market and impact various market participants?

There are fundamental changes in terms of trade transparency between MiFID as it stands today and what will be required under MiFID II. For MiFID II, the requirements change from covering only equities and equity-related instruments, to a much broader universe, including fixed income and derivatives. The instrument universe affected will go from some 7,000 instruments to somewhere between 15 and 20 million instruments. It’s hard to say at this point because we don’t know exactly in terms of packaged deals and derivatives contracts.

Additionally, we will see a fundamental change in pre-trade transparency obligations under MiFID II with the Systematic Internaliser (SI) regime. Banks and brokers who today run broker crossing networks (BCNs) will, under MiFID II, to a large extent operate as SIs, which involves pre-quoting requirements.

Furthermore, the hierarchy around who has the reporting obligation in any given scenario is defined to a detailed extent under MiFID II. This is very different from the reporting obligations under MiFID, where there are no clear rules, resulting in over reporting and distortion of the view of real liquidity in the market. Under MiFID II, if a trade is executed on a venue (Regulated Market or MTF), the venue will report the trade to the market. If the trade is executed against a SI, then the SI has the reporting obligation. In other scenarios, it’s the seller’s obligation to report the trade.

Ultimately, the main changes can be outlined as:

Extension of instruments covered, from equity and equity-like only, to also include fixed income and derivatives.
Enhanced use of the Systematic Internaliser regime.
Defined rules hierarchy around who has the reporting obligation.

As a result of this, trade reporting changes from being purely a sellside brokerage function, to something that will impact all market participants.

MiFID was very much the first step towards trade transparency in the market, and led to the creation of Boat Services (at the time a consortium of 9 investment banks). Boat has been servicing the market as a leading trade data monitor (TDM) ever since, and has a flawless track record in this space.

Boat has certainly evolved since those early days, and through the partnership with the London Stock Exchange, Boat has seen the creation of TRADEcho. TRADEcho is the approved publication arrangement (APA) for the future. TRADEcho will offer all relevant services for trade transparency under MiFID II, covering all asset classes and every instrument in terms of pre- and post-trade transparency in Europe.

Are there differences as to how certain instruments or asset classes are treated under MiFID II?

Under MiFID II the rules around trade reporting time limits are changing, where trades must be reported within 1 minute for equities and 15 minutes for other asset classes. Furthermore, there are differences around deferrals as well as if an instrument is deemed liquid or illiquid.

The main change is probably more around the practical impact on different asset classes. These changes will affect fixed income market participants in a profound way. It will offer more transparency to the fixed income market, and will change how people understand the market and how one can measure best execution. Ultimately, this will impact how trading decisions are made. In general, with more data and transparency, market participants can get a better idea of the implicit cost of a trade.

Fixed income is still very much an OTC market, quote-driven rather than order-driven, and less electronic than say equities. Market participants have a lot of work to do, both on the buy- and sellside, to ensure they capture all trades in an electronic environment and record the time stamp of the execution, which will determine when this needs to be reported. This market is going through a profound transformation, driven by electronification, data and transparency.

What can firms do to help ease the burden of MiFID II trade transparency requirements for themselves and their clients?

With the increasing transparency obligations under MiFID II it is important that firms have a solution that they are confident will report their trades accurately and on time.

TRADEcho combines 10 years of trade reporting experience from Boat Services and the London Stock Exchange, resulting in unparalleled expertise in transparency services. We have an unmatched understanding of transparency regulation, its impact, and how to tailor reporting solutions for all market participants.

In terms of pre-trade transparency, we offer a solution for Systematic Internalisers, both around determination and quoting. On the post-trade side, we offer a market leading APA solution for trade publication. Here, we will cover every instrument that is captured by trade transparency regulation in Europe, hence the natural choice for any trading across asset classes. We also facilitate an integrated assisted reporting solution that brokers can offer their clients, potentially essential for sales desks (again, unique in the sense it covers all asset classes).

The most interesting thing we offer is the Smart Report Router (SRR), which solves the real issue in the market. TRADEcho’s SRR helps firms determine if a trade has to be reported, and when regulatory criteria is met, publishes the trade to an APA of choice. The SRR works by measuring all trades against relevant legislation and then defines the reporting obligation for the firm. This is a unique value we provide to the market by solving a problem that many firms are struggling with.

Viewpoint : The impact of technology : Monica Cammarano and Umberto Menconi

By

Ian Rycott

-

April 22, 2017

BANKS, BUSINESS MODELS, INNOVATION AND STRATEGY.

Wasn’t innovation already here? Yes, but this time it’s different, as Banca IMI’s Monica Cammarano and Umberto Menconi explain.

Technological advances are reshaping the traditional ways and processes of financial institutions and the retail sector is no exception. Today, more than ever, banks must effectively reposition their own services to become a reference point for the customer.

However, organisations have their own set of challenges and while technology opens new business opportunities, it can also pose threats in terms of cyber-security and time-to-market ability. Moreover, financial markets are exposed to other disruptive forces such as increased regulation, market fragmentation, IT risks, risks, increasing costs and the rise of new rivals.

Clients are also becoming more demanding and expecting a wider range of products and services. In order to meet these hurdles in a cost effective manner, banks are turning to electronification to become more competitive, more efficient and faster to market. Pressure for this to happen now in financial services is in part being driven by the enhanced expectations that clients derive from their daily activities outside the financial services industry.

Electronification is part of the digital trend that is profoundly changing business in a world where every touchpoint is important in providing clients with the best-in-class experience. However, to truly harness this potential, it is important that the technology deployed and the bank’s strategy are aligned in order to meet client expectations.

While predicting the future is always difficult, keeping an eye on the development of, and the investment in fintech, will give an indication of the direction of travel. It has been a steady upward climb starting with private investments of $1.8bn in fintech companies in 2010 and rising to $2.1bn in 2011, $2.4bn in 2012 and $4bn in 2013. The pace then accelerated, tripling to $12bn in 2014 and $19bn in 2015. Overall, the market has increased tenfold in just five years.

Breaking it down, 73% of the investments were directed to SMEs (small and medium-sized enterprises) and retail finance including account holders and clients looking for loans. These two sectors represent the largest chunk at 46% of the profits, followed by corporate banking at 35% and investment banking at 19%.

A large chunk of the money is being directed towards a multi-channel offering to meet the varying needs of the client. However, the advent and growth of digital banking will not be a substitute for the network of bank branches. On the contrary, the new technology will enrich the “customer experience” for the growing number of sophisticated banking clients.

As with many new changes, banks will not only have to dig deep into their coffers but also overcome cultural obstacles. History is littered with examples of companies that were slow to embrace change – much to their detriment. It requires buy-in from the top of the organisation to the bottom, along with the managers who can implement and integrate the new technology and services.

Financial intermediaries should be able to create engagement processes established on the concept of “Right Time Marketing”. In order to reshape its own business model, banks in practice have to find the correct equilibrium between capital expenditure (CAPEX) and operational expenditure (OPEX).

However, the most successful banks will be those that can be flexible and successfully use new technologies to automate the existing processes, create new products, adapt their compliance framework to the new regulatory requirements, revolutionise the customer experience and turn upside down the key components of the value chain.

Equally as important, financial institutions will have to deploy significant resources to improve the efficiency of their internal operating processes. This is because they will play an essential role in the management of big data and the successful enrichment of their product offerings. Once this degree of efficiency is reached, the bank will become a fully-fledged service hub for their customers.

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Asking all the right questions.

Eric Böss, Global Head of Trading at Allianz Global Investors, speaks to Best Execution about the impact of MiFID II on the buyside.

STEADY AS SHE GOES?

Joe Gawronski, President and Chief Operating Officer of Rosenblatt Securities talks to Best Execution’s Lynn Strongin Dodds about the path of regulatory change, both in the US and Europe, and whether there is a risk of divergence.

THE UPS AND DOWNS OF T2S.

Mary Bogan charts the progress and bumps along the way.

A LEAP INTO THE UNKNOWN.

Gill Wadsworth assesses London’s chances of remaining the financial jewel in the European financial services crown.

SHOW AND TELL: THE NEW SERVICE PARADIGM.

Francesca Carnevale offers insight into the ever-changing equity trading landscape.

THE TCA CHALLENGE.

Chris Hall assesses the changing face of TCA to help buyside firms achieve best execution.

PAINTING THE WHOLE DATA PICTURE.

Heather McKenzie looks at the challenges of managing data across the regulatory landscape.

THE RACE IS ON.

The pressure to hit deadlines is enabling regtech firms to grow, but most importantly their clients are getting wiser and more agile. Dan Barnes assesses the scene.

IN EQUITIES AND BEYOND.

Per Lovén, Commercial Director at TRADEcho outlines the impact of MiFID II on trade transparency, and explains how this will differ between equities and other asset classes.

BANKS, BUSINESS MODELS, INNOVATION AND STRATEGY.

Wasn’t innovation already here? Yes, but this time it’s different, as Banca IMI’s Monica Cammarano and Umberto Menconi explain.

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