With Christian Schoeppe, Head of FX Trading EMEA, Trading and Product Development, Deutsche Asset Management
Deutsche Asset Management’s global ‘hub and spoke’ model began development three years ago with the introduction of a trading desk in New York for the Americas. Last year a trading desk was added in the UK as an addition to the central Frankfurt hub, and this year a further desk was opened in Hong Kong. There are advantages to this ‘follow the sun’ trading approach. Prior to this, in Frankfurt we had to operate very early and very late hours which, from a coverage perspective and an investment technology angle, were difficult to manage through a centralised hub 24/5. In addition, the relationship between our traders and PMs as well as our brokers, was not as intense as it might have been with a live trading desk on the investment platform in the regions.
Regarding FX as an asset class in its own right has remained a clear industry trend after 2008 as well when we started working on a new execution concept by analysing the internal and external flows for the product across our various departments. Our goal was to centralise flows at a dedicated execution centre of excellence. Secondly we always wanted to leverage the rise of electronic trading in the industry enabling investors to access markets that were once the preserve of a few major banks. For FX, we applied an efficient approach to utilise and extract the most benefit from best-in-class execution systems, especially for the very liquid currencies inside the G10. This is also true for any additional ones with similar liquidity patterns outside the G10 such as Mexico e.g. which are traded around the clock. Our aim is to execute the majority of such trades, including up to bigger bulk ticket sizes mostly using via our automated tools built in Frankfurt instead of additionally transferring trades to the New York and Hong Kong desks. As a result, more than 85% of global foreign exchange business is executed through Frankfurt. So the focus of the regional trading desks in America and Asia is, first to securities but also to provide live execution, which is not covered by European working hours. By leveraging local expertise for our global PM platform, funds receive better access to liquidity, better market colour and trade idea generation.
Global Roll-out
Since initiation of our Frankfurt FX desk our execution volume has surged. It is now possible to absorb significantly increased ticket numbers, as recently experienced on a single Brexit event, via our continuously enhanced execution technology without adding additional trader headcount. The biggest improvement for the Deutsche Asset Management investment platform has been the global installation of a new order management system (OMS) which has enabled us to operate trading, settlement, and portfolio management functions on one unified data platform without any of the interface problems we used to experience when those departments all operated on different systems.
Now there is an OMS for the whole global platform of Deutsche Asset Management and there has been significant improvement, particularly in the handling of OTC products. On top of the OMS, there are different execution management systems which are applied. Deutsche Asset Management’s central trading hub in Frankfurt has always aimed to trade in as automated a fashion as possible. However, the majority of FX trading volumes in Europe are still executed with a manual touch of experienced traders’ expertise through competitive RFQ, RFS or via direct broker lines. Nevertheless almost 30-40% of the order business is already executed in an automated manner without human trader intervention. For such small- and mid-size ticket business we utilise traditional hourly fixings, such as the WMR, in addition to automated RFQ channels.
The fixings business has been in the spotlight over the past two years and new regulation has been successfully introduced to cover this area. As a result, the industry has experienced a stabilisation of the fixing offerings through new FSB regulation. If we examine volatility and liquidity profiles for those hourly fixings, there used to be unusual spikes so we decided to avoid certain fixings with irregular volatility profiles prior to the FSB modernisation. Since the new regulation, there have been almost no abnormal volatility patterns and the impression in major parts of the FX industry is that the new regulation has taken this product out of the spotlight and stabilised it with very solid results for our benchmark investors in need of a low-cost point-in-time execution.
Regulation and TCA Data
As trading in FX becomes more automated and fragmented across brokers and venues, the need for transactional data analysis is increasingly being fuelled by regulation and market structure complexity. Today, at Deutsche Asset Management our execution and brokerage governance process is extremely rigourous. Our governance committee meets monthly, it is made up of all member departments of our investment and support functions including portfolio management, risk, settlement, and compliance. They work to verify that the firm’s fiduciary policies and procedures framework are addressed appropriately whilst trying to achieve the best trading results for our investors.
Transaction cost analysis (TCA) needs to be seen within this context of optimal execution for the various investor groups across our main client pillars in Active, Passive, and Alternatives investment management. In addition to our internal TCA we constantly evaluate what independent TCA providers can do to support our pre- and post-trade analyses. Conceptually we try to approach TCA from two angles; in addition to measuring against indicative reference prices provided by Bloomberg and Reuters as a standard, we additionally modernised the framework for executable reference prices for the growing number of trades in competition. In this context we refer to performance analytics rather than TCA which implies a ‘cost’ and does not suggest any savings for buy-side traders. Everyone in the industry knows that there’s still much work to be done but we feel we are on the right path: striving for more transparency which will result in better conduct. Regulation is important because it ensures that all industry participants are in-line with certain fundamental standards.
When I started at Deutsche back in 2000, there was already a conduct framework of policies and procedures that we were required to follow on the sell-side – as well as on the buy-side where I moved in 2004. Such a framework was not in place industry-wide however, and a new Global Code of Conduct for the FX industry was just released in its first version by the BIS, supported by the major central bank’s FX working groups, covering both the buy- and the sell-side including best practices. Major input for the GCC was delivered through the ECB’s FX contact group here in Frankfurt where Deutsche Asset Management is a member. A significant code work exercise has been undertaken with a well acclaimed first result showing how serious the FX industry has been undertaken this opportunity to improve and change for the better.
Within the asset management industry, there are also some considerable changes taking place around the use of data. Under the new regulations the buy-side will be required to ensure that this data is available to clients as well. At Deutsche Asset Management, the data has always been available because we have always used it to see where we are profitable, where we can automate further, or where it makes more sense in an illiquid emerging market asset class to have an experienced trader executing our trade. That is why we try to attach experience and skilled traders to larger and more complex transactions on the one hand, and automate trades where there doesn’t need to be a human touch on the other.
Building on the model
Moving forward, the approach Deutsche Asset Management will continue to take in FX is to look at the different liquidity profiles of the underlying pairs and analyse how to handle each of them in the most efficient way. Then it is important to select the right business partners to support our efficiency in executing the bucket. We have seen various providers exit certain areas in the past few years because they were not relevant to their business model anymore. For example, instead of attracting massive volume, some banks only want to support the tier 1 real or fast money clients on their platforms. MiFID gave us a duty to change the picture to achieve the best execution framework of a competitive broker list and not only use internalised channels even through custodians. We now have a very competitive broker list where 90% of our FX business in Frankfurt is executed with the top 20 names on the Street. This is a very efficient way of using the top providers as the average execution cost is now only a third of what it used to before the initiation of our desk. In spite of liquidity fragmentation we are currently still in an environment where we can benefit from technology enhancements and the narrowing of spreads achieved through the major industry trend of digitalisation.
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Building A Global FX Hub
Buyer’s Guide: Infrastructure Cloud Providers for Financial Services
Piloting Next Generation Cloud Services
This buyer’s guide report outlines the key aspects of infrastructure-as-service (IaaS) cloud offerings that must be assessed by financial institutions before selecting a cloud provider, and it presents an assessment of the next generation IaaS offerings of four market leaders – Amazon Web Services, Google Cloud, Microsoft Azure and Oracle Cloud – as well as the open source initiative, OpenStack.
Achieving Vendor-agnostic Market Data APIs
Utilising an Open Source Abstraction Layer
This report examines the market data end-user API abstraction layer that financial institutions can utilise to overcome proprietary market data vendor technologies. By transforming the market data architecture, institutions can increase the cost efficiency and the technological and business flexibility of systems to help tackle the rising costs of market data.
Best Practices in Buyside Regulation Implementation
Constructing a Successful Compliance Roadmap
This report explores the ways in which large EU- and UK-based buyside firms can run and execute change management programmes associated with the implementation of and compliance with a spate of incoming regulations.
Buyer’s Guide: Risk Management Solutions
Vendor Responses to Regulations and a Changing Market Landscape
The risk management system space is undergoing significant changes as a consequence of regulations, the growing importance of data within institutions and the emergence of digital risk. The extent of the changes to the risk management space will continue to be unveiled over the coming three-to-five years with technology vendors, investment managers and banks adapting to the emerging risk management landscape.
Best Practices in Pre-Trade Risk Controls 2016: Conducting Risk Control Assessments of Electronic Execution Systems
Best Practices in Pre-Trade Risk Controls 2016: Conducting Risk Control Assessments of Electronic Execution Systems
This report provides an update to GreySpark Partners’ Best Practices in Pre-Trade Risk Controls 2014 report, which assessed the ongoing challenges that increasingly complex electronic execution systems posed to healthy functioning of capital markets. The 2014 report provided a series of best practices for both sellside capital markets agency and principal flow businesses to utilise when designing and implementing pre-trade risk controls.
https://research.greyspark.com/2016/best-practices-in-pre-trade-risk-controls-2016/
New York calling : Lynn Strongin Dodds
NEW YORK CALLING.
NEW YORK CALLING.Prime Minister Theresa May’s seemingly hard Brexit makes for uncomfortable reading for Britain’s financial services industry. The worst case scenario is that the sector could lose up to £38bn in revenue plus 75,000 jobs may disappear if firms do not have access to the European Unions’ single market, according to a recent report from Oliver Wyman, on behalf of the main industry group The CityUK.
Although nothing is written in stone, retail banks, asset managers, insurers and investment banks, were surprised by the strident tone adopted by May at the recent Tory conference. She not only seemed to rule out prioritising protection of the banks in Brexit talks but dismissed their key business request for an interim deal to continue to provide services across the EU beyond the two year negotiation period.
Bank representatives are not giving up hope though and are continuing to lobby May and EU leaders. If May ignores their pleas, it may be at her government’s peril as there may be no other contender to fill the gaping hole the industry would leave if business migrates to other financial centres.
This is because half of the UK’s trade surplus in financial services — worth some £18.5bn in 2014 — is derived from exports to the EU. London is the dominating force, accounting for a hefty 78% of the EU’s foreign exchange business and 74% of over-the-counter interest rate derivatives. This is not even mentioning the 59% of international insurance premiums that are written in London or the 85% of the region’s hedge funds and 64% of private equity assets managed in the city.
The bottom line as the Oliver Wyman report shows, is a total contribution of between £190bn and £205bn of revenue annually and an employer of around 1.1m people. This contingency also pays a hefty tax bill of between £60bn and £67bn pounds; £10bn of which could be lost if the country breaks all ties.
As mentioned, leaving the single market would trigger the worst case scenario – the £38bn and 70,000 plus job losses – but a softer stance could see just 4,000 jobs exit, £2bn of lost revenue and a drop of £500m in tax. However, that would mean the UK sitting outside the European Economic Area but maintaining ongoing access to the single market on broadly similar terms to now.
Despite the rhetoric it is still difficult to predict what actually will happen. Banks and asset managers are already murmuring that they will move large parts of their operations that relate to European sales to alternative EU bases. Russia’s VTB Bank is the first big lender to publicly say it will move its European headquarters out of the UK but US heavy-hitters such as Goldman Sachs, Morgan Stanley and BlackRock have also intimidated they could head for the door.
Not surprisingly, Dublin, Paris, Frankfurt and Luxembourg are all rubbing their hands in anticipation. However, they may not be the first port of call if Xavier Rolet, chief executive of the LSE Group, is right. He recently commented that New York would be the winner because it was the only other global financial centre that could centrally and efficiently clear all 17 major currencies.
Moreover, it has the infrastructure, skill set and willingness to work around the clock. There is a reason why it earned the nickname – the city that never sleeps.
Lynn Strongin Dodds
Managing Editor, Best Execution
©BestExecution 2016
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The Art And Science Of Trading
By Jacqueline Loh, Former Head of Asia Trading, Schroders
Technology has completely changed the way traders go about their jobs. The modern trader is tech savvy and able to handle the various types of platforms and trading venues now present on his/her desk. Trading desks are much quieter places; phones hardly ring while communication with brokers takes place on electronic chat. Matches for the other side of the trade are done electronically. When they are found (often heralded by a pop up alert on one’s computer) negotiations too take place electronically. As trades are electronically sent from the traders’ order management systems (OMSs) and execution management systems (EMSs) to the executing venues and back again, errors are minimised, leaving the trader to focus on the task of trading. The ability of trading systems to electronically capture timestamps and live prices has spawned a whole new world- the science of trading performance measurement.
As trading algorithms continue to improve, more of trading has become automated. The more liquid names eg, where order sizes are less than 5% median daily volume(MDV) can be traded by algorithms in most markets. Orders which are half a day’s volume or more will require trading by hand and looking for blocks. For most markets in Asia, trading in small cap stocks will still require much manual intervention. In Japan, where high trading frequency (HFT) prevalence is an added challenge, it is even more important to stay in the market for only short periods of time.
Instinct vs technology
Electronic venues continue to evolve, making it easier to look for matches even in the less liquid names. Although pre-trade analysis might be of some help in valuing a block of stock of several days’ volume, pricing is still subjective and requires exercise of a trader’s judgement. The traders’ broker relationships also add value here, in sourcing and placing blocks of stock with information disseminated to the right people and controlled impact costs.
Bayes Theorem, pattern recognition and machine learning will drive the new generation of trading algorithms. However, I think block pricing under different market conditions will still require some human skill and judgment.
Trading by instinct is good and will always remain so. However, the use of transactions cost analysis (TCA) can further refine that skill by identifying the situations in which that has worked well and situations where it hasn’t. As human beings, it is natural for us to keep remembering our successes, but not so much our failures. We will always tend to remember the time we beat our benchmark by 100 bps but perhaps not the 10 times we underperformed by 10 bps.
The ultimate end game
It’s all about getting better. The end game must be about increasing trading quality for the benefit of clients. The art of trading is in the trading of small cap and illiquid stocks, the science is in the use of quantitative forms of performance measurement to keep moving forward. Performance measurement is always an emotive issue. Yet, performance measurement is a very necessary evolution of trading processes. It is an admission that traders are not infallible and we are always looking for ways to improve. The objective of using TCA in any review is never to devalue the broker relationship but to numerically record the successes made possible by that relationship. Equally, it gives the buy-side trader an insight into the successes (or not) of those strategies employed, and the trader’s inherent strengths and weaknesses.
The future will see the trader making increasing use of technology to achieve scalability and higher execution quality. Scalability will be achieved as EMSs become more advanced, allowing enhanced real time monitoring of larger portfolios of stocks over wider parameters. Development of advanced algorithm portals will offer insights into how algorithms interact with the market. As the science of trading performance measurement grows in increasing sophistication, frameworks for comparing algorithms will be developed, identifying best in class algorithms, as well as the trading environments they work best in. Machine learning and artificial intelligence platforms will also allow more different variables to be taken into account in algorithm design. The modern trader’s skill will lie in adapting his/her strategies accordingly to achieve optimal results in a circle of continual improvement.
When science meets art in the guise of the modern trader, the benefits are higher standards in the industry and satisfaction of a job well done for the trader.
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Buyside profile : Mike Bellaro : Deutsche Asset Management
TAKING THE BUYSIDE BULL BY THE HORNS.
Mike Bellaro*, global head of equity trading, explains why Deutsche Asset Management has taken a proactive role in building out its electronic and block trade offering.
Mike Bellaro*, global head of equity trading, explains why Deutsche Asset Management has taken a proactive role in building out its electronic and block trade offering.What impact do you think MiFID II and unbundling will have on the industry?
I think it will usher in a new era and will be the equivalent to the Big Bang in 1986. It will reshape the equity landscape especially on the execution front. At the moment, there has been a lot of focus on unbundling and research in terms of the product, how it will be valued and the pricing, but there has been little thought about the profound changes this will have on the execution side. I expect this to become a greater focus for the buyside trader because it will no longer be combined with research in a bundled commission payment and they will be more accountable.
What about the sellside?
It will be a complicated exercise. The larger firms will have hard choices because they will no longer be able to benefit from cross subsidisation and will have to decide which segments of the business they want to stay in. It will also be challenging for the smaller to medium sized regional firms, and we have already seen some withdraw and disengage from pockets of execution. However, there will also be new kids on the block and overall those that continue investing in R&D as well as innovation in electronic trading will be able to continue to operate in this space.
We have taken a fairly aggressive view and have cut our electronic trading partners from 17 to six core brokers. We mainly did this from a governance standpoint because it is impossible to understand what 17 brokers are doing with your order flow and how their dark pools operate.
How do you envision the buyside trading desk of the future?
It is all about scalability and using technology to sharpen your competitive advantage. Our aim is to build a sellside infrastructure within the buyside. We have been investing significantly in technology to build a platform that uses smart order routing to optimise efficiency, minimise slippage and preserve alpha for our end investors. However, it’s not just about the technology but also hiring traders from the sellside who understand the investment process.
I read that you place great emphasis on automation and that the majority of your order flow was executed electronically – much of it through customised algos with no human intervention. What are the reasons behind this?
I have a good problem in that volume has exploded on the platform – we have four times the volume that we had three years ago. However, one of the challenges is to support the growth without taking on additional headcount. The only way to do this is through automation. We want to automate as much and as intelligently as we can. What this means is that the majority of flow can be traded electronically while the alpha-sensitive trades can be directed to the hands of the most capable traders.
It is not just execution but we are also automating the broker selection process. We are adopting a multi-faceted approach and look at historical best execution, real-time data, and block trading as well as other relevant data driven criteria. Based on the data, the trader will be given the three best brokers to choose from. Also, automation can help inform the trader which algorithmic strategy would work best given the type of order. This would be based on analysis of previous best results. However the final decision would still rest with a human, at least for the more important trades.
You have said in the past that block trading has become increasingly important. What are the drivers?
There are definitely the winds of change, and over the past three years we have put a strong emphasis on building a block-trading desk. This is mission critical because although most buyside firms are strong in electronic trading, block-trading seems to be a lost art. One reason is that over the past 15 years the common practice is to take large orders and break them down into tiny pieces to avoid leakages and minimise impact using dark pools and broker-dealer algos. However, this is set to change under MiFID II and the caps on dark pools. This will change the psychology of the buyside trader and we believe we will see a return to block trading.
When looking at post-trade analytics, I have seen a significant improvement in performance which has all been led by our block trading. Our electronic trading performance is upward now on one to five basis points, and block trading accounts for the entire alpha preservation.
Touching on the role of the sales trader in more detail, how have things changed and what is their value-add today?
In my mind, in order to have a trading desk that is best in class, you need sales traders that are embedded in the investment process. This not only involves handling the more complicated trades but also idea generation, market intelligence and offering advice on portfolio construction and implementation. In other words, it is a partnership whereby they deliver information that the traders care about and is aligned with the fund managers’ objectives.
I know you are one of the founding members of Plato but can you tell me about the initiative and in general what role you think utilities play?
Plato Partnership Limited, is a not for profit industry group representing the buy- and sellside and has come together with a vision of improving market structure in Europe. In the first of many future initiatives, Plato has partnered with Turquoise (see https://globaltrading-lscura.dev.securedatatransit.com/announcement-turquoise-plato/). We will work together to deliver increased efficiencies to anonymous European equity block trading. I think it is a unique value proposition in that it creates a safe and secure environment for market participants to trade large natural blocks anonymously, without market impact and leakage. It is all about reducing the cost, which ultimately improves the experience for our end clients.
One of Plato Partnership’s other unique features is that the revenue generated will be directed to academic research via the Market Innovator (MI3), which will produce independent research and analytics to improve future market structure and design.
Overall, we have the brightest minds in the world of equity trading sitting around the table trying to develop solutions for the complex issues that impact equity trading today. The potential solutions this delivers will benefit the entire market place enormously.
Looking ahead, how do you see the equity landscape developing?
As we head into MiFID II, I think the equity world will become more capital intensive than it is today. One of the biggest challenges will be how firms can interact with a centralised risk book and conduct block trading without human intervention. As for the opportunities, on the automation front, I expect continued innovation in electronic trading and for example, some of the solutions that we now see in FX to be used in the world of equities.
Biography: Mike Bellaro is global head of equity trading for Deutsche Asset Management (DeAM). He joined DeAM in 1988 with seven years of industry experience. Prior to his current role, he was head of equity, derivative and passive & active FX trading for DeAM in Frankfurt. Previously, he managed the US equity and derivative trading operations for DeAM in New York. Prior to this Bellaro served as a managing director in the equity trading department at Scudder Kemper Investments (acquired by Deutsche Bank), where he was heading international trading at the firm. Bellaro started his career as an international arbitrage trader at Paine Webber, working both in New York and London. He is a Member of the Advisory Board for TradeTech DACH, TradeTech FX and International TraderForum.
©BestExecution 2016
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Regulation & compliance : Market Abuse Regulation : Francesca Carnevale
THE SURVEILLANCE SCENE.
Francesca Carnevale assesses the impact of the newly minted regulation and how the industry is responding.
As Europe’s Market Abuse Regulation (MAR) and the directive on criminal sanctions for insider dealing and market manipulation (CSMAD) came into effect in July, early thinking had it that the problem might have been the lack of preparedness of market participants for its implementation, in particular among the buyside. However, since its inception, it is clear that other, as pertinent, concerns are beginning to weigh on the market, across both primary and secondary securities markets – not least the timing of MAR relative to the introduction of the second Markets in Financial Instruments Directive (MiFID II).
Although initially designed to counter abuses in traditional equities and bond markets, in practice MAR works across all asset classes, including specialist financing, such as high yield debt, as well as extensive commodities, FX and derivatives trades. MAR also clearly touches on the primary market and companies with bonds listed in the EU must now promptly publish material information, to record lists of key insiders and their families, as well as requiring managers to follow tougher trading rules.
Current views are that MAR’s enhanced reporting requirements could encourage issuers to eschew Ireland and Luxembourg, traditionally dominant bourses in Europe’s approximately $500bn high yield market for example, for more regulation-lite regimes. Alternatives include the Channel Islands Securities Exchange (CISE), Singapore’s SGX and/or the Bermuda Stock Exchange, all of which have been touting their advantages as alternative listing venues.
SGX was one of the first off the block, having set up a special corporate bond trading platform last December. CISE has also touted for business, on the basis that, “The rules and continuing obligations regime applicable to debt securities listings on the CISE under Chapter 8 are relatively limited and straightforward in comparison to the continuing obligations regimes on many EU-based exchanges and, most notably, do not currently contain any of the ongoing administrative burdens imposed under MAR,” explains senior associate Michael Evans at Guernsey law firm Ogier.
Changing winds of issuance
It is, perhaps, a tad early to sound the death knell of high yield primary market issuance on the European mainland. Even so, in late August, two well-known high yield issuers, Mydentist and Adient applied to list their bonds in Guernsey. If it is the beginning of a shift it will have consequences. AFME’s recently issued Q2 Leveraged Loan and High Yield report suggests primary high yield issuance in the second quarter (Q2) this year touched E31.8bn, a 195.6% and 4% increase by euro amount, respectively, from Q1 (worth E10.8bn) and Q2 2015 15 (E30.5bn).
Moreover, corporate bonds have listed on exchanges because of the tax advantages issuers can leverage as well as the regulatory considerations of investors, explains Evans, but while some bonds have covenants around the maintenance of their listing, some recent junk bonds have included clauses that highlight that they “cannot assure” the listing will be maintained.
It has worried the buyside, which, working through industry groups such as AFME (the Association for Financial Markets in Europe), have been trying to push back attempts by arrangers and issuers to pare back covenants, such as restraints on listing venues, leverage levels and dividends. The buyside prefers heightened reporting standards, as it helps mitigate market risk: so whether this fact will ultimately temper any short-term movements away from European exchanges, is yet to be seen.
Primary market concerns aren’t the only marred fruit. There are also questions about the timing of MAR’s implementation, given delays in the application of MiFID II, as it strengthens the requirement for the stringent algorithmic testing. Specifically, trading venues will require members to “certify that the algorithms they deploy have been tested to avoid creating or contributing to disorderly trading conditions” (also outlined by European market regulator ESMA in its MiFID II Draft RTS 7, Article 10.1).
Any tests and certification must be made prior to the deployment of algorithms and when they are updated. Additionally, under MiFID II, investment firms will be required to test and ensure the stability of their algorithms under stressed market conditions. However, Eddie Thorn, director of Capital Markets, SQS in an interview earlier this year, noted that “Investment firms and exchanges have found it difficult to correctly replicate these real markets in a non-live environment, where the algorithm being tested interacts realistically with other relevant market players”.
David Tolladay, director, surveillance firm Alerts4 Financial Markets agrees that all firms using any form of trading algorithm ultimately “need to invest in a new way of testing their algorithms”. Moreover, although MAR does not mandate non-live testing of algorithms, “many of the abusive behaviours described in MAR can be detected by implementation of new testing methodologies which will prevent a trading firm falling foul of MAR and its onerous penalties”.
In this regard, MAR may have jumped the gun on MiFID II concedes Stefan Hendrickx, founder and executive director of market surveillance maven Ancoa. Additionally, he warns, the impact of putting MAR’s regulatory cart, before MiFID II’s testing horse could expose firms to some “hefty financial penalties; involving as much as E5m on individuals and E15m, or 15% of a firm’s turnover, whichever is greater, where regulators deem algorithms to have caused reckless trading, market disorder or where market manipulation has been committed.”
Senior managers could also face criminal sanctions of up to four-year imprisonment under CSMAD (or its UK equivalent, as of course, the UK alongside some other European countries has opted out of CSMAD).
Keeping a tight rein
In general, firms will need to demonstrate to regulators that they have adequate and automated surveillance capabilities in place, capable of detecting both market manipulation and manipulation intent, not only on transactions but orders as well. Market surveillance must now capture market manipulation intent, as the existing obligation to report suspicious transactions (STRs) extends to include suspicious orders (STORs).
With so much on the block, Hendrickx says that the most effective response is to look for trading patterns thematically, rather than worrying about individual traders or adopting a granular response, where it “is easy to bypass the system, by say implementing smaller trades over a much longer period.” The advantage of a thematic overview is two-fold: a 30,000-foot viewpoint more readily highlights where pressure points that need investigation are found; and two, “a regular thematic review which raises both STORs and STRs is a health check on how robust a firm’s own surveillance system is,” he says.
There is also the administrative load of MAR, which places “a heavy burden on sales and trading staff to make a lot of decisions on what should be included in even the simplest and shortest investment recommendation” says Lawrence Paterson, regional business manager, Quark Enterprise Solutions. “At best, staff will do this correctly but it will take them a very long time to add all the necessary data, impacting their productivity. At worst, they will get it wrong and the material will be deemed non-compliant, putting banks at a high risk for losses, both from claims made by clients and penalties issued by regulators,” he explains.
Ultimately, Hendrickx thinks the less appreciated benefits of surveillance done under of MAR is the introduction of business intelligence gained from the advanced analytics required to do surveillance. While the market has made great strides, and has been a boon for market surveillance firms, lawyers and consultants, clear gaps remain, he concedes, not least because of the scale of the work involved.
©BestExecution 2016
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