Has the financial industry failed to adopt technology that would help the end user, given the 20-year history of electronic trading in fixed income?
This was the question put to the panel evaluating which electronic trading tools have had the greatest impact for the buy-side. Representing the buy-side, regulator, execution venue and data services, the panel argued a careful no, while laying out the steps needed to push on.
Growing data
If electronic trading in credit markets has been around for 20 years, then what is new, asked Stu Taylor, CEO of Algomi. Answer: data. “We should be thinking about the digitization of the whole process, not just execution. We have not put enough effort into the liquidity problem occurring before the execution.” Only by putting information around traders can they can make the connections to decide to enter the market, he added.
Buy-side traders are under pressure to change, but do they have enough information, suggested Tsai Li Renn, Senior Vice President and Head of Fixed Income Trading for SGX. Platforms will be evaluated on how well they facilitate that change, as more price points will boost traders’ confidence, Tsai told attendees at the recent Fixed Income leaders Summit APAC in Singapore.
The Monetary Authority of Singapore (MAS)’s Deputy Director and Head of Financial Products and Solutions Division, Ong Boon Chye, said the regulator welcomes initiatives to promote greater market transparency.
The amount of data required to fuel new fixed income trading platforms is increasing quickly, especially as the data delivery transitions from an end-of-day push to real-time data access, explained Magnus Cattan, Senior Vice President of Price and Reference Data (Asia Pacific) for ICE Data Services.
Smarter executions
With more data comes an increased ability to make better decisions through pre-trade TCA, Cattan added. However, many buy-side trading desks have historically viewed TCA as a post-trade process. Rather than evaluating new TCA solutions, many buy-side traders are looking for additional data to calculate their own TCA, Cattan said. Examples include an instrument’s potential trade capacity and how long it might take to liquidate a position.
“The TCA offerings I have seen were all based on equity methodologies,” shared Carl James, Pictet Asset Management’s Global Head of Fixed Income Trading. “An Implementation Shortfall methodology cannot work for bonds that trade five times a year.”
For a buy-side fixed income trader, proving they entered the market at the same time as a potential counterparty, could be another significant metric for evaluation execution quality, suggested Taylor.
James replied that as a proprietary trading desk, it makes sense to have a watch list, but from an asset managers’ perspective, trading is the result of a much longer process. In many cases, the information would need to be inserted into the asset allocation and portfolio management process well before it arrives at the trading desk, James said.
More fluid, if not bigger
To continue developing electronic trading in fixed income, the goal of all platforms should be to encourage investors holding pools of liquidity and are not currently active in the market to trade.
Any solutions that encourage diverse participation are welcome, according to the MAS’ Ong. New platforms may decide to develop solutions catering to different segments within the fixed income market, Ong mused.
As a counterpoint, James mentioned that although Italy has a history of retail participation in fixed income, it is still less than 1% of total bonds traded.
In the institutional space, currently most of the volume in fixed income is concentrated in 20% of the trades, Tsai reported. Electronification has happened fastest in smaller trades, often through RFQs. However, many feel the RFQ mechanism is no longer sufficient, and while it is not clear what its replacement should be, there are many platforms trying different trading protocols, Tsai said.
Market participants looking for solutions should remember new platforms do not create liquidity, but rather a more efficient means of access, reminded Cattan. Unlike in equities, the heterogeneous nature of fixed income instruments means different segments of the market will require individual solutions, Cattan said. To meet these diverse requirements, new bond trading platforms are offering a range of features, including dark pools, time based auctions and synthetic central limit order books, James noted.
New platforms may specialize by instrument or they may divide according to participant, be it institutional, retail, private banking or hedge fund, Ong mused.
It will take time for dust to settle but there will probably be between 5-10 platforms focused around a boutique or global offering, Cattan argued. “The data and execution will start to come together, in that the platforms will have to supply the data required to achieve the executions traders want.”
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Better Data, Better Trading: True for Fixed Income Too
The Algorithmic Environment In India
With Sanjay Rewal, CEO Open Futures
Over the course of the last year, complaints have surfaced about preferential access to Indian markets, and trading patterns that were not as the regulator expected. As a result, there has been a certain amount of push back on the industry. The regulator in India, the Securities and Exchange Board of India (SEBI) tends to be more proactive than other regulators, and as a result they have decided to look more closely at various aspects of algorithmic and high frequency trading (HFT) to ensure its suitability for the Indian markets by means of a detailed consultation.
Another area of regulatory concern is that there should be no preferential access to Indian markets. An additional issue is whether there are added benefits for the markets, given that algorithmic trading is prevalent. The Indian regulator wishes to discuss these points with the marketplace. It will be an interesting consultative process because, depending on the proposals, they may or may not be conducive to helping market micro-structure.
From recent interviews, we understand that the regulator is looking at a two-tier system or a minimum resting period: for example, mini-auctions for very short periods of time. Once the consultation is published, trading participants will be able to comment on whether the proposals make sense from an Indian and a global perspective. We understand that the Chairman of the regulator is looking towards IOSCO for guidance and best practice. Hopefully, the consultation process will take a reasonable length of time because the longer they take to discuss this with the general public and market participants, the wider the range of perspectives they will have to analyse.
For example, a retail broker’s perspective might actually contain a misunderstanding of what HFT or algorithmic trading is. There needs to be a legitimate, broad marketplace that allows people to articulate their points of view whether they are retail traders, a mutual fund, an HFT group or a proprietary trading group. If the marketplace is transparent and functions on that basis, then we should get a better market for all types of investors.
Ideal market structure
At Open Futures we believe in transparency. Creating more restrictions only benefits the trader with the wrong type of edge. From the point of view of a high frequency trader – how do they make money?
They make money because they have access to great technology and successful models. They are not going to make money if their models are not profitable no matter how fast they can trade.
Transparency and access should be highlighted and promoted rather than increasing the number of hurdles in the way. Having said that, if there is a legitimate concern that somebody is getting hurt because a firm did something wrong, then of course, they need to create the right hurdles. But if a retail customer is being hurt because someone is doing trading of a particular nature, then there needs to be evidence to support that.
There are at least 80 research papers released in favour of algorithmic/HFT and there will be plenty with the counter view. In general, the reason why regulators worldwide have chosen not to interfere with the market micro-structure beyond a point is precisely because of the way it functions as a whole. Look at the current market – first the lot size increased which forced the volume to shrink, then the Securities Transaction Tax was increased on options which meant that option volumes started to come down.
Now, if the changes to options trading are being done because the regulator doesn’t want retail to be speculating in the option market, at least there is a definite argument for it. We may well disagree, but at least there is a sensible discussion to be had. But, insofar as algorithmic trading goes, the evidence suggests that it has not led to any inefficiency in the Indian market nor overseas. It has not led to traders becoming disenfranchised because other traders use an algorithm. This is an age of progress. We ought not restrict those who are trying new technologies, new algorithms and innovative ways of trading.
If there is a legitimate concern about protecting retail traders, then the articulation of that concern should not necessarily be via preventing algorithmic trading or HFT in the form we see today. If there is specific abuse, then the market and the regulator can work together to find that person and proceed against them. However, we very much hope that the consultation process finds evidence to suggest that retail is not getting hurt.
The role of an exchange
The role of an exchange ought to be to create a transparent, fair, ‘equal to all’ market place. In all seriousness, at Open Futures we believe that co-location (co-lo) is actually one of the biggest levellers. Co-lo means that everyone is dependent on their own brains and their own ability to leverage technology and mathematics. In the past there were differential access mechanisms, so if a firm were connecting to an exchange which didn’t have co-lo, and they were connected using exchange lines, it meant that someone sitting five kilometres from the exchange would benefit more than someone sitting 5,000 kilometres away. Differential access was built into the system. Co-lo ensures that differential access does not happen.
We have discussed this issue with the exchanges and have suggested that they give subsidised access to co-lo to every broker they can. The reason for this is simple. Let’s say a small broker indicates that they are suffering because they don’t have co-lo access. If the exchange put in servers at a lower cost than that of leasing lines to the exchange, it becomes impossible for a retail broker to say they don’t have access. There should be no question of a differential level of access. However, we don’t agree that if a firm can pay, then they should be able to access data faster. Everyone should be allowed to pay for data at a certain rate. With co-lo, access to data is much faster because we are sitting next to the exchange compared to someone sitting 1,000 kilometres away.
Once the exchange indicates that everyone is free to access it, then there will be open access to the same data. The point is that the exchanges need to understand this and maintain a fair, transparent and equal marketplace.
This is the most important role of the exchange.
It is our hope that the exchanges and the regulators will deliberate at length over the discussion papers when they are released. It should not be the case that they have decided what they are going to do already. After considered discussion, people will begin to realise that algorithmic trading does provide liquidity and that it allows the markets to trade even more volume.
Trading more is not necessarily wrong. This is a marketplace and it is supposed to have all the constituent elements of a marketplace. It is very unlikely that the regulators will choose to do anything that is not backed by extensive research by renowned trading experts both in India and overseas.
For example, if there is a two-queue system, then the first fundamental rule of an exchange, which is price/time priority, would be broken. When an order is received which is of a higher or lower price, then it gets priority. If an order is received at the same price which, for example, is sent at time T and another is sent at time T+10 seconds, then T should get priority.
It is vital that the regulators go into the marketplace and find out what market participants actually think. The marketplace will certainly respond with proof that algorithmic trading doesn’t affect the market in the manner that they think. Anyone who works with a large amount of data and looks at the market data from that angle will find the same evidence that we have found.
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The Evolution Of TCA In Foreign Exchange
With John Radle, Global Head of Trading and David Biser, Senior Trader, Campbell & Company
The foreign exchange (FX) market, notorious for being dynamic, fragmented, and competitive, has become increasingly electronic in recent years and now more naturally lends itself to Transaction Cost Analysis (TCA). In the past, trading was driven by voice-based market-making and any sort of implementation shortfall was difficult to quantify. Measuring the quality of FX execution is becoming more attainable and is also becoming a requirement as the market continues to have stricter guidelines around FX trading activities.
When trading electronically, the relevant data and trade details are going to be more granular. As technology and analytics improve, so too will the usefulness of TCA. As an example, we gather all the individual fills and can measure to what degree we are passive as opposed to aggressive. But trading is a process more than it is a single outcome; point-in-time analysis is important but it is often more meaningful when comparing traders/liquidity providers/algorithms over longer time periods. Interpretations will vary when evaluating implicit costs, but the point is that we can now take a wider range of data points into account and make modifications as market dynamics change.
Finally, all these technological developments are coupled with increased scrutiny of trading by both the regulators and clients. Transaction Cost Analysis studies have been adopted by many in the market to provide a certain level of confidence in trade execution. This emphasis is the reason it is important to have tools to show best execution.
Data handling
Cleaning, managing and analysing data presents a significant challenge. However, Campbell & Company has a long history as a strong quantitative manager. We have leveraged our capabilities on the research side to effectively carry out those deep dives on the underlying currency pairs and liquidity providers. FX TCA can be difficult for electronic trading because of the lack of consistency – comparing measurements will be less meaningful if each provider has a different liquidity pool. Furthermore, each algo has its own logic so it may be difficult to determine whether it was poor algo performance that produced a sub-optimal result or whether it was because of limited liquidity during a trade.
As more pressure is exerted on providers, there are certain elements that are becoming more standardised when producing TCA. Particularly when they offer algorithmic execution solutions, banks are increasingly taking prudent measures to evaluate their liquidity sources and to remove those venues that could adversely affect fills. There is an impetus for people to provide that information so that algo users can get the best price possible given the strategy and their respective liquidity pool.
Recently we have been working with the banks and firms like Pragma to get feedback on venue analysis and fill rates and have subsequently used this information to complement our TCA. This gives us a different perspective than solely using sell-side TCA. We rely upon the use of algorithmic trading across a diverse set of venues and methods of execution and believe it is important to have a method to independently evaluate trades.
Sell-side conversations
Using TCA in an increasingly granular fashion has been a great way for us to give feedback to our liquidity providers, particularly our banks. For example, a bank may be streaming into a liquidity pool and believe they are streaming competitive prices. Even if they are away from the market by the smallest of margins, we may not be transacting with them. We have excellent relationships with our banks and in these circumstances know they welcome any feedback. We have seen banks move up the ranks dramatically just by making minor adjustments to their price stream. It has been a good opportunity for us to have productive conversations and to provide valuable feedback based on our unique experience.
The business continues to be driven, in large part, by relationships though now we have substantially more data and metrics to enhance the dialogue. The banks appreciate and understand that the buy-side wants to execute as efficiently as possible and are viewing execution quality more objectively. They are moving towards increased transparency and using the information provided by us to improve executions and reduce market impact.
The spreads provided by the banks are, in part, due to how the market participant interacts with the liquidity provided. As we do more business and as they become more comfortable with our style of trading, the banks are more willing to engage in a mutually beneficial dialog. Listening to feedback makes them more competitive in the long run and we get better execution and more options for our investors. TCA plays such a pivotal role as we want to understand where/why we are dealing and how we can reduce costs for our strategies and for our clients.
The future
The proliferation of non-bank liquidity sources means the market dynamics are changing and adds additional complexity. Relationships with banks will always be important and we value that they are a stable source of liquidity, but these additional liquidity providers are stepping up and taking a significant role in market making.
Increasingly, we are seeing emerging markets that were not traditionally traded electronically made available in execution algorithms. As liquidity improves and the average daily trading volumes increase, we would expect to see more markets begin to trade electronically and already pricing has begun to improve within certain pairs.
It is unlikely that we will ever be totally satisfied with our TCA. We are always looking for ways to improve – to look deeper into the microstructure of the market and to calculate where we can possibly gain an edge and thereby achieve better executions for our investors. We have achieved major successes in TCA already but there is more valuable work to be done. Our aim is to continue to evolve and, as the market changes, ensure that we always get the best execution for our clients by using TCA in the most productive way possible.
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Benchmarking The Value Of A Buy-side Trader
By Tom Kingsley, Global Head of Sales and Gabriel Kan, Quantitative Analyst at Bloomberg Tradebook
How much value does a buy side trader add to the investment process? According to a recent Bloomberg Tradebook survey of buy-side clients, more than half of respondents (56%) evaluate trader performance using the classic TCA vs benchmark prices. However, this simple benchmarking method does not properly represent the risk that a trader is taking to achieve the return. One popular evaluation alternative is to compare the Sharpe ratios; the average performance divided by the standard deviation. However, an inefficiency of the Sharpe ratio calculation is that it does not account for order profiling, meaning a trader may appear to perform better simply because he is in an easy market. A buy-side trader should be rewarded, however, by how he performs relative to the difficulty of the orders. Thus, we have identified three components that are important to evaluate execution performance:
1. Performance measure
2. Risk measure
3. Order profiling
We propose a new approach to combine the three criteria in a united framework (Figure 1). This approach is a parallel analogy to the Capital Asset Pricing Model (CAPM) that is commonly used to evaluate investment alpha. First, we select a benchmark and calculate performance of each order as standard TCA. Then we set a so-called “index strategy” and evaluate its performance for each order. Finally, we run a regression on the order performance vs the index performance to obtain alpha and beta. Alpha will be the net value added after risk adjustment, and beta is a measure of risk with respect to the index strategy.
We calculate the index strategy performance as the peer average (Figure 2). For each of our own trades, we consider peer orders with a similar order profile in the last 30 days. Then the index performance is calculated as the average in the peer group. Figure 3 illustrates the time series of the peer average together with individual orders. The idea of this approach is to reward traders who outperform in a tough market, and penalise those who underperform in an easy market.
Table 2 shows the results by running the alpha-beta model on Hong Kong orders in 2015. After the risk adjustment, B-Smart, a dynamic liquidity seeking strategy, provides the best performance. B-Smart also takes the most risk across the strategies. On the other hand, VWAP strategy gives the lowest alpha and almost zero beta. This suggests that a static VWAP strategy is not taking much risk but does not add much value either.
In our framework, alpha represents the net value added by a buy-side trader. It does not generally equal the classic performance measure vs a benchmark, but only in special cases. One example is when accessing unique liquidity or using a unique strategy. In this case, the correlation to the peer performance is low and the overall performance will become 100% alpha. The skill of a buy-side trader to outperform others by accessing unique liquidity with a unique strategy will be reflected via alpha on a risk-adjusted basis. This is analogous to the alpha that fund managers deliver by outperforming the index.
Performance, risk and order profiling are the essential elements to evaluate execution performance. The proposed alpha-beta approach is a unified framework to account for the three elements at the same time.
While buy-side traders are equipped with different trading strategies and exposed to different market conditions, the new approach attempts to provide a consistent evaluation method across buy-side traders and desks.
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Raising The Standard For Cybersecurity
Michael Cooper, CTO BT Radianz, Lisa Toth, Global Head of Regulation and Risk, Hatstand, a Synechron Company, Chris Bok, Consultant, Jordan & Jordan examine ongoing changes to the cyber security landscape, and how the industry can work together to combat the risk.
Michael: The Cybersecurity landscape remains complex and problematic. Barriers to entry for those wishing to disrupt, attack and exploit vulnerabilities are being almost constantly lowered. This is compounded through effective use of collaboration in the exchange of information and with rapid dissemination and innovation of exploits. Further, the volume of criminally incentivised, as opposed to disruptive/ opportunist-oriented attacks seems on the increase. So the challenge of sustaining security has become more difficult, more complicated but increasingly important.
Alongside this is an increased awareness and recognition of that risk, coupled with an expectation that firms must address this. One consequence is that obligations and responsibilities have become broader and more onerous to execute. Legislators and regulators are continuing to raise both expectations and mandates.
Lisa: In light of the high profile cyber events that have been in the news recently, all across the globe we are seeing central banks reminding their members that they must have robust cyber security, governance, policies and procedures in place. We are also seeing countries examining the regulations they already have in place and looking to set up further rules. The Hong Kong monetary authority announced earlier this month that this year it will be publishing a cyber security assessment framework, a similar step to the FFIEC. The regulators are definitely taking note and are looking at their member firms to ensure that cyber security is embedded within their culture, policies and procedures.
SEC and FINRA have put cyber security preparedness as a high priority for their 2016 exam review, and in the UK, the FCA announced that its member firms are not doing enough to protect themselves from cyber breaches. It is therefore likely that we will see many more fines being levied against firms with insufficient policies and procedures and as well as against those firms who have experienced cyber breaches and subsequently failed to remediate the issues.
There have been three cyber security-related fines imposed by the SEC recently. Last year, $75,000 was applied to a regional broker/dealer, in January 2016 there was a fine of $100,000 against a fin tech firm and more recently, a large investment bank was fined $1 million. The scale of the fines is increasing rapidly.
Michael: Clearly the regulatory position is evolving and becoming more stringent as regulators seek to incentivise markets and market participants to respond. Alongside of this, there is clearly more regulatory content to consume, and this is not entirely aligned globally. So while the intentions are right, there is additional complexity in different timescales, expectations and specification – additional complexity in an already complex area.
Lisa: In April, IOSCO released a report highlighting some of the key global regulatory initiatives that are underway and continually use NIST as an example of a robust framework. While IOSCO doesn’t actually come out and recommend that everybody base their cyber security framework on NIST, they are publishing them as examples.
Michael: There are also a number of forums being set up within different sectors and parts of the market which are regulatory-inspired. In addition, there are entities like IOSCO seeking to do something at the macro level and there are others trying work at a more micro level. So there is more activity overall, not just in terms of regulation, but in terms of the industry’s response to it.
Identifying solutions
Michael: I believe that most people will have a decent awareness of the issues and risk presented by cyber security – particularly following some of the recent bigger, more publicised events. The challenge for firms is to identify what they can do given the resources, knowledge and assets they have.
Lisa: To look further at this, it comes down to how sophisticated firms are in terms of their cyber practice. Some firms view cyber risks as purely a technical or IT solution, so they put in place firewalls and anti-malware and think that they are protected – but there is so much more to it than that. Firms do need to have IT solutions in place, but they also need clear governance, policies and procedures, and in addition they must have suitable response plans in place.
These should be embedded as part of their business continuity and disaster recovery planning. Firms should have a risk register, and be able to identify the types of cyber security risk that they face. Then they should create threat scenarios and test against them. Firms should be doing penetration testing, vulnerability assessments and then testing their response plans. If they go through these preparatory steps they will find that the amount of time it takes to identify and resolve a breach will significantly reduce. Investment up front will reduce potential exposure to a cyber breach at the back end.
Michael: The market has made considerable progress but obviously there is still a long way to go. Some of this is around security practice; how firms need to operate and the decisions they must consider and ultimately make. There is a big step up required before this practice becomes industrialised. Firms are doing it more than perhaps they were before, but there’s still much more to be done.
Building Transparency On The Buy-side
With Joe Kassel, Global Head of Dealing and Exposure Management, AMP Capital
It is fair to say that Australia has had a unique vantage point to observe the long march towards unbundling and the looming regulatory changes in Europe. These changes will shape how an investment manager’s clients’ commissions can be used going forward. Spared from the entrenched practice of soft dollars in other regions, and their questionable usage of times past, the local industry has effectively adhered to agreed industry norms within a principles based regulatory framework.
It is clear, however, that the Australian market will be impacted by European regulatory changes. The focus now is on what this means for the industry and regulation here as Australia creates its own local requirements. For firms such as ours, with trading operations in Sydney, London and Chicago, the bigger conversation is also about how to respond to requirements in other jurisdictions and whether to adopt local requirements locally or the most onerous requirements globally.
From our discussions with our trading counterparties and with our clients when they conduct operational due diligence on us, it seems clear that European rules will become the effective regulation that global clients will expect Australian firms to adhere to.
Until now, Australia’s response has been to provide increasing transparency to clients in terms of how commissions are used and how much commissions are paid. Buy-sides have been able to demonstrate to clients that commissions are used only for research for their own benefit while absolutely cutting out any questionable uses that might have been a feature under previous norms in other markets.
Perhaps the single most effective measure to demonstrate how seriously we have fulfilled our fiduciary duties in this area has been our proactive regular review and adjustment of commission rates with counterparties. For example, a recent AMP Capital study looked at our weighted average commission rate paid to brokers over the last 25 years and showed that the average commission rate for equity trades over that time frame has fallen by one basis point per year. According to the study, clients have seen a 25 basis point drop in commission rates over the last 25 years.
For an actively managed fund this equates to a 25bp performance boost per annum attributable to lower explicit trading costs. The unbundling discussion aside this is a very concrete outcome for our clients.
The regulators’ role
We believe that it is very appropriate for the regulator to actively review conflicts of interest in investment management as well as take action when a principles-based approach has not worked. What is still unclear, however, are the impacts and steps to implementation of a prescriptive approach to assigning budgeted dollar amounts for particular items of research, and the segregation of anticipated client commissions accordingly into research payment accounts. It is important to our firm, for example, that our clients continue to benefit from our scale and that there is a satisfactorily transparent pricing mechanism for research applicable to all investment managers.
That said, Australian buy-sides are well placed to meet anticipated regulatory requirements and certainly, our firm is. We disclose to clients our trading activity, trade commission uses, commission rates, as well as any services received. Adapting further, though, to a more prescriptive, standardised, itemised, fixed priced research regime is work that still lies ahead for all investment managers.
Global agreement
Will there be a unified global regulation on CSAs and unbundling? Probably not. But in order for fixed budgeted dollar amounts, unrelated to the value of trading, to work, the buy-side needs a standardised solution. As a large firm it is also important that none of our clients subsidise research provided for any of our other clients. As a firm, and for our clients in aggregate, passing on the benefits of our scale in the market and our efforts to negotiate low commission rates ensure that we are not subsidising research provided to other asset managers just because we happen to be the big fish in a small pond.
It is also worth noting, smaller research providers are unlikely to see a negative impact because we see the trend of the percentage of commissions going to specialist research firms continuing to increase.
Smaller asset managers, on the other hand, who traditionally relied on bundled research, will face a number of tough decisions. Increasing internal research capability will be a financial challenge for small and medium-sized asset management firms. At AMP Capital, our ability to generate our own independent research is a definite advantage.
The long term impact will be felt on the sell-side. Already brokerages have downsized research departments, as bulge brackets directly reduce their coverage of stocks in anticipation that a lesser percentage of their commissions will be eligible to pay for that research. As their customer and an investor, we more actively coordinate with our brokers on how we receive research and what research we value most. By providing a clear understanding of our research needs, our clients’ commissions are spent more efficiently.
Further evolution on commission usage should be expected. Sell-side firms cannot afford to maintain prior service levels after unbundling. By reducing their offerings or restricting it to buy-sides willing to pay for it, sell-sides will eventually settle on a balance.
Effects on the buy-side
Whether we view it from the perspective of a regulator or a client, transparency is the goal. That push will not go away any time soon. In the last three years AMP Capital set up trading desks in Chicago and London, in part to be closer to the regulatory requirements in each market and verify – both for clients and regulators – that we are adhering to the highest standards in the markets that we operate in.
Transparency has had and will have many manifestations for trading desks: with whom, how and where we route orders, how we access markets, our ability to access all sources of liquidity, our execution processes, our analysis of trade outcomes versus expectations, the true cost of trading and importantly, our usage of research.
In the past we may have jealously guarded our proprietary research and market insights. These were our intellectual IP – they were our edge . Now, at all turns, we seek to share our insights, processes and expertise with our clients. This transparency is our new edge because that is what will help build trust and understanding with our clients and enable us to better help them meet their investment goals into the future.
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Announcement: Plato Partnership & Turquoise
Plato Partnership, a not-for-profit industry group of buy and sell-side firms who are collaborating to bring creative solutions and efficiencies to today’s complex equity marketplace, has entered a Co-operation Agreement with Turquoise, a leading pan-European MTF. This partnership marks the first time that the buy-side, sell-side and a trading venue have come together to deliver increased efficiencies in anonymous European block trading, and is a significant milestone for the industry.
PRESS RELEASE:
PLATO PARTNERSHIP ENTERS CO-OPERATION AGREEMENT WITH TURQUOISE.
London, 6th September, 2016
- Agreement formally brings together for the first time buy-side, sell-side and trading venue to deliver increased efficiencies in anonymous European equity block trading
- Turquoise will rebrand its non-displayed services as Turquoise Plato™, including the award winning TurquoiseBlock Discovery™ and Turquoise Uncross™ as Turquoise Plato Block Discovery™and Turquoise Plato Uncross™
- Plato Partnership and Turquoise will jointly promote the use of Turquoise Plato™and co-develop the next generation of anonymous European equity block trading services
Plato Partnership, a not-for-profit industry group of buy and sell-side firms who are collaborating to bring creative solutions and efficiencies to today’s complex equity marketplace, is pleased to announce that it has selected Turquoise Global Holdings Limited (Turquoise), a leading pan-European MTF, as its Preferred Partner. This decision was made following an extensive selection process, with Turquoise having displayed a secure and rapid route to market, demonstrable innovation and an alignment with Plato Partnership’s guiding principles.
As partners, Plato Partnership and Turquoise will develop increased efficiencies for the electronic execution of anonymous block trades in European equities in response to growing demand from market participants, particularly buy-side firms. Turquoise was selected because of its proven track record of listening to customers to deliver innovation that works, its well-established commitment to enhancing market efficiency, and its position as a leading provider of electronic block trading services.
Integral to the Cooperation Agreement announced today,
- Plato Partnership and Turquoise will jointly promote the use of Turquoise’s award winning existing block trading services and will use these as the platform from which to deliver further functional enhancements for the benefit of all market participants.
- Turquoise will rebrand its non-displayed services, reinforcing the importance which both parties ascribe to their cooperation. The services will now be known as Turquoise Plato™.
- The parties will work closely together and inclusively with the wider buy and sell-side community to develop and validate enhancements to the Turquoise Plato™market model that set standards for marketplace excellence, including now and future best practice in electronic block trading.
Both the buy-side and sell-side members of Plato Partnership have a common objective to ensure a rational market structure for block trading under MiFID II, and collectively believe this would be best served via collaboration with existing venues.
Nej D’jelal, Plato Co-Chair and Managing Director, Head of Electronic Equities Product, EMEA, Barclays, commented:
“The creation of Plato Partnership marks a substantial and exciting milestone for the industry. This collaborative initiative will aim to improve European equity markets in the interests of end investors based on a not-for-profit ethos, which is truly unique. This partnership with Turquoise lays the foundations for Plato Partnership to drive forward future industry initiatives that will seek to increase efficiencies and simplify market structure for the benefit of market participants.”
Mike Bellaro, Plato Co-Chair and Global Head of Equity Trading, Deutsche Asset Management, commented:
“Plato Partnership is very significant for the buy-side community. It provides a unique value proposition that considers the needs of the marketplace, provides for liquidity and reduces costs – ultimately improving the trading experience for our end clients. Partnering with Turquoise provides the ideal solution. Turquoise has demonstrated its commitment to innovation and customer partnership in this area and already brought to market solutions that will form the foundations of our joint initiative. As a buy-side member, I am proud to be a part of this important initiative and look forward to seeing Plato’s continued drive to bring innovative solutions to other areas of the equity ecosystem.”
Dr Robert Barnes, CEO of Turquoise, commented:
“Plato Partnership and Turquoise share values and vision of a marketplace that delivers the best result on a continuous basis. With Turquoise Plato™, the industry has a Large In Scale electronic execution channel that works. Turquoise Plato™ offers neutral and trusted MiFID II-compliant mechanisms for executing larger anonymous block orders above 100% of Large In Scale thresholds. As Turquoise Plato™, we welcome leaders across the investment spectrum to contribute next generation models that serve as an efficient and natural focal point for Large in Scale liquidity.”
Paul Squires, Global Head of Trading and Securities Financing at AXA Investment Managers, commented:
“This partnership between Plato Partnership and Turquoise is a hugely important development for the marketplace. Plato Partnership’s innovative response to regulatory developments represents a refreshing change, and should not be undervalued as an impetus for enabling further new and innovative thinking. The collaborative nature of the initiative; bringing together the buy and sell side, as well as utilising the established industry knowledge of Turquoise alongside Plato Partnership’s not for profit ethos, makes it a unique equities solution, and one which should soon gain strong momentum.”
Øyvind Schanke, Chief Investment Officer for Asset Strategies, Norges Bank Investment Management, commented:
“We must continue seeking to address any element of market model inefficiency and an initiative such asTurquoise Plato™ provides a solution to that problem. Well-functioning markets are essential for us and other participants to operate, and we fully support initiatives that seek to make markets work better. This partnership with Turquoise seems like a natural choice for Plato Partnership to work towards its goal of enhancing the fairness and robustness of future markets, as well as reducing complexity in the marketplace.”
Christoph Hock, Head of Multi-Asset Trading, Union Investment, commented:
“Union Investment is delighted to support Plato Partnership and its partnership with Turquoise. This grouping of thought leaders coming together to solve big market structure issues of the day is a compelling proposition and represents a huge opportunity both for our clients and for the market more generally. Collaboration with an industry partner like Turquoise will offer Plato Partnership the possibility to achieve an effective route to market, and we believe that representation from all parts of the value chain makes this a promising approach, and very important for the buy-side community.”
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Enquiries: Joanna Crawford, Cicero Group
plato@cicero-group.com
+44 (0) 20 7343 1600 / +44 (0) 77 4131 1781
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About Plato Partnership
Plato Partnership, a not-for-profit industry group representing the buy and sell-side, has come together with a vision of improving market structure in Europe. The group’s key aims are to reduce trading costs, simplify market structure, and to act as a champion for end investors.
Central to this vision is Plato Partnership’s Market Innovator (MI3); a research fund which will sponsor academic research and analysis that will identify ever better ways of executing trades, as well as lowering the cost and improving the quality of the broad range of processes required to support the execution lifecycle.
Plato Partnership will work with industry partners to achieve its goals and objectives, and put its research findings into practice.
Members of Plato Partnership include Axa Investment Managers, BlackRock, Deutsche Asset Management, Fidelity International, Franklin Templeton Investments, Norges Bank Investment Management, Union Investment, Barclays, Bank of America Merrill Lynch, Citi, Deutsche Bank,
Goldman Sachs, Morgan Stanley, and UBS. Firms currently undergoing the membership process include JP Morgan.
For more information, please visit www.platopartnership.com or @PlatoMarkets.
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About Turquoise
Turquoise is the European multilateral trading facility majority owned by London Stock Exchange Group in partnership with the user community. With a single connection, members can trade shares, depository receipts, ETFs, and European Rights Issues of 19 European countries with an Open Access model that allows members to choose among 3 interoperable CCPs to clear these trades. Members include banks, brokers, specialist trading firms and retail intermediaries.
Turquoise features two electronic orders book services. Turquoise Integrated Lit combines simple limit and iceberg orders with Large In Scale hidden orders. Turquoise Midpoint Dark, renamed Turquoise Plato™, prioritizes orders by size and allows users to configure Minimum Execution Size; it features two distinct mechanisms, each executing at the midpoint of the Primary Market Best Bid and Offer: continuous matching and Turquoise Plato Uncross™, an innovation that provides randomised uncrossings during the trading day, ideal for larger and less time sensitive passive orders. Turquoise Plato Block Discovery™ matches undisclosed Block Indications that execute in Turquoise Plato Uncross™.
For more information, please visit:
www.tradeturquoise.com, @tradeturquoise or www.linkedin.com/company/turquoise
Announcement: MarketAxess selects Ancoa
MarketAxess selects Ancoa’s Market Surveillance Capabilities for its European Fixed-Income Trading Platform.
LONDON, 1 September 2016 – Ancoa, provider of contextual surveillance and insightful analytics for exchanges, regulators, buy- & sell-side firms, today announced that MarketAxess Europe Ltd, a wholly owned subsidiary of MarketAxess Holdings Inc. (Nasdaq:MKTX), has deployed Ancoa’s market surveillance capabilities across its European fixed-income multilateral trading facility (MTF). As a leading electronic fixed-income trading platform and provider of market data and post-trade services, MarketAxess operates an electronic trading platform enabling more than 1,100 institutional fixed-income trading firms to efficiently trade corporate bonds and other types of fixed-income instruments globally.
In recent years, regulators have expanded the scope of surveillance of fixed-income trading. The Market Abuse Regulation (MAR), which came into effect in July 2016 across the European Union, will require all market participants and EU regulated trading venues to comply with more stringent market surveillance criteria. Market surveillance will, for the first time, need to capture market manipulation intent, as the existing obligation to report suspicious transactions (STRs) extends to include suspicious orders (STORs).
MarketAxess deployed Ancoa’s platform to monitor instances of potential market abuse on its MTF, and meet the scenarios set out under MAR. As an asset class, bonds are typically less liquid than cash equities which makes assessing a trade’s price normality a challenge. To address this, Ancoa, in conjunction with MarketAxess, designed and deployed new specialised RFQ-based trading alerts. Ancoa also provides functionality to ensure that MarketAxess receive alerts for sanctioned instruments across its bond universe. Ancoa’s visualisation tool aggregates all trading and contextual data onto a single screen and MarketAxess’ analysts now have access to the insights Ancoa generates, considerably improving their analytics and compliance-oversight capabilities.
Kurt Vandebroek, Chief Executive Officer, Ancoa, added, “We are delighted that MarketAxess has deployed Ancoa’s market surveillance capabilities for their EU fixed-income trading operations. Our growing focus on the FICC markets and expertise in market surveillance for RFQ based trading, has enabled us to deploy our monitoring platform within a short timeframe, helping MarketAxess detect and deal with potential market abuse and, meet their regulatory obligations with confidence and ahead of deadline.”
Media Contact: On behalf of Ancoa
Sybille Mueller / Holly Finn, Streets Consulting
Tel: +44 (0)20 7959 2235
Sybille.Mueller@streetsconsulting.com
Holly.finn@streetsconsulting.com
About Ancoa
Ancoa provides contextual surveillance and insightful analytics for exchanges, regulators, buy & sell-side firms. Our highly sophisticated, yet easy to deploy and simple to use, monitoring and surveillance platform helps firms take full control of their regulatory, reputational and operational risks across markets, functions and asset classes.
We help improve market integrity by providing greater visibility over trading behaviour. Our independent and real-time approach to monitoring, analytics, alerting and reporting, using powerful visualisation tools, enables firms to identify and manage potential risks of market abuse, fraud and operational shortcomings on a single platform.
Founded in 2010, Ancoa’s management team brings together a strong pedigree & track record in capital markets, technology, surveillance, analytics and entrepreneurship.
For more information visit www.ancoa.com or follow us on twitter @AncoaSoftware.
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Looking Towards The Japan Electronic Trading Conference On 5th October In Tokyo
By Japan FIX Trading Community Regional Committee co-chair, Hiroshi Matsubara, Marketing Director, Japan, Fidessa
A couple of key factors have contributed to the global market turmoil (i.e. oil prices, a slowdown in the Chinese economy and US interest rate hike), and these factors have certainly made a very challenging year for trading the Japanese market. As Abenomics and the QE (Quantitative Easing) policy by Bank of Japan are perceived to have recently stumbled a little, Japanese equities have been suffering from shrinking market liquidity and the market is getting quite behind with market performance compared to major markets in the rest of the world.
Wider moves towards changing the market structure of Japanese equities trading seems to have somewhat stabilised over the last couple of years. The FFI (Fidessa Fragmentation Index) for Nikkei 225 constituents shows a figure of around 1.1, recently whereas it used to show over 1.2 a couple of years ago, meaning trading is becoming more concentrated. The introduction of smaller tick sizes for the TOPIX 100 universe by JPX in 2014 shifted the liquidity of large caps from PTS, the alternative execution venues, into the primary market (PTS share is now 3- 4% for the Nikkei 225 universe). In the meantime, the broker dark pool execution percentage of Japanese equities is estimated to remain roughly constant (around 7 % for Nikkei 225) over the past couple of years.
The smaller tick size program by JPX also affected HFT trading with market-making strategies and saw some tendency by these participants to stay away from trading Japanese equities. However, the universe of HFT trading has been expanding into mid and small cap shares and the presence of HFT in Japanese equities trading remains well established (the majority of institutional orders are now coming through the co-location service offered by JPX).
The use of low touch electronic trading (DMA and DSA), along with access to broker SOR and dark pools, has penetrated into almost all domestic asset management firms in Tokyo. Electronic trading of OTC fixed income instruments is making progress and ETP (Electronic Trading Platforms), the Japanese version of SEF in the US, for trading Yen IRS (Interest Rates Swap) started operation last autumn.
In the meantime, by following the ongoing direction of the regulatory review by the SEC and CFTC in the US and MiFID II in Europe, the discussion of a regulatory framework on market structure issues (e.g. HFT, algos and dark liquidity) is now taking place, led by the Japanese regulatory authority. We anticipate some conclusions towards the year end.
In order to provide Tokyo market professionals with the opportunity to share updated information on the latest market developments and peer-to-peer networking opportunities, the Japan Regional Committee is currently preparing to host another biennial Japan Electronic Trading Conference in the autumn. Our previous trading summits hosted by the Japan Committee always attract a large number of delegates, and this year we expect between 500-600 to attend. The event is widely recognized as the main event focused on institutional trading in the country. The Committee’s volunteer team (which consists of 13 brokers, a buy-side and four vendor firms) have been spending a lot of time and effort to prepare for the event.
The agenda is in the process of being finalised, but we are planning to invite keynote speakers from the JFSA (the Japanese Financial Services Agency), JPX (Japan Exchange Group) and university professors (on the issues of HFT and corporate governance) and feature panel sessions to discuss key issues of electronic trading that both buy- and sell-sides are facing today (e.g. “Best executions and TCA”, “The latest trading platforms”, “The latest equities electronic trading”). We also intend to catch up with some of the latest discussions related to FinTech by featuring sessions on “AI usage on algorithmic trading”, “The future of Blockchain technology” and “FinTech for retail markets (e.g. Robo Advisors)”.
We look forward to seeing many of the readers of GlobalTrading at the event venue in Tokyo in October.
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Multi-Asset Executions Across Asia
With Kent Rossiter, Head of Asia Pacific Trading, Allianz Global Investors
It is important to remember that this is a people business and that relationships are essential regardless of the asset class being traded. Without long-established and tight broker relationships, it can be more difficult to achieve solid allocations on primary deals, or for banks to assist when an order is bigger than conditions warrant, and get pricing inside the spread during tough times.
TCA measurement of fixed income trading is as much a challenge for us as it is others in the industry. This is not helped by very sparse trading in many of the securities and the general lack of transparency. The fixed income markets have been trading OTC for decades and it is unlikely that they will transform into the ‘ticker-tapes of equity-type’ trading or become a transparent market overnight. At Allianz Global Investors (AllianzGI), we have adjusted our trading behaviour to reflect the realities of the markets. We are confident in our processes and trading discipline, and that we are able to get the best outcome for our clients when trading bonds.
Our bond brokers are evaluated not only for their trading acumen, but also their research and sales servicing abilities; there has to be a balance between both factors. In equity trading, commissions are paid and CSA programs have been set up. However, this isn’t currently available for fixed income in the same way. We have had to find ways to reward both the fundamental and economic research provided by bond brokers, but still achieve best execution. Where possible, the focus is on brokers providing the holistic fixed income service.
In FX markets, almost all our major currency trading takes place electronically. Some restricted currencies are still traded using voice trading via phone or IB chat.
Merging desks
Our Asian-based peers are increasingly showing interest in what AllianzGI Asia Pacific has been doing for years; that is, trading multiple assets from a single desk. From a practical point of view, this makes sense because we use the same systems and staff. With trading volumes sporadic and lumpy (i.e. some days dozens of bond trades and other days there may only be a handful), it would be inefficient to have a fully staffed trading desk so specialised that they couldn’t execute and assist on other trading products during slower times. Our traders do have designated markets and products but they are also flexible and well-rounded enough to execute other products.
A key feature of our set-up was the merger of our trading desks in Hong Kong, Singapore, Melbourne and Tokyo into one single desk, now based in Hong Kong. It made more sense and improved communication having traders side by side as this balanced out the flow on the team. Our regional bond investment team is headed by CIO for Fixed Income Asia Pacific, David Tan from our Singapore office, yet all the trading takes place out of Hong Kong. Within Asia, we execute orders from portfolio managers based in Hong Kong, Singapore, Taipei and Tokyo.
Issues of Asian USD-traded corporate bonds are usually traded electronically through various platforms. Sometimes we have more success electronically with sell orders than buys, probably because the dealers lack inventory in those names and are hesitant to sell short. It is evident that dealers continue to be risk-adverse: coming into year-end, liquidity further dries up as dealers prefer flat books. One of the benefits of electronic trading is that multiple brokers can be approached much more quickly than could be achieved manually via separate IB chats. However, electronic trading of Asian local currency bonds has not yet developed enough to trade successfully that way all the time, with the exception of perhaps some SGD or HKD bonds. Even with increased activity from our multi-asset portfolio management team based in Tokyo, we still trade much more in corporate bonds than sovereign bonds.
Without a significant change in the behaviour of investors, the traditional model of using brokers is likely to be part of the Asian fixed income landscape for years to come. The markets are ‘fractured’ mainly due to the lack of control of bond markets and the amount of inventory. There are some initiatives slowly gaining traction to match orders: either scrape the order blotter, or potentially even the inventory of institutions who are likely to be trading the same bonds, but in opposite directions. Blotter scraping for equities has grown increasingly over the last decade and is now a well-established practice. It is likely to gain a similar following in fixed income as investors become more comfortable with the idea. We are looking to invest more effort and technology into matching up potential Indications of Interest (IOIs) of investor positions. Many end-investors may not be able to imagine a market so fluid that there are market makers and genuine investors out there making bids on the positions they hold.
There are many valuable initiatives coming through but they need more take-up from users. There are also competing interests depending on where you are in the cycle. The vested interest from banks to keep bonds trading OTC resulted in relatively slow take-up, and considerable resistance to the move towards electronic trading. Politics is also a factor; for example if one government legislates that their countries’ bonds must be exchange-traded, then that is just one element of what the desks handle. The Chinese markets are a good example of how hard it is to get people to trade bonds on exchanges. The China interbank bond market (CIBM) which trades the same bonds as are listed on the Shanghai & Shenzhen bond markets, still have the lion’s share of trading volumes.
It is clear that bonds can trade in many ways, with different types of broker and market participant – there is a singular lack of consistency in this ‘fractured market’. This is quite unlike Hong Kong equities where nearly all the equities are going to the exchange with the exception of blocks, and even those get reported on the tape. The development of bond trading platforms and tools is very valuable, and we are moving in the right direction but progress is slow.
Some effort is being made to reduce the number of different bonds available, although anyone at DCM may disagree given the multitude of new issues they have to deal with daily. It will require the maturation of existing bonds and the retirement of a large number of issues before we really find much success there.
With fewer bonds, there is a better chance of being able to trade them more systematically. Right now, it is comparable to the housing market where each and every house is different and you have to look at each one differently. What is needed is a more uniform approach (as it already exists for equities) so that each “Running a multi-asset trading desk inevitably means there are more topics in which our traders have to specialise. There are so many in fact, that the work has been allocated so each trader focuses on a different subject, developing them into the ‘go-to’ trader for that area. ” and every bond isn’t another ‘house’ per se but an ‘apartment’ with known dimensions and specifications, and you can buy it or sell it without actually having to visit the property.
