Chris Pickles, Open Symbology Team, Bloomberg examines reporting standards and initiatives.
Whichever country you operate in, the demands and complexity associated with regulatory reporting have been gradually increasing over the last ten years. That includes transaction reporting to local regulators as well as trade reporting to the market as a whole, irrespective of asset class. As a result, the urgent need to agree and adopt standards that will help regulators to monitor markets and help financial institutions to achieve regulatory compliance more cost-efficiently has become more and more apparent to all involved.
Three key areas that market participants are addressing together with regulators and industry associations are: the process of identifying what has been traded, identifying the nature of the trade and establishing how to communicate all of this information to regulators consistently.
You might think it’s simple for firms themselves to identify what they have traded – but even that isn’t as easy as it seems. Each different area of financial markets currently has different ways of identifying what is being traded. Each country has its own system for identifying equities and bonds, and those domestic identifiers are at the heart of the ISO International Securities Identification Numbering (ISIN) standard.
However, regulators have recently started to recognise that ISINs are little-used outside of the securities (equities and fixed income) sector. Derivatives exchanges have historically generally used their own in-house identifiers with no international standardisation, with OTC derivatives frequently having no recognised identifiers at all. And when it comes to other asset classes, such as commodities, foreign exchange and money markets, and other financial products, such as loans and mortgages, standardising the identification of financial instruments is still in its infancy.
Work is ongoing in the USA and across Europe to agree on how to standardise Unique Product Identifiers (UPIs) and Unique Trade Identifiers (UTIs) for the OTC Derivatives sector. Regulators in Europe are separately proposing the use of non-standardised “Alternative Instrument Identifiers” (AIIs) to identify exchange-traded derivatives. These regulators have started to recognise the vast number of instruments for which there have been no standardised identifiers, saying firms will just have to describe those instruments to the regulators when they report transactions. As yet there is no clear agreement on the approaches to be taken.
While one solution could be to “glue together” lots of different data fields that describe the instrument in question, that approach contradicts basic principles of data management – principles that the Global Financial Markets Association (GFMA) emphasised when the global Legal Entity Identifier (LEI) system was being designed. For an identifier to be unique, persistent and unchanging, it must contain no information about the object that it identifies.
To put all of this into perspective, the ISIN standard was created some 25 years ago and so far around 30 million financial instruments have been allocated ISINs. In parallel, Bloomberg has confirmed that it now has to be able to identify over 220 million instruments and that, on average, the firm is now having to identify an additional 5 million instruments each month.
In the financial markets sector, it would be easy to think ISINs are the norm when, in fact, they identify less than 15% of the instruments that a given financial institution can be involved with. One result of this is that in October 2014 the Object Management Group (OMG), a global standards body, adopted a new standard for Financial Instrument Global Identifiers (FIGIs) that has now been applied by Bloomberg to allocate FIGIs to all of the instruments that it covers.
The second key area being examined is about identifying the nature of a trade and how that impacts the basic information that relates to that trade. Without details of the nature of a trade, information about that trade could be interpreted wrongly. For example, the same identical financial instrument could be traded in two different ways and at two different prices: without knowing how the trade occurred, pricing information about that instrument could be used incorrectly to make investment and trading decisions. Understanding the nature of the trade is where the Market Model Typology (MMT) becomes invaluable.
It’s a natural tendency to expect that financial markets in all countries function in the same way as in your own country – but that’s very often not the case. Just taking one example of this, stock exchanges can operate a market in three ways that are fundamentally different – quote-driven, order-driven matching and order-driven auction – and each of those different market structures can result in different prices for the same equity. A single organisation can operate multiple exchanges and multiple market segments within those exchanges, and each of those can be operating in competition to other exchanges and non-exchange systems, such as Multilateral Trading Facilities (MTFs) and Electronic Crossing Networks (ECNs). All of these can be operating in multiple countries. Achieving a consolidated view of prices across the overall market may be relatively simple, but understanding what those prices mean and how they were arrived at is much more complex.
In the European Union, where there is now a legal requirement to implement one or more systems for providing a consolidated view of the markets in equities across the region (European Consolidated Tape), it became clear some years ago that this would also require a clear definition of the data relating to equity prices. Trade reporting is a regulatory requirement for publication of pricing data to the market as a whole, but that is only of value to the market if the reported information can be clearly understood. The Federation of European Securities Exchanges (FESE) initiated the work on the definition of a “Market Model Typology” (MMT), later expanding this work by including participants from investment firms and relevant industry associations, including the FIX Trading Community. In order to ensure that the MMT is considered and managed as an open standard developed by and for the industry, the coordination of work internationally on the MMT has now been handed over fully to the FIX Trading Community.
At this stage we can therefore see that FIGIs provide a basis for unique identification of financial instruments across all asset classes and the MMT provides a basis for understanding the pricing information about those instruments. The third key area currently being addressed is how to communicate all of this information to the different regulators. Until very recently, regulators have dissociated themselves from industry standards, arguing that regulators are not part of the financial industry and issues surrounding industry standards therefore fall outside their remit. However, practical experience over the last ten years has proved that standards can make a major difference to regulators’ own work as well as to the compliance work of the institutions that they regulate.
As well as an individual country potentially having more than one regulator, financial institutions that have a broad range of activities and that operate in multiple countries frequently have to carry out regulatory reporting in more than one country. Added to that complexity is the fact that regulators want to be able to exchange information meaningfully with each other in order to regulate global financial markets to better effect. There is clearly a vital international requirement for the standardisation of how the market communicates with regulators and how regulators communicate with each other, both in terms of data standards and protocol standards. The European Securities & Markets Authority (ESMA) is one regulatory body actively examining this area. In March this year it gathered responses from market participants about which protocol and data formats they would find most helpful and appropriate to use for regulatory reporting. One of the options given was the use of FIXML, the XML version of the FIX Protocol.
The importance of FIX to the day-to-day operations of investment firms across Europe is clear, but not only for pre-trade activities through to trading: FIX is an ideal standard for use in trade reporting and transaction reporting as well. Being an open industry standard, FIX allows for the use of both ISINs and FIGIs, thereby ensuring that FIX can be used to report all trades and all transactions in any of the 220+ million instruments that financial institutions are involved with today. FIX also enables the MMT to be applied in regulatory reporting so that the information that is delivered has meaningful value to market participants and to regulators internationally.
Regulators are beginning to understand better the importance of standards to efficient and well-regulated markets. It’s now very much up to market participants to take the next important step and emphasise that free, open and non-proprietary standards such as FIX and FIGI are the most appropriate approach for regulators to adopt as well.
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Standards And Regulatory Reporting
Be careful what you wish for : Lynn Strongin Dodds
BE CAREFUL WHAT YOU WISH FOR.
BE CAREFUL WHAT YOU WISH FOR.Greek voters resoundingly voted no, decisively rejecting terms of international bailouts in Sunday’s referendum, but the big question is what is next? Even with controversial finance minister Varoufakis’ resignation, will Prime Minister Alexis Tsipras be in a better position to negotiate with 61% plus behind him, or will the European Union policymakers dig their heels in? The jury is out whether the country is heading out the Euro door and even UK bookies have stopped taking bets due to the volatility of the situation.
Perhaps analysts at Citi summed up the mood best when they dubbed the current situation: “Grimbo” or Greece in limbo. As they pointed out in their note, Grimbo “is a near-certainty and Grexit (Greece Eurozone exit) risk has risen. However, even then, a formal Grexit could still take months or even years to happen.
Returning to the Drachma would allow the country to keep printing money until monetary policy was loose enough to stimulate economic growth and exporters would benefit from a weaker home grown currency. Greece regularly devalued the Drachma, taking it to over 300 per Dollar before it was replaced by the Euro in 2002, from 30 to the Dollar in the 1970s.
The danger, of course is that the government would print so much of the new currency that it would fall too far, creating inflation and soon lacking credibility with the people. Further hardship could lead to a technocrat-run government, civil unrest, or a return to the past in the form of a military coup.
In the meantime and more immediately, Greek banks are fast running out of cash even with capital controls and are unlikely to re-open this week unless the European Central Bank approves an increase in emergency loans today. The ECB may decide it needs the eurozone to guarantee Greek debt if it is to continue supplying emergency loans, as it did in 2012, a decision that would have to be taken by leaders.
Not surprisingly, there are no easy answers but one reasonable solution put forward by some economists is a write-off of Greece’s debt, or at least a deal that would not require any payments for the next ten or 15 years. Additional aid would also have to be injected to help kick start its economy but the population will also have to realise that they will no longer be able to retire early or not pay taxes. Unfortunately, positions have become entrenched and compromises will have to be made. If not, that old saying – be careful what you wish for – has never rung truer.
Lynn Strongin Dodds,
Editor
[divider_line]©BestExecution 2015
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Evolution of Istanbul
With Muammer Çakır, Head of Derivatives (VIOP) Borsa Istanbul
Borsa Istanbul, with historical roots going back to 1873, is a diversified regional and global trading venue in Turkey, home to the world’s oldest known exchange and birthplace of minted coinage, providing trading, settlement, custody and registry services for a wide range of products. Borsa Istanbul operates a broad range of equities, fixed income, derivatives, precious metals and Islamic finance markets in Turkey all under a single umbrella after successfully completing horizontal integration via acquisition of the derivatives and gold exchanges after its de-mutualisation in 2012.
With a Gross Domestic Product (GDP) of $786 billion, Turkey is the 18th largest economy in the world. In less than a decade, per capita income in the country has nearly tripled and exceeded $10,000. Foreign Direct Investment (FDI) per annum has grown from just over $1 billion to an average of $13 billion in the past five years. Turkey’s geopolitical advantage combined with growth opportunities facilitates its journey to become the largest financial center of the Eurasia region. Bridging East to West, Turkey is capable of combining Western and Islamic financial practices more than any other country.
The project to gather Istanbul Stock Exchange (ISE), Istanbul Gold Exchange (IGE) and Turkish Derivatives Exchange (TURKDEX) under the same umbrella to make Istanbul a financial center was started in 2009. Following the Capital Market Law, enacted on December 30, 2012, Borsa Istanbul A.Ş. was founded to become the hub of all centralized trading activities. In 2013 Istanbul Gold Exchange (IGE) and Turkish Derivatives Exchange (TURKDEX) merged under the umbrella of Borsa Istanbul. By these mergers, horizontal integration has been completed successfully. Borsa Istanbul has also increased its equity share at Takasbank (Istanbul Settlement and Custody Bank) and MKK (Central Securities Depository) to complete the vertical integration.
After this merger, all derivatives contracts have started to trade at Borsa Istanbul Derivatives Market (VIOP). As the region’s leading and most liquid derivatives marketplace, investors and corporates use VIOP as a trading venue to manage their risk. VIOP offers the widest range of regional benchmark products across all major asset classes, including futures and options based on equity indices, currencies, precious metals, commodities and energy. With daily average of around 250,000 futures and options contracts traded in 2014, VIOP is an important derivative marketplace to manage risks in its region. The flagship BIST 30 Index futures on the other hand, currently trade, on average, more than 170,000 contracts per day.
On the other hand, since March 2014 Takasbank has become Central Counterparty for all VIOP contracts. In the central counterparty practice Takasbank commits to complete the clearing and settlement for all VIOP contracts by acting as buyer against seller and seller against buyer. Takasbank regulates this service and related issues in line with the CPSS-IOSCO and European Union regulations.
To meet the demand of increasing order flow and trading activity, Borsa Istanbul and NASDAQ OMX Group signed a strategic partnership agreement, which includes the delivery of market-leading technologies to Borsa Istanbul. NASDAQ has become a 5% shareholder of Borsa Istanbul. Key aspects of the agreement include the provision of NASDAQ OMX’s most advanced and complete selection of market technology solutions, based on the globally market-leading Genium INET suite and all associated platforms and applications, with regional resell rights and also eventual self-sufficiency for Borsa Istanbul. Further, the parties are working together to strengthen Borsa Istanbul’s position as a financial center of the Eurasia region.
Moreover, Borsa Istanbul signed a partnership agreement which covers derivatives and index products with the London Stock Exchange Group. Under the terms of this partnership agreement London Stock Exchange Derivatives Market (LSEDM) will offer trading in futures and options contracts on the BIST 30 Index first and on leading Turkish stocks. LCH.Clearnet will provide central counterparty services to LSEDM and its clearing members.
Borsa Istanbul VIOP is cooperating with other exchanges in the region. Sarajevo Stock Exchange blue chip index SASX 10 futures contracts have been listed at VIOP as of December, 2014. Other futures contracts based on the regional exchanges’ blue-chip indices are in the pipeline.
Borsa Istanbul VIOP launches new products in line with the investors’ preferences and hedging needs and has the vision of being a one-stop shop for all sorts of risk management needs in its region. Steel scrap futures contract based on The Steel Index (TSI)’s daily Turkish scrap price index published by Platts was launched on April 2, 2015 to meet the hedging needs of the growing Turkish steel industry participants.
Furthermore The London Metal Exchange (LME) and Borsa Istanbul A.S. signed a partnership agreement under which the LME licensed LME steel billet settlement data to Borsa Istanbul VIOP, and will work with Borsa Istanbul to develop derivatives products and related services for the steel market. Borsa Istanbul also acquired LME’s stake in the clearing house LCH. Clearnet. Additionally, Borsa Istanbul obtained the right to disseminate real time data from the LME and HKEx.
At the moment, VIOP is also working on overnight repo rate futures which will fill the need for an interest rate product in the Turkish markets. Another important project is to increase the liquidity of the commodity futures at VIOP. The currently cash settled contracts, mainly wheat and cotton, will be converted to physically settled ones via licensed warehouse system currently available in Turkey.
In April 2014, the FIX protocol was enabled at VIOP. At the same time Borsa Istanbul launched the Primary Data Center. Borsa Istanbul is able to serve as the data center of the region’s exchanges as part of its strategic partnership with NASDAQ OMX. The Primary Data Center will also offer co-location services for the financial institutions.
Borsa Istanbul VIOP also launched a popular market making program based on revenue sharing. The principle of the program is to distribute the exchange fees collected by Borsa to market makers. The program has become quite successful for single stock futures and is planned to be extended for other products.
Borsa Istanbul Derivatives Market VIOP is dominated by retail investors flow which accounts for 64% of the daily total volume. One of the important strategic objectives is to increase the institutional flow in the Derivatives Market to peer standards. Similarly, even though the foreign investor participation in the total volume has almost doubled from 15% in 2011 to 28% in 2015, as an exchange we are aiming for 40-45% in the next couple of years.
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Electronic Trading In Istanbul
By Michel Balter, Chief Strategy Officer, CameronTec Group
As the transformation of Turkey’s financial markets continues, leading Brokers are investing in new technology to maintain and grow their business. Michel Balter, Chief Strategy Officer for CameronTec Group, takes a closer look at the advancement of FIX connectivity in Turkey’s emerging capital markets, and the ways Sell Side firms can gain more efficient access to Nasdaq BIST.
Today large financial institutions globally are increasingly investing in ways to reduce complexity around their electronic trading environments. Much focus has been around harmonizing front office systems across trading desks and asset classes to reduce disparate silos and redundant technology. The fragmented technology and regulatory landscape in emerging markets such as Turkey, has further complicated these challenges, adding operational cost and risk.
With Turkey now responding to market liberalization, the emerging technology adoption trend is for modern platforms and FIX protocol standards that help reduce cost and complexity, and build out a competitive business platform that will keep them in the game.
FIX alone however, is not the magic connectivity wand, and emerging markets can learn from FIX investment over the past decade or from across the more mature markets. In many cases the widespread adoption and rapid uptake of the FIX protocol has resulted in cobbled-together systems of home-grown and vendor-provided FIX-enabled services including FIX engines, rules engines, and systems for testing, monitoring, customer onboarding, risk management and support services. Many of these firms today are dealing with internal infrastructure that is aging and costing a small fortune to maintain. Upgrading and harmonizing their overall FIX routing, monitoring and testing infrastructure with a complete set of integrated products can dramatically reduce complexity and operational risk, while improving the customer experience.
Up-to-date FIX infrastructure should include integrated systems that enable the application of complex business logic and risk controls with minimal impact to latency. It should also include systems to support automated regression testing and customer onboarding, and make it easy to monitor and manage connectivity. Out-of-the box resilience can help firms optimize their operations, infrastructure and trading capabilities.
Detailed below are three tangible benefits firms can realize as a result of migrating from an outdated FIX network to a more advanced, functionally rich FIX infrastructure.
1. Reducing Complexity
Many financial institutions have grown through acquisitions, and these businesses often end up pushed together with dissimilar technologies and processes in place. This trend has exponentially increased complexity in banks’ infrastructures. When it comes to their trading framework, it’s not uncommon for these firms to have numerous FIX installations that are all siloed.
Accommodating client needs also increases the complexity of a sell-side’s routing infrastructure. Clients often have technical idiosyncrasies that require customization. In many cases, the customized processes are handled with custom code. Order routing infrastructure becomes increasingly convoluted as more custom code is layered onto the system to handle specialized business needs. These layers add more operational risk, increase the difficulty of debugging problems, and require increased maintenance and support resources.
At the same time, the markets themselves are becoming increasingly complex. While this complexity is unavoidable, it’s incumbent on firms to optimize their trading environments as much as possible.
Ideally, an advanced FIX infrastructure solution should help simplify a firm’s trading environment; making it easier to apply business rules without writing code. It should accommodate market complexity while making it simple to organize and update rules. It should include monitoring systems to make it quick and easy to identify issues and debug errors. In essence, it should provide the tools necessary to manage all the complexity.
2. Reducing Operational Risk
All failures have a cost. While not all incur multimillion dollar losses, even minor outages can jeopardize a firm’s reputation or relationship with a client. With allocations rapidly shifting to the emerging markets, operational risk is gaining increasing attention, with the sell-side or buy-side escalating its importance.
A lack of proper testing is often at the root of such outages. Typically regression tests run by firms are manual and based on testing individual FIX messages rather than business logic. Therefore, the tests are unable to provide a truly realistic picture of how a function might perform in a real-life trading situation. Part of the problem is that legacy FIX testing systems don’t allow users test real scenarios with complex flows that are consistent with real trading behavior, so they are unable to predict how systems will behave in more complex scenarios.
Quality assurance teams need the ability to test the entire order lifecycle in an environment that is as true-to-life as possible. They need tools that enable advanced exchange and client simulation capabilities in order to simulate real market conditions involving race conditions, volatility and high throughput, and a variety of order types sent in at volume. Most of these tests are too complex to set up manually. So the only way QA departments can truly run sufficient regression testing is by using sophisticated automated testing tools designed for testing FIX trading infrastructure.
Such an advanced automated testing solution will provide a combination of rich data model-based testing to automate real client behavior; strengthening continuous regression testing and feeding script-based negative testing.
3. Reducing Operating Costs
Legacy FIX architectures are expensive and time-intensive to maintain. Typically these solutions are built on rigid, dated technology with an abundance of custom extensions. So every time updates are required, FIX engineers are manually amending code. And often custom code is not well documented, making it more arduous to uncover issues or errors later on.
Staff reductions at many major banks have compounded the problems. Pared down IT teams are tasked with managing the volume of manual processes surrounding their trading environment. This increasing trend has exposed a real need for automation to be introduced into a number of routine processes that may have once been handled manually when more staff was available.
Advanced FIX infrastructure can automate many of these tasks and simplify others, thereby facilitating the offloading of many tedious activities. Additional order monitoring tools with a proactive alerting solution can provide transversal efficiencies to also help reduce operational costs by arming both business and IT staff with real time order flow insight for engendering a faster response time.
Weighing the Options
Evaluating FIX infrastructure and maintenance costs is integral to investing in the right technology to deliver business value, ensure competitive capabilities and reduce total cost of ownership. When selecting the right technology partner consideration also needs to factor their ability to deliver future connectivity requirements, whether this be related to FIX, ITCH, OUCH or other. Firms migrating to a rich FIX solution that incorporates all of the integrated functionality needed in the trading workflow are able to reduce complexity, thereby allowing them to re-focus internal teams and resources on more strategic projects.
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Seeing through the Cloud
Cloud services need education, articulation to take root in Asian trading
Uncertainties over cloud-based services persist in financial services, and particularly in the trading world. Migrating trading architecture to the cloud has been hindered by regulatory limitations and the lack of a compelling business case.
However, best practice is emerging. As the industry gathers around best practices and establishes uniformity in cloud technology applications, regulatory approval should become easier.
A Cloud by Any Other Name
30 senior leaders from trading and technology backgrounds attended the roundtable discussion in Hong Kong at the China Club, hosted by GlobalTrading. The discussion began with charting the industry’s current usage of cloud services.
“Cloud is a dirty word,” mused Patrick Shum, Head of APAC Trading Systems for Fidelity Worldwide Investment. “Many banks and asset managers are going through a market exercise to understand what applications and cloud technologies we are already using”, Shum added.
“We have always used clouds in the electronic trading world when we used private networks. The question of using the cloud comes up when we discuss public networks,” explained Jim Timmins, COO of FIXFlyer. In years past, financial technology firms built proprietary data centers and maintained all of their data locally, however, many firms now comfortably use secure third-party data centers with managed infrastructure and software for corporate business operations and it is now ripe for FIX and electronic trading Timmins noted.
The understanding of what the cloud is and what it can do is increasingly mature, according to Gareth Bridges Senior Manager of Enterprise for Equinix. “People are starting to consider the implications of data sovereignty, regulatory compliance and leveraging other cloud applications.”
One firm actively considering such applications is Macquarie. “We have been looking to drive usage of the cloud across a spectrum of businesses, but every business’ appetite for cloud applications is different depending on the need they are trying to solve,” commented Ashok Kalyanswamy, Global Head of Equities and Futures Technology at Macquarie. “The number one differentiator of a cloud offering is utility billing and using Infrastructure-as-a-Service, because traditionally technology costs locked in capital expenditure,” observed Kalyanswamy.
It is easier to make the business case to regulators for using the cloud for storage and compute in testing environments, but a production environment in a public cloud faces too many security hurdles at this time, Kalyanswamy said.
Regulation and Security
The reality is cloud computing is saddled with it’s initial positioning. Described as an amorphous, ‘puffy white cloud’ where data was held without individuals and companies needing to worry about how and where that was done; but this worried regulated business, suggested Stacy Baird, Chairman of the Asia Cloud Computing Association (ACCA) Data Governance Committee.
An ACCA report examining 14 Asian countries found the cloud services provider needs to work with the client to get through the regulatory process. “There has to be a better understanding of the regulatory environment by the cloud-services provider as well as the kinds of services will fit that regulatory compliance framework,” Baird said.
The report, Asia’s Financial Services: Ready for the Cloud – A Report on FSI Regulations Impacting Cloud in Asia-Pacific Markets, scored jurisdictions specifically on their approach to cloud for financial and insurance applications.
From a security perspective, internal technology systems may also have greater risks than third-party systems, Timmins said. “Cloud-services providers such as AWS and Lucera have setup their infrastructure from the ground-up to meet information security and regulatory requirements and more importantly systematically update that infrastructure. These cloud-providers can do a lot to help their clients with maintenance and reporting of security updates to improve regulatory and compliance auditing.”
In the past two years, regulators have become more interested to learn how cloud computing can work for their regulated community because they heard of the business benefits, but did not understand how it could fit into their compliance and security regimes, Baird said.
Identifying Best Practice
FIX connectivity which is today a commodity in the capital markets industry becomes a successful case study for trading architecture in the cloud. Whereas trading desks used to own the physical connections to their various brokers and counterparties to achieve an advantage, reliable FIX connectivity via a managed cloud service allows traders to focus resources without dedicating time and personnel to managing a wired FIX infrastructure, Timmins explained.
Latency-sensitive systems, however, do not fit that model. “If it’s latency-sensitive, for example market-making, activity will still be on a traditional compute platform until the performance in virtual environments is suitable” Kalyanswamy said.
Understanding not only which business processes can be moved to the cloud, but which parts of the business process can be moved, is critical for ensuring data compliance. “Moving to the cloud will not be about picking up what we have today and dropping it into another facility. We should look for ways to solve customers’ bigger problems by improving application capabilities through direct access to multiple clouds, data sources and network providers,” Bridges suggested.
A better understand the location of customer data should enable more informed decisions about what to keep on the cloud as security improves. “As a customer, I’m pleased to see the providers investing in cloud-computing,” Shum opined. “When we have business problems, cloud-services should provide additional tools we can deploy to solve them.”
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Hong Kong’s New Era
New markets, assets dominate 2015 HKEx Hosting Services Ecosystem Forum
Mainland links, regulatory changes and commodities expansion as well as the theme of innovation drove the discussion at this year’s HKEx Hosting Services Forum. Attended by more than 300 market participants, the event departed from prior years focus on technical developments to identify the most pressing issues faced by Hong Kong’s markets.
Jonathan Leung, Senior Vice President and Head of Hosting Services, HKEx opened the forum highlighting the growth in market activity as a result of active take up of HKEx’s hosting services.
A new era of mutual market access beckons, according to Richard Leung, HKEx Managing Director and Co-Head of IT. He presented the current stage of HKEx’s development in the context of a recent history that’s featured more Chinese IPOs, domestic growth and finally opening up to international listings.
Having bought the London Metal Exchange (LME) in 2012, HKEx is now utilizing the LME’s price mechanisms to offer hedging tools to commodities users and traders in China. Connecting with China was a strategic motivation behind the acquisition of LME, according to Rebecca Brosnan, Managing Director and Head of Asia Commodities for HKEx. Brosnan, who helped orchestrate the £1.4 billion deal, has rolled out new commodities derivatives products to the vast commodities flows into China.
Work on the Shanghai-Hong Kong Stock Connect began almost immediately after the LME acquisition was completed, although it was only made public in 2014. After trading began in November 2014, there were many questions and concerns as the aggregate quota use remained relatively low. However, April’s sudden rise in southbound trading has demonstrated the possibilities traders had hoped for.
Citi’s Endre Markos, Director and Regional Head of Execution to Custody, Markets and Securities Services lead a panel featuring buy-side and sell-side views on the six-month-old trading link between Hong Kong and Shanghai. Although the focus was on how the right balance between regulation and products was found for the initial launch, Tae Yoo, HKEx’s Managing Director and Head of Fixed Income Currency Development and Client Business Development, noted subsequent enhancements will improve the programme.
“The Shanghai-Hong Kong Stock Connect was eagerly awaited by Fidelity. From a fundamental perspective, we are excited about the opportunity to invest in China. From an operational perspective, there were a number of questions we had to address around trading, settlement and other functional areas to be ready to trade on day one, which we were able to do successfully.” said Chris Seabolt, Asia Head of Trading for Fidelity Management and Research.
Emma Quinn, Global Co-Head of Equity Trading for AllianceBernstein, commented that having another mechanism besides QFII to accessing China to service their China funds was a significant benefit.
Many broker’s QFII allocation was fully committed before the Stock Connect launched, and since then, QFII has become available again as firms choose to take positions through Stock Connect, noted Hani Shalabi, Head of Advanced Execution Services for Credit Suisse.
International investors have to become comfortable with an opportunity before they pursue it. Having already integrated QFII into investor disclosures, major fund houses may need to wait a year before beginning the comprehensive task of adding new compliance-approved disclosures about positions taken via Stock Connect, commented Dean Chisholm, Regional Head of Operations for Invesco.
After the forum’s break, HKEx’s PC Wong, Senior Vice President, Derivatives Trading gave an update on the take up of derivatives at HKEx, noting stock options now make up half of trading volume. After 1.2 million contracts were traded on 13 April 2015, Wong is confident that larger cash market turnover will generate further interest in the derivative instruments.
With the consultation period on the exchange’s proposed Volatility Control Mechanism (VCM) and Closing Auction Session (CAS) recently ended, HKEx ’s Senior Vice President for Cash Trading, Sally Kwok, discussed the rationale for the proposals and HKEx’s objectives of protecting market integrity as well as satisfying the needs of all market participants.
While a VCM is standard for trading venues in many different markets, there is open debate on the ideal VCM model and the specific features it should have, such as using dynamic versus static limits for volatility triggers, the number of times a trigger can be activated, and how to exit the VCM’s controls after they are triggered. The CAS is a significant priority for institutional investors required to trade at a closing price. The proposed model is aimed at addressing institutions’ needs as well as possible concerns of other market participants. HKEx anticipates it will publish its consultation conclusions and next steps sometime in 2015.
HKEx’s Winnie Poon, Senior Vice President and Head of Market Data, outlined HKEx’s tiered data offerings before a final panel on risk regulation and technology, moderated by Greg Lee, Barclay’s Director and Head of Equity Electronic Trading, Asia Pacific.
“A big change from our side is that we now make sure risk checks are also done on our side. The issue then becomes coordinating our risk checks with multiple brokers all employing slightly different approaches,” noted Lee Bray, Head of Trading, Asia Pacific, JP Morgan Asset Management.
Brokers also have to consider which regulator is reviewing the order, as retail orders will be assessed by the Hong Kong Monetary Authority with one set of objectives, while institutional orders are evaluated separately by the Securities and Futures Commission, observed Sanji Shivalingam, UBS’ APAC Head of Algorithms and Analytics.
Regulatory, technical and market structure changes have created a buzz around the Hong Kong market that is only surpassed by the din of broken trading records. A new era is underway.
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Driving The Debate
Dave Lauer, Co-founder of Healthy Markets and President of KOR Group examines changes to market structure, and how firms need to involve themselves in the debate.
It seems that not a week can pass without mention of market structure, especially in US equity markets. While the debate has raged for decades, the years up to and following Regulation NMS have proven particularly dramatic. We’re now a year past the publication of Flash Boys, although many of us were focused on market structure well before that book, and most likely will be long after the paperback gathers dust in a used book store.
Over the past few years, many firms from across the industry have recognised the need to get further involved in the market structure debate. Generally this is a self-interested motivation – market structure has a dramatic (though not necessarily well-understood) impact on firms throughout the world. Certainly it is simple to understand why exchanges and broker-dealers are actively lobbying Congress and the SEC for / against new regulations, such as maker-taker reform to address broker routing conflicts, or a trade-at rule to bring more volume on to lit exchanges. What may be less obvious is why asset managers, and the buy-side in general, should be taking a much more active role.
When it comes down to it, the buy-side is the ultimate “consumer” of the market – it’s the buy-side firms whose orders are being executed in the market, and these are the firms that must ultimately answer to their clients. Reliance on the sell-side and their analysis of execution quality is no longer sufficient for the buy-side.
While several buy-side firms have recognised the importance of being represented in the ongoing debate, appearing on Congressional and SEC panels, or meeting with lawmakers and the SEC privately, these efforts have generally been loosely organised. There is no doubt that broader organisations such as ICI and MFA have been a part of this movement as well, but only as a small piece of their much larger and broader organisational focus.
These limitations have had significant consequences for the discussion around market structure reform. Buy-side organisations have struggled to find a common set of beliefs or ideas that their entire membership can coalesce behind, and so have found themselves mostly reacting to issues or ideas from others, rather than leading the debate. There have not been any strategic attempts to mobilise the buy-side to drive the market structure debate, to lead with ideas and a concrete platform of changes.
We believe there is a better way. My colleagues and I formed the Healthy Markets Association almost a year ago to lead the way. We formed this non-profit to be a small group of buy-side firms to drive reforms, both within the industry and from a regulatory / legislative perspective. We believe that the buy-side should be the leading voice in the market structure debate, while constructively engaging the rest of the industry.
The Healthy Markets Association is a US non-profit coalition of buy-side firms led by independent experts in market structure analysis and research. Our mission is to reduce complexity, increase transparency, improve understanding, and enhance efficiency and quality in US markets. Healthy Markets coalesces around a clear set of principles for which we believe industry-wide support is achievable:
· Transparency
· Accurate Metrics
· Data Freedom
· Displayed Liquidity
· Heightened Competition
To accomplish this, we believe we can drive changes within the industry. Our focus is on ATS transparency, data-driven research and better market structure metrics. Within each of these areas of focus, we are facilitating cooperation between the buy-side work and the rest of the industry, including ATSs, exchanges, market makers and broker/dealers. We work with leading ATSs to enhance voluntary disclosure in the industry, so that regulatory intervention is not needed. We work with market makers and SROs to build the Healthy Markets Research Institute, so academics can study markets with unprecedented data sets.
One of the more important initiatives worth highlighting is our work around Best Execution. As markets grow in complexity, the buy-side can no longer solely rely on brokers to reliably demonstrate execution quality. Third-party accreditation of both buy-side firms and brokers is needed, and Healthy Markets is leading the way by bringing firms together to agree on an accreditation methodology, a set of metrics and how those metrics should be measured. We seek to transform how the buy-side and brokers look at execution quality, order routing and meeting Best Execution obligations.
There is a tremendous amount of regulatory attention on Best Execution. Regulators often base regulations on industry best practices, which is why we believe that the buy-side must lead the industry forward to ensure those regulations are sensible and in the best interests of investors.
Some of our members have joined because they want to be leading voices and thought leaders as market structure changes happen. Others want to be publicly seen as contributing to this leading effort to promote sensible industry changes. And some want to join because they believe market structure is taking up too much of their time, and would like Healthy Markets and the work we are doing to relieve them of that burden.
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A Pivot To Asia
With Josh Crabb, Head of Asian Equities at Old Mutual Global Investors
The sell-side has been going through a relatively rough few years, with changes to unbundling and commission spend, with increasing regulatory burden and they have been in a long cost cutting cycle. They have had to cut back on their number of desks and research teams. They are focusing more on electronic desks, and asset classes that generate higher revenues. However, from the buy-side perspective, we’re generally still seeing firms looking to increase global operations away from their original hubs. Firms are looking to increase their global presence to take advantage of markets that are increasingly open, and to get teams on the ground to manage those funds.
Asia is a strong market that continues to grow, and so with those two elements that are happening at the same time; where on one side you’re still seeing contraction and rationalisation, and on the buy-side there is room for expansion, we wanted to take advantage of this shift, and we chose to open an office in Hong Kong at this time.
Trading follows where investment wants to go, so while we have a centralised dealing desk in London, and that’s been where most of the investment has been done, our move to having a second investment based hub in Hong Kong is part of our view that Asia is becoming increasingly important. This is a region where we’ve always had some exposure but we’ve decided to expand and have an operation out here, an investment team and the trading that is associated with that. We’re going through that process at the moment.
A long term plan
There’s been a number of changes in our organisation over the last three years with regard to the asset management business. We’ve been putting in a lot of effort into what we want to do as a business. And the Asian part of that journey is quite significant because it’s the first time we’re going overseas. But it is important to say that it is not being driven by more recent developments such as the stock connect, etc. It’s a commitment to the region because of what we see happening over the next decade or so.
If I talk about me personally rather than the business, part of the reason why I think this is an interesting time do something somewhere new and innovative is because we are in a scenario where stock markets are undervalued. The combination of market factors and outlook, and the structural reforms such as Stock Connect, etc. is going to be positive for the markets. So for me, it’s a very interesting time to be in a place where I do have flexibility and room for innovative to take advantage of those circumstances. However, for the organisation I think the commitment to Asia has been something that’s being building up over the last couple of years as part of what we’re trying to do as a business as a whole.
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Franklin Templeton AIR Summit 2015: Changing Technology, Finding Alpha
With Bill Stephenson, Director of Global Trading Strategy, Franklin Templeton
How technology is changing traditional operations at asset managers:
Innovation will disrupt pretty much every industry over the next five to 10 years, and those that embrace change and different ways of thinking are most likely to be part of the next generation of winners. Technology is certainly at the center of innovation across industries, and the asset management industry will be no different. Many disruptors don’t even view themselves in the same industry as their supposed competitors. For example Uber, Tesla, and Airbnb consider themselves technology companies and approach traditional business problems from a completely different angle. The attendees at the Franklin Templeton AIR Summit were looking for that angle which will differentiate them from their competitors (some of whom were also in attendance), especially in the highly competitive arena of active portfolio management, which today is a $16 trillion asset business in the US alone. There is no question a ‘technology’ company will look for ways to disrupt our business – we are already seeing pockets of this in the financial adviser space with so-called ‘robo-advisers’ gathering billions of dollars in assets and providing highly scalable personal investment advice. As Dan Kaufman said as part of his hour-long introduction to the innovative work at DARPA; don’t be someone with a vested interest in thinking about the world the way you always have. In his example, that is why Amazon was able to disrupt the publishing business.
With many lines beginning to be become blurred within investment management, ie active vs. passive, trader vs. portfolio manager, alpha vs. beta, etc., strategic leaders are becoming more creative in how they think about the ways they add value to their domain and are driving more collaboration across different roles in the investment process. Certainly within trading, we saw the advent of algorithms 15 years ago, and now we are seeing traditional long-only trading and investment teams comprised of Phd caliber quants that are scouring social media data, satellite images, and other unique public data sets. This analysis is being leveraged throughout the entire investment process. Firms are becoming proficient in automation, machine learning, and other quantitative techniques that make their processes more predictable and scalable. Even portfolio managers are getting in the game by utilizing sophisticated tools to measure and understand their biases in their own decision making process. We have highlighted several of these vendors at our 2014 and 2015 events as the behavioral side of our business can be misunderstood – and hacking it can lead to a significant competitive advantage.
So, there is this symbiosis developing between technology and humans that will drive our industry to new heights and all innovation in general. Those that don’t shy away from innovation, change, and collaboration will ultimately generate new kinds of alpha and expand the active asset management industry. We hope the AIR Summit can be one of those events that can continue to get industry participants to re-think their process and how they can leverage technology solutions that will keep them competitive.
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Franklin Templeton AIR Summit 2015: Changing Technology, Finding Alpha – Part 2
By Joseph Sowin, Head of Global Equity Trading at Highland Capital
One of the key takeaways from the conference for me was awareness: what new innovations currently exist that can improve investment making decisions? How do I access innovative and potentially alpha generating ideas? AIR Summit 2.0 provided a forum, a collaborative showcase for not only buy-side but all market participants. This continued through a theme of interoperability. Once new alpha enhancing innovations are discovered, it is our job to map across investment infrastructure, and with technology moving at a faster pace, innovation/capitalism knows few boundaries. My challenge is to remain ahead of the technological curve.
Social media has virtually zero boundaries. News is coming from non-traditional sources at faster paces. The challenge becomes filtering noise to deliver actionable signals for the investment process.
Technology has allowed us to do more in less time and in more efficient manner. Examples include but are not limited to; functions such as trade entry, pre-trade compliance, trading platforms, risk management, operations, and trading which are easier due to technological enhancements.
Trade Entry: at the click of a button, portfolio managers now have the ability to send multiple orders from positions screen to trading desk.
Pre-trade compliance: checks are automatically performed prior to an order being placed on blotter. This is scalable. Many rules for various investment preferences have widened the asset managers’ range.
Multi-asset class trading platforms: integration of exchange and broker data allows seamless routing to counterparties via fix connection which leads to facilitation of settlement process.
For the trader, electronic trading initially allowed a shift to less expensive trading. Secondly, customization of low touch strategies helped drive performance. There have also been steps taken in pre-trade trading strategies analyzing a range of factors including momentum, average bid/ask spread, block size, average dark liquidity available, etc.
And changes to pre-trade and post-trade execution analysis has allowed for process improvement and shortened feedback loop from trading desk back to portfolio manager.
Further developments have been made in commission aggregation, software designed at corporate access, securities lending, risk management and operations to name a few.
I am always amazed at the resources within our grasp. The presenters at the conference are building algorithmically designed services and products with the intent of identifying, classifying, and determining significance of real-time information to deliver alpha to the investment process. These signals are designed as a compliment to existing research process not a replacement by saving time and focusing on discovering actionable insights. Overall, I was very impressed with the structure and content of the conference.
Orbital Insight was the best presentation and carried a “wow” factor due to utilisation of satellite images as a compliment to the investment process. The visualisation of idiosyncratic factors is compelling. They spun out of Oxford University in 2011, and were intellectually compelling and thought provoking, and I look forward to following them more in depth.
For us a key target is to identify areas within our firm where technology can enhance functional domains such as trading, risk management, compliance, and overall investment process. We also need to examine each vendor within each domain for interoperability and concordance with current systems capacity, and then create an implementation schedule, and evaluate effectiveness.
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