By Christian J. Zimmer and Hellinton Hatsuo Takada, Itaú Asset Management
The FIX Protocol is present whenever someone thinks about the terms “electronic” and “trading” together. Rare is the case that another protocol, i.e. a proprietary one, is used. Of course, there are several criticisms that can be leveled at the FIX Protocol. These are mainly related to performance and its text encoding, and for special demands like HFT where other protocols may currently be better. However, the FIX Protocol is consolidated as the worldwide standard, and sometimes other protocols are even being converted to it before being processed by market participants.
In the other extreme, there are cases when the market is still highly dependent on human interaction and far away from a liquid virtual trading environment. Latin American corporate bonds are examples of such securities. It is also the case for non-standardised OTC contracts. Clearly, electronic trading is not directly associated with such scenarios. For the electronification of the market, price disclosure is usually the first step. Data providers showing those prices on their screens open the door for electronic pre-trade arrangements via IOIs and RFQs. The FIX Protocol comes into play again to automate these processes.
In another scenario, when it comes to post-trade, the FIX Protocol has an important role for cost savings and reduction of operational risk. It really helps to standardise the processes among the different business partners. Unfortunately, even for the international equity markets, the number of broker dealers that currently support FIX for post-trade allocations is still limited. File uploading via FTP is very common. However, changes are taking place in this space as there is an active group within FPL led by a group of asset management firms that are encouraging FIX messaging for post-trade equities and as a result demand is expected to grow.
At Itaú Asset Management, we go even further with the FIX Protocol. We treat it as an important tool for integration between our internal systems. Everyone remembers the traditional conflict between STP and modularity. The FIX Protocol standardised and smoothed the path to modularity! There is no need for creating and managing interfaces, APIs or even Enterprise Service Buses. It is just necessary to include a FIX engine in your application and specify the communication details to every other application via an XML configuration file.
Is the FIX Protocol the best solution for all business needs? Perhaps… It depends on the specific business complexity, performance and security requirements, and on how good the apps involved can talk FIX. Writing FIX wrappers for each appliance you have will consume some development resources for a time. However, you will benefit from this in the mid-term, standardising the support and decreasing the bargaining power of system suppliers.
Talking specifically about the buy-side trading cycle, the FIX Protocol allowed us to choose the best OMS for our portfolio managers. The OMS routes the orders to our traders. Each trader can choose which EMS best suites them. No need to be a prisoner of a sub-optimal EMS-included OMS. Neither does the portfolio manager adequate his work to the traders’ choices concerning EMSs. The EMSs send the orders to our trading risk system and they are routed to the counterparties by a FIX gateway. Once again, any new connectivity or liquidity provider can be set up in a very short time at the gateway. All communication is done in FIX. Our time to business is highly reduced. No expensive, hard to change STP solution but full flexibility with no interface headaches.
FIX: Beyond Equity Trading
News : SunGard named best market risk solution provider. Source : Waters Technology Rankings 2013
SUNGARD NAMED BEST MARKET RISK SOLUTION PROVIDER.
25 July, 2013
SunGard’s Adaptiv solution has been awarded “Best Market Risk Solution Provider” in the 2013 Waters Technology Rankings.
The awards, which are voted for by readers of Waters magazine and industry participants, recognize excellence among providers to the financial industry.
SunGard’s Adaptiv provides enterprise-wide credit and market risk management and risk pricing solutions for financial institutions. The solution, which can be deployed on a hosted platform or in-house, helps customers measure, manage and monitor market risk. It also helps provide a true portrayal of positions, which supports risk reporting and helps firms meet regulatory requirements. By helping to provide improved risk management, SunGard’s Adaptiv helps firms enhance their competitive performance.
Adaptiv’s market risk solution is designed to help meet the regulatory and internal requirements for enterprise market risk assessment, control and reporting. It helps equip firms with improved analytical capabilities to better identify sources of risk for enhanced trading and risk decision making. The solution’s rich infrastructure supports Basel and other regulatory requirements including: Value at Risk (VaR), Stress VaR, worst historical period, Equity Specific Risk, Debt Specific Risk, Stress Testing, VaR Back Testing and Incremental Risk Charge (IRC).
“The Adaptiv solution suite is helping more than 120 firms worldwide improve transparency of risk data and adopt a more strategic risk management practice. This latest accolade, voted for by the industry, reflects SunGard’s continued commitment to develop solutions that help financial institutions enhance risk infrastructures and drive competitive advantage for improved risk management,” commented Juerg Hunziker, president, Trading & Risk solutions of SunGard’s Capital Markets business .
News : Goldman Sachs offers top clients automated block trading. Source : Economic Times
Economic Times Goldman Sachs offers top clients automated block trading Economic Times While robot-like machines now rule many aspects of equities trading they have not displaced humans in block trading because some clients still prefer talking to…
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Are you on the hook?
Is the Hong Kong regulator going to come knocking on your door?
With the release of the Hong Kong Regulator’s (the Securities and Futures Commission) conclusions on its recent consultation paper on the regulation of electronic trading, the institutional trading community in Hong Kong, and those who trade into Hong Kong from abroad, began to look at their new obligations. A principal area for concern are the new efforts by the SFC to have buy-side users of algorithmic trading strategies, and the brokers who route those strategies, to have documented due diligence and training on the use of those algos, including areas such as responsibility for orders, a dequacy of systems, risk management (internet trading and DMA), qualification, testing, and risk management (algorithmic trading), for when the regulations come into effect in January 2014. As Robert Laible, Division Director at Macquarie and Co-chair of the FPL Asia Pacific Exchanges and Regulatory Working Group says “users need to understand exactly how [their alogs] perform and what they should be used for. I don’t think you can say “I relied on my broker-dealer and he told me it was a good algo” anymore; those days are gone.”
Jessica Morrison, Head of Market Structure APAC at Deutsche Bank, and also Co-chair of the FPL Asia Pacific Exchanges and Regulatory Working Group adds “the SFC has come to focus on the risk controls, testing process, documentation and audit trail, including looking to assign responsibility to people in a more defined way. The SFC basically want to make sure that algos are being rolled out in a thoughtful manner and have been tested properly, and if they do have a negative impact on the market, who is responsible?”
The burden
As with all new regulation, there is an inevitable burden to be placed on market participants, and as is often the case, much of this burden will sit with the sell-side. But, as Ashley Alder, CEO of the SFC said in a recent interview with GlobalTrading “The answer is that you absolutely need to check out [the system you use] – because if you don’t, the risks you are taking on are unknowable; you would be flying blind.”
However, Rob Laible contests, “most firms have been doing this to a large extent, but it may not have been a formalised written policy. Now things are going to have to be much more formal and there is a greater element of record keeping, implying there will be added cost.” The difficulty for sell-side firms is the control of what comes through their infrastructure, especially if they didn’t write the algorithms in use themselves, and doubly so if the buy-side firms employing these algos are based outside of Hong Kong. Jessica Morrison explains, “Where the client writes their own algo, the broker is expected to have a good understanding of the electronic trading systems and algos the clients use. This will get quite hard for the brokeragecommunity, particularly where those clients are offshore. With some offshore traders that have sophisticated strategies not being directly regulated by the SFC, How willing will they be to attest to their broker on how their algos have been developed and tested? A concern for the brokerage community is that there could be brokers willing to take on those clients without proper due diligence, and this could put pressure on others to also lower the standards bar as no one wants to lose a client. But you also don’t want a client that puts you at regulatory risk, so the brokers have to consider the balance very carefully.”
Testing environment
One practical aspect being closely examined by market participants is the need for a suitable testing environment at the Hong Kong Stock Exchange to allow for rigorous testing of new algos. Jessica specifies that “We want the exchange to offer a rich enough environment that we can try to break our own controls, to ensure that they work. We need that environment to be as close to a live 
environment as possible – it is difficult to get confident that your testing was good enough, if it was only in a very simple stable low volume market environment.” But there are signs of progress being made in this area, as Rob reflects “The fact that the exchange has become more sensitive to our needs, and is offering up a potential opportunity to use some infrastructure that would be as close as possible to production, is a good thing.”
Industry body collaboration
Currently leading industry groups are working on a consolidated industry approach to the SFC regulations on electronic trading to ensure that there is ample education for firms both based in Hong Kong, and those that the new regulations affect based elsewhere in the world. Jessica elaborates further, “The collaboration between industry groups started off as FPL, AIMA, ASIFMA and ATF and it is hopefully growing. We are keen to expand to as many as groups as possible. We are focusing on the process of attestation between the various interested parties. This industry group is working on a set of documents that are relatively standardised so that firms can use a template rather than having to respond to potentially hundreds of different enquiries, and that will minimise the practical workload that will come along with this. The interesting thing about standardisation is that is also allows the buy-side to compare various brokers on their diligence.”
Nick Ronalds, Managing Director of ASIFMA concludes that “the new regulations broaden the scope and rigour of due diligence requirements on a range of fronts. If every broker adopts a different set of standards and requirements it will lead to greater complexity, higher costs, and potential confusion among clients. We think a collaborative industry approach is crucial so that all participants can adopt common standards, protocols, and procedures.”
The buy-side’s involvement in the broader conversation is also paramount, as Matthew Saul, Head of Trading Asia ex Japan at Fidelity, and Chair of the Asia Trader Forum noted “ATF is glad to see the sell-side approaching this in a co-operative manner. However, it will be ascramble for many buy-sides to have the levels of formalised process in place that the SFC regulations might require by January 1st [the SFC’s implementation deadline], but certainly everyone in the ATF group will be heading in the right direction.”
As APAC Regional Director of the FIX Protocol industry standards organisation, Edward Mangles adds “a natural role for us is to work alongside other industry organisations to create practical solutions, and this current collaboration is moving the industry towards a set of robust best practice guidelines.”
The point of principles-based regulation is that firms have to collectively and independently exercise judgement and implement the appropriate level of diligence.
As Rob Laible states, “The SFC is saying that they’re not going to tell you how to pass any test – they want to make sure you have appropriate procedures, and that they achieve what they are supposed to do, and if the SFC come knocking, firms must be able to explain their procedures in an intelligent, meaningful way, and demonstrate how they work.”
Paul Squires : AXA IM
The Summer, 2013 issue leads with a frank interview with Paul Squires of AXA IM.
TAKING THE LEAD.
Paul Squires of AXA IM discusses how the financial crisis gave rise to the empowered buyside trader.
What impact do you think MiFID II will have?
I do not expect it to materially change our commercial proposition. We would have to change our algos if for example they got rid of the reference point waiver or minimum resting period but it will not have an impact on whether there is a need for a buyside trader. I would like to see a consolidated tape come out of MiFID II but I think the focus has shifted from seeking the perfect ‘tool’ to more general enhancements to post-trade reporting standards and granularity.
Overall, I think that the Financial Transaction Tax(es) will have a more significant impact on the industry. The Italian and French versions have not caused too much of a concern in terms of deteriorating liquidity and spreads. However, the initial European draft will be significantly more damaging if it goes ahead in its current form. In short it could encourage global market arbitrage and it would ultimately affect the real economy which is probably why there are already counter-proposals to water it down.
What about EMIR (European Market Infrastructure Regulation)?
This is where our focus has been recently. We are setting up front to back end processes and structures to meet the new requirements. As part of that due diligence, we have drawn up a shortlist of clearing members we would like to work with.
How has the relationship with the sellside changed since the financial crisis?
In the past there was a greater reliance on the sellside to provide the intelligence, tools, analytics and systems. The buyside trader would pick up the phone to the sellside sales trader and have a conversation about the orders and form of execution. This has changed and what we have seen over the past few years is the empowerment of the buyside trader. One reason has been the rationalisation on the sellside because of falling commissions and shrinking margins. This has been unsettling for us and the industry because, among other things, people form professional relationships with people they work with so closely and this can add value to the execution process. However, the buyside can’t really complain because to some extent we drove the model by wanting those lower commissions and more algorithmic trading.
What has been the result?
We are more in charge of the decision making process (around execution) but this has come at a cost in that you need to have the right tools and capabilities to do it yourself. We conduct rigorous due diligence and trade with around 100 different brokers although we have significantly consolidated our list over the past three to four years. A big percentage of our flow goes through our top 20 or so brokers with a large tail being handled by local specialists used for specific mandates such as small caps or emerging markets. We rate brokers on a variety of criteria with transaction cost analysis accounting for a 35% weighting followed by the quality of execution intelligence, IOIs (indications of interest) and general service.
I actually don’t see too much difference between the top global brokers because they provide almost everything we want. The level of service is not the same though as in the pre-Lehman days where there were maybe 30 sales traders covering different markets and sectors. Their headcount has been cut at the same time that their client base has grown. This means they do not have time to be as proactive, scrutinise markets and stocks or call us with any breaking news in a particular stock for example if an order has been executed.
Do you think that unbundling is finally happening?
Yes, I think we are actually beginning to see the dawn of a new era. The Financial Conduct Authority has reinforced to fund managers the need to avoid conflicts of interest and to split the commission components more than they did in the past. Having the execution decision segregated from where advisory services are being consumed is liberating and positive from a clients’ perspective: it is their money and it is important to ask whether you are using their commission spend for execution and advisory services in the most effective way.
There is a trend toward multi-asset trading today, although I know AXA was one of the first. How has it developed?
We introduced a new order management system (OMS) in 2005 from which all asset classes were executed. This enabled connectivity to be set up and provided us with an STP (‘straight through processing’) solution for equities, fixed income and FX: using FIX either directly to brokers or to RFQ (‘request for quote’) platforms. More recently we have integrated an execution management system (EMS) to enhance the functionality of a single platform for multi-asset trading. We started with equities, which upgraded our algo capabilities to offer greater granularity on how we are trading, which venues we are using, and are about to move FX onto our EMS, which has already enabled us to deliver enhanced execution performance analysis. This supplemented the benchmarking work that we had already been providing in fixed income using our proprietary tools.
Do you think there will be more consolidation on the exchange and MTF front?
Do you think there will be more consolidation on the exchange and MTF front?The proposed merger between ICE and NYSE Euronext is interesting because it proves exchanges are not profit generators in their own right but need technology, clearing, derivatives and data to make money. The merger between Chi-X and BATS also shows that they needed to diversify their own channels. However, some countries still seem to attach some Nationalistic ‘prestige’ to owning their own primary exchanges which represents something of a constraint to consolidation and we also see other entrants launching new venues.
Looking ahead what opportunities do you see for your business?
What we have done over the past four years has been partly strategic and partly in response to the market environment and changing client requirements. I do think there will be opportunities in the outsourcing of execution services as smaller to medium sized asset management firms may not have the resources to have dedicated traders and the infrastructure or expertise required to meet the accelerated regulatory changes.
I think the extension of outsourcing of back office operations to a review of segregated trading desks is something that might emerge. We have 31 traders across all asset classes including derivatives, have a technology platform which enables connectivity, performance analysis and client bespoke reporting and spare capacity to take advantage of such economies of scale. If the need for further investment in a trading capability becomes more of a barrier to entry for smaller asset managers then consolidation of such services could easily occur in buyside trading as it has done elsewhere.
[Biography] Paul Squires is head of trading within the trading and securities financing (TSF) team, covering all asset classes including derivatives. He has held this position since 2006. He started his professional career as a UK equity trader for Mercury Asset Management (now Blackrock) in 1993, before becoming a UK equity trader for Sun Life Investment Management in 1996 (subsequently taken over by AXA) and going on to trade European equities there in 1999. In 2003 he set up the fixed income trading team in the UK. Squires has a BA (Hons) in business economics from Reading University and holds both the IMC and the SFA registered representative qualifications. He is also an independent non-executive director of Smartpool Trading and co-chair of the FPL Investment Management Working Group. ©BestExecution 2013Announcement : Liquidnet posts strong 1st half results
LIQUIDNET’S STRONG PERFORMANCE SIGNALS BEGINNING OF ROTATION BACK TO EQUITIES.
Strong Global Performance Bolstered by Ranking as Best Broker in the World for Second Year in a Row
New York – July 23, 2013
Liquidnet, the global institutional trading network, today announced strong quarterly performance in EMEA and a record first half in Asia Pacific. In addition, Liquidnet announced that for the second year in a row, it achieved the ranking of #1 Brokerage Firm in both the global and North American rankings by Abel/Noser Solutions, provider of broker-neutral pre-trade, real-time and post-trade tools for institutional investors.
“We have built a company with a global liquidity pool that is truly unique in its scale, safety and size of execution. As the money being pulled from bond funds starts to flow back into equities, asset managers will continue to rely on Liquidnet to execute in much larger size without moving the market. It simply means better performance for their funds,” said Seth Merrin, Founder and CEO at Liquidnet. “The consistency of this ranking as best broker is a significant reason why Liquidnet remains a top destination for institutions looking to maximize performance.”
Strong 1st Half Performance
The first half of 2013 showcased a renewed surge in equities investing compared to the year prior. Liquidnet’s APAC region experienced a record first half of the year. Aside from launching Thailand, Liquidnet’s 10th market in Asia Pacific and 42nd market globally, the region also reported record average daily liquidity up 27% for the first half of 2013 at $10.5B from $8.3B in the first half of 2012. The execution size for Asia Pacific for the first half averaged $1.25M USD.
Liquidnet EMEA also had a very strong first half, average principal traded rose 57% to $359M in the first half of 2013. Globally, average daily liquidity showed an uptick of 24% compared to same time last year – up to $81.6B from $65.6B in principal.
Our dominance in block trading also continued in the first half, as 76% of the time our Members traded a U.S. stock they executed either the 1st or 2nd largest print of the day in that stock. For small cap stocks, Members executed the 1st or 2nd largest prints of the day 87% of the time. In addition, Liquidnet has executed the largest trade of the year thus far in 294 distinct U.S. securities.
Mike Seigne and Rob Crane : Goldman Sachs
THE DIFFERENT FLAVOURS OF EXECUTION.
Rob Crane (left) and Mike Seigne (right), co-heads of electronic trading for EMEA at Goldman Sachs talk about offering their clients more choice.
What changes have been made since the financial crisis?
MS: We have been focused on many things, but central to our changes is improving liquidity access for our clients. In the first phase, post MiFID I, it was all about re-aggregation of venues. Now it’s more about changing how we offer execution services to help address fragmentation of liquidity resulting from different business models or execution silos. One of our key strengths is our ability to move quickly. We have reacted to meet our clients’ demand to offer a new set of options to better service their execution needs. Now, clients can have a single point of contact or a fully segregated service for their different trading requirements. The goal is to put the choice in our clients’ hands whilst being both skilled and technically able to deliver execution excellence across the board.
RC: As a firm we are strong believers in maintaining specialisation and not just offering a homogenous execution model. Many clients really value expertise and detailed, in-depth knowledge, others are happier with a single point of contact, and some are somewhere in between; we are now able to cater for all.
As a result of these changes, how different is the role of the sales trader today?
RC: In the past, the sales trader focused on directing highly relevant stock and market information to clients and managing a predominantly manual order flow. Now, they still deliver the content but also act as the conduit between all Goldman Sachs has to offer and how those products can be tailored to a client’s specific needs. The buyside now have much better tools and access to advanced execution algorithms, but the sales trader in many ways has become more relevant in the trading process. Now, more than ever before, they are really able to differentiate the liquidity in terms of where it can be traded, sourced and negotiated.
MS: We have done a lot of work to empower our sales traders with more execution-specific information and if you look at how we now deploy our traders, we have a heavier concentration in areas where clients have told us they most value their expertise, such as emerging markets or mid-cap stocks.
Has regulation been one of the biggest challenges?
RC: We broadly support the objectives of the various regulatory reform initiatives that are on-going in Europe and elsewhere. Of course, there are implementation challenges that the industry is experiencing more generally, in particular as further regulatory provisions are clarified and as relevant implementation deadlines approach. One of the biggest challenges for us is managing the broader resources needed to get these various implementation projects defined, such as the compliance, legal and operational teams as well as communicating these changes to our clients – often in a short space of time.
What impact do you think the proposed caps under MiFID will have on dark trading?
MS: The brokerage community and our clients believe there is value in non-displayed liquidity and unfortunately this message has not been articulated clearly enough. We are concerned that the proposed caps on the reference price waiver will have a negative impact on the ability of our clients – which include asset managers, insurers, and pension funds to achieve best execution on behalf of their stakeholders.
RC: One of the most important benefits of non-displayed liquidity is that it can be a more cost effective way to execute an order. For example, if you are an institution with larger orders you may benefit from pre-trade protection which is best achieved by using non-displayed liquidity sources, either through an electronic channel or a traditional single stock desk. If this option is no longer available, the end client may experience a material reduction in execution quality.
Do you think that best execution has improved over the past six years since MiFID was launched?
RC: Best execution is still a nebulous term, in so far as it is defined by the organisation that is doing the executing. It is all about having a policy and procedure. The more interesting question is whether the quality of execution has improved and I would say it has for a subset of orders in terms of the implicit trading costs falling. However, I think we still have a long way to go in post-trade efficiency regarding the clearing and settlement side of things.
MS: Fragmentation is still challenging for institutional players. There may be more ways to trade – electronic, cash, programme trading, agency broker models etc., – but orders placed with brokers to execute are typically smaller and it can be harder to find the other side. We try and help clients who are liquidity challenged by offering them more choice in how we can deliver our execution service.
How do you think the debate about high frequency trading will evolve?
RC: I’ve still yet to see an effective definition of what actually constitutes “HFT”. It can range from market making to quant trading to more aggressive arbitrage strategies, with various other flavours in between. What I think is most critical though is to ensure that at the venue level, all parties get equal treatment in terms of market data, functionality, special order types, etc.
What other trends are shaping the industry?
MS: We are seeing a move on the part of some of the more bespoke or regional broker dealers to outsource their execution infrastructure. For example, they are turning to us to provide them with a smart order router or a suite of algorithms. This is being driven in part by the increasing complexity and number of regulations, which makes it prohibitively expensive to build and maintain high quality execution. You also need to be flexible and able to react dynamically to changing market conditions and this requires significant and continuous investment.
[Biographies] Rob Crane is co-head of electronic trading for EMEA at Goldman Sachs. He also manages electronic trading and co-manages programme trading in Europe. He joined Goldman Sachs in 1999 as an associate and was named managing director in 2008. Prior to joining the firm, Crane worked at Ernst & Young and Nomura International. He earned a BSc in Chemistry from the University of East Anglia. Michael Seigne is co-head with Crane. In addition, he manages the European transition management business and has responsibility for the European futures sales team. Previously, Seigne co-managed the European program trading business in London. He joined Goldman Sachs in 1994 as a foreign exchange trader in Hong Kong before moving to the equities division in 1996. He worked in Hong Kong and Australia as an equities sales trader until 2002 and was named managing director in 2007. Prior to joining the firm, Michael was a civil engineer in Hong Kong. Michael was educated in Ireland and England and earned a BA in Civil Engineering and Mathematics from Trinity College, Dublin. ©BestExecution 2013
Mark Hemsley : BATS Chi-X Europe
GOING PUBLIC.
Mark Hemsley, CEO of BATS Chi-X Europe talks about life as an exchange
What are the benefits of recently becoming a fully-fledged stock exchange?
One of the main benefits of being a recognised investment exchange (RIE) is that we can now broaden our customer base among the retail and the more conservative institutional fund managers. Some fund managers and retail brokers across Europe have not updated their mandate to allow trading on MTFs. Our new RIE status means that they are now able to connect to trade with us. Our current customer base represents a wide range of investment firms, but retail investors have largely been under-represented. They have yet to benefit from the competitive advantages brought about by MiFID and we aim to change that. One of our main differentiators is that we can help local brokers build their franchises and lower costs by offering easy access to the pan-European market.
Did you have to make any significant changes?
We made subtle changes. As an MTF, we always significantly invested in risk management, market surveillance, compliance and regulatory tools and resources. As an RIE, this will continue and our plan is to further enhance our technology, products and services.
Are there any geographies that you are particularly targeting?
We trade securities and have strong liquidity in 15 European countries. Over the past year we have been particularly focusing on increasing our market share in Spain. It had been a difficult market due to the complexities of the short selling ban, as well as their clearing model, which was different compared to other countries. However, improvements have been made in the clearing process and the local regulator CNMV (Comision Nacional del Mercado de Valores) has also lifted the short selling ban on all stocks. There was a great deal of pent-up demand and as a result we are experiencing a significant and sustainable increase in flows which has boosted our daily market share of Spain’s IBEX35 to over 14%. For the six biggest stocks within the IBEX35 our market share is even higher, representing between 23% to 30%.
What would you say have been the advantages of the acquisition of Chi-X Europe over the past two years?
The integration was seamless. We closed it on 30 November 2011 and completed the integration by the end of April 2012. We have seen tremendous cost saving benefits in terms of synergies across technology, data, communications and office space. We are also able to offer separate order books for our two lit markets – BXE and CXE – as well as for two books for dark trading. We reviewed our pricing structures. In our BXE book we have no rebate for makers and a 0.15 basis point charge for takers. In our CXE book we have a 0.15 basis point rebate for makers and a 0.3 basis point charge for takers. The new tariffs differentiate the books by separating order flow between firms according to their trading strategy and focus on cost. The trade-off is deeper liquidity for a slightly higher fee; the change seems to have resonated with our customers and we have so far held onto our 22% to 23% market share.
What was the driver behind your latest deal – the purchase of a 25% stake in a new clearinghouse created by the merger of Amsterdam’s European Multilateral Clearing Facility (EMCF) and the Depository Trust & Clearing Corporation’s EuroCCP?
The main drivers are to create economies of scale and drive down costs and facilitate consolidation. There are too many clearinghouses in Europe and I think the combination of EuroCCP and EMCF is a significant step in the right direction. Together, they will deliver substantial savings in terms of reduced settlement fees, decreased levels of margin and funding costs, as well as through the elimination of one set of exposure to loss sharing and the funding costs. Further savings for customers will be achieved by the reduction of membership fees, IT and connectivity expenses. We are strong supporters of the open-access or horizontal model and we want to ensure that it continues.
Will you attempt going back to the market? If not what are the future plans?
We keep our eye on the market but a BATs IPO is not a main focus. We are finishing off the RIE process and as I mentioned hoping to increase our customer base. We started by focusing on the biggest stocks and customers and now we are looking at further developing our retail, regional and smaller customer base across Europe. We are also looking at the depositary receipt business, which we launched around three years ago. We had around 2% to 4% of the market but we have doubled our share in the past year to 8.1% through May. Russian companies are a big part of the market and while there is a push in the country to have them to list on their local markets due to the changes on the Moscow Stock Exchange and introduction of a central securities depositary. There is still demand to trade in depository receipts in Western Europe.
We are also exploring the exchange traded funds market in greater detail. We are looking at how we can create a more liquid pan-European ETF market by using trade order routing techniques that are well established in the equities markets. Our pan-European low cost offering is well placed to prosper in low volume environments and is highly scalable as volumes increase.
What impact do you think regulation such as MiFID II and the Financial Transaction Tax will have?
MiFID I was designed for competitive reasons but MiFID II is much more political with the focus being on, among other things, dark trading and high frequency trading. You have to keep negotiating and ensure that when it comes to dark trading that regulators are making changes that are creating a good market infrastructure.
As for the FTT, there is a lot of complexity and it is a worrying development for exchanges. Although volumes have bounced back after the introduction of an FTT in France, Italy’s levy has proved to be disruptive. The proposed EU FTT under discussion will also prove damaging to the equity markets at a time when regulators are looking to these markets to raise money for small and medium size companies. If it goes through it will only make it more expensive to do business. I don’t think we will see anything FTT zone wide until well after next January, but even the discussions are putting trading firms off the European market. I hope common sense will prevail.
Looking ahead, what do you see as the biggest challenges?
Probably the biggest challenge to our industry is the uncertainty in the global economy. If the U.S. economy continues to improve that could counter the challenges facing the Euro-zone. If we see a notable rise in bond yields, that in turn could help lift equity volumes. Separately, the uncertain regulatory environment remains a cloud for all investors. Until there is clarity on looming regulatory changes, all investors are disadvantaged.
[Biography] Mark Hemsley is chief executive officer of BATS Chi-X Europe, the largest pan-European equities exchange and the European arm of BATS Global Markets. He joined BATS in April of 2008 as chief executive of BATS Europe, which launched in October 2008. Before joining BATS, Hemsley was managing director and chief information officer at LIFFE, running its Market Solutions group. Previously, he was a managing director of global technology – serving as chief operating officer and a CIO – during his tenure at Deutsche Bank GCI, the investment bank. His previous positions included time as a vice president at Credit Suisse First Boston, where he was global head of foreign exchange technology, and a stint as CIO at Natwest Capital Markets. © BestExecution 2013Market Opinion : Alternative financing : Jannah Patchay
MARKETS RELOADED.
Jannah Patchay of Agora Global Consultants looks at alternative financing options and the benefits to investors
It is often said that small-to-medium enterprises (SMEs) are the engines of growth in an economy. Every year, thousands come into existence; some destined for an early grave, others persevering through the initial challenges facing any business – bringing a product to market, developing a brand, building and retaining a client base, attracting investment – particularly in light of current market conditions, to flourish.
The painful truth encountered by many of these start-ups is that a good idea, well-defined business model and strong management team sometimes just aren’t enough. Access to capital for both investment and cashflow management is vital.
In the post-2008 financial environment, banks are (not unreasonably) reluctant to lend to high-risk borrowers, and where such financing is available it is often prohibitively expensive. Interest rates of 15-20% are not uncommon and financing costs can substantially impact the bottom line.
Meanwhile, in a different segment of the market, another group of participants is faced with a challenge – what to do with their savings? With retail banks offering typical APRs of 0.1% – 1% on the more generous offers, the returns fall well below inflation rates, let alone any prospect of capital growth.
And in a beautiful demonstration of the forces of supply and demand at work, a few canny entrepreneurs have found innovative and mutually beneficial ways to bring these two groups, SMEs in need of financing and savers in search of growth opportunities, together. Whilst platforms such as Kickstarter left many observers scratching their heads – why would an investor give money to a start-up, oftentimes in exchange for no apparent tangible benefit other than a sample product and their name in the credits? – this new breed cuts out the old intermediaries to directly address the needs of both investors and businesses in which they are investing.
Peer-to-peer lending platforms such as Funding Circle, and crowd-funding platforms such as Seedrs and CrowdCube, are introducing sophisticated new models to lift the alternative financing sector to a new level and offer a viable alternative to the traditional model in which banks act as intermediaries by taking deposits from savers and lending to borrowers. At first glance, they may appear to bear little resemblance to their antecedents. However, a closer inspection reveals that the market challenges both faced by and addressed by the newcomers are very familiar to the traditional market operators.
Return on investment
Fundamentally, every investor wants a return on their investment. Preferably a guaranteed return – witness the enduring popularity of bonds and fixed-term deposits with savers – but a higher level on risk may be acceptable if they deliver higher performance. The new breed of platforms can deliver the goods but in slightly unorthodox ways. For example, investors in a company wishing to take a new product to market and seeking funding via Kickstarter do not receive equity, nor do they receive any form of repayment. However, they are often the recipients of the first batch of product. This creates a virtuous cycle for the start-up, which is guaranteed not to be left with a mountain of unsold stock, as well as a source of free marketing (consumers who like a product will tell their friends about it).
Funding Circle, which matches savers to a portfolio of businesses wishing to borrow, offers returns from 6.3-9% depending on the borrower’s credit profile, an impressive step up from typical savings account rates that is also well below typical business loan rates.
CrowdCube and Seedrs both offer a more traditional route for investors through an equity stake in the business, through which dividends can be paid and exit via a sale achieved.
Liquidity
In any market, liquidity is essential – the ability for investors to dispose of assets and take P&L in cash. Whilst these instruments are hardly going to be as liquid as those listed on a main market, this is a well-known challenge for SME markets and both lending and equity-based players are taking steps to address this. Solutions include provision of a limited secondary market function whereby investors wanting to exit may re-sell their holdings to another platform member. Innovative product structuring can help to encourage liquidity. Funding Circle allows investors to manage risk and diversify their portfolios across many small loans, and to auction these micro-loans off.
Investor Confidence
While investors may have different risk appetites, in order to continue attracting investors, a platform must be able to demonstrate a certain level of success on the part of the businesses it introduces to them. Here again, the model of investor-who-is-also-customer reinforces the growth prospects for a business. Some platforms pre-screen SMEs who come to them for funding, while others take the view that market forces know best and allow any business to advertise itself, leaving it up to the investors to judge the relative merits of a business model. Most encourage businesses to provide extensive and detailed documentation to support their bids for financing, including publication of business cases, accounts and financial projections.
Additional Services / Market Infrastructure
It is simply not sufficient to facilitate an equity sale transaction resulting in the investor holding a number of share certificates and the business holding some cash. Seedrs now acts as a custodian for shares, manages the payment of dividends from businesses to investors, and provides a secondary market for investors wishing to exit – a full-fledged market in miniature. This is the sort of value-add service that lowers the barriers to entry for investors, by making it easy and transparent for them to use the platform.
While their business models are new, the market structures evolving around the new breed of alternative financing platforms are familiar. They may be creating new opportunities for historically neglected market participants – start-ups and ordinary savers – but the shapes and patterns follow a well-worn, tried and tested path.
©BestExecution | 2013
Comment : Fidessa’s Grob talks buyside business models. Source : SmartBlogs
Steve Grob is the Director of Group Strategy for Fidessa, where he is also the brains behind the Fidessa Fragmentation Index. SmartBrief sat down with Grob at the International Derivatives Expo in London to discuss regulatory reform and other issues he sees affecting the marketplace.
How will regulatory reform efforts like Dodd-Frank affect the derivatives market and is the market ready?What is becoming increasingly evident is that slowly but surely people are starting to understand the enormity of the changes that are going to hit the derivatives industry…
See on smartblogs.com
See on Scoop.it – Best Execution