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Hans-Ole Jochumsen : NASDAQ OMX

By
Ian Rycott
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Hans-Ole Jochumsen, NASDAQ OMX
Hans-Ole Jochumsen, NASDAQ OMX

A NEW EXCHANGE TAPESTRY.

NASDAQ_Hans-Ole_Jochumsen

Hans-Ole Jochumsen, executive vice president of Transaction Services Nordics for The NASDAQ OMX Group and president of the Federation of European Securities Exchanges (FESE) and president of NASDAQ OMX Nordic discusses how the group is meeting the new challenges.

How do you deal with the onslaught of regulation?

I think it is difficult to find another historical period where there has been so much change in regulation and one that will have such an impact on the financial services industry. It is not only about EMIR (European Market Infrastructure Regulation) but also MIFID II, the Market Abuse Directive and the Financial Transaction Tax. We try to influence the outcome and last year we opened an office in Brussels because we realised we needed to work with the Commission, the Parliament and the Committee on Economic and Monetary Affairs (ECON) on so many different levels. Also, as president of the Federation of European Securities Exchanges I follow all the developments very closely.

You have noted there are both challenges and opportunities. What are they?

We have upgraded our technology and risk management systems and have just introduced a collateral management service. In the past, we outsourced the function but in order to be EMIR compliant we need to handle this function in-house. Last year we moved the clearing business to a single facility based in Stockholm because the industry is about scale and we want to leverage our technology across all facilities. In line with EMIR we’ve also changed the structure and have implemented a member-financed default fund for the first time. We also have to create a separate legal entity for our clearinghouse with independent directors and an independent risk committee.

Our stated ambition is to become a leading player, providing trading and clearing across multiple asset classes such as equity derivatives, commodities as well as Nordic products in fixed income, especially interest rate swaps. We are already clearing Swedish interest swaps. The volume is limited at the moment because we are in the middle of managing the process with clients. I think there will be a gradual increase in volumes and our plan is to expand the product scope to, for example, include basic swaps and overnight index swaps denominated in Swedish krona. Later in 2013 we also plan to clear interest rate swaps and related derivatives denominated in Danish kroner, Norwegian krone and euro. The deadline for mandatory clearing may still be unclear but we are ready and prepared.

What plans do you have for other asset classes such as equity derivatives?

What we’ve seen since MiFID is increased competition in cash equities, and we believe the next wave of competition will be in derivatives. Our response has been to launch NLX (the derivatives venue trading interest rate contracts) and make other investments so we that can be on the frontline when things start moving. This is why last year we bought a 25% stake in the Dutch trading venue, The Order Machine (TOM), a three year old platform that trades Dutch, Belgian and French stocks and associated derivatives. It currently accounts for around 20% of Dutch options contracts, a significant market share in one of Europe’s most active options markets.

The initial focus will be on developing the Dutch market but our goal is to build a pan-European equity derivative business. We think there are good signs for the future and we have a five year option to buy up to 50.1% to give us majority control. The rationale is the same as for our other businesses in that we want to be able to use our scale as an advantage and offer cost-effective solutions to clients. For example, both NLX and TOM will use the same data centre in London.

What stage are you with NLX?

We plan to launch it this year. It will offer a range of both short-term interest rate (STIRs) and long-term interest rate (LTIRs) euro- and sterling-based listed derivative products. It will also provide competitive execution and clearing fees and significant margin efficiencies, using NASDAQ OMX Genium Inet technology and a partnership with LCH.Clearnet.

What are your plans in the power market?

We are looking to expand in the German power market, which is the largest in Europe. We have increased our offering to include monthly, quarterly and yearly contracts as well as German options. This will supplement the clearing services we already offer for the Nordic power market. We see further opportunities in both markets as well as the UK.

What was the reason behind the acquisition of Thomson Reuters’ investor and public relations units?

We just got regulatory approval and the integration planning is at full speed. Adding the Thomson Reuters portfolio to our offering will help diversify the corporate solutions business by adding $150m in revenues and around 7,000 customers. The group offers online information, multimedia and tools for investor relations and public relations professionals.

What do you think about the merger between EuroCCP and EMCF?

With this transaction we’re creating a cash CCP that will offer our Nordic clients substantial collateral efficiencies, in addition to new innovative clearing services. We’re also making sure that our clients can clear almost their entire Nordic equity flow within the same liquidity pool. Over 90% of the Nordic flow can be cleared through the new CCP. As a shareholder in the largest cash CCP in Europe, we will have even better possibilities to influence the clearing industry to develop in a direction that we think will benefit our Nordic client base.

Do you envision taking part of any consolidation in light of the possible merger between ICE and NYSE Euronext?

We would of course have to evaluate the Euronext business case if the deal would mean that it becomes available. That however doesn’t necessarily mean we would bid on it. It’s difficult to gauge now as it is likely to be a lengthy process.

What do you think are the main challenges facing the industry? I think the decrease in the initial public offerings market is a big problem and is connected to the Eurozone crisis. The other great challenge is the capital requirements that banks are facing. They are reducing their loans and as a result, small and entrepreneurial companies which are viewed as risky are not getting the necessary funding to develop their business. There needs to be out-of-the-box thinking in how to improve the situation. One concept that’s being discussed is to harmonise the corporate bond market across Europe. Each country currently has its own set of rules. Another is the impending Green Paper from the European Commission which addresses the long-term financing of the European economy.

 [Biography]
Hans-Ole Jochumsen is executive vice president of Transaction Services Nordics for The NASDAQ OMX Group and president of the FESE (Federation of European Securities Exchanges) and president of NASDAQ OMX Nordic. Prior to the merger between NASDAQ and OMX, he served as president and member of the OMX executive team. Previously, Jochumsen served as president and CEO of Copenhagen Stock Exchange and FUTOP Clearingcentralen.  From 1990 to 1998 Jochumsen served as member of the management board of the following Danish financial institutions; BRFkredit, GiroBank and BG Bank. He holds a M.Sc. degree in economics from University of Copenhagen.
©BestExecution

 

Viewpoint : Darren Toulson

By
Ian Rycott
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DO HFTs REALLY ‘GAME’ BUYSIDE ORDERS?

LiquidMetrix - Darren Toulson

Darren Toulson, head of research, LiquidMetrix explains to Best Execution how to dissect an order to see what is really going on.

In recent years, a significant proportion of liquidity provision and trading on lit markets, usually estimated to be around 40% of matched volumes in Europe, is conducted by ‘HFT’ firms.

A common buyside complaint is that the trading styles and strategies of HFT firms exacerbate the market impact of ‘real’ orders being sent to the market, making it difficult for them to access lit liquidity without being ‘gamed’ by faster HFT participants. This fear has lead to an ‘arms race’ with increasingly elaborate algorithms, faster connections and faster machines being used to slice orders and hide intent when accessing lit markets.

To what extent are these fears justified?

Example: SOR order

We’ll look in detail at the lit market reaction to a specific buyside order. The example chosen here is typical of the behaviour seen when analysing thousands of similar orders.

The order in question is a ‘SOR slice’ executed in a Swedish stock by a London-based algorithm. The order’s target volume is too large to execute with a single aggressive order at EBBO on one venue and so was split into chunks and sent aggressively, and simultaneously, to 3 London-based MTFs (CHIX, BATE, TRQX) and the primary Swedish market.

The entire algorithm executed over a period of 58ms and resulted in over 70 individual fills at different price levels on different execution venues.

So what happened?

 

Diagram. Orderbook across all venues showing orders available at the beginning of the SOR trade

 

The diagram (above/right/left/below?) shows all on-book offer liquidity (this was a buy order) available on CHIX/TRQX/BATS/BURG/XSTO at the first millisecond of the SOR order. Each rectangle represents a piece of resting liquidity on a lit venue. The background colour depicts the venue.

The volume text colour shows what happened to the available liquidity over the next 58ms as the SOR slice executed:

• Black: the SOR algorithm successfully ‘hit’ the liquidity; for instance, the SOR algorithm successfully hit all of the London MTF liquidity at 174.1.

• Orange: the liquidity was pulled (cancelled) before the aggressive orders sent by the SOR slice reached the venue. So, at the first price level of 174.1, 7 out of 11 of the resting orders on Stockholm were cancelled just before the SOR orders could execute.

• Red: another market participant sent an aggressive order that executed ahead of the SOR slice. In other words, it was ‘stolen’ by a faster participant.

What’s striking about this picture is the amount of red / orange activity. There is nothing special about the timing of this order; market activity on this stock in the seconds preceding the order was negligible.

So to tell the story of what happened with this SOR slice:

• The first orders sent by the SOR to London MTFs successfully hit their targets.

• HFT liquidity providers, reacting to these trades, immediately cancelled most of the orders resting on XSTO. This implies that the HFTs were able to react to the executions on London and send messages to cancel orders in XSTO faster than time taken for the SOR orders to reach Stockholm.

• Other HFT market participants (not necessarily the same firms) aggressively traded ‘in front’ of the SOR slice.

• A similar story unfolds as the SOR order executes further down the book.

The analysis

What does this example tell us? Firstly, it illustrates the degree to which liquidity and trading really do react at millisecond timescales. Buyside orders attempting to access such liquidity must be precise in their timing and sequencing otherwise they may be ‘gamed’.

However, it also demonstrates that much of the resting liquidity on lit venues is currently being provided by HFT players. The improvements in average spreads and liquidity seen when MTFs appeared in Europe may well be in part due to such HFT liquidity providers feeling able to offer tight prices as long as they can “dodge the falling knife” when they see large incoming buyside orders.

Finally, what of current proposals for minimum 500ms resting times? This rule would primarily target the ‘orange’ HFT liquidity providers, i.e. those trying to avoid adverse selection but who do add liquidity. It would do nothing to prevent, and in fact would encourage, aggressive (red) HFT activity using lower latency to trade ahead of slower participants.

Perhaps not the regulators’ intended target?

 

©BestExecution | 2013

 

Viewpoint : Robert Boardman

By
Ian Rycott
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ITG_Rob-Boardman_610x375
ITG - Rob Boardman 610x375

ITG_RobBoardman

FTT: SHOULD WE BE AFRAID OF GOETHE’S APPRENTICE?

As the European Union moves towards the implementation of a Financial Transaction Tax on 1st January 2014, Rob Boardman of ITG reviews the causes and consequences of this great experiment in taxation policy.

In Goethe’s poem The Sorcerer’s Apprentice the well-meaning trainee attempts to invoke powerful magic learned from his master to do his housework, but soon realises that he cannot control the forces he has unleashed. In 2011 the European Commission President, José Manuel Barroso proposed a new experiment to invoke the magic of revenue-raising through a Financial Transaction Tax (FTT), based on a model proposed by the Nobel Prize winning economist James Tobin. Yet other economists and market participants fear the FTT will cause unintended negative consequences. Perhaps European policy makers, rather like Goethe’s apprentice, have not fully anticipated the destructive power of Tobin’s magic. But should we be fearful of the European FTT?

Certainly the experience of Sweden, which adopted a FTT in the mid-1980s, is not encouraging. After introducing a tax on trading in Swedish stocks, bonds and derivatives, transaction volumes fell, and trading moved offshore. Predictably taxation revenues were much lower than anticipated, liquidity in stocks and (especially) bonds dropped alarmingly, and the futures market was all but eliminated. Eventually the Swedish government admitted defeat and by 1992 had abandoned the tax completely. So why has the idea resurfaced now?

Since the financial crisis started in 2007, the media and politicians have accused banks of creating markets which made credit (particularly sub-prime mortgages) too easily available because risk could be transferred (e.g. via credit derivatives) without accountability. The fact that some banks had to be rescued with public money made them doubly targeted. Of course regulators and credit-rating agencies had their part to play in the crisis, but policy makers are now focused on reducing “speculative” trading in financial instruments. Another factor exposed by the financial crisis was the large budget deficits built up by many European governments. So the FTT kills two birds with one stone: raise money to plug the public finances by imposing a tax which throttles financial market trading. Simple in theory, but will the new European FTT suffer the same fate as Sweden’s?

European policy makers have tried to learn the lessons from the Swedish experience. The process approved at the 22nd January ECOFIN meeting, and revised proposals published on 14th February, although not near to being definitive, crucially are structured to tax “resident” traders irrespective of where the transaction occurs. Furthermore the FTT contains exemptions on transactions involving central banks. These measures are designed to ensure trade cannot simply move offshore and that central bank financing operations avoid the difficulties encountered by the Swedish government.

So if anti-avoidance measures work, how much money could the tax raise? Well that depends on the tax rate imposed and how much transaction turnover falls. Assuming a 10 basis point tax on purchases and sales of shares and bonds, and one basis point tax on derivatives, the official European Commission model estimates annual revenue of €57.1 Billion, if applied in all EU countries. Limiting it to the 11 countries who have agreed to adopt the FTT reduces the target to €35 Billion annually. Two-thirds of the total levy is expected to come from the derivatives market, particularly the highly liquid interest rate derivative contracts which the European Commission’s model suggests will account for half of the total tax raised. The model assumes a massive 90% reduction in derivative transactions, so the accuracy of its estimates about the impact on derivatives will be key to predicting tax revenue.

What about cash equities? Although not to blame for the financial crisis, other political rhetoric demands equities are included in the FTT. Some politicians demand curbs on speculative and high-frequency trading, arguing that it serves no “public purpose” and cite the 6th May 2010 Flash Crash in US equities as further evidence of instability caused by rapid automated trading. Such is the demand to introduce a FTT in equities that France and Italy have already introduced a limited scope FTT covering equity trading in larger companies incorporated in those countries, in advance of the European version. If the proposed European FTT is watered down, these early versions could be useful barometers of what might happen following its introduction.

The French FTT, introduced 1st August 2012, required buyers of French equities to pay 20 basis points tax, levied on stocks with a market capitalisation of greater than €1Bn. The Italian FTT, introduced 1st March 2013, gave a new twist: 12 basis point tax for purchases done on exchanges or multilateral trading facilities, or 22 basis points for purchases done over the counter. The Italian tax has a lower threshold market capitalisation of €500 Million. Significantly both tax laws were drafted to charge the net settled position each day, which meant that market makers were able to reduce their tax liability by ending the day with flat positions. The tax is of course paid by end investors, mutual funds, pension schemes and other real-money investors. Both FTTs also included a separate tax on high frequency trading, but it was narrowly drafted and the amounts collected are small.

Using BATS data for the first 15 business days of the Italian FTT, turnover in the Italian MIB large cap index has fallen 11% compared with the same period in 2012. But turnover in the German DAX index (where there were no tax changes) has also fallen 10% in the same comparison, so there is not yet compelling evidence of reduced turnover. The OTC market in Italian equities has collapsed, and instead some brokers are using a work-around to report OTC trades to exchanges and thereby benefiting from the lower rate. The French FTT had a similar small reduction in market turnover immediately after its introduction, but there was no long term reduction in liquidity. High-frequency trading has largely continued. So despite the political rhetoric, the FTT was a disguised tax on the general public and did little to reduce perceived risk in public markets.

The final terms of the European FTT are still being negotiated, and although the initial draft lacked some of the exemptions that are present in the French FTT, many political observers believe that France in particular will be lobbying to position its current tax as the model for the new European levy. The result of these negotiations will be crucial to determining whether the European Union can wave a magic wand to produce pain-free revenues or whether it will be found, like Goethe’s Apprentice, to be dabbling in experiments with disastrous consequences.

©BestExecution | 2012

 

Behind the scenes : Volta data centre

By
Ian Rycott
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Q&A WITH JULIAN KING, COMMERCIAL DIRECTOR OF VOLTA DATA CENTRES.

Volta, J.King

Well connected

In less than one year Volta has invested millions of pounds and approximately 150,000 man hours in stripping out and refurbishing the old BT Great Sutton Street data centre in Clerkenwell. In Q2 this year, the fit out will be completed and the 91,000 square feet facility will open its doors.

Julian King, Commercial Director of Volta Data Centres gave Best Execution a tour of the site. Between inspecting cooling systems and checking out carrier rooms, we asked Julian about his ambitions for the centre given its prime City location.

A considerable investment in a challenging climate, you must be confident that there is demand to be met?

Absolutely. When we conducted our due diligence, we could see increasing demand for a high quality centre from the ever-growing TechCity community on our doorstep and the City and financial services community in the Square Mile.

We could see the driving changes across the global financial services industry. Looking at the equities markets over the past 5 or 6 years, competition has had a huge impact. New competitive exchanges and liquidity venues have been born, creating market fragmentation which in turn created new algorithmic trading and order routing technology. This has had an explosive impact on market data volumes. Just look at the demand this has placed on exchanges, trading firms and their vendor communities in terms of data centre space, demand for co-location, connectivity, power and bandwidth.

Five years ago, if you had asked firms what they anticipated their requirements to be in 2013, it probably wasn’t even close to what they actually need today. And the challenge is not diminishing by any stretch of the imagination. As we know, regulation is driving other asset classes along similar avenues. Simply, we do not consider that the financial services community is served by sufficient data centre space to meet the future demand for trading engines, proximity services, data processing services, not to mention back up sites demanding a different location. We have been encouraged that even before we have completed the fit out as there has been considerable interest from a wide range of financial services firms.

There is stiff competition out there, why would a trading firm come to Volta?

Other than our central London location, we believe there are a number of compelling reasons.

Firstly, our low latency connectivity. One of the appealing attributes of the building was its history as a financial services data centre for some 25 years. This meant that many of the world’s leading carriers already had their fibre in the building. Over the course of our fit out, even more carriers have installed their lines. As such, we sit on all the high speed networks which provide connectivity to all the trading venues including, for example LD4, Basildon, LSE. We are already connected. This means that any firm in the data centre will not only benefit from a central highly-connected location, but also from the latency arbitrage opportunities this can offer. This can be particularly appealing for international trading firms looking to trade the European markets. They will literally be located midway between Slough and Basildon and very close to the City-based matching engines.

Secondly, our resilience. We have contracted with UK Power Networks, which has installed a new 9.6 MegaWatt power supply. Unlike most data centres in Central London, which are supplied at 11KV, Volta is supplied at 33KV. We don’t just have one transformer, we have installed two. More than this, the building is supplied from two separate power substations, from two separate parts of the national grid. Quite simply the only way in which Volta could ever lose power would be in the unlikely event of whole of London losing power. This makes us uniquely resilient.

Security is clearly very important to the financial services trading community.

Absolutely and this has been a key part element to our fit out. We have not only made it more powerful, more resilient but also more secure than ever before. Not only has the building served as a data centre for the last 25 years, we have set it up for the next 25.

How flexible is the space?

The space has been designed to be very flexible and we offer a variety of options. These range from single to multiple racks of 4KW upwards, half racks, to private caged areas offering 50KW upwards.

We have installed a new form of cooling system. A brand new fit out at the Great Sutton Street Data Centre gives us the luxury to adopt the very latest technology. Rather than use the traditional cooling systems which can often create challenges when filling space, we have installed ‘In Rack Cooling’, a modular system as modern as the very servers they seek to cool. The cooling system’s power consumption levels are significantly lower than traditional air conditioning systems and come with the stamp of approval by the Carbon Trust.

Returning our hard hats and high visibility jackets, Julian extends an invitation to any readers who would be welcome for a tour. What better opportunity to understand how a data centre really works, than towards the end of its fit out?

©BestExecution | 2013

 

FPL 2013 Mumbai Conference

By
Yulia Kuksina
-

The FPL India Conference, held on the 5th March in Mumbai, produced a host of event participant perspectives and offered a diverse cross section of important takeaways:
One of the key threads of the day was that the responsibility for driving much of the new technology and architecture entering the Indian market rests with the brokers.
The exchange will always lean on the side of caution over trading, and that is reflected in exchange attitudes towards software vendors entering the market and the checks and balances that are placed on brokers. This warning to brokers extends into the API debate around proprietary versus open systems; the broker is fundamentally responsible for what comes in and out of their operations, and while glitches happen everywhere, there is culpability. Questions are also being raised over the responsibility of the vendors, and comparisons between local and global vendors are coming to the fore, especially as the market increasingly opens up and becomes more attractive for foreign vendors.
On the automation of trading of asset classes outside equities, Fixed Income is still at a very immature stage, and there are multiple opportunities for vendors and sell-side firms to offer new services. There is also need for local firms to assist asset managers, so that they aren’t required to build out their own systems.
Looking ahead, the two main areas for future expansion are Cloud and Mobile opportunities; it is an area the rest of the world is examining and developing rapidly, and so India needs to catch up.
In summary, the Indian market is rapidly developing, and is becoming a global player, but several areas still need more options for traders, and the regulator is watching closely.
 





Jon Knight : Liquidnet Europe

By
Ian Rycott
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Liquidnet: Jon Knight
Liquidnet: Jon Knight

KEEPING WATCH.

Liquidnet, Jon Knight

Jon Knight, Head of Surveillance, Liquidnet Europe, talks to Best Execution about the importance of market surveillance in terms of creating and maintaining an efficient and orderly market.

What are your views on the regulatory changes striving to curb market abuse practices?

Preventing market abuse is in the best interest of the whole financial market and its participants. Today regulators and investors are unwilling to tolerate market abuse of any kind. At Liquidnet, as a global trading network, we operate a robust surveillance system, Liquidity Watch, in order to protect our members – and it is a responsibility we take extremely seriously.

That said, there will always be people looking for ways to manipulate the market and this is why regulatory efforts to curb market abuse practices, in consulation with market participants, are important. The message must be that if you commit market abuse be prepared to face the consequences, because you will get caught.

What are the current issues and trends that you are seeing?

As trading in the financial markets becomes faster and arguably more complex, so does the task of market surveillance. For example, fragmentation of the European equity market means that market participants can trade the same stock on multiple venues. As a consequence, we monitor very closely for potential manipulation of bid/offer spreads and trade prices on the different venues along with other market distorting behaviours.  This means that we survey activity on our own and other trading venues globally.

Surveillance methods, at the very least, need to keep up with developments in trading technology and so at Liquidnet, we make ongoing investments in our monitoring tools with the aim of staying one step ahead.

What are the prime concerns for buyside institutions?

Buyside firms, like all investment firms, have a regulatory obligation to achieve best execution, which is often misconcieved as an obligation to get the lowest cost of execution. In truth, for the buyside, best execution relates to an obligation to minimise market impact and information leakage, as well as cost.

Liquidnet’s buyside members trade through our network because they know that doing so provides them with best execution and reduces the potential for information leakage and market impact. Every day, our members trust us with their most valuable information: their trading intentions. Because of this trust, we have a responsibility to do everything we can to protect their orders and information, and Liquidnet’s Market Surveillance team are key to making sure that we fulfil this responsibility.

How does market surveillance work in Liquidnet globally in terms of protecting the interests of your members?

Liquidnet has MTF (Multi-lateral Trading Facility) status and as such, we have the same requirements as regulated markets. We operate a global surveillance team, which reflects the fact that our members are dispersed world-wide and trade markets around the globe. Today we connect over 700 of the world’s leading asset managers to large-scale trading opportunities – block trading – in 41 markets across five continents, including 29 markets in Europe, and offer a different type of trading proposition1.

We have strict membership requirements that are intended to safeguard the integrity of our network. Essentially, these requirements provide members with the assurance that when they trade with us, they are accessing a natural pool of liquidity and connecting with other like-minded long-term investors.

Under FSA rules we are required to monitor our market for breaches of our rules, disorderly trading conditions and most importantly market abuse. This requirement is in addition to the standard market abuse monitoring requirements that all investment firms have. Essentially we monitor all trading activity on our markets in real time and on a T+1 basis in an attempt to detect a variety of manipulative and information-based behaviours that are, or indicate, market abuse or conduct issues.

Within our Liquidity Watch surveillance system we use a feature called Auto Policing, which analyses our members’ behaviour in real time and helps to ensure their information is protected at all times – particularly frustrating behaviour can result in a member being temporarily suspended from being able to trade a stock automatically by the system. Indeed, if one member does not follow the appropriate protocols, we have an obligation to our other members to prohibite them from interacting within the network.

Is harmonization across different jurisdictions an issue for your organisation and how is it addressed?

Harmonisation of market surveillance practice is a natural progression. We have a single surveillance system here at Liquidnet that applies best practice in whichever jurisdiction it is required, globally. This means that we provide the same high level of surveillance across all of the markets and juristiction we operate.

Who, other than the regulators, are pressing for change?

When it comes to market abuse, it is clear that everyone is pushing for a continued commitment to develop more enhanced methods and processes for market surveillance. It is an area of the financial markets where everyone is trying to work together. Regulators look to market participants and trading venues to help them understand the issues and develop appropriate responses, and the markets need regulators to make sure that standards and rules are applied across markets, and enforced where necessary.

A firm’s surveillance function exists to prevent and identify market abuse, and to be successful, surveillance teams across the industry have to work together to achieve this goal. In my view, a collaborative and holistic approach to market surveillance is needed, and I am positive about the progress that has been made as a result of ongoing dialogue between regulators, participants and trading platforms like Liquidnet.

1. The average trade execution on Liquidnet today is c.€800,000 (c.US$1m) versus other MTFs/non-displayed venues at between €5,000-€25,000 and €3,000-€5,000 on European lit markets.

Interview by Roger Aitken

© BestExecution 2013

Artur Fischer : Equiduct

By
Ian Rycott
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Equiduct - Artur Fischer
Equiduct - Artur Fischer

FINDING THE RIGHT BALANCE.

Equiduct, Artur Fischer

Artur Fischer, interim CEO of Equiduct speaks to Best Execution about the inadequacies of best execution guidelines from the perspective of a regulated exchange.

How, from an exchange point of view, would you define best execution? Has the meaning changed over the years?

The term itself means different things to different people in the market – the buyside, the sellside, exchanges and end users – and unfortunately my impression is that the meaning hasn’t changed.

Best execution as defined by MiFID is only good for the end user, and there’s not necessarily any incentive for the distribution units (e.g. online brokers and retail banks). As a regulated exchange we need these distribution units to reach the end user. However, the best execution criteria are not attractive to the distribution units – in fact quite the opposite is the case.

The original idea was that competition would sort things out, and perhaps the criteria for best execution would not be of relevance for the distribution units. But the end user ultimately will demand that their bank delivers to the same standards as the competition. If they don’t then they can switch brokerage accounts.

The crux of the matter from my perspective is that I sell to these distribution units. In turn they offer our product to their clients. It’s exactly the same as if one goes to Tesco (UK supermarket chain) in order to buy coffee or wine. Now the decision about what you can or cannot buy is not made by the producer of these commodities, but by Tesco – the “distribution unit”. So, they decide whether they want to stock your product or not.

The problem with best execution, using our Tesco analogy, is their criteria to list me in their range are quite different from the criteria retail users have when they buy the product. And, aspects that are important for the distribution unit (e.g. logistics and delivery) will not necessarily be important to the end user.

Another issue is that end users do not have a meaningful representation. We have millions of end users, but how will they all organise themselves into a single voice? Typically, they don’t.

Have there been any unintended consequences from best execution as a result of it being ushered in under MiFID?

Best execution could be said to have become less affordable. Previously, we had the concentration rule, which meant one got the best price at the venue that had the highest volumes and most diversified order flow. Subsequently, through MiFID, a plethora of new venues  – MTFs/exchanges – emerged in Europe. Sometimes this resulted in better prices being achieved, but not always on the same venue. That meant that it became more complicated and expensive to actually identify where the best execution was. It also required technology to source best price using including Smart Order Routers (SORs).

Now, if one comes to Equiduct, we calculate what the price would have been and provide it to you at a low cost. Our system deploys a mathematical model to facilitate that low cost and offers the same quality of service that only SORs can offer. Under best execution the quality of your execution might have improved, however, it’s not for everyone – only for those that can afford it.

How can exchanges optimise technology to deliver best execution and re-engage European investors?

Best execution is not just about achieving the best price but also the lowest transaction cost. So, obviously we have to look continuously at reducing our costs, but at the same time we require low latency. Consequently it’s a struggle between being the cheapest and the fastest. Therefore your technology [at an exchange] has to provide a balance between being cutting edge and low cost. It’s not good enough just to have the best technology.

To engage investors we don’t have to spend €20m to educate our end users. In theory our website is visible to anybody and it’s just a matter of doing it smart and doing it right. We need to get our message out there and explain what the advantages are for end users to trade via our platform, but in order to enable end users to access Equiduct’s offering in the first place, retail banks and online brokers need to provide our offering to that constituency.

Build versus Buy? With multiple exchanges using the same or similar technology providers, is in-house technology development the best way for exchanges differentiate their product offerings?

This all revolves around the issue of cost. Certain functions do not translate into competitive advantage. For example; connecting to a clearing house. As an exchange, I will not lose business if I opt to use a software component or services which are also provided to other parties needing to connect to a clearing house. I don’t care if I utilise it with ten other parties or on my own. So, certain services can be regarded as a commodity and do not help differentiate. As an exchange we cannot take any risk on board and the system has to be operationally safe. But in addition it has to be cheap.

Other components can clearly provide differentiation. Take the components relating to our market model. This is something we would not share with any other party. Equiduct has developed its own software and intellectual property, which distinguishes us. We have the ability to react swiftly to market demands, regulatory changes and beat the competition.

Can new networking tools such as Social Media be used to help educate and communicate with the end investor?

As an exchange we are really trying to use Social Media, and believe we cannot afford not to be involved. We have our sites and try to promote them. Currently it’s not making a significant difference in terms of impact, but potentially it will. Just like a lottery game at some stage you’ll get lots of followers and people connecting. Every month staff in Berlin and London analyse the statistics using Google tools on how many people have visited our website. Wherever possible we try to communicate through Social Media and not necessarily on topics that have to do with our market (e.g. interacting with the media). Personally I have a Twitter account (@fisart) and have been interviewed on TV a number of times to communicate our message.

 
© BestExecution 2013

 

 

Trading : Execution consulting

By
Ian Rycott
-

AT YOUR SERVICE.

Bloomberg, R.Shapiro

Execution consulting may not be new but it has gained traction in today’s fragmented, electronic world. Lynn Strongin Dodds reports

It may seem ironic that buyside clients are looking for a helping hand in today’s high tech electronic markets. However, if a recent crop of studies is anything to go they are seeking advice for optimal ways to navigate the increasingly complicated trading maze.  Naturally brokers and banks are more than willing to step up to the plate not only in response to their client’s needs but also as way to set themselves apart from their rivals.

In fact, a recent study from Aite Group showed that a hefty 87% of the 22 broker dealers canvassed viewed real time execution consulting services as a main differentiator, ahead of liquidity management, algorithms, technology support and research. Laurie Berke, principal at TABB Group, who identified the trend over two years ago with her report “Execution Consulting: the Next Generation in Sales Trading,” attributes one of the main drivers to “buyside firms having to become more knowledgeable and experienced in self direct trading. Algorithms have become commoditised, and buyside traders no longer look towards the sellside for simple technical support but rather to add value to trading performance. This new-world sales trader offers insight, advice and information, and delivers it right alongside an in-depth quantitative analysis of the venue-specific results of smart order routing logic.”

For now, only around 13% of asset managers currently tap into these services according to industry figures but that number is expected to grow in time. In many ways, it is a reconfiguration of an offering that was tied to programme trading. The difference today is that the level of sophistication has been ratcheted up thanks to MiFID in Europe, Reg NMS in the US and a host of other regulations. Liquidity has been scattered across a wider array of dark and lit pools and while the once cutting edge tools of direct market access and smart order routing have a place, buyside firms also want a more nuanced approach to the changing market structure.

In the US alone, TABB Group figures show that fund management firms currently execute 48% of their US equity order electronically over 65 trading venue using more than 600 broker-built algorithms, thousands of smart order routing logic solutions and an endless stream of post-trade transaction cost analysis data. “Execution consulting is becoming a big topic as the electronic component has become bigger,” says Adam Toms, chief executive of Instinet Europe. “It is not just about execution but the advanced analytic product set. I think it will become more important because buyside traders are focusing more on the value that their brokers are creating.”

Different options

Of course there is no one size fits all strategy and each brokerage firm has its own spin. There are common threads though in that they all are aiming to offer more of a personalised and tailored service. This ranges from high touch advisory and trade and risk execution analysis to real time tools for live insights, according to the Aite report. For example, Bank of America Merrill Lynch (BAML) offers bespoke analytics to expose trends and opportunities to enhance the trading style or strategy customisation while Citi dissects algorithms and monitors the liquidity they interact with in order to improve performance. Both global banks also have the advantage of being able to leverage their group’s wide range of expertise on multiple disciplines, risk management, transaction cost analysis and quantitative research.

Bloomberg Tradebook, on the other hand, has dynamic execution consulting which includes flexible order delivery solutions, pre-trade analysis and tools, real-time trade implementation analytics and alerts as well as post trade analysis. It also offers trading workflow consultations, customised client workflow solutions, education and training, market structure and regulatory commentary plus trade optimisation analysis and feedback

“Execution advisory services started on the programme-trading side with pre and post-trade reporting,” says Francois Banneville, global head of execution services at Société Générale. “Before you executed the order you would look at the names, illiquidity, size and the best way to execute the program. Today, it is trickier because the markets are more complex and fragmented with different exchanges, dark pools and broker crossing networks. As a result, execution advisory services are much more technical and quantitative and linked to the microstructure. Clients want much more detail, a greater understanding of what makes prices move and more analysis on their trades. There is also a much greater awareness of benchmarks and performances. We look at up to 50 parameters and statistical indicators when we execute an order.”

Chris Jackson, EMEA head of execution sales also notes that high frequency trading and regulation have created a much more challenging environment. “The terms of TCA have become far more complex – historically relatively few tools were available – VWAP and Implementation Shortfall being two of the most prevalent. In recent years though, in an effort to reconcile opposing variables like market impact and time risk, TCA providers have developed increasingly complex measures often relying on complex and obscure proprietary calculations. “This has led to more rather than less confusion and uncertainty around what constitutes good execution.

“We are able to analyse a client’s trading style and work with them to customise our trading platform to suit these objectives. We’ve worked with clients to develop systems for splitting inventory between high and low touch to maximise efficiency and performance”

Brian Schwieger, head of EMEA execution sales and consulting at Bank of America Merrill Lynch also sees a greater move towards bespoke products.  “There is definitely greater customisation which can range from providing minor tweaks to a clients’ strategy through to designing and implementing new strategies to meet client’s specific trading objectives. Through execution consulting, we are able to drill down deeper into algo behaviours and performance to offer a more granular view of the best way to trade. We can also offer systematic solutions for increasing trading desk productivity like filtering off smaller orders that can be automated so traders focus on the more difficult ones that need the human touch.”

Moving across

Although execution consulting started in the equities space, Berke sees the service migrating to other asset classes. “This new hybrid sales person, the execution consultant, part trading partner and part trading guide, has developed the DNA to survive and thrive in the new normal of trading in the capital markets,” she says. “Sellside equity trading rooms have been reorganised and reconfigured. In one firm, pods of experts across multiple verticals – equities, futures, ETFs, algorithmic trading – team up to serve a unique set of clients; in another, individuals develop the skills to bring one type of client across both high- and low-touch trading solutions.”

Jim Kwiatkowski, global head, transactions sales, marketplaces, financial and risk, Thomson Reuters also sees a gradual shift occurring. “Just as with equities, execution quality analysis has become important in the FX markets and we are seeing increased demand for consulting services. This was not commonplace five to six years ago. Part or our service includes using our analytics to help clients better understand and improve upon their current execution strategy.”

Robert Shapiro, global head of trading and execution consulting at Bloomberg Tradebook echoes these sentiments. “Five years ago, the main focus was on equities and it involved taking full service traders and making them electronic. Today we are seeing the evolution of execution consulting into other asset classes. However, this does not happen overnight and we spend a great deal of time extensively training sales traders through our accreditation programme. We see this as one of our main differentiators and it underpins our technology and analytics.”

©BestExecution

 

Best practice : The human factor

By
Ian Rycott
-

THE JUNGLE ROOM.

The trading scandals of the City are well documented but Mary Bogan explores the biological reasons and the ways to change the culture.

He was known as the “London Whale”, the “Caveman”, “Voldemort”. A mega-dollar earner, working for the bank famed for successfully circumnavigating the worst of the 2008 financial crisis, JP Morgan’s Bruno Iksil, was the kind of risk-taking trader whose long track record and bullish style made him widely admired, if a little feared, in the trading community. However, in 2012, Iksil’s career crashed around his ears. In a strategy which, according to the banks’ own chief executive, featured self-inflicted “errors, sloppiness and bad judgement”, Iksil, together with a handful of other key players, lost the bank a cool $6.2 bn, taking the record for the US bank’s biggest trading loss ever and earning a place in the league of greatest trading blunders of all time.

Iksil’s story may be one of hubris writ large but the tale of the prudent trader who, after a long run of success, then crashes and burns is not an uncommon one. Why? Typically it’s to charts, data and strategy that banks turn to find a rationalisation. But, according to a man who once ran trading desks for Deutsche Bank and Goldman Sachs, the explanation for reckless trading and rash decision-making often resides in a more surprising place – the body.

“Risk-taking is not just an intellectual, cognitive activity based on analysis and reason,” says John Coates, a successful Wall Street trader turned Cambridge University neuroscientist. “When you take a risk, you face a threat, a potential hurt. And when humans are under threat, the body responds by preparing for action.”

The physical changes that kick in when traders prime themselves for action – the accelerated breathing, the thumping heart, the tense muscles, the knotted stomach, the sweating brow – are familiar to anyone who trades. What is less obvious though, and what Coates’ workplace research has proven is that, accompanying these visible outward changes, is a series of invisible, hormonal adjustments that can shift traders’ appetite for risk and affect their capacity for rational decision-making.

Central to these internal changes are the male hormone, testosterone, and the stress hormone, cortisol. In experiments conducted on London trading floors, Coates’ team has found that when traders get ready to risk-take – like other young males in the animal kingdom preparing for competition – their testosterone levels surge. But when testosterone rises, the chemical balance of the brain changes. Confidence rises and the appetite for risk increases. If then the risk pays off – if the trader ‘wins’ the bet – testosterone levels surge higher. In what becomes a virtuous winning cycle, the more the trader wins, the more testosterone rises, the more risks the trader takes, the greater the chances of winning again.

What applies in the jungle, applies in the City. In just the same way that when two equally matched lions compete against each other, it is statistically more likely the testosterone-fuelled animal that won before will win again, so it is that the testosterone-fuelled trader who has placed a winning bet before will do so again. This is the physiology behind the familiar image of the trader on a winning streak.

At some point in this upward victory spiral, however, testosterone overshoots and judgement becomes impaired. As a result, effective risk-taking morphs into overconfidence. Prudence gives way to recklessness. The star trader places ever-increasing bets despite ever-worsening risk-reward tradeoffs. Then one day, just like the London Whale, his positions blow up.

At this point, another hormone, cortisol, sends the trader at the losing end of the game on a downward spiralling trajectory. As the body’s stress response goes into overdrive, anxiety rises, danger is perceived where there is none and an irrational risk aversion takes over. The end result is another widely observed phenomenon on trading floors: the trader whose confidence is shot, whose ability to trade, even in clement market conditions, is paralysed.

The human factor

In the hard-bitten financial world, a physiological explanation of traders’ winning and losing streaks, and the irrational exuberance and pessimism they engender, may seem outlandish but, judging by the interest in Coates’ ideas, there is some acceptance that the theory does chime with practice.

“The idea that risk-taking has a biological dimension, that the state of your body might be predicting your performance in markets, may seem odd at first. But traders quickly recognise a truth in what I’m saying. They see it explains why they so often succumb to recklessness at the end of a winning streak and why, when losses mount, they experience extreme stress and fatigue,” says Coates.

The notion that trading has a powerful human dimension clearly has major and wide-ranging implications for banks, starting with risk management, where the introduction of a warmer human touch could help risk managers curb individual traders’ wilder excesses.

“In my view, managing risk is a human activity,” says Marcus Cree, vice president, risk solutions at SunGard. “But right now too much time is spent in back-offices producing numbers and reports. Risk managers need to get out on the floor and engage with the mentalities and personalities of traders. An effective risk manager is the person a head trader can consult in volatile markets and say, ‘OK, things are going crazy here. Who are the people we need to watch?’”

One way risk managers could answer this key question, says Cree, is to collect information on how individual traders react under calm and stressful market conditions. These profiles could then be built into stress testing and risk budgeting, with each individual trader being set an individual risk limit according to their personal trading style.

Re-establishing human connections on the trading floor could also mitigate reckless risk-taking through improved monitoring, according to Paul Hayward, acting managing director of OANDA, EMEA. “When I was trading up until the mid-nineties, before technology took hold, there was a lot of human interaction. You were constantly speaking to other departments, explaining decisions to your bosses or colleagues and people could see what others were doing. It was almost self-policing.”

Reverting to some kind of apprenticeship where junior traders are guided through the idiosyncrasies of different market cycles under the wing of seasoned traders until judged fit to fly solo, may also prepare traders better for risk-taking than the finite six-month rotational schemes common for graduates today.

Changing the composition of the trading floor could also dampen the worst excesses of testosterone-charged recklessness. Attracting more women and retaining older, more experienced male traders to trading teams – which are invariably young and male – could make for more balanced decision-making, while pulling young male traders off the field, before they reach the end of their winning streak, would give an opportunity for testosterone-fuelled bodies to calm down and reset.

A change of pace

Perhaps the biggest changes needed in banks are in management style and culture, recommends Coates. Macho managers, who rule trading floors by fear and create a climate in which mistakes are likely to be driven undercover, need to be discouraged from leadership roles. Rewards policies that incentivise short-term performance and hiring policies which currently resemble a revolving door, need to be to reversed and stabilised. Two institutions which have started to move in this direction are Deutsche Bank and Goldman Sachs. Deutsche, for example, has announced that bonuses for senior bankers will be paid once every five years instead of annually while the decision by Goldman to end two-year contracts and bonuses for new hires in investment banking and investment management is partly designed to emphasise long term career opportunities, says the firm.

Another intervention open to banks is to change the kind of person they recruit into trading. According to Hugo Pound, managing director of leadership consultancy RDI, this is exactly what banks are now doing. But the move has less to do with any wish to lower testosterone levels on the trading floor and more to do with the changing nature of bank trading since the financial crisis.

“First, trading is not seen as an isolated, separate island anymore so banks need people who have the maturity to recognise the complex interdependencies across the business and the ability to build relationships inside and outside the organisation. The second thing is with greater regulation and capital getting scarcer, banks, keen to mitigate risk, want people who will respect compliance and the law. Certainly the anecdotal evidence from the past is traders didn’t do that. Now, trust, honesty and transparency are the qualities being emphasised.”

According to Pound, the kind of thrill-seeking risk-taker who used to be found on almost every trading desk is now migrating to hedge funds where fewer compliance rules and greater freedom are to be found.

So does that make Coates’ research an increasing irrelevance for banks, an idea whose time has passed? Coates doesn’t think so.

“These ideas are applicable to any organisation taking risk not just banks. And judging from the money banks still make, trading won’t be disappearing any time soon. Even black boxes and algorithms don’t remove the human dimension from trading.”

“I just don’t think we can cut our bodies out of the picture and I don’t think we want to. When it comes to decision-making, some of our most valuable signals are our gut instincts.”

©BestExecution

 

Regulation & compliance : Market surveillance

By
Ian Rycott
-

BIG BROTHER IS WATCHING.

Be20, DIVIDER, Regs

In light of the recent trading scandals, market surveillance has risen to top of the agenda. Heather McKenzie assesses the solutions on offer.

Imposing a fine of £42.4 m on UBS following the conviction for fraud of former trader, Kweku Adoboli, the UK’s Financial Services Authority (FSA) cited systems and control failings that “revealed serious weaknesses in the firm’s procedures, management systems and internal controls”. The fine, which was discounted to £29.7m for early settlement by the Swiss bank, was handed out in November last year and is just one of a growing number of increasingly hefty penalties imposed on financial firms.

In the US, financial regulators are also cranking up the pressure on firms via large fines. During the past three years, the Securities and Exchange Commission (SEC) has filed more insider trading actions – 168 – than at any other three-year period in its history. The actions were filed against nearly 400 individuals or entities and the profits or losses involved totalled around $600m.

In its statement on the UBS fine, the FSA pointed to the Swiss bank’s computerised risk management system, which it said was not effective in controlling the risk of unauthorised trading. It also said its trade capture and processing systems had “significant deficiencies” that enabled Adoboli to conceal his unauthorised trading. “The system allowed trades to be booked to an internal counterparty without sufficient details, there were no effective methods in place to detect trades at material off-market prices and there was a lack of integration between systems,” stated the FSA in its ruling.

Regaining trust

In the wake of the global financial crisis and trading scandals, ensuring markets are fair and orderly has become a priority. Steve Leegood, an executive at market information company Bryok, says there is a perception among buyside firms that they are being “ripped off” by their sellside counterparties. “There is increasing recognition in the industry – by brokers and by exchanges – that integrity is a good thing,” he says. “Being able to demonstrate integrity is becoming a competitive weapon.”

It is an expectation that if you run a tier one market you will have high quality supervision and be able to demonstrate that to regulators, says Mark Hemsley, chief executive of BATS Chi-X. “We believe surveillance is something to keep investing in and improving.” BATS Chi-X’s surveillance team uses a combination of in-house and third-party tools to monitor trading activity. The automated system includes real-time and T+1 alerting; cross-venue monitoring across displayed and non-displayed pools of liquidity; ad-hoc reporting; scalability with high message throughput; replay capabilities; and cross-market views.

This push for integrity is not only being driven by financial regulators. Magnus Almqvist, senior product specialist at SunGard’s capital markets business, says buyside firms are taking a more active interest in how traders are executing their orders. Moreover, many buyside firms are now trading on their own account via direct market access. “Regulators are asking asset managers to monitor their own transactions for abuse and at the same time the customers of those asset managers are beginning to ask questions about surveillance.”

While financial regulators in individual countries are throwing their weight around, the European Securities and Market Authority (ESMA) has also weighed-in with guidelines on automated trading. The guidelines, which came into force in May 2012, apply to any firm that trades electronically or provides algorithms for others to access automated financial markets. “Whilst many market participants may feel they already have sufficient systems in place to address ESMA’s requirements for automated trading in equities, this is not true for all asset classes or all participants,” says Rebecca Healey, senior analyst at research firm Tabb Group. “Even for those who have solutions in place, existing systems risk becoming overwhelmed with the sheer volume and complexity of algorithms and requisite data. Necessary controls and procedures are fast proving inadequate ahead of the further legislation coming down the pipe.”

Healey is the author of the March 2012 report, Market Surveillance in Europe: Under Starter’s Orders. In it she writes: “As the trend towards automated trading is set to continue, and asset classes are forced out of the opaque shadows of the OTC world onto exchanges, the need for improved surveillance is even more critical. The result will be an ever-increasing pressure on financial services firms to collate and analyse escalating data volumes in their legacy systems, just when budgets are being tightly squeezed and any available cash for investment in technology and back-office services is evaporating.”

Despite this, investment firms realise they must appear to be beyond reproach and invest in systems that will uphold their integrity. “Internal surveillance independent of external monitoring by the regulators is essential,” Healey notes. “By firms finding internal faults ahead of the game, the opportunity exists to find solutions away from the glare of publicity and exercise successful damage control. In today’s high-scrutiny environment, market participants who implement effective surveillance programmes to uphold a vision of long-term integrity will differentiate themselves from the pack in a shrinking commission pool.”

Different solutions

Healey says trading firms differ in their approach to surveillance systems. Some firms are now operating at a “higher level”, supplementing the standard checks and balances with searches for events considered to be abnormal (such as a trader not taking holidays for a year). “Firms are beginning to talk about compliance as a new marketing tool – they are investing in surveillance systems not only for regulatory reasons, but also because they want to prove to their customers that they are whiter than white and can ensure that their clients are not at risk.”

Technology is not an issue when it comes to surveillance – there are myriad solutions available that can crunch the numbers required to seek out market abuse. The traditional approach to surveillance – whereby compliance officers pored over spreadsheets after an event (akin to finding a needle in a haystack) – is giving way to technology and a change in business focus. Says Healey, “Risk and compliance officers are moving from the back office on to the trading floor. Firms are addressing surveillance in real time, rather than waiting for a spreadsheet after the event.”

Being able to extend surveillance systems to monitor actions beyond stereotypical market abuse such as insider trading and front running is also becoming a popular approach says Theo Hildyard, product manager, director capital markets at Progress Software. “Firms are now looking for systems that can also monitor for fraud, rogue trading and other abnormal behaviour. They want to tighten the controls on monitoring algorithmic trading to ensure there is no manipulation, nor erroneous orders.”

A typical trading firm in the current environment has many IT demands but no money, says Hildyard. As a result they are looking for more efficient ways to approach issues such as surveillance. “Point solutions that deal with individual issues such as money laundering or insider trading are rigid and inflexible. Firms want to deal with all these issues via a single, extensible platform that requires a single interface.”

Veronica Augustsson, chief executive of Cinnober agrees that firms are looking to expand their solutions. “At a technical level, exchanges and market participants have the same needs in surveillance – a real-time feed and the ability to configure alerts. Regulators and exchanges tend to want hosted solutions while banks prefer solutions that can be accessed in the cloud,” she says. “When it comes to trade surveillance at banks, they increasingly want to include AML capabilities.”

Monitoring activity across multiple instruments and venues can be challenging for some firms, says Martin Porter, business development director at b-next. “The surveillance infrastructure at most firms supports separate instruments; the challenge is to combine that and do true market abuse surveillance across all trading activity.”

A big debate in the industry at present is how to address the ever-increasing speed of trading. “If you analyse every order that is being sent to the market, you risk slowing down that trading activity. HFT is all about getting into and out of the market as fast as possible, so when do you execute pattern trading analysis?” asks Porter.

Another discussion is centred on cross-venue surveillance. BATS Chi-X’s Hemsley says there is a potential conflict of interest in how to tackle this issue. “Solutions that are sometimes put forward require a leap of faith about who assumes the cost. There are also conflicts of interest if trading venues are asked to provide confidential customer data to a competitor; that’s not appropriate,” he says.

Such an issue could be addressed via a central surveillance utility. This would require a consolidated tape or audit trail. “Building this would be difficult, but not as difficult as it might have been a few years ago. Technology is moving on apace and there is a willingness to use technology to tackle the issue,” says Bryok’s Leegood.

Leegood likens a surveillance utility to Interpol, where policing is taken away from local forces in some circumstances. “This will move the issue away from parochialism and defensiveness in individual markets. Surveillance is a cost to be borne and there is no competitive advantage in it. Why not share the cost with others?”

©BestExecution

 

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Global Trading is an industry-leading news service for the global equities capital markets: providing information, education, insights and analysis for senior professionals working within trading and execution across Europe, the UK, North America, APAC and other emerging markets. With a focus on the intersection between the buy and sell-sides, Global Trading covers all industry elements from technology and trading strategies to regulation, best execution, market structure and liquidity.

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