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Risk management regulation – SunGard's take on the FPL guidelines.

By
Yulia Kuksina
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David Morgan, Marketing director, trading and client connectivity, SunGard’s capital markets business, Q&A on FPL’s recommended risk guidelines and SunGard position paper “Implementing effective electronic trading risk controls”.

FIXGlobal

What is your general opinion on the FPL Guidelines?

David Morgan

We were very pleased to see them, as clearly any initiative coming from an organisation with a lot of credibility looking to promote best practices in the market place must be a good thing, and of course also from a selfish point of view as a software vendor: those best practices need some good software in order to support them

This particular area of pre-trade risk management is one where we’ve been active for a long time; we feel we have some particular advantages with our well developed products. We were very keen when the first issue of the FPL guidelines was published in 2011 to use them as a benchmark to check whether we were covering the major items that were being brought to light by FPL as best practice recommendations.

So we went through that as an exercise and we have done the same thing again on the updated 2012, guidelines, which provide more detail on derivatives-specific requirements.

FG

So the value is that it gives you a benchmark for comparison?

DM

Yes, it gives a basis for discussions with individual clients when looking at how the product line should be moved forward, because different points will have different importance to different clients based on the nature of their business. There are some guidelines that 99% of people were already following, at the level of fat finger checks etc. At the other extreme you’ve got some points in the guidelines which I would say very few people are doing and even fewer are doing them on a pre-trade basis, as it might be impractical to do so. Others are of a more specialist nature where it would depend on the nature of the business as to whether they are relevant or a priority. So there is quite a variety in there from the absolute vanilla to the quite exotic.

FG

Is there anything you think the FPL guidelines missed or could have done better as the organisation always welcomes industry feedback, or is there a deliberate intent to leave gaps for others to fill?

DM

They appear to be pretty comprehensive. They are fairly prescriptive; in the second edition of the guidelines you can almost take it as your outline product specification and start writing the code; they don’t leave much to the imagination, which is a good thing. This isn’t an area where one should mess around with vague discussions.

There are a couple of minor areas that our products cover that the FPL guidelines do not. One is in strategy trading, as strategies are not easy to pre-validate. Normally buy and sell legs cover each other, so validation of the whole strategy has to be done: if you validate each leg independently you will be too restrictive. We cover this, but FPL doesn’t mention it. It’s important in many derivatives trading contexts, and for equity pairs trading.

Second is the area of alerts, where FPL doesn’t talk about their use. Before getting to the point where you have to block an order, it is often useful to alert the trader that he has reached a certain percentage of a limit: we provide this option.

FG

You talk about the different variations between companies on their pre- and intra-day trade and firms trading naked, why do you think those variations are still prevalent and are they diminishing?

DM

Well once again it is a function of the business and to some extent the skill and experience of the people involved, and also a function of culture, where some are simply more cautious and prudent than others. What I would say is pretty much universal is the absolutely basic fat finger checks; price limits, reasonable order quantities and so on.

As soon as you move to the level of position checks, credit checks etc you get into the first divider as to whether those are pre-trade or at some point relatively close after the trade, and you will see examples where those are not checked until end of day: in that way people can be on an agency or principal basis effectively trading naked; they have some protection from erroneous orders but their organisation is not protected from intra-day trades that can build up a very risky position.

FG

So we have touched on the philosophical differences between SunGard and the FPL recommended risk controls and different groundings, do those differences need to be reconciled?

DM

I wouldn’t say there are different philosophies: all we are talking about is whether particular points of emphasis are appropriate, and to some extent that is driven by whether we come across a particular client case where something like the pausing of orders, for example, becomes important. SunGard’s relevant product line is fairly mature, it has evolved and developed to a point where it has a wide range of functionality: when you get to that stage the further development is going to be driven primarily by specific client requirements that you come across.

So the question is whether brokerage firms in the market place use the FPL guidelines as a driver for what they are doing and will that lead them to come to us and say “We want to see X or Y.”

It is absolutely not about two different philosophical approaches but more about whether gap X or Y gets filled because of a specific requirement.

Lastly perhaps is the question of practicality – what one can do pre-trade as distinct from post-trade, which is where there is an inevitable compromise that has to be struck with the demands of low latency and therefore how much processing time you can spend on pre-trade checks. With pattern risk checks, which are inevitably multi-order anyway, it is quite reasonable to say that you can do that analysis on a post-sending basis, and then when you have spotted a suspect pattern you come back and stop the next order in that sequence going through. There is room for reasonable compromise at that level, we would say.

To back up this point about there being really just one philosophy in this area, it is also interesting to look at how closely the FPL guidelines correspond to the other 2012 document we have in the European markets, which is already taking regulatory force in the EU. It is a set of guidelines published by the European Securities and Markets Authority (ESMA). Those guidelines go into several areas of compliance
and they have a strong emphasis on pre-trade risk control.  Nobody who read the first FPL document in 2011 would have been at all surprised by what they found in the ESMA document of 2012. The principles are pretty clear and universal.

There is also fairly universal agreement that this particular regulatory push is a good thing: you don’t hear too many dissenting voices.

Be careful what you wish for – the future of HFT

By
Yulia Kuksina
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Weng Cheah, Managing Director of Xinfin, continues his discussion with prop and quant traders, looking at what the future holds for high frequency trading.

It was inevitable that the world of brokerage, in particular execution, would become faster and more automated. Competition drove the world of physics into brokerage and shaped many new services. However, the challenges of today have switched from achieving nanosecond execution, to maintaining profitability, with volumes that have halved in 2011, and continue to decline in 2012.

Even from traders there is clarity that the race to faster execution has all but ended.  An Asia based proprietary trader shared his thoughts on execution latency, saying “we are several fold past ridiculous,” but, more importantly adding that “speed is not where innovation needs to occur.”

It’s not about the speed of execution…

Magazines, professional literature and business plans are all littered with thoughts and opinions about the future, that vary only by how quickly, or how wrong they are. However, it maybe worthwhile to frame the discussion with the following observations:

·         The last three years have seen significant investment in Low Latency services from technology vendors and some brokers, to the extent that a sub-millisecond average round trip is no longer an achievement; sub-microsecond is normal.
·         In a world with a sub-microsecond norm, there are fewer participants unhappy with this performance. It’s rational that there will be fewer resources dedicated to even faster gateway solutions.

·         Although, it is difficult to foresee the total exclusion of research into hardware acceleration, the cold, harsh reality that is the economics of this business will halt even the most technically promising research project.

·         Data has resumed importance.  However, it is interesting that there is a hierarchy of criticality, where historical data volumes, in particular for new markets or contracts, will be more valuable than low latency market data.

·         Excluding pre-trade risk controls is no longer a valid route to speeding an order to market.  This regulatory arbitrage is no longer a selling point by brokers looking to differentiate their services.

·         Intraday risk assessment and management are the least developed links in the chain. This is true for the technology, but also for the organization structure and methodologies employed.

·         Productivity and back testing tools and for quantitative analysts, were specialized and usually built bespoke for a strategy. However, there is an increasing number of generalized frameworks and back testing products from software vendors.

The key takeaway from these observations is that it is not about speed, and hasn’t really ever been about speed, but about the quality of the decision making processes. The world needs to forget about faster, and start getting a lot more original in idea generation.

… It’s the rate at which you can manage the change of speed

Regardless of your role in today’s modern markets, the development of higher frequency trading has permanently changed the competitive landscape; none more impacted than the intermediary. The broker has changed from chasing technical innovation to differentiate themselves and capture clients, to having an abundance of capacity. It wouldn’t be unreasonable to suggest that brokers will not want (or in fact need) to commit further capital to execution product development.

Furthermore, differentiating an execution product is increasingly more difficult as the relative performance amongst brokers narrow. The result of this will be that price competition is likely to continue and margins narrow.

There was almost a peaceful acceptance in a conversation with a London based quantitative fund manager that “the role a broker in the future… it’s looking doubtful.” Going forwards it is worth pausing, pondering on that, and then adding “at least in this form”.

Although we are all familiar with SEC Rule 15c3-5, it codifies the broker’s obligation to provide independent controls to market access. 

This kind of clarity, after a time immense technology investment, and while we are experiencing declining economics will hopefully lead to some important questioning.

At what level does it make sense to cease investing in your own execution gateways and use the technology provided by a broker?
If you had to account for the regulatory obligations and costs to operate as a broker/dealer or NCM, at what level would this become unattractive?

You would have to expect that in the provision of execution, the participants have reached a plateau. One that favors brokers that can provide at least competitively fast gateways, strong operational controls, and intraday risk management that is supported in the organizational structure and methodology.

Unlike growing technology and infrastructure, the changes of today are organizational, and will continue to change. The fact of the matter is that the shape of the desks is not working. Having a large number of people in product development who are solely focused on speed is not helpful; the people need to be focused on developing the right range of products, to either improve the value of the broker’s technology and the links between the elements in the system, or to branch out into separate technology. People are needed on trade risk management and to manage the relationships between the elements of the trading chain.

“Speed is not where innovation needs to occur”

These thoughts were echoed in the words of a proprietary trader in the US, who said that “No matter how good your models, you cannot run them if you don’t understand them. There is a difference between people who create models and people who only operate machines. We know a bigger and badder computer doesn’t make the system any better.”

Aside from the technical challenges of managing super large volumes of data, as well as ensuring the analysis is statistically representative we must recognize that we still need to deal with the logistics of capturing financial data and opinion information. To move data en-mass will vary in difficultly, from the easy already digitized information such as prices, spreads, volatility etc. The more difficult would be financial data that is encapsulated in reports, analyst’s opinions, regulatory filings and various statistical submissions.

Protocols and standards based communications will have a profound impact on future analysis. In particular, the rising adoption of XBRL for regulatory filings and some statistical returns may become a cornerstone to adding fundamental data.

The common thread in all the conversations is the need to know and study the markets. However, there is much more data and derived data in finance than ever before. Managing data has always been important to find a signal, that “needle in the haystack.” As data volumes rise – we find the rise of Big Data to find a “needle in a needle stack.”

Faster isn’t more transparent

Regulators have amended and clarified rules regarding market access. However, they are yet to make advances in systematic tools that aid in the supervision of markets.

This is critical in re-establishing the credibility of markets and integrity of participants, and in so doing attracting greater participation.

Piece by piece, the rules and tools of twenty-first century trading are getting much closer to providing the efficient market that many academic papers in the past had assumed. In real life, it’s always disappointing to meet your heroes – and it is also the same in trading; disappointing to meet a really efficient market.

10th Asia Pacific Trading Summit Hong Kong

By
Yulia Kuksina
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Out of the over 580 attendees, FIXGlobal spoke with a few event participants to get their take on liquidity, regulation and innovation in Asia.
What are you doing to find liquidity in this market?
And what is the biggest regulatory issue in Asia, either across the region or market-specific?
Srinivas Padmasola, Société Générale
To help our clients access liquidity we are building connectivity to as many venues (dark and lit) and fine tuning our SOR capabilities with Quality of Venue Measures.The constantly changing regulation is the biggest regulatory issue but it only goes to show that Electronic Trading has become a mainstream business.
 
Yang Xia, UBS
UBS continues to strive to provide its clients with choice and alternative liquidity. The combination of our best execution policy and liquidity strategy provides clients with a strong traditional block trading and syndicate service, while our best-in-class technology and in-house systems, provide access to automated internalised crossing services. Watching and potentially having to react to international events and imposing more rules around short selling, dark pool and algo trading that’s maybe not warranted but desired due to external forces.
Michael Corcoran, ITG
ITG is focused on providing the most dark liquidity options for the buyside. Our dark pool aggregator connects to over 17 dark pools in the region and helps to re-piece liquidity that’s been split down into small sizes across different trading venues. To that we’ve added the ability to connect buy-side firms directly to each other to maximize the chances of finding big blocks of natural liquidity. This combination helps find liquidity more quickly and efficiently.Over-regulation of alternative trading venues and dark liquidity is a concern. We’re very supportive of the approach being taken by regulators such as those in Hong Kong and Australia of monitoring volumes of alternative and dark trading to establish if any further rules needs to be put in place.
 



 
 
 
 
 
 
What single innovation has most significantly changed trading in the last 18 months? What will it be in the coming 18 months? And Why? 
Bryan Keough, IPC
Regulation has been and continues to be one of the primary drivers for innovation in capital markets: examples include the creation (and the demise) of alternative liquidity venues, the growth of high frequency and algorithmic trading, and going forward, new ways of trading OTC derivatives such as swap exchange facilities and organized trading facilities.
 
 
Tina Tsui, Equinix
From a strategy innovation perspective, it has to be the global trading ecosystem. Market participants can future proof their infrastructure investments while maximizing profit through connecting to such growing neutral global trading hubs that offers best connectivity, lowest latency and maximum security.
 
Bernard Ho, TradingScreen
Electronic trading is remaking the industry, including the traditional exchanges and new venues, the extension of algos to all asset classes, and the use of real-time TCA to monitor their performance. In the coming 18 months, traders will struggle to access liquidity in fragmenting venues (given that there are growing pockets of pools away from the traditional exchanges). The buy-side will rely more on technology and decision support tools like TCA in order to gain greater control, productivity and transparency in trading all asset classes.

My City : Vancouver

By
Yulia Kuksina
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FPL: Supporting the Needs of Global Cross Asset Trading

By
Yulia Kuksina
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Carl Weir of HSBC and Gregg Drumma of Gamma Three Trading discuss how the newly formed Global Cross Asset Committee (GCAC) is helping to support existing FPL asset class focused committees in their best-practice, educational and promotional efforts.
In early 2012, the FPL Global Steering Committee (GSC) discussed the need for a new committee to oversee multi-asset class activities and strategic considerations given many of the common issues and overlapping initiatives of FPL’s Derivatives, Fixed Income and Foreign Exchange committees. The GSC proposed the creation of the Global Cross Asset Committee (GCAC) to oversee the Global Fixed Income, Global Foreign Exchange, and Global Derivatives committees and report directly to the GSC.
While equity markets have matured and been electronic for some time, there has been rapid movement towards a more electronic workflow in other asset classes. Historically, each asset class was segregated, but times have changed and are continuing to do so quickly. Exchange and marketplace consolidations have expanded global liquidity to offer multiple assets. Buy-side firms are increasingly diversifying their portfolios to add a wide range of assets to manage risk and improve returns. Sell-side counterparties are offering increased access and merging desks. A subsequent need for order/execution management systems to handle combined asset coverage has driven vendors to provide solutions to support wide asset coverage. This also includes an everexpanding range of over-the-counter (OTC) products and instruments. Once the GSC recognized the need for a committee, a call for nominations for the newly formed GCAC was sent to FPL members in March 2012, with an election held soon after. Gregg Drumma, Founder and President, Gamma Three Trading, LL C and Carl Weir, EMEA Head of Cross Asset FIX Connectivity, HSBC Global Banking and Markets were elected as co-chairs for a two-year term. Both co-chairs have years of experience in the electronic trading markets of multi-asset trading.
At the time of writing, over 50 representatives from almost 40 different FPL member firms had joined the committee. The members represent a global presence and cover a complete cross section of single and multi-asset exchanges, products, sell-side, buy-side and vendor firms. The committee’s success is driven by its members and the voices from all markets and participants over the entire trade lifecycle.
The GCAC will provide oversight, guidance and help coordinate the efforts of the Derivatives, Fixed Income and Foreign Exchange committees, and provide its findings to the GSC for consideration in specifications, best-practices, and educational and promotional efforts. As a first step towards this goal, an initial survey was distributed to the GCAC members on a range of topics relating to FIX and multi-asset trading, education and forward-thinking technology crossover integration. The results are being collated to help direct the committee to the immediate needs of its members and will be published shortly for group review. The survey questions included topics relating to specific asset classes and technical concerns, regulatory issues, instruments, the discussions around professional certification and training, in addition to certification of the FIX Protocol, and also offered additional room for comment on topics not covered.
When working outside equity markets, there are many more data elements and complexities to consider. While FIX usage is strong in the listed derivatives, foreign exchange and the fixed income markets, there is much wider implementation of FIX versioning and use of custom tags within these assets compared to equities. Standardization and best practice suggestions across asset classes will help improve adoption success. In addition to the business flow, backward compatibility of FIX versioning is used to support older systems where possible. Each of the asset class sub-committees is working toward providing direction in their area, and GCAC works to unify them.
The promotion of FIX adoption within the pre-trade and trade environment for these asset classes is consistent with the recommendations set forth in the widely adopted Investment Roadmap, which FPL produced in collaboration with other leading standard bodies. The Investment Roadmap promotes the increased use of non-proprietary, free and open standards that have already achieved mass adoption. Since its launch the Investment Roadmap has been providing the industry with clear direction as to which standards are, and should be used to support business processes throughout the various stages of the investment life cycle to provide optimal transparency, consistency and operational efficiencies.
To enable FPL to ensure that all responses to regulatory consultations are submitted in a manner that reflects the interests of its members, FPL has regulatory focused groups active in different regions globally. The GCAC will work with these groups to review the FPL regulatory initiatives and their impact on the markets with respect to cross-asset electronic trading and the FIX Protocol. For example, MiFiD II and EMIR in EMEA and Dodd-Frank in the US markets are topics being actively discussed.
Working with the Global Education and Marketing Committee, the GCAC will also look at how it can promote FIX adoption and use outside the equity space. This includes raising awareness of the current multi-asset support as well as improvements and updates on work achieved by the committee. While the equity markets have widely adopted FIX, there is still capacity for growth in other assets, and of course inter-asset interoperability.
FPL members who are involved in any aspect of the topics discussed here are encouraged to join the GCAC. The success of the FIX Protocol is attributed to the involvement of its highly respected community: the more members involved, voices heard and knowledge shared – the greater its success. If you would like to find out more about the GCAC, please contact the FPL Program Office, FPL@fixprotocol.org.

Winning Isn’t Just About Being Faster, It’s About Being Better

By
Yulia Kuksina
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Quant and prop traders share perspectives with Weng Cheah, Managing Director of Xinfin, about the evolution of high frequency trading.
It is unsurprising that we feel swamped by our rapidly changing industry. However, to bring some experience to these words, I had a number of conversations with quantitative and proprietary trading professionals who are responsible for managing money for themselves, or in a fund. Whilst it is not appropriate to name these individuals, the following reflects some of their perspectives.
Trading has changed dramatically in the last 25 years; firstly in that we are no longer physically present in the pit. One US-based hedge fund manager I spoke to went so far as to say that the industry had “never seen so much change in one person’s lifetime.”
This ‘electronification’ of the markets was the necessary catalyst to what has been a continuous evolution in trading, where technology has been a constant companion. However tempting it is to assume, one thing is certain, where we are today did not start by someone saying “I need to be microsecond quick to win.”
Information Process
The investment process tries to manage uncertainty by seeking information that can be sorted into a model through which we can understand the value of an asset. Information is at the heart of all investment, what is curious is that all investors do not select the same information.
There are those who will research the company and build fundamental models from the financial statements and returns as their basis for trading, and a tactical allocation model based on how macroeconomic trends could set their trade quantum.
However, there are also traders who would look at asset price history and examine price actions to set their strategy. As one US-based fund manager said “the price of corn knows more about corn than I do” reinforcing the idea that price is the source of all information.
Quantitatively they recognise that they can increase their absolute return without taking on any additional risk, by stepping up the frequency of trading. Although transaction costs are higher, this is more easily managed than market risk.

Technological Developments Supporting Buy-side Trading

By
Yulia Kuksina
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Thomas Brown, Manager, Trade Support and Settlement, RBC Global Asset Management and John Wysocki, Head of Cash, Compliance, Fixed Income and Trading Technologies for State Street Global Advisors discuss the must-have technologies for the buy-side and how increased automation leads to increased communication with traders.
FIXGlobal: What are the must-have technologies for buy-side trading? Are they built in-house or supplied by brokers or vendors?
Thomas Brown, RBC Global Asset Management: The most important issues are the ability to find liquidity through electronic trading platforms and to be able to place orders using smart routers to avoid high frequency trading (HFT) platforms. Vendors have an obligation to integrate regulatory or market practices into their environments and these practices can be missed or delayed if they are part of in-house builds. Vendors’ fiduciary responsibility to their client base ensures that their environments are in line with the most recent releases.
John Wysocki, State Street Global Advisors: Our primary goal is to help ensure best execution for our clients by using the most advanced technology in the most efficient way possible. We see significant value in Order Management Systems (OMS) and Execution Management Systems (EMS) to automate compliance and electronic trading across asset classes. We take a best-of breed approach to technology and utilize a combination of internally engineered and customized vendor solutions.
FG: How would you describe your interactions with the trading floor?
JW: IT and Trading have a very close relationship at SSgA. Our primary goal is the same – best execution.
TB: Our team is part of the trading floor so we have ongoing and continual interaction with the traders and the investment team. We support all aspects including new technical builds, which makes it easier to introduce new applications.
FG: Have you seen an increase in interaction in recent years, and if so, around what themes?
TB: The more automated the trading desk, the more we interact with the traders. We’re also finding that the more moving parts there are that act faster – the more important it is to communicate breaks to the desk.
JW: Our relationship has become closer in the last two to three years as the financial markets continue to become more electronic across asset classes. Our business partners recognize that technology is an intrinsic part of the trading process and we communicate on an ongoing basis as our systems evolve and new technologies become available. FG: What piece of technology would you want if money were no object?
TB: We would like to see better matching of settlement platforms around the world. When we can communicate in real time with all jurisdictions, it doesn’t make sense to take 48 hours to move assets or money between parties.
JW: From an IT perspective: An environment that could collect all transactions from production on a given day and replay them in a test environment while precisely simulating and validating all workflows under peak volumes.
From a business perspective: Full integration of all external capabilities into the OMS without performance sacrifice including access to all broker algorithms, bidding ability to multiple sources and execution management.

The Impact of Dark Pools on Access to Desirable Liquidity

By
Yulia Kuksina
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Emma Quinn, AllianceBernstein’s Head of Asia Pacific Trading discusses accessing liquidity through dark pools, aggregation and asset allocation.
Trading Volumes, Liquidity and Asset Allocation
I think that you’ll see trading volumes rise when you get an asset allocation back into equities, and people have more conviction in the markets. The reason that there’s just no liquidity in the markets is not because people are worried about exchange mechanisms or aspects like that, it’s about the macroeconomic environment and the allocation into equity.
I don’t think that we’re going to see volumes in other asset classes recover faster than allocation into equities as we’ve already seen that allocation change. People are either bullish or bearish, and are set for what they think is going to happen. And so we are in a position that people will just trade around their positions without making any significant move either way until we get some clarity on the macroeconomic environment.
The Rapid Expansion of Dark Pools and Access to Desirable Liquidity
We use dark pools to access liquidity for orders we would not normally place in the central limit order book. I think dark pools aid price discovery. There has to be post-trade transparency but once that happens you’ve actually got more transparency on a market than you normally would. In this sort of environment, because you’re not putting out so much into a central limit order book, what used to be 10% of average daily volume is now 30% of average daily volume, you’re obviously leaving more in a dark pool if your order size hasn’t changed. I do think dark pool liquidity aids you, as your expected cost is going to be lower and thanks to post trade transparency in dark pools the market sees a block trade that it would not have seen.
With regard to desirable liquidity, I think the onus is on the buyside to actually put in parameters that can minimize risk. Obviously, you don’t want to go into a dark pool blindly. The same thing could be said of going on to the central limit order book. The same thing can happen to you on a central order book as can in a dark pool, if you’re not smart about the way you trade in a fragmented environment you leave yourself open to be gamed.
Best Execution
We have an unbundled commission policy and as such our traders are not limited to paying based on a research vote. We have the discretion to use the broker that will give us the best execution outcome. This discretion is important and enables us to focus purely on the best execution outcomes for our clients.
Impact of Direct and Indirect Costs Imposed on Buy-side Traders by Liquidity Fragmentation
We spend a lot of time on quantitative trading strategies and both post and pre-trade cost analysis – we have pre-trade expected costs in our trader management system and we also look at post trade – both daily and weekly as it is not enough just to look at one trade in isolation as so many factors can contribute to whether you have got a trade right or wrong.
Some of the cost of fragmentation has already been borne by the buy-side and sell-side, such as having to have smarter systems and employ quantitative trading. Brokers are now wearing additional costs with some regulators looking to recoup the costs that come with the increase in surveillance costs for a fragmented market. The brokers may have made savings due to the fact that we now have multiple markets and with that came a compression on exchange fees, but they could well and truly be paying that out now to regulators.

Quantitative Trading:Sourcing Liquidity And Managing Momentum

By
Yulia Kuksina
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Michele Patron, Senior Quantitative Trader, AllianceBernstein talks to Stuart Baden Powell, Head of European Electronic Trading Strategy, RBC Capital Markets about sell-side algorithms, efficient sourcing of liquidity, the need for pre- and post-trade transparency and high frequency trading.
Stuart Baden Powell, RBC:
Recently, there has been much discussion about improvements in sell-side agency algorithms: some would argue that the core ‘building blocks’ of scheduled and opportunistic algorithms remain virtually identical, built around the same underlying models; others would point to a more radical shift away from mere incremental enhancements. Regardless of view, what is clear is that the buy-side is taking control of its execution destiny. Concerns about a reduction in trust, together with insufficient transparency of internal operations from many brokers have all contributed towards the shift. Whilst some buy-side firms will purchase off-the-shelf, canned algorithms from the sell-side, marginally tweak them and call them their own, other institutional firms are taking matters more into their own hands. Quantitative trading has been of huge importance to hedge funds over recent years. However, there are now a few select long only houses moving to incorporate quantitative trading in-house and link this to their own fundamental trading strategies. AllianceBernstein would fall into that latter bracket – Michele, you have worked at both CQS and BGI and now run European Quantitative Trading at AllianceBernstein. Could you talk us through what you are up to?
Michele Patron, AllianceBernstein:
I think that the discussion about how much buy-side firms should rely on the sell-side for trading research should have a definite answer by now: it is well-recognised that saving transaction costs represents an important source of alpha – even for medium turnover strategies. In addition, the wealth of information that buy-side firms have about their own flow cannot be achieved by counterparties, especially in multi-broker interaction scenarios: an accurate estimate of an alpha decay profile, which could be based on simple internal factors (i.e. order reason or PM strategy), will give the buy-side an important trading advantage.
At AllianceBernstein, we see our counterparties as partners, both in the high and low touch space. Within Quant Trading – which is globally headed by Dmitry Rakhlin – we continually try to analyse and customize execution algorithms, after we have had open discussions with our key counterparties. The ‘building blocks’ that you referred to earlier, are in principle easy to understand, and all the algo offerings out there can be bucketed into a few categories: the sell-side can offer us a hedge with smarter technology and expertise around execution tactics. There are some very smart options available in the market to minimize the latency arbitrage effect on client flows. A good solution can be achieved without tweaking the most relevant variable for this problem – system latency.
Two key tasks for a buy-side trading desk are: sourcing liquidity efficiently – especially for high AD V orders – and managing momentum – for low AD V. Having the ability to provide electronic solutions to address the latter, gives traders the opportunity to concentrate on the first task.

Breaking Down Boundaries:Multi-asset Trading

By
Yulia Kuksina
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State Street Global Advisors’ Head of Trading in Asia Pacific, Stephen Mantle, talks about the investment decision making process and the firm’s pioneering multi-asset trading capabilities.
Investable Universe
State Street Global Advisors (SSgA) has a global platform, further enhanced by internal customisation, which enables us to cater to client demands. These internal capabilities can customise to just about anything, and our aim is to not only meet the client’s demands, but exceed them.
We cover something like 800 indices for our clients, so there’s not very much that we don’t look at. At the end of the day, the investable universe is defined by the client; what the client needs and what the client requires.
Frontier markets present different challenges, including some delivery versus payment issues, counterparty issues and head-winds with regards to credit risk. However, these are concerns that we constantly look at to help us offer a broader platform in these markets.
Existing and new clients, in their search for returns in difficult market conditions, are looking for more customised benchmarks and increasingly customised portfolio solutions. This is an area in which we are expanding and continue to pay close attention to.
The Role of Trading in the Investment Decision Making Process
A few years ago being a portfolio manager and a trader were two very segregated jobs: PMs made the decisions and traders tried to implement them. However, the two jobs are now much closer together, and the traders are part of the investment group. In today’s environment, the PMs consult the traders about the construction of the basket with regards to liquidity and other issues. There is dialogue throughout the implementation of the basket. There will also be a conversation afterwards with regards to market impact and how we can improve the process.
As a further safeguard and to ensure smooth communication, State Street has PMs stationed globally, and the teams will have local specialists. Therefore, if we can’t contact the PM, we can always contact someone that is stationed here in Asia and they will be fully briefed on how the basket should be implemented.
The Impact of Electronic Connectivity
Dealing in different markets was more of a challenge a few years ago; electronic connectivity has made trading in multiasset markets much quicker. In futures, electronic trading is only a few years old, and there are now products allowing you to electronically trade FX. State Street prides itself in being at the cutting edge of electronic trading. To give yourself an edge in these markets you need to use all the technology that is available to you.
One feature that State Street is particularly proud of is that in Boston and EMEA all four asset classes are traded from the same platform. In Asia, we trade three out of four asset classes – FX, equity and futures from the same platform. Equities and futures have always been together, because it is a natural match, and we gravitated FX to the same desk in Asia about three years ago. Furthermore, high level discussions are ongoing, and fixed income is in the process of being migrated to the desk.
The advantage State Street has from using the same platform is if the trade is contingent, they will trade together. We know what each class is doing within the basket and we can trade each component according to its relationship with the others. This is a huge advantage when we’re implementing multi-asset baskets. It also mitigates risk and reduces implementation errors.
At SSgA we have had an internal TCA department for ten years, and it covers all four asset classes. All of the TCA data comes from the trading systems, so we know it’s reliable. It is becoming an increasingly important part of the investment process, both pre- and post-trade. The importance of having a TCA department for a long period of time is that it is impossible to look at two or three quarters’ worth of data and spot trends. It takes a lot of data to draw reliable conclusions, but we have the depth of data, and it is robust and accurate.
Client Involvement
Clients are looking for ever more integrated solutions. If you can gravitate as many asset classes to the desk as possible, then you’re improving your chances of getting the best implementation with the least risk.
Furthermore, trading FX live in Asia, rather than waiting for London or Boston to come in, creates a tangible difference in TCA. As a consequence we’re very close to doing our first restricted currency trades, pulling them away from the custody part of it. We know when the restricted currency is going through because we’re doing it ourselves.
Broker Relationships
The change towards multiasset trading makes my job more interesting, because as a desk head, my relationship used to be with equity and futures contacts at the brokerage community. Now I have FX, so I have a new contact. Upon being told I was getting FX I had to go and learn about it.
As a result, the relationship with brokers is becoming more complex, but the centralisation of the roles makes communication significantly easier.
Better Technology
On the matter of technology, the brokerage communities are doing a good job. Algorithmic trading and electronic platforms with regards to latency and algo-suite offerings are extensive; they’re efficient and they work. There’s now electronic futures trading and soon there will be electronic FX trading algorithmically at more than one brokerage.
One area I would like to improve is liquidity, which continues to be the biggest challenge in Asia. The question is, how we achieve that? Whether through aggregated dark pools or fragmentation. There are more liquidity venues now, and we are seeing fragmentation in Australia and in Japan. Proprietary trading systems are probably 10% of the market now. There is some traction, but fragmentation in other markets in Asia has headwinds. So my wish list would be better liquidity and aggregated dark pools, but that’s for the future.
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