FPL Co-Chair Updates May 2012

May 15, 2012

By Jay Hurley, Robert Smythe, Hanno Klein

As a member-led organization, FIX Protocol Ltd (FPL) empowers its members. Hear from the women and men who run the committees and working groups about the diverse, global initiatives within FPL.

FPL Global Technical Committee Co-Chair, Hanno Klein

The FPL Global Technical Committee (GTC) has supported a number of larger initiatives in recent months and provided extensions in the pre-trade, trade and post-trade area. One of them is an industry initiative to accelerate the adoption of FIX for the trading of Interest Rate Swaps and Credit Default Swaps. The GTC also reviewed and approved various extensions to support regulatory reporting, including Large Trader Reporting to the CFTC in the US. Last, but not least, FPL is pleased to have closed its last major gap related to the exchange of reference data related to parties, accounts, entitlements and risk limits.

FPL Global Foreign Exchange Co-Chair, Jay Hurley

The Global Foreign Exchange Committee has put the FX OTC Options gap analysis on hold pending a review of the impact of regulatory changes that could affect both the trading and settlement of OTC options, which will enable FPL to more effectively meet the needs of the FX trading community moving forwards. In the APAC region, dialog has been established with the Chinese FX Exchange (CFETS) who use IMIX, a derivation of the FIX Protocol, to seek opportunities for collaboration.

FPL Canadian SubCommittee, Robert Smythe

A regional meeting was held in Montreal on March 8, 2012 with the Montreal Exchange and Fidessa kindly hosting the event and we were pleased to welcome the 30 representatives in attendance. This is the first FPL meeting in Canada outside of Toronto. It featured presentations on OTC Derivatives, FIX and OTC Trade Repositories. Preparations for the FPL Canadian Trading Conference on June 5th in Toronto are well underway with the agenda set and most speaker slots filled. The Canadian Subcommittee continues to hold regular monthly meetings for Canadian members to be kept appraised of developments within the FPL organization and to make FPL aware of requirements specific to the Canadian markets that might impact the FIX Protocol.

Finishing Well: Beating the Close Price Benchmark

GlobalTrading

May 15, 2012

Bank of America Merrill Lynch’s Josephine Kim lays out the reasons why the close price benchmark is so important and how experienced traders can utilize technology to meet the benchmark.
Close Price Benchmark
Mutual Funds
Interest in the closing price is due to the structure of the market. Mutual funds are marked at the end of the day at the closing price. This is the published net asset value (NAV) that indicates that the mutual fund will be marked once a day, and where all the purchases and sales of that mutual fund will be marked at. This is a relic of the market structure of mutual funds. Now, mutual funds are not traded each year or all day long – buys and sells are made at any point during the day and the price is given at the market close. If mutual funds are traded on any given day, the mutual fund trader is going to attempt to get the closing price if at all possible.
Transition Trades
Another way in which a trader would try to beat the closing price is via a transition trade. This is when a pension fund moves assets from one manager to another by selling the assets in one manager’s holding in order to buy the assets from another. The pension fund may go to a specialist transitional manager, who takes all the holdings from the current manager, sells them, uses the proceeds to buy the holdings for the new manager, and then passes those holdings back to the new manager. This process has a mark on valuation and the closing price is that mark.
Index Rebalancing
The final type of trade that allows traders to beat the closing price is index rebalancing. Asset managers may opt for a guarantee on their trade. Brokers will bid aggressively for those trades with the same tradeoffs occurring. Index rebalancing trades have an additional nuance in that everyone in the market typically knows whether the street has to buy or sell a stock for the rebalance, so brokers will put out research ahead of the rebalance.
The brokers then have to make a tradeoff, knowing there is potential demand to buy or sell these stocks from many different buyers and sellers. Traders must decide whether to trade early because they know everyone is going to buy the stocks when the index weight goes up, or trade them later (or even the next day), because everyone is going to sell. In the last few years, more and more investors have the requisite information to make the right decision on rebalancing trades.
Implications of Missing the Close Price
The implications of missing the close price benchmark are straightforward. If the trader purchases below the close price, the mutual fund investor buys the fund at a higher price than their investment, which creates transfer of wealth from the new purchaser to the shareholders of the fund. If the mutual fund is not able to beat the close price but requires funds in excess of the new investment, then the existing shareholders subsidize the purchase.
In a transition trade, missing the close price on the funds to sell and the funds to buy creates numerous problems. For transition trades, brokers will very often give an assessment of the expected range of slippage ahead of time, based on the liquidity of the portfolio they are trying to liquidate and the portfolio they are trying to invest in. The broker clearly hopes to land within that range. If they are outside that range however, the transitional manager might refund some of their fee or maybe even negotiate a profit share ahead of time to incentivize them to minimize slippage. Unless the transition manager is able to buy at a discount, missing the close price means a loss to the fund. This slippage can have major implications for the value of assets retained by the client.
The Right Conditions
The fundamental issue when aiming for the close price is that traders do not know the value of that benchmark until it is too late. If the volume traded going into the close is less than expected, then it is highly likely that any orders to execute with the close price benchmark will have an incrementally higher impact than would otherwise be expected.
One of the factors increasing the likelihood of missing the benchmark is the circuit breakers at exchanges which prevent the close price from moving too much. An order expected to finish at the close will not deviate from the benchmark, but if it triggers a circuit breaker and cannot finish, this introduces overnight price risk. In order to hit the benchmark, traders must be reasonably sure that the expected liquidity will be available. Being able to judge when to start an order is important for beating the close price. Considering all the statistical indicators and overall daily volumes, it may be prudent to begin trading the order before the close to ensure that it completes. This may require deviating further from the close than if you were able to finish the order at the close, but saves the trader from potentially further deviation via overnight risk. Predicting volume leading up to the close allows traders to alter their strategy to minimize slippage.
Volatility can also cause traders to miss the close price benchmark. If a trade is expected to be 5% of the closing print, it is unlikely to move the price and the whole order can be entered. If the order is for a volatile stock and there is reason to believe the closing print will be small, it may be prudent to start trading in advance of the close. The resulting prints will be different than the close because the stock price can move significantly because it is a volatile stock. With low volatility, it can be effective to trade ahead of the close, but for stocks with high volatility that tactic is risky because the stock price tends to move around. Experienced traders segment their trades leading up to the close. They trade in advance where price volatility is low and where volatility is high, trade more of that order into the close (and not be so concerned about pushing the close price).
Experience of Automation
An experienced trader, with all the knowledge and expertise that he or she has built up over time, will generally beat an automated strategy most of the time. The problem is that human traders are not physically able to trade every single stock. A computer applies the same set of rules across everything it sees, and because of the speed of processing power, a computer can read everything. While a human can do the job better, it would require so many humans that it becomes uneconomic.
The question is not whether to use a human or an automated MOC algorithm strategy, it is where to cut off between the human and the computer. For example, if there are 500 orders to do at the close and 480 of those can be dealt with automatically, then more time can be directed to the 20 orders which have a greater impact on portfolio performance. As automation improves, that threshold will change and so traders will be able to take on more trades or perform better on the fewer trades they actively look at.
When a MOC algorithm strategy is employed to beating the close price benchmark, it is important to understand if the system.

Is able to execute both in the auction and the continuous trading session, and if required, based on the estimated impact of the order size?
Is smart and intuitive? Does the system analyze historical volume profiling and realtime trading signals (volume traded over the day, predicted auction volume, current spread, current volatility) to create an optimal ratio of volume to trade in the auction and continuous sessions.
Recognizes urgency levels? The system should allow user to control the level of auction participation and how early to start trading in the continuous session, if required.

Tradeoffs
Trying to be the axe regardless of the benchmark used, means a trader can provide the same price to everybody and not move the market because the market exists on their desk. Whenever higher closing volume is expected, (whether through a transition trade or a rebalance of an index), brokers will compete to be the axe in the names that matter for that trade. Attracting other traders for that stock allows the broker to provide an equilibrium price without spilling their trading flow into the open market. The sell-side is constantly trying to leverage its ability to trade the close better.
Buy-side traders might also pay for a guarantee to beat the close price and accept a fixed amount of slippage, so transferring the risk from the buy-side to the sell-side. The sell-side takes the risk, the buy-side gets the zero risk trade, and the sell-side then has an opportunity to beat the price that they gave by trading intelligently. This is beneficial for buy-side traders who are risk averse or lack the technology and time to execute such a large trade. If a buy-side trader does not handle this type of trade often or is otherwise occupied elsewhere, they may come to the brokers looking for an agency or a principal trade.
It is generally thought that the sell-side should be marginally better at closing trades than the average buy-side desk, because of the scale that they have in terms of technology. Large closing trades are complex and require tradeoffs, but the technology an experienced broker has can enable a trader to be competitive.
Beating the close price with a MOC algorithm strategy offers significant benefits especially when traders have orders with closing price benchmark and when they want to capture close liquidity while minimizing price impact and next day reversion. It especially works well when the system is sophisticated but remains intuitive.

Each to Their Own Design: A New Direction for Exchanges

GlobalTrading

May 15, 2012

Liquidnet’s Seth Merrin shares how exchanges can develop a global strategy to compete today.
Following a year of failed crossborder mergers, exchanges are at a crossroads. They have worked in siloes within their respective countries but now have to create their global strategies. To move forward, there are lessons for the exchanges to learn from another industry that followed a very similar trajectory more than a decade ago—the airline industry.
Airlines share many parallels with exchanges—a strong nationalistic sentiment, a highly competitive environment driven by the entrance of low cost carriers, and a record of unsuccessful M&A activity. So what steps did the winners in the airline industry take in order to beat out the low cost competition, how did they achieve global scale and what can exchanges learn from this?
Airlines tackled the fundamental evolution of their industry by focusing on three key areas: diversification of revenue by selling more to their existing client base, differentiation of their offering by focusing on a premium customer, and development of global alliances to expand their geographic reach.
Let’s first take a look at revenue diversification and how exchanges can take a similar approach. Airlines realised they had a captive audience with their customers and once they had these customers in their seats, they could sell them more products. As a result, the airlines introduced paid-for services in coach and new premium products and services to all customers. Who hasn’t been on an aeroplane and paid for food, extra space, or, picked up an ever-expanding catalogue of duty free items?
Historically, exchanges have had two primary streams of revenue: company listings and trading. Today, these revenue streams constitute only a minor component of total revenue as exchanges have placed more emphasis on their ‘premium offerings’. The NYSE Euronext and Nasdaq, both of which have faced significant competition sooner than many of their peers, recognised that they had a captive audience in their listed companies and expanded their offering by selling premium services such as new technology offerings and premium data products and services. Today, both of these exchanges have multiple revenue streams and no single business comprises more than 20% of their overall revenue. What they have left to do—and what virtually no other exchange has done—is to develop a premium class of customer.
The entrance of low-cost providers, such as EasyJet and Ryanair, in the airline industry commoditised the price of an airline seat. As a consequence, airlines (particularly the established players) could no longer compete on price alone and needed to diversify their offering. So they went upscale, choosing instead to focus on high margins and higher value offerings, which their discount counterparts couldn’t match. While discount carriers charged for pillows, winning airlines created a premium offering and experience for their business and first class travellers. It’s not surprising that these premium passengers were willing to pay significantly more for steak, champagne, and lieflat beds because of the ultimate experience these airlines provided.
As exchanges have demutualized, they have focused primarily on high frequency trading and non-trading services, two low margin, commoditised offerings—the economy end of the plane if you will. By focusing on these types of services, exchanges have missed a significant opportunity to differentiate themselves through building a first class cabin for an underserved constituency—the institutional investor.
Institutional investors need a safe and efficient way to trade in size. Exchanges are well positioned to help facilitate a new market structure where these institutions can trade alongside the retail market—choosing when they would like to interact with other constituents and be protected when they do not. Across the world we have seen that a single execution venue cannot efficiently handle all the competing interests in today’s marketplace. By catering to the needs of institutions, exchanges will benefit with increased execution sizes, increased liquidity and a more efficient market where they can attract greater investment to their country from around the globe.
What we can learn most from the airline industry is how they embraced a global strategy that did not rely on consolidation. Airlines realised that it was not realistic to consolidate airlines to create their global reach. Their solution was to create global alliances through code and service sharing agreements which would allow customers to travel around the world with one ticket, and without re-checking their luggage.
It is equally unrealistic to think that exchanges could acquire enough exchanges to create a similarly global reach considering the scale of a global platform, the politics and the nationalist pride that would accompany any acquisition of an exchange by a foreign entity. The majority of recent merger talks have all but been abandoned due to issues such as these.
The age of going global through exchange consolidation is dead. Exchanges need to rethink how they can create global scale for their members to access the best opportunities regardless of where they are in the world. Exchanges, long the centre of capital creation in their local markets, are well positioned to become the gateway to the rest of the world by creating borderless trading opportunities that benefit all of their constituents. Through global alliances, exchanges have an opportunity and a better alternative for facilitating investment in and out of their countries and serving the global investment needs of institutional investors—without compromising their important role at home.
This is already happening. Since the launch of Liquidnet’s partnership with the SIX-Swiss Exchange last year, it has quickly become the largest exchange operated dark pool in Swiss equities, with turnover topping CHF1.36 billion, and with an average trade size of CHF708,136—more than 96 times larger than any other MTF or exchange (dark or lit) as of the first quarter 2012. SIXSwiss Exchange members can now direct executable block orders in 2,500 Swiss and other European names to the platform.
Exchanges, despite being a pillar of their local economic and market structures, must find new ways of diversifying, differentiating and developing a global strategy in order to compete in today’s highly evolved market dynamic. Partnerships, like the airline industry’s code-sharing, offer attractive ways of doing this without raising nationalistic or political concerns at home. Above all, they offer exchanges the opportunity to best serve a premium client—the institutional investor—a client that represents the millions of investment and pension holders in their market.

Making the Best of it: Best Execution in Europe

GlobalTrading

May 15, 2012

Citi’s Salvador Rodriguez and Daniel Mathews explain how best execution has evolved alongside MiFID and how the latest proposals are likely to affect buy-side and sell-side trading desks.
How is best execution under MiFID II different from MiFID I and from pre-MiFID? Where have we come?
Daniel Mathews, Citi: Although we are referring to MiFID II, we are at the early stages of the MiFID II legislative drafting process. The European Commission (EC) published its proposals last October, and there will be a number of amendments proposed by the European Parliament over the coming months. The Council of the European Union (EU) will also table amendments and ensuing agreement between the EC, the European Parliament and the Council of the EU (27 member states) will then be required. It is not yet clear what MiFID II and MiFIR will look like in final form as there are a number of key areas which are acknowledged by both sides to need addressing. What is clear is that there will be significant changes to the drafting that is on the table at present.
Salvador Rodriguez, Citi: With the MiFID II process we have seen closer alignment between buy-side and sell-side interests. There is more cooperation between the buy-side and sell-side with a view to what may or may not come out of MiFID II; and this in itself, is a clear improvement from the earlier iterations, which is encouraging for the business at large.
DM: Certainly, the meetings we have had with the buy-side indicate that they are taking far more interest in what MiFID II will mean for them; they want to participate in the debate and are keen to understand what we are doing from a sell-side perspective.
Tools and strategies that have become accepted best execution for many brokers are now under review (e.g. broker crossing and the Systemic Internaliser (SI) regime). How difficult will it be to provide comparable offerings within the SI framework?
DM: One of the current challenges is understanding how the SI regime will operate under Ferber’s proposals and understanding the unintended (or intended) consequences of the amendments, such as ‘all OTC trades must be conducted under the SI regime’. The scope of the SI only extends to liquid stocks, so what happens to non-liquid stocks? Can we trade them outside an SI? Will all risk trades need to be executed within SI and therefore within published firm quotes, even though a risk trades to client may warrant a price outside firm quotes? At the moment, there are many unanswered questions raised from Ferber’s proposals concerning what the SI regime actually means for us and our clients.
SR: As Dan has alluded to, many of the requirements have fallen into the lap of the sell-side. From a trader’s point of view, the tools, strategies and decisions around how to execute a trade will probably not change significantly. Traders will continue to send VWAP or participate with volume-type orders. Naturally, there are pending questions around how risk is employed and whether firm capital can be used within an OTF environment. As a broader business, how clients and orders interact with risk, and how we internalize house flow, are wide-ranging questions. There is no one clear answer; it is a multi-layered problem and there are still grey areas to be resolved.
From which of the MiFID updates will institutional investors notice the biggest change in execution quality and/or strategy?
SR: The MiFID proposals will clearly affect everyone. Under the Commission’s proposals, a BCN would be an OTF and an SI is not a venue. I think this needs to be unpacked. Legally the classifications are fairly clear – you can trade on either a trading venue (RM, MTF, OTF) or OTC and if the latter then to the extent the trading is systematic and frequent then the firm must be an SI. As Dan says though, Ferber’s amendments have muddied the waters so that it’s not clear how an SI is intended to function. Our job is to figure this out through dialogue with our buy-side clients, and we have been seeing many of them recently on market structure road shows, explaining where the current process is at and the areas still to be resolved.
DM: Our clients value choice and one reason they participate in broker crossing networks is because they trust and value the liquidity in them. There can be a level of discretion in how they interact with different types of liquidity within the pool. Under MiFID II, it is questionable whether clients will be have the same choices; being able to participate in broker pools and have that same level of ‘discretion’ as to what kind of flows they interact with.
SR: One of the things I touched on at the EMEA Trading Conference in March was ensuring that customers have a menu of choice, particularly in dark pools. There is no ‘one size fits all’ solution. For example, some traders are aggressive, others are more passive, so you are never going to have a solution that suits everyone. As brokers we need to tailor solutions to particular client needs. It falls back to the ‘know your client’ adage, so discussion with them and understanding how they want to execute their business helps us to identify and understand consensus in the industry. While we want consensus on how to deliver solutions to a client, it is equally important to understand the bespoke execution requests to ensure that we align their expectations with what we can deliver.
DM: Within our broker crossing system, there are different types of flow – for example, client flow and principal flow from unwinding of risk trades. Both generate important sources of liquidity. Under the EC’s proposals, clients can interact with an OTF but we could not deploy our own capital (i.e., principal flow from unwinding risk trades) within in the OTF. This means that our clients would be unable to access the liquidity of our risk trade unwinds. It’s back to investor choice – clients value the choice of interacting with different types of flow within broker crossing networks and under MiFID II they would not be able to do so. In addition, under the Commission’s proposal BCNs would be OTFs; under Ferber, OTFs are limited to the non-equities space.
How is greater post-trade transparency, both in terms of a consolidated tape and reduced trade reporting delays, going to affect best execution?

DM: A consolidated tape will help post-execution analysis, but it is not necessarily going to change trading behaviour, per se. Establishing the consolidated tape from various venue feeds will increase latency compared to direct feeds from trading venues. Brokers will still need to subscribe market data directly from trading venues, whether it is a MTF, an OTF or primary exchange, to ensure they have the lowest latency of market data against which to execute their trading strategies.
SR: The best execution requirement states that we must ensure that we are accessing the correct venues, at the correct times, for the correct liquidity and at the correct price. This is an important point because historically brokers have always had access to the post-trade element. We have recently seen the rise of third party providers offering this service to the buy-side, and more sophisticated clients who now have their own tools and personnel, with full-time staff to analyze the executions that we, the broker, are feeding back to that client. Not only are we being measured against our own internal TCA, but also against third party TCAs and clients with their own dedicated staff that measure each execution.
Alternative venues gave European brokers greater choice in execution, but also added complexity and cost in terms of IT and connectivity. What will happen to the balance of cost and choice under the new OTF and MTF regime?

SR: There are undoubtedly going to be costs attached to this, in the sense that brokers have to ensure that they fully comply with MiFID II. There will be ongoing costs in terms of personnel, and if we need to make changes to areas such as the MTF, OTF, or SI regime, then there may be adjustments in quant and IT resources, which might not necessarily increase costs but will divert attention.
DM: There will be more trading venues – We have already seen this as firms begin to pre-empt the outcome of MiFID II. There is an overhead to joining any trading venue and a substantial uplift in the amount of market data that needs to be consumed and processed.
Will it be harder for a broker to get a new algo to market under MiFID II? Why, or why not?

DM: This depends on the definition of algo trading, whether it is the EC’s definition of an algo or Ferber’s definition. Under the EC’s definition, any “computer algorithm” was considered an algo and therefore fell under the obligation to provide a continuous two-way quote, which is not going to work for clientstyle VWAP algos. Whereas, if you look at Ferber’s amendments, he splits out algorithms used for client orders from algorithms used by high frequency trading (HFT) strategies. It is unclear which approach will prevail although we know that neither will stand as it is drafted currently. In addition, the recently published European Securities and Markets Authority (ESMA) Guidelines on Automated Trading would suggest that it will be no more difficult for a investment firm to introduce a new algo to the market than it is today.
SR: Client directed flow – the traditional VWAP, Participate with Volume business – will not be very different. There might be one or two new rules but as we mentioned earlier, we have dedicated staff within our legal and compliance departments who will monitor, oversee, and approve any new strategies, amendments or customizations. Gone are the days where you simply delivered an off-the-shelf VWAP algorithm to a client. Clients are more demanding regarding customizations and adjustments to meet their particular requirements. Once we have identified the client’s specific needs, we then have an implementation process. We discuss it internally, involving our quant and product teams and agree what can be done from a technical or quantitative point of view. Throughout this process, we also liaise very closely with our compliance colleagues before delivering an execution solution to our clients.
DM: There is already a high degree of oversight and governance around algos as it is part of the regulatory framework in which we operate. There will be small tweaks that we have to make, for example, having the traders’ IDs reported to the regulator. Non-regulated entities, like hedge funds, will need to ensure that they have the correct oversight in place, but from our perspective and that of most large brokerage houses, it will be business as usual. Sometimes we forget that many of the firms operating these algos are already thoroughly regulated by the Financial Services Authority (FSA).

A Fluid Picture: Accessing Liquidity in the New Japan

GlobalTrading

May 15, 2012

Fidessa’s Hiroshi Matsubara, Co-chair of the FPL Japan Regional Committee, discusses the changing picture of Japanese best execution and the role technology (particularly TCA) will play in improving market efficiency.
How important is Proprietary Trading System (PTS) aggregation for best execution in Japan?
The importance of PTS aggregation is certainly increasing, but it still faces several critical issues before it can develop further in Japan. The share of Japanese equities trading on the PTS venues has now reached around 6% and even exceeds that of the cash equities trading on Osaka Securities Exchange (OSE). The Fidessa Fragmentation Index (FFI) for the Nikkei 225 index constituents is now around 1.4 compared with 1.15 in July 2010.
The main PTS venues for institutional traders are Chi-X and SBI Japannext. The main benefit PTS provides as a trading venue is smaller trade tick sizes in decimals, which enable price improvements which cannot be achieved on the Tokyo Stock Exchange (TSE) as there are no decimal tick sizes on TSE. High frequency trading (HFT) models can make money more easily on a PTS with decimal tick sizes and a low latency trading platform, as offered on Chi-X and SBI Japannext.
So far, only a small number of domestic buy-sides are using PTS – mainly via broker SOR s (Smart Order Routing). Yet, even the more conservative asset managers in Japan are finding it difficult to ignore this opportunity for potential price improvement. More Japanese buysides are interested in trading on PTS venues, but the following factors are hampering on-shore buy-side traders in Japan from active usage of the lit alternative venues:

The restriction of trading more than 5% of a stock off the exchange, in connection with the Takeover Bid (TOB ) rule. As a result, some domestic asset managers only use PTS for sell orders.
Not all brokers’ back office systems are ready to accept and place decimal limit orders on PTS.
The volume of shares being traded on PTSs is increasing, but it is not yet recognized that PTS venues have acquired the traditional price discovery function, thereby assuring achievement of best execution.

What is the next trend in algorithmic trading in Japan? Is smart order routing increasing or is the emphasis more on dark pool/execution algos?
In the two years since the start of arrowhead on the TSE, use of algorithmic trading has become a standard of buy-side trading, even for most domestic asset managers in Japan. Now, mid-tier domestic brokers are implementing algo execution services, as accepting Direct Strategy Access (DSA) orders has become a de facto prerequisite for attracting order flow.
I believe that the most typically used algo models are still based on VWAP and IS, but liquidity-seeking algos used to identify a trading opportunity for illiquid stocks are being used more.
Given the recent solid development of PTS venues in Japan, Smart Order Routing (SOR) technology is now a ‘must have’ tool for agency brokers, following closely after the algo engine itself. I anticipate that mid-tier domestic brokers will start adopting SOR in the next few years.
What are the best ways to access liquidity in these market conditions? How does technology help to meet this demand?
The development of alternative venues has altered the trading landscape in Japan. The role of SOR will become increasingly important in order to be competitive in this new environment. In terms of technology, SOR is needed in a multi-venue environment, but both the buy- and sell-side need to get more acquainted with tools for analyzing their execution quality. Each broker provides their transaction cost analysis (TCA) but from a buy-side point of view, they cannot rely solely on the broker’s tool for measuring execution quality. Buysides will be forced to adopt their own neutral TCA execution quality measure, which is another aspect of the technology required.
It is also evident that since the launch of arrowhead, order sizes are getting smaller in Japan, according to data provided by the TSE. This may create problems for traditional asset managers, where their liquidity requirements are more for block orders. You cannot avoid situations where some liquidity is missed, but those changes should be absorbed by the development of further alternative venues. This specific block order requirement will be absorbed by a dark pool like a Liquidnet.
What changes will investors notice if the merger between OSE and TSE goes through?
Traders will notice very little difference for cash equities trading, as Osaka only handles a small amount of cash equity trades. Moreover, exchange trading commission is traditionally very low in Japan, so it is unlikely to benefit investors significantly, unlike Europe where consolidation reduces fees.
The main impact will be on derivatives trading, as the merger should mean consolidation of the major Japanese derivatives instruments. With the Nikkei 225 futures and options traded on the OSE and JGB Futures and options on the TSE it will be good to see the major derivatives instruments in Japan integrated onto one trading platform.
A single co-location centre between the TSE and OSE will create the lowest latency trading environment between TSE’s cash and OSE’s futures and options platforms. This will provide HFT firms with opportunities to exploit cash/futures arbitrage. Clearing and settlement for derivatives are currently separated between TSE and OSE and the merger will provide a more efficient platform for the back office flows of derivatives trading.
What should be done to prevent another trading halt similar to 2 February 2012? What other market structure questions still need to be addressed by FSA Japan and Japan Securities Dealers Association (JSDA)?
In reality, you cannot expect a completely trouble-free trading system on any exchange. Therefore, it is imperative to be ready for another situation where trading is suspended on the incumbent exchanges. The JSDA has announced that from 1 April 2012 off-exchange trading (including PTS) will NO T be halted in such cases. This should give the market greater confidence that trading on alternative venues will be possible if such a situation occurred again.
Even though this is the correct reaction, it does not mean that everyone will necessarily shift their order flow to PTS venues the next time there is a problem on arrowhead. Many of the market participants do not yet recognize PTS’s price discovery function as it is difficult to prove that potential executions to be made on PTS are the ‘best executions’.
It is interesting to note that when the London Stock Exchange (LSE) halted trading in November 2009, all trading in the market ceased without there being a significant increase of trading in MTFs. Despite any reservations, the ongoing trend of increasing liquidity in alternative venues (including broker dark pools) will not reverse in Japan.
In terms of the regulatory situation, I think that we will eventually see those restrictions currently levied on PTS trading relaxed. At the same time, I would expect the Japanese regulatory authority to create a more solid regulatory framework, which will encourage market participants to compete to achieve best execution.

Risk under Wraps: Effectively Managing Trading Risks

GlobalTrading

May 15, 2012

Neal Goldstein, J.P. Morgan, Timothy Furey, Goldman Sachs and Greg Wood elaborate on the forthcoming FPL Risk Subcommittee’s Risk Management Guidelines including their extension to cover DMA, symbology and futures.
While margin checks do not fit into the typical pre-trade risk check, how can traders assimilate the risk limit functionality of FIX with their margin-level risk monitoring?

Neal Goldstein, J.P. Morgan:
Pre-trade risk checks are a key element of the comprehensive risk management strategy applied for business lines like prime brokerage. For electronic trading relationships where a client is offered leverage based on some level of collateral, real time positions for each client are usually calculated based on start of day, and intra-day drop copies of execution reports. A typical risk control is to link the post-trade position checks with the pre-trade checks applied at the gateway. If a client’s intra-day position approaches a level that exceeds the pre-arranged leverage or margin agreements, the post-trade system can send a cut off signal to the pre-trade gateway. The client would then be allowed to liquidate the position to reduce the long/short positions, but not go any further long or short.
The basic definition of DMA trading is that brokers provide access to a venue in the most efficient and effective way possible. What can brokers do to ensure they do not miss client risk limits, internal counterparty checks, rule 15c3-5 requirements, etc while maintaining speed of access?

Timothy Furey, Goldman Sachs:

Whether using algorithms, smart order routing and/or DMA to access the market, it is important to make sure that the rules are optimized and that automated testing and checkout processes are in place to verify that they are working. Appropriate risk controls are a key part of execution and are baked into the process. With all the advances in technology, development teams have the ability not only to better optimize the execution path for speed and efficiency, but also to provide benefits like automated testing to check that controls are functioning properly.
How important is symbology validation to equity risk controls? Can better technology remove fat finger errors from trading?
Greg Wood:
Symbology validation is very important to any type of electronic order flow since the broker must clearly identify the instrument being traded by the client. An erroneous validation of a symbol could have serious repercussions in how the order is executed in the market, including inadvertent disruption to the market. One of the key rules of engagement when a broker certifies a FIX connection with a client or vendor is for both parties to agree what symbology is being used on the session and then not to deviate from that without a subsequent recertification.
Risk management technology is definitely evolving alongside trading technology to provide better controls for the way people are trading now. A simple fat finger check can prevent an inadvertently large order being sent direct to the market. However clients are increasingly using algos to trade large orders over a longer duration or using different types of interaction with the market. In this situation the fat finger check is deliberately large to allow the order to be submitted to the algo. The algo then needs to assess whether the parameters of the order – instrument, aggression, duration, time of day, etc – are suitable for the size of the order. If a large order has parameters that are too aggressive in comparison to the average daily volume of the instrument and the desired timeframe for execution then the algo should either reject or pause the order to avoid impact to the market. If this happens then the broker and client should discuss how to adjust the parameters of the order to avoid impact.
How applicable are these recommendations to futures as well as equities?
Greg Wood:
We approached this document knowing that we would include a set of risk management checks for futures and options. During writing it became clear that the majority of checks were common across all exchange listed instruments, and the only real differences were around how you approach credit checks. Since futures and options are inherently leveraged, the concept of a notional check typically is not applicable because settlement is based on the margin requirement for the instrument. As this may vary daily – especially for options – actual credit checks are commonly performed post-trade for listed derivatives, and position checks are typically used on a pre-trade basis as a proxy for credit.
These guidelines demonstrate that regardless of actual market structure, the same good practices always exist regardless of asset class. For example, it is important to run checks at the pre-trade level to avoid fat finger mistakes as well as reducing the possibility of taking out too large a position, and it is important to check for duplicate, stale or runaway orders from a client’s system. With the growing adoption of execution algorithms for futures and options, the concept of managing risk within the algo also applies. It is imperative to avoid adverse market impact by comparing the order against the calculated average traded volume of the instrument. This is especially true for less liquid long dated maturities or strikes in the same way that it is true for a less liquid stock. If this results in an algo order being paused while the broker and client discuss how to proceed, then this can help avoid inadvertent impact to the marketplace and provide a consistent user experience regardless of whether a stock, future or option is being traded.
How is the FIX tag approach (103=21) an improvement of the prior pause mechanisms? How will the Tag 58 text be standardized?
Neal Goldstein, J.P. Morgan:
The intent of the new FIX convention is to provide a message construct to reduce the ambiguity when an order is in an intermediate state between new and acknowledged, after a given risk threshold has been breached and the order has been paused. The FPL Risk Management working group engaged many of the industry leaders in the 3rd party vendor OMS/EMS product space, who indicated that they can leverage this message to provide buy-side clients with added clarity on the state of a paused order. The information incorporated in FIX Tag 58 is going to be used to populate the text field in the OMS/EMS popup window to indicate that the order exceeded a given risk threshold. For the initial implementation, we expect that the information in Tag 58 will vary across sell-side broker’s products. I believe that over time, we will apply further standardization.

Control and Flexibility: How Trading can Add Value to the Investment Process

GlobalTrading

May 15, 2012

Michael Corcoran of ITG sits down with Jason Lapping, Head of Asia Pacific Trading for Dimensional Fund Advisors (DFA), to discuss the practical impact of electronic trading and dark aggregation on his trading process.
Michael Corcoran, ITG: DFA is one of the largest users of electronic trading techniques in Asia Pacific. Why have you chosen this model and what benefits does it bring?
Jason Lapping, DFA: The primary driver for us using electronic trading is to give us full control over the trading outcomes. DFA’s unique process of generating investment returns is highly focused on the overall returns of an investment decision, and that includes the impact of trading. Portfolio managers generate orders for the trading desk but provide some flexibility over what to purchase on a specific day. This means we can be patient, exploiting the opportunities and liquidity available at any given moment. As a result, around 90% of our global trading volume is electronic. In Asia Pacific, that number is even higher, with over 95% of trading managed by our own traders using DMA and algorithms accessing both lit and dark liquidity simultaneously.
Dark and alternative sources of liquidity also form an important part of our strategy. DFA manages in excess of US $240bn, so we are often interested in trading a large percentage of a day’s volume in a stock. We utilize dark pools to try to achieve this in a way that does not signal to the market. Most of our dark pool fills are small, but cumulatively they amount to a significant extra size traded without signaling the extent of our interest to the market.
We generally trade in dark and lit simultaneously as there is an opportunity cost to placing an order only in the dark. So for us dark liquidity is particularly useful as a complementary strategy.
Firms often describe what they do as trading securities, but in fact what we are doing is trading liquidity. And anything that helps us interact with more liquidity is really important. Therefore in the developed Asia Pacific markets, about 10-15% of our total executions are done in dark pools. We believe this helps reduce implementation costs while getting more done. Both of these elements benefit our investors.
MC: Has the move to full control of the trading process been explained to your investors and do you find it’s a differentiator for DFA?
JL: Trading is very much a value-add in DFA’s overall investment process. So our engagement with clients involves explaining that we have an integrated investment process where portfolio managers work closely with the trading desks, giving them a degree of flexibility. When the market is not going our way, this flexibility allows DFA traders to be patient on a specific stock at a given point in time. When the market is going our way, it allows our traders to be opportunistic. We execute at prices where it makes sense to do so, not because we have been told to get the order done today.
What this ultimately means is that trading can start to add value, rather than being a drag on a portfolio’s returns. The cost of implementation can be significant, and our job as traders is to minimize the gap between the theoretical and actual returns of portfolios. I think that many of our clients find this is a differentiator for DFA, and it is potentially a reason to choose us over another investment manager.
MC: So how has this evolution of the trading desk at DFA been applied in practice?
JL: The key changes we have seen over the past five years for our own Asia trading process broadly fall into three areas:
• increased usage of algorithms and customized algorithms,
• using more dark pools, and
• dark pool aggregation.
Algorithms
As I mentioned earlier, in an attempt to retain control of the trades, we use many customized algorithms. So the brokers we deal with have strong abilities in this area. Algorithmic strategies are particularly useful because of the large number of securities we have to trade. They also are an essential tool for dealing with the differences across the various Asia Pacific markets.
Part of an algo’s job is to act as a translator between the nuances of the different markets: the trader knows what kind of outcome they would like from a trade, and they want a consistent outcome whatever market they are trading in. Traders do not want to have to manage all the microstructure issues manually. Having the algo deal with the various market idiosyncrasies behind the scenes allows traders to focus on the real value-add of the trade. At DFA we have worked with brokers to customize algos so that we have a uniform approach to trading and one that is globally consistent with our overall investment philosophy. Our PMs require consistent outcomes whatever the market, and our custom algos help us to deliver that.
Dark pools
We have also seen growth in the number of dark pools in the developed Asia Pacific markets, and the biggest benefit is the liquidity they bring. Our relationship with dark pools is very interactive. It is important for us to have dialogue with dark pool providers. We often act as a provider of liquidity, particularly in the small- and mid-cap space. So we want to build relationships whereby we bring value to the pool and they add value in our execution quality. This way we all benefit.
Dark aggregation
Dark aggregation is one of the tools we utilize primarily to keep our settlement costs down. This goes back to the point that our primary goal is to minimize implementation costs for our end clients as trading costs can be a significant drag on portfolio performance. So we look at all the costs involved, across the process.
Aggregation also brings efficiencies in terms of how the traders interact with the variety of dark sources, and it definitely helps to improve both trade performance and our use of time. If you are trading 300 stocks in Australia and trying to access multiple dark pools, it is very difficult to manage effectively unless you use some form of aggregation, particularly given the rising number of pools available.
MC: So if we turn our attention now to compare Asia with other regions, given that DFA runs a fairly global process do you see the same trading tools now available in the different regions, and are there still differences?
JL: If we compare Asia Pacific and Europe for example, Europe operates on a more pan-European basis so when tools are developed they tend to work across more markets automatically. In Asia, on the other hand, the wide range of rules and regulations across different markets means the technology has to work harder behind the scenes. However Europe has more lit venues and fragmentation has moved the liquidity around more than it has done in Asia Pacific, where there is usually still a primary exchange. This means that in Europe you need to use or develop far more sophisticated SOR techniques.
MC: And do you find there are specific challenges in dealing with this?
JL: DFA has invested heavily in its global trading team and systems, which allows us to focus on trading and execution quality. So for us, the complexity of market structure represents choice and opportunity, rather than simply a challenge. We are used to actively managing our trading and we can choose where and when we want to engage. This helps us maintain our flexibility.
Having a complex market structure means you have choices: if you have choices of venues, types of orders and order sizes, this allows you to be more sophisticated instead of having a one-size fits-all, one-venue structure. If it is a very uniform market and you are restricted, it is harder for a trading desk to differentiate itself and add value. Our use of sophisticated trading techniques gives us choices which means we can add more value to portfolios, and to our investors.
MC: So looking at the Asia Pacific markets and how they might change in the future, what do you see as the biggest hurdles or changes coming up?
JL: Lack of uniformity of regulations across the Asia Pacific markets is significant and it is not a problem that is going to go away. There is also a risk of over-regulation – I very much believe in an environment where competition among venues is a good thing. It generally allows for a reduction in trading costs.
One simple example is at the level of average bid-offer spreads. Some of the fixed tick sizes in Asia are a real problem in keeping costs high both for institutional trading and also for retail trading – which usually involves crossing the spread.
MC: And what about the discussion around regulation of dark pools which is very topical at the moment?
JL: Dark pools are a benefit to execution quality, particularly in helping institutions like DFA avoid information leakage. If maintaining price formation quality on the lit markets is the concern of regulators, then having a good process around post-trade transparency is far more important than focusing on restricting dark pool trading and trying to dictate a one-size-fits-all or ’lowest common denominator’ structure.
From DFA’s global trading experience, when there is no confidence in the lit market price, no-one will trade in the dark, therefore it becomes a self-regulating environment. Dark pool orders are generally ‘pegged’ to the Bid, Mid or Offer of the primary lit exchange or NBBO . So if too much liquidity migrates from the lit venues to the dark venues, the reliability of the lit venues’ prices used as a reference for the ‘pegged’ dark pool orders would lessen. Traders or SORs would then pull back from dark activity in that stock.
Asia Pacific has the benefit of hindsight, operating at a market level on an 18-month to two-year time lag compared to US and European markets where dark and lit venues have proliferated. I hope regulators in Asia Pacific can learn lessons that help create an infrastructure where institutions can transact in a cost-effective way, rather than a one-size-fits-all trading environment. One-size-fits-all only increases trading costs and is a drag on portfolio performance – ultimately this affects people’s retirement funds.

Barrier to Entry: Buy-side Pre-trade Risk Controls

GlobalTrading

May 15, 2012

Fabricio Oliveira, Head of Risk Management at Mirae Asset Global Investments Brazil, discusses his approach to pre-trade risk controls and how local market structure influences the occurrence of risk.
Market Open
At Mirae we do much of our trading with offshore entities. For example, we have funds that are administered in Hong Kong, Luxembourg, Brazil, US and Korea and this geographical disparity creates operational risk. Differences in settlement price, currency and the timing of financial transfers are all aspects that must be considered when using offshore funds. The ability to settle a US trade in the US and not in another time zone is also important. This is particularly true of Hong Kong as our time difference is a huge barrier to trades in Asia. It is almost impossible to book these trades in Hong Kong even though our traders here see the opportunity to do so.
When I focus on the risks for open trading, the settlement movement is an important concern. Whether you are focused on market risk or liquidity risk, all risks need to be monitored, so you can have a clear view of what potential risks lie ahead.
High Frequency Trading
There is much discussion in the industry and at conferences about high frequency trading (HFT) in Brazil, but we are not yet ready for high frequency strategies. The industry is starting to see how HFT works, but liquidity in Brazil across asset classes is insufficient to support these strategies. There are approximately 300 listed companies in equities and about half that number in derivatives, whether in bonds or yield curves or currency. The local players who run HFT strategies focus on the few stocks and derivatives with liquidity, which does not give them many options to find alpha over short periods. It will be interesting to see how it works in North America and Europe and for us to consider what might be possible in Brazil. For now, I do not see many players in HFT and I can count on one hand the number of funds using HFT.
Our pre-trade risk controls have not had to account for HFT volumes and speeds yet, so we have focused more on core control mechanisms. We have some vendors who can produce risk controls for the current liquidity. If we have liquid stocks, derivatives or OTC products, then we can define our own risk controls. Fund houses with hundreds of funds will have difficulty in applying those controls to the trading systems, but as Mirae mainly focuses on equities, our implementation burden is much lower. Today, all our pre-trade risk controls are done in real-time, including automatic limits. Beyond this, we still have a layer of control in the trader on the desk.
Working with Brokers
When discussing risk controls, it is important to mention that in Brazil all brokers employ significant risk controls on their side, to prevent them from taking on more risk than they can carry. When the brokers start to trade with the exchange, the exchange provides them with risk guidelines and limits. As clients of the sell-side, buy-side desks cannot exceed their assigned broker limits and their orders will be automatically paused if the broker’s limits are reached. The broker’s risk controls are complete; they will not take on risk. As a result, their clients do not have much help in implementing their own controls. This is exacerbated because a fund house may trade with many brokers – in our case we deal with 35. It is impossible to implement one solution per broker, so we rely on our OMS provider to connect with the brokers and to match up risk controls.
The ideal situation for the buy-side should be to have pre-trading control on their side, not the brokers’, even if they do not build it themselves. The brokers’ concerns are with their limits from the exchange, and they are less focused on our limits. We have to develop the control for each product ourselves. In Brazil, margin requirements come from the broker, but they are derived from the limits set by the exchange, based on their stress models and movement fees. Many of the position limits on the sell-side have internal controls for each fund house, whereby brokers give limits based on the fund’s assets under management.
Algorithmic Order Flow
Here in Brazil we have many algorithmic funds or quant funds that are reviewed on a weekly or daily basis. By way of example, we had a multimarket fund with some quant strategy that used an algo to select its asset allocation, but the algo was only designed to run once a week. We do not have much in the way of HFT mainly because of the way these algos are designed in Brazil. Many of the brokers with HFT trading and related algo products to offer to investment managers (essentially, the traders who are familiar with the current liquidity profile) also know it will be almost impossible to get in at this stage with a good result.
When the circumstances are right for increased HFT, we do not expect to have to change many of our risk controls because we have already made significant investment in pre-trade controls. The fund houses with hundreds of funds, however, may find it more difficult.
Our risk controls are mainly focused on the transaction, market share and price movement. If a trader creates an order that is going to be 50% of the volume in a certain stock, then we will block it. Similarly with ‘fat finger’ trades: if a trader attempts to buy more than they have bought in the last year, then again it will be blocked. We have two kinds of warnings. The first is a caution, which requires a confirmation and the second stops the order because it is incorrect, either because of price or market impact. These risk controls are specific to the buy-side because often they are related to the makeup of a fund.
For more information, please visit
http://fixprotocol.org/committees/riskwg/documents.

Buy-side Prepare for MiFID II

GlobalTrading

May 15, 2012

AXA IM’s Head of Trading, Paul Squires, shares his thoughts on how the buy-side are preparing for MiFID II.
What are the major concerns for institutional traders if broker crossing is limited or severely regulated so as to be less effective?
The major distinction which generally makes a BCN preferable to an MTF is the control that the operator can exercise over the type of flow that is given access. There are often multiple streams to the relationship between an asset manager and a broker and the shared objective is usually to optimize the execution performance of the client’s trades. As the operator of a BCN can closely monitor the impact (or ‘toxicity’) of flow that is allowed in, it is well positioned to govern any amendments that need to be made.
I think the intention to increase definition of different elements of flow that is currently found in a BCN (the initial ‘OTF’ recommendation) is the right one (and why not have three different types of ‘OTF’ category to add granularity to the different type of flow?) but to simply remove BCN as a category by applying the ‘OTF’ category only to nonequity instruments is a mistake. The ‘MTF’ alternative, by definition, means that there cannot be differentiation between access by market participant (for example all HFT would be allowed). Similarly unhelpful for the preservation of BCN activity is the SI structure which suggests continuous quoting of prices (‘market making’) which is quite separate from the potential of the BCN operator to unwind risk trades already executed or for ‘riskless principal’ trades.
How can systemic internalisers be tweaked so as to ensure transparency for all participants, while not inhibiting the efficiency of aggregation and internalization?
Good question! The SI category is still something that is surrounded by confusion as to what, in practice, it is meant to represent. If the intention is to create a level playing field and add transparency at the same time then it is commendable but in reality – and particularly if it is imposed inappropriately – it will deter competitive market making which has traditionally been led by brokers and further incentivize HFT ‘quote stuffing’ which gives the impression of adding liquidity and reducing spreads but often disappears at the point of execution.
FPL EMEA Regulatory Update
There is a considerable amount of activity taking place in the European regulatory environment and its impact is a central concern for many FPL member firms. As an organisation, FPL works closely with regulators globally to encourage the use of nonproprietary, free and open industry standards in the development of regulation, so all sectors of the financial community can benefit from increased consistency and transparency. The standards FPL promotes are those that have already achieved mass adoption by the trading community, enabling firms to more easily meet new requirements by leveraging existing investments across additional business areas.
FPL is increasingly approached to comment on regulatory consultations and in Q1 2012, reconvened the EMEA Regulatory Subcommittee, led by Stephen McGoldrick, Deutsche Bank and Matthew Coupe, Redkite Financial Markets, to ensure that all responses submitted strongly reflect membership interests. FPL welcomes participation in this group from all FPL member firms with an interest in the region, if you would like to find out more please contact fpl@fixprotocol.org.

Creating an Innovative Trading Environment with FIX

GlobalTrading

May 15, 2012

Olumide Lala of THE Nigerian STOCK EXCHANGE shares their plan to upgrade their trading system and adopt FIX for trading.
Nothing has a greater impact on the future of organizations than the ability to harness technology. As a result of the increase in the application of technology to market processes, there is today a shift from trading floors to screenbased systems. Electronic trading platforms are increasingly in direct competition with traditional exchanges, amongst other associated developments. Electronic trading, long established and used by the leading stock exchanges, is now the norm across much of the developing world. Although the leading African exchanges, notably the Johannesburg Stock Exchange (JSE, South Africa), Cairo-Alexandria (Egypt), Casablanca (Morocco) and THE Nigerian STOCK EXCHANGE (NSE, Lagos), made the switch over ten years ago, the rest of Africa has been slow to catch up.
Increased Electronic Trading
The gap between the trading technologies used by developed, emerging and frontier markets has been contracting rapidly over the last two to three years. Africa’s more peripheral stock exchanges have sought to modernize, largely in response to the interest shown in frontier markets by international investors.
During the 13th annual Conference of the African Securities Exchange Association (ASEA) in Nigeria in 2010, the ASEA identified Africa’s generally positive growth prospects as an opportunity to attract increased foreign investment at a time when growth prospects remain negative or flat elsewhere. For the host nation, the technology roadmap has been a positive one, with the recent change in management, there has been a major drive in transforming the exchange with respect to the business model and technology framework.
Growth in the Nigerian Capital Market
The recent growth witnessed in the Nigerian capital market can be attributed to the introduction of remote trading or Electronic Communications Networks (ECN) in 2005. This system enabled brokers to trade in the comfort of their offices without having to come to the trading floor. To date, there are 235 remote trading connections in Lagos besides those deployed in branches across the country. In addition, there are an increasing number of dealing member firms accessing the exchange system remotely.
The ongoing transformation with respect to technology initiatives is one of the major driving forces behind the development of the Nigerian capital market. The long term vision is to make Nigeria’s capital market one of the largest 20 economies in the world by 2020. The Financial System Strategy 2020 blueprint will be used to achieve these goals: developing and transforming Nigeria’s financial sector into a growth catalyst and engineering Nigeria’s evolution into an international financial centre.
Challenges
Growth in the capital market has long been inhibited by constraints such as low liquidity levels, high risk perceptions and limited trading technologies. Lack of adequate communications infrastructure is another challenge for many market participants in moving towards an electronic trading platform.
Opportunities
As THE Nigerian STOCK EXCHANGE seeks to transform its electronic trading environment through the use of innovative trading technology – new matching engines, market data initiatives etc., the adoption of the FIX (Financial Information eXchange) Protocol within the market will become necessary to favourably position THE Nigerian STOCK EXCHANGE within the ‘financial global village’.
By using FIX, THE Nigerian STOCK EXCHANGE hopes to deliver the following benefits to the Nigerian capital market:

Improved access to liquidity for market participants by enabling the electronic exchange of trade-related information. FIX compresses the time needed to discover price and transact.
Help in price discovery and the promotion of price improvement. FIX makes it quick and easy to discover market depth across as many prospective trade counterparties as you wish.
FIX delivers insight that helps manage risk, increase efficiency and improve investment performance.
Reduced transaction cost – by automating the trading process (often referred to as STP) costs are brought down with the benefit of ‘lower costs’ for investors.
Greater liquidity – electronic systems increase liquidity by attracting many market participants.
Further competition by attracting new entrants into the industry.
Increased transparency – with electronic trading markets becoming more transparent and risk is well managed through real time monitoring of trades.
Tighter spreads – increased liquidity, competition and transparency means that spreads are tightened.

The CEO of THE Nigerian STOCK EXCHANGE, Oscar Onyema, is excited about the transformation-enabling opportunities that FIX will afford the bourse, saying “the adoption of the FIX Protocol in our market will set it apart from most of the sub-Saharan and frontier markets, by offering our investment community access to a world class connectivity platform and tools to make trading and price discovery more transparent and efficient”.
Conclusion
The vision to evolve into a world class stock exchange complemented by state of the art technology, to attract institutions, to enable efficient socio-economic development, to foster meritocracy, good corporate governance, innovation and entrepreneurship has been and will continue to be the ambition of the exchange.
For this to be achievable we see technology playing an increasingly important role. This is evident by the recent agreement between the NSE with NASDAQ OMX to implement its Xstream Exchange platform. The NSE is the first exchange in sub-Saharan Africa to go down this route.
Ade Bajomo, the NSE’s Executive Director for Market Operations and Technology states: “We see this as our first step in building a positive trading relationship with our local and foreign investors, by providing straight-through processing with real-time order management and execution, as well as real-time connectivity to broker systems and price feeds. This is a game changing initiative that will enhance the customer experience of doing business in the Nigerian capital market. In addition, we have other initiatives in the pipeline; offering brokerage services via smart phones and generating revenue through the sale of market data”.
We are hopeful that these various technology initiatives will enhance the capacity of the exchange and the capital market to become a critical source of funds for infrastructure and industrial development and contribute meaningfully to the actualization of vision 2020.

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