By Steve Grob
Steve Grob of Fidessa explains how brokers, traders and exchanges can adapt to life under MiFID II.
If MiFID II increases regulation on broker crossing networks, what other options do brokers have to trade with minimal market impact?
It depends upon the shape any such regulation takes. It looks likely that MiFID II will introduce a new category of ‘venue’ called an OTF – or Organized Trading Facility – that will be used to describe Broker Crossing Networks (BCNs). This will help the market as a whole as it differentiates the client crossing activity of brokers from their other, discretionary, activities. In this latter case the broker is fulfilling its fiduciary duty to its client in other ways such as by risking its own capital in order to complete a client order. This is a completely different activity from the quasi ‘venue-like’ matching of two different client orders electronically.
BCNs are part of the non-lit trading category that also includes buy-side crossing networks such as Liquidnet, dark Multilateral Trading Facilities (MTFs), such as Chi-Delta or SmartPool, and bilateral Over-the Counter trading. Unfortunately, all of these very different activities are sometimes lumped together as ‘dark’ trading. The lack of clarity around non-lit trading is the cause of much confusion amongst the regulators, some of whom seem to think that all ‘dark’ trading is somehow bad, however, trading away from an exchange is often the only way that many investment firms can achieve their objectives without undue information leakage or price slippage.
What is really needed is a clear description of each of these non-lit categories so that traders know what they are getting into, how deep the water is and who else they might be swimming with. In this way, the investment community is free to choose the best way of completing its orders.
Where is the biggest opportunity for banks in this new round of regulation? How can European banks come out ahead from this, or is it a question of losing the least?
The banks have suffered as much as any other market participants. In particular, the lack of a clear consolidated record of post-trade information has made it harder for them to prove the efficacy of the millions of pounds they have invested in technology to help their clients navigate the new post-MiFID liquidity. Clearer reporting rules will also make it easier for them to rebuff the politically motivated criticism they have faced.
What role will technology have in ameliorating the effects of MiFID II? What solutions should firms consider in order to better cope with the shift toward lit venues and transparency?
Technology has and will continue to play a huge part in all this. One of the trends we are seeing is a convergence between algorithmic trading and Smart Order Routing (SOR) so that the process of deciding how to trade gets combined with where to trade. On top of this we are also seeing a greater propensity for the buy-side to fly these hybrid algos remotely.
How can European high frequency proprietary traders remain competitive if they are required to undergo public scrutiny regarding their algos and strategies?
The High Frequency Trading (HFT) community would certainly find life difficult if its algos and strategies were open to public scrutiny, although this would seem to be an unlikely outcome. Given that HFT represents such a significant proportion of European (and US) volumes it would be an incredibly brave move if the regulators sought to censor them in such a heavy-handed manner. In many cases, the HFT community is simply acting as electronic market makers and actually are increasing liquidity and reducing risk in markets. This is because they act as sellers when there are no natural buyers and vice versa. On the other hand, there is a perceived concern over what can happen to markets if their algos go wrong or misfire. The first people to suffer in any such eventuality, though, are the HFT firms themselves, so it is not in their interest to be careless in this area.
Nevertheless, mistakes can happen and most HFT firms would accept the idea ofcircuit breakers being introduced at the exchange level. This is where the ‘fuse box’ needs to be and it is right that the exchanges bear the cost of this as they are the ones making money selling space to the HFT players in their co-location centres. Ultimately, the responsibility for maintaining an orderly market must rest with the venue rather than the participants. If they build faster and faster racing tracks, then they surely have a responsibility to erect and maintain suitable crash barriers.
Preparing for MiFID II
Exchanges Embrace the FIX Protocol to Shore up Competitive Positions
By Annie Walsh
The Vienna and Ljubljana Stock Exchanges comprehensive FIX upgrades reinforce the continued global trend for reliance on FIX over an alternate proprietary technology. Annie Walsh, Chief Marketing Officer for CameronTec, examines a case for FIX.
2010 was a pivotal year that saw many local exchanges fending off new, unfamiliar competition in what for many regions have traditionally been non-competitive market places. With competition continuing to intensify and once cozy monopolies progressively being dismantled, the stakes have rarely been higher. If regional consolidation was 2010’s buzz, then 2011 will be characterized by structural reform, increased central clearing and the emergence of a host of new players that will be ushered in as a result of Dodd-Frank and EU legislative equivalents.
The paradigm shift has been good for FIX. Looking back it was the emerging new trading venues that first demonstrated considerable appetite for FIX. Their motivation was driven by an acknowledgement that FIX could provide ease of entry into markets and a competitive edge for attracting liquidity away from the traditional exchanges. Exchanges can no longer operate in isolation within segregated vertical markets. Their consolidation due to mergers and the emergence of alternative trading venues has escalated the importance of technology around the trading lifecycle. Latest figures indicate just how much liquidity the new marketplaces are attracting. Volume for BATS, Chi-X, Pure Trading and Alpha ATS, to name a few, show significant levels of liquidity shared by a broad number of different venues.
Field-leveling regulations such as MiFID and Reg NMS have also put the spotlight on technology with a growing focus on reducing latency that has implicitly changed the exchange business model. Competition for exchanges is about performance and cost, with the highest performing and lowest cost marketplaces attracting the most liquidity. Now, more than ever, the need for a more uniform API has become a critical consideration, and this is one area where investments in technology are being made. Exchanges today recognise the considerable benefits of an exchange compliant FIX interface on a number of fronts.
The FIX Protocol is increasingly providing the level playing field for many market participants, while encouraging exchange market differentiation across more value added service areas, such as Straight Through Processing (STP), latency, trading platforms
and strategies, corporate services and increased data offerings. FIX enables exchanges to take advantage of economies of scale and provide broader access as well as generate the additional revenues the business requires.
The Vienna and Ljubljana exchanges are two marketplaces within the CEE Stock Exchange Group (CEESEG), now using a cutting edge FIX API for trading access, order routing and market data. CEESEG’s decision to offer this to members is in response to participant support for the protocol over any proprietary alternative. On the business side, leveraging FIX across CEESEG’s exchange members provides a more flexible and cost efficient solution.
Jack Vensel : Citi
BREAKING THROUGH.
Citi has risen in the ranks to the top three on Greenwich Associate’s electronic trading survey. Jack Vensel, explains how the firm plans to keep its top position and the challenges for the industry overall.
Q. How do you feel MiFID has changed the trading landscape?
A. The adoption of MiFID in 2007 accelerated the pace of change in trading. What took 10 years in the US took three in the UK and Europe. MiFID increased competition and helped compress bid/offer spreads. Although overall it had a positive effect, there have been unintended consequences. It has made everyone’s jobs more challenging, but also when MiFID was first implemented three years ago the market conditions were very different than they are today. Volumes were growing and it was much easier to justify the necessary investments in infrastructure. It is more difficult to invest in infrastructure when volumes are falling.
Q. What have been the positives of MiFID and those unintended consequences?
A. Fragmentation, which was expected, has been a positive outcome in that it has led to better prices and lower costs to execute trades. It also helped to promote innovation throughout the industry. However, one of the main problems has been the lack of a consolidated time and sales tape. There has been a proliferation of market data sources of varying quality, which has resulted in the unintended consequence of lower quality and higher costs for pan-European data. This has meant that firms are having a harder time than ever figuring out what the actual price is and are having to pay more to get a consolidated view of European data. There is a lot of work being done within industry groups as well as pressure on the regulators to come up with a cost effective and viable solution.
Q. What do you think about the MiFID review on dark pools?
A. There has been quite a lot of focus on dark pools with reports from the FESE (Federation of European Securities Exchanges) claiming that that as much as 40% of European trading is taking place away from exchanges. I think the active figure is far less. For example, the OTC market includes quite a lot of “give-up” trades – (trades done that are simply reported, perhaps as a result of some multi-legged derivatives transaction).
In general, the European Commission Consultation Paper released 8th December shows that the European Commission understands the difference between broker crossing systems and MTFs. They recognise that finding the natural other side of an institutional client’s order is a traditional function of the broker dealer. The Commission also recognises that broker crossing systems play a useful role in the markets. The idea of providing more visibility on a post- trade basis is interesting and should be explored further, taking into consideration the needs of both the institutional community and the regulators’ desire for more transparency.
This is a good and fair place to start the debate, and I applaud the Commission for seeing through much of the hype and misinformation put out by groups and individuals interested in preserving the status quo.
Q. Can you tell me the drivers behind your own dark pool – Citi Match?
A. Citi Match was originally developed in the US about three years ago and we launched it in Europe in April 2009. The goal is to provide institutional clients anonymous access with a broad universe of retail, institutional, principal and broker-dealer liquidity that Citi is able to generate and attract. Our clients benefit from having the first opportunity to trade against all the flow.
We designed the platform with the institutional client as the main focus. They know that they get best execution because in our system the institutional order always takes priority. If they match against another institutional order they match at the mid-point, whereas if they match against another source they can get 100% of the spread. I can show them the execution versus the European best bid and offer on a trade-by-trade basis. Our priority is protecting our clients, and as a result we have complete control over access to our dark pool. Different customers trade differently. Some are happy resting an order only in our dark pool, while others will instruct us to seek liquidity in other dark pools. The key is to provide our clients with the tools they need in order to meet their best execution obligations. Citi Match is one of those tools.
Our clients also benefit from access to Citi Execution to Custody (E2C), (an integrated electronic execution and custody solution available in most major equities markets). Citi E2C combines electronic execution and smart-order routing to achieve best execution while using the custody capabilities of Citi’s Global Transaction Services unit to reduce settlement costs, automate settlement processes and provide post-trade asset servicing.
Q. Looking at other kinds of traders, what do you think about the focus on the high frequency trading end of the spectrum?
A. High-frequency traders have been in the news especially after the May 6th flash crash. There are several misconceptions about who these traders are and what they do. Some view them as day traders on steroids who are predatory and distort the markets. The problem is that high-frequency trading is too broad a categorisation. They cannot be lumped into one group because for many their goal is to capture the spread, which does provide liquidity to the markets. High-frequency traders have helped cause bid/ask spreads to compress, which benefits retail investors.
Q. There is also a great deal of focus on the clearing and settlement space. How do you see the industry developing?
A. Although there have been several discussions about mergers between clearing houses, we are actually seeing the opposite happening and an attempt to return to the vertical silo. NYSE Euronext recently announced the launch of two clearing houses – one in Paris and one in London while the London Stock Exchange has announced a desire to do the same. This raises the question of the viability of having so many models in a space which is commoditised. I think in the long run it will make sense for them to consolidate. MiFID may encourage competition but from a clearing perspective it is much more efficient and less expensive to clear and settle trades in fewer places.
Q. Looking ahead, what are your challenges and future plans?
A. The biggest challenge is to keep the momentum going. Citi Match is the largest dark pool in Europe (according to Rosenblatt Securities). We have moved up four places in the Greenwich Associates electronic trading survey in two years, reflecting that our clients have recognised the value we provide. We have also doubled the size of our sales trading team, enabling us to be more proactive. We have also strengthened our algo products team, more than doubling headcount in the same period. Our clients have recognised the value we bring and we want to continue to build upon that.
Our future plans include building and growing a global wholesale (broker-to-broker) business, providing multi-asset algorithms to our clients, continuing to offer a truly global platform to our institutional clients. We hope we will continue to be seen as agents of positive change in the markets.
[Biography] Jack Vensel is managing director and head of electronic trading, EMEA at Citi. Prior to this appointment, Vensel developed and managed sellside sales and consolidated marketing efforts for ATD’s operations. Previously, he was executive vice president at Island ECN, the former electronic marketplace now known as NASDAQ’s INET. Prior to that Vensel was a vice president with Instinet, and also worked in different positions with Fidelity Investments and Arthur Andersen. Vensel has an undergraduate degree at Boston College and an MBA from Harvard Business School. ©BEST EXECUTION
Joe Gawronski : Rosenblatt
A DIFFERENT TAKE.
It is hard to keep up with the regulatory and market changes in the US but Rosenblatt Securities gives clients the tools they need to stay top of their game. President and COO Joe Gawronski explains.
Q. What do you think the impact of regulation will be in the US?
A. The US has seen a perfect storm of significant market structure transformation, post-crisis political and systemic risk concerns, and, more recently, the May 6th flash crash. These events have put a lot of pressure on regulators to act, but in some instances their desire to act is simply not there and regardless it will take time to agree upon the rules deemed necessary. As a result, our view is that regulatory action will be much slower and less dramatic than people expect. The SEC alone has 90+ rules to write for Dodd Frank implementation. The regulators rightly are dealing with complex issues with care, and in general I do not think they will want to radically upset the fabric of the market structure that they created.
In terms of the changes, I think there will basically be a few tweaks around the edges of the market structure. I don’t think all of a sudden the regulators are going to stand up, do a 180 and take a mea culpa saying, ‘The past 15 years of rulemaking has been a mistake. Let’s go back to a manual market.’ I do not expect them to outlaw substantial things like co-location or impose minimum time-in-force quoting obligations that would destroy high frequency trading. Instead, the changes will continue to focus on areas relating to systemic risk such as sponsored access rules, further changes to the operation of the circuit breakers, and de minimis market maker obligations, as well as broker/exchange routing transparency, including around dark pools and flash orders.
Q. How do you think high frequency traders will be addressed?
A. There is nothing new about high frequency trading. In fact, if you look at the SEC’s history, it has been a champion of automated trading, partly because of the surveillance capability that automation provides. The SEC adopted Reg ATS and all the order handling rules back in the late ‘90s, which created the fragmentation that exists today. Then they brought changed the minimum increment to16ths and ultimately decimals, which further decimated the traditional market makers and fostered HFT. In 2006 the SEC adopted Reg NMS, which endorsed the high frequency trading that already dominated Nasdaq trading and forced change on the NYSE market structure. In fact, high frequency trading did not become an issue until 2009 after the financial crisis and politicians were looking for a culprit. And while some may complain about how these traders are distorting the market, statistics on spreads, volatility and overall transactions costs show that the market quality has actually improved during their ascendance.
Q. What do you think will happen with dark pools?
A. Although the focus is on the US and Europe, there are some interesting things going on in Canada. The regulator has just come out with a position paper that suggests that internalization can only be justified if minimum order sizes are met or meaningful price improvement is delivered. While the SEC is certainly considering similar solutions (the “trade at” rule in US parlance), I think there are much better odds that the Canadians or Europeans end up with such restrictions than the US. [Interestingly, Canadian regulators have also proposed that regulatory costs be allocated to exchanges and brokers based on message traffic, which addresses something about the current cancellation heavy HFT-dominated market structure Europeans, Americans and Canadians alike have pointed out as inequitable.]
Q. How do you see the broker role changing?
A. It is a definitely a more complicated world today. We used to have two distinct market structures – the NYSE floor for trading NYSE-listed stocks and market makers for Nasdaq. The NYSE market structure for example was very simple and oddly transparent. To get good execution you had to go down to the floor. You could use DOT, an automated delivery mechanism, but even with that, there was a manual process requiring specialist interaction. So when you sent your order to the NYSE, you knew what happened and if you ever visited the floor you knew exactly how it worked. Today, the rise of competing venues has brought choice and lowered explicit transaction fees as the monopoly has gone away, and the buyside is more empowered than they ever have been. They push the button to send the orders and have all the tools on their desk that the sellside has. However, at the end of the day, they have a lot less understanding and transparency as to where that order is going in this complex market structure.
As a result, there is a greater need for a broker to help the buyside navigate the market and to make sure that its own trading desk can navigate the market effectively. This means brokers have to be true execution consultants, a term that is often used but seldom really practiced. The market structure work we started doing eight years ago has allowed us to demonstrate that execution has not been as commoditised as some might think. The fact that we’re independent and not hawking any proprietary venues or tools gives us a more credible perspective about what is happening in the dark pools, how the algos can best meet the needs of our clients, how to measure transaction costs and toxicity of venues, and so on.
Q. Do you think best execution has become easier in the wake of the regulation?
A. I think the idea of achieving best execution is almost a joke today, although striving for best execution is something we and a few other brokers still take very seriously. It is very difficult, even with all the transaction cost analysis tools on the market, to measure best execution because of the degree of fragmentation that exists. You can try your hardest to achieve it and I think we come as close as anyone does but you can never say on any given trade with certainty that you achieved best execution because you don’t know where all the hidden orders are. It’s impossible to even be connected to every venue out there, because you can only have one or two order management and execution management systems and none of them connect to everyone. And sadly most brokers today make their routing decisions based upon how expensive one venue is relative to another. Only a few make their decisions based upon best execution and liquidity.
Q. Tell me a bit of the history of Rosenblatt and the market structure group that you run?
A. Dick Rosenblatt started the firm in 1979 as an agency only broker on the floor of the New York Stock Exchange. He was one of the first to move upstairs in the 1980s to offer trading in Nasdaq stocks as an agent as well as programme trading. [We also were early to embrace technology and were in fact the very first firm to introduce automated trading in the form of DOT access to the buy-side.] Today, I think one of our main differentiators is our market structure research. It makes our own trading desk better and not only provides in-depth research on market structure to buyside traders, but also granular analysis on the exchange space to analysts and portfolio managers, though we eschew traditional Wall Street buyside ratings, earnings estimates and price targets. Three years ago we hired Justin Schack (former assistant managing editor at Institutional Investor) to the newly created position of vice President, Market Structure Analysis to help develop the product. He has since been made a director.
The group publishes a monthly news digest which offers our take on important market structure and regulatory happenings, as well as our Trading Talk reports that provide more in-depth looks at important developments, such as the rise of high frequency trading, evolution of US option markets, European fragmentation and the like. For instance, ETFs are a topic we are doing a lot of work on now since they have become a much bigger part of the market and we have found we can add a lot of value in trading them on the desk, but there are things we have learned that we want to share with our clients. We also have Let There be Light reports which are considered to be the industry’s premier source of information about non-displayed liquidity in the US and Europe since their launch in early 2008.
[BIOGRAPHY]
Joe Gawronski is the president/chief operating of Rosenblatt Securities. Gawronski is formerly a securities lawyer with Sullivan & Cromwell, a vice President in the equities division with Salomon Smith Barney and chief operating officer of Linx LLC, a block crossing network start-up. He received his B.A. in Public and International Affairs at Princeton’s Woodrow Wilson School and his J.D. from Harvard Law School. He is an Allied Member of the NYSE, a member of the NYSE Hearing Board, a member of the Advisory Boards of both The Journal of Trading and Wall Street & Technology, a term member of the Council on Foreign Relations, the author or co-author of several published papers on equity market structure and a leading lecturer, moderator and panelist on the topic.
©BEST EXECUTION
Getting the Right Fit : Buy-side, Sell-side and Vendor on Non-Standard ATDL Implementation
Dmitry Koltunov of Highbridge Capital Management opens up to FIXGlobal about the buy-side expectations for FIXatdlSM algos and how vendors and sell-side firms can improve their offerings.
How do you evaluate a broker’s FIXatdlSM offerings? Are you requiring or looking for them to hold to a standard?
Our preference is towards FIXatdlSM 1.1 or 1.0, since the recent iterations are able to capture more details of the algorithm. However working with any version of FIXatdlSM is already a significant improvement over a static document. Since our proprietary EMS/OMS is built around a customized implementation of FIXatdlSM, the broker FIXatdlSM can never be taken “as-is”. We also do some minimum tweaking to the layout, rules and default settings based on our trader’s preferences. This allows us to have the same look and feel for similar algos from multiple providers.
The standard has been evolving significantly, and in our view, it would be beneficial for the industry to come to more of a convergence point. Having every FIXatdlSM consumer require a different version may be detrimental to overall adoption, because it raises the maintenance cost for the vendors to keep backwards compatibility for each client. The FPL Algorithmic Trading Working Group (which developed FIXatdlSM) has now drawn a line in the sand with the latest version and is making a widespread industry push for it. FIXatdlSM 1.1 is quite comprehensive, so we would be pleased to see the community shift gears from evolving content to aiding adoption of this version. However there are constantly new types of Algorithms coming to the market and this will keep pushing the standard to grow and change. The challenge remains for the industry to work collaboratively to evolve at a measured pace while fostering widespread adoption.
How responsive are your brokers to your requests for new algorithmic products?
We have seen varied response times, which range from a few weeks to over a year, depending on the broker, algo type and level of customization. Most bulge bracket firms are responsive, but the smaller boutiques can vary from poor to great, with those that explicitly focus on execution at the forefront. Some brokers have also put together custom solutions for our traders, and those timelines vary from weeks to months.
It has been a challenge to integrate with brokers that tie their algos to a particular EMS. In one particular situation, a vendor indicated that it would take over a year to make its algo accessible through FIX. Waiting was not an option, so we ultimately worked with another vendor with similar functionality that did not require a particular EMS and could integrate through FIX and FIXatdlSM. Vendors that realize that their real product is execution logic, as opposed to a particular display or EMS, wind up being more successful. In general, we have recently seen more brokers respond to us with FIXatdlSM. This is a positive development, because a year ago, only a handful of brokers were even aware of it. In many cases, we were the first firm to ask our brokers for FIXatdlSM files, so we find it encouraging that more than half are now able to serve up the files. When we do request FIXatdlSM, the timelines vary from weeks to months, and we have seen some firms hire consultants to complete it more quickly.
Timing is a differentiator and FIXatdlSM is critical to this. In general, traders become accustomed to how certain algos behave, and the first algos to get ’test-driven’ have an advantage. As the space becomes increasingly crowded, I can see the laggards start to struggle to keep a presence.
日本FIX委員会トレーディングサミット
運営会社G-MACのリチャード・メッサーが非常に期待され、大盛況だった今回のサミットに関する統括を行った。
天候に恵まれ、市場の景気回復がすぐ先に感じられた10月6日の日本ＦＩＸ委員会トレーディングサミット2010では、525人以上の参加者により、電子取引についての対話がいかに欠くことのできないものとなったかが示された。一日かけて行なわれたサミットにおいて、専門家らは、FIXatdlやHFTからSORやPTSまでありとあらゆる話題についての議論で盛り上がった。
サミットの開催にあたり、TA B BGroupのシニアアナリストであるマシュー・サイモン氏が、「欧米市場における電子取引のトレンドとアジア市場の展望」について発表した。そこではマクロレベルの実態が描き出されただけでなく、トレーディング・デスク、市場の複雑さ、将来の展望といったテーマについても示された。またサイモン氏は、よりよい接続性とより低いコミッションを実現するための最良の技術へのニーズがもたらす機会についても、参加者に教示した。サイモン氏が示したように、完全に安心できる状態にある、というわけではない。さらなる市場の複雑化、競争の激化、規制の変化といった困難に立ち向かわなければならないのだ。サイモン氏の見通しでは、最良の経営執行こそが来年の成功のための最優先事項である。
基調講演変化する株式市場規制と日本の課題
「変化する株式市場規制」は、株式会社野村総合研究所研究創発センター主席研究員、東京大学大学院法学政治学研究科客員教授、大崎貞和氏によって発表された。まず大崎氏は進化する世界の取引システムについて概要を提示した。大崎氏によると、注文処理の高速化と、取引システムの多様化という二つのトレンドが、現在突出しているという。次に大崎氏は、米国の株式市場構造が変化していることに触れ、使用の分裂と多様化にも言及した。この示唆的な発表として大崎氏は、5月6日の「フラッシュ・クラッシュ」と、それによってもたらされた乱高下に代表される欧州における変化を明確に示した。この発表は、これらの問題の再発防止策としての「サーキット・ブレイカー」制度の導入をアピールし、締めくくられた。
基調講演我が国証券市場の現状と東証の取り組みについて
「我が国証券市場の現状と東証の取り組みについて」と題し、株式会社東京証券取引所代表取締役社長 斉藤惇氏により、すばらしい概観が発表された。本講演は、将来的な改善
の可能性はもとより、日本の証券市場を取り巻く状況について、さらには東京証券取引所でなされる新たな方策でのアプローチを参加者に知らせるものであった。東京証券取引所とその他のアジア市場との比較により、斉藤氏は現在の株価、円為替、地価、時価総額についての価値ある見識を共有せしめ、為替とPTSビジネスモデルについても手短に触れた。今年はじめの「arrowhead」のシステム開始以来、ほぼすべての株式における流動性が増したことについて、斉藤氏が触れたのは当然のことである。本講演で斉藤氏が説明したのは、来年から移行するTdex+システムが、市場の流動性を高めるマーケットメーカー制度とともに、システムパフォーマンスにおいてどれだけ劇的な変化をもたらすか、であった。
東京証券取引所株式部統括リーダーである増田剛氏は、「資本市場における最新のトレンドについての発表、そして分野の最前線にいる重要人物たちによるそのトレンドの将来の方向性についての発表は、実に興味深いものだった。このサミットは、参加したすべての市場関係者に対し、主題に対する更なる洞察を与える機会となったに違いない。」とコメントした。またメタビットのCEOであるダニエル・ブルギン氏は「東京のFIX委員会トレーディングサミットはFIXのみならず、日本における最大の金融関連のイベントに成長している」とコメントした。
総じて、本イベントは出席者に有益な議論とネットワーク作りの場を提供したといえる。このサミットおよび発表に関するより詳しい情報は、以下のハイパーリンクを参照のこと。
http://www.fixprotocol.org/JapanConference2010
FIX IN FX
By Jay Hurley
Jay Hurley, FPL Global Foreign Exchange Committee Co-Chair and Vice President, Morgan Stanley Fixed Income, unravels FIX’s role in FX and argues for FX to be integrated into equities algo trading.
Adoption of FIX in FX
Adoption of FIX in FX for the core functions, such as streaming prices, orders and executions, has done well. Evolving from a situation where few ECN’s and banks used FIX for FX to one where the last ECN not using FIX will be FIX compatible in January of 2011. While adoption at the ECN level is almost 100%, for banks it is probably around 70%, up from 15% 5 years ago.
I would say FIX sold itself. It just naturally happens that when you get enough critical mass, after that tipping point, outliers start to look unusual. From there, it becomes more important for FIX to address more than just core functions. For instance, nondeliverable forwards (NDFs), which include most of the Asian currencies that cannot be freely traded, have some of their own specific features that need to be incorporated into the protocol.
New Developments in FIX for FX
The FIX Protocol for FX has provided an opportunity for rapid product development and deployment, and in doing so has increased competition in the market space. FIX provides the flexibility necessary for a platform provider to work with potential users to provide product enhancements. If a product doesn’t meet the needs of the market participants, it will fail quickly; but other times a new product will fill a gap and become the new force in FX trading. This process does not need regulatory oversight for it to happen – it happens by innovation.
Currently, the GFXC is working on OTC options as well. FX specific issues for options revolve around the fact that often at the end of the day, traders receive deliverable cash, so questions like ‘What is the currency of your option?’ are not as obvious. In a currency option, you have several currencies: the currency of the option, the currency that it is against and the currency of the payment, which can be a third currency.
The FPL Global Foreign Exchange Committee (GFXC) has also worked on FIX for allocations, which has some quirks for FX that are not present in equities. For example, if a fund manager has 50 sub-funds, often they will do a single FX trade, representing the net exposure of all of the funds. Rather than buying and selling some all day, they aggregate it. As a result, a single trade of ‘buy 1 million Euros, sell US Dollars,’ turns into an allocation of sell 50 million Euros, buy 150, sell 100, etc. Also, the net trade cannot be zero; otherwise, you cannot settle the trade. This issue caused a lot of consternation, but because there is still a need for a way to do the allocations in a trade where the net is very small, it was decided to have a one cent minimum.
Other factors FIX has to address include delivery and settlement dates, and NDFs cannot actually be delivered, so they are cash settled – normally in US Dollars. There are also questions regarding what fixing rate to use, because FX is an OTC market and there can be several semi-official prices to choose from.
HFT and Algorithmic trading in FX
The major current trend in FX is similar to the evolution of equities, which is towards more High Frequency Trading. Essentially, traditional equities brokers have access to all the same ECNs and exchanges as each other and the prices are all offical, so added value comes from how smart a broker’s algo is and how much potential liquidity they have in their internal pool. Whereas, in FX internal liquidity matters more than which ECN’s you have access to, because a trader can make a price from inventory without access to an ECN.
Algorithms in FX operate on a different basis than equities, where an algo winds its way through smart-order routing and dark pools to get the best execution. The real goal for bank FX liquidity providers is, for them to build their own internal liquidity pool and have 100% of their trades match within their group. Essentially, they could find buyers and sellers amongst their different clients. Some of them would run algos, while some would ask for one-off prices and it would all just transact. It is not ever going to reach that extent, but a lot of the top players have so much going through their own books that their prices are heavily skewed towards their client flow.
Running an algo with one broker could get a totally different price than running it with another because the prices one trades against would be different that the other’s. Then, because there is no official price and there are no volume figures, how do you do a VWAP trade?
It is difficult for FX traders to trust algos. Just as in equities, half the work is post-trade analysis. By the time a trader runs an algo, it will be optimized against historical data, so they will run an impact analysis to measure today’s performance. There might be too much impact, however, simply because they traded with a bank who happened to be long and they made the counterparty more long, but if they traded with someone who was short, there would be much less impact. It is difficult for people to trust something that they cannot definitively say is working. There are obvious algo applications that can reduce market impact and execution cost, but once you get past the obvious, if you cannot measure it, it does not really exist.
FIX and the FX Back Office
FIX is unlikely to have a huge impact on the back office; it is possible, but unlikely. Although FIX adoption has been good on the core trading platform, I think allocations would take some time to be supported because many traders are not using an OMS/ EMS. It is remarkably common for FX traders to use their platform on their desk all day and then fire off an Excel spreadsheet or an email to allocate their trade at the end of day. We have the allocations FIX spec to enable more automation of this work flow.
FX had a good financial crisis. Even though the market was volatile in the extreme and there were various lockups in sovereign bonds and CDS’s, it functioned perfectly fine despite everything that happened. On May 6, for example was very busy: I did what was typically half our entire 24-hour volume in the Asia morning. While it was busy, it all continued to function.
I think FIX is a solution to the FX problem that people do not know that they have. There is still a lack of appreciation for the effect that FX trading can have on the return of your equity portfolio. Let us take the Australian Dollar (AUD) as an example, which in 2010, has gone up 50% from its lows in October 2008. If a trader made a call on Australian stocks going down, and they were short, a downward movement in the stock price of 10% with an increase of 50% in the currency would have resulted in a greater loss due to the currency swing than would have been made on the equity portion of the trade. Traders may look at a TWAP and analyse the execution cost as a few basis points, but if the currency moved against them 3%, does even ten basis points really matter more than the 3%?
Traders need to look at their work in a currency-hedged fashion. Eventually, it has to reach a point where equity and FX trading are synchronized. At that point you could run a FIX algorithmic trading definition language (FIXatdl) order and attach an FX instruction on the side of it. This is technically possible, but the problem is no one would use it because they do not know that they ought to. There is no point in putting the cart miles down the road in front of the horse, just yet, but there is huge potential for more cross asset class trading.
Thomson Reuters’ Ned Micelli shares the benefits of including FIX in FX matching services.
The Financial Information eXchange (FIX) Protocol provides an industry proven, highly efficient mechanism for order management and post-trade workflows. While FIX has traditionally been the protocol of choice for equities products, there has been an increasing demand from market participants to utilize FIX for FX trading workflows. We see the usage of FIX as being a key enabler for algorithmic FX trading into our matching service. The use of a low latency FX-FIX interface allows customers to remove legacy hardware from their site, while benefiting from an industry standard FIX interface. Removing our client’s dependency on Thomson Reuters’ provided hardware also allows our FX customers to quickly embrace turn key hosting solutions. This approach allows FX traders to readily adapt their existing FIX based algorithmic trading engines into our FX matching service while, at the same time, reducing their hardware footprint and their overall cost of ownership. Our matching service will also use FIX for post-trade processing, where standard Trade Capture Reports (TCRs) will be used to represent each FX trade executed.
Face2Face Korea: October 2010
Korean Markets Profit from the Adoption of FIX – FIXGlobal Face2Face Electronic Trading Forum, Korea: October 2010
Having visited Korea in November of 2010 and started a discussion on FIX and electronic trading, the FPL team returned to the Westin Chosun in downtown Seoul to continue the conversation. With over 200 delegates in attendance it was clear that there is a growing appetite in Korea on the subject of FIX and the benefits that increased adoption would mean for the Korean market going forward.
As the competition amongst Exchanges in Asia continues to intensify, there was a clear exchange focus throughout the day, with the CME, Deutsche Borse and KOSCOM joining in. CME has partnered with the Korean Exchange (KRX) to position the Korean market as a financial centre through their Globex Platform. Tae Seok Yoo, Director and Head of Strategic Sales Asia at CME Group, took to the stage and pointed out that Korea is the #1 Derivatives Market globally; however, in order to have an active derivatives market you need an active cash market and technology has a very important part to play. Investment is crucial and the adoption of FIX by KRX and KOSCOM will have repercussions on the landscape of the Asia market.
Local participation on the day was apparent, as David Lee, CEO of DataRoad, who has been involved with FIX from the start in Korea, shared some insightful facts and perspectives. Users of the FIX Protocol in Korea break down fairly evenly at approximately 50% in the Securities and Futures arenas, however, this percentage drops further across the asset management community, where only 30% are trading via FIX. It is felt that increased understanding of the FIX Protocol and the challenges presented by non-standard FIX implementations that exist in Korea would prove advantageous and assist in growth of the FIX Protocol in Korea. It was suggested that the establishment of a local FIX user community and further FIX Protocol education would be beneficial, and that communication of the lessons learnt by other firms from the international FIX community, that have benefitted from implementation experience and expertise could prove valuable to the Korean market.
Explore our website to learn more about future Face2Face Electronic Trading Forums, view past presentations or browse event photos.
https://fixglobal.com/f2f2010.php
Face2Face China: September 2010
The Acceleration of the Chinese Market – FIXGlobal Face2Face Electronic Trading Forum, China: September 2010
As Dr. Bai Shuo, CTO of the Shanghai Stock Exchange put it, the Chinese market resembles a leopard, as shown by its ability to accelerate at an incredible pace.
The tremendous success of this year’s Face2Face China Forum clearly demonstrated the accelerated interest in electronic trading and FIX in China. With 50+ buy-side and 80+ sell-side eager to hear the perspectives and technical solutions available, more than 200 delegates packed the ballroom at the Grand Hyatt Shanghai.
Early in the day, Dorothy Wang of Goldman Sachs highlighted the development of QDII and QFII technology and how they will enable the masses to be reached and ultimately the institutions will be the greatest beneficiary.
FIX as an enabler was at the core of discussions throughout the day, with numerous questions from the audience about Transaction Cost Analysis (TCA), Smart Order Routing (SOR), Algos and High Frequency Trading (HFT). Gordon Morrison, Global Head of Equity Trading Analytics at HSBC enjoyed an attentive crowd as he addressed the importance of TCA and the questions it can answer, specifically for fund managers. The number of delegates who requested to view the material, accessible on our website, indicates the educational value of his presentation.
To round up the day, the buy-side took the stage and aired their views about the increasing sophistication of the A-share market and how trading technology and services need to catch up through greater understanding and continued engagement with the regulator. International vendors were once again put to the test, with continued calls for collaboration with local vendors and the adaptation of products for the Chinese market, such as the translation of interfaces. Michael Wang, Head of Trading for China International Fund Management pointed out that China is, indeed, headed in the right direction, and a combination of more sophisticated technology, improved regulation, increased efficiency and an injection of expertise from Chinese nationals returning from overseas markets, together, form the shape of the leopard, accelerating the Chinese market into the global electronic trading arena.
Explore our website to learn more about future Face2Face Electronic Trading Forums, view past presentations or browse event photos.
https://fixglobal.com/f2f2010.php
