Ian Salmon, Head of Enterprise Business Development EMEA for Fidessa reviews the dynamics of trading in the MENA region including DMA access and drivers of future growth.
The Middle East North Africa (MENA) markets appear set to embark on a recovery led by the attraction of investment within and into the region. We’re seeing demand for electronic access to these markets from both our existing western tier 1 customers, who are looking to offer their services in the region, and from local brokerages and banks looking to offer both DMA and retail access to the markets in a way that is safe and reliable. For now, at least, the services required by brokers in this region are order management, the ability to handle FIX flow and straight through processing (STP) with risk and portfolio management.
Two important factors come into play. First, electronic services accessible to market participants from outside the region require reliable communications and the adoption of FIX, together with risk and order management platforms locally to ensure secure and performant access. Obviously, there are a number of networks operating, and they all expect to receive orders via FIX. This is prompting the exchanges and their members to seek reliable pan-MENA communications and complimentary support services. Second, in order to service the needs of the local investment community, which is predominantly retail in nature, competent web-portal and risk capabilities are needed to facilitate pan-regional market access. This forms the backbone of the type of reliable web portals launched by NCB Capital, for example, which can feed into an OMS capable of supporting their 1.2 million retail customers and 250,000 concurrent users.
There are three main models for order flow in the MENA region. First, there is inbound traffic coming from large international firms employing strategies that take account of local trading restrictions. The local brokers are aware of this and are looking to offer FIX-based solutions for inbound order flow as well. The second is intra-regional order flow, where brokers within the Gulf Coast countries utilize their relationships to route orders between themselves and between their memberships. Finally, the third is outbound order flow, which is based on the attraction of ownership of foreign bonds and equities to local players, with local brokers going outside the region to trade these instruments.
In MENA, it is more often about a full-service offering. If a client is participating in a listing, the ability to participate on the market, make the market and trade client orders is more valuable for both tier 1, western banks that are participants in the market and for local institutions. For the most part, MENA market participants are looking to offer pan-MENA support, so as local brokerages they look to support bilateral agreements with other countries in the region, and again, FIX plays a critical role.
As for the drivers of growth in MENA, it is inevitable that I’m going to mention technology. Without a system to handle FIX and the risks that are associated with both retail and institutional flow, expansion in the region will be limited. The local exchanges are also playing an important role. Many of them are adopting a much more collaborative and innovative approach to collating their collective liquidity, allowing local brokers to leverage value from the intra- and extra-regional flow of orders.
In Qatar, for example, the markets are recovering and the banks are being offered brokerage licenses on the exchange. It is a competitive market, because they are offering innovation through algorithmic trading and DMA access to the markets, where there probably has not been that amount of choice before.
The regional requirements were something that we have had to overcome in offering managed services in the region. One such challenge is the physical location of the data. In markets like Saudi Arabia data cannot be hosted or transferred anywhere outside of the region. Also, if a MENA platform is being run from Europe, then that service must be available 24/7 to accommodate Sunday trading. This can be a challenge from a support, service and technical perspective. Commonly, we see our customers adopt managed platforms or separate instance platforms, to trade in the MENA region for two fundamental reasons: one, they have to physically locate a system in the region and two, they have to run a platform that is operating on different hours and days from their EMEA platform.
For many of our customers Sunday trading also means they have lost their window to take their systems down for maintenance. Many use a global order management, ‘follow the sun’ approach, where they run an EMEA, North American and Asia Pac platform that hands over at certain times. Some retain the window at the weekend to conduct maintenance, but many simply create a MENA-specific build, with a same look and feel, which then relates back their parent platform. It is efficient and it works. The demand for electronic trading solutions in conjunction with FIX certainly looks set to continue in this region.
Opening Up Gulf Coast Trading
2010 FPL Americas Trading Conference : Highlights from New York
Moderator of the High Frequency Trading Panel and CEO and Founder of PropelGrowth, Candyce Edelen discusses the benefits of the FPL Americas Trading Conference.
How did PropelGrowth benefit from the FPL Americas Trading Conference?
Frankly, the most important benefit for us is new opportunities. The exposure from moderating the High Frequency Trading panel and time spent networking at the event made for some very significant conversations. We have attended FPL twice before and have won new clients both times. The 2010 event was no exception. We already have several new opportunities in the pipeline that started from conversations at the event. I have been in the FIX space for ten years now, and while I always enjoy the opportunity to reconnect with friends and colleagues and meet new people.
Which session(s) were most valuable to you?
I greatly appreciated the opportunity to participate in the event as a panel moderator, and I’d have to say that the panel I moderated was the most valuable for me, personally. All of the members of our panel are well-respected industry leaders, and it was an honor to have an opportunity to work with them. I found two other sessions particularly valuable. The Multi-Asset Trading panel went into detail about the obstacles confronting cross-asset trading related to the complexity of risk management and compliance. That session was educational and timely too, as this seems to be where the industry will have to go in the next five years to continue to drive trading profits. I also found Adam Sussman of TABB Group’s presentation on how the buy-side uses high frequency trading (HFT) very informative.
As an executive, what is most valuable about your experience as a presenter? (e.g. company exposure, new connections,trend-spotting, etc)
I appreciated the opportunity to shake things up a little in our approach to the panel. The HFT panelists were all game to try a different approach and stage more of a debate around our topic instead of a more traditional panel. We spent quite a bit of time preparing, and I learned a lot from our panel members. The feedback we receieved seemed to confirm that our approach was interesting and engaging. It was also a great opportunity for me to meet some leaders whom I would not have ordinarily had an opportunity to work with.
How did your session on HFT and the event as a whole fit into the overall HFT space in the Americas?
In our panel, we dug into some of the most controversial issues surrounding this trading trend including the media coverage and the impact of recent regulatory changes. We took a different approach to our panel discussion to facilitate more of a debate, examining HFT from multiple points of view. We discussed the role the high frequency trader plays and examined their overall value to and impact on the markets. Then, we tackled hot topics around co-location, short selling, quote stuffing and naked access. All in all, the session and event successfully continued the conversation on a subject that is greatly impacting our industry.
Former Director and Global Trading Strategist for AXA Rosenberg, Ignatius John gives his perspective on where electronic trading in the Americas is headed.
Which session(s) were most valuable to you?
The Fireside Chat hosted by John Goeller at the end of the conference was very useful and interesting. This panel discussed the future direction of FPL, and that it is heading towards servicing the multiple asset classes. It is always exciting to get a sneak preview before new versions get rolled out. This way FIX users are better prepared for future developments within their firms. There were a lot a sessions on High Frequency Trading and low latency which were of interest to me coming from the buy-side. The impact to larger institutional asset managers was supported by many interesting discussions and different perspectives.
What was most valuable about your experience as a panelist?
I valued the opportunity to connect and network with the buy-side, sell-side and vendors. It is a great opportunity to share with the industry what is working well for us and which areas need improvement. I enjoyed the interactive sessions where the audience had an opportunity to ask questions. Through this process, I could not only share my experience on a related topic, but also learn from the interactive discussion.
How did your session on liquidity and best executio inform the state of electronic trading in the Americas?
I had mentioned during my panel that technology has changed the trading landscape; however, in the last two years the trading landscape has been moving and changing a lot faster. Electronic trading is now becoming more low touch. Technology has moved into the trading space with such dominance that traders are now playing a monitoring role as orders are sent to the market. It is imperative that buyside shops invest or outsource their technology, rather than be dependent upon brokers to provide this.
What's Next for Asia's Exchanges : Consolidation or Competition?
Robert Rooks, Independent Market Consultant, questions the current Asian equities market infrastructure and statesthe case for greater competition.
As listed companies, many of Asia’s bourses, like the companies they list, are under constant pressure to reduce costs and return an ever increasing value to their shareholders. This pressure is driving exchanges to invest in or consolidate with other exchanges to continue to offer value to the investors. Market participants, themselves, are questioning whether these so-called ‘global alliances’ will increase market access, reduce costs and return real profits to investors. Consolidation is often a consequence of economic circumstance with any perceived benefits eventually trickling through to the end customer, or in the case of exchanges, the market participants and finally, to the investment community.
Change needs to be spread wider than just the exchange level, to include clearing houses. In Asia, the exchange often owns and operates its own clearing houses, leaving one to wonder whether any savings made on the exchange are clawed back through the clearing and settlement process, given the vertical silo monopolies that they operate. Arguably, this is why the region’s exchanges have the largest market cap and remain some of the most profitable in the world. With continued advances in technology and the advent of new venues it is realistic to assume that this would lead to a reduction in the cost of trading through uniformity and efficiencies? If this is the case, why is the transactional cost of clearing and settlement still far higher in Asia than in other regions?
It would appear from the US and European markets that competition, not consolidation, is what drives costs down. In Europe and the US, the emergence of new trading venues and market operators has led to increases in market efficiency, as well as a substantial reduction in costs. New venues have necessitated new clearing solutions, such as the European Multilateral Clearing Facility (EMCF), further reducing the costs of clearing and settlement. Along with new entrants reducing execution fees, the EMCF has contributed substantially to the increases in liquidity and improved transaction cost transparency.
As the markets’ appetite for change continues to grow, new operators will, where regulation allows, continue to emerge, offering more efficient alternative trading solutions at fraction of the cost of the incumbents. With new pricing models to contend with, exchanges face challenges across many of their revenue lines as lower-priced venues, such as Chi-East in Singapore, are already operating. Around the world, regulators continue to look closely at the costs of trading, clearing and settlement and how it relates to as well as its impact on competitive markets. Yet, as consolidation begins within the Alternative Exchange Venues (AEVs), it is logical to question whether the investor on the street will eventually benefit from these changes and what future steps regulators will take to protect the investment community at large.
In Asia, where the hurdles are compounded by regulatory differences and jurisdictional boundaries, participants and investors will have to continue to deal with a fragmented rule base and multiple market operators, each of whom has their own commercial agenda and shareholder mandates. Without a regional clearing house or a standardized settlement, clearing and connectivity process, the region’s markets will not reap any of the benefits that a shared regulatory framework; for instance, increases in liquidity and the advent of new venues, which often lead to the new capacity.
Although the region’s markets have been monopolies for years, is change finally on the horizon? The region’s exchanges, led in part by Singapore and Japan, are adapting to a world where regulation is quickly out-grown by the markets they are mandated to protect. For Asian exchanges, changes to market structure should include some basic requirements: first, the standardization of market connectivity and accessibility through FIX (i.e. allowing for a more equal market access is necessary to meet with recognized best practices), second, the long awaited need for common standards in trade reporting settlement and clearing across the region, therefore further reducing the transactional overhead, in what is often an expensive and onerous necessity.
As exchanges become like the companies they list, they often look more to their bottom line and their shareholders, which cause an unwillingness or acceptance that there is a necessity to change. In markets like Asia, where there are constitutionally or regulatory protected monopolies, it is often hard to predict whether change will ever happen. The question of course is where does this leave the investor? The signs of change are there. With new venue operators approved in Australia, Singapore and Japan finally setting up their own markets, the industry has sent a clear message to incumbents and regulators: exchanges must continue to provide a fairer and more transparent market for the benefit of the broader investor community. Everyone knows change is not easy, but there may be a light at the end of the tunnel. The potential merger of the Singapore Stock Exchange and the Australian Stock Exchange (awaiting approval at the time of writing) could be a sign that some exchanges waking up to the fact that competition has arrived, and therefore, they have to continue to strive for further reductions in costs and increases in market efficiencies. The continued pressure on Asian exchanges’ margins and their need to expand beyond their geographical borders will continue as their markets attract more liquidity. With new management in some of the region’s exchanges demonstrating that change is possible, with the possible consolidation of two of the most progressive exchanges in the region likely to happen and with the advent of services, such as arrowhead in Japan and the successful launch of Chi-X Japan and Chi-East, change is finally happening. While the final shape of Asian markets is almost impossible to guess, one thing is for certain – they will never be the same.
The Content Cloud: A Silver Lining for Traders?
By Andrew Feig, Adrian Kunzle
Andrew Feig, UBS, and Adrian Kunzle, JP Morgan Chase, open up to FIXGlobal about the applications for cloud-based services in the electronic trading arena.
Andrew Feig and Adrian Kunzle represent their respective firms on the Open Data Center Alliance (ODCA) Steering Committee, an independent consortium comprised of leading global IT managers who have come together to resolve key IT challenges and fulfill cloud infrastructure needs into the future by creating an open, vendoragnostic Usage Model Roadmap.
Are concerns about the security of data on clouds unfounded?
Andrew Feig: It all depends on what type of clouds you are talking about. If the discussion is about public clouds, then yes. Multitenacy introduces a whole new level of security concerns. There are many issues including making sure the data is secure enough and understanding the risks associated. Realistically, not all workloads will be candidates. Private clouds have a much lower hurdles, since they are usually only for one corporation, but may or may not be outside their own datacenter.
Adrian Kunzle: The concerns are not unfounded but also not insurmountable. Much of our current security mechanisms are transferable.
Where will financial firms see cost reductions through using cloud-hosted services?
AK: Cost savings will vary, depending on the size of the firm. At JP Morgan Chase, we would see the largest cost reductions through sizing. To elaborate, we currently scale all of our infrastructure at peak usage, so our systems are always prepared to cope with the greatest demand. Clouds will enable us to scale our infrastructure to average use and simply outsource during peak times. It’s like we currently pay for a service all year round, yet only use it a few times a year.Smaller firms would see savings across the board and be able to run more efficiently all around. The difference in cost reductions lies in the fact that larger firms like JP Morgan Chase have economies of scale that smaller firms do not necessarily have.
How much should a financial firm migrate onto a cloud, as opposed to retaining traditional physical architecture?
AF: Whether a firm chooses to do its own private cloud or use a public one comes down to their specific situation. If the firm has enough scale, then it may make sense to do their own or a hybrid model of private and some public. It will also come down to specific use cases, as some applications need a very high service level and it may not be cost effective to move outside the walls of the firm.
AK: Financial firms need to consider what applications would work and what data they are considering migrating onto a cloud. Obviously some software would operate better in the cloud, where others will not. Customer Relationship Models (CRM), for instance, have proven to be more useful and effective in the cloud. Platforms that accommodate employees who are often on the road would work well in the cloud. Where there is a competitive advantage to keeping our applications internal (in a private cloud or on physical hardware), we will.
For financial firms whose trading strategies rely on speed and high frequency trading, will cloud services aid their quest for speed?
AF: I envision specific cloud offerings will be developed to address these requirements. For example, exchanges will do a lot more in the cloud space, so it’s the next evolution of their current offerings like colocation.
AK: Almost certainly not. Trading platforms for top tier banks like JPMorgan Chase will most likely not go to the cloud.
How will cloud services, whether computational or archival, fit into the US regulatory mandate that traders achieve ‘best execution’ on behalf of their clients?
AK: There is a clear opportunity to source archival applications from the cloud. However,‘best execution’ is a very specific regulation, where requirements are specific to certain trading systems, which do not fit into cloud services as they currently exist. Trading systems will most likely not be migrated to clouds at this time.
How easily can cloud-based services be integrated into a bank’s existing physical data/ computational architecture?
AF: Once again that will depend on the firm. The Open Data Center Alliance is looking to make this much simpler. Hopefully, the adoption of the Usage Model Roadmap by vendors will make this a lot easier than it is now. Many of these challenges, around security, cloud on-boarding, etc. are going to be addressed by the roadmaps that the Alliance will begin to publish in early 2011.
AK: Integration with a cloud can be done relatively easily for computational architecture because it is stateless; there is no data attached. We have been working on public cloudbased services for computational architecture and expect to have a concept finalized by early-mid next year.
Cloud-based services that contain data will be more difficult to integrate. There are high costs as well as security issues associated where physical data is involved. We have to pay to move the data, pay to keep the data there, and then pay again to bring the data back.
Jeffrey Banker, Executive Vice President, Real-Time Market Data and Trading Solutions for Interactive Data, considers how managed services via clouds enable an expansion of electronic trading and wealth management.
New, innovative technology and the need for efficiency and cost containment have continued to drive financial institutions to closely examine their business processes and determine new areas that could be more effectively managed as outsourced functions. It has become clear to many firms that financial information, especially real-time market data and related applications, can be outsourced.
Growth of managed services in electronic trading
Two polar forces are impacting the institutional demand for hosted managed service offerings. This has led to the rapid evolution of vendor and exchange-supported product platforms and commercial models. Electronic trading, which is on an eternal quest to reduce latency in the trading stack – as well as desiring rapid connection to an evolving set of markets that are affected by changing market structures – has expanded its use of managed service platforms. Aggregated direct market access, raw market data, risk management and low-latency backbone connectivity are now broadly available and offer a cost-effective access point to over 50 high volume exchanges.
Historically, most firms developed and managed their own infrastructure to enable these capabilities, but the control premium has decayed as scalable vendor offerings have enabled more cost-effective, nimble access to the markets. Highly resourced firms will continue to manage and deploy their own assets, but many firms that use latency-sensitive trading strategies are increasingly adopting managed offerings. As the industry expands and smaller institutions enter the marketplace, outsourced solutions lower the barrier to entry, while maintaining the same latency and strategy benefits enjoyed by top-tier firms. As arbitrage routes evolve between cash and futures and the FX markets, the cost of modifying infrastructure for the self-enabled firms can be significant, and requires constant analysis and attention for optimization.
Meeting the evolving needs of the wealth manager and active trader
On the other end of the spectrum are the challenges related to the changing roles of the wealth manager and the active trader. Electronic trading has increased message rates for market data beyond the ability of the human mind to interpret or react. According to statistics compiled by the Financial Information Forum (FIF), maximum OPRA messages per second (MPS), or ceiling rates, rose from 12,000 in 2000 to a staggering 2,053,000 in 2009 – and OPRA projects that these rates will rise to 5,067,000 mps in 2012. The overall MPS for Interactive Data’s own consolidated feed were less than 50,000 back in 2003; in October 2010 a new peak of approximately 4.4 million MPS was reached.
Increasingly, displayed market data is being utilized as a reference point for advisors interacting with clients and assets – and less around trade execution optimization. The costs of supporting market data have rapidly increased partly due to higher message rates that impact bandwidth utilization across an enterprise, while the value proposition of the data has decreased due to the microsecond algo-based execution capabilities of many of the industry participants.
These and other factors are motivating many institutional sell-side firms to migrate or pilot content cloud-based offerings, which essentially consolidate and manage all the necessary market data sources in a hosted environment accessible by Java, Flex, or Silverlight front ends, as well as a variety of application programming interfaces (APIs).Attractive model for market data consumers
Aside from the cost benefits that can be realized by shared infrastructure and bandwidth, there are significant advantages related to change management, disaster recovery, portability and agile product development. Resistance to the adoption of the content cloud has previously been driven by the negative perception of internet reliability and packet loss, as well as by the lack of control. However, the internet is a considerable determinant for revenue growth for most financial services firms and is, therefore, broadly adopted on the consumer side, but resisted in some circles for institutional applications. Given the increasing cost of delivering market data – and the reduced need to show every tick for displayed applications – the content cloud is an attractive model to service internal and external market data consumers. Firms who have adopted this approach have reduced total cost of ownership by up to 60 percent, while maintaining reliability and improving mobility and application utility for their subscribers.
Although it is typically the high volume, high frequency data and applications that are most appealing to clients today, other types of data and applications are expected to be in demand via cloud offerings in the future.
As high-frequency and electronic trading becomes even more competitive, firms are looking for new differentiated data sets in their real-time trading models and the outsourcing of new real-time content sets can provide that competitive differentiation. These content sets include any application that is data intensive, such as reference or event data, hosted tick data, depth of data for direct market access (DMA), and more powerful analytical tools that can help institutions to manage risk.
While many financial services firms are still evaluating the pros and cons of the content cloud and are working to identify applications that are more cost effective in the cloud than as part of in-house infrastructure, the benefits outlined above could be a turning point for many.
Expanding CSA Market Goes Global
By George Kledaras
George Kledaras of FIX Flyer discusses how FIX enables buy-side firms to get better value for their research using
commission sharing agreements.
There was overwhelming interest from the buy-side member community at the FPL Americas Electronic Trading Conference to discuss Commission Sharing Agreements (CSAs), also known as Client Commission Agreements (CCAs) depending on your buyside or sell-side perspective. CSAs allow asset managers to separate the fees paid for trade execution from the fees paid for research and other services such as FIX connections and market data.
A survey of the buy-side conducted by Integrity Research Associates reports that in the US, “CSAs have gained in popularity over the last five years, and now account for 30% of research commission payments on average. Respondents [to the survey] typically use 5 CSA providers, although some large investment firms use 12 or more.” In the UK, this number is 70% of research commission payments on average.
CSAs allow asset managers to “unbundle” the sell-side trade commission into separate execution and research spending, so that the manager may pay for the execution service with a portion of the commission fee, and use the rest to pay for research or research related services to one or more places. Often this is because the research provider is not necessarily the broker that executed the trade.
The Securities and Exchange Commission (SEC) in the US and the Financial Services Authority (FSA) in the UK both encourage the use of CSAs in order to allow the manager to optimize the services that they receive, and at the same time, increase the transparency of these fees to the end investor.
The most critical element to understand is how commission breakdowns could be reported to the buy-side with FIX, in order to comply with CSA regulations and describe the workflow from the buy-side that tells the sell-side what research and other services that the sell-side pays for. The significance of CSAs to electronic trading is evidenced by the recent FPL Americas Electronic Trading Conference panel on CSAs.
How FIX facilitates CSAs
Commissions generated by the buyside are reported using back office systems that feed into settlement. After settlement, the broker keeps a breakdown of what portion of the commission is going to be used for execution versus research using rate tables agreed upon with their asset manager clients. While CSA systems right now are based on T+1, delivering commission breakdowns in FIX will allow OMS vendors to provide commission systems in real-time, leading to increased service for the buy-side and further growth in the CSA market.
If a trade is marked as a principal trade (P) in FIX using the OrderCapacity (tag 528) versus agency (A), the commission is separated by the broker into its components. For CSA purposes, a new value for OrderCapacity could be called Mixed, in order to designate that the trade has separate execution and research. This tag is used by back office systems to apply the appropriate commission rate table and report the correct ratio of execution service versus research service.
The Commission (tag 12) and CommissionType (tag 13) need to be expanded in order to be able to report the breakdown from the broker to the buy-side in real-time. Currently, breakdown information is kept by the buy-side in their own commission tables, and the broker reports this information at the end of the day via a web portal or email, which can be prone to errors. If commission breakdown information can be reported at the time of the trade, the buyside can feed this information into their decision process, and further optimize their research and services spending from their earned commission credits.
Payment Workflow
Another aspect of significant manual processing is communicating to the broker regarding payable invoices from a research provider or service vendor, and checking the status of those payments. Right now, most people are using broker-supplied, web-based systems, and if firms are working with several brokers, it can be difficult to get an aggregated view of outstanding payment balances.
The best way to do this would be to build this functionality into the trading systems and use FIX as the messaging standard between the buy-side and the broker. These messages do not currently exist in FIX, but many of the tags can be reused.
There are two major workflows for payment: one for a broker that has their own research, and one for brokers who are paying third party research or service providers.
FIX could be used to communicate all of the payment details between the buy-side and the sell-side in real- time. The benefits would improve chances for the buy-side to optimize their spending on services and to process them efficiently, with fewer errors. If the buy-side accepts CSA workflows into their OMS, then they will get an aggregated view of their balances, leading to informed decisions regarding their research credit spending and monitoring.
Preserving Research Credits in the Age of Algorithmic Trading
Due to the growth of algorithmic trading and increased competition for low touch services, the buy -side is discovering new ways to optimize their commission budget in order to apply their commission credits to the best research and services. At the same time, the challenge to the sell-side is to provide a la carte options for the ‘just-in-time’services that the buy-side needs and ultimately, this benefits their investors. The buy-side continues to use research to capture alpha as the opportunities to become more efficient are getting harder.
FPL Americas ElectronicTrading Panel on CSAs
On October 21st, 2010, at the FPL Americas Electronic Trading Conference, a panel entitled Trading and Research: Bridging the Gap was moderated by Brian Ross, CEO of FIX Flyer, with representatives from: Gartmore Investment Management, Bank of America Merrill Lynch, Morgan Stanley and Mayer Brown. Among the interesting discussion points, it was mentioned that in order to optimize choices, the buyside often keeps a healthy mix of large and niche brokers, with different capabilities for execution and research. This mixing of brokers also helps to diversify the amount of research credits at any one firm. When Lehman Brothers and Bear Stearns went bankrupt, the court ruled that any client balances would not be recoverable, and no buy-side wants to have all their eggs in one basket anymore.
From the sell-side perspective, buy-side trading volumes are down significantly. Despite this, the buyside expects or negotiates for the same level of service. The end result is increased competition for sell-side services, with decreased volume from the buy-side. Some sell-sides include trades from other domiciles, asset classes, or program trading desks. Managers are being much more careful about the use and management of commission dollars, and sell-sides with the best service offerings are gaining market share.
CSAs are actively used in the US, UK, and Canada, and their use in Hong Kong, France, Germany, and Japan are increasing rapidly. The opportunity is now for the industry to better manage credits earned using trading commissions. Using FIX simplifies the reporting and better integration into the workflows to support the increasing use of CSAs.
Implementing Electronic Trading Opportunities in Turkey
By Serkan Aran
First Mover Advantage
The history of electronic trading in Turkey started with the launch of ATMs in the late 1980s. Isbank played a pioneering role in Turkey’s financial industry, launching the first ATM in 1987. Back then, banks were only providing basic transactions, but in the years following, the types of services increased and today it is possible to electronically execute all services obtainable by phone.
Customer demand also played a major role in shaping the future of the industry. From the providers’ point of view, some of the major reasons for supporting this trend included attracting remote customers and cutting operational costs. Customers showed an appetite for electronic trading because of its anonymity, low cost and use of technology to beat the markets, which only recently became an issue.
Isbank executed its first Direct Market Access (DMA) transaction for local investors in 1990, with foreign interest arriving later. The initial enquiries from international institutions for DMA to Turkish exchanges came in 2004. We immediately formed a team to provide DMA to clients outside Turkey. Isbank’s experience in electronic trading helped, but we soon realised there were infrastructural issues – like the technology that the ISE (Istanbul Stock Exchange) was using – and latency problems due to the quality of the connectivity between Turkey and the outside world. To solve this difficult task, we had to find the perfect partners to deliver perfect service.
It makes me smile now to remember the conversations about latency in Turkey back in 2004. I asked our head of IT how long it would take to send an order to the ISE, to which he replied around 10 seconds, unaware that I was expecting milliseconds, not seconds.
The Istanbul Stock Exchange, however, was aware of the direction the industry was going and showed extensive commitment and cooperation in taking this path. Recently, the ISE further reduced latency by extending their order capacity from 1,800/sec to 3,000/sec, but there is still some way to go. I believe the ISE will continue to support positive development, and if the industry continues to move into the fast lane, 6,000 orders per second will be the target.
Along the way, Is Bank also cooperated with Turk-Telecom, BT Radianz and others. For instance, GL Trade had a ‘base camp’ set up in our IT room for weeks, to deal with infrastructural issues. Since then, Is Investment has worked hard to pave the way for other players in Turkey. After dealing with infrastructural issues, we started attending international events like GL Forum, TradeTech and those organized by FIX Protocol. After each event we made new partnership agreements on both the business and technology sides, including relationships with GL Trade (now Sungard), Bloomberg, MPN, Fidessa, Pat Systems and CQG.
Eventually, we signed up with Tradeweb to share our expertise. Working together with Tradeweb to provide our clients with DMA to Turkey has been a great experience for us. Between 2004-2008, DMA counted as less than 10% of Is Investment’s volume, but it is now around 20%, and we believe this ratio will go higher in the coming years. Regulatory requirements like the Markets in Financial Instruments Directive (MiFID) will only increase the demand for DMA.
DMA services had been offered only for equity trading until Isbank launched DMA for the Turkish Derivatives Exchange (TurkDex) in 2009. Is Investment also offers value-added services like algorithmic trading along with DMA to create differentiation. Algorithmic trading has rapidly become an important tool for electronic trading, and we receive a lot of demand for algorithmic strategies. We have developed tailor-made solutions for our clients because there is no order cancellation on the ISE and some order types do not specifically exist in Turkish equity markets.
We continue to work to provide more algorithmic strategies to our clients. At every opportunity we underline that we provide DMA to Turkey for both equities and derivatives. Is Investment currently handles 70,000+ DMA orders everyday from local and international clients, with plans in the near future, to provide Turkey and a selection of other countries in the region as a “regional basket” for the clients.
EMEA Trading Conference 2010: Exceeding Our Highest Expectations
By Daniella Baker
The largest event ever organised by FPL, attracting more than 720 delegates on the day, addressing a very broad range of topical issues, and demonstrating FPL’s engagement at so many levels across the trading community from both the business and technical perspectives.
Let the facts speak for themselves…
- Delegate numbers exceeded expectations, with the event closing to further registrations due to reaching venue capacity limits – 724 senior representatives from the buy-side, sell-side, vendor and exchanges/ECN communities attended
- More than 70 speakers participated in the more than 20 interactive presentations and panel sessions that took place throughout the day
- The event featured both business and technical streams, prepared and presented by the leading subject matter experts and industry professionals
- 86% of delegates rated the conference sessions as either ‘very good’ or ‘excellent”
- Media post-event coverage was generated within 7 leading trade publications
With latency issues increasingly taking centre stage and becoming central tenets of the industry’s business strategies, a panel on low latency advancements, especially in the order routing arena, captured the attention of the capacity delegate crowd. In an era of competitive proximity hosting offerings and the co-location arms race, delegates heard firsthand from buy-side, sell-side and vendor firms on the challenges of implementing low latency solutions across a number of the day’s panel discussions. Conclusions offered encompassed the difficulties associated with defining and measuring latency in a consistent way, that enables sensible comparison and benchmarking, as well as the importance of continued investment by market participants in technology and infrastructure.
No industry leading event would be complete without comprehensive coverage of algorithmic trading development. To go one better, the EMEA Trading Conference provided the opportunity for FPL itself to officially launch FIXatdl (FIX algorithmic trading definition language). A landmark event that will clearly shape the development, rollout and use of algorithmic strategies for years to come, this innovation offers value to all participants involved in using algos. FPL’s EMEA Regional Director, Stuart Adams, succinctly explains; “Everyone wins. Sell-side firms are able to send their algo strategies out to clients quickly, and see revenues straight away; the buyside
receives these algo strategies and can react to evolving market conditions much more quickly; and the vendors get some of their development staff back, saving time and resources while providing more efficient solutions to clients.”
Ultimately, adoption of FIXatdl as a standard will inevitably grow, due to these enhanced efficiencies, and with clients increasingly providing impetus, as American Century Investment’s Scott Atwell (also FPL Global Steering Committee Co-Chair) illustrates; “It all comes down to prioritisation, but at American Century Investments, we have told all of our brokers that we want all their algo specs in FIXatdl. So in the same way that if you’re a broker and want to trade with us, you need to communicate via FIX, if you’re a broker and want to provide algo trading strategies to us, we want you to do so using FIXatdl.”
The broad range of the major issues facing the institutional trading community is often bewildering. So it was impressive to witness nearly all of these being raised and discussed in detail across a one day event. Issues such as the establishment and implementation of pan-European consolidated tape and the use of FIX in the exchange space were among the weighty matters discussed in the sessions. The credentials of the event, as being planned and executed by industry participants themselves, was clearly the differentiator that enabled this to happen. In addition to discussions around latency and the launch of FIXatdl, a few other highpoints of the day included the following observations:
- Highlighting Pension Funds’ tightening attitudes to asset managers’ operational risk strategies was very apt; given the turmoil global markets have endured over the last year or two.
- The sheer diversity of views around high frequency trading juxtaposed to the broad realisation of its importance in the current trading landscape.
- The assumed internal and external cost savings of dark liquidity, fragmentation and potential consolidated tape, are not a given; neither are the respective implications on the evolution of European market structures / oversight.
- The reach and utility of advanced FIX functionalities is growing rapidly, especially due to the increasing adoption of FIX5.0 SP2 in the exchange/ECN arena, the FAST Protocol for Market Data/low latency, and also FIXatdl in the algo space.
The Case for FIX 5.0
By Parthiv Mehta, Mahendra Hingmire
Infosys Consulting’s Mahendra Hingmire and Parthiv Mehta explain how FIX 5.0 can improve automation, reduce costs and increase revenue through greater efficiency.
Early FIX solutions
The FIX Protocol has evolved from supporting equities to supporting messaging requirements of multiple asset classes, including derivatives, fixed income and foreign exchange.
The explosive growth of use of FIX, facilitated by the flexibility it presents, the parallel growth and use of proprietary application programming interfaces (APIs) by the exchanges, met the industry’s immediate needs for business growth. At the same time, the earlier versions necessitated certain costs on maintenance, interconnectivity and language translators.
The flexibility to create custom tags, met the needs of individual firms, however, this practice can also lead to the generation of non-standard versions of the protocol and its widespread use can result in higher costs of implementation and a longer time for deployment for the industry. Also, the tight coupling of the application layer and the business layer in FIX4.X versions limited the ability to adapt to newer functionalities offered by later FIX versions.
Demand of the Industry and FIX 5.0
The industry as a whole needed to address the limitations of the existing protocol as well as find a protocol flexible enough to support their future requirements. FPL came together to address the dual needs of its members and the outcome was FIX 5.0 and FIXT.1.1, the FIX Session Protocol, as an answer to its members’ requirements.
Transport independence disconnected business messages from their carrier thereby allowing different versions of FIX Protocols to be run on the same session via any appropriate technology, in addition to the FIX Session Protocol. This feature helped reduce technological constraints and made it possible for firms to communicate with each other regardless of their FIX version. This is possible because FIX 5.0 runs on top of the FIX Session Protocol. Transport independence serves the industry’s need to use the existing FIX versions and also help firms reduce the future cost of implementing new FIX versions.
The regular release of extension packs, which offer additional functionality and are available for adoption as soon as they are developed, incorporate new functionalities and message tags, which encourage standardization at the industry level and discourages members from having to develop non-standard custom tags. Also, separate release and versioning of the packs for application layer and session layer allows for addressing requirements specific to application and session layer.
Migration to FIX 5.0
While the market participants are well defined by their roles and functions, the multitude of protocols (proprietary and industry standard) and their non-uniform adoption creates complexities that the members need to address in order to conduct business seamlessly.
FIX 5.0 and FIXT.1.1 give the industry an opportunity to transform their communication and messaging infrastructure, reaping the benefits of reduced cost of maintenance of bespoke versions, improved connectivity and interoperability between counterparties, lower costs in testing and faster roll out, bandwidth conservation, latency reduction, automation and straight through processing (STP). Since FIX is only prescriptive and not mandatory, market participants are free to choose their adoption based on their individual business requirements and priorities. While each market participant has its own strategy for the use of protocols, it is evident that a collective industry effort would yield maximum benefit for participants.
In the following section, we look at various strategies industry participants might follow in the adoption of FIX 5.0.
Liquidity Centers/Exchanges
Exchanges are proactively looking to retain and grow trade volumes by providing clients rich functionalities, low latency and greater market depth at lower transaction costs. FIX 5.0 can form an integral part of the strategy of maintaining leadership by providing benefits to clients that are in the process of implementing FIX 5.0 and also to those clients using legacy FIX versions for connectivity, thereby enabling quicker, more cost effective integration of communication channels. Exchanges/liquidity centers can fully migrate from earlier versions of FIX and non-FIX protocols and phase out their proprietary protocols. We have already seen progress on this strategy with leading exchanges such as BSE rolling out a FIX 5.0 compliant interface.
Sell-Side
It is important for sell-side firms to not only look forward to maintaining state of the art exchange connectivity infrastructure for better price discovery and distribution, but also to look internally for improvements in their core trading platform infrastructure, for supporting higher volume, lower latency and fewer trade errors.
Implementation of FIX 5.0 can help lower latency on account of fewer message translations and lower trade errors. However, changing the core trading infrastructure is not easy, as a typical sell-side firm will have a plethora of systems, both off-the-shelf and proprietary, that communicate in various versions of FIX. Hence, the sell-side firms can adopt a“Session Migration” approach to FIXT.1.1. This will allow firms to first connect internal systems running FIX 4.X over FIXT.1.1, thereby benefiting from the transport independence framework.
In the long run, sell-side firms can migrate to FIX 5.0 to fully benefit from the rich business functionalities offered by the protocol as well as achieve adoption of a single protocol that caters to internal and external systems.
Buy-Side
The buy-side need for best execution is met by its ability to connect and transact either directly at points of liquidity or through the sell-side. A wider access to the sell-side and the points of liquidity improve the buy-side’s ability to transact at ‘Best Price.’
Typically, the buy-side systems interface or use sell-side’s infrastructure to transact. It is likely that buy-side firms would prefer to use services of sell-side firms which use FIX 5.0 compliant systems in order to benefi
t from reduced latency. Direct Market Access (DMA) is likely to be first the infrastructure to undergo this change. In the long run the, buy-side can slowly adopt a migration approach similar to the sell-side i.e. “Session Migration” followed by a “Protocol Migration” to FIX 5.0 in order to benefit from its rich business functionalities.
Conclusion
As the momentum of industry participants moving toward FIX 5.0 gains ground, the industry as a whole will gain from the experience of implementation, reduction in cost of implementation and the availability of off-the-shelf solutions. This will further accelerate adoption across the industry as participants realize benefits through a reduction in costs achieved by a rationalization of communication protocols used to communicate, transact, process, and settle large volumes of trades across asset classes. This will be fully realized when the buy-side, sell-side and points of liquidity communicate seamlessly over FIX 5.0.
Clearing Systems in Asia: Catching up to Trading
By Wayne Eagle
Wayne Eagle, Head of Equities, LCH.Clearnet, digs into clearing costs in Asia and unearths the reasons for current clearing structures
Clearing Costs
Clearing is very much a volume business. The infrastructure for a quality clearing operation is expensive to build and maintain, and it is consequently a business in which economies of scale can make a huge difference to pricing. The more the infrastructure can be leveraged, the lower the cost per trade. Conversely, across a region, the more fragmented the infrastructure, the more costly clearing is likely to be.
It is also worth considering the evolution of clearing. In many markets the clearing house is owned by an incumbent exchange, which enjoys a monopoly position. If this entity is a profit maximising institution, it will naturally seek to maximize its returns from clearing and the absence of any competition will mean it has no incentive to lower fees.
Differences between Asia and Europe
The most significant difference between Asia and the Europe is the existence of the European Commission – that is, a body which can legislate across all member countries. It was only the introduction of MIFiD in 2007 that cemented competition in the European markets. The impact of this has been to reduce both the cost of trading and of clearing in many markets and erode the margins of the established players. However, it has also resulted in a more fragmented landscape, and we anticipate that the next evolutionary step will be consolidation.
The situation in Asia is similar in some respects, but different in others. In some markets the established infrastructures still enjoy a privileged position, however, in others, competition is being introduced in the form of alternative trading venues , even without specific legislation, and this is likely to impact costs in the medium term.
Clearing in Asia
There are two reasons why Asia is so important to LCH.Clearnet. On the one hand, Asia is an important part of the global economy and its rate of growth far outstrips the rest of the world. On the other, markets are becoming ever more global in nature and as our clients, many of which are large international banks, grow their presence in Asia they are looking to us to support some of their key trading activities.
Asia has some highly developed and sophisticated markets, however, we believe LCH.Clearnet has unique expertise, particularly in risk management,as was highlighted during the Lehman default.
Pan-Asian Reform
We believe Asian markets will continue to evolve organically. Without a pan-Asian regulatory or legislative body, there is unlikely to be uniform reform across the region. However, the current regulatory approach, which has enabled the development of alternative trading venues in the region, will continue to be supportive of an evolving environment in which competitive pressures are likely to place a downward pressure on fees.
Change through Competition
We believe that all markets are best served by a degree of competition; it is the most effective means of ensuring a quality service combined with competitive pricing. This can be seen in some markets at the trading level, where even the threat of potential competition from new entrants has resulted in lower trading fees.
At the clearing level, a clearing house that is able to consolidate the volumes of more than one market will be able to deliver real economies of scale to the market. We also support any initiative which enhances the robustness of clearing infrastructures and ensures best practice risk management. Lehman’s default illustrated how prudent risk management can ensure that neither a clearing house nor market member need suffer any financial loss, and conversely, how clearing, unless underpinned by robust risk management, does not necessarily protect the market.
As competition is introduced into markets which have historically had protected vertical structures we anticipate seeing some reduction in costs. The extent to which costs are lowered will depend on the degree of competition which the respective regulators permit in each market.
