By Tony Whalley, Chris Jackson
Tony Whalley, Head of Dealing and Derivatives for Scottish Widows Investment Partnership and Chris Jackson, Head of Execution Sales, EMEA, Citi highlight to FIXGlobal the changing role of the broker, implementing technical solutions and the chances for a consolidated tape in Europe.
FIXGlobal: How have electronic trading technologies changed the way you go about your job – for example, a trader’s investment styles or attributes?
Tony Whalley: Previously, brokers just had to find the liquidity; however, nowadays the difference is what brokers need to do in order to find that liquidity. I think if you compare and contrast market conditions today with those 18 months ago, they are dramatically different, and the trader who is unable to adapt to those changing conditions, is not going to do particularly well.
Chris Jackson: The growth of client-driven electronic trading has meant that low touch portions of a clients trading blotter are executed more efficiently and with lower risk. In turn this has allowed the sales trader to operate more efficiently and focus on more valueadded interaction with clients.
FG: Is sell-side execution performance continuing to improve? What can be done to make that relationship more efficient? How can a broker stand out?
TW: I think it works pretty well. What we have with the vast majority of our counterparties is a symbiotic relationship. I believe that at the end of the day, they need to do business with us in order to have a degree of credibility within the market, and we need to do business with them because, if they’re the other side of our trades, we chose them for best execution purposes. So from that point of view, it works very well.
Occasionally there are spats, misunderstandings, or whatever you want to call it, but I don’t really feel that this is down to developments in the electronic trading market space. I think we’re in a situation where as soon as one broker comes up with a smart-order router, someone else comes up with another, and then another one and another. Once one broker moves into a certain technological space, everyone needs to get there as well; otherwise, one firm is going to find they’ve got an edge over another and, from our point of view, clearly, if that house has a distinct edge, then they’re going to get more business than others. What we’re tending to find, however, is that if a broker does have a competitive advantage, it won’t last particularly long.
FG: Is there a right or wrong answer as to whether firms should outsource technology implementations or develop them in-house?
TW: I think from our point of view, given the size of our operation, it has to be done in-house. I think when you look at some of the smaller niche players, then there is a very good reason why technology could be done outside the firm, but certainly from our point of view, it has to be done internally.
CJ: From a sell-side perspective, the majority of client-facing systems are in-house. Our algorithmic trading platform or our internal order management systems, for instance, have to be designed internally. We’ve found that we need to maintain a level of focus and ‘bespokeness’ to the platform and the product. It needs to be able to adapt quickly to a changing market environment, which you can’t get from out-sourcing. We cannot ask a client to work to a third party’s deadline. That kind of quick turnaround requires that we have control over the resources in-house.
FG: Over the coming 12-18 months, where will your firms be devoting resources in terms of developing tech infrastructure?
TW: On the buy-side, we rely very heavily on our brokers to provide the technology that we need in order to get our best execution. For example, we rely almost entirely on them to provide smart-order routing. We evidence that by looking at destination reports, and so on and so forth, but at the same time, we believe it is down to them to be able to route to all the various venues as and when they feel it is correct. So from that point of view, the choice in terms of what we do and how we do it is taken out of our hands. We do not want to use our own capital in developing these capabilities because they would be of use to us alone, whereas for the brokers, they are of use to all their clients. What the broker is trying to do in the execution space is create an advantage over the competition which is discernible, and they do that by creating all these different suites of products, which we can choose from. So we are the beneficiaries of the investments that they make.
CJ: At Citi, we look forward over the next 12 to 18 months, the core requirements for electronic trading products are smart-order routing, our Citi Match internationalisation engine, and our algorithmic trading suite. These are all things that will continue to be revised and finessed over time, but they’re very much there and in place. The next challenge is to integrate the electronic trading product into the liquidity ‘engine’ that is the equity trading floor at Citi. We’re already seeing some huge steps forward in that integration process.
FG: Will trading technology (and standards like FIX) take a greater role in other asset classes or will it be limited to its existing applications?
TW: It makes total sense, when, for example, Chi-X are looking at derivatives platforms, to broaden their activities. Various other people will look at this. The technology is there and it’s just a question of broadening it out to the different asset classes. The investment has been made in the technology, and therefore, it makes sense to use that technology, not just for one asset class, but across the board.
CJ: Absolutely. We are seeing that the assets may differ on the face of it, but in many ways, if you look at FX, and indeed, some of the derivative markets – certainly futures – a lot of the technology is almost plug and play from equities.
TW: The problem is, when you look at the evolution that’s going on here – or revolution, depending on which way you look at it- the market is moving so quickly that one broker will have the best system today, and then in a week’s time, someone else has unveiled their new system. It’s like asking what is the fastest car? The fastest car today is not going to be the fastest car in three months’ time, and it is not going to be the fastest three months after that, because people are constantly striving to innovate.
I think to a certain extent, it would be bad for the industry if the same firms continue to be the best at everything, because if they were, they’d naturally get all the business and no one else would get a look in. Therefore, our business would suffer due to lack of competition.
CJ: Yes. I think we’ve gone through a process of change over the last five years, which parallels the early days of the Internet. You had this huge explosion in the Internet, which was really all about offering a new form of accessing information. And then very quickly, people realised that the important thing isn’t the browser, it’s the content. Similarly, the first phase in electronic trading has been about widespread adoption of algorithmic trading tools into the buy-side workflow. The next phase is characterised not by tools but by the underlying liquidity they give clients access to.
FG: On a different note, what are the biggest risks in European trading?
TW: Lack of pre and post -trade transparency.
FG: So that would be a consolidated tape or something similar?
TW: Absolutely. The problem here is all the brokers agree, but none of them are really prepared to do anything about it, because the less transparency we have, the more profit they make. Therefore, they all diligently pay lip service to a consolidated tape and do everything in their power to avoid giving it to us.
FG: What do you say about that, Chris?
CJ: I think the sell-side have a responsibility to work towards an industry solution and to contribute a significant amount towards that industry solution. There’s consensus across the market that MTF’s, data vendors, exchanges and buy-side participants should share that responsibility.
TW: Absolutely. The vast majority of people are providing all their data free. You have Turquoise, Chi-X, BATS etc, providing their data for nothing. On the other hand, you have the London Stock Exchange continuing to charge the same rate as they were three years ago, when they had 100% of the data, for what effectively is now 50% of the data, and therefore, not worth a jot on its own.
FG: So where do you see this going in the next few years?
TW: Well, hopefully we’ll get legislation, which means that that data has to be provided at a reasonable cost in a consolidated form and someone will be charged with consolidating that data.
FG: Does this come through the European Parliament?
TW: I would hope so. I think it needs to; otherwise you’re going to get differences in the way we do things in the UK, France, Germany, Spain and Italy, which clearly would not be ideal. To be perfectly honest, you’ve got a far better situation in places like Germany than you had previously, but in the UK it is far worse, and the reason for that is we have sunk to the lowest common denominator.
CJ: Take any industry, which has been brought under a European regulatory umbrella, and you will find there is exactly the same move over time from the general to the particular. The initial legislation is kept deliberately broad to allow the varied industry groups the latitude to re-align businesses to new rules. MiFID 2 will logically start to close the gaps and better define the rules of play.
TW: It’s the commonsense approach that’s needed.
On Good Authority: How Electronic Trading is Changing
Indian Regulator SEBI Approves Smart Order Routing
SEBI lays out the requirements on brokers and exchanges for smart order routing facilities.
On Sept 27, the Securities and Exchange Board of India (SEBI) announced its approval of Smart Order Routing (SOR) for Indian securities. According to the circular (CIR/MRD/DP/26/2010), released by the Indian securities regulator, brokers will be able to offer SOR facilities to their clients, provided they comply with SEBI guidelines, including mandatory pre-trade risk-testing, best execution, third party system audits and full audit trails. All brokers must apply to the respective exchanges to have their SOR facility approved – applications which must be approved or denied within 30 days of submission.
“The step to permit Smart Order Routing (SOR) by SEBI is a welcome move in taking Indian capital markets in step with the developed US & European markets,” said a spokesman for Tata Consultancy Services. “Since the launch of DMA and algorithmic trading in India, there has been a growing demand from broking houses and institutional clients to permit SOR so that clients can benefit from best execution and improved liquidity.”
SEBI further stipulated that Indian brokers must locate their servers in India and enter into “specific agreement” with their clients regarding smart order routing. Rajeev Saptarshi, COO, Kotak Institutional Equities said, “SOR was one of the most sought after features in the Indian markets, keeping in mind the dual listing of stocks. SOR will enable execution of orders at the best venue and should help improve performance of liquidity seeking and arbitrage algorithms.”
SEBI also required exchanges to synchronize clocks ahead of each trading day and begin time-stamping market data feeds within three months of implementing SOR. Additionally, exchanges must strengthen their investor grievance channels and install SOR surveillance systems. Kotak’s Saptarshi predicts “the cost for compliance, market data and storage will grow exponentially.”
The Bombay Stock Exchange welcomed the development. “BSE is very pleased with this important regulatory change in the securities market environment in India,” said James E. Shapiro, Head – Market Development at Bombay Stock Exchange. “We believe it is good for liquidity in the Indian markets and — most importantly — good for customers hoping to achieve best execution in India’s multi-exchange competitive environment.”
According to Tata Consultancy Services, “while the introduction of SOR is beneficial to the clients, it would require brokers to invest in systems so as to prove ‘best execution’ to the client. A service like a consolidated tape from a neutral third party would go a long way in proving best execution.”
The Impact of The DODD-FRANK Reform and Consumer Protection Act on Non-U.S. Managers
By Anne-Marie Godfrey, Amy Natterson Kro
On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Reform Act”) into law, bringing about sweeping changes to the regulation of the U.S. financial system, many of which will directly impact investment advisers and fund managers who have their office and principal place of business outside the U.S. (“Non-U.S. Managers”). The full impact of these changes will emerge over the next several years as U.S. agencies undertake the extensive rulemaking mandated in the Reform Act.
Elimination of “ Private Adviser” Exemption
The Reform Act amends the U.S. Investment Advisers Act of 1940 (the “Advisers Act”), and eliminates, effective July 2011, the “private adviser” exemption commonly relied on by Non-U.S. Managers that do not wish to register with the U.S. Securities and Exchange Commission (the “SEC”). The “private adviser” exemption was available to a Non-U.S. Manager if‚ inter alia it advised fewer than 15 “clients” resident in the U.S. during the preceding 12 months and neither held itself out to the public in the U.S. as an investment adviser nor acted as an investment adviser to any investment company registered under the U.S. Investment Company Act of 1940‚ as amended (the “1940 Act”), or any entity electing to be treated as a business development company under the 1940 Act (each registered fund and business development company under the 1940 Act, a “1940 Act Fund”). For purposes of the 15 client limit, each fund advised by the Non-U.S. Manager counted as a single client and the U.S. investors in such fund were not counted as separate clients.
The Reform Act provides for a narrower “foreign private adviser” exemption that exempts a Non-U.S. Manager from registration under the Advisers Act provided that it (a) has no place of business in the U.S; (b) has, in aggregate, less than US$25 million (or such higher amount as the SEC may determine) in assets under management attributable to clients in the U.S. and investors in the U.S. in private funds that it manages; (c) has fewer than 15 clients and investors in the U.S. in private funds which it advises; and (d) neither holds itself out generally to the public in the U.S. as an investment adviser nor acts as an investment adviser to any 1940 Act Fund.
Many Non-U.S. Managers that previously relied on the “private adviser” exemption are unlikely to qualify for the “foreign private adviser” exemption, given the low US$25 million threshold. Furthermore, under the new “foreign private adviser” exemption, the ultimate U.S. investors in the funds advised by a Non-U.S. Manager will be counted towards the 15 person limit. The SEC may consider raising the US$25 million threshold, although there is no assurance that it will do so.
Non-U.S. Managers should consider if they qualify for other Reform Act exemptions from Advisers Act registration, such as new exemptions available to advisers solely to (a) private funds if such advisers have assets under management in the U.S. of less than US$150 million or (b) “Venture Capital Funds”. The SEC must define“Venture Capital Funds” by July 2011, and, until it does, the scope of the Venture Capital Fund exemption will be unclear. Non-U.S. Managers currently relying on the “private adviser”exemption, and who do no qualify for an alternative exemption, are required to register by July 2011.
The Reform Act imposes new disclosure and recordkeeping requirements, including on some investment advisers that are not required to register with the SEC. A Non-U.S. Manager that registers with the SEC must observe, at least with respect to its U.S. clients, the applicable SEC regulatory requirements, including implementing compliance policies and procedures, maintaining certain books and records, making publicly available filings with the SEC, accepting periodic SEC examinations, and adopting and enforcing detailed codes of ethics and personal trading rules for their personnel.
The Volcker Rule
The Reform Act amends the U.S. Bank Holding Company Act of 1956 to generally prohibit a “banking entity” from, (a) acquiring or retaining ownership interests in hedge funds and private equity funds and (b) engaging in proprietary trading (the“Volcker Rule”). The Volcker Rule potentially reaches many Non-U.S. Managers as the definition of “banking entity” includes any affiliate or subsidiary of a U.S. insured depository institution and also of any company that controls an insured depository institution (a “bank holding company”) — which includes those non-U.S. holding companies that own or control U.S. banks — or that is treated as a bank holding company for purposes of the International Banking Act of 1978. The Reform Act does not prohibit a banking entity from acquiring, retaining and sponsoring hedge and private equity funds “solely” outside the U.S. provided that (a) such funds are not offered to U.S. persons, and (b) the banking entity is not directly or indirectly controlled by a banking entity organized under the laws of the U.S. or one or more U.S. states.
As a result of the above, banking entities regulated by the Federal Reserve System (the “FED”) may be required to redeem certain of their holdings in hedge and private equity funds in the future. Non-U.S. Managers to such funds should examine their organizational documents and fund-related contracts (e.g. investor “side letters”) to determine how the redemption, sale and/or transfer of affected fund interests may be effected.
The Reform Act does not prohibit proprietary trading by non-U.S. banking entities that are not controlled, directly or indirectly, by a banking entity that is organized under the laws of the U.S. or one or more of the States, if the non-U.S. banking entity’s activities are conducted exclusively outside the U.S. with non-U.S. persons. If a Non-U.S. Manager or its advised funds are directly or indirectly controlled by a U.S. banking entity, such as a bank holding company or another banking entity, including a U.S. subsidiary or affiliate of a U.S. banking entity, then the Non-U.S. Manager and its advised funds may need to consider whether the Volcker Rule could impact current trading activities. As readers may have noted, many U.S. banking entities are moving to divest their interests in hedge and private equity funds, in part to allow those funds to continue to function unfettered by the Volcker Rule as well as in anticipation of the prohibition on holding interests in such funds.
The Reform Act requires rulemaking implementing the Volcker Rule to be effective no more than two years after the effective date of the Reform Act except that the FED or othe regulators can extend effectiveness for up to three one-year periods and on a case-by-case basis, the FED can grant a one time five-year extension for the divestiture of “illiquid funds” held by a banking entity.
Nonbank financial companies that are supervised by the FED are not prohibited from engaging in proprietary trading or from acquiring or retaining ownership interests in hedge and private equity funds. The Volcker Rule does direct regulators, however, to adopt rules imposing additional capital requirements for and additional quantitative limits with regard to such activities.
To the extent that the Volcker Rule could impact the activities of Non-U.S. Managers, the rulemaking process being undertaken by U.S.agencies, in particular the FED, provides an opportunity for Non-U.S. Managers to meet with regulators now and explain how the regulations implementing the Volcker Rule could be drafted to minimize unintended impact on activities outside the U.S.
FIF/FPL Regulatory Reporting Working Group: Gaining Traction
By Arsalan Shahid
An update from Arsalan Shahid of the FIF/FPL joint working group covering recent efforts to integrate FIX with away market indicators on non-tape report and audit trails.
Since the start of the financial crisis, the Securities and Exchange Commission (SEC) has attempted to regulate the US financial markets to eliminate fraud, increase market transparency and restore investor confidence in the financial services industry. Increasingly, rule filings have focused on the role of technology as both the source and solution to current market issues. In order to assist the industry in understanding and addressing implementation issues with recent SEC and FINRA filings, FPL joined forces with the Financial Information Forum (FIF) to create the FIF/FPL Regulatory Reporting Working Group.
The Financial Information Forum is an industry association that resolves open implementation issues that impact compliance with industrywide initiatives. Through comment letters and informal discussions, FIF members offer regulators insight into the impact of proposed rule filings on operations and technology; often offering alternative solutions to achieve the regulator’s policy objective. The purpose of the FIF/ FPL collaboration is to leverage FPL’s electronic trading and FIX Protocol expertise and FIF’s practical knowledge of regulations to better coordinate timelines and proactively address rule changes. Rather than reacting to filings after they have been approved, the joint working group seeks to establish FIX support for new rule filings as part of the approval process. Having an approved FIX business practice at the start of the implementation process makes for a more efficient and less error-prone implementation for broker dealers, asset managers, exchanges, vendors and regulators.
The initial focus of the group was the implementation of away market indicators on non-tape report, as discussed in FINRA Regulatory Notice 09-54. The joint group focused on order management and trading issues that could be addressed by standardizing FIX tags and values for reporting the execution venue. There was consensus within the group that even though this regulatory requirement originated in the US, it was conceivable that any country or region with multiple markets and Trade Reporting Facilities (TRFs) may similarly desire such transparency, and a standard means for indicating such transparency would be a helpful addition to the FIX Protocol. As a result, the Parties block was updated utilizing ISO 10383 MIC codes:
- A new PartyRole of “Reporting Market Center” could be used by brokers, exchanges, and ATS’s in Execution Reports to indicate where a trade printed.
- A new PartyRole of “Related Reporting Market Center” could be used by brokers submitting nontape reports to TRFs. A number of proprietary methods for conveying this information have been adopted by the TRFs, but the purpose of this was to create a single interoperable standard, which may, in the future, be adopted by the TRFs.
Why the SEC Should Use FIX for the Consolidated Audit Trail System
The SEC’s proposed Consolidated Audit Trail System seeks to capture in real time details of all orders and trades on US equity markets. Instead of using a custom regulatory data protocol within this new system, Martin Koopman asks why don’t we just use FIX? After all, we are using FIX for nearly all of these orders and trades already.
The Financial Information eXchange (FIX) Protocol has been one of the biggest success stories within our industry in the last 15 years. FIX is used in equities, foreign exchange, fixed income, commodities, and derivative markets. FIX is used by the buyside, sell-side and exchanges. It is a global standard, being the dominant protocol in all major European and most Asian markets.
The advantages of using FIX for the Consolidated Audit Trail System are:
A. Lower Costs to the Industry
Buy-side, sell-side and exchanges already communicate and store messages using FIX. Costs to develop systems to store and communicate trading information to the SEC or Self-Regulatory Organizations (SROs) would be lower using FIX as the data already exists in a suitable format today.
B. Less Error and Easier Auditing
As records are currently kept using the FIX Protocol, if any other protocol is used a translation is required to transform data into a different protocol. This introduces error and offers the potential for manipulation of the data. Using FIX means the SEC is looking at the original format of the data.
C. Real-Time
All FIX messages are generated in real time for trading. The SEC could more easily attain a real time reporting system by using FIX.
D. Ability to Coordinate Across Derivative Markets and Globally
Market events such as the May 6 flash crash require looking at not just historical equity data, but also data from equity derivative markets and international markets. As the FIX Protocol is dominant in other asset classes and derivative markets, including equity index futures, equity options and global markets, regulators can more easily gain a broader
view.
E. Ability to Use Established Knowledge and Vendor Base
All buy-side and sell-side firms and exchanges today have experience working with the FIX Protocol. There are thousands of business analysts, developers and consultants with in depth experience. There are hundreds of suppliers with products that communicate, monitor and manage the FIX Protocol. These products range from free open source to robust vendor solutions. Using the FIX Protocol will allow the SEC, SROs and firms to use this established experience and vendor base.
Nearly all pre-trade, trade, and some post-trade messages that are sent between the buy-side, sell-side and exchanges are sent using the FIX Protocol. FIX is used for indications of interest, quotes, orders, basket/list orders, cancel/replace orders, executions, allocations and confirmations. Many brokers also use the FIX Protocol for routing messages within their organization. The FIX Protocol already captures most of the information that the Consolidated Audit Trail System hopes to capture, including timestamp, side, quantity, order type, client order ID, account, order handling instructions, desk received, and stock locate for short sales. If any extra data needs to be captured for the Consolidated Audit Trail System this can be easily done by adding new fields to the protocol, which the FIX Protocol organization often does.
Currently some of the scope of the Consolidated Audit Trail System is captured in FINRA’s Order Audit Trail System (OATS) and the NYSE’s Order Tracking System (OTS). It is worthwhile to use many of the processes around data requested and the data transmission between brokers and the SRO from these systems. However, the advantage of moving to FIX Protocol instead of using one of the custom data protocols that these systems use is that the data is first in FIX and, therefore, requires no translation ensuring accuracy. FIX is in realtime, while these custom data protocols are used for end of day reporting. Using a custom data protocol means that the data will not be as easily compared with data from derivatives and international markets that use FIX. Using a custom protocol will forever silo understanding of the data in the protocol within the limited number of people who focus on regulatory and compliance issues at securities firms. The entire global securities industry uses FIX, while only the regulatory and compliance departments at US equity brokers understand the OATS or OTS data format.
For clarity, the FIX Protocol has two parts. The application layer governs the data format (what the data looks like) and is what this recommendation is focused on. The session layer governs the transport of the messages (how the messages are sent between firms). While the session layer could be used for sending the messages from firms to the SRO, there may be other ways of sending the messages that are just as suitable.
Our industry speaks FIX. We can help the regulators do their job, and lower the costs to our industry, by explaining to them how FIX should be used in the Consolidated Audit Trail System.
FIX Allocations: Redrawing the Post-Trade Terrain
Scott Fitzpatrick, Vice President / Business Manager of FIX Marketplace for NYSE Technologies breaks down the increase in FIX allocations in post-trade, with buy- and sell-side commentary from Wellington Management and Nomura.
Recently there has been a growing trend of post-trade allocations being delivered from the buy-side to their brokers via the FIX Protocol. Over the past year, we have witnessed significant growth in the number of allocations being sent via FIX through our FIX Marketplace community. Comparing the first half of 2009 to the first half of 2010, we have found that allocations sent via FIX has grown over 70%. We believe this high growth could be the start of a true paradigm shift in how the allocation process is treated.
Post-trade allocations are the breakdowns of a block trade – executed in any asset class – to a buy-side firm’s underlying client funds. Historically, allocations have been communicated to the broker by a variety of means and methods like phone, email, or fax as well as various other electronic systems.
These typical methods are failing to keep up with the faster pace of today’s trading requirements and the need to reduce risks and costs from a firm’s trading processes. As the financial industry continues to grow in new directions, we have reached a critical juncture in how post-trade allocations are handled and many forward-thinking financial institutions are turning to FIX to help solve this issue.
Why Change is Afoot
Today’s trading systems handle thousands of client orders and instructions in mere micro-seconds. With such lightning fast systems in place, the post-trade settlement process still takes days to complete. The global banking and market crisis that has occurred over the recent years should drive financial market regulators and practitioners to seriously look at changing the settlement process by reducing the risks and costs associated with the post-trade process.
For example, in Europe, where pan-European trading platforms are becoming the norm, so too will the eventual introduction of pan-European settlement. In this case, and others, reducing risk and costs will result in changes to the lifecycle of the trade and increase the demand for much shorter settlement cycles – possibly even to settle transactions on the day of the trade.
Even without the market dictating change, firms are still looking to reduce costs in this area as every cent spent is under laser focus in order to meet investor and client demands.
Today, we see two main ways in which institutions are trying to reduce this friction through FIX.
- Moving traditional middle-office functions, such as allocations, closer to the point of execution
- Modifying current post-trade practices to include all asset classes, particularly futures, options and Foreign Exchange
Bringing Allocations Closer to the Point of Execution
Because of the industry’s demand for immediately available information, firms today are looking at trade allocations – once considered to be a purely middle office function – as being an integrated part of the trading process. Buy-side firms are moving middle-office functions like allocations onto the trading floor as they look for new ways to communicate trade details between two trading counterparties.
By moving the allocation process to the front-office, errors relating to allocations can be recognized earlier in the settlement process. This, in turn, helps to mitigate trading errors as the trade moves through the settlement process. This shift in workflow requires new ways to communicate information between trading counterparties. Since FIX is a well established protocol and is ingrained in the current trading workflow for order generation, buy- and sellside firms can take advantage of existing technologies to push FIX into the post-trade process. This has led innovative firms to begin communicating allocations and, in the future, possibly even confirmation details using the FIX Protocol.
Global broker Nomura already supports using FIX for allocations and plans further investment in this space. “FIX already allows front-offices to communicate electronically, globally and crossasset with minimal cost,” said Nomura’s Andrew Bowley, Head of Electronic Product Management, EMEA. “Now our clients are looking at their middle office and looking for the same flexibility and cost savings.”
Lee Saba, Vice President of Trading Applications at Wellington Management and current Chairman of the FPL Americas Buy-Side Working Group, adds, “Allocations, in some way, represent a new frontier for FIX. Even though support has been available since the beginning, it hasn’t been widely utilized to date, and there is a lot of opportunity out there to grow the use of the protocol. Industry-wide, we’re definitely seeing a trend toward adopting FIX allocations across all asset types.”
In many cases, the requirement for FIX allocations is not a replacement for existing messaging or electronic transmission of data using a file – it is simply being used to replace workflows that were historically manual.
Using the Agility of FIX to Meet Multi-Asset Challenge
Many buy-side firms attribute the emergence of FIX in the post-trade space to their interest in achieving straight-through processing (STP) across an increasing number of asset classes. As the fund management business has evolved, these firms have pursued multi-asset strategies and as a result have required their trading operations to support a broad and continuously growing spectrum of instruments. To keep pace, operations have been restructured and systems enhanced up and down the trading cycle.
As the buy-side races to support the need for better, faster and more adaptive multi-asset trading environments, the post-trade services they rely on to allocate and confirm trades with their brokers and banks have been unable to keep up. When new, unsupported asset classes have required automation, they have had no choice but to turn to FIX and the cooperation of their key trading partners to automate post-trade processes.
What they have learned along the way is that FIX is a very effective post-trade solution for allocations, that provides the agility required in today’s fast changing, multiasset trading environment.
Lee Saba of Wellington Management agrees. “Working in conjunction with our brokers, we have recently revamped our futures orderrouting, allocation and confirmation processing to utilize FIX 4.4, thus greatly enhancing our trading capability and efficiency across both our front and middle-offices. Now we’re looking at improving other asset types with FIX allocations to gain even greater efficiencies.”
Andrew Bowley of Nomura also agrees with the assessment. “Each region’s execution functionality and regulation is diverse, but this is just as true of the post-trade environment. Confirms, give-ups, rounding, taxes and charges – each region has its own conventions. Catering for this variety, while still providing a global service is challenging, but it is where the real efficiency savings lie.”
If FIX works for the most difficult challenges and is more agile in dealing with new ones, why not use it for more workflows? Existing services do adequately support the processing of traditional equities and fixed income trades, but there are considerable costs:
- Trade operations need to support multiple infrastructures and processes within separate asset class silos.
- Monitoring and risk management capabilities are constrained because information is not standardized throughout the trading cycle.
- Third-party systems need to support (and charge for) separate interfaces.
- Service providers do, in fact, need to be paid.
Many firms today struggle with these costs and are looking to find ways across the trading process to deal with their growth into new asset classes. By adopting FIX as a standard, end-to-end protocol, buy-side firms could better address these cost issues and create a more efficient process.
The Future of FIX in the Post-Trade Process
The suggested shifts in how the allocation process works are not going to happen overnight. Many of the electronic systems that exist today still provide valuable services in the post-trade world that the industry relies on. However, as the landscape of the trading industry expands in new directions and the pressure to drive down costs and risk continues, a common platform to handle the entire life cycle of a trade will help many firms optimize their bottom line performance.
Utilizing FIX and existing standards for the entire post-trade process – even in areas not discussed in this article, like settlement – will help firms leverage existing technology, and thus, remove development or outside system costs from their processes. Plus, it would create a more efficient FIX community that would allow counterparties to communicate in a more seamless and end-to-end manner with one another. Further, by adopting FIX, investment managers, brokerage houses, and clearing entities would be able to exchange post-trade information in real-time. This would eliminate risks in the post-trade process, as any errors would be able to be identified and rectified immediately.
With NYSE Euronext’s key assets in so many different areas of a trade’s life cycle and knowing how fast our industry can change, remembering the 70% growth in allocations using FIX through our Marketplace, we believe that it is certainly worth exploring new methods to handle post-trade processes sooner rather than later.
中国市场的结构转变：高频交易的前景
高频交易席卷全球，而亚洲也不例外。高频交易所面对的挑战，以及为市场带来的优势，经已广为外界讨论。在本文中，Chi-X Global 亚太区首席执行官Ronald Gould将集中分析高频交易在充满机遇的中国市场的发展前景。
一般而言，市场结构的发展必须配合三个因素。首先，一个容许转变和鼓励创新的合适规管环境。其次是交易场所技术，这项因素普遍与市场拥有多于一个交易场所有关。虽然交易技术的供应情况正在改善，但若说各地市场在这方面拥有相同的水平，将是错误的假设。最后，必须提供一个由使用者主导的环境，为市场转变带来支持，并积极推动业界创新。亚洲各个市场都在不同程度上出现这些因素，部份市场提倡转变，也有其它市场在勉力顽抗。目前，亚洲大部份地区的市场转变进程处于犹豫阶段，因为大都在静待其它市场率先转变。根据我们的经验，日本、新加坡和澳大利亚乐于领导转变，其它市场则取态审慎或反对转变。
若审视亚洲各个市场的架构，便会发现部份市场的情况相对模糊。中国是其中一个最引人入胜和令人费解的市场。它具备庞大的发展潜力，能够吸引投资者的兴趣，并且明显乐于创新和转变。不过，外界对中国的规划和目标通常了解不多。由于中国对投资者的重要性不断上升，增加市场转变的透明度必然有所助益，而这正是本文的目标。首先，我们不妨描述当前的市场状况，以确立起步的基础。
根据国际证券交易所联会于2009年底发表的数字，以总市值计算，中国现为全球第二大股市。然而，由于国家和企业持有大量的股权，故公众流通量偏低。市场交投以个人投资者主；现时，中国的活跃账户数目超过5,000万个，并且与日俱增。机构投资仍处于发展初阶，但共同基金正急速增长，交易所买卖基金也是主要的增长领域。由于中国不少大型公司在往属于国营企业，股权仍相当集中，导致机构投资者的交易周转率偏低。虽然上海设有大宗交易设施，但至今尚未普及，而且若要吸引更
多投资者参与，便须把系统升级。上海证券交易所的新一代交易系统在2009年12月启动。该系统购自德国证券交易，并由埃森哲公司应因不同的市场状况，经过数年时间改编而成。上海投资者没有深入审视系统延迟的问题，但他们也并非毫不介意。当前问题在于：到底中国是否处于转变的拐点，在追求创新本能的推动下，令市场渐趋开放。现在，让我们分析有关证据。
首先，从规管开始谈起。中国证券监督管理委员会（中国证监会）一直表明，有意通过创新和转变，藉以提升中国市场在国家经济所担当的角色，并强化与国际投资者的相互参与。中国证监会鼓励开发新的交易场所和衍生工具产品，也批准扩大合格境外机构投资者（QFII）和合格境内机构投资者（QDII）计划，和容许开展融资和融券交易。这些改变总总显示中国证监会在朝着正确的方向发展，但当其它地区在积极解决常见的股票交易问题，为市场架构带来主要的转变时，中国证监会至今尚未明确表达其意愿。从外国投资者的角度而言，中国市场在外汇和交易性质方面仍充满限制。合格境外机构投资者计划的规模和灵活性都未达到转折点，因此目前的资金流动情况仍相对未受到限制。当情况配合内部需要时，这个转折点或会出现但这个日子尚未来到。现时，中国缺乏市场架构以推动发展多边交易设施的平台，而且不论营办人身份，交易所以外的交易场所概念尚未建立基础。中国需要长期努力，鼓励这方面的创新发展，而目前仍处于起步阶段。合格境外机构投资者计划的持股期为三个月，显然不利高频交易的发展，但市场正就有关转变进行积极的讨论。由于高频交易有助改善机构投资者的流动性，而随着机构投资者在中国市场渐趋重要，当高频交易作为市场庄家的角色获得较高评价时，便可能为转变提供决定性因素。
正如我在上文指出，帮助吸引高频交易的第二个市场架构转变因素乃由技术主导，而这方面也朝着正确的方向发展。经纪商的技术运用渐趋成熟，当中以大型外国投资银行所成立的合伙企业明显领先。主要交易所正致力应付技术转变带来的挑战：上海和深圳证交所正谨慎审视多个选择，但它们至今未就日后的发展作出明确的决定。受个人投资者的市场位置影响，中国的市场架构对新技术构成一些特别的障碍。若能在主要交易所开发更多以机构投资者为本的交易平台，应可巧妙避开这些技术挑战，但结果仍是未知之数。不过，目前已有精英士处理有关问题，相信在不久的将来，以技术推动市场架构转变不会再成为限制。
我认为推动转变的最后一个因素在于使用者的需求，包括经纪商和最终投资者。这是整体大局中最值得注意的部份，因为机构投资活动尚未主导中国市场，而个人投资者的动机不足。中国市场的流动性存在高度变数，而暂时到目前为止，机构投资者的大宗交易规模确实不大。对机构投资者的下单来说，市场的流动性必须提高，而高频交易的参与将可带来帮助，并应与新式和延迟程度较低的技术同时推行。若中国本土市场的参与者逐渐冒起，便能推动中国的高频交易活动踏出起步点，但现时的市场环境未能刺激有关发展。在当前而言，若高频交易投资者期望能为日后的中国市场营造活跃的环境，便须试验不同战略，以测试它们在各个市场架构环境的运作情况。不过，目前的合格境外机构投资者规例所实施的限制，令以上的试验面对巨大的挑战。随着中国机构投资者日渐重要，加上市场对进一步吸纳外国流动资金的需求增加，我们定能找到把握机遇的良方，或许可望为高频交易公司开拓光明的前景。可是，暂时来说，我们仍须静观其变。
Market Structure Change in China : Prospects For HFT'S
High Frequency Trading (HFT) is creating waves the world over, and Asia is no exception. With the challenges HFT presents being highlighted by many, and the benefits it offers markets being stressed by many others, Ronald Gould, Chief Executive Officer, Asia Pacific, Chi-X Global, focuses on their likely prospects in the enticing markets of China.
Developments in market structure generally occur in conjunction with three things. First, such developments require a receptive regulatory environment, one that permits change and encourages innovation. The second requirement is trading venue technology, generally coupled with the existence of more than one trading venue. Trading technology availability is improving but it would be wrong to suggest that markets everywhere are equal in this respect. Finally, there needs to be a user environment that is supportive of market change and willing to help drive innovation. These ingredients are observable in varying measure across markets in Asia, some at the forefront of change and others warily fighting against it. In most places in Asia, the current status of market change is in limbo as a result of hesitance on the part of one party or another to begin the process. Our own experience indicates that Japan, Singapore and Australia are leaders in this change while others are either cautious or opposed.
If we survey the market structure scene in Asia, some places present a more ambiguous picture than others. One of the most intriguing and perplexing pictures is China, a market filled with potential, intriguing to investors, clearly interested in innovation and change but whose plans and objectives are often opaque to the outside world. Given China’s growing importance to investors, an effort to make the picture of change clearer must be a useful one. First, it is helpful to establish a baseline from which to start, a description of the situation today.
According to figures published at the end of 2009 by the World Federation of Exchanges (“WFE”), China is now the world’s second biggest equities market based on total market capitalization. Free float is much smaller however, as both State and corporate holdings are still substantial. The market is heavily dominated by retail investors, of whom there are more than 50 million with active accounts and more arriving daily. Institutional investing is at an earlier stage although mutual funds have grown rapidly and Exchange Traded Funds (ETF’s) represent a major growth area as well. Because many of China’s largest companies were previously state owned and with shareholding still tightly controlled, turnover rates among institutional investors are very low. While a block trading facility exists in Shanghai, it is not as yet widely used and probably needs upgrading if it is to attract a greater audience among investors. The new generation trading system for the Shanghai Exchange was launched in Dec 2009, purchased from Deutsche Boerse and adapted with the help of Accenture for rather different market conditions over several years. Latency is not something that gets much scrutiny by investors in Shanghai but it is not a characteristic as yet highly valued. The question we confront today is whether we are at an inflection point for change in China, a point at which the instinct for innovation begins to drive a greater openness. Let’s look at the evidence.
Starting with regulation, the CSRC (China Securities Regulatory Commission) has long made clear its interest in innovation and change as a means of preparing China’s markets for a bigger role in the national economy and greater interplay with international investors. They have encouraged developments of new trading venues, new product areas in derivatives and permitted the expansion of the QFII (Qualified Foreign Institutional Investor) and QDII (Qualified Domestic Institutional Investor) schemes. They have even allowed a start with margin trading and short sales. This suggests that the instincts of the regulator lie in the right direction but says nothing definitive as yet on their willingness to tackle some of the most common equity trading issues that have been addressed elsewhere and led to major market structure change. From the outside investor’s perspective, China remains a market with constraints both on FX and the nature of trading. We have not yet reached the tipping point in the size and flexibility of the QFII programme such that fund flows would be seen as relatively unrestricted. This is likely to happen when it suits a domestic agenda and that moment has not yet arrived. There is no structure at the moment that would easily permit the development of MTF (Multilateral Trading Facility) type platforms in China and the notion of non-exchange trading venues has not yet taken root, regardless of their sponsorship. There will need to be some longer term efforts to encourage innovation in this area and it is still early days. QFII investment holding periods of three months are obviously not HFT friendly but here too, there is active discussion of change. The decisive factor may be a better appreciation of the market-making role of HFT’s in improving liquidity for institutional investors as that group rises in importance for Chinese markets.
The second requirement I noted for the kind of market structure change that would attract HFT’s is technology driven and here again, there are signs of movement in the right direction. Brokers are becoming more sophisticated in their use of technology and the major foreign investment bank partnerships are clearly leading the way. The major exchanges are grappling with technology change challenges but neither Shanghai nor Shenzhen have as yet made any clear decisions on their next steps although both are carefully examining a number of options. China’s market structure holds some special hurdles for any new technology, especially because of the position retail investors have in the market. It may well be that the development of more institutionally oriented trading platforms within the main exchanges can provide an interesting way around these technology challenges but the outcome is not yet clear. However, there are some very smart people working on these issues so that technology as a driver of market structure change is unlikely to be a constraint for very long.
The last element I suggested as a driver of change is demand from the user community, both brokers and end-investors. This is an interesting piece in the puzzle because institutional activity is not dominant in China’s markets
and the retail investor is not yet motivated to be very interested. Liquidity in Chinese markets is highly variable and institutional block trading very small indeed, at least for now. There is certainly a demand for better liquidity for institutional size orders that would be helped by HFT involvement in the market and that would go hand in hand with the availability of new, lower latency technology. The most likely starting point for HFT activity in China will be if there is an emergence of some home grown players, something that the environment has not yet stimulated. For now, HFT–type investors will need to experiment with a variety of strategies that may work within a very different kind of market structure environment if they want to be ready for a more active future in China’s markets. The limits imposed by current QFII rules make this an ambitious challenge for now. As the importance of Chinese institutional investors rises and there is an increased drive towards access to more foreign liquidity, ways will certainly be found to capture the opportunity, probably opening the prospects for HFT firms more broadly. For now, it’s a waiting game.
Real-time Transaction Cost Analysis : Building Up the Buy-side Tool Kit
ITG’s Kevin O’Connor sorts the nuts and bolts of real-time TCA and discusses specific strategies with Steve Peterson of the Teacher Retirement System of Texas.
Monitoring and reporting on trading performance in real-time is not a new concept. Trading profit and loss (P&L) calculations and supporting transaction cost information has been available in most Execution Management System (EMS) and some Order Management System (OMS) platforms for a number of years. However, integrating the calculations and information into trading workflows presents a unique problem. Specifically, how do you design a monitoring and feedback system that is fast, easy to use and provides information that will help traders make smart strategy choices. Real-time monitoring can be broken down into three main categories:
- Transaction Cost Analysis
- Risk Monitoring
- Market Conditions (Prices, Volumes, etc.)
Transaction Cost Analysis (TCA)
In its simplest form, real-time TCA consists of comparing execution prices to various benchmarks, such as arrival price, interval volume weighted average price (VWAP) or previous close, and displaying this information back to users as a realized P&L number. In addition to realized P&L, unrealized P&L (which uses a proxy price for the unexecuted portion of orders) can be shown, providing a trader with a view as to the potential exposure remaining in their orders. When analyzing individual orders, real-time TCA tools plot actual executions against market prices to provide a visual representation of the execution “footprint”. When analyzing multiple orders, the tools focus on generating alerts or highlighting performance outliers.
Risk Monitoring
Risk monitoring tools analyze the risk characteristics of a residual tradelist. This typically includes metrics such as total risk, tracking error, beta and sector imbalances. Real-time risk monitoring is used by traders that are looking to minimize total risk while working a program or a list of securities. These tools are also used by portfolio managers and trading desk management to monitor the status of portfolio transitions.
Market Conditions
There are many ways for traders to monitor market conditions. The simplest metrics quantify actual market volume, prices and volatility. For volume monitoring, a comparison of current volume to historic volume is often provided. Order-by-order and aggregate participation rates are also generated, providing traders with a view of their total market participation. For market price monitoring, individual security prices can be compared to industry, sector and market movements. Volatility is another analytic that can be analyzed in real-time. Comparing realized volatility to historic volatility gives traders some perspective on the relative difficulty of the current market conditions.
To make this type of real-time monitoring most effective, it should be available for all electronic trading flow, not just the transactions staged through an EMS. By way of example, Investment Technology Group provides real-time monitoring capabilities for all transactions that flow through broker-neutral platforms. Traders can now get a consolidated view of their trading activity even if they don’t stage all transactions via a single EMS. Using the monitoring capabilities available, traders can quickly and easily monitor real-time market conditions and trading P&L for all of their electronic trading.
I recently spoke with Steve Peterson, Trader and Transaction Cost Analyst specialist at the Teacher Retirement System of Texas about his experience with real-time monitoring tools.
Kevin O’Connor: When did you start using real-time monitoring tools?
Steve Peterson: The Teacher Retirement System of Texas uses both internal and external managers, and there are portfolio transitions that occur from time to time. We decided that we would like to do some of the transition work internally, but that we also needed the tools that transition managers have to monitor the market, risk and trading P&L in real-time. We started using these tools over the last year, and we now consider them essential to our ability to monitor our transition activity, and important to our overall trading process.
Kevin O’Connor: How are the tools integrated with your trading workflow?
Steve Peterson: The tools we use are integrated directly with our EMS. We started using them to monitor our internal transition activity, focusing on risk monitoring and P&L monitoring. However, they are available for all trading, and since they are integrated with, but also separate from the blotter, we can have them running on the side while we trade. When we do trade, we tend to have a lot of activity, so the tools become an important part of our process. We usually run a quick, aggregate pre-trade snapshot as soon as the list is staged to the EMS. This pretrade report is sometimes sent to the portfolio managers so that they can get an expectation of implementation costs. After that, we typically break up our list and assign it to different traders. The tools are flexible enough to allow each trader to monitor their own orders and view a P&L for the activity they are responsible for. At the same time, all of the traders or trading management can look at the risk characteristics of the original trade list to make sure we are minimizing residual risk and/or sector imbalances as we are all trading.
Kevin O’Connor: How does real-time monitoring mix with your traditional, post-trade TCA reports? How is post-trade TCA different?
Steve Peterson: We recognize that post-trade reporting is about examining trends in costs over large time periods and peer group comparisons. The kind of process improvements we consider when looking at our post-trade data are more at the macro-level. When monitoring individual orders, we are focusing on what we can do tactically to minimize potential performance outliers by altering trading strategies. In theory, if we manage our dayto-day trading being sensitive to arrival-price benchmarks, we will see better performance over time in our post-trade analysis. Conversely, if we see trends in our post-trade analysis that highlight areas for improvement, we can monitor those types of transactions more closely.
Kevin O’Connor: Are you using the real-time monitoring tools to alter your trading strategies?
Steve Peterson: We have always used market information to inform our trading strategies. The challenge comes on busy days, when we have more names to trade than can be monitored individually. On those days, we look at our Summary P&L chart to see which names we need to focus on. We can drill into those names looking at both the volume monitor and trade progress charts to decide if a change in strategy is possible. We will examine real-time pricing and volumes for individual names, making decisions as to whether we should speed up or slow down. There may also be times where the algorithm selected is no longer the right choice, and we need to search for liquidity elsewhere.
Kevin O’Connor: What kinds of additional tools and metrics would you like to see from analytics vendors?
Steve Peterson: I’d like to see more graphical representations of market conditions, including metrics that would help us determine when there is significant high-frequency trading in the names we are working. It would also be helpful to have metrics that analyze specific algorithms. A chart or graph that shows the algorithm’s market footprint (trade prices in relation to the bid/ask/mid) for a specific name would help users determine if the prints you are getting are of high quality.
I think there is room for improvement in pre-trade analysis as well. The ability to see a dynamic, evolving pretrade number, one that is adjusted by current market conditions (volatility,spread, volume), would be a great help to traders. A dynamic pre-trade estimate would allow traders to get a better feel for what their performance will be against post-trade benchmarks, which consider market impact and market conditions. Along those same lines, being able to see performance against a participationweighted price benchmark intraday would be helpful since that is one of the benchmarks we use post-trade.
One piece of information that ismissing right now in real-time monitoring is a view into the historic performance of specific destinations, given current market conditions. Adding this type of information would be another analytic that could be used to aid us in strategy and destination selection.
Kevin O’Connor: Do you think real-time monitoring tools will become a standard part of every trader’s workflow?
Steve Peterson: Absolutely. I think many traders are already comfortable with real-time P&L monitoring and basic market analytics. With more traders being exposed to posttrade TCA, they are also familiar with the metrics and benchmarks used in evaluating their aggregate performance. If the tools provided by vendors can cover all electronic flow and provide alerts and easy to understand graphics, traders will use them as part of their regular trading process. Anything that can provide traders with the information they need to analyze execution flow and perhaps avoid significant outliers is worth experimenting with.
