Will FIXatdl Revolutionise the Way Algos Will Work?

June 15, 2010

By Damian Bierman, Gregg Drumma, Mo Takhim
Damian Bierman, Portware, Mo Takhim, ULLINK and Gregg Drumma, Gamma Three Trading take a closer look at the way the FIXatdl standard is changing algorithmic trading.

Without a doubt, FIXatdl is going to revolutionize the way algos work.

On the front-end, FIXatdl standardizes an algo suite’s data flow, controls, and layout. Traders like it because it provides a more predictable look-and-feel, and an overall more consistent user experience.

On the back-end, platforms supporting FIXatdl will benefit from greater ease of maintenance and updates. With FIXatdl, updates to algo specifications, or customizations that brokers wish to present to their clients, can be realized by updating a single file. Gone will be the days of having to undergo lengthy development / release cycles to affect what may be conceptually a very simple change to a couple of tags for a particular strategy. By using FIXatdl, firms will be able to significantly decrease the time-to-market for new and updated trading strategies.

Considering the advantages and current maturity of the FIXatdl standard, it appears that wide-spread adoption is just around the corner. The ever increasing need for customer controlled order behavior and the chase for best execution dictates a change in the current process, and FIXatdl is a great recipe for delivering it.

Ask any broker how seamlessly their algorithms are currently implemented in each buy-side system and even the most sophisticated algorithm providers will agree that this is a painful process that not only is expensive to them, but more importantly, time consuming.

The question remains, with the progress this industry underwent over the past few years, how does this issue still exist, while the usage of algos has skyrocketed to unprecedented levels? Enter FIXatdl, the FIX algorithmic trading definition language. It was designed based on the input from several market participants representing broker-dealers, OMS/EMS vendors, buy-side users and other vendors.

From a buy-side perspective, clients can benefit from access to their brokers’ algorithmic trading strategies as soon as they are available in FIXatdl XML format, thereby significantly reducing the resources and time spent on performing analysis and development.

From a sell-side perspective, algo providers are able to develop and build FIXatdl compliant algorithms in a matter of hours instead of months. Brokers and other algorithm suppliers also have the ability to customize specific strategies based on their client needs and submit the XML file to be rendered immediately in their client’s front-end system.

This creates a whole new race in the vendor space. A few core EMS vendors have been pro-active in the adoption of FIXatdl and are already offering this service to their clients and others are slowly following their steps.

There is no argument that the potential upside of FIXatdl is huge. The reality is that the race to adopt FIXatdl has already started; the only question that remains is when you will join?

With the release of FIXatdlSM, which allows algorithmic trading strategy providers to release their specifications in the industry standard, computer readable XML format, FIX Protocol Limited has created a standard that will enable firms across the industry to significantly decrease the time-to-market for new and updated trading strategies. When asked whether FIXatdl will revolutionize the way algorithmic interfaces are created and consumed, one must look beyond the technical requirements to understand how the current process works today. In my experience working with broker/dealers on introducing algo trading to the buy-side, it became apparent how many Order / Execution management systems (OMS/EMS) each broker had to integrate with. While there are large vendors of OMS / EMS solutions with hundreds of clients, there are many more in-house systems that are built with internal IT staff under many different technologies.

Brokers are looking to get their latest products to the buy-side as soon as possible. The buy-side looks to take advantage of the offerings when they are available. For buy-side vendor solution providers, the process of incorporating new or updated algorithmic interfaces can sometimes be a form of consulting revenue. Meanwhile, the challenge for internally built systems is to allocate limited development resources away from system maintenance and support. As such, it’s no surprise that the current process of reading a spec and implementing it can cause months of delay until a final solution is rolled out into production.

With FIXatdl this process can be significantly accelerated by the following:

Broker/Dealers can release their current specs as a document and/or in FIXatdl format.
Broker/Dealers need to ensure a mutual benefit of adoption to the buy-side vendor solutions.
Finally vendors and internal solutions must allocate development resources to build to the spec in their chosen technology. Since the broker/dealer specifications would now be available in FIXatdl format, there is incentive to do so.

Asset Managers’ Middle and Back Office: A New Focus for Investors

benjamin_gunnee

June 15, 2010

By Benjamin Gunnee
While Madoff maybe a dirty word for many investors, the scandal at the end of 2008 certainly helped propel the often forgotten operational departments of an asset manager into the limelight.
Never before had so many institutional investors got caught up in such heavy losses caused directly by the lack of internal controls and oversight at an asset management firm. Historically, losses had been mainly driven by poor performance from asset classes, for example the equity markets after the tech bubble burst. The Madoff scandal highlighted investors’ need to understand much more than the team running money on their behalf.
Pre-Madoff most institutional investors focussed the vast majority of their efforts selecting an asset manager based on investment process and portfolio strategy. In the new world the selection process for identifying asset managers has become more rigorous, with many more investors focusing on the quality of the operations, control and support functions, in addition to the portfolio management team. An institutional investor study carried out by Mercer in 2009 found 41% of respondents carried out some sort of operational due diligence in 2009, up from 13% in 2008.
As investors start to embrace operational due diligence, it is having a material impact on the way asset managers position themselves during the selection process, and more importantly, the actual controls and processes applied behind the scenes. For the first time, asset managers are being asked questions about their audit process, their compliance department, valuation methodologies and pricing sources.
On top of a strong investment process, investors are looking for:

A strong organisational structure promoting good corporate governance
Formal segregation of duties between front and back office activities
Infrastructure and systems to match the size and complexity of assets under management
Appropriately experienced and qualified staff
Documented policies and procedures
Reputable service providers including lawyers, auditors, custodians and administrators
Robust back-up plans in case of disruptions due to power failures or other disruptive events

In order to find answers to the points listed above, many investors are attending meetings on-site or appointing a specialist operational due diligence provider to review an asset manager’s operations, control and support functions. Again this is a major change from existing behaviour where most of the selection process took place at the investor’s or a consultant’s office.
The informal feedback Mercer has gathered indicates that many investors are surprised by some of the findings at asset managers. There have been instances of asset managers running their whole technology infrastructure using spreadsheets, and fax machines heavily used for asset confirmation. Whilst these types of processes were acceptable in the 1990s they are not sufficiently robust for current day asset managers with many employees running complex products, managing millions or billions of investor’s money. Both of these examples show a lack of investment in infrastructure and the reliance on manual processes, which increase the probability of losses through mistakes or fraud.

Latin America: Update From the Industry

alice_botis

June 15, 2010

By Alice Botis, Sebastian Rey Ortega

1. Where is electronic trading in Mexico/Brazil/Chile now? Do you see a role for increased use of electronic trading in Mexico/Brazil/Chile?

Increasing political stability, greater levels of consumer affluence and international interest in the potential value of its natural resources and commodities are placing the countries of Latin America (LATAM) on the trading map. As a result of this, electronic trading is rapidly establishing itself in the LATAM region. Brazil is currently leading the way, followed by Mexico and then Chile. In Brazil, it is possible to route orders directly to the exchange using FIX, and algo trading and High frequency trading (HFT) are already extensively used. Buy-side firms are also able to make use of Direct Market Access (DMA). In Mexico many brokers as well as the exchange make use of FIX and algo use is prevalent too. DMA is also available but this goes via member brokers rather than directly to the market. In Chile it is still early days, but the recent launch of FIX access by the exchange is expected to act as a catalyst for growth. Also, as part of an alliance that is expected to come in to force later this year, people will be able to route between the Chilean, Peruvian and Colombian markets from any individual connection.

With all this investment in technology and the rapid uptake of the services that have become available, it is clear that as far as electronic trading in the region goes, the only way is up. We can expect to see volumes from this style of trading access continue to increase going forward.

Barriers To Market Structure Evolution In Japan

michael_kim

June 15, 2010

By Michael Kim
Order flow internalization and off-exchange crossing has been a common market practice in Japan for years. In 1998, Japanese regulators approved the introduction of the proprietary trading system (PTS), a privately operated night time marketplace. Then around 2005, we started to see PTSs operating during day time hours in direct competition with the traditional exchanges. In fact, PTSs are lit venues that operate similarly to the exchange. They have well defined market structure and market participants with price formation taking place in the visible order book. Most PTSs define their tick increments at about 1/10th that of the exchange. One major hurdle for PTSs is that they can not be more than 10% of the market share. Once they reach that point and hope to grow further, they will need to apply to become an exchange.

Dark pools started to appear in Japan in earnest around 2005. In the last couple of years they have become a standard product offering for major international brokerage houses as well as some of the large domestic institutions. Global firms have been able to leverage their expertise and investments in dark pools and smart-order routers in the US and Europe, and have implemented Japanese dark pools with varying degrees of success.

Despite over 10 years of PTS history and a regulatory environment ripe for internalization, alternative trading venues have only managed to capture 1-2% market share from the Tokyo Stock Exchange. What are the reasons for this lack of success in alternative execution venues? What are the catalysts that may move more volume off the exchange?

1. Smart-order routing Infrastructure

In order to effectively access PTSs and dark pools, participants need a smart-order routing system. Smartorder routers can constantly scan available execution venues for best available price, and then execute optimally based on various internal and market rules. The smartorder routing technology needs to operate effectively with both lit pools and dark pools. It needs logic that can handle various market structure related constraints, antigaming rules and the different cost structure of each trading venue.

Most of the global broker-dealers already operate smart-order routers for their US and European businesses, so for them, implementing smartorder routing is a relatively straight forward exercise of localization. However, for those firms without the same infrastructure in place, scratch building a competitive smart-order router is a fairly difficult task. As a result, most of the international broker dealers operate smart-order routers in Japan, while there are only a handful of domestic firms with smart-order routing technology. Not surprisingly, there is almost no retail or on-line brokers operating a competitive smart-order routing technology.

2. Best Execution policies

In Japan every execution agreement mentions a best execution policy. Unlike in other countries, there is no single overarching regulatory framework, such as RegNMS in the US or MIFID in Europe, which outlines the details of best execution. As a result, more often than not, the brokers’ execution agreements are not uniform from one broker to another. Many of these agreements use primary exchange as the default execution venue. There have been efforts across many of the dark pool operating firms to “re-paper” best execution agreements, but ultimately there are no regulatory drivers expanding best execution practices to span multiple liquidity venues.

3. Fund mandates

Many of the domestic pension and traditional funds have mandates that require them to execute at the primary exchanges like TSE or OSE. For those funds, executing in PTSs would be a breach of their mandate. These funds would need to amend their mandates before they could allow their orders to be executed in PTSs. However, given the current level of PTS market share, there is no strong incentive for these funds to add PTS amendments to their mandates.

4. Regulatory Environments

The practice of short selling in PTS has never been clearly outlined in the regulations until 2009. Until then, each PTS operator depended on its interpretations and some have decided to allow such a practice. In March 2010 the regulators have further clarified the short sell rules are to be followed in that PTSs as well as in the exchange. This has effectively halted, and even reversed, the growth in certain PTSs. Significant volume has moved off of the PTSs in the subsequent days and months. On top of that, the TSE’s introduction of Arrow Head system accelerated migration of liquidity from PTSs. Moreover, the recent regulation requiring dark pools to report trades through TOSTNET potentially puts additional restrictions on taking liquidity off exchange. These types of ad hoc regulatory changes have had negative impact on the overall market structure and at least in the short term, a negative impact on the growth of PTSs.

Proprietary Trading Systems In Japan

yoichi_ishikawa

June 15, 2010

By Yoichi Ishikawa
Yoichi Ishikawa of kabu.com Securities navigates the developments of PTSs in Japan and their effects on markets, traders and regulators.
(1) Could you tell us about the history of PTS in Japan and its growth over the past 3 years?

The history of Proprietary Trading Systems (PTS) in Japan began with the launch of PTS trading in September 2000 as the country’s first alternative stock trading platform. Initially, two brokerages developed and launched PTS operations geared primarily toward after-hours trading for retail investors, using the closing price at exchanges and VWAP for certain institutional investors. As a result, until April 2007, PTS trading never accounted for more than 0.2% of overall market volume (monthly basis). PTS trading volume, however, gradually began to expand starting in the second half of 2007 owing to the added liquidity provided by new link-ups between PTS operators and brokerage houses. In 2008, PTS midday trading was launched, offering smaller minimum price movements than the exchanges. PTS operators expanded to six firms, and a small number of international brokers began smart-order routing (SOR) operations.
2009 brought even smaller minimum price movements – less than 1 yen – and the launch of PTS stock price streaming through major information vendors such as Thomson Reuters, Bloomberg and QUICK. As a result of these advances, PTS trading exceeded 1% of overall market volume (monthly basis) for the first time in October 2009. Although the launch of the Tokyo Stock Exchange’s (TSE) advanced trading platform, Arrowhead, at the start of 2010 resulted in reduced latency and reduction of tick size, overall market trading value, including the Tokyo bourse, has not witnessed a significant increase. While PTS trading value, too, has not seen much in the way of growth, PTS trading is now primarily used by brokerage houses for algorithmic and electronic trading to capitalize on arbitrage trading opportunities to leverage the price discrepancy between the Arrowhead System and the smaller PTS price ticks. Arbitrage trading will likely grow to represent over half of all trading on the kabu.com PTS platform.

(2) What are the implications of the growth of alternative platforms/PTS – On clients?

Since 2009, Japan Consolidated Tape, which displays the best price from multiple markets (traditional exchanges and PTSs) using streams from major information vendors, has become the focus of attention regarding the trend toward a reduction of tick size, including less than 1 yen. While institutional investors are considering using SOR to efficiently execute trades at this best price, the challenges faced include: developing systems (OMS, back office administration, etc.) to link with PTSs, which have not been used until now; the formulation of internal rules and regulations; and dealing with environmental changes arising from greater liquidity in the Japanese equities markets, including PTSs.

– On sell-side firms?

Brokerage houses have focused attention on organizing internal policy governing PTS usage, the pursuit of reduced latency using collocation and the review of whether PTSs represent a viable alternative market trading platform and the capabilities of SOR, such as whether orders can be routed efficiently to multiple markets. From a policy perspective, after the start of 2010 several brokerage houses in Japan have revised their best execution policy to clarify SOR connections to PTSs.

As for settlement cost and counterparty risk, a growing number of firms, including those who previously avoided connecting to PTSs, are now considering using PTSs more intently because the Japan Securities Clearing Corporation (JSCC) will offer clearing services to alleviate these risks from July 2010. On the other hand, in terms of technology, the ability to develop advanced and sophisticated IT systems, including reduced latency networks and direct feeds from the markets, represents a pressing need in the battle for best execution, especially considering prices can fluctuate by the millisecond in SOR.

– On the venues, including exchanges?

In July 2010, JSCC plans to offer clearing for PTS trades. Of the six PTS operators in Japan today, the brokerage house-centered PTSs Kabu.com Securities, SBI Japannext, and Chi-X Japan (a planned market entry) are to participate in the JSCC clearing system. With JSCC as the central counter party (CCP), PTSbased trading can expect more efficient settlement through netting of exchange trades as well as reduced counterparty risk. On the other hand, compared to the 105 listed firms on the TSE, each PTS contains less than 10 securities, so PTS operators will need to use JSCC clearing as a means to expand the number of participating securities to increase liquidity going forward.

– And on the regulators?

In March 2010, the Financial Services Agency (FSA) revised part of the Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc. Regarding PTSs, these revisions clarify guidelines on the need for PTS licensing through order matching within firms, specify that margin trading is not allowed using PTSs and set forth the need to match PTS short selling practices with short selling regulations implemented by the exchanges. In May 2010, the Japan Securities Dealers Association (JSDA) set up the Equity Trading on Alternative Trading Platforms Policy Development Working Group to address short selling on PTSs by seeking to develop its own and other regulations.

(3) Looking forward, how do you see competition playing out? What will be the impact of increased competition on technology?

Starting in 2010, firms have moved forward with SOR operations that link to viable alternative markets for the buy-side and sell-side, and policy development has also progressed regarding the role of JSCC and short selling on PTSs, etc. In addition, Chi-X, with its experience operating alternative trading platforms in Europe, plans to launch its own PTS in Japan on the premise of JSCC clearing. Neither trading volume nor value has seen an uptick since the TSE Arrowhead System went into operation in January 2010, but the evolution of market infrastructure, such as collocation, new alternative trading systems and SOR brings the possibility that high frequency trading (HFT) may grow more active in Japan as well. Amid these changes, we believe there will be significant growth in the roles of PTS operators and brokerage houses with the ability to respond quickly to policy changes and the competencies to provide trading platforms that reduce latency in matching systems, OMS, and networks with speeds in the sub-millisecond to millisecond level. We also feel that it will be important for the entire securities industry in Japan to grasp and practice the idea of “best execution in multiple markets,” which is such an integral part of markets in Europe and North America, to generate new and enhanced competition amongst equities markets.

(1) Could you tell us about the history of PTS in Japan and its growth over the past 3 years?

2000年9月に日本で初めて代替市場（PTS; Proprietary Trading System）が開始して以降、2業者により、取引所終値での売買の夜間時間帯でのリテール向け提供やVWAPの特定の機関投資家向けのみへの限定的な提供が中心であったため、2007年4月まで、市場全体（月次）でPTS取引の占める割合は0.2%を超えることはなかった。2007年後半から、PTS業者とブローカー証券の接続による流動性の提供、2008年から取引所取引と同時間帯による昼間のPTS取引の開始、取引所よりも狭い呼値の刻み、PTS業者数の6社への拡大、および一部の外資系ブローカーによるSOR（SOR: Smart Order Routing）の稼働、2009年から小数点も含めた呼値の刻みやThomson Reuters、Bloomberg、QUICKといった大手情報ベンダーによるPTS株価の配信が開始され、2009年10月には、市場全体（月次）でPTS取引の占める割合は初めて1%を超えるまでに至った。2010年以降、東京証券取引所の新システムであるアローヘッドが稼働し、低レイテンシと一部呼値の刻みの縮小等がなされたが、東京証券取引所を含む市場全体の売買代金は大幅な増加基調にまで至っていない中、PTSの売買代金も大幅な伸びはないものの、アローヘッドとPTSの小数点の価格差を利用したアービトラージ取引が、約半数以（kabu.comPTSの場合）となるなど、ブローカー証券のアルゴリズム取引・電子取引を中心に利用されている。
(2) What are the implications of the growth of alternative platforms/PTS – On Clients?

2009年以降、PTSにおける小数点を含めた呼値の刻みの縮小の普及に関して、大手情報ベンダーによる複数市場（取引所とPTS）内の最良値段を表示する日本版統合板モニター（Japaneseconsolidated tape）が注目されつつある。機関投資家は、この最良値段での効率的な執行のため、SORの活用の検討を進めているが、一方これまで取引をしていなかったPTSに対するシステム構築（OMSとバックオフィスでの管理）や社内規則の整備、さらにPTSを含めた日本市場全体の流動性拡大への環境の変化が課題となっている。
– On sell-side firms?

ブローカー証券では、PTS利用上の制度面の整理の他、コロケーションの活用による低レイテンシの追求や有力な代替市場につながっているかという点、さらに複数市場に効率よく注文回送できるかというSORの提供力が注目されている。制度の面では、ブローカー証券の中には、2010年に入り、最良執行方針を改訂することで、SORによるPTS接続を明確化する会社もでてきた。さらに、これまで決済コストやカウンターパーティーリスクの面でPTS接続を敬遠してきた業者も、2010年7月以降のPTSにおける日本証券クリアリング機構（JSCC）対応を前提に、PTS利用の本格検討を進める会社も増えてきている。一方、テクノロジー面では、SORにおいて、数ミリ秒レベルでの価格変動がある中、最良価格で執行できるかが競われるため、各市場からのダイレクト・フィードや、さらなる低レイテンシ・ネットワークの構築など、高度なIT構築力が競われている。
– On the venues including exchanges?
2010年7月からはJSCCにおけるPTSの清算開始予定であり、現在日本におけるPTS6社の内、ブローカー証券参加型であるカブドットコム証券、SBIジャパンネクスト証券、 Chi-X Japan（参入予定）の3社が参加予定である。JSCCによるCCP（Central Counter Party）対応により、取引所とPTSでのネッティングした決済の効率化の他、CCPによりPTSのカウンターパーティーリスクが低減される。一方、参加証券数は、東証の会員数が105社に対し、1つのPTSの参加証券は10社以下である。JSCCを前提とし、PTS業者は流動性拡大のため、より参加証券を拡大していく必要がある。
– And on the regulators?

2010年3月に金融庁にて「金融商品取引業者等向けの総合的な監督指針」の一部が改正された。PTSに関しては、業者内マッチングでPTS認可が必要になるか否かのガイドラインの明確化や、PTSでは信用取引を扱わないこと、およびPTSでの空売りについては取引所取引における空売り規制との整合性を図る必要があることが明記された。このPTSでの空売りに関しては、日本証券業協会（JSDA）にて、5月に「取引所外売買など株券等の取引の制度整備に関するワーキング・グループ」が立ち上がり、協会の自主規制と規則について整備が図られている。
(3) Looking forward, how do you see competition playing out, what will be the impact of increased competition on technology?

これまでみたように、2010年より、バイサイドやセルサイドで有力な代替市場とつながるSORの活用が進み、PTSではJSCCや空売りなど制度面の整備が進んできている。また、欧州で実績を持つChi-Xは、JSCCを前提に、日本のPTSに参入しようとしている。2010年1月の東京証券取引所におけるアローヘッドの稼働以降、大幅な取引増はまだ見られないが、コロケーション、新たな大手代替市場の参入、SORなど取引市場インフラ環境の進化もあり、日本でもHFT（High-Frequency Trading）が活性化する可能性がある。このような環境の変化の中、サブミリ秒～数ミリ秒レベルにおけるネットワーク、OMS、およびマッチングシステム等について低レイテンシを追求した取引システムの提供力と、制度変更への迅速な対応能力のあるPTS業者およびブローカー証券の役割が一層重要になってくると考える。さらに、業界全体では、欧米で浸透している多市場における最良執行の考え方が、より日本に根付き、あらためて市場間競争が本格化することが重要と考える。

China: Electronic Trading Offshore Global Markets

alan_dean

June 15, 2010

By Alan Dean
As recent history shows, China has a vast and diverse economic system, which contains a number of economic sub-systems, many of which have experienced growth in the last 36 months. In the media, headlines portray China to be an economic powerhouse, with expansion plans that have far reaching implications for these domains, including electronic trading in Financial Services.
One area that has seen much attention from western companies in the financial sector over the last two years is that of the Qualified Domestic Institutional Investors (QDIIs). More and more of the QDIIs, are gradually being granted authorisation by the Chinese government to trade global offshore securities in the stock, bonds and other securities. QDII programs are used in places where the capital markets are not yet completely open to all investors. For example, any institutional investor in China that obtains approval to be a QDII may invest up to 50% of net assets into allowable foreign securities, so long as not more than 5% is invested in any one security.
Background on some recent changes to the QDII programme
According to DeaconsLaw.com, the China Securities Regulatory Commission (CSRC) has confirmed it had signed Memorandum of Understandings (MOUs) with four jurisdictions, namely Australia, Germany, Korea and Luxembourg, in addition to Hong Kong, United Kingdom, Singapore, Japan and USA over the past year. This means for commercial banks, QDII investment products issued by commercial banks may invest in listed stocks and mutual funds supervised by the relevant regulatory bodies in these jurisdictions. Also, in the case of Chinese fund management companies (FMCs); in 2009 the FMCs were permitted to extend their asset management services to multiple-client accounts, following single client segregated account services, which were launched during 2008. Whereas now, FMCs may expand their managed account asset management services to include investments in offshore markets and mutual funds as well as offering QDII funds.
To be able to invest offshore, FMCs need to apply for a new QDII investment quota or use any balance of their existing QDII investment quota (originally granted for the launch of QDII funds), provided an approval is obtained from State Administration of Foreign Exchange (SAFE).
Trading offshore – Global Markets
Global Markets may be a new experience that some of these Chinese Funds’ find they have insufficient understanding or experience to adequately deal with.
This perceived shortfall of global markets trading experience manifests itself in both an opportunity and a threat, each with their own risks, neither of which can, nor should be ignored. Prudence and patience should be employed when prioritising the financial services opportunities in China; with their exceptionally high savings rate and positive trade balance providing an abundance of capital, some of which is targeted at foreign investment – Qualified Domestic Institutional Investors (QDIIs), this is a fledgling sector and is transitioning very slowly.
What is important for western companies to consider is that a lot of leg work will be necessary, whilst it may feel like a fruitless exercise, it is important to stick at it and be sure that your value proposition is appropriately reviewed in the right forum.
The financial services arena in China, is no stranger to electronic trading, this can be seen with their domestic solutions, which demonstrate a good deal more Straight Through Processing (STP) than most western organisations.
What are the opportunities and who would be the beneficiaries thereof?
1. Chinese Funds

Tapping the Global Markets trading experience; obviously, there is an abundance of highly motivated experienced resources available in the offshore global market place that can help these QDII Funds with their transition into trading global markets.
Avoiding the trap of legacy; the advantage these funds will have over western funds is that they will be able to acquire and implement the latest “best in class” solutions and thus not be steeped in legacy systems to hold them back.
Leaping ahead of western Funds; the advantage of hindsight is always useful and often can only be utilised anecdotally, as the moment has probably already passed. In the case of the QDII market inside China, they have this advantage and if leveraged appropriately, the Chinese Funds can setup bespoke highly focused operations designed to succeed with their challenges of electronic trading of the offshore global markets.
By leveraging the more modern technologies; typically built around the Financial Information eXchange (FIX) Protocol, these QDII Fund operations could go straight to the top of the class, without suffering the pain or risks associated with the last 20 years the west has endured as part of our learning curve.
Spoilt for Choice; the QDII Funds will not have any shortage of organisations putting their hands out to assist them with their transition in trading offshore global markets – their challenge would be to seek out the most useful.

2. Offshore Banks and Brokers

New Customer base; the opening of the Qualified Domestic Institutional Investors (QDIIs) market place, brings about a new client base that can be mined.
New source of cross-asset revenue; the QDII’s will be seeking to implement investment strategies that enable them to trade equities, futures and fixed income; most of which will have the risk of currency fluctuations, which means foreign exchange (FX) hedging as well. According to Z-Ben Advisors, total industry Asset Under Management (AUM) growth is projected to be Rmb6.9tr (USD1.0tr) by 2014, rising to Rmb15tr (USD2.2tr) or more by 2020.
Imbedded value creating stickiness; for those organisations who have their own technology Intellectual Property (IP) or business solutions that can be leveraged by the QDII’s as part of their operations, whether it be front, middle or back office, this can be an advantage over competitors.

SEC Large Trader Identification Proposal

kevin_tyrrell

June 15, 2010

By Kevin Tyrrell
The SEC recently proposed new rules for large traders. Kevin Tyrrell of Bank of America Merrill Lynch provides us with a snapshot on what constitutes ‘large traders,’ and the scope of their responsibilities and the brokers’ under this proposed rule.
U.S. equities and options trading has experienced several significant changes over the past few years. Some of the most important trends have been increased fragmentation, increased market volume, the growth of high-frequency trading (HFT), and (for equities trading) the rise in dark pool and other off-exchange trading. These factors have made analyzing market activity far more difficult, and the rapid growth of HFT has led many to question what that business entails. In response to this increased complexity and the general concerns about high-frequency trading, the SEC has proposed a Large Trader Identification rule in order to better review market activity.

A primary motivation for this rule is to allow the SEC to more easily review trading activity that can be dispersed across several executing brokers. Currently, the SEC has the ability to gather all information necessary to reconstruct market scenarios and determine which end users entered orders that affected securities prices. However, the process for gathering such data is slow. The SEC needs such end user information in a more accessible format in order to assess significant market activity. The dramatic events of May 6, 2010 and the subsequent search for the root cause of the dramatic price drops show the substantial challenges faced in determining exactly what and how forces can impact the markets.
What is a “Large Trader”?
In the current proposal, the SEC defines a large trader as any entity (either a firm or individual) who, in exercising investment discretion over an account, executes a total of 2 million shares or $20 million notional value of NMS (National Market System) securities in a single calendar day, or 20 million shares or $200 million notional value in a calendar month1. This definition encompasses all exchangelisted securities, both equities and options, with options activity determined by multiplying the number of contracts traded by the contract amount (i.e., an options trade of 50 contracts would count as 5,000 shares). The SEC considers this to be a relevant benchmark for large traders as it represents 0.01% of the double-counted daily market volume. There are no specific or broad-based exemptions proposed to the definition of large trader: any firms or individuals meeting the activity thresholds will be considered large traders.
What Does Being a Large Trader Mean?
Any person or firm meeting the Large Trader definition must selfidentify to the SEC, using the new SEC Form 13H. This form includes basic identifying information about the firm, including its type(s) of trading activity, as well as account identification information for the accounts for which the Large Trading occurs. The SEC will then issue the Large Trader a Large Trader Identification Number (LTID), which the Large Trader must then provide to all of its executing brokers. A Large Trader is required to selfidentify and register with the SEC promptly after the activity which triggers Large Trader status, and is also required to submit the form annually in recognition of its ongoing status as a Large Trader.
Broker Responsibilities
The executing broker is responsible for maintaining the LTID and related account information for all clients, and must be able to provide trade information including the LTID(s) as soon as T+1. To facilitate its analysis and market reconstruction capabilities the SEC is proposing two additions to the current Electronic Blue Sheet (EBS) system: LTID and execution time. The broker will then be expected to be able to respond to information requests as soon as T+1, and to provide the data, including the newly-required LTID and execution time fields, to the SEC within the time specified in the request. The data report should include all executions meeting the “reporting activity level” of at least 100 shares (and any other executions the broker deemsrelevant) 2. Additionally, in the event that multiple LTIDs maintain investment discretion over single account, the broker must be able to report the multiple LTIDs associated with that account’s activity.
Brokers also have responsibilities relating to firms not registered as Large Traders, but with a safe harbor provision. Essentially, brokers must have policies and procedures that can detect activity levels that approach or exceed the threshold amounts for Large Traders and confirm that the clients directing such activity are registered as Large Traders. The SEC says it would consider disclosure of Large Trader reporting requirements at the time of account opening, as well as notifications to unregistered clients as they approach the threshold, to fulfill the notification aspect of the safe harbor provision. If the broker has such procedures in place, and also does not actually know that the trader is a Large Trader, the safe harbor provision would generally be considered fulfilled. If a broker is aware that a client meets the definition of being a large trader but has not registered (e.g., is an “Unidentified Large Trader”) the broker is responsible for tracking that trader’s activity in much the same way as a registered Large Trader is tracked. In lieu of the LTID, Unidentified Large Traders’ activity must be identified by the Trader’s name, address, account opening date, and tax ID number 3.
Furthermore, brokers have a responsibility to assess their own activity and determine if they are required to register themselves as Large Traders. Like any other market participant, if the broker meets the execution threshold amounts by trading in an account over which it exercises investment discretion, it must file Form 13H and register as a Large Trader with the SEC. The broker must then share this LTID with any other broker through whom it may trade, and also be prepared to submit details of its own activity as it would for any of its Large Trader clients.

Dense Interconnection Points for Global Financial Markets

john_knuff.

June 15, 2010

By John Knuff.
Common Meeting Places Benefit All Participants
No stranger to turbulent change, the financial services industry continues to face revenue and cost pressures as well as an increased need to operate globally. Exchanges have merged and relocated, new financial centers and trading venues have appeared, and the market share for incumbent players has declined. Established players have been required to adjust both strategically and operationally to survive in this evolving marketplace. As a result, many firms are rethinking their technological infrastructure and evaluating co-located services.

Demand for fast, reliable and cost-effective technology has grown significantly in the last decade. Reliability and throughput are more important than ever before, and firms that were once content to operate their own data centers or co-locate infrastructure with a financial extranet are evaluating their ability to maintain a competitive position at a manageable total cost of ownership. At the same time, the number of options to consider when determining where an order may be best executed has increased.

As a result, the number of required connection points has grown. In this environment, the ability of network-rich data centers to connect to the various execution venues has made their value more apparent. Bringing together network providers, asset managers, brokerages, exchanges and trading platforms as well as market data and analytics providers, these data centers can dramatically lower the number and cost of high-speed interconnections.

Although data centers owned by network providers currently provide a range of co-location services, they have not proven effective in supporting traffic outside their own network. Increasingly, network-neutral data centers are seen as an effective option for firms pursuing global markets across the evolving financial ecosystem.

Trends in capital markets

As 2009 drew to a close, the Aite Group drafted an impact note outlining what it saw as the most significant trends affecting capital markets in 2010. Drivers include:

Market fragmentation and increased competition, particularly from multilateral trading facilities (MTFs) in Europe and alternative trading systems in the Canadian and Asia-Pacific markets.
Increasing commoditization of high-frequency trading, particularly as independent traders have opened their own trading desks.
Developing a global presence and managing global risk. Aite sees the importance of having a global presence as “one of the key issues for sell-side and buy-side firms.”
Demand for trading infrastructure innovation, including low latency, throughput and support for multi-asset class trading.

Taken together, these trends underscore the important role that technology vendors will play in supporting participants in the global financial ecosystem. At the same time, those vendors are evolving, and the roles they play are shifting to better serve asset managers, brokerages, and exchanges and trading platforms.

The growth of co-location services

The changes in roles for technology vendors started a decade ago, when financial services firms began looking for opportunities to ensure capacity (headroom), improve connectivity, strengthen business resilience and manage costs.

Financial services firms typically evolve their use of data center vendors in four stages:

Building a data center adjacent to or in a networked building
Co-locating in a phone company data center
Co-locating in a financial extranet data center
Co-locating in a networkrich data center

Building Blocks: JSE Answers Call for Large Trade Anonymity

By
leanne_parsons.
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June 15, 2010

By Leanne Parsons.
Leanne Parsons, Head of Equities Trading at the JSE speaks about BlockX and how it marries the efficiencies of a transparent market with the need for more anonymity for larger trades.
In an era in which the average transaction size is declining world-wide, the Johannesburg Stock Exchange (JSE) is set to introduce on-exchange anonymous trading functionality to limit the market impact costs related to large transactions. Dubbed BlockX, it will allow for complete anonymity in the execution of large trades through hidden order functionality in the JSE’s existing central order book.

Launched in June 2010, BlockX is aimed at institutional investors looking to acquire or sell large tranches of shares. International regulatory concerns have been taken into consideration in the development of the new functionality. “The global proliferation of dark pools in response to Reg NMS and MiFID has not escaped the South African environment,” comments Parsons. “Our large traders have made it clear to us that while a transparent central order book has numerous advantages, this transparency sometimes has its costs,” she adds.

Like many other leading exchanges, entering the fray is a way for the JSE to retain trading which may otherwise migrate to new venues that provide dark pools. The concept, which took 18 months from conceptualisation to launch, marries the benefits of a dark pool with those of the central order book. “Although we are considered a highly innovative exchange, we tend to take a cautious approach when developing a new business case. On this occasion, many months were spent on researching dark pools internationally and cherry-picking elements to create this hybrid,” adds Parsons. As yet, the pricing model hasn’t been finalised.

One clear advantage of the BlockX model lies with its interaction with the lit market. As the facility will not be a separate dark pool, it will not fragment liquidity. Much of the controversy surrounding dark pools has centred on the fact that they draw liquidity away from the public markets and a two-tier market is created; one for larger players and one for smaller players. On the contrary, Parsons believes that it will encourage greater liquidity. “The JSE is hopeful that Block X will prompt increased trading in the local market by bringing the latent liquidity of large orders on dealers’ desks into the market more quickly.” Minimum order sizes (MOS) and minimum execution sizes (MES) prevent gaming of orders. The JSE has specified additional requirements of what can be built into the software that interacts with the bourse’s equities trading platform. The exchange also has the authority to disconnect users that operate electronic trading programs that behave against its regulations. Trades resulting from hidden orders will be immediately published to the market once successfully matched. “We haven’t put aside the ideals of price discovery and transparency that the central order book offers,” says Parsons.

Parsons anticipates a wave of regulatory pressure internationally to change how dark pool activity is managed and reported on. In South Africa, the changes to the JSE rules are waiting for final regulatory approval from the JSE regulator, the Financial Services Board (FSB). The FSB has been consulted throughout the development process and has approved the concept in principle. The JSE’s regulation is recognised as world class. The World Economic Forum Global Competitiveness Report for 2009-2010 ranks South Africa second out of 133 countries for Regulation of Securities Exchanges.

Increased trade due to the introduction of BlockX should build on recent trade growth which may have been buoyed by a revised equities billing model. The billing system, implemented to recognise both low value and high volume traders, has been effective since 1 March 2010. Trading statistics for March and April have shown increases, with latest statistics showing that cash equity transactions for the four months to end April 2010 are up 18.17% on the same period in 2009 (2010: 7,625,903; 2009: 6,453,175)
Source: JSE Market Profile- April 2010

Developing an anonymous block trading facility is only one of the JSE’s initiatives to attract trade and increase liquidity. The JSE, which will also be FIX enabled by Q3 2010, has a track record of innovation with the exchange being one of the first to allow Direct Market Access (DMA) for investors. “As competitive pressure in the global exchange environment builds, innovation becomes increasingly important. We are certainly not taking our foot off the pedal in this respect,” concludes Parsons.

CameronFIX Survey Captures Latest Industry Views on FIX

By
Creating Digital
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June 15, 2010

By Annie Walsh
CameronTec conducted a worldwide CameronFIX user survey last month to capture latest industry opinion concerning the adoption and broader usage of the FIX Protocol; movement in FIX volumes since the financial crisis hit; and the greatest challenges currently facing FIX, its users and FPL itself. Annie Walsh, Chief Marketing Officer for CameronTec sums up the findings while drawing on industry participants for further comment.

Respondents to the survey represent both buy- and sell-sides, across large to smaller firms, as well as exchanges and Independent Software Vendors (ISV’s). In terms of geographic location, respondents cover every major financial precinct.

For many firms where technology is a key market differentiator on their trading desk, the need to maintain a competitive system with all the requisite functionality has importantly included FIX.

Over 75% of FIX users reported an increase in FIX volumes; with FIX usage considerably greater since the financial crisis hit in 2008. FIX investment has remained stable with 60% of firms reporting no downsizing to their FIX team over the same period.

While overall FIX usage is up worldwide, many firms did however reign in investment on new FIX infrastructure, translating to strong stability for existing FIX frameworks. Both the versions of FIX used (72% are still using FIX 4.2) and the age of their infrastructure (four years on average) indicates that firms preferred to keep with existing frameworks over anything new during the crisis, but they are now shifting gears as they look forward.

“Performance is always on the radar but in harder times project prioritisation is more a factor for long-established firms,” notes Max Colas, Chief Product Officer of CameronTec. “At the same time, the emergence of High-Frequency trading has driven stronger demands on FIX engine performance pushing the vendors to continuously deliver.”

Adds Colas: “Long-established firms have looked at recent innovations and performance upgrades in FIX engines with mixed appetites, but survey responses indicate the need for upgrades is brewing with many looking to the future and making plans with partners that will still be there tomorrow.”

There was an overwhelming consensus among respondents for the need to explore ways to reduce latency within FIX, although this enthusiasm was also met with some reservations that such efforts could, in reality materialise with a tangible outcome.

“The major challenge for big financial houses, brokers and trading firms is to achieve ultra-low-latency per inbound and outbound FIX messages in direct market access flow,” says Erika Bajer-Jurkovic at Deutsche Bank. “It is very important to accurately measure and present these latencies in the real time and flag delays. An easy to follow, unambiguous latency-measurement standard on the top of the FIX Protocol could introduce and shape new metrics with a business to be considered, especially in the area of algorithmic trading.”

Commenting on buy-side firms driving FIX latency requirements, Jet Tek’s CEO Greg Orsini says, “While there has long been pressure from buy-side firms to continually shrink market data and transaction latency, there has been no standard way to measure and communicate total latency as well as all of the constituent point-to-point latencies. Recently, the FIX Interparty Latency Working Group has been tasked with defining FIX extensions to formalise how these discrete latencies can be presented. This will provide sell-side firms the opportunity to distinguish themselves from their peers by providing new information, which their customer can use to investigate network elements, make real-time routing decisions and eliminate slow liquidity providers.”

Vendor latency also continues to be a highly scrutinised. Despite some high frequency traders capable of using FIX today to trade in around 250 microseconds, in reality only a small number of FIX engine providers are currently producing engines anywhere near capable of consistently beating or surpassing 30 microseconds for message processing to deliver throughput of around 50,000 messages per second.

For many FIX users, another important issue is the growing gap between more recent FPL initiatives compared with the boiled down reality in the trenches. Industry-wide stickiness of older FIX versions (80% of FIX traffic still uses FIX versions 4.0, 4.1 and 4.2) continues to impinge on what would otherwise be a natural upgrade cycle.

John Heaney, Client Connectivity Manager for electronic market making firm Winterflood Securities points out: “We have a large number of connections trading multiple asset classes either on our internal liquidity or via our DMA platform; and within these connections a mixture of FIX versions 4.0 and 4.2 are being utilised. Winterflood, however, is yet to see later versions of the Protocol adopted for pure order routing among clients. While we currently implement FAST FIX to achieve low latent market data feeds and new FIX 5.0 trading connections to exchanges, we are not being asked by clients to implement FIX 5.0 connections.” Stickiness of older FIX versions also resonates with Deutsche Bank. According to Erika Bajer-Jurkovic: “In the real world there is a gap between versions being developed and versions being maintained with a majority of clients using FIX 4.2, and FIX 4.1 and FIX 4.0 still being present.”

“In general,” Bajer-Jurkovic continues:

“Unwillingness to upgrade existing FIX versions is widely present as there is a perception that it would introduce instability into trading patterns due to possible different interpretations of FIX fields and domino effects on the surrounding systems.”

Changes are afoot however, with respondents reporting current adoption of newer versions of FIX such as 4.4 at 18% and to a lesser degree 5.0 at 3%, but with demonstrable intent to upgrade: 63% of our surveyed clients say they will have us upgrade their FIX engine this year and of these 31% will upgrade in the next 6 months. Reasons put forward for upgrades are principally two-fold; firstly the promise of higher performance (60%) and secondly access to latest functionality in the engine (45%).

Of FPL’s initiatives during the past several years, a large majority of users find FASTSM, SCP, FIXT and FIX 5.0 less relevant. FASTSM however appears to counter this trend with a more enthusiastic approach to adoption of the FIX Protocol’s algorithmic trading definition language evident.

“While historically we found FIX easy to implement and that it works fantastically well as a method of sending and receiving order flow, posting IOI’s/trade ads and allocation messages, we are now looking into FIXatdl as a way of allowing clients to electronically instruct us exactly how they want their orders executed,” says John Heaney. “Whether this advantage will introduce new complexity, we are yet to find out.”

Erika Bajer-Jurkovic adds:
“Algorithmic trading is another fast growing area and while FIXatdl is still in its infancy there will be more and more in-house developed specifications which will be difficult to migrate later on.”

CameronTec’s CTO Steve Christinson highlights the varying costs associated with FIX operations: “For some firms obtaining and maintaining productive FIX connectivity can be a relatively inexpensive process. At the opposite end of the spectrum, creating a large-scale, continuously-operating FIX network serving tens of thousands of users can be a costly proposition.”

John Greenan at BNP Paribas Investment Partners says: “It’s important to ensure that the increase in complexity around FIX does not lead to increased costs for the end user in terms of support, implementation and management. Historically the simple focus of FIX to allow buy-sides and sell-sides to transmit orders and executions meant that FIX was ‘easy’. The expansion into a whole new range of business areas and workflows has meant an explosion of complexity. We, the FIX community have to find ways to keep it manageable even if we can no longer keep it simple.”

“FIX Protocol’s development roadmap is weighed down under pressure to maintain backward compatibility while addressing future feature evolution demands,” says CameronTec’s Christinson, “And the widespread adoption of FIX and its usage across an ever expanding range of market situations, will only amplify this dilemma further.”

“Many firms are finding that neither the build nor buy approach works, at an acceptable price point, and in isolation. Increasingly it is about finding FIX solutions and components which can be used standalone and mix and matched with existing infrastructure without comprising quality, performance and levels of service from the vendor.”

“Given the richness and complexity of the specification itself, defining FIX Rules of Engagement can be difficult and often counterparty specific. Complexity can arise around operations management; for deployment, configuration and monitoring of the FIX installation. In addition, integration with non- FIX systems plus measuring, achieving and maintaining best of breed performance e.g. when compared with native Exchange APIs, can present problems.”
“Up until very recently there was clearly a lack of affordable automated regression testing tools and suites available, although this is now changing with a number of entry level tools recently made available from vendors such as Jet Tek and Lasalletech, as well as the open source community, in particular the VersaFix initiative.”

In a true measure of the dedication endemic to those within the FIX community, CameronFIX survey respondents whole-heartedly endorsed FIX as future-orientated; with most believing it will still prevail in five years time. Presumably, this also means they expect the current drawbacks of FIX such as latency and over-customisation to be resolved along the way, which leaves as many challenges to address for the community.

What happens at the frontier of FIX with regard to communicating with other protocols remains unclear, and uncertainty persists over the broad course of convergence. A speculative view would say that users do not necessarily see it as a challenge, more so an issue of relevance.

The survey was carried out early May 2010 with a global sample of CameronFIX users representing 200,000,000 FIX messages per day and more than 4,000 FIX sessions.

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