By Robert Warshaw
The value of Indicators of Interest (IOIs) is being questioned and the growth of new distribution mechanisms has actually heightened the concerns with several key problems remaining for the industry, contends Tradeweb’s Robert Warshaw.
Problems abound
Dealers are not getting the return from IOIs that they would like. Buy-side firms are becoming more reluctant to interact directly with IOIs because they do not necessarily represent block capacity and there is immediate information leakage. So, while they remain important as guideposts for order management, IOIs are losing their power to drive trades.
The distribution of IOIs is also evolving with a significant increase in direct distribution from specific trading venues – Alternative Trading Systems (ATSs) and algorithms. Regardless of the nature of the distribution, the question is whether block-sized IOIs can increase the likelihood of creating a satisfactory trading experience for both sides.
The biggest problems with the current model are:
A) Uncertain rules of engagement.
Dealers offer IOIs as an invitation to trade while buy-side firms want IOIs to be a promise that a trade will occur if they expose their order. Because there is uncertainty around broker intent, buy-side firms are using IOIs for information purposes but with less willingness to accept the invitation to trade.
B) Unreliable targeting of messages.
Buy-side firms only want to see relevant IOIs on which they can execute. Because dealers cannot know all order flow, too often the buy-side gets buried in irrelevant messages or misses out because the broker has assumed they are not interested in a symbol. This hurts the broker and client.
C) Difficulties in evaluating IOIs.
Even with some of the new representations of IOIs that are appearing on buy-side desks, it is very difficult to determine the comparative merit of one IOI versus another, and to the market.
D) Information leakage.
Many clients are reluctant to react directly to an IOI because it means showing their hand to the dealer without certainty of response. Good IOIs help set the parameters of a good negotiation. Bad IOIs act as fishhooks to reel in a customer with less welcome consequences. Distinguishing between the two is not always easy.
E) Market fragmentation.
IOIs can come from distributors, direct from dealers or through dark, really grey, pools. Some are integrated into Order Management Systems (OMSs) while others are not. They can be in the form of traditional IOIs viewed through third party displays, FIX IOIs integrated into OMSs, EMSs, IM messages etc. The complexity and fragmentation have increased the difficulty of determining contextual relevance.
Unresolved, these problems will increase the trend that IOIs influence but do not drive order activities.
Tackling the Block in the IOI Landscape
Prospects for European MTFs
By Hans-Ole Jochumsen
In light of recent changes in the European MTF space, FIXGlobal speaks to Hans-Ole Jochumsen of NASDAQ OMX on European MTFs in general and NASDAQ OMX in particular.
Have the MTFs in Europe enjoyed the kind of success experienced by the ATSs in the US? If not, why?
The proliferation of Multilateral Trading Facilities (MTF) in Europe came as a result of the abolition of the concentration rules brought in by the EU Markets in Financial Instruments Directive (MiFID), which came into force in November 2007. MTF volumes in Europe have developed very fast and less than three years later, the MTFs stand for more than 25% of the European equities trading. MiFID has been successful in bringing about intense competition for trading volumes, but we still have a way to go in creating a level playing field among trading venues in ensuring adequate levels of transparency for the benefit of the investors. Another interesting issue is that competition in the European marketplace means that most MTFs are struggling to make money, creating uncertainty over how long many of them can survive.
Looking forward, how do you see the changing exchange landscape in Europe?
Competition is here to stay and it will increase to cover not only equities but also other asset classes. One key issue that Europe has to solve is in the post-trade area; the cross-border interoperability among clearinghouses. The cost for exchange trading has gone down dramatically, but the total cost for trading including the cost for clearing and settlement has not followed suit. I believe that when we reach full interoperability among clearing houses, that’s when we will witness a lower total cost of trading which will bring higher volumes on the European trading venues. We also expect there to be further consolidation in the MTF sector. We believe that going forward the successful model will be that of global exchange organisations such as NASDAQ OMX, who retain dominance in local regions. Our pre-eminence in the Nordic markets is a good example of this trend.
Where are the opportunities for NASDAQ OMX in Europe?
Europe is a strategic priority for NASDAQ OMX. We offer clients access to trading in securities from all Nordic countries and we will look at expanding this offering in line with customer demands and with a market by market approach. In the latter part of 2009 we welcomed 34 new members looking to trading and clearing of Nordic derivatives and we’ve been tremendously competitive in this offering. Beside our strong local presence, more than 40% of the trading in Nordic equities comes from global clients based in London. It is also from London that we run the UK Power exchange N2EX, and NASDAQ OMX’s goal to build a global commodities business is spearheaded from and based on the expertise of our operations in Oslo, Norway, just to mention some of the things NASDAQ OMX does in Europe.
How do you view the global market structure moving forward, with higher competition for the exchanges and regulatory framework on dark pools and sponsored access?
Regulators on both sides of the Atlantic are currently assessing what impact the development of alternative trading venues as well as new trading patterns are having on investors. There is no doubt that the market infrastructure will evolve as a response to policymaker concerns. In Europe, it is clear that the EU directive MiFID has increased competition but it has not been successful in bringing OTC trading into a more lit environment, which was one of its purposes. We believe that the reason that the regulated exchanges performed so well during the financial crisis is because they operate under clear timetested rules and practices that ensure transparency, neutrality, open access and professional market surveillance. We also believe that these features will remain competitive differentiators, along with speed and cost. Competition in the trading sector is a positive development and it is here to stay.
Buy-side Firms Use TCA to Measure Execution Performance
By Brian Mitchell, Dale Brooksbank, Ian Firth
“Does your firm use TCA to measure execution performance and if yes, how effective a tool do you find it?”
Ian Firth, Aviva Investors, responds
Aviva Investors both subscribes to and supports the use of Transaction Cost Analysis (TCA). We acknowledge there are limitations, both with available systems and market data. We aim to identify trends and ways to improve our trading strategies, and we have spent a great deal of time and resources to continually improve the process we operate. The key to efficient TCA is accurate data and efficient time stamping. This will demonstrate where within the cycle of the order there are inefficiencies. All of our equity trades are subject to review, although a small number may fall out due to the fact specific markets and benchmarks in those markets are not provided/supported.
Trades are loaded on a daily basis and there is commitment from dealers and our in-house execution analyst to ensure that as much information as possible is attached to clearly identify specific trades. Regular reports with details and exceptions are sent to portfolio teams and management to monitor the ongoing performance of dealers, brokers and execution venues. We compare against various benchmarks, with Implementation Shortfall (IS) being our primary benchmark. There is greater discipline in recording all attributes, whether price limits, volume restrictions or direction from the fund manager, in order to identify exceptions and where appropriate identify these trades.
We have seen, and continue to see, an improving trend to our execution capability. We are able to easily identify outliers and explain the reasons for these. Improving results have helped with our profile and we have been able to distribute the results of our trading capability to end clients. We have received positive feedback from our clients, both direct and end, due to the results and the knowledge applied to explain said processes and results.
Brian Mitchell, Gartmore, responds
Yes; Gartmore’s monitoring and analysis of dealing efficiency is aimed at helping to reduce trading costs, identifying potential deficiencies and helping to ensure that our investment processes are in line with the highest market standards for buy-side best execution.
As part of our effort to ensure cost effective execution, we perform detailed TCA and within that we focus, amongst other things, on both the explicit and implicit costs of trading. Explicit costs include equity commission rates, ticket charges and local taxes. Implicit costs, which can account for more than 85% of overall implementation costs, include: (i) market impact (the cost of the bid/offer spread plus the price movement in excess of the bid/offer spread needed to trade the required volume immediately); and (ii) opportunity cost (the performance impact of not instantaneously completing the execution of an order).
While we use broker-led TCA offerings, (across our cash equities, PT and Algo business flows), we do not solely rely on them, given the potential lack of impartiality. It is also difficult to compare trades transacted by competing brokers, as most will inevitably use differing methodologies. We currently use an independent TCA service to help analyse in detail the true impact of equity trade implementation on client accounts and to analyse Broker / Dealer performance, sending them all trade data from our OMS on a weekly basis.
日本における株式市場の急速な発展に立ちはだかる壁
By Michael Kim
日本においても、受注した注文を社内クロスや取引所外クロスによって執行することは日常的に行われている。1998年、日本の規制当局は証券会社が夜間運営する私設取引システム（PTS）の導入を承認。2005年には、これらのPTSがザラ場中の取引を行うことにより伝統的な取引所と競争し始め、事実上PTSは取引所と同じ様に運営されるライトプールに位置づけられた。PTSは、詳細に規制されたルールに則り透明性と優位性を持って運営されており、例えば、あるPTSでは呼値の刻み幅は取引所の10分の１と定めている。ただPTSにとって規模拡大の壁となるのは、市場シェアを10％以上にできないことである。シェアがいったん10％に達し、それ以上を目指すのであれば、「取引所」として申請を行わなければならない。
日本で本格的にダークプールが提供され始めたのは2005年。ここ数年、海外の大手証券に加えて、国内大手でももはやダークプールは標準的なサービスの一つとなっている。グローバル企業は、欧米で培ったダークプール、SOR(スマートオーダー・ルーティング)の経験実績と投資を強みとして、日本にもダークプールを導入し、顧客サービスの充実性を高めるために懸命である。
10年以上にわたってPTSの歴史および社内クロスに対する規制環境が成熟してきたにもかかわらず、このような代替取引市場が東京証券取引所から取り込むことができたシェアは1～2％程度に留まっている。代替取引市場のシェアが伸び悩む理由は一体どこにあるのか？流動性を取引所外へと促す要素は何か？
SORのインフラ– PTSおよびダークプールに自由にそして瞬時にアクセス可能にするには、SORは必要不可欠。SORは、利用可能な執行市場を常時チェック、最も有利な価格を見つけ出し、社内および市場のさまざまな規則に基づいて最適な執行を行う。SORは、ダークプール、ライトプールのどちらにおいても効率的に作動しなければならない。それには、制約、アンチゲーミング・ルール、各取引市場によって異なるコスト構造などそれぞれの市場に対応する必要がある。
海外大手証券は、既に欧米でSORを提供しているため、SORを日本に導入することに抵抗はない。既に持っているインフラをローカリゼーションすれば良いからだ。しかし、同様のシステムをゼロから立ち上げるのは困難を極める。その結果、海外勢大手が日本でSORを提供している反面、国内勢でSORの提供に踏み切れたところは一握りにしかすぎない。当然のことながら、競争力のあるSORを提供できている個人顧客専門の証券会社またはオンライン証券はほとんどない。
最良執行方針
日本では、どの執行契約にも最良執行方針が義務付けられている。だが米国のRegNMSや欧州のMIFIDのように、最良執行の詳細を定めた統一的な規則は存在しないため、執行契約は業者ごとに異なることも少なくない。これらの契約では、多くの場合、東証、大証などの主要取引所を最良執行市場として想定している。そのためダークプールを運営している企業の多くでは、最良執行契約の見直しを続けているものの、残念ながら現在のところ最良執行市場を複数の市場へと拡大させる規制面での強いインセンティブは存在しない。
資金運用
国内の年金基金や従来の基金の多くは、東証または大証などの取引所で執行することが義務づけられている。PTSで執行を行うことは規約違反となる為PTSでの執行を可能にするためには、規約を改正する必要がある。しかし、PTSの現状を考慮すると、規約を変更するに至るメリットを得られるに至っていない。
規制環境
2009年まで、日本の金融庁はPTS内での空売りについて言及を避けてきた。その間、各証券会社はそれぞれの見解のもとでPTSの運営に当たってきた。2010年3月、金融庁は、空売り規制についてはPTSにおいても取引所と同じような 対応が求められることに言及した。これは、PTSへの発注を限定的にしPTSの成長を止めかねないものとなった。また、東京証券取引所のアローヘッド導入により、市場集中原理が再燃。追い討ちをかけるようにTOSNETを通しての取引の報告がダークプールに義務付けられるなど、、取引所外で流動性を求めるメリットが限定的となる。 潜在的な制約が増えたことは、市場全体に陰を落とし、短期的にPTSの成長を阻害する要因となりかねない。
マーケットメーカー
欧米のMTF（マルチラテラル・トレーディング・ファシリティ）においては、十分な流動性を確保する上でマーケットメーカーは必要不可欠な存在となっており、執行市場に提供する流動性に対して、通常はリベートが支払われる。それに対して日本の執行市場では、マーケットメーカーが提供する流動性に対してインセンティブはなく、多くのマーケッメーカーは、リスクヘッジとコストカバーのため、大きなアルファやスプレッドをとりに行かなくてはならない。
PTSの細分化
日本では現在6つのPTSが存在する、うち3つは個人投資家のみと依然閉鎖的。その他のPTSとしてはInstinet、カブドットコム、SBI JapanNextと、近日中サービスの提供を開始予定のChi-Xジャパンがある。明らかなマーケットリーダーの存在はなく、PTS全体でも流動性はTSEの1～2％にすぎない。
PTSおよびダークプールが直面している成長阻害要因をいくつか検証してきた。代替執行市場の活性化には、欧米並みの規制緩和が必要。しかし、全面的な見直しには時間がかかるであろう。
JSCCによる決済
2010年7月から、PTSで執行された取引は、株式会社日本証券クリアリング機構（JSCC）を通して清算することができる。これにより、PTS取引における受け渡しが保証されることから、リスクは限定的となり参加者の安心感は広がる。さらに、執行から決済までがSTP（ストレート・スルー・プロセッシング）となり、非効率な事務処理も軽減される為、PTSをあらたに代替執行市場として参加しやすい環境も整いつつある。
取引コストの削減
取引量を増やすには、PTSがその手数料を劇的に引き下げる必要がある。東証の取引手数料は約0.2bps、多くのPTSはTSEのコストと連動させた価格設定だ。PTSでの取引コストは、流動性を供給される側には注文に対し手数料は0.2bps以下、流動性を提供する場合には手数料をゼロとすべきであろう。
マーケットメーカーに対するインセンティブ
PTSはマーケットメイクをを行う会社に対してはインセンティブを与えるべきだと思われる。日本ではリベートの提供に対しては規制上の制約がある。しかし、システマチックに市場に流動性を提供できる参加者に対して、単にリベートを支払うだけでなく、もっと柔軟性をもって多様なインセンティブを喚起する構造を作っていくことが肝要であろう。
流動性の集約
流動性を集約するというコンセプトは特に目新しいものではない。しかし、現状ではシステム改良余地がまだまだあるスマートオーダー・ルーティングの技術水準を考えると、ある一つのPTSが他のPTSの注文をも取りまとめ、その先のルーティング機能もこなすことで、PTSが流動性の集約場所となって機能し、そのことで多くの市場参加者が恩恵を受けることができる、というのは意味のあることと思われる。
すなわち、必要とされる技術を持たない参加者に代わって、複数のPTSに簡単に接続できる、というプロセスがここに実現
日本の現在の規制環境と比較的低い取引コストを考慮すれば、取引所外の執行市場をもっと積極的に活用できる市場構造を追求できるはず。従来の常識にとらわれない発想によって、新たな流動性に着目したビジネスモデルの構築に向け、前向きに投資する覚悟があれば、かなりの市場シェアを獲得できる機会がそこには存在すると考える。するのだ。
Mike Powell : Thomson Reuters
CHANGING CONTENT.
Mike Powell, global head of enterprise information at Thomson Reuters assesses the latest industry trends and explains how the company is responding.
It has been about 18 months since the financial crisis hit, what do you see as some of the long lasting impacts?
Although the credit crisis has grabbed the headlines, many of the underlying trends that we are seeing today were already happening before the financial crisis and continue to shape the market. For example, high frequency traders are taking the place of traditional market makers in providing liquidity, while we have seen a blurring between the traditional mutual fund managers and hedge funds in that they are launching similar products to generate returns. The buyside is also beginning to take more control or their own trade execution through leveraging direct market access and sponsored access capabilities.
What type of regulation do you foresee being passed and do you think it will be too onerous?
The full impact of the financial crisis will be seen in the types of regulation such as the Volcker rules and the AIFM (Alternative Investment Fund Managers) directive. At the moment there is still a lot of discussion and the industry is trying to plot a course to see what is meaningful and how it can be practically implemented. For example, if banks under the Volcker rules have to split out prop trading, what impact does this have on market liquidity? Similarly the SEC review of high frequency trading and the fairness of co-location infrastructure has the potential to change how the more liquid markets are currently being traded. It is too early to tell though what the outcome will be which is why many investors seem to be taking a wait and see attitude.
Do you think MiFID delivered its promise?
MiFID and the break-up of the concentration rules have dramatically changed the market landscape. It has fuelled fragmentation and the need for low latency access to trading venues. Before MiFID, if you wanted to trade Vodafone for example, there was one primary venue to execute on – the London Stock Exchange. Today, there are a slew of MTFs such as Chi-X Europe, BATS and Turquoise as well as broker-sponsored dark pools that traders can leverage. I have seen estimates that in 2010 approximately 30% of cash equity market trading will be executed off the primary exchanges in Europe. What this has meant is that the buyside cannot afford to ignore the larger MTFs which now provide meaningful liquidity. They have become more nimble and have had to invest in broadening and increasing the sophistication of their market infrastructure in order to access these different sources of liquidity. This has increased the automation of the trading process through the use of algos and smart order routing. For example, about 56% of US equity cash trading is currently executed via algorithms.
What about the challenges on the data management front?
Fragmentation of the markets has generated a significant volume of new data and the buyside not only have to look at scaling its infrastructure to consume the volume but also how to use the content and derive value in a meaningful way. There is also a greater demand from the high frequency and algo trading communities to get the data faster and more efficiently. They want the noise stripped out and to ensure that accurate data is delivered as fast as possible into their trading applications. It is not just about trading strategies though. People are looking for greater consistency and quality of data across the front, middle and back-office in order to support their risk as well as compliance systems due to growing regulatory demands.
What about the consolidated tape debate?
One of the key issues in the industry is the lack of the consolidated tape given the fragmentation of liquidity over the last few years. The London Stock Exchange is still seen as the benchmark but I think that one of the challenges of creating a consolidated tape for the industry is the underlying costs of exchange and venue fees for the data on top of what users may already be paying. If this can be addressed there are a number of independent market data providers such as ourselves who are well placed to deliver the service. One of our advantages is that we are broker neutral and not a source of liquidity ourselves – this was a key factor behind our agreement with Alpha Trading in Canada whereby we will provide a consolidated view to the market of all cash equity liquidity across the various exchanges and alternative trading facilities in Canada.
Co-location has also become a hot topic. Do you see demand for those services?
It depends on the business strategy of the trading firm. For example, there is greater demand from high frequency traders who are in and out of the markets multiple times a day, trading on small price anomalies. The larger sellsides, particularly the Prime Brokers, are also looking to locate trading applications as close to the market as possible on behalf of these and other type of active trading clients. However, the long only traditional fund managers who operate on different strategies and typically rely on broker execution, do not feel the need to co-locate as the cost and complexity is not relevant to their trading strategy.
What type of data management solutions are you offering?
We have a wide variety of solutions on the market as we believe the days of ‘one size fits all’ are long gone. For example, there is our collaboration with Savvis, where we have launched a series of scalable, performance-tuned data centres in New York, Chicago, London, Frankfurt, Tokyo, and Singapore that offer our low latency market data, analytics and data management platform. There is also our NewsScope Direct service, which is geared towards providing algo traders the fastest possible access to machine-readable news content. It allows them to connect and integrate news feeds into their trading strategies from their own data centres or our proximity hosting solutions.
What about the recent deal with the Tokyo Stock Exchange’s new trading platform, Arrowhead?
We launched a new market data delivery solution called Thomson Reuters Data Feed Direct for the Arrowhead platform which was introduced by the TSE earlier in the year. The service not only allows clients to receive low latency data via a direct connection to the TSE, but they also gain access to full depth-of-order-book data. Simultaneously we launched the new Arrowhead service across our global consolidated feed, meaning customers can access the data cost-efficiently anywhere in the world. Our low latency direct feed gives clients the flexibility to connect the feed into their own data centre, the TSE’s co-location facility or leverage Thomson Reuters proximity hosting solution with the performance needed to fuel algo trading applications.
[BIOGRAPHY] Mike Powell became global head of enterprise information at Thomson Reuters in 2008. Before the merger, he held different jobs at Reuters which he joined in 1995. They included global head of real-time enterprise information, managing director Asia – business direct & customer service, marketing director as well as sales manager, Reuters Japan and business development manager in London. Prior to these, Powell was account manager for the UK and Nordics at Bloomberg and worked in Japanese equity institutional sales & trading at Nomura. He holds a BSc Managerial & Administrative Studies from Aston University ©BestExecutionXavier Rolet : LSE
THE GLOVES ARE OFF.
The trading landscape may be changing but Xavier Rolet explains why the LSE will be one of the main contenders.
In the run up to MiFID, many predicted that exchanges would lose
significant market share to MTFs and that you would find it difficult to compete with them on price and technology. Your acquisition of Turquoise appears to confirm the latter. What does that acquisition mean for the LSE? How will you leverage it? What can the LSE bring to that acquisition or is it more about what Turquoise can offer the LSE?
The key aspects of our shareholding in Turquoise are that it enables the Group to partner with its major clients, and to gain a foothold in both lit and dark pan-European equity trading. Turquoise is still an independent competing pan-European MTF, trading both Italian and UK cash equities. From Turquoise’s standpoint, what the acquisition will do is allow it to benefit from the Group’s infrastructure and from the migration to the new MillenniumIT platform later in the year. This will put it in a position to significantly grow its market share in the coming months.
How well have traditional exchanges emerged from MiFID and is it fair to say that the exchanges’ stranglehold on trading has diminished?
Competition is here to stay, and we welcome it. MiFID has helped bring down the cost of trading and stimulate innovation. Exchanges have lost market share of course, but we intend to compete. We’re improving our technology – we acquired MillenniumIT. We’re lowering our costs and we are passing on the savings to our clients in terms of lower tariffs. And we’re scaling up our assets – we’re using Turquoise to reach into Europe, and offer dark trading.
What are your views on liquidity fragmentation. Is it a good thing for the market or is it creating more cost and complexity?
Fragmentation of trading activity is an inevitable consequence of competition. MiFID has created a competitive landscape, encouraging tighter spreads and lower prices, to the benefit of investors. This in turn has led to innovation in areas like dark pools and high frequency trading. Despite the fragmentation, the London Stock Exchange remains the central price formation venue to which prices on other platforms are pegged.
What do you think needs to be done to harmonise the post trade world?
Post trade costs are currently too high. This is because the structure of the post trade world is inefficient: Clearing houses’ capital bases and risk models differ from country to country, and there’s no consistency in the way they’re regulated, allowing high cost national models to perpetuate. If we’re going to have a secure post trade infrastructure in Europe that is efficient and competitive, this needs to change and we need common standards of regulation with passports enabling CCPs to operate and interoperate across Europe. Regulation of clearing houses that is consistent across Europe will create the dual effects of security and proper competition. Central bank regulation of clearing houses is something the US Federal Government is looking at now, and I think Brussels should be considering it too, due to the systemic importance of CCPs.
What future role do you foresee exchanges playing in the trading
landscape? Will it revert back to the US model of early 2000 where all the independent ECNs were snapped up by the major exchanges?
The competitive landscape for equities trading is not likely to change in foreseeable future although it will evolve. Most of the current crop of MTFs are loss-making although I doubt the number will be as high in a few years as it is now. I don’t foresee a repetition of what happened in the US ten years ago. The market structure in Europe is different. Where Europe does need to replicate the US is in achieving the levels of equity turnover it sees. Europe has a higher GDP and a larger population than the US, but the value of equity traded in Europe is not even a third of that in the US. The main way to change this is by bringing down the cost of trading in Europe. This means ensuring competition can flourish both in the secondary markets and in the post trade world, and exchanges’ roles in ensuring this are central.
Will stock exchanges have to become like department stores catering to every link of the value chain in order to compete with the new players?
Diversification is enormously important in the exchange industry. Our revenue streams for example are very diverse. Around 20% of our revenues come from our post trade assets, while nearly 35% come from information and technology services. Under half comes from our Capital Markets division.
Providing our customers with a range of services is one thing, but exchanges also have an important role to play in primary markets, centralising price formation and providing infrastructure. This extends to working with governments and regulators to ensure a successful future for financial markets, and the economy as a whole. Exchanges are not always directly comparable with the new entrants.
I read recently that you expect the LSE to become one of a select group of leading global exchanges as the industry consolidates over the medium term. What are the main planks of your strategy to remain in the club?
Regulation, technology, competition; all these things are shaping the industry at an unprecedented pace and those that can’t keep up won’t survive. For this reason, I wouldn’t be surprised to see five or six major global exchange groups in about ten years time. We intend to be one of them. Pan-European scope, reliable and efficient technology, competitive pricing; it’s key we stay on top of these things and, most importantly, we need to listen to, work with, and align our own interests with those of our major clients.
Euroclear UK & Ireland has reduced its trade-netting tariff
from the start March. How much will it cut the cost of trading on the LSE and what will be the overall impact?
We estimate our customers will save around £10 m in the next year due to EUI’s decision. It’s a step in the right direction, and it levels the playing field with our competitors, but we remain committed to working with all parties to keep bringing down the cost of post trade services and despite the short term tariff reduction we continue to believe that in the medium term the netting model will have to change. It’s vital not just for the UK, but for Europe as a whole, that post trade costs are significantly reduced. The implementation of pan-European interoperability will be instrumental in this – we can’t hope to match US levels of liquidity in Europe if we don’t have genuine competition in post trade.
Do you think the 50% bonus tax in the UK will impact London’s standing as a major financial centre?
London’s standing as a major financial centre goes much deeper than its tax regime. It has one of the largest pools of investors in the world. It has a long history of market making and on top of this it has an unparalleled pool of expertise, in economics, in law, and in specialist sectors such as Islamic finance. London has established itself in these areas over decades, even centuries. The infrastructure that makes it such a successful financial centre is very strong, and uniquely diverse. We mustn’t underestimate this value, and its crucial we protect London’s reputation going forward.
[Biography] Xavier Rolet became chief executive officer of London Stock Exchange Group in May 2009. Previously, and since 2000, he held different positions at Lehman Brothers, the most recent one being chief executive of France. He was also head of senior relationship management for Europe and co-head of global equity capital markets origination and head of European and Asian equities. From 1997 to 2000 Xavier was deputy head of global equities as well as head of global risk and trading at Dresdner Kleinwort Benson and before that he was an international equity strategy consultant at Bayerische Vereinsbank, and head of European equities at Credit Suisse First Boston. He started his career in 1984 and spent ten years at Goldman Sachs as co-head of European Equities sales & trading and vice president, international arbitrage. Xavier has an MBA from Columbia University and Master of Science in Management at école Supérieure de Commerce. ©BestExecutionAlasdair Haynes : Chi-X
TAKING Chi-X EUROPE TO THE NEXT LEVEL.
New CEO Alasdair Haynes and his team will not allow Chi-X Europe to rest on its laurels as the leading MTF (Multi-lateral Trading Facility). They are implementing a three-year plan to ensure it stays on top of the trading game.
Although Chi-X is Europe’s third biggest trading platform there is some confusion as to who owns you. Can you explain how the firm operates?
There has certainly been some confusion over the structure of Chi-X Europe. One reason may be because Chi-X Global, which is owned by Nomura, was set up to replicate the success of Chi-X Europe in other countries. However, Chi-X Global is 100% owned by Nomura and we are not. Nomura has a 34% shareholding in Chi-X Europe through Instinet Holdings and holds two of the nine board seats. As such, Chi-X Europe is managed independently and has its own governance, board and management team.
There has been some criticism that Chi-X is too reliant on high frequency traders. What is your response to that?
It is true that when some people talk about Chi-X Europe they argue that the business model cannot be sustainable because of claims that we are too reliant on high-frequency trading flow. This is simply not true. We have been operationally profitable this year, which proves that the business model is sustainable. Although we do have high-frequency traders, they account for less than half of our flow. We have a healthy mix and our liquidity flow is generated from a broad spectrum of participants including large investment banks and mid-tier brokers as well as high-frequency traders.
You came on board recently after being at ITG for several years, how do you plan to keep the momentum going at Chi-X Europe?
In many ways the experience reminds me of working at ITG in that I am working with a relatively small team and we are developing a business. There are two stages, the first of which focused on building the business and raising its profile. There were some in the market who doubted the business model at the beginning, but Chi-X Europe has proved that it is one of the post-MiFID success stories. Now we are in stage two and my ambition is to cement and build upon our liquidity and market share. There is a great deal of focus on profitability, but to me the emphasis should be on value creation and the need to continue investing. I see absolutely no reason why we cannot continue that growth and maintain our position as one of the top three European exchanges.
Will you be sticking to your strategy of low fees?
Yes, we are a low cost provider and we have no intention of raising prices. We are currently eight to ten times cheaper than the incumbent national exchanges and I think we will see other exchanges lower their trading costs. They have tiered fee structures, which award the lowest prices to the highest volume traders. The headline rate looks good, but the smaller and the mid-sized players have not really benefited from any cut in fees. That plays to our strengths because we have a very simple maker-taker fee structure. It has not changed since we started and it is not going to change any time in the near future.
What are the other planks of your strategy?
Overall, we are implementing a three-year plan with the main strategic focuses being on market data, the inclusion into indices and eventually launching derivatives on those indices. We will continue to offer Level 1 data free of charge. In some cases, historical data and other value-added data may warrant a charge, but the Level 1 data should be free of charge. I strongly believe every trading venue should follow suit. We also plan to push for inclusion into the major European stock indices. I can see no reason why we should not be included, particularly given our market share is over 20%, and in some cases over 30%, of trading in some markets. Our data is of the same standard as exchange data and it should be included. The end game is to have a single platform across Europe that can provide services for cross-margining of its stocks, index products and one that eventually will become multi-asset class.
In general, the European trading landscape has changed dramatically since the introduction of MiFID, what further challenges need to be addressed?
The first stage of MiFID created competition in the execution space but now we are in stage two. One of the biggest challenges is market data, not just for us but for the industry. Overall, the cost of exchange data is still high in Europe particularly when compared with the US. European trading firms pay on average five or six times more on a value basis for their data than their US counterparts, who pay a one-time fee for all their post-trade equity market data. The exchanges derive substantial revenues from data but these are frictional costs that need to be tackled if the European market is to reach its potential. We believe it is important that Europe moves to consistent and low-cost reporting practices and a single pricing feed or consolidated tape of record that covers the different European trading platforms. We believe the regulators should introduce standards specifying when and how the industry reports.
I also think there should be more attention paid to increasing competition in the post-trade space. The market needs to look at interoperability between clearing houses amid concerns the exchanges will look to develop further their vertical silos. I think addressing these two issues will help further reduce frictional costs and help make the European market truly competitive.
Do you think the LSE’s acquisition of Turquoise will trigger a wave of consolidation?
I think consolidation is only just starting with the LSE taking over Turquoise. I am not sure how the playing field will pan out but I would anticipate that ultimately we’ll end up with three or four truly pan-European venues. I am confident though that our three-year plan ensures that we will be one of these contenders.
[BIOGRAPHY] Alasdair Haynes was appointed as chief executive officer of Chi-X Europe in December 2009. From 2006-2009 Haynes was chief executive officer of ITG International, where he was responsible for all of ITG’s non-North American businesses. This role followed his ten year tenure as CEO of ITG Europe, during which time the firm launched Europe’s first fully electronic crossing network, POSIT®. During his career Alasdair has also served as global head of equity derivatives at HSBC James Capel, head of European listed derivatives at UBS, head of listed and short dated equity options at Bankers Trust and head of equities risk management at Morgan Grenfell. ©BestExecution
Impacting the Basics
By Mihai Bistriteanu
Mihai Bistriteanu of Citigroup Global Markets Japan focuses on the trading pattern changes post-arrowhead implementation as well as its many opportunities and challenges.
Without a doubt, the Tokyo Stock Exchange’s (TSE) implementation of “arrowhead” this January 2010 was one of the most important events in the history of Japan’s equity trading, with a lot of information and articles being circulated on the structural changes following the new system’s implementation. It is indeed amazing how arrowhead’s implementation changed the very core of Japan’s trading landscape making a huge impact on latency, market volume, trade size, price, as well as tick size dynamics.
Low Latency
Primary exchange speed was along awaited feature in Japan. The one digit millisecond turnaround on a non-collocated infrastructure, promised by the Tokyo Stock Exchange (TSE), is now finally happening in Japan, with a few interesting trends starting to develop as a result of the higher speed:
- Strategies requiring low latency infrastructure can now be easily implemented across Japanese stocks.
- There is an ease of integration of TSE flow within SOR (Smart Order Routing) systems and crossing engines.
One of the key drivers of arrowhead implementation is the aggressive growth of competition in Japan. The PTSs (Proprietary Trading Systems) and broker dark pools had the speed, and in some cases, price as competitive advantages. The liquidity available outside the primary exchange is still small compared to the ratios seen in Europe and the US.
A large percentage of the sophisticated buy-side investors refrained from using SOR technologies to avoid missing liquidity in the primary exchange because of the overall latency.
A standard matching system, with queue jumping functionality when posting liquidity, usually places multiple legs of the same order in multiple venues. When an order is matched in the proprietary crossing engine, the system sends cancellation requests to the other venues, and only when the acknowledgement is received is the cross executed.
The bottleneck for this technology used to be the speed of receiving the acknowledgement from the primary exchange, when the cross was found. Similarly SOR technologies send IOC (Immediate or Cancel) orders to multiple venues including primary exchanges. When one of the venues is slow, it will delay the entire system, therefore missing rapid price changes.
The fact that the TSE infrastructure speed is now in-line with its competitors will have a positive effect in widening the use of liquidity aggregation tools. This also may eventually result in an increase in liquidity on the alternative liquidity pools. The new broker pools and PTSs have to be competitive on all parameters (speed, price and liquidity) to enter and be successful in the Japanese market now.
Market Volume and Median Trade Size
Following the implementation, the volume growth started gradually. At this very moment, as I am writing this article, the rate of growth is still very positive. We expect this to reach saturation over the next couple of months. The main drivers behind the growth are the new strategies that take advantage of the high speed environment, as well as the general increase in activity at the beginning of the year and the market recovery.
The decrease of the median trade size is the natural consequence of the higher percentage of electronic trading in the market. Though, this has been happening for several years now, what is different this year, is the steeper adoption. This is caused by the chain reaction effect (Figure 1):
- New flow generated by high frequency models with tiny order sizes are bringing down the average trade size in the market;
- Some of the algorithmic models are sizing their splits in relation to the average trade size in the market, consequently generating smaller splits
- Human traders having difficulty trading manually are sending more flow to the automated systems, further bringing down the average order size. The transaction data is increasing dramatically and greater investment will be required in scalable, front to back office technology. (Based on a rough estimate by the Exchange about 3.5 times higher data volume was experienced in January 2010 versus December 2009.)
Tick and Price Dynamics
Volume shocks now have a larger impact, resulting in steeper price spikes. Within a shorter period, the stock price can reach ‘limit down’ and eventually bounce back, if the swing was caused by a larger impact order. Exhibit 2 shows an example of a stock price fluctuation on January 7. The effect is amplified now, as the matching speed changed from once every 3 seconds to immediate execution. In addition, the speed of ‘participation strategies’ is higher and the “follow the shock” catch-up effect more important.
Once a large order moves the stock price, the immediate effect is a sudden widening of the bid/ask spread. This could be used as a filter to avoid trading immediately after a volume shock. However, in Japan, due to the long queues for some stocks, many strategies are placing orders to get the maximum priority without crossing the spread. It is only required to have two different strategies with similar trading pattern on the same stock to narrow the spread immediately.
Let’s consider a fictitious example as shown in Figure 3. We have a stock trading at 100 bid/ 101 ask; a sudden large volume comes into the market and moves the stock to 96 (-4%). We assume that the offer at 101 is constituted of 2 different strategies with similar behavior and let’s call it for the sake of simplification ‘Be the Near Touch’. Both orders’ (100 shares each) target is to always get the maximum priority, and become the ‘near touch’ when possible.
Following the spread widening, the second order in the queue will immediately amend down, to become the offer with the highest priority (at 98 for example). The order left behind will follow the amending at a lower price to achieve the same target. In a matter of milliseconds, the spread is artificially brought down to one tick at the 95/96 level, making it impossible for the filters based on the sudden spread widening, to work properly. Eventually the price will move back at 100/101 level, however this is a significant volume traded 4% below the expected price.
To avoid this, traders have started to use shorter term VWAP, instead of IS (Implementation Shortfall) or POV (Participation of Volume) strategies to steer away from over-participating at non-favorable prices following volume shocks. As a result, the shift from VWAP/TWAP strategies to IS and liquidity seeking strategies that has been happening over the last few years in Japan has reversed in January ‘10. More sophisticated, anti gaming and “follow the shock” algo trading filtering features will shortly become available to help cope with these problems. Once implemented across the main algo providers, the shift to IS and liquidity seeking strategies will continue.
Spreads
The most positive change is on the trading cost, as there is a direct relationship between execution cost and bid offer spread. A ‘medium performance’ VWAP engine has a slippage of about 20% of the spread. The reduction of 25% of the average daily spread of the Nikkei 225 will have an overall and directly proportional effect on the trading costs. The dramatic change is for stocks within 2,000 to 3,000 yen range, which are now five times cheaper to trade.
Conclusions
We have seen a very rapid evolution to market-microstructure in response to the system changes. Spreads are down, median trade sizes are down, transaction numbers and market data volumes are up. Most significantly, the tick inside touch, a defining characteristic of the old microstructure, has been replaced with a normalized, smaller touch with the bulk of the volume a tick or two behind the market. Participants who have invested in systems capable of effectively trading in this more efficient environment will have a significant advantage over those who have simply connected old systems to the new market.
Global Equities 2010 : The Liquidity FIX
What key features do successful exchanges share that encourage liquidity; how automated trading drives growth and why markets will attract incremental liquidity with the advent of global CSAs. Robert Barnes, Managing Director, Equities of UBS Investment Bank explains.
The execution arms race continues. The prize is order flow that concentrates to those most capable, particularly in navigating market structures.
Market structures comprise the rules and institutions that determine competition and the framework of interaction, including Exchange fees, which ultimately shape order execution strategies. The focus includes external factors that impact business and operating models, driving opportunities to grow revenues and reduce costs.
Exchanges rebuilding liquidity is a priority market-wide theme in 2010 in the context of competition, transparency, and investor choice at trading and clearing layers. From a User perspective, we wish to work in a spirit of partnership with Exchanges and Regulators to promote liquidity and new business, and we thank the Authorities as they provide a framework within which we can behave as entrepreneurs.
Macro trends include rising number of trades, coincident with automated electronic trading. Regulation promotes competition, transparency, investor protection. This leads to a better result for clients via competitive execution policies. Competition, thus fragmentation, makes the world more complex. Not all brokers, however, can keep up with the technological arms race. Direct Execution models of electronic trading are evolving to address this. Latency reduction increasingly is sought for competitive advantage.
There is increasing awareness of a positive dynamic involving non-displayed pools and high frequency trading. The key insights are that markets allowing discretionary non-displayed broker crossing processes and non-discretionary dark pools effectively speed net liquidity onto order books. The benefits are lower market impact, greater efficiency, and a better result for end investors.
These benefits multiply if statistical traders are active. When orderbook liquidity increases, so too does the proportion of trading opportunities; and these stimulate further orders to the orderbook from automated strategies. This incremental liquidity, aggressive and passive, narrows spreads.
The world’s markets are split into those that support and benefit from high levels of automation, and those with the opportunity to encourage more. Investors’ current focus include global macro trends and emerging markets which means that moving toward more consistent electronic access models will help markets to take advantage of this burgeoning liquidity. A good start is to implement and enhance FIX specifications to offer advanced electronic flexibility. This adoption of standardisation can aid emerging markets in growing their scale of business.
One of the more “seismic” changes to Equity markets in recent years is the proliferation of commission unbundling and Commission Sharing Agreements, “CSAs”, or Client Commission Agreements,“CCAs”, in the USA. Initiated by UK regulators in 2006, this commission unbundling initiative spread across Europe (at the end of 2007) with the arrival of the Markets in Financial Instruments Directive, or “MiFID.” Global clients, preferring one consistent process world-wide, have led the demand for CSAs to become a market convention. With many CSAs established on a global basis, it can be easier than ever before for a newly automated market joining a broker’s network to attract liquidity.
Successful markets world-wide share key features and best practices that encourage efficiency and liquidity growth. These include :
• Electronic Trading
Clients want faster execution and access to more liquidity, so they increasingly employ Electronic Trading Services such as “DMA”(Direct Market Access) and algorithmic trading strategies that lead to better alignment of execution with client objectives, more ownership over the traded price and therefore more influence over best execution. Automation speeds the process, trading is safer with system-embedded checks.
Clients want the ability to trade with a spectrum of Algorithms as well as DMA, and Algorithms are more effective with a meaningful range of order types and the facility to quickly enter, modify and cancel orders.
• Anonymity of Broker identifiers :
Offering anonymity of Broker identifiers is a key to greater market liquidity and investor fairness.
• Auctions
and support for complementary liquidity pools: Many investors benchmark a market’s close; they appreciate a robust mechanism that also serves as a concentrated liquidity point.
