Global Derivatives – Analysing the key developments and accelerators for FIX

By

-

September 15, 2009

FIX has grown rapidly from the historic base of cash equity product, and pre-trade and trade business process support, to a point where it now supports a broad range of product types; Fixed Income, Foreign Exchange, Equities and Derivatives. This organic growth has been driven by the business benefits of FIX, and a dynamic user and vendor community. JP Morgan’s Andrew Parry explores the technical aspects that will take FIX to the next level, in particular in relation to global derivatives.
The success of FIX, to date, is supported by a simple premise. It is useful, provides valued business outcomes, and has an active user, vendor, and consultancy community, rather than trying to be the most beautiful possible technical solution.
To expand FIX further we need to continue the lines of work opened up in FIX 5.0 so that we can continue to provide valued business outcomes with what is, by now, a far larger model in terms of data and function support than when FIX began.
These lines of work such as correctness, machine readable business rules and process rules – discussed below – should improve the core of the FIX model, and increase the ease of use, both for software tool makers, and our end users.
Companies such as Google and Apple provide a good example of this approach. The end user of Google maps does not have to understand the technology behind it, whereas application developers are provided with a Google Maps API. We should approach the FIX model in the same spirit.
An analysis: Service Packs
FIX 5.0 onwards supports a service pack model, which supports the addition of minor changes within a matter of months’. This approach has particular value for the derivatives industry, which has a high rate of business driven change, and increasing regulatory requirements.
By adopting the service pack model, we promote standardised additions, instead of customised user extensions, which are commonly required in the absence of a timely way to make contributions. We will go on to look at how the service pack model has been used to a wide range of features to support derivatives in FIX 5.0 onwards.
Building Blocks
The service pack approach has been used to provide business correct building blocks, which can be re used. Taking an example from FIX 5.0-SP2( Service Pack 2), which has provided timely support for the business requirements and regulator demands of credit derivative contract specification standardisation and central clearing in America and Europe.
EP83 – Enhancements for Credit Default Swaps Clearing. “The following new fields were added to the Instrument Block … AttachmentPoint (1457), DetachmentPoint ( 1458 )”.
These fields are in support of CDS index tranches, which give investors the opportunity to take on exposures to specific segments of the CDS index default loss distribution. For example the “0% to 3% tranche” with attachment (0% ) and detachment (3%) is the lowest tranche, known as the equity tranche, and absorbs the first 3% of the losses on the index due to defaults.

Correctness
The percentage data type used for AttachmentPoint and ExhaustionPoint should only allow values between 0% and 100% (inclusive) to be business correct. The attachment and exhaustion points are always between 0% and 100% of the notional amount. This is data type correctness.
Where a tranche is being modelled, both AttachmentPoint and ExhaustionPoint should be used, otherwise the tranche is unbounded. This is model structure correctness.
AttachmentPoint should always be less than ExhaustionPoint, otherwise the Tranche would have zero or negative width. This is business rule correctness.
Where we have standardised tranches, such as “0% to 3%” we should have a way of tying back to a reference data source to confirm that this is indeed one of the standard tranches. This is reference data correctness.
The purpose of considering all these degrees of correctness is so that the FIX model is business correct, easy to use for automation, and enjoys good software tool support.

Business Rules
The business rules within FIX are not currently machine readable. They exist only as text descriptions in the specification. This requires users to understand and implement them all correctly, or places the burden on software tool vendors and consultants to do the same. Several examples of conditional presence being described in text only form are provided by the ExecutionReport message.
These conditional presence requirements are always true of the ExecutionReport message. In many other cases the set of business rules will vary. The content of an exchange traded derivative should be that which is found in the contract specification, for example:
CBOE BINARY OPTIONS ON THE S&P 500 INDEX (SPX)
“CBOE Binary Options are contracts that have an “all-or-nothing” payout depending on the settlement price of the underlying broad-based index relative to the strike price of the binary option.
Binary Call Options pay either 1) a fixed cash settlement amount, if the underlying index settles at or above the strike price at expiration; or 2) nothing at all, if the underlying index settles below the strike price at expiration. Binary Put Options pay either 1) a fixed cash settlement amount, if the underlying index settles below the strike price at expiration; or 2) nothing at all, if the underlying index settles at or above the strike price at expiration.
So we know that transactions under this contract specification will always have a binary payoff, and always cash settle. The same arguments apply for the rest of the contract specification, such as Multiplier ($100), and Exercise Style (European).
The goal is that FIX business rules should be machine and human readable, both for rules which are always true, and for those which are context sensitive.
The FIX Model
The FIX model contains both data (business things) and functions (business processes). In the examples above we have looked at both data (a CDS tranche) and functions (an execution report).
The data model within FIX contains a high degree of optionality – both AttachmentPoint and ExhaustionPoint are independently optional – and weak typing (both AttachmentPoint and exhaustion point use an unbounded Percentage type).
The function model within FIX is expressed as diagrams, which are not machine readable. The diagram, below, shows how to use the message ExecutionReport with the response ExecutionReport – Ack.
From the text specification – Execution Report Ack – is an optional message, and from the diagram above you will note “optional” and “optional, however recommended”. Such text is not machine readable, and every integration project needs to arrive at implementation decisions to ensure the correct execution of the business process. For example we could decide that every outbound message will solicit a response.

Appreciating the end users
A guiding principle for ease of use should be what is a “reasonable ask” for the skills and motivation of each section of our user community, and what should we deliver to maximise FIX adoption and growth. Continuing the Credit Default Swaps example, consider the roles involved in a hypothetical CDS clearing project.
Project Manager: May be a generalist project manager, with limited understanding of CDS contract specification and processing. Needs to be assured that FIX is not a technology risk, and understand how it serves business requirements, and fits into the delivery plan.
Business Analyst: Should have a good understanding of CDS contract specification and processing. May have limited prior exposure to FIX. Needs tools both to communicate to management, understand the FIX specification, and provide clear specifications, tied back to business requirements.
Developer: May have limited business knowledge, and little prior exposure to FIX. Needs good software tools to implement from a clear specification, ideally an executable specification.
Software Tools
The web browser screen shots featured in this article are all from FIXimate, a read-only window onto the FIX repository. It is driven by software which has been contributed by many leading members of the FIX community over several years. The structure and content of the FIX repository continues to be developed and improved.
To promote a healthy range of software tools that support FIX it is important to arrive at a common, open repository format, which holds the FIX model, and allows users to operate on it. A user, for example, may take a public version of FIX as a base, add their own custom tags to support new requirements, then choose to release the custom tags as a public domain FIX expansion pack.
As well as being able to write into the repository, the ability to export out of the repository into other applications is vitally important. To consider the end user profiles, the Business Analyst would wish to export out to a document or spreadsheet format, and the Developer would wish to export out directly to a FIX engine, to avoid any errors in translation, and allow multiple FIX engines to be identically configured.
Such software tools provide a great benefit to users even if they are not using customised versions of FIX. We saw in the process example above that the use of the ExecutionReportAck message is optional. Good software tools provide support for “capability profiles” which allow a group of systems to share capabilities and behaviour, for example they all choose not to use the optional message. They reduce integration cost, and improve time to market.
Stick to Business
FIX has grown because the technology and organisation have delivered business value, grown organically, with the network effort of a high number of adopters delivering great value.
As we continue to grow in both product and process coverage, we should learn from past experience, apply the best of current technology, and engage with the FIX community to continue business driven standardisation.

Fixed Income?

By

Creating Digital

-

September 15, 2009

– Can FIX do for fixed income what it’s done for equities?
While the influence of FIX has spread rapidly in global equity trading markets, its role in broader asset classes has been less vociferous. FIXGlobal asked market leaders, MarketAxess, Tradeweb and Fidessa LatentZero for their views on the impact of FIX in the fixed income arena.
FIXGlobal: FIX4.4 was introduced back in 2003 as a version that provided strong support for fixed income trading. How successful do you feel 4.4 has been?
Bill Hayden (Tradeweb): The adoption of FIX 4.4 was slow at first as people jerryrigged their existing FIX 4.2 engines to handle data for fixed income securities. Over time, however, firms began to address issues such as support and scalability and it became obvious that using FIX 4.2 for fixed income was no longer desirable.
The big wave of adoption for 4.4 came as clients gradually upgraded or replaced their FIX engines. In many cases this was a result of an upgrade or replacement of an existing order management system.
Nick Themelis (MarketAxess): FIX 4.4 was developed to provide realtime, counterparty connectivity for the fixed income community and, since its inception, we have seen strong interest from the buy-side community. For example, 63% of our connected clients access our platform via FIX. We have built partnerships with OMS vendors who use FIX connectivity for their operations, which has further expanded FIX adoption for the buy-side community. We’ve also seen several fixed income ECNs use FIX connectivity.
FIXGlobal: Where the protocol has not been widely adopted, do you feel its been limited by technical strengths or by other business environment issues?
Hayden: In the current climate, the adage of “if it ain’t broke, don’t fix it” takes hold. Firms are not able to make strategic upgrades and are instead forced to switch into a mentality where the primary goal is to keep the lights on.
Another reason that the protocol has not reached a one hundred percent adoption rate is that in many cases fixed income takes a back seat to equities. If a firm is using FIX 4.2 for its equity business then they might not see the incentive to upgrade to 4.4 if the volume of fixed income is small.
Themelis: There is nothing technical or conceptual that prevents the fixed income community from adopting the FIX Protocol. There was a legacy investment in proprietary protocols in the early days of fixed income etrading, however as automated trading increases, clients are looking to take advantage of more efficient, more reliable connectivity technology.
Many leading STP tools now support FIX 4.4, allowing for fully electronic interaction across all functions. Pre- and post-trade processes such as order creation, negotiation and trade allocations and settlement can now be fully automated.
Additionally, there are automated, reliable tools available for market participants to get onboard and easily overcome any barriers to entry such as cost or technology development. Greenline’s suite of FIX Protocol solutions and services are designed to ease the FIX adoption process for clients looking to update their legacy systems.
There is growing interest in messaging standards like FIX 5.0 for structured products such as credit default swaps. We have supported CDS etrading since 2005 and continue to offer the technology and access to liquidity for credit etrading.
FIXGlobal: The US has a much more diverse range of fixed asset types than elsewhere in the world, and is typically an over-the-counter (OTC) market. However, some asset types are being offered in a centralized exchange market, such as the NYSE bond market. Do you see this trend towards a centralized market as a way to achieve greater price transparency in the current US economic situation?
Hayden: The primary transaction venue for client-to-dealer fixed income and derivatives trading is likely to remain in the OTC space for the foreseeable future. If we have learned anything in the recent credit crunch it is the importance of the over-the-counter market as credit becomes tight. The primary dealers play an invaluable role in creating liquidity, which leads to lower costs for clients.
The issue of market transparency is also an important driver for the continued role of the OTC model. Due to the very large size of trades, the buy-side is very reluctant to show their positions in an open exchange.
Themelis: Fixed income is best suited by electronic trading protocols that emulate an OTC market, such as our request-forquote client-to-multi-dealer trading system. The credit market is not well suited to the exchange trading protocol that we see in the equities market where there are continuous two-sided markets all day long.
Furthermore, a trading platform that disintermediates dealers and their liquidity from their clients is not suited to the market structure right now. The advent of TRACE reporting has probably had the greatest effect on increasing transparency in the US for corporate bonds.
FIXGlobal: Where do you see the retail fixed income space relative to the institutional side? With more and more retail-sized clients looking for safe returns by investing in municipal, corporate and TIPS bonds, are your firms working to automate between retail and fixed income?
Hayden: After eight years of operating in the instructional dealer to client space, we launched our Tradeweb Retail platform at the end of 2006. The requirements of retail investors are very different and the system addresses these needs. From day one the retail platform has embraced the use of FIX 4.4. In fact, because of the large number of smaller trades, straight-through processing (STP) is arguably more important in retail than institutional.
Themelis: We see increased activity in the retail sector as clients and regional broker-dealers look for new sources of liquidity. We’ve responded to this demand by incorporating regional dealers onto our trading platform. Regional dealers are typically focused on smaller trade sizes and their participation on the platform has brought much needed liquidity to the fixed income community. The new dealers include independent broker-dealer firms, as well as dealer subsidiaries of regional banks.
FIXGlobal: A tremendous focus has been placed on counterparty risk management since the collapse, or mergers, over the past year of some blue chip financial firms. Real-time position keeping has been of particular interest. Do you feel there is a place for FIX in this risk management process?
Hayden: I think it depends on your view of what FIX is. If you see FIX as a communication tool between two counterparties then I don’t see FIX being implemented for these purposes. If, however, you use FIX internally to connect your various systems such as trading and risk management , then the protocol could be important. In the latter, risk management systems can use FIX to convey position and credit information between internal systems. To this extent it could help customers to manage their counterparty credit. This will be even more important as companies outsource parts of their processes to third party applications that need to interact.
Themelis: Fixed income securities that trade electronically on platforms such as ours help clients update their trading positions more quickly. In the case of corporate bond etrading, executed prices are reported to TRACE in real-time.
MarketAxess’ BondTicker data service incorporates TRACE data into our trading platform to provide real-time corporate bond pricing. Investor clients can use this corporate bond pricing service to run proprietary risk analysis programs. While we offer FIX feeds for our data into any risk management program, additional analysis is ultimately required to derive risk management metrics such as duration and credit ratings.
FIXGlobal: Central clearing is seen with a competitive eye by firms such as NASDAQ (NCC initiative), LCH and Chi-X and EuroClear. What is the impact on international fixed income trading, and what business and technology challenges are firms being forced to address?
Hayden: We view central clearing as being complementary to electronic trading. Our firm is agnostic to the central party; rather we look to work with each of them. We feel that the benefits of electronic execution (speed of execution, price discovery, STP) can be even further enhanced by an electronic link to a central counterparty.
There are technical hurdles that must be addressed with OTC derivatives. FpML has been the defacto standard for derivatives messaging. However, up to now, it has only been used in the post-trade space. Tradeweb has embraced FpML in post-trade, bringing it into the FIX Execution Report message. There are still gaps in coverage with regard to the pre-trade and trade arena.
Themelis: There is potential for the FIX protocol to develop messaging standards for central clearing activities. Incumbents such as the DTCC are facing new entrants into the clearing space as the popularity of credit derivatives is driving the proliferation of clearing opportunities.
MarketAxess supports initiatives that increase transparency and efficiency within the credit markets. Central clearing will significant reduce counterparty risk, thereby contributing to a more sound credit market.
FIDESSA LatentZero join the debate with a different perspective…
Message formats and infrastructure that serve and support cash payments have been very successful. Do you think the market is becoming more motivated to reduce communications costs where real money is not involved?
David Blocker (Fidessa LatentZero): No. The market, like any other, is motivated by cash control and real, verified savings. Fixed income products trade either short term or long term.
Short term is dominated by new issues where the investor deals directly with qualified institutional borrowers. The long term is dominated by OTC and secondary markets, where there is great variation in the packaging, distribution and consumption of securities. This business is still ‘manual’, conducted over the telephone, and it requires greater effort from operational, legal and management viewpoints. Consequently it will continue to be driven by cash protection and preservation.
The market is also being driven by the need for hard and fast processing-cost reductions. Deploying messaging without an eye toward real costs is not beneficial, either from a business or a technical standpoint.
Fixed income data is significantly more complex than equity data. Do you think the FIX working groups have the experience to deal with fixed income instruments and workflows?
Blocker: The FIX group has been working on fixed income trading since at least FIX4.2. The FIX message tags have gradually been expanded to cater for fixed income specific instrument definition fields and RFQ trading workflows.
This has been an evolutionary strategy and this can be seen in the relatively low volume of fixed income trades currently processed via FIX. It seems there are significant differences in focus between the sell-side (which concentrates on instrument structures) and the buy-side (which concentrates on trading workflows). It might be prudent to separate these two client bases and business disciplines.
Has FIX gone down an equity path that may never work for fixed income?
Although evidence suggests that software that works for one asset class doesn’t work for other, the substance of the messaging infrastructure does not necessarily follow a format specific to a particular asset class. By David Blocker, Fidessa LatentZero, Fixed Income Product Strategist
A well constructed structure, that bears similarity in language and logic to market documentation, trading terminology and events that create messaging content, should be able to suit cross-asset classes and their events as they develop.
FIX has had very active participation from its user community. Is this a sign that, when it comes to anything highly interpretive, technical and complex, a large group of users are the last people who should be involved in the solution?
Blocker: Probably. A small team of practitioners could probably distil a messaging solution from readily available special interest group publications (SIMFA, ISDA, etc) following their regulations and standard practices.
That might create a product with greater utility, breadth and acceptance. It appears from existing FIX participant interactions that the target deliverable doesn’t actually conform to any specific market or practice. It risks becoming a “common denominator” with limited benefit except to those with the time, energy and financial resources to drive the product towards their own particular way of conducting their business.

Paddy Turner & Stephen Gallagher : Market Axess

By

Ian Rycott

-

July 26, 2009

BUILDING MOMENTUM.

The phone may have dominated fixed income trading but talk is not always cheap. Stephen Gallagher and Paddy Turner discuss why electronic trading will have its day.

What is the history of the company?

Paddy Turner: Rick McVey who is still our chairman and chief executive launched the company in 2000. He had been head of North America fixed income sales at JPMorgan and realised that there was gap in the US market. There was client to dealer electronic trading for government securities and equities but there was not a platform for high grade corporate bonds. The business has developed from there and we now offer electronic trading in 6 fixed income asset classes across 12 currencies including eurobonds, emerging markets, high yield, US agency securities and indices. We opened our doors in Europe in 2001 and went public in 2004 on Nasdaq.

Who is your client base?

Turner: Our client base is twofold – 50 broker/dealers who provide the liquidity for some or all the asset classes on our platform and over 1000 institutional investors in North America and Europe. We are not a retail platform so our institutional base mainly consists of long only asset managers, insurance companies, internally managed pension funds and large wealth managers.

Who do you view as your main competitors?

Turner: Our main competitor has historically been the phone, but the space is rapidly evolving and flow business is increasingly migrating to electronic venues. We see ourselves as offering a complimentary service to the traditional voice broker whose time is increasingly taken up with trades that require a greater degree of hand-holding. The other primary players in our space are TradeWeb and Bloomberg – but we all have different models. Our aim is to harness an increasing share of what we call the sweet spot of institutional credit trading. This tends to be in ticket sizes of €/£10m equivalent or less where we can add real value by providing timely and efficient execution services for our institutional clients.

Can you tell me about the new dark pool service you are launching?

Turner: We rolled out this new service which we call Market Lists for US products earlier this year and the plan is to introduce the full service for European products in Q3. European clients can already use Market Lists to trade US high-grade corporate and $-denominated emerging markets bonds but that will be expanded to include euro and sterling- denominated eurobonds by mid-year. The service allows investors to efficiently distribute their bid/offer order to the broadest community of market participants. The broker/dealers are a key part of the equation. Clients can direct a trade to their chosen broker while at the same time anonymously making their order visible to all other users on our system. We provide a shop window where people can display their wares and conduct price discovery. This is especially important in today’s marketplace where price transparency and liquidity are both at a premium. This new functionality will not only deepen the liquidity pool we offer but most importantly will benefit both dealer and client traders by increasing the likelihood of each finding a match for their flow.

Is there more hand holding with clients as a result of the financial crisis?

Stephen Gallagher: We have taken advantage of the market conditions and have hired more experienced external facing staff. However, we are not going into competition with the broker dealer. We see our service as bringing efficiency to the process, minimising the cost and enhancing the optionality. Our goal is to provide as much assistance to users, whether it is to dealer/traders, buyside execution desks or the community as a whole to find the other side of the trade.

What are the biggest challenges in today’s marketplace?

Gallagher: Illiquidity has become a problem because of the financial crisis, but one of the biggest challenges remains the lack of price transparency in the OTC cash markets.There is no consolidated (post trade reporting) tape in Europe. In the US, there is TRACE (Trade Reporting and Compliance Engine which facilitates mandatory reporting of over-the-counter secondary transactions in eligible fixed-income securities. The Securities and Exchange Commission uses the service, for example, to track OTC trades in fixed-income securities and other secondary markets.)

We launched a service in the US called BondTicker a few years ago which takes live price feeds, enhances the information and then delivers it back to the clients real time. (The data includes real prices as well as MarketAxess estimated spread-to-Treasuries and asset swap spreads for all investment grade and high-yield bond trades – about 30,000 – distributed by Financial Industry Regulatory Authority which was formerly known as NASD).

Do you think there will be a Euro TRACE?

Gallagher: Europe is too much of a fragmented market and at the moment, the regulatory focus is on the credit derivatives market. There is no data service like TRACE and while we have recently launched BondTicker for euro and sterling denominated products it is not as robust because it is missing the real time pricing piece. However, our clients would like to have that type of information tool and if a consolidated tape does happen in Europe, we are all set up to take advantage of the opportunity.

What is MarketAxess’ plans for the future?

Gallagher: Adding more liquidity providers onto the platform is an ongoing process. Out of the total of 50 broker dealers, Europe accounts for about 19. We have been talking to different firms and hope to increase that number to 25 by the end of the year. We are seeing interest from players who were not traditional fixed income market makers but who are interested in building a fixed income franchise. On the institutional side we are seeing demand for new products and asset types. For example, European wealth managers who had hitherto not been amongst the biggest buyers of credit as an asset class have become very active buyers of corporate bonds across all of our currency buckets this year.

What about your plans for Asia and the Middle East?

Turner: We look at the Middle East and Asia as providing our next opportunities. We have recently hired a salesperson for the Middle East and plan to add at least two more for South and North Asia coverage in the second half of the year. There are several large global asset managers and central banks in these regions who are big players in the asset classes we already support and we are looking forward to offering them access to the full range of execution, data and technology services we already provide to the US and Europe’s most active players.

[Biographies]

Stephen Gallagher (right) is the head of Europe, responsible for managing all European business initiatives out of our London office, a position he assumed in September 2007. Gallagher first joined MarketAxess as head of dealer services in May 2006. Previously, he was head of high grade trading at Wachovia and had held similar positions with Banc of America Securities, Bear Stearns and Merrill Lynch from 1987-2003. Gallagher began his career with Kidder, Peabody & Co in 1983 after serving as a Captain in the U.S. Army in Texas and Germany from 1979-1983.

Paddy Turner (left) is the had of European Sales, a position he assumed in April 2004. Prior to joining MarketAxess, Turner held a number of positions within the FIRCC division of UBS Investment Bank in both New York and London, including head of North American non-dollar bonds sales and head of UK IMG flow credit sales. Turner began his career with Swiss Bank Corp in London in 1989 after having received a Bachelor of Laws (LLB) degree from the University of Buckingham.

©BestExecution 2009
[divider_to_top]

Adam Toms & Andrew Bowley : Nomura

By

Ian Rycott

-

June 26, 2009

A NEW BEGINNING.

Lehman had spent years building a premier equities division, reaching the top of the LSE. Adam Toms and Andrew Bowley explain how they plan to emulate that success at Nomura.

Can you tell me about Lehman’s development in Europe and the platform since the acquisition by Nomura?

Adam Toms: From 2000 onwards, Lehman Brothers invested significantly in trading technology and infrastructure. The team had a clear view on the evolution of the European market place in terms of the types of investors participating in the market, and central to this was the belief that liquidity providers and high frequency traders would contribute significantly to exchange activity going forward. A great deal of emphasis was placed on innovation in terms of technology and also new products for clients. It enabled the bank to become a market leader in the electronic services space that has grown with institutional and hedge fund clients in Europe over the last few years. The goal was always to become the number one firm across the European exchanges and for several years, the bank held the number one spot on the London Stock Exchange.

Following Nomura’s acquisition of the Equities business in Europe and Asia in October 2008, our goal has been to be among the top three brokers on the LSE by the end of the year. We were ranked 84th on the LSE last December and in March 2009 we were already 10th place by volume and value of equities. Globally, our express goal is to become a top five player in the global equities market by 2011.

What changes have you made to the platform?

Adam Toms: The acquisition and subsequent integration gave us a very unique period of around four months to develop and implement innovative changes to our offerings, leveraging the global resources of Nomura. One of the real advantages of being out of the market was that we were able to step back and look at how we could improve the technology and infrastructure offered to clients and to ensure that we continue to be a leading execution provider globally. The trading environment had also changed dramatically from September to December and continues to do so – we needed to ensure that our platform had the scaleability and flexibility to be able to respond. We totally transformed what we had before to ensure our offering moved forward. We offer direct market access (DMA), smart order routing systems, algorithms (ModelEx) and dark pool services (NX) across Europe but I think our new platform is one of the strongest in the region given the significant enhancements we have made.

Did you lose many people?

Adam Toms: Since October, we have retained and hired some extremely talented individuals and reorganised the structure of our equities division. We have had significant retention rates in the electronic team including 100% of the management team. Innovation and how we deliver those products and services to clients remain a key focus for us. Our experienced sales and product teams are central to this.

What have been the biggest challenges since the merger?

Adam Toms: From a logistical viewpoint, we had to reconfigure everything in Europe. This meant integrating the front and back offices, dissecting all the different components at a global level and taking the best elements from the legacy businesses. It also meant connecting to 31 different venues as well as renegotiating agreements with a range of existing and new vendors. The integration happened very quickly and smoothly. For everyone involved at Nomura, it was an absolutely unique experience.

Andrew Bowley: The current market conditions have been one of the biggest challenges. It is interesting to be re-starting and launching a new business in such an environment but we have a long- term strategy and are clear about the end goal. We feel confident about the robustness and capacity of our infrastructure, but investing in technology will continue to be a priority. For example, since we launched the new offering in January 2009, we have been continuously enhancing our electronic trading suite to maximise the off book liquidity management, including smart order routing performance, latency and algorithmic tools. We cannot afford to stand still or change course because of what we hopefully see as a short to medium term downturn. We want to ensure we have the right number of people, resources and infrastructure to grow the business to meet our three to five year objectives.

What about the image of Nomura as being Japanese and not a global player?

Adam Toms: People know Nomura as a Japanese bank with an excellent domestic franchise across many lines of business, but it is now an enhanced global investment bank with a global equity offering. The reputation of the team and platform is strong with clients and they like the enhancements to the new platform. This combination of strengths is very appealing to clients and our ranking progress across the Pan European Exchanges and MTFs is testament to this.

We also expanded our European research product and have been actively hiring in that area. (Nomura recently hired eight senior analysts covering business services, leisure and transport & infrastructure sectors). Our goal is to have over 600 stocks (up from 400 at Lehman) under coverage by early next year. I think it is registering with the whole marketplace that we are aggressively pursuing our plans and we are on target to reach our goals.

What impact has the financial crisis had on electronic trading?

Bowley: Today, there is much more emphasis on efficient liquidity management and liquidity seeking solutions. This is not only because of the financial crisis and lower trading volumes, but also due to the fragmentation on the back of MiFID. It is harder to find liquidity because the flow is now spread across a raft of venues. We are connected to them all and are completely agnostic; we route orders to the most suitable venue at any point in time and do not have any bias, each venue is evaluated independently.

As a result of the structural changes in the market place, smart order routing is a key focus for our franchise. There is an increased demand for more aggressive strategies which can avoid opportunity costs and we have been making adjustments to our models.

[Biographies]

Adam Toms (left) is a managing director and head of Market Access Group for EMEA within the Nomura Equities Division. Toms joined Nomura following the acquisition of the European and Asian equities business of Lehman Brothers in late 2008. He had been at Lehman Brothers for eight years prior to this where he was responsible for the Market Access Group . Prior to joining Lehman he worked for Barclays Global Investors where he was a member of the central dealing desk team executing global equities, derivatives and commodities.

Andrew Bowley (right) is executive director, head Lehman Brothers in 2004 to oversee the implementation of the firm’s new global connectivity system and market side connectivity platforms. Prior to Lehman Brothers,Bowley spent seven years at Dresdner Kleinwort initially in front office product development and then for five years as head of the firm’s institutional connectivity and order management activity. He qualified as a chartered accountant at KPMG and also worked at JP Morgan.

©BEST EXECUTION

Paul Squires : AXA Investment Managers

By

Ian Rycott

-

June 25, 2009

STAYING THE COURSE.

The financial crisis has put the whole industry to the test but Paul Squires explains why AXA’s integrated platform helped them weather the turbulence.

When was the trading and securities financing (TSF) group established and what was the rationale behind it?

TSF was created in 2006 to take advantage of the synergies between the two divisions but also to bring a seemingly opaque operation – securities lending – into the mainstream. The two activities are clearly segregated both operationally and in terms of the governance structure, and there is a solid Chinese Wall between the two. The division has 25 traders across three asset classes – equities, fixed income and foreign exchange. The AXA trading operation has evolved into a fairly sophisticated trading desk which uses algorithms and smart order routing, with traders in close proximity to the fund managers. We believe this relationship is one of the keys to us being a successful operation.

What has been the impact of the financial crisis?

Liquidity was left behind. It dried up and risk capital disappeared. Traditionally it was larger brokers who would provide this type of instant liquidity but post-Lehman, they could not afford to take these positions. Also, there is potentially more market impact and opportunity cost than before because the lower volumes in today’s markets mean that your trade has become a larger share of the whole and this can be very expensive.

What role did technology play?

Technology and liquidity are often put together but although liquidity is very important it is only one part of the equation. We have spent a lot of time and money building our infrastructure and have a wide range of tools to access liquidity across multiple venues. However, the human touch and expertise should not be underestimated. This is especially true in the more illiquid stocks such as small caps. AXA Framlington, for example, has a significant small cap business and they rely on their brokers’ experience and access to flow.

The way we work is that we have relationships with crossing networks such as LiquidNet, a few brokers who do much of our liquidity seeking as well as relationships with other brokers who provide us with a range of different services. It is because of these relationships, for example, that we are able to get capital commitment when it is not readily available in today’s market conditions.

In many ways the financial crisis has eclipsed MiFID which had been the big story before the Lehman collapse. What have been the outcomes?

The financial crisis was much more significant than MiFID. It was an extreme situation and all of a sudden, overnight, buyside traders were much more focused on credit ratings, counterparty risk, collateral positions. This was not the case previously. Also, some of the players had disappeared and the people you spoke to 15 times a day were gone. As a result, service took a hit and I do not think that it has returned to the levels that it was before the crisis.

As for our business, it made us rethink how we executed orders because the volatility was so extreme. Also, the scope of what we are doing has broadened. We are providing more guidance and analysis for clients on issues such as counterparty risk.

What was the effect of the financial crisis on the stock lending side of the business?

The financial crisis has had a major impact on our stock lending business because after Lehman’s, collateral positions had to be transacted in order to return assets to clients. It was a huge and intense undertaking that consisted of laying out spreadsheets and manually reconciling positions. It also involved a series of phone calls to clients to ensure that they knew the situation and what our strategies were. I think one of the reasons we were successful is that we are centrally organised and had the infrastructure and strong collateral management in place which allowed us to deal with this situation. If we had remote departments that we had to co-ordinate it would have taken twice as long.

In general, how has MiFID changed the European trading landscape?

There is no doubt that MiFID has caused fragmentation. There are currently 12 venues in the market but our experience shows that only a handful of them have meaningful liquidity. I think there will be consolidation but the most important factor to us is who has the liquidity and whether we can access it. Typically buyside firms do not have the infrastructure to sign up to all these MTFs so consolidation in the industry would be seen as a positive move.

Another outcome has been the lack of visibility in trade reporting. We get information from Boat, Chi-X, Turquoise and the primary exchanges but they are each structured in a different way. In some cases, it is hard to determine who is doing what on certain venues. Also, while there are third party providers who can offer us a breakdown of the data, it is not only inconsistent but also takes a long time to be delivered. As a result, the information is not credible or a reflection of what is actually going in the marketplace. What I want when I am trading is to have the information readily available and in a consistent format.

Benchmarks continue to be a popular topic of conversation. Which are the most popular today?

We prefer using implementation shortfall but it depends on the investment strategy and the type of fund manager you are trading for. For example, VWAP is still popular among low touch, high frequency quantitative firms. However, those working more difficult, larger orders may opt for a more sophisticated approach. Most of our activity is for fund managers who are taking a long-term view based on fundamental research, so we are in a different category.

Do you think MiFID will apply to fixed income?

MiFID generated a great deal of discussion around fixed income but as there is no central order book there were no conclusions. We are a genuinely multi-asset class firm but most of the buyside dealing desks are equity based and there is an imbalance between equities and fixed income technology. I think there needs to be more done in this space. What we have done is in-sourced a lot of data and aggregated price information from our main counterparts in order to create our own order book.

[Biography]

Paul Squires is currently head of global trading within the Trading and Securities Financing (TSF) team at AXA IM. Squires has held this position since 2006 after having been head of the central dealing unit at AXA IM from 2004. He started his professional career as an equity trader for Mercury Asset Management (now BlackRock) in 1993 before becoming a UK equity trader for Sun Life Investment Management in 1996. Squires has a degree in business economics from Reading University.

©BestExecution

Get on the bus. Is it the trading, the traders or the trading tools that have changed?

By

ned_phillips

-

June 15, 2009

By Ned Phillips
Can you teach an old trader new tricks? BlocSec’s Ned Phillips argues that you don’t need new surprises, you just need to perform the same tricks in a smarter way.

Fundamentals rarely change. That’s why they’re called fundamentals. In the trading world this means: buy low, sell high. Aim to beat the benchmark you’re given and trade your positions with the minimum market impact.
So if the fundamentals haven’t changed, what has? Are we throwing ourselves lemming-like off the innovation cliff, without looking at what’s below? Innovation – and by innovation we tend to mean innovation in the way we trade electronically – is only innovative if it raises efficiency and reduces cost.
Hare or tortoise?
One area where we have overachieved in the name of innovation is in speed. Looking back, trading used to involve picking up the handset, dialing the number of your favorite broker, having a chat about what you did on Friday night, relaying the order, waiting for him to yell across the desk to his dealer and waiting for his dealer to yell back when the sale was executed. You then hang up and call your client to let them know that a confirmation will be sent to them sometime later. I’m hoping this sounds familiar. If it doesn’t, then you’re too young, or … I’m too old.
War of the acronyms
How things have changed. Today we have FIX, SOR, DMA, Algos, light pools, dark pools, and many others. The mot du jour is latency. Everything is faster, better, cheaper. These are the new weapons with which traders fight for best execution. Such is the level of technology at your fingertips, you should arguably be able to punch in a few commands first thing in the morning and be good for the rest of the day.
All roads lead to liquidity
However, the reality is very different. More important than speed is liquidity. The ability to source liquidity in today’s multiexchange world is what separates the good traders from the great. All traders in essence want the same thing when looking for liquidity. They want to be able to see everyone else’s liquidity without showing theirs. Of course, that logic doesn’t work. But enough traders are willing to participate in liquidity pools and make use of IOIs – or indications of interest, because they understand the need for a community of traders to work together to make the trading environment better for all.
IOIs and Dark Pools
It is this delicate interplay that created IOIs which are an excellent way to show and source liquidity. As the use of IOIs increased, so too did a more efficient trading culture. Some would argue that IOIs were the forerunner to liquidity pools. Dark pools were developed as the answer to how you advertise a block of stock, without telling everyone else.
When ITG first launched POSIT, it was considered to be ahead of its time. It was, and still is, an excellent concept, but the electronic trading landscape of the 1990s was not ready for the technology. Not until the new millennium did the rest of the market catch up, and together with Liquidnet, these dark pools became forerunners of an explosion of venues in the US market.
Plugging the information leak
Dark pools revolutionized the way people traded in the US. Suddenly you were able to anonymously source blocks of stock without fear of leakage of information. You could show your entire hand in a discrete, yet efficient, manner. For every trade in a dark pool the result was an opportunity cost win. If you had 20 orders at the beginning of the day, and by sourcing liquidity from a dark pool you were able to execute eight immediately, the remaining 12 trades could command much more of your attention. In short, dark pool trading both provided liquidity and freed up traders to focus their attention on the other higher ‘value add’ orders that still needed to be traded in live time on the traditional exchanges.
From better to best execution
Dark pools, however, only help … if you use them. The drive towards increased usage of dark pools has been one of the major changes in the trading landscape. Traders have had to adapt from having two tools on the desk – the phone and the Bloomberg terminal – to having an almost limitless range of play things. Today’s traders must be able to multi-task. Eight screens, multiple alternative venues, an OMS and EMS, a dark pool and a handful of algorithms are now the standard tools of the trade.
I haven’t seen a comparison of the trading quality between a trading desk who embraces all liquidity venues and a desk which doesn’t but I am willing to bet that any desk that uses all the tools at their disposal will be the one that wins. They will be the one who sees every piece of liquidity out there.
Same goal – different tools
These are the tools that allow traders to perform their fundamental role – buy low, sell high, beat the benchmark – more effectively. These are the tools, that when used properly, propel traders above the users of just the telephone and Bloomberg. They can see and access every piece of liquidity.
Traders that don’t use dark pools today, who have a block of stock on their blotter and suddenly see a day’s volume in their stock go through the exchange in one print, may be left wondering “how did that happen?” They are clearly missing out.
The basics of trading haven’t changed, but the tools have. For today’s traders, the message is clear: get on board, or get left behind.

The Great Debate – Cost, risk and responsibility top the agenda with 400+ delegates in Hong Kong

By

Creating Digital

-

June 15, 2009

In a packed room, and with nine meaty sessions, it was obvious there was a lot to talk about at the 7th Asia Pacific Trading Summit held in Hong Kong on the 4th of June. From an overview of the rollercoaster ride of the past year, to a crystal ball look at the year ahead, no subject was left untouched in a dynamic day-long event.

The theme for the event was a guaranteed conversation starter: ‘The Great Debate: Cost, risk and responsibility’. The overwhelming – and perhaps only – consensus of the day was the situation this year was markedly different from 12 months earlier.
The day started with well-known Hong Kong minority shareholder activist, David Webb, challenging the local stock exchange and regulator to ensure appropriate protection for investors in the markets. The discussion turned to the impact of the past year on asset management firms, followed by an assessment of what Asia can learn about best execution from the European model. It was broadly agreed that a Pan-Asia model was unlikely – not in our lifetime, some of the panelists remarked – it would be hugely advantageous for regional markets to create closer links. The speakers urged each market to consider and develop its own definition of best execution. More consensus on, and investment in, trading technology would be needed to support these enhanced networks, and regional regulations would need to be relaxed.
After listening to the discussion, the audience was asked via interactive voting consoles: Do you think existing regulation in Europe and the US adequately defines Best Execution and should they be adopted in Asia? The top answer, with 43% of the vote, was that there was no one-size-fits-all solution and that individual markets needed to define their own parameters.

As a follow on question, the audience was asked: Do you think Best Execution practices are already being implemented in Asia? A resounding 61% said there was a long way to go before Asia had the necessary tools and practices in place.
The Great Debate
The highlight of the day for many was a debate between a team of agency brokers and a team of full service brokers. It was a feisty session with some marked differences of opinion on the advantages offered by the respective brokers. The full service team pointed to the “full” and “service” in its title, arguing that for every $1 their clients put in, they received $10-worth of value. In a strong rebuttal, the agency brokers argued that “agency” was not synonymous with “small”, and instead spoke of the value of unbundled commissions. However, there was one key point of agreement: whatever the future held, both teams said, it would be the clients that would ultimately decide which route to take and that the decision would be based on cost and service. The main winner would be the buy-side, which would have a much greater choice of broker providers.

No knee-jerk reaction from the SFC
Always a popular speaker, the CEO of Hong Kong’s Securities and Futures Commission, Martin Wheatley, updated the audience on regulatory changes over the past year. Wheatley said more regulation was on its way, but that the SFC was committed to a considered and gradual approach which factored in the needs of the market, without resorting to the knee jerk reaction which many felt had been seen in the UK, continental Europe and the US. Judging from the reaction from the audience, the delegates felt the same way.

Power to the buy-side?
A shift in the power towards the buyside in the current trading environment was a discussion that generated a great deal of buzz among delegates. A panel from the buy-side preferred to call it a more “level playing field” with a positive focus on rewarding the broker that makes the most difference and adds the most value. The panel said that the brokers who recognized change as an opportunity, and who could move quickly and nimbly would be the winners. The panelists explained that the buy/sell-side relationship was built on trust and that this was the foundation on which they worked with their brokers. Technology was also an area in which the buy-side said it expected the highest level of service from its brokers. Taken together, trust and technology were the cornerstones. By way of an example, the buy-side panelists explained that, on average, 85% of trades went to their top 15 brokers, and that up to 50 brokers could be involved in the remaining 15%. The focus, they summarized, was on a consistent outcome for trades, rather than peak/trough performance, and that this often penalized start-up brokers.

The positive side of competition
Towards the end of the day, the focus turned to Hong Kong’s domestic exchange, the Hong Kong Exchange (HKEx). The audience was asked for their wish-list for HKEx. All agreed that the exchange had the opportunity to lead innovation in the region. The Exchange was also encouraged to give up its monopoly and urge the regulator to allow other liquidity venues to enter the market. Looking to examples in Europe and the US showed the opportunities created by introducing a more competitive exchange environment with greater liquidity, and while the domestic exchanges across Asia might lose market share, in percentage terms, the move would create more activity across the region and ultimately lead from better to best execution.
Wrapping up the day, before delegates retired to the bar to mull over the day’s proceedings, the co-chairs of the event organizing, FPL Asia Pac Education and Marketing Committee, offered a vote of thanks to Templeton’s George Molina who, after four years in the role, would be stepping down as FPL’s Asia Pac Regional Co-Chair. Molina, it was widely acknowledged, had played a key role in building awareness and understanding of the need to develop an efficient electronic trading across the Asia Pacific region.
To view all presentations and photographs, please visit www.fix-events.com

Liquidity? Cost? Speed? What’s driving automation?

By

chris_sims

-

June 15, 2009

By Chris Sims, Bradley Duke
Taken from the buy or sell-side the answers can be very different …While there is no turning back the technology clock, the rate of development and adoption across the investment services community has not always been consistent. However, bucking the gloomy financial markets, 2008 and 2009 have seen a strong rise in automation. FIXGlobal discussed the issue with two leading industry professionals from the buy and sell-sides, to see what was driving this growth in automation on their respective sides of the business.
View from the Buy-side

The increase in automation that we’re experiencing is a natural progression in our industry. We’re a client facing business and we feel that technology is helping us to bring additional services and benefits. As to the main drivers, I would identify a number of aspects that are affecting the pace and depth of automation. Firstly, you need to look at accessing liquidity. This would have to come close to the top of our list. Automation gives our people the latest tools to perform at the highest level. It’s a risk management tool, both when markets are choppy and when we need to use all the networks and order routing tools to tap into multiple exchanges and dark pools.
Getting it right is more important than doing it fast
Secondly, I’d point to an area which I feel is actually not driving automation to greater heights. Latency. In my view, there is too much focus on speed. Overwhelmingl your investors are more focused on ensuring the investment decision is made in a thorough and considered way, and similarly, the trade executed efficiently. That it might take a few micro-seconds longer is not the key issue.
More colour, better audit trail, less counterparty risk
A third area that’s driving, or is at least a by-product of greater automation, is transparency. If you’re looking at creating an auditable trail, or need greater colour, taking the electronic route is clearly preferable. It’s easier to manage. Every order is raised, executed and sent to compliance electronically. Verbal orders simply don’t have the same transparency or level of detail.
This automation also keeps us in line with the requirements of the industry regulators. For a few years now, we’ve been working with increased regulation and given the current economic situation, it’s understandable that we’ll see even more. With electronic trades, the more logs in the audit trail, the easier it is to efficiently satisfy the regulator. In particular, the traditional institutional buy-side firms that are also involved in using hedge funds, for example, are in a much stronger position to remain in line with regulators.
But the opportunity of automation and resulting audit trails provides the buy-side with more. The ability to capture, monitor and analyse the way that trades are initiated and consequently executed allows you to better gauge your counterparty risk. If you’re working electronically and you want to describe the deal, it provides the opportunity for you to talk more efficiently to your counterparty. You can travel back and check the costs and underlying exposure.
Cost ? Less of a factor than you think
Finally, we often talk about the costs of trading. But the options are rarely black and white. Automation allows you to access the services that give you the best implementation, the option you choose might not always be the cheapest but might deliver the desired end result on a more regular basis. It might be cheaper to run a direct link to the latest MTF, but use of a broker algorithm with access to the same MTF might deliver a cheaper overall implementation. Clearly though you still need an experienced trader deciding on the correct approach for each individual investment decision.
View from the Sell-side

The key driver for increased automation, in my mind, is the complexity of the markets today. With fragmented, global markets overlaid with a complex range of financial instruments available, it’s almost impossible to trade unassisted. It’s essential to have some form of support from tools such as algorithms and smart order routing solutions. It really comes down to a question of efficiency. When you’re looking for liquidity, not all of it is public. There is a lot of dark liquidity in the US and Europe – and each pool tends to have its own rules and protocols – so it can be incredibly demanding for the individual traders. To achieve your investment objectives and to trade in a timely manner, greater automation is a must-have support service.
Computers still can’t do it alone
But, if you think computers and algos are going to replace humans, you’d be wrong. I don’t see computers and smart programming replacing people. It’s not about fewer traders, it’s about greater efficiency. Behind each machine there will always be the investment strategy. Developing this strategy is a process developed by financial professionals that understand the investment needs of their clients. It is unlikely that in the foreseeable future computers will be able to understand trading objectives. The human elements of experience and skill that traders and programmers bring to the equation are still essential in the process.
Transparency? Depends where you are in the trade
I don’t personally see a direct correlation between increased automation and the need for greater transparency. Certainly clarity is improved with electronic trading in terms of the audit trail, but transparency is not driving the technology. I fully appreciate that a high level of transparency is desirable post-trade, but while you’re holding the order, it could be a dis-service to the client. Keeping market impact to a minimum, while maintaining anonymity is crucial.
Trading efficiency – not necessarily cost-efficiency
I’m often asked whether cost and the desire for greater efficiencies is driving automation, and I feel that it really depends where you’re trading. In the US, where you have multiple exchanges but a single settlement structure, it is reducing costs. However, this is still not the case in Europe. In Europe, it gives you trading efficiency, but not necessarily cost efficiency as there is limited intra-operability between CCPs.
Cost may squeeze the smaller players – or create niche players
The required capital and on-going upgrade costs of improving your electronic trading capability can certainly be high, resulting in the increased risk of squeezing out some of the smaller players. I certainly see an irony in the fact that MiFID, which was introduced to improve the competitive landscape, has brought with it, some high cost considerations in meeting the regulatory requirements laid out in the Directive.
We’ve certainly already seen a lot of the smaller brokers consolidate, be bought up, or simply drop out of the market. The smart ones are realising that they can no longer be full service brokers, so they focus on the niche areas in the business. It’s an interesting development of both MiFID and the increase in automation across the industry, and it is most likely going to continue for some time to come.

Driving FIX in LATAM : Buy-side buy-in and infrastructure improvements key to FIX success

By

alfredo_milera

-

June 15, 2009

By Alfredo Milera
Extending from Mexico in the north to the southern tip of Chile, the LATAM region is home to 31 countries and dependencies and almost 570 million people. In its main urban centres, Mexico City, São Paulo and Buenos Aires, the FIX revolution is making gradual inroads. Compliance and trade order systems’ experts, Charles River Development, look at what LATAM needs to do to bring its electronic trading into the international arena.
FIX: Looking at Latin America over the past five years, have you seen a marked increase in the interest and adoption of FIX, or has it been a more gradual process?
Alfredo Milera: The adoption of the FIX Protocol in LATAM has been, and continues to be, a gradual process. If you look at the adoption of FIX trading globally, it has – more often than not – been driven by the buyside. However the opposite is true in many LATAM countries, since the infrastructure – telecommunications, computerization, internal expertise, etc. – has not been in place for local firms until now.
What we see is that local buy-sides are slow to relinquish their long-standing ‘comfort zone’ with current workflows and manual ‘over the phone’ execution, despite FIX advantages of error reduction, best execution and market transparency.
This slow adoption of FIX by the buy-side has prevented LATAM brokers from being able to receive order flow from their own region, causing them to focus their services on the international community. If you look at order flows to LATAM brokers at the moment, much of it comes via FIX from international players (hedge funds, UK buysides, etc.) seeking to access local liquidity. To date, equities have been the main source of electronic liquidity via FIX, followed by futures. In Mexico, there is some electronic trading of options on Mexican Derivatives Exchange (MXDR).
For LATAM to take the next step, we need to see the LATAM buy-side community joining their sell-side counterparts.
FIX: This is a huge and economically diverse region. How widespread is adoption across LATAM?
AM: Brazil and Mexico have certainly taken the lead in FIX adoption, infrastructure investment and demand for new tools, such as algorithms. Judging from our experience, we expect Chile, Argentina, Colombia and Peru to follow, as global demand increases for these markets’ local instruments.
FIX: What have been the key drivers for adoption?

AM: As we are seeing in other markets, FIX demand and investment in local infrastructure are the two main drivers for FIX adoption.
Looking at the demand side, this is originating both internationally and locally. There is certainly an appetite from international players wanting to invest in emerging markets, and this has lead many LATAM sell-side firms to adopt the FIX Protocol. Looking at Brazil’s heavilyregulated market as an example, the new Comissão de Valores Mobiliários (CVM) compliance rules now allow local traders and portfolio managers to invest outside the country. In practice, this means local firms are now increasingly looking for international liquidity, competitive market quotes and best execution – all via FIX networks. This is affecting the adoption of electronic trading and the rapid development of tools, such as transaction cost analysis (TCA) analytics.
It’s important to look at investment and adoption not only in FIX, but in other enabling technology, such as the automation of trading workflows, which is an area where we have seen a dramatic increase in buyside demand. Firms are also moving away from ‘home grown’ proprietary systems and beginning to investing in world-class Order Management Systems (OMS) to enable FIX adoption and access multiple broker destinations for increased liquidity. At Charles River, we’ve certainly seen a direct correlation between the implementation of the FIX Protocol and the demand for preand post-trade TCA analytics.
FIX: Which countries/markets are acting as FIX front-runners?
AM: In LATAM, Brazil is the clear frontrunner. Black box and algorithmic trading solutions are already in production with the local exchange, and much of the Brazilian sell-side community is already connected to multiple FIX networks, receiving order flow from international players.
Mexico is not far behind, and both of its exchanges are already FIX-enabled. The Mexican Derivatives Exchange (MexDer) has promoted FIX in the region, drawing international order flow directly to its markets. The MexDer has also worked with service providers to offer FIX platforms to the sell-side community.
FIX: What are considered the barriers to further FIX adoption?

AM: FIX will not become a widely-used solution in LATAM until the local buy-side increases demand for electronic trading, has the proper infrastructure in place, and fully understands all of the protocol’s benefits. Many LATAM firms still rely on manual processes and homegrown solutions that cannot support multiple asset classes and/or new regulations. Leading international Execution Management (EMS) and OMS systems incorporate access to regional and global FIX destinations, and ensure that all FIX orders comply with international and local regulations, such as Brazil’s CVM rules.

Cost and resources have always been major barriers to the adoption of FIX in Latin America. Virtual private network (VPN) capabilities are allowing firms to use the internet, instead of dedicated telecommunications infrastructure, to trade electronically via FIX. VPN connectivity for FIX is particularly attractive to firms in emerging markets, because they can quickly get up and running with little investment. So, for firms that prefer a dedicated teleco infrastructure, VPN connectivity provides a good temporary solution during extended teleco installations.
Network providers, such as Charles River, offer complete services for FIX software administration, testing, certification and connectivity management – allowing buyside firms to focus internal resources on investment management activities.
Further education regarding the FIX protocol will increase LATAM’s buy-side adoption. We help our clients in LATAM, and worldwide, to identify their specific challenges and solutions for accessing liquidity. We also offer training and participate in industry forums, such as the FPL Latin America Electronic Trading Conference in Sao Paulo, to educate buy-side firms on the benefits of FIX in automating workflows, ensuring compliance and gaining seamless access to global liquidity.

Equity Trading Fundamentals: How Fast, How Small, How Soon, and How Easy?

By

kerr_hatrick

-

June 15, 2009

By Kerr Hatrick, Danila Deliya
In the last 18 months, the credit crunch has distorted equity market conditions significantly, but there are some trends that appear to have continued, despite recent shortfalls in liquidity. To provide some context on these trends, we analyze and quantify the mechanics of trading over a significant period of time, across a wide range of different markets. We confine our study to looking at trading patterns of the most liquid stocks1 in the countries studied.
One of the clear advantages of this cross sectional and historical approach is that it allows the identification of outliers. For equity trading, the clear and consistent outlier is still the US, where trading in the most liquid assets is still faster, and smaller, than the busiest non-US assets.
We attempt to show how significant differences in trading environments are, by looking in detail at the month of October in 2008. We compare all venues analyzed and attempt to place them on the evolutionary line travelled by the NYSE. While interesting, we note that such a comparison implicitly assumes that exchanges will travel the same line. At the very least, the regulatory regimes in different regions should make us question this assumption.
Lastly, we look at bid offer spreads and how they have evolved. These spreads are an important part of transaction cost. We look in particular at how they have evolved over ‘Crunch’ period and beyond.
The Evolution of Size and Speed in Global Equity Markets
Over the past ten years, with the growth of program trading, algorithmic trading hubs have moved from novelty to ubiquity. They now manage a sizeable portion of trading activity in major markets. In doing so, they have transformed what was in effect a paper driven process, where traders would calculate what to execute when, into a fully automatic one. Transaction costs have been pushed down to the limits imposed by profitability. What has this process looked like in terms of trade speed, and size? We consider speed first.

We measure speed in terms of typical intertrade duration; that is, the typical time, in seconds, you would expect to wait for one trade to follow another. Results are aggregated over the countries, for the top ten most liquid stocks, per year. We concentrate on continuous, automated trading.
For the US, typical trading duration has compressed steadily. Intertrade times for liquid assets are typically less than 1 second. Indeed, for NASDAQ, intertrade duration for liquid assets is significantly less than this. In terms of the greatest increase in trading speed – and possibly the greatest increase in automation – Europe stands out.
How soon will my exchange be as fast as the NYSE?
Against our better instincts, we measure trading speed on different exchanges, but using the NYSE as a benchmark. In other words – again, for liquid names – if you had to guess where an exchange placed against the NYSE, using just typical trading speed as a measure, which year of the NYSE would be most similar to where the exchange is, currently. Why not NASDAQ? Simply because trading speed there, as measured by intertrade duration, typically makes the other exchanges look unflatteringly slow. For instance, in ’06, the typical intertrade duration on NASDAQ, for our collection of liquid stocks, became faster than all other exchanges are now (including the NYSE). We hasten to add that faster speeds, of course, do not necessarily equate to more efficient markets.
In addition, an increasingly large proportion of NYSE stocks are traded on alternate, non-NYSE venues – so the typical intertrade duration is actually an overestimate. But it seems clear from the data that principal US markets currently outstrip other markets. And in the US itself, one market – NASDAQ – still clearly outstrips the other. The cold hard quantitative facts justify them being regarded, at least currently, as the most evolved, with respect to speed and cost.

How much are trade sizes shrinking, really?
What conclusions can we draw from the data on trade sizes presented in figure 2 and table 3? The years in which trade sizes actually increase – especially in Hong Kong and London – have been the years of the bull market.
Typical size traded is determined by the cost of trading. In the US, the cost of trading on both NASDAQ and the NYSE has been low, relative to their peers in other regions.
Lower costs translate straightforwardly to smaller trade sizes. Hong Kong, on the other hand, stands out as having larger trade sizes. This isn’t just a simple matter of stamp tax, which is levied on a per-notional basis, or the bull market. Trading lots are typically larger in Hong Kong, and push up typical trade sizes.

While there seems to be a general downwards pressure on trade size, the different countries occasionally buck the trend – witness the recent increase in trade size on the Tokyo Stock Exchange, for instance. It should be noted that the data sample, per year, focuses on the ten most liquid stocks traded on the respective exchanges; the further one moves away from liquidity, the greater the uncertainty in the estimation of typical trade size.
Trade Size is Shrinking, but the Queues are lengthening…
So far we have focused on typical intertrade durations, but this is only one measure of the speed of trading. More sophisticated measures also take into account orderbook queue dynamics; in other words, how many times you would expect an order to be placed, or cancelled, on the order book. We measure simply how frequently the bid/ask queues change, over a typical trading day, for our set of exchanges. The order cancellations or submissions we count occur only on the most competitive bid and ask levels. High numbers of changes are a strong indication of significant systematic, or algorithmic trading activity. It is here, in particular, that US trading really distinguishes itself from the rest of the world; specifically, trading on NASDAQ. In Figure 3, we look at a near current picture of number of trades, and the number of bid/ask changes, during October 2008.
Algorithms jostle for precedence in the bid/ask queues, particularly in their passive cycles. During these, they try to execute parts of their original quantity without resorting to a market order. This results in longer natural queue lengths, but does not fully explain the extraordinary number of changes evident on NASDAQ. We attribute at least some of this to other active systematic trading systems, perhaps designed to capture spread.

Ease of Trading over the Credit Crunch
Algorithms which target VWAP typically have a number of hard decisions to make. One of these, is when to transition from passive behaviour to more active behaviour. Optimal passive behaviour ensures good order placement in the bid, or offer queues. In a liquid market where there is some appetite for risk, passive cycles make executions easy and cheap. In less liquid, risk-averse markets, active behaviour is necessary to execute target quantities of shares: the bid-offer spread need to be crossed, and this pushes up the cost of the average execution.
The typical bid-offer spread that must be crossed at different periods of time varies widely. We show how it has varied over the credit crunch period in figure 4. We choose to focus only on this period to minimize the effect of tick size reductions which complicate earlier pictures of spread evolution. Some events in the history of the credit crunch are clearly visible in the typical bid/offer spread of liquid names, trading on the exchanges considered. Bear Stearns hedge funds’ bail-out is clearly visible in the NYSE spread history. Massive credit events like Lehman Brothers’ bankruptcy have a longer lasting effect on spreads.

Throughout the contortions, one trend has held steady: the trend towards faster, and – mostly – smaller and more fractured executions. It has held steady in all markets, through high volume panics, as automation suffuses equity trading more broadly each year.
To end on an optimistic note, if one views bid-offer spread as a risk indicator, then the risk aversion of the market has moved steadily downwards since March of this year. Perhaps new algorithms to deal with volatile spreads will emerge just as the volatility is decreasing. Whatever, it seems certain that algorithms will continue to evolve to the limits imposed by trading costs, and lack of alpha forecasts.

.cls-8{fill:#fff;stroke-width:0px;}

BUILDING MOMENTUM.

The phone may have dominated fixed income trading but talk is not always cheap. Stephen Gallagher and Paddy Turner discuss why electronic trading will have its day.

What is the history of the company?

Who is your client base?

Who do you view as your main competitors?

Can you tell me about the new dark pool service you are launching?

Is there more hand holding with clients as a result of the financial crisis?

What are the biggest challenges in today’s marketplace?

Do you think there will be a Euro TRACE?

What is MarketAxess’ plans for the future?

What about your plans for Asia and the Middle East?

A NEW BEGINNING.

Lehman had spent years building a premier equities division, reaching the top of the LSE. Adam Toms and Andrew Bowley explain how they plan to emulate that success at Nomura.

Can you tell me about Lehman’s development in Europe and the platform since the acquisition by Nomura?

What changes have you made to the platform?

Did you lose many people?

What have been the biggest challenges since the merger?

What about the image of Nomura as being Japanese and not a global player?

What impact has the financial crisis had on electronic trading?

STAYING THE COURSE.

The financial crisis has put the whole industry to the test but Paul Squires explains why AXA’s integrated platform helped them weather the turbulence.

When was the trading and securities financing (TSF) group established and what was the rationale behind it?

What has been the impact of the financial crisis?

What role did technology play?

In many ways the financial crisis has eclipsed MiFID which had been the big story before the Lehman collapse. What have been the outcomes?

What was the effect of the financial crisis on the stock lending side of the business?

In general, how has MiFID changed the European trading landscape?

Benchmarks continue to be a popular topic of conversation. Which are the most popular today?

Do you think MiFID will apply to fixed income?

.cls-8{fill:#fff;stroke-width:0px;}