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FIX – South African Style: Emerging markets have lots to learn from SA's rapid roll-out

By
Creating Digital
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Few markets can boast the growth numbers seen in the South Africa trading community over the past five years. Technology provider, Peresys, has championed the development of electronic trading and FIX during this period. Ashley Mendelowitz, CEO of Peresys, looks at what other emerging markets can learn from the southerly nations experience.
The adoption of the FIX Protocol and concomitant growth in electronic trading in South Africa has been nothing short of prodigious. A little over five years ago the local trading environment had the characteristics of your typical turn of the century emerging market – comparatively low volumes, telephonic orders, paper based order management and error strewn post trade administration.
Half a decade later, and the picture has altered in dramatic fashion. The value of cash equities traded on the local exchange has sky-rocketed to US$34.6 billion in October 2008, from US$6.6 billion five years earlier, an impressive 424 percent increase. Offshore originated electronic trading accounts for up to 25 percent by value traded, while upward of 90 percent of local institutional orders are now routed electronically. Capping the meteoric growth, South Africa now has the largest single stock futures market in the world, by number of contracts.
None of this would have happened without the FIX Protocol.
The seeds were sown as far back as 1997 when the top two or three buy-side firms began to explore options in terms of taking their equity desks electronic. It quickly became clear that the barriers to automation were high and wide. These included:

  1. Non-existent order management systems on the buy-side and sell-side
  2. Telecommunications monopoly and exorbitant bandwidth costs
  3. Reluctance of traders on either side to change their work flow
  4. Lack of open application programming interface (API) to the exchange matching engine or broker trading systems
  5. Virgin territory insofar as a globally accepted messaging and session management protocol for pre-trade and trade messaging
  6. Lack of local or international vendor appetite to invest in building a workable solution that addressed all of the above barriers.

Breaking Down Barriers
It took some five years to gradually knock down or climb over the barriers above, through cash and resource investment, constant evangelising the benefits of electronic order routing by the converted (including our firm) and, critically, the buy-in and backing of a buy-side champion. The first buy side champion in South Africa not only committed its firm to the concept, but also made it clear to its sell-side counterparties that the telephone would be phased out within twelve months.
In 2003, the implementation of a first buy-side to ten brokers began, as well as the selection of a FIX engine provider flexible enough to price their product at ‘emerging market’ levels. Within three years, the first FIX hub had established a South African footprint spanning eight of the top ten buyside firms, the top thirty five broker members of the local exchange and a large chunk of local and international hedge funds trading SA equities.
Once Direct Market Access (DMA) was allowed on the SA equities exchange, the ability for brokers to receive orders via FIX played a key part in the exponential growth in DMA trading volumes originating from outside the country. Multinational investment banks and hedge funds could leverage their existing FIX infrastructure to trade into SA in a cost effective, reliable and high speed manner.
Today all the barriers to electronic trading have been removed:

  • Local and offshore vendors have successfully rolled out FIX compliant OMS products
  • Local telecom competition and the decision to connect the local Hub to any global FIX network based on demand has translated into cheap connectivity
  • Traders have seen the financial benefit of increased order flow through electronic messaging
  • The exchange implemented a comprehensive and well documented API
  • FIX has addressed all user concerns about a global standard for messaging formats, workflow and session management
  • Electronic trading pioneers paved the way for other buy-side/brokers/vendors to follow in offering products that exploit FIX, including hubs, order management systems, algorithmic trading and IOIs




What Next For FIX In SA?
FIX messaging in the institutional environment is now a given, and all who have invested in the protocol are increasingly looking at how they can maximise their return by moving other asset classes and parts of the trade cycle to an electronic platform. Based on the pace of a number of projects, I would expect equity futures, currency futures and bonds to be routed via FIX engines and hubs before the end of 2009, with OTC instruments to follow in 2010.
IOIs, orders, trades and allocations are already automated for equities, and there is no reason why research documents and contract notes cannot be done via FIX as well, given the significantly lower cost and reliable services on the market.
With its fairly advanced financial market trading landscape, South Africa has proven to be an ideal laboratory within which to build, sell and implement cutting edge products and services.
The template that has proven successful here is not localised and could be taken to other markets, especially emerging ones who face similar challenges, ideally in a partnership model. This is all the more in the current conditions where managing and understanding the risk of trading is in the spotlight. Secure messaging tightly coupled with risk measures, such as limits and audit trails, is no longer negotiable and will be a pre-condition for cross border trading, if it isn’t already.
Today South African buy-sides and sell-sides have taken the baton and are enthusiastically pushing the boundaries with FIX and electronic messaging. Many of them have become members of FPL and no doubt feel empowered enough to plan for what is coming next. The playing field has been well and truly leveled.
Electronic order routing and trading are here to stay and, with similar risk appetite in the rest of the continent, most of Africa will have embraced FIX and reaped the benefits of increased investment, efficiencies and customer confidence in the next decade.
As for South Africa, we can expect volumes to keep growing as the FIX messaging footprint broadens into Asia and the US. The retail trading environment will also see dramatic transformation with private clients looking for bigger and better front-ends and functionality able to integrate seamlessly into multiple brokers and trading venues anywhere.
And maybe, just maybe, MIFID will come to Africa. www.peresys.com

It's a question of Risk!

By
Creating Digital
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By Kent Rossiter, Vincent Trouillard-Perrot, Gerry Pablo,
Put three men and a FIXGlobal’s Edward Mangles around a table; serve them lunch and let the tapes roll. FIXGlobal listened in on a conversation that ranged from regulators to risk and from FX to FIX.
Edward: In defense of the regulator … how should they know what’s going on when neither the sell nor buy-side seem to know?
Vincent: Recent events have shown the divide between the financial market participants and the regulator. For example, the Lehman’s mini bond issue has forced a strong dialogue between the regulator and, in particular, the broker side. But the engagement is slow.
Kent: Retail brokers tend to have a strong voice here in Hong Kong and over the years have developed a strong working relationship with the regulators. Local brokers can at times be pretty outspoken and have proven on many occasions to be an effective lobbying group. From our perspective international brokers tend to be less visible in some of these debates. We see certain common characteristics across Asia where understandably there is a good deal of focus on protecting the retail investor given the high retail investor participation in many of the stock markets in Asia including Taiwan and Korea. The challenge has certainly been in the retail space where there is an overlap of regulatory responsibility in approving and offering products.
Edward: Are we asking the impossible of the regulator to create the same rule book for retail and institutional investors?

Kent: The general principal is that retail investors are less savvy and experienced and regulations need to be explicit. There is a general assumption that as professional investors, institutions can operate with greater flexibility since they can understand the risks in a more sophisticated way. Taking account of this framework then it will not be possible to standardize for both types of investor. The risk is that setting minimum requirements to protect the retail investor may not suit the way business is transacted at an institutional level. Here we advocate consultation and support stronger trade associations.
Vincent: I don’t think you can realistically expect the same regulations for retail traders as for big institutional investors. That’s a utopia that’s never going to exist. These two  groups of investors have different needs. Many regulators – in Europe for example and Luxembourg in particular with their efforts to push through the UCITS 4 protocol – understand that you need different protocols for retail investors.
Kent: But Vincent, every investor has the same goal: making money. It’s only the detailed requirements that are different.
Gerry: There’s certainly a larger burden on the big firms to uphold ethical, legal and fiduciary standards.
Kent: Yes. Retail investors don’t generally have the same constraints on their activities. Institutional investors need a more developed investment process and must ensure fair treatment across all clients regardless of size and fees. Institutional investors will undoubtedly be looking at different investor objectives – for one, they need to be able to implement their strategies in much greater volumes, and in scale, for example.
Edward: How about the role of regulators in curtailing short-selling in many markets? Knee jerk or long-term strategy?

Kent: I’d like to see the ability to short-sell fully resumed as soon as practically possible. We’re now in a situation where some markets have suspended it, and some are allowing it again. This is not ideal. I certainly see the temporary prohibition as a knee-jerk reaction and understandable given the groundswell of public opinion and corporate pressure as the financial crisis took hold – not all of this opinion was entirely rational. In fact, short-selling restrictions can reduce volumes for trading in the markets overall. For one, we have a 130-30 fund. So in this fund, if we’re limited in the number of attractive long-short pair trades we can put on then we’ll just end up trading less. So it’s business that never happens and the unknown would-be client on the other side of our trade – whether they’re institutional or retail – through the exchange, never gets to take advantage of the liquidity. What we need is a greater understanding of how shorting operates. There is a lot of misconception around this issue.
Gerry: I see the value and merit in allowing short selling in varied markets. In markets that don’t allow it, the regulators need to develop this functionality. It encourages more liquidity and volume. But I do understand that in the current environment the regulators have little choice. We won’t know the full impact until later on.
Vincent: The problem is that there’s no consistency among the regulators. Some only forbid short selling on financials. It’s a disruption to competitiveness between various sectors.
Kent: Yes. And not being able to short, will reduce derivatives trading. The fact is, a lot of the shorting that goes on isn’t just one-way, but a strategy with a ‘long’ component to it as well. And funds that relied on the little performance boost from securities lending fees have also seen their returns diminished. The equity finance desks at the brokers have seen a real drop-off in trade volumes because of this.
Vincent: Now the regulators are trying to encourage investors to buy again in a bear market – and there’s a lot of inconsistency between the messages they’re sending now and what they were telling us six months ago.
Edward: How about Europe – and the role of the regulators?

Gerry: The European market is very different. It’s much larger, all the markets open and close at pretty much the same time and they have a common currency.
Vincent: I think the regulators are more pragmatic. But Europe’s by no means a perfect example. It has, in the past, proved hard to get approval from all the national regulators. But there seems to be a greater push. If you look to all recent efforts to reach a common agreement among the European regulators for the new UCITS 4 directive, which aims to create a common frame for mutual funds in Europe, it sounds like things are going in the right direction. Normally it would take up to five years to get approval from all the countries. But now we’re seeing a political pressure to harmonize – but we’re a long way from this in Asia.
Edward: With market harmonization, is Asia already learning from the experiences in the US and Europe?

Gerry: One of the things that is going to hold Asia back, in most of the markets, is the rule on foreign ownership. This is a limiting factor. I can’t see one country’s stock exchange owning another.
Vincent: It’s already happening in a cross-Pacific context, so why not in Asia. EuroNext is an association between Paris and NYSE. I can certainly see this happening between Singapore and Malaysia, and why not between Singapore and Hong Kong?
Edward: Would this kind of consolidation and partnership enhance competition and ultimately bring costs down?

Kent: This kind of thinking brings us back to the benefits to multiple venues, versus single, national exchanges. You need to think about fragmenting liquidity and whether this brings down costs, or pushes them up. The argument for multiple venues and/or national exchanges has a number of pros and cons.
Edward: How do your think technology will cope with the growth of multiple venues in Asia? Do we simply inherit what’s being rolled out in the US and Europe?

Vincent: Are the tech needs that different? I think we have similar needs worldwide.
Gerry: Technology in the US has had to be robust enough to accommodate the estimated 60 dark pools and exchanges that are currently operating.
Kent: The technology is already available. But it’s a big task to bring it all to Asia, where we’re still at a much earlier developmental stage than the US. But we’re seeing some investment being made here by the brokers, so that they can connect to multiple execution venues. But in a number of Asian markets the exchanges still have ironclad grasp on all trading and there’s no competition. These are the same exchanges which tend to have more restrictions on trading.
Gerry: Yes. While the various networks may have different functionalities, everyone’s game plan is pretty much the same: to provide liquidity and best price. This is the baseline forum for all the new venues.
Edward: I’d like to turn to another hot topic. Counter-party risk. From the buyside perspective, who’s calling the shots in allocating trades to brokers?
Kent: From our perspective, there’s basically two parts to that question. Firstly, our investment team conducts an extensive semi-annual vote to assess the services we use from the Street. So we get input from traders, research analysts, and fund managers on which firms are providing the best services. We then aim to pay more of our commissions to these ‘voted brokers’, but a prerequisite is that these brokers must be on our ‘approved broker counterparty list’. There are a lot fewer brokers on the ‘voted list’ than the broader ‘could trade with’ counterparty list. This counterparty list is reviewed and maintained by our risk department, and coordinated on a global basis. The actual placement of trades is not decided by management – and I suspect that’s the way it is at other firms as well. An added level of complexity comes into play with unbundling, which is growing in popularity and seeing some real take-up in Asia, probably accelerated by the recent financial crisis.
Furthermore, there are a number of smaller, specialist firms whose financial situation may be tenuous – and we won’t trade with them. We’re assisted by the technology of our systems, so our EMS even prevents us from routing or processing trades with a broker code unless that broker has been approved. And when an approved broker goes ‘on watch’, then their codes are deactivated on the system.
Vincent: Counterparty risk is not exclusively on the broker side. In the fund industry, more and more attention is focused on the custodian firms. Regulation insists on a separation between who manages the fund and who holds custody of the fund. This is relatively new and it’s the responsibility of the fund manager. Our clients are asking us now: who is your custodian and how do you review your brokers.
Kent: Often the client already has a custodian, and we’re just taking over an existing mandate from another manager. However, in many cases where a mandate is new, the clients may well have chosen the custodians without our input.
Edward: How has the recent turmoil affected the internal relationships? Clearly, the risk management and trading teams will have different priorities. How do firms marry the need for tight control and regulation with the need for risk taking that is inherent in making money for clients?

Kent: In our industry, you do need the risk takers. This is how you beat your peers. Nevertheless, you need monitoring on the risk side to make sure you’re capturing the full picture. Reviewing the credit worthiness of trading counterparties isn’t a task that rests with the trading dept. That’s better kept with an independent department who’s tasked with looking into their financials.
Vincent: On one hand we’re seeing a flight to quality and a search for simple products, together with a strong pressure on disclosure and transparency. But this does risk standardizing your products. You need to be able to deliver a little bit of alpha to prove to your investors that they’re right to entrust you with their money. As a fund manager, you need better products to justify your fees. If you simply replicate an index, where is your added- value? It’s a balance between the monitoring system and the judgment aspects of the investment process. We need to differentiate, but we have tremendous pressure to stay within our guidelines. Our head office and also the customers require this.
Edward: A recent buy-side survey highlighted that the buy-side is going to spend as much on technology this year, as last. Do you think this is an indication that the buy-side is taking ownership of the technology, rather than relying on the spending by the sell-side?

Kent: Maybe the sell-side feel that they’ve already spent enough on technology, but I’m not sure they’re anywhere near where they need to be, for example with regards to accessing dark pools in Asia. For that matter, most aren’t even using their internal flow in an effective manner. And when it comes to popular usage of smart order router’s (SOR’s) in Asia, it’s an investment that’s been mostly overlooked up till now. Asia’s had dual exchanges like Osaka/Tokyo, or India’s Mumbai/National exchanges competing with each other for flow for years, but very few brokers can effectively trade between them in an electronic and automated manner. Most are still using dealers to do this trading manually. So a lot of the spending the sell side’s done was on technology to help themselves be able to handle high capacity periods, i.e. with the use of DMA and Algo’s, either for their own staff internally, or direct usage by their clients.
Gerry: We certainly need to keep on top of our IT requirements as there is always the desire for larger budgets in this space. We always need greater advancement in this dynamic environment, and we need to ensure that we capture every part of the technology advantage to create speed, precision and cost reduction. Technology is a continually evolving arena, so taking the lead, rather than ownership, may be more appropriate, but it is a consultative process.
Edward: What is the role of FIX? Is this the way forward for a more efficient trading platform in Asia?
Kent: Certainly the kind of standardization of messaging that FIX creates makes things much easier. We are all real lucky that every major Asian market has adopted FIX as the de-facto standard.
Vincent: I’m sure we’ll see the regulators pushing for much greater standardization and FIX has a key role to play in this.
Gerry: I think despite the difficulties we’ll have bringing markets such as China under a universal protocol, it is still what we should aim for. We need an agreed set of parameters to create this one homogenous, efficient electronic platform for routing orders, trading and settlement. This is where I see FIX advantages. It’s a neutral platform which already has broad consensus between the buy and sell-side.

Charlotte Crosswell : Nasdaq OMX

By
Ian Rycott
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This is not the first time Nasdaq has tried to crack the European market but this time it is hoping to go the distance. Charlotte Crosswell outlines its plans for success.

Nasdaq OMX Europe launched at the end of September during the start of a volatile period. Had you thought of postponing?

It is always a challenge in these types of market conditions and questions were raised as to whether we should push back the timetable. We had an aggressive timetable and were keen to keep to our original launch date. We had an office in London and we have been working hard since our announcement in March. The last few days were hectic and a couple of customers did put off testing for a few days, although that was to be expected. We have a strong pipeline of business.

What do you think sets Nasdaq OMX Europe apart from its competitors?

If you look at the bigger MTF picture, it comes down to price, speed, technology and sustainability. In our case, we have leveraged our INET technology, (which is the basis for Nasdaq’s US electronic stock market) and have tailored it to the European market. It can handle high volumes at sub-millisecond transaction speeds. The other main difference is our goal to be the most competitively priced platform, and to that end we have been very aggressive. Also, another key differentiating factor is that we offer a service which routes trades through to other primary exchanges or platforms when they don’t match on our order book. Due to our low costs of starting up and our existing well reputed technology, we also have a sustainable model which is important in the current market.

Can you expand on the order routing service?

We will use Citi’s memberships and technology to give our customers efficient, fast and low cost access to multiple pools of liquidity – MTF’S and primary markets – across Europe. I think people recognise that Europe is different from the US. It is much more fragmented with different markets, currencies and regulations. Our service offers participants access through a single connection and is particularly useful to people who do not have smart order routing systems. One of the ways we took market share away from the NYSE was by targeting mid-tier firms who did not have this technology. Orders will automatically execute on our own order book if we can match or better the best price in the market. If not, we will route to the market with the best price.

And what about the pricing promotion – which includes a 25% increase in rebates to 0.25 basis points for adding liquidity on the market by posting sale or purchase orders on the book, and a further 17% discount for removing liquidity from the Nasdaq OMX Europe order book?

Our promotion is part of our promise to deliver a better trading experience to investors, while at the same time reducing costs not only on our own book but also across other marketplaces in Europe. We are charging an all-inclusive transaction fee of 0.25 basis points for routing orders in UK-listed equities to other MTFs or the London Stock Exchange (LSE), representing a further 70% reduction in current routing charges to the LSE. We introduced this in early November and it applies to all Nasdaq OMX Europe market participants. If we cannot offer the best price we will route it away to the venue that does. As for the future, the promotion runs until the end of the year and we will determine whether to extend the price promotion.

This has not gone down well with the LSE. What do you think of its response of charging one basis point on equity orders channelled to its market from competing platforms and criticising the promotion?

I think our move has sent a wake-up call to the European exchanges that competition is here to stay. LSE’s action seems to be contrary to the core principles of MiFID and we are sticking with our pricing, regardless of the LSE tariff. If we can offer price improvements, then I believe it is a good thing and will apply more pressure on the sellside to use our platform.

What do you see as future challenges and what are your plans for the 2009?

One of the advantages that we have is our low overheads. We only have 25 people and we are using the offices that were already in the group. This enables us to build our business while keeping our costs down. We started trading 25 FTSE 100 stocks on the 26th September and over the weeks rolled out to 600 across Europe. We will continue to add to the list and the goal is to reach 700 European blue chip stocks. Our target is to capture 5.0% of trading in a year’s time while our long term objective is 20%.

Our aim is to attract a wide range of customers and next year we will continue to build market share. We plan to target small to mid-sized brokers as well as spend more time with all our customers in order to ensure that we are responding to their needs.

What do you see as the big issues in the market in general?

One of the big problems is the lack of a consolidated tape of pricing trade data and we are participating in discussions with other MTFs to see if we can find a resolution. There needs to be more transparency in pre- and post-trade reporting. Everyone wants liquidity to move from the main markets and then once it does, we can compete for it. However, now when one of the main primary markets goes down, it is difficult to see who is determining the price. We definitely have a long way to go but I think we are heading in the right direction and competition will really open up once we have that consolidated tape.
 
[Biography]
Charlotte Crosswell’s current job as president of Nasdaq OMX Europe is her second stint at the exchange group. From 2004 to 2007, she worked as head of international listings before joining Pension Corp., a London-based pension management firm, where she was partner and head of business development. Previous to those two positions, she held a number of management positions at the London Stock Exchange, including head of international business development. She started her career working in European equity sales at Goldman Sachs in 1996.
 
©BEST EXECUTION 2008

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Mark Hemsley : BATS Trading

By
Ian Rycott
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STEPPING UP TO THE PLATE.

BATS_Chi-X_MarkHemsley_640x375

BATS Trading has made a name for itself in the US by stealing the primary exchange’s thunder. It is hoping to do the same in Europe. Mark Hemsley talks to Best Execution about the trading platform’s strategy.

What is the background of BATS?

BATS was borne out of a high frequency trading environment and launched in January 2006 by 13 former employees of Tradebot Systems (a proprietary trading house). We now have 12% of the US market and are hoping to emulate our success in Europe. Obviously, there are differences between the two and although 90% to 95% of our platform is the same as the US, we have configured it to the clearing and settlement structures, local data systems and multi-currencies. We started out with 10 UK shares and are well into a phased rolled out of UK, French, Dutch, Belgium and German securities. At the moment, we have 22 employees and we expect that number to rise to 30 by the end of next year.

There has been a spate of MTF launches in the third quarter, what is your differentiating factor?

We have built a good reputation and trackrecord in the US and believe we can build on that in Europe. We also have a low cost base. We are based in Kansas City and can share the technology development costs between the two locations. Also, we deliver. Six months ago, we were across the street in a cafe and today we have a data and market centre, Financial Service Authority approval and are building market share. The other important factor is that we spend alot of time talking and working with the trading community to develop solutions. Ultimately, though, one of the most important factors is our trading technology. There is definitely a premium on speed.

Our platform enables people to trade 2,000 a second, which no human can achieve, and the BATS US platform has handled up to 187,000 trade messages a second over a sustained period of several hours. However, it is not just about raw speed in terms of execution. It is also about reliability and efficiency. It is also capable of handling high volumes, which has been particularly important in the last few months. The platform will not collapse under pressure and has been built to deal with unexpected events.

What has been the reception so far?

We are already ahead of schedule in the number of subscribers we thought we would have and our team here is busy signing new participants. They include proprietary trading houses, bulge-bracket brokers and smaller broker-dealers. We do not just want a corner of the market but a meaningful share and hope to have a 5% market share sooner rather than later, although our eventual target is significantly above that. The goal is to expand market share first and profitability will follow once we have achieved that.

How do you see the landscape unfolding?

I think Europe will emulate the US in terms of competition in the form of alternative trading platforms. We have already seen a number of high frequency players in the US setting up operations in Europe to take advantage of MiFID. We expect that to have a positive impact the MTFs. In general the MTFs have superior technology to the incumbent exchanges. They also offer one place to trade pan-European equities. I think the exchanges have been slow off the market in developing technology.

The next stage of development will be in the back office. Despite all the efforts in Europe, there is still no pan-European clearing house. Instead, we have two to four large central counterparties that can compete and interoperate. I think this is a better structure than in the US where there is one but that does not necessarily mean it is the most efficient.

Touching on the exchanges, what do you see as their future?

One of the problems is that many exchanges have shareholder bases that are looking for profits and return on capital. They are now trying to play catch up which is why we are seeing many announcing plans to launch their own MTFs. The main attraction of an MTF such as BATS, though, is cost. It is much cheaper to connect to our platform. We do not charge for membership, market data or connectivity whereas most exchanges charge for connectivity and offer proprietary networks.

The other advantage is people can come to one platform to trade pan-European equities instead of five or six. Part of the strain on exchanges is that they have a national view but they need to offer pan-European trading as well as rationalise their cost structures across boundaries.

Going forward, I think what we will see is that liquidity will beget liquidity and traders will move towards those centres that offer the best pricing, service and technology. The platforms that can achieve that will be the successful ones. Looking ahead, I think there probably will be small number of MTFS and exchanges that will survive.

What are your plans for 2009?

We will continue rolling out trading on the main European markets and signing up as many new participants as we can. Other plans include pricing innovation and implementing customer order functionality which is underdeveloped here in Europe. One of the main differences between the US and Europe is the lack of a consolidated tape which can make getting the best price difficult. I think it is useful to have a reference price so it is clear as to what you are getting.

The other feature we plan to introduce is sponsored access which enables participants to not only manage risk but also interact with BATS pools of liquidity.

Following on from that, can you explain the deal you were involved with Chi-X and Nasdaq OMX on symbology?

The three of us have formed an industry working group to develop a uniform symbology framework for trading European stocks. The goal is to have European trading participants be able to easily consolidate market data from any trading venue – either MTF or exchange – and to more effectively smart route orders. While it is just the three of us, participation will be open to all European execution venues.

[Biography]
Mark Hemsley is chief executive officer of BATS Trading Europe. Previously, he founded Belvedere Hill Ltd., a London-based corporate advisory business and was chief executive officer of Choreology, a venture- funded start-up which specialises in the development of leading-edge enterprise messaging software. From 2001-2004, Hemsley was managing director and chief information officer at LIFFE and from 1996 to 2000 was managing director global technology – chief investment officer and chief operating officer at Deutsche Bank.
©BestExecution 2008
 

Robert Flatley : Deutsche Bank

By
Ian Rycott
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DB Rob Flatley
Rob Flatley, CEO of TS Imagine.

DB Rob FlatleyNAVIGATING THE AUTOBAHN.

 

Deutsche Bank has spent the past two years building a new trading route. Rob Flatley, talks to Best Execution about the autobahn Equity electronic trading platform which encompasses direct market access and algorithmic trading.

Can you tell me about the development of autobahn Equity?

Our Platformautobahn is an electronic distribution platform that offers execution services in different asset classes such as equity, fixed income, futures and options. The electronic equity platforms grew from mature cash and prop trading desks which were traditional businesses that had electronic components. When I joined Deutsche in 2006 every bank was continuing to transform their business models making electronic execution a core business strategy rather than merely a means of execution. The biggest challenge for me was to build a global platform and put a together a global team. I needed people who understood how to transform workflow from a traditional base to an electronic platform on a global basis. Today, we trade electronically in 62 markets. It helps us to be the first into many emerging markets as we can build better understanding into their regulatory, post trade processes and market microstructures.

What were the biggest challenges building such a platform?

It took us about two years to develop a set of market leading features we have today and the platform can be accessed from nearly every buy-side order management system globally. There were main two pieces of work. Firstly, from a distribution perspective consulting with and educating our clients on the finer points of our platform. As buyside is taking more control of their order flow it is important to explain how our products work and how they are integrated with the markets. Fund managers are at different places on the learning curve depending on their size and requirements. However, they are all focused on razor sharp execution, predictive analytics and measurement. For us, that means not only having people who understand the technology but also can navigate a complex conversation.

And the second challenge?

The other issue was market structure. The changes in regulatory frameworks in the US and Europe coupled with the increase in volatility mean an explosion of market data and venues. That presents a significant challenge from a technology standpoint. Think of London in 2005. There was one place to send orders and for accessing market data. By contrast, in 2010, there could be 10 places and ten times as much data. The benefit of market centre competition is that trading costs go down but the technology spend increases as you have to deal with more complex structures and systems. The markets are changing all the time which means we need to be ahead of the curve in terms of market structure details and products.

I know you have made investments in other networks. What is the strategy behind that?

If you look at the US, there were over170 investments by brokers in exchanges and ECN’s over the past six years. That investment wave was initially started by brokers who were fearful that NASDAQ and New York Stock Exchange’s consolidation of ECN’s would give them absolute pricing power. As a result, broker dealers started to invest in start-up and regional exchange platforms. For our part, in the US we bought a minority stakes in BATS Trading and BIDS Trading. In Europe ,we are one of the shareholders of Turquoise for both strategic and tactical reasons. We have our own views on market structure evolution. Additionally, no one wants to be the last one in trying to figure out how a trading venue works. We would rather exert influence from the beginning to better understand the regulatory issues and trading mechanism and to ensure that our technology is up to date and compliant.

How do you see the European trading landscape unfolding?

I think we will see many aspects of the US evolution unfold in Europe. We will see new players pile in and as with any industry, the models that are good will rise to the top while those that aren’t will fall to the bottom. There will also be some consolidation after the growth in venues. The difference, between the US and Europe is that things will move at a much faster pace in Europe than in the US mainly because a great deal of the work has already been done in terms of modern exchange technology and routing frameworks. For example, in the US, it took time for firms such as Pipeline and Liquidnet, which have non displayed pools, to adapt to sellside flow. They can plug that into Europe immediately. Today, we are well past the experimentation and adoption phase and are much farther along in the evolutionary cycle. We have a platform like Turquoise ready to trade in both dark and light pools from day one.

How has trading changed since the credit crunch?

Prior to 9 August 2007, stocks traded more or less the same pattern for the past three years. After the subprime crisis, volatility spiked, spreads have widened and there has been significant whipsaw price activity. This has led to an increase in trading volume along with a marked decrease in transaction size throughout the period. And when that happens, there are more transactions in the marketplace, which makes it extremely difficult, in terms of physical human reaction time, to actually trade even familiar stocks manually. The increased velocity in turn puts the emphasis on automation. Firms who were not fully electronic are now saying lets make the changes now in order to deal with the volatility.

What are the future plans for autobahn?

We have started to roll out our new product called optimal portfolio execution (OPX) which enables traders to specify stock and portfolio specific instructions. Typically, algos (algorithms) worked on a single stock basis with parameters built around one stock. However, this did not consider portfolio level instructions. Portfolio instructions were enforced more or less manually. We started this project before the credit crunch but it has become particularly useful with the increase in volatility and unexpected events such as spike in the oil price. For example, fund managers can add instructions around the movements of the NYMEX (New York Mercantile Exchange).

As this and other projects require a mathematical and quantitative techniques, we pulled people together from the derivatives area of Deutsche Bank to work on electronic equity the projects. We have used OPX on our programme trading desk and now we are in the process of educating our clients about how to use it.

[Biography]
Rob Flatley is a managing director and the global head of autobahn Equity at Deutsche Bank, is chair of the firm’s global equity market structure committee and sits on the boards of numerous exchanges. Prior to joining Deutsche, Flatley was managing director of electronic trading services at Bank of America where he oversaw the firm’s expansion into the space. Before that, he was chief operating officer of Macgregor and senior vice president of worldwide sales of Financial Technologies International.
©BEST EXECUTION

Clare Vincent-Silk : Investit

By
Ian Rycott
-

BUYSIDE DEALERS PLAY THE MiFID HAND.

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The combination of unbundling, MiFID and the ensuing new trading platforms and techniques has meant that the buyside dealer has had to rethink their role. Best Execution talks to Clare Vincent-Silk, principal, operations at consultancy Investit about her new report – The future of the buyside dealer – on how fund management companies are tackling the issues.

What prompted Investit to undertake the research?

It came from our Intelligence Services (a subscription service that allows members to access the latest reports and thinking on investment management topics) in response to members’ request for the information. There have been a huge number of changes over the past few years and as a result, quite a range of attitudes towards the dealing function. MiFID (The Markets in Financial Instruments Directive) has focused the attention but the Myners report and the publication of CP 176 (the Financial Service Authority’s consultation paper on bundled commissions, soft commissions and transparency) also made the buyside look at dealing in terms of how much money they were spending on research and execution. We wanted to get a picture of how firms were responding. Altogether, we held face to face interviews with 47 different firms, 20 of which were fund management groups, ranging in size from £15 bn to £1 trillion assets under management. About 16 were software vendors, three multi-lateral trading facilities (MTFs), three brokers, with the remainder being an investment consultant, outsourcing dealing providers and the Financial Services Authority (FSA).

What were the main areas that you covered?

We looked at a range of issues from the drivers to the use of MTFs, algorithms and direct market access to transaction cost analysis and the skills needed for today’s dealing desks. One of the general drivers is the desire to improve the efficiency of dealing due to the advances of technology. An interesting finding was that while MiFID is definitely a factor, the drop in broker capital commitment is also prompting the buyside to look at cheaper ways to trade large order sizes. Capital is not readily available due to the credit crunch and the industry expects this to continue.

According to our results, currently, 19% of our respondents used broker capital commitment, 12%, algorithms, 7% MTFs and 1% DMA. When asked what their behaviour would be over the next three years, 81% of firms said there would be an increase in the use of MTFs, 47% thought that there would be a decrease in the use of capital commitment while 78% saw an increase in the use of algos. Views were split 50/50 on the likely increase or decrease in the use of DMA. The reason for this response is that the use of DMA and algos are similar and people prefer using algos over DMA.

Was trade reporting a major concern as there is a great deal of talk about the lack of a consolidated tape?

Before MiFID, trade reporting had to go to the central exchange and was then forwarded back through data feeds via a Bloomberg or Reuters. This was especially true in the UK which had superior standards in transparency. Today, it can be a confusing picture especially with the increase in MTFs and dark pools. It is difficult to see pre trade price information and the buyside may be working in an environment where they do not have the confidence about the price. Although Reuters and Bloomberg say they have a consolidated tape, fund managers now have to pay more for the service. The European Commission is conducting a post MiFID implementation review which is due to be completed in 2010. It is hoped that trade reporting will be one of the areas it addresses.

How are firms upgrading their technology?

One of the big surprises of the findings was the rise in the buyside’s implementation of execution management systems (EMSs), We found that 40% of respondents had installed EMSs, in 2008, up from 14% in 2006, while only 20% were not considering moving to an EMS, compared with 54% in 2006. There are several reasons behind this trend. One is that fund managers are looking for more sophisticated execution techniques to improve dealing efficiency. They want better connectivity and an easier system to use for algos, pre-trade transaction cost analysis and other tools. Also, some firms had older order management systems (OMS) that did not have features such as FIX connectivity and it was cheaper to upgrade to an EMS than update their OMS. I also think EMS is seen as a sales tool which demonstrates that firm has the latest technology and is seeking greater efficiency. Finally, the EMS is a good way to monitor brokers. Even if a firm is not going to be actively using some of the more alternative trading methods, an EMS allows fund managers to keep an eye on their brokers, enabling them to ask more intelligent questions about their execution capabilities.

Are you also seeing an increase in the use of transaction cost analysis?

Yes, our report showed that 44% of firms give TCA reports to clients on request. This may only be one or two clients requesting, but it reflects growing interest in dealing efficiencies by clients. They are becoming much more knowledgeable about TCA and are asking more questions.

What are the views on commission sharing agreements?

The regulations were supposed to promote unbundling and the splitting of commissions between execution and research. However, our findings showed that some fund managers are still directing flow to their brokers as a reward for their trading ideas. This leads then to the question of what is the value of the flow and to what extent do commission sharing arrangements truly work. We found a wide difference in the number of CSAs being used.

From your study, what do you think the buyside believes to be one of its greatest challenges?

Ensuring that they have the right skill sets. As dealing has become more sophisticated, about 50% said that technology was a required skill set as dealing has become more sophisticated, while 17% were after sellside knowledge. They wanted people who had a greater familiarity with algos, DMA and new trading techniques. About 39% wanted more asset class knowledge, especially derivatives as well as exchange traded and over the counter derivatives as well as foreign exchange, moneymarkets and to a lesser extent fixed income. Roughly 17% wanted wider market experience such as quantitative dealing methods and more experience dealing in international markets.

[Biography]
Clare Vincent-Silk has worked in the financial sector for over 25 years, coming from a technical background developing front office systems solutions for broker dealers. In 1993 she moved over to the buyside where she designed order management systems and provided front office pre-sales support and general consultancy. Prior to joining Investit in April 2005, Vincent-Silk’s previous two positions were business relationship manager for the front office for Dresdner RCM and Morley Fund Management where she had the following roles: project management; front office IT strategy; system selection and implementation of front office applications which covered functionality from research to trade execution.
©BEST EXECUTION

 

Eli Lederman : Turquoise

By
Ian Rycott
-

ALIVE, AND MORE THAN KICKING.

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It may have seemed like a long time coming, but Turquoise is finally up and running. Expectations are running high but Eli Lederman believes the trading platform can fulfil them. He talks to Best Execution about the reasons he joined and his hopes for the future.

My first question is why did you decide to leave Morgan Stanley after such a long career with the bank?

I had a good career at Morgan Stanley but I thought Turquoise presented a fantastic, as well as challenging opportunity. The timing was also great in that thanks to MiFID, the market environment is changing from being monopolistic to one where there are several commercial possibilities. Our goal is to provide a better trading service with the new technology available and I believe that my experience with Morgan Stanley has helped. I also see Turquoise as a pure play in that it is a small organisation focused on one thing versus a large investment bank which has a portfolio of businesses. However, there are many things from the culture and approaches to work at Morgan Stanley that I am working to replicate.

From the tortoise on your shelf, I know you are well aware of the criticism and the nickname Turquoise was given. Can you please explain why it took longer than people expected to get off the ground?

It takes time to build an entrepreneurial and complex company like Turquoise. In the beginning there were no employers but just part-time people from the nine investment banks who are the shareholders. In a sense it was being operated as a project by a consortium, but last September we decided to reconstitute Turquoise as a company. The foundation had been laid and we then had to go find the right calibre of people to head the different divisions such as technology, operations, legal and compliance. We had to make sure that we chose people with the right backgrounds but who were also dynamic and entrepreneurial.

Who were some of your hires?

We hired Yann L’Huillier (former chief investment officer of the Boston Stock Exchange) as chief technical officer, Adrian Farnham, seconded from his day job at Morgan Stanley during 2007 to work on Turquoise, is now chief operating officer and Duncan Higgins, formerly of UBS, is head of client relationship management. Ian Werner, who was compliance manager of the London Stock Exchange is our head of legal and compliance. Altogether, we have 40 people from different disciplines and we are planning to expand as the business grows.

What do you think are Turquoise’s differentiating factors?

Turquoise will feature both a conventional displayed order book as well as a dark pool for anonymous orders. It will be possible for the dark orders to meet the light orders, which is an important factor because it gives the dark book the opportunity to attract small order flow. The aim is to have high cross rates available to our members which today number over 50. The minimum order for Turquoise’s dark pool is Euro 500,000, which is up to 20 times more than the average trade size. I think traders with large orders, or significant orders in less liquid names, will be comfortable with having them in the dark pool, where they can find the other side naturally and even benefit from crosses against the light orders. Overall, our approach is designed to increase matching rates, improve execution and minimise information leakage. We will offer trading in all 1,267 stocks in the dark pool – but also have an open order book trading for the 270 most liquid stocks.

Another difference is that we chose EuroCCP, (the European venture of US-based Depository Trust Clearing Corporation) as our clearing and settlement partner. Chi-X, NasdaqOMX and Bats Europe have all appointed Fortis Bank to handle clearing, EuroCCP will act as the single pan-European clearing platform for all Turquoise trades. The European market has a very fragmented structure at the moment and I think the combination of us and EuroCCP both offering pan-European platforms will help to steer that fragmentation.

Were you happy with the soft launch?

We prefer to call it limited live trading. This went very much as we expected and wanted it to in that it went according to plan and passed without any real issues or problems. From 29th August we opened the gates on the rest of the share universe and began trading in each of the 1,267 stocks in 13 countries. From the middle of September all of the founding shareholders will have begun market making in the most liquid 270 stocks and Turquoise will have fully completed the launch process.

Does it concern you that expectations are running so high for Turquoise?

I agree, expectations are running pretty high but we plan to meet them as quickly as possible. Over time, I think Turquoise will develop considerable market share in the transparent and dark book, although the dark pools may take a bit longer.
Shortly after we officially launch, I expect to see 5% market share. There are a growing number of platforms but we are also in a market environment where people are looking rather ruthlessly at their technology spend. They have to justify the cost for linking to the front end of a trading platform but also for the maintenance. Users will also be looking at the differentiating factors between the business models. I think our quality of execution, cheaper clearing as well as no membership fees will mean that users will not get a better price on another platform.

There was a lot of hoopla over Turquoise opening earlier than the LSE and Deutsche Börse. What made you change your mind?

There was a misperception in the market. Our plan was that this was always going to be a temporary measure. We were not looking for a competitive edge but doing it because the participants agreed it was a way of helping us to get critical mass and establish ourselves as a competitive platform. Once we achieved that critical mass, we would open at the same time as the LSE and Deutsche Börse and the other European marketplaces. However, we took the decision not to after we encountered threatening behaviour from the established exchanges. They said they would open earlier if went ahead with our plan. It really does not matter in the grand scheme of things and their behaviour makes me more confident about the likelihood of our success.

[Biography]
Eli Lederman is chief executive officer of Turquoise, the pan-European trading platform officially launched in September, 2008. Previously, he had spent 14 years at Morgan Stanley, the most current role being managing director in its sales & trading division overseeing the cash and derivative electronic trading businesses for European equity, credit and interest rate products. From 2004 to 2006 he served as co-chair for the FIX Steering Committee for Europe, Middle East and Africa. Lederman received his B.Sc. in physics from Brown University and his Ph.D., also in physics, from New York University. Prior to joining Morgan Stanley in New York, he was a post-doctoral research fellow at Harvard.
©BEST EXECUTION

Tony Whalley : SWIP

By
Ian Rycott
-

ON A CLEAR DAY… A BUYSIDE PERSPECTIVE.

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Tony Whalley has always been vocal about his views on the direction of the industry. He shares his thoughts about how MiFID is affecting the buyside and what needs to be done in order to improve best execution.

What has the impact been of MiFiD so far for the buyside?

There has definitely been fragmentation. Previously, in the UK, everything was traded on the London Stock Exchange and you knew what the volumes were and therefore, the appropriate benchmarks to use. While the industry expected to see different players in the marketplace, what perhaps it did not anticipate was the impact on the trade data side. There is no mandatory consolidated tape, and under MiFID, trades can be published to numerous venues, including traditional exchanges as well as multi lateral trading facilities, or directly to data vendors. As a result of regulatory changes, there can be a three day wait before we see the trade data. If sizeable trades are not printed, then that could have an impact on the price as it gives traders time to unwind their positions. It also makes it difficult to achieve best execution. From a trading standpoint, we believe we are doing this, but best execution is much more than price. It is a combination of factors including settlement and timeliness.

Do you think there will be a consolidated tape?

This is what the industry is pushing for but I do not think we will get one in the short-term. It means a change of rules for the whole of Europe and that takes time. It is not just about the UK but it impacts all stocks across the continent. It is an expensive proposition. For example, pre-MiFID, the cost of a feed into the London Stock Exchange cost £45 a month per work station but post MiFID, for that money you will not get 100% of the data. However, to plug into all the potential venues will now cost about £214 a month per work station. That is a huge difference. For us, fortunately, the majority of our trades go through the LSE and Chi-X (which provides the feed for free).

How has it affected SWIP?

It has dramatically increased our use of electronic trading whether through direct market access or algorithms. I would say the bulk of our business is going through the brokers’ pipes although we call the shots. The problem, though, is that investment banks are not talking to each other and are trying to internalise as much flow as possible. This makes sense in terms of their profitability, but my concern is ensuring I get the best price for any given stock, rather than lowering the cost of trading which is worn by the broker. My problem with banks internalising flow is there is always a chance I can get a better price elsewhere. I do not want to limit my options. This is why the sellside is looking at developing an independent smart order routng system alongside Turquoise which talks to all brokers’ dark pools as well as the main exchanges and other venues.

What has SWIP done to become MiFID ready?

I think the issues were on the legal and compliance side. We spent massive amounts of time and resources ensuring that we met all the requirements. We also spent two years upgrading our technology not just to meet MiFID require- ments, but to become more effective and competitive in the 21st century.

We installed a new version of OMS (order management software) – Macgregor XIP as well as FIX connectivity. We did not see the need for an EMS (execution management system) because we are long term investors on the systems side and the system we have suits our needs. It enables us to go from fund management to OMS to settlement. I think EMS is more for those who want to trade actively in the markets and are looking for a stand alone system.

Overall, the biggest challenge for us and the industry in general is to ensure that we keep up with the latest state of the art technology and ensure that the technology in question meets our requirements.

What was the reason for joining Chi-X as a non-executive director?

I have always been a keen observer of market changes and new entrants. I also thought it was time to stop complaining about the lack of progress from the outside and start influencing from within. I have, historically, held strong points of view regarding Project Boat and Project Turquoise and now I welcome the chance to bring the institutional investors’ perspective to the table.

The whole point in the current market environment is that we do not want one or the other execution venue to be dominant, as in the past, but we want and need them to work together in a symbiotic relationship.

What is your opinion about Turquoise now that it looks like it will be up and running by September?

I think there is more certainty now that there is an independent management structure and they have set a launch date. It has the backing of nine of the biggest global banks and they would like to see it succeed. However, at the recent TradeTech in Paris, one of the questions put to Peter Randall, (head of Chi-X) was – “What is the difference between you and Turquoise?” His reply was simple – “We are up and running and Turquoise is still a project.” I think we will have to wait and see something more concrete before we can say for sure whether Turquoise is successful. However, it looks like it will become a reality.

Do you think Europe will emulate the US in terms of execution venues?

In the US, it seems that you can buy an MTF off the shelf or on eBay. I do not think it will happen in the same way here. Europe is a different marketplace. There will be fragmentation and then consolidation but there is only limited room for a finite number of venues. Again, lack of clarity over data will hold things back until we follow the US example of a consolidated tape.

[Biography]
Tony Whalley is an investment director, head of derivatives and dealing,
and a member of the investment management group at Scottish Widows Investment Partnership (SWIP). He is also the manager of all tracker funds and all derivative-based funds. He joined the group in 1989 from Citicorp Scrimgeour-Vickers, where he was a director of derivative products. He is currently a member of the IMA and London Stock Exchange institutional advisory groups as well as a non- executive director of OMLX and a member of the market advisory board of LIFFE and is currently a non-executive director of Chi-X.
©BEST EXECUTION

Chris Smith : NYFIX

By
Ian Rycott
-

CASTING LIGHT INTO DARK POOLS.

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NYFIX is hoping that its recently launched dark pool will make the same splash on European shores as it has in the US. So far, competition is thin on the ground but that is likely to change over the next year. Chris Smith explains the group’s formula for success.

I know Euro Millennium has recently launched but can you please provide some background.

NYFIX was first established in the US in 1991, and in 2001 the business launched NYFIX Millennium, the US dark pool. Around the same time, we created a presence in Europe. We offer electronic trading software, FIX connectivity and execution services to the global financial community. NYFIX realised the importance of FIX technology early on and bought a FIX connectivity software firm called Javelin which was known as a pioneer in the industry. It had a suite of products including Appia, which is a high performance FIX engine. It was because of this background in technology that we were approached by a group of sellside firms who realised that the US market was changing from the traditional floor-based to a more electronic or upstairs (over the counter) trading environ- ment. They wanted us to create an electronic market system and as a result, Millennium was born.

What has been the impact of Reg NMS and MiFID?

Reg NMS was a key driver for the proliferation of dark pools in the US and although there are different figures out there, on average, the total market share of dark pools in the US is some- where between 5% to 10%. NYFIX Millennium, which matches an average of 50m shares per day, is one of the top dark pools. Trading in dark pools has really taken off. In 2001-2003, there was steady but not spectacular growth but in 2004, people ramped up their use driven both by regulation (like Reg NMS) and an increasing adoption of electronic trading tools and algos. The venues in the US each have their own value propo- sitions and strategies but we are definitely seeing an overall increase in the use of algorithms.

In Europe, MiFID was brought about to foster greater competition and a primary consequence will be the growth of alternative trading platforms including dark pools, although we do not expect to see anything like the number of alternative trading venues (MTFs in Europe) here as they have in the US.
I believe we will also see the buyside seek to take greater control of the way they execute their orders. They will utilise technology to enable them to create and operate different trading strategies for different orders. Market infrastructure innovation and the growth of dark pools as an example will enhance the choices the buyside have when it comes to executing their order flow.

Why was the launch delayed from last year to this past March?

We formed an advisory board of buyside and sellside firms and started meeting once a month from May 2007. From September, we recognised that if we launched directly following the introduction of MiFID, no one would be ready to talk to utilise the pool.

Our advisory board provided us with an invaluable source of product development input and in full consultation with them, we scheduled a Spring 2008 launch to ensure that our service would meet all of their requirements.

The involvement of our Advisory Board ensured that we would not fall into the same trap as many firms do, when they fail to recognise that subtle cultural and market differences can impact the success of bringing a service to a new market.
Our advisory board includes Allianz Global Investors, Baring Asset Management, BNP Paribas Securities Services, Citi, CA Cheuvreux, Credit Suisse, DWS Investments, Goldman Sachs, Insight Investment, JPMorgan Asset Management, JPMorgan, Merrill Lynch, Resolution Asset Management, Schroder Investment Management and UBS.

What, if any will be the differences between Euro Millennium and NYFIX Millennium?

We built the Euro Millennium service based on NYFIX Millennium technology, drawing significantly on our heritage and experience in the US . With both services clients can place orders which reside in the pool until they are matched, or they can choose to send pass-through orders, which sweep the pools for a match before being routed to another source of liquidity. In the US, this other source of liquidity is typically an electronic trading network or exchange. A major difference with Euro Millennium is that the other source of liquidity can be a preferred broker dealer. We made this enhancement based on feedback from our Advisory Board.

How do you see the Europe an developing markets in the wake of MiFID?

There are some clear parallels to the way the industry developed in the US initially, using the timeline I referenced earlier; I believe the first three years of fast growth seen in the US could be consolidated into a single year. We are going to see a revolution in the market in terms of trading with national sentiment slowly diminishing. We are already seeing that happen with the success of Chi-X, which I believe has been a trail blazer. Overall, there are likely to be a smaller number of pools because Europe was already an efficient marketplace. However, one critical potential inhibitor to development could be the lack of a central clearing and settlement system. There is movement happening on this front in Europe and I believe that the growth of the multilateral trading facilities (MTFs) will help to force change in the clearing and settlement infrastructures in Europe.

Although it is early days, how been the response to Euro Millennium?

The response from the market has been exciting and we are seeing a great deal of interest in linking to the service. With all new services of this type, it takes time for clients to adapt to the functionality of the service and build the appropriate tools to allow their traders to reach the pool. This has taken some time although it is now accelerating. The main reason has been technology resourcing with the buyside upgrading their order management and execution management systems. We are coming to the end of the tunnel and in the meantime we have been developing our product offering.

In addition to our success with Euro Millennium, we are also very excited about our recent acquisition of FIXCITY, a UK based specialist in web-based electronic trading and liquidity discovery solutions. Its flagship product is iodine, which is known for its IOI (indications of interest) analysis, filtering, and alerting capabilities. NYFIX plans to combine its IOI workflow expertise with FIXCITY front end technology which will enhance our client’s search for liquidity. The system is already being used in Europe and we plan to roll-out to other regions later in the year.

Can you give us more detail behind the SWX deal?

About a year ago we developed our business plan for Euro Millennium and one of our goals was not to be a club for a particular segment or platform. We see the Euro Millennium service as a truly open and complimentary venue to that of exchanges and other MTFs. SWX Europe was very interested in our vision because they were looking for innovative solutions to add and create new liquidity. We announced a deal whereby NYFIX Euro Millennium will power the Swiss Block service offering non displayed liquidity trading for Swiss blue chip securities. The service is expected to be launched in the summer of this year.

[Biography]
Chris Smith is head of Euro Millennium and director of NYFIX International. Previously he was with SWX Europe as a consultant and vice president of Trade Web. He started his career at Fidelity Investments as manager, transaction support before joining Thomson ESG as director, global strategy, planning and marketing, and then Reuters as manager, straight through processing.
©BEST EXECUTION

Rob Maher : Credit Suisse

By
Ian Rycott
-

THE START OF A NEW CHAPTER.

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It has been all change at Credit Suisse’ Advanced Execution Service (AES) group. After more than six years at the helm, Richard Balarkas left last year to be replaced by Manny Santayana, previously head of AES sales for the Americas. Meanwhile Rob Maher moved to London only two months ago and plans to leverage his experience in the US into the European markets. He talks to Best Execution about the firm’s plans.

Credit Suisse is considered a pioneer in the execution and algorithm space. Can you please tell me how the business developed?

Credit Suisse’s Advanced Execution Services was launched in 2001 in the US as a result of the changes in market structure as well as regulation such as decimalisation. Initially, the tools we built were for our own internal trading desk but the next year we offered them to our institutional clients. We are now focusing on realising the full potential of our AES product and have access to 60/70 liquidity pools around the globe. We are also growing the brand to include other asset classes particularly foreign exchange, options and futures, along with equities.

Can you expand a bit on your multi-asset class offering?

We have seen tremendous growth in our FX product [AES FX] which we launched last year. Algorithmic trading into foreign exchange represents a significant shift in the institutional mindset. FX is a very different marketplace than equities in terms of risk and price, and the majority of participants are not profit seeking. We have applied the same principles we have used in equities – anonymity, efficiency and smart tools – to find the best liquidity. Although you would expect the world’s largest marketplace to be very liquid, it has many different players and at times can actually be quite a fragmented market. The product enables clients to vastly increase the efficiency of their trading.

We went live with our AES Futures and AES Options products two years ago and we have seen and expect continued growth. Both offerings are available with a full suite of algorithms and analytics on more than 25 exchanges globally.

Do you think that Europe will follow in the US footsteps now that MiFID is a reality?

I would say that Europe is where the US was about two to three years ago. It has been about six months since MiFID was launched and all the telltale signs are there in terms of fragmentation. I think there will be a proliferation, and by the end of the year we could see five to 10 different multilateral trading facilities (MTFs) and then like in the US, there will be a shakeout. However, I do not think that Europe will experience the same type of severe fragmentation as the US. The markets here went electronic about ten years ago and they were more efficient than when the changes took place in the US. I believe the main differences, as well as challenges, in Europe are the lack of a centralised clearing facility and a single consolidated tape*. For example, without a tape, it will make it somewhat problematic for efficient price discovery across markets.

What lessons have you learnt from the US that you will be bringing over to Europe?

Part of the reason I am here is due to my experience in the US. Credit Suisse’s philosophy in the US is that we go out and talk to as many people as we can, whether it is counterparties, alternative trading platforms or investment banks. The same principles apply here. We are neutral as our goal is to find liquidity wherever it resides. This is why you have seen us striking alliances with alternative platforms such as Chi-X and Turquoise. Before we decide, though, we conduct rigorous due diligence and look at the technical aspects, pricing plan and whether we believe the business will fail or succeed in attracting liquidity.

The AES department is very much associated with Richard Balarkas, who has subsequently moved to become chief executive of Instinet. What, if any, impact has that had?

AES has never been about just one person. It has always been a team effort. We have been raising our profile to assure clients that nothing has changed and that we will continue to deliver the same standard of products and services they have come to expect. We have been recognized for our groundbreaking work in algorithms by several industry and client polls and we plan to build upon that success.

What do you think the next generation of tools are going to be?

The most important development to date has been smart order routing, which seeks out the best liquidity across multiple execution venues. This product has become more important in Europe since MiFID and its focus on best execution. The future is less likely to be about the next algorithm that is going to revolutionise the industry but more about helping clients implementing their specific goals. Clients want to have a choice as to where they trade – primary exchanges, MTFs, or other venues, and our job is to offer an integrated service, that includes best of breed strategies.

The ability to customise is also increasingly important. As clients have become more comfortable with using algorithms and measuring what works best, they have also become more forthcoming about what they want. The vast majority would like us to take the complexity out of the trade, and we have developed a global framework which offers building blocks that allows us to do that in an effective and efficient way.

How do you plan to retain your competitive edge?

There is tremendous opportunity in the marketplace but you have to continually re-invest in the business to ensure that you have the best technology, ideas, products, and of course people. That goal is to develop simple, efficient tools that clients can plug into their own networks and systems. This has been one of our main drivers and we are fortunate in that we are able to do this from a financial standpoint.

* Consolidated tape: a US, high-speed system that continuosly provides the last sales price and volume of trades in exchanges-listed securities

[Biography]
Rob Maher is head of European Sales for Credit Suisse’s AES group. He is one of the original members of the AES team and has recently relocated to Europe after spending over five years managing AES sales for the Western US region. Prior to joining Credit Suisse, Mr. Maher was head of E-Commerce and Electronic Trading at Robertson Stephens.
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