Two thirds of buy-side firms expect to see significant movement to client-funded research funding models within the next two years, according to survey results from Substantive Research. Mike Carrodus, CEO, spoke to Global Trading to delve into the results.
Substantive Research conducted a survey of 35 large asset managers, with a combined AUM of more than US$11 trillion, to assess the buy-side appetite for investment research funding structure change. This follows FCA’s ‘Payment Optionality in Investment Research’ paper, published earlier this year, in itself a reaction to Rachel Kent’s Investment Research Review.
“Almost half [of respondents] think that there will be an equal mix of client-funded and P&L, which means one of two things,” Mike Carrodus, CEO of Substantive Research, told Global Trading. “Either some firms stay P&L and others make the move [to client-funded], or within budgets there’s some P&L and some client-funded. It would be a headache to administer, but it could be the way.”
Just over a third (35.3%) expect existing P&L firms to make no changes to their models, and only 17.6% predict the majority of budgets to move to a client-funded model. In terms of a time frame, there’s a three-way split. Some want to transition to a client-funded research budget rapidly, others want to wait and see, and a third group stated they will not make a change unless they are the only P&L research payers left.
“It’s not often that people have such different opinions about how things are going to unfold,” Carrodus commented.
85% of those polled currently use a P&L research funding model, and more than three quarters stated that they did not expect to make changes to their research process. Carrodus explained that this suggests firms’ confidence in their underlying research, valuation and procurement processes. Making change is more related to disclosure, he added, while Substantive Research’s report noted that firms will have to change their disclosure in order to fully benefit from regulatory change.
More than half of those surveyed shared their belief that although the details need to be ironed out, suggested amendments to MiFID II will remove operational barriers to allow firms to charge end clients for the investment research they consume.
Hesitancy to be an early adopter is driven in part by strategy level disclosures and other requirements that could worsen the administrative burden, the firm explained.“The market needs an early adopter group, it needs to watch people go through [the transition] before they have the conviction to move,” Carrodus added. He suggested that small-to-medium US firms with London offices which are currently caught under MiFID II will be likely to jump first, creating momentum for others to follow.
Looking ahead, “I don’t think there will be any big changes from now until the final rules,” Carrodus opined. “One issue is that currently UCITS aren’t included in this; for some firms, they’d need to see them included in order to move. The FCA has said that they’re going to get around to it eventually, but I think a lot of firms would rather it was in the summer rules when initial payment optionality comes into force.”
Concluding the report, he stated: “The key question remains: ‘How will end investor clients react to these returning costs, and how will asset managers’ adoption or avoidance of these new freedoms affect their competitive positioning?’
“What the buy side needs right now is a code – a set of standards that firms feel that they can sign up to. There will be different interpretations of the current wording of the FCA paper, and uncertainty on issues like what constitutes a ‘Strategy Level Budget’ and associated levels of disclosure. The buy side will want detailed frameworks to compare against, which the FCA can verify, ultimately providing more comfort to asset owners.”
Jeffrey Mortara, global co-head of equity capital markets, Societe Generale
Societe Generale has appointed Jeffrey Mortara as global co-head of equity capital markets. Along with Luis Vaz Pinto, he is responsible for the division’s operations.
Mortara has more than 25 years of industry experience and joins Societe Generale after eight years at UBS. Most recently he was global co-head of equity capital markets, before which he was co-head of equity capital markets for the Americas and spent almost five years as head of the firm’s equity capital markets origination division.
Earlier in his career, Mortara was with Deutsche Bank for close to 20 years—the majority once again spent as a managing director for equity capital markets.
Anne-Christine Champion, co-head of global banking and investor solutions, commented: “Jeffrey’s appointment comes at an especially opportune time for Societe Generale following the launch of Bernstein and its top-ranked equity research and distribution capabilities which together with Societe Generale’s own strengths creates a powerful and fully integrated equities platform for our clients.”
The Commodity Futures Trading Commission’s (CFTC) Technology Advisory Committee (TAC) has made five recommendations as to how the CFTC should handle AI responsibily in order to safeguard financial markets.
The TAC defined responsible AI with five typical properties which speak to how AI models are designed and deployed: Fairness, robustness, transparency, explainability, and privacy.
The TAC report recommends that: The CFTC should host a public roundtable discussion with industry to understand the types of AI technologies most prevalent within the sector; the CFTC should consider the definition and adoption of an AI Risk Management Framework (RMF) for the sector; the CFTC should create an inventory of existing regulations related to AI in the sector and use it to develop a gap analysis of the potential risks associated with AI systems; the CFTC should establish a process to gain alignment of their AI policies and practices with other federal agencies; and the CFTC should work toward engaging staff as both observers and potential participants in ongoing domestic and international dialogues around AI.
Christy Romero, TAC chair, CFTC commissioner
TAC chair Christy Romero said: “Given the collective decades of AI experience of committee members, their findings regarding the need for responsible AI practices, as well as the importance of the role of humans, governance, data quality, data privacy, and risk-management frameworks targeting AI-specific risks, should be taken seriously by the financial services industry and regulators.
“These expert recommendations are geared towards more responsible AI systems with greater transparency and oversight to safeguard financial markets.”
The TAC was created in 1999 to advise the CFTC on complex issues at the intersection of technology, law, policy, and finance.
Vinayak Bhat, senior vice president and head of APAC, Charles River Development
Charles River Development (CRD), a State Street company, has appointed Vinayak Bhat as senior vice president and head of APAC.
In the Singapore-based role, Bhat will be responsible for APAC business oversight and collaboration with front-to-back asset servicing platform State Street Alpha. In addition, he will have client and commercial oversight of the Middle East and will become chair of the newly-formed Alpha APAC Executive Committee
Bhat has more than 25 years of industry experience and joins CRD from FactSet. He spent 13 years with the company, most recently as senior vice president and head of the APAC business. Prior to this he was vice president and regional director of sales for South East Asia and India, and country manager for India.
Bhat began his career with Tata Consultancy Services, where he spent almost 12 years. Based in the US, he was a module leader and analyst, senior project manager and finally business relationship manager.
Spiros Giannaros, CEO and president of CRD, commented: “I’m very pleased to welcome Vin. [His] primary location is Singapore, which allows him to work closely with the broader State Street organisation on go-to market initiatives and client servicing.”
Bhat said: “I am delighted to be joining CRD at a time of exceptional demand and excited to work closely with our Charles River and State Street Alpha clients, continuing our open partnership model that has been at the core of our success. I look forward to working with my new colleagues to build on growth and expansion in the region.”
Robert Miller, head of market structure and liquidity solutions, Kepler Cheuvreux
Robert Miller, Vanguard
Vanguard’s global head of equity execution consulting explains how his team works to optimise trading practices and minimise costs; and discusses the future of equity execution.
What does your job title mean, and what does your role entail?
As the global head of equity execution consulting at Vanguard, I oversee the strategic direction and operations of the Equity Execution Strategy and Analytics team. Our team comprises individuals with diverse backgrounds in quantitative fields, data science and engineering and our primary focus is on leveraging execution technology, data, and research to advance Vanguard’s execution strategies.
In essence, my role entails leading a team that collaborates across global markets to optimise trading practices and minimise costs for our clients. We utilise cutting-edge analytics and innovative technologies to inform our decision-making processes, with the overarching goal of empowering our traders to achieve the lowest trading costs and unmatched efficiency. By continuously refining our strategies and staying at the forefront of industry trends, we strive to improve shareholder outcomes and uphold Vanguard’s commitment to delivering value to our investors.
You were an algo trader on the sell-side before moving to Vanguard – how has your approach to algos evolved since moving to the buy-side?
I have been trading for 20 years and in that time, I have been lucky enough to trade for all different types of market participants. Early on in my career I traded on behalf of retail clients back when we were using paper dealing tickets and fax machines, so there wasn’t a lot of algo trading necessary! I then moved to a hedge fund where the trading objectives were very different – algos had evolved significantly and usage had picked up, which started to change the dynamics of the market. To stay in front of the ever-changing market environment, we implemented transaction cost analysis (TCA) in order to review our executions and make tweaks to try and improve trading going forward. My career moved on and I started trading as a market maker – these algos are very different to what you see on the sell-side as again the objectives are very different – you have a risk book to consider, and this can change your perception of a security and help add to price discovery.
On the sell-side you have access to a lot of data – these large data sets make it ideal for analysis to try and gain insights into how you can evolve algo strategies, however they don’t necessarily see the parent order information, which can limit the effectiveness to the buyside and the data can be biased by the sell-side’s own setup. For example, how or when they sweep different venues or even what venues they are connected to. The buy-side on the other hand have access to parent level information and they can see the difference between broker setups on the same type of order flow. However, they don’t see a lot of data that the sell-side have access to further upstream – such as all the interactions at the venue level, particularly those that don’t end up with a fill. So, the buy-side/sell-side relationship has evolved as a partnership to help solve the complete picture and overcome the pain points.
You do a lot of work around TCA for Vanguard – why is it so important?
This is a question I get asked a lot, I always use a quote from Vanguard founder John Bogle – “Where returns are concerned, time is your friend. But where costs are concerned, time is your enemy.” Transaction costs will compound over time and slowly erode shareholder value. That’s why TCA is so important, if we can reduce our footprint when trading, ultimately the end investor benefits from tighter index tracking. TCA is used to measure trade effectiveness, identify outliers and to meet reporting and oversight requirements. The biggest impact our team has had is measuring and increasing trade effectiveness. We talk a lot about the trade feedback loop – the insights we gain through data analytics are relayed back to the desk to enable better execution. We hold regular feedback discussions with our brokers, venues, and other market participants to increase innovation in technology, market structure and regulatory reform in order to improve the overall market ecosystem.
The tools we have access to for TCA are constantly evolving – the industry as a whole has been using machine learning techniques for a while now which has given us different insights into execution data and have proven successful, however as technology evolves there will be a bigger focus on real time execution signals produced from large data sets – which will enable us to retrain models on the go.
How can traders best leverage data insights, and how are you feeding pre- and intra-trade data analytics into your dealer selection and execution in order to improve outcomes?
Traders can leverage data insights by incorporating them into their decision-making processes at various stages of the trading lifecycle.
Pre-trade – before executing a trade, data can inform potential opportunities and risks, which in turn can lead to a recommended trading strategy. Analysing historical market data, fundamental factors, macroeconomic indicators and other potential alpha signals to anticipate price moves. By conducting comprehensive pre-trade analysis, traders can develop well informed trading strategies that align with their investment objectives and risk tolerance.
Intra-trade – during the execution of a trade, traders can continuously monitor market data and performance metrics in real-time to make timely adjustments and optimise trade execution. This involves leveraging data analytics tools to track trade quality and monitor liquidity conditions that can ultimately reduce trading costs. By performing intra-trade analysis, traders can adapt their trading strategies dynamically to changing market conditions to maximise efficiency.
The EMS is important for intra-trade analysis – it can help leverage visualisation tools to track performance or detect anomalies. It can be used to set up alerting or automation based on changing market conditions – that could be momentum, spread, volatility or volume metrics.
What is the future for equities execution – what’s top of your list for 2024?
The future of equities execution is poised to be shaped by several key factors – here is my list for 2024.
Data quality and availability
Model interoperability
Computational efficiency
Market dynamics
Cybersecurity
I hope to witness in 2024 a concerted effort to collaborate and take tangible action on key items that have been discussed at length over the past few years. Recognising the collective benefit of shared standards, best practices and collaborative initiatives – market participants will increasingly come together to address common challenges and drive positive change in equities execution. Through collaborative forums and industry associations, market participants can drive progress and ensure that equities execution in 2024 is characterised by resilience, innovation and integrity.
Sandeep Sabnani, head of equities product strategy and growth at ION Markets, explores the explosion of the Indian equities market, and the role that trading technology is playing in this unprecedented growth.
In recent years, the Indian equities market has undergone a profound transition, emerging as a key player in the global financial landscape. In fact, the combined value of shares listed on Indian exchanges surpassed US$4trn on 5 December 2023 and just recently overtook Hong Kong to become the fourth biggest equity market globally. This rush has been driven by a number of factors including the burgeoning middle class, a surge in domestic investors, significant inward investments, as well as supportive government initiatives.
As the market continues to expand, we are also seeing a technological revolution in the trading systems that sustain the market. Broker firms are increasingly turning to advanced trading technology, working to understand its critical role in navigating the complexities and seizing the opportunities presented by this dynamic environment.
Unprecedented growth
The unprecedented growth has been fuelled, in part, by the increasing number of domestic investors. As the country’s middle class expands, against the backdrop of sustained, robust economic growth, interest in investments and in particular equities, has expanded with more individuals seeking to participate in the market. Traditionally, external investors have also been attracted to the Indian equities market for these very reasons – robust economic growth, demographic advantage, and an emerging middle class. More recently that has led Wall Street investors like Goldman Sachs and Morgan Stanley pulling out of China’s economy and into India.
As internal demand has blossomed, domestic efforts to attract international investment have grown too. For example, the Gujarat International Finance Tec-City (GIFT City) was established as an International Financial Services Centre to provide a favourable regulatory framework for financial services as well as boasting state-of-the-art financial infrastructure, global connections and branches of the National Stock Exchange of India (NSE) and Bombay Stock Exchange (BSE). This and similar initiatives by the Indian government are clear case studies for the drive to make the country an attractive gateway for foreign investors seeking exposure to India’s stock market.
Fuelling growth with technology
But this increased interest is putting a strain on the technological systems that underpin the market. For new investors, a lack of interoperability between global trading systems may compound the existing challenges of navigating a unique regulatory environment.
A crucial factor to ensure that foreign investors can participate in India’s equities market is the technology that broker firms so heavily rely on. The surge in demand is pushing firms to re-evaluate their current trading infrastructure and scrutinise their ability to adapt to the complexities of a globalised equities market. For international firms trading into India and local firms trading internationally in particular, it is no longer feasible to have separate systems for domestic and international business, which can cause logistical headaches, operational inefficiencies and unnecessary inaccuracies.
Likewise, existing algo trading solutions are often separate applications from the core trading platform. Such solutions can be difficult to scale up as volumes increase. There is a desire from broker firms for common algo functionality that delivers reliable performance and regulatory compliance. In order to stay competitive and keep up with the market’s growth, both domestic and international firms should work towards a technology strategy that prioritises having one integrated system that is able to deliver the full range of trading functionality. More efficient, streamlined and interoperable technology will help to ensure that anyone wanting to participate in India’s equities market can, sustaining interest in the opportunities presented by the dynamic environment.
Securing the future of India’s equities market
In this rapidly evolving landscape, the importance of keeping up to date with advancements in trading technology cannot be overstated. As the Indian equities market continues to attract both domestic and international interest, broker firms can get ahead by embracing, integrated feature-rich platforms that can deliver algo workflows and FIX connectivity as well as core trading functionality.
Looking ahead, the International Monetary Fund has projected that India is poised to overtake Japan and Germany to become the third largest economy in the world by 2027. What’s more, as global investors become increasingly optimistic, India’s stock market is predicted to surge to new highs by the end of June and gain nearly 9% in 2024. All eyes are on the region, with broker firms in India holding the key to unlocking the first door towards such impressive growth.
While IPO numbers are low, the chance to electronify new issues should be taken, minimising the risk and complexity of change. Dan Barnes reports.
Initial public offerings (IPOs) are not the most pressing issue in equity markets today – and that is precisely why now is the time to reform them, say market participants.
In 2023, global IPO volumes fell 8% year-on-year with proceeds down by 33% compared with 2022, according to EY, with 2023 being the lowest for proceeds in five years. Concern about falling IPO volumes in Europe is a pressing concern, for investors and politicians.
For the people who manage equity issuance, either in IPOs or in secondary placement of bonds, this let up in activity gives a window of opportunity to modernise the very manual processes involved.
“In some ways, equity capital markets have remained quite old fashioned, at least in part, because of the relative infrequency of activity,” says Gareth McCartney, global co-head of equity capital markets at UBS. “You might do four or five major IPOs a year in Europe, Middle East, Africa (EMEA) and by comparison you probably do 50 block trades a year. But equally, given innovation elsewhere in the market, relying on verbal order entry, manual processing and calibration, there’s a real opportunity for change.”
Ed Wicks, global head of trading at LGIM, says, “For equities, it’s an incredibly manual, laborious process and it’s not without operational risk or burden because of that. The number of interlocutors is high, with multiple portfolio managers (PMs) potentially looking to participate in an opportunity, multiple sell-side contacts to interact with as well, so the driver for me is probably first and foremost an efficiency play.”
The gap between the buy side and sell side creates operational risk through human error – which is an expensive mistake in large primary orders – and this needs bridging says John Bentinck, co-founder of Primary Portal, which has developed a platform specifically to tackle inefficiencies in primary markets.
“When a PM decides to submit an order indication, he will instruct his traders, who will then contact their sales-trading counterparts at the banks by phone, email or chat,” he says. “The sales traders will then manually re-key that order indication into a ticketing system to get it into a bookbuilding system.”
Motivation on the sell-side is just as high as it is for asset managers notes McCartney, as the amount of labour spent without generating addition value is high.
“Today the process is fairly manual and voice-operated, rather than electronic,” he observes. “If you just take the book build, the bank must go to multiple traders and a lot of people have to enter the order over the phone rather than electronically. As an order gets adjusted quite a lot during book build because of price changes or similar, that’s quite labour intensive. It’s ripe for disruption.”
The electric IPO
Electronifying the IPO process is not a new idea, notes Adam Conn, head of trading at Baillie Gifford, and with both buy- and sell-side firms agreeing that change is desirable, a direct path forward is needed.
“In 2014, a number of buy-side firms met to discuss ways to improve efficiency and when transmitting orders in equity IPOs, placings and fixed income new issues,” he says. “We need to replicate the order-placing process in the secondary market and replace the current manual process. The goal is to remove the risk of error in transmission, and of any misinterpretation by the receiver of those placed orders.”
However, there are nuances within the process which could be tackled by any given solution, and these need to be agreed on before a common system is developed.
“Depending on what you’re looking for the solution to achieve, is it a means of communicating an order and receiving an allocation?” says Wicks. “Or is it a means of more thoroughly following electronically bookbuilding and pre-allocation processes?”
Bentinck says that delivering an electronic flow of information will be the key deliverable.
“The problem we’re trying to solve for the buy side is the straight-through-processing of indications and allocations in equity capital markets (ECM) transactions. Right now, it’s very inefficient as the order management systems (OMSs) and execution management systems (EMSs) that the buy-side use are not interoperable with the bookbuilding systems that the banks use. The process is labour-intensive and error prone because of all the manual rekeying.”
Preventing fragmentation
On both sides of the street, technology is in place which firms will want to continue using, and Wicks notes that any solution will need to avoid replicating this complexity by working with what is there and not replacing it.
“The first challenge is interoperability,” he says. “Finding something that can work for a good segment of the market. Scale is important. Secondly, not just on the banking side, but on the asset management side, every trading desk and asset manager potentially has a different process. Then on the technology side, asset managers can have different OEMSs that they want to connect to.”
Bentinck agrees, “We’re creating the infrastructure layer in between that makes those systems interoperable. In our view, a buy-side firm should be able to use whatever OMS/EMS they choose to place an indication and those indications should flow straight into whatever bookbuilding system a bank is choosing to use, be it Dealogic, S&P, CMG or an in-house system that some of the larger banks are building.”
In an effort to be completely agnostic when facilitating the flow of indications and allocations, Primary Portal has developed user interfaces on for both the buy side and the sell side to allow those flows to take place.
“There are about 15 buy-side institutions who are actively using our order indication system,” Bentinck says. “As a second step, we would like the bookbuilding providers and the OMS/EMS systems to work with us to create those integrations. Banks recognise that order indication entry is not something they can do on their own as the buy side doesn’t want to enter indications into different systems. They want a platform that will be agnostic to whatever bookbuilding technology the bank is using.”
Standard approach
While the development of several systems appears to be hitting the right buttons for both banks and investors, the providers need to be cognisant that having multiple solutions will simply create the need for another layer that allows integration of those views into a single picture.
“We’re definitely seeing a couple of solutions in the last six to eight months, which are looking to address that specific interoperability challenge,” says Wicks. “There’s more than one. And again, that’s great. But at some point, the probability of success will be greater if we can coalesce around a solution.”
Conn observes that committees discussing the FIX Trading Protocol were behind the meeting to solve this issue ten years ago and that a standard communication protocol would almost certainly be needed.
John Bentinck & Ilan Leshem, Primary Portal
“We understand that FIX is the protocol that OMS systems universally support and that’s why we are focused on establishing connectivity using FIX,” notes Ilan Leshem, co-founder of Primary Portal. “An alternative REST API is available though we will be guided by the demands of our buy-side clients. Primary Portal brings an agnostic and open standard to the market, our goal is to enable the buyside to communicate their indications of interest from their OMS system, eliminating the need for re-keying and thus reducing risk and time to deliver the information to their sell side counterparts.”
In the fixed income space, regional preferences have led different solutions to being adopted in tackling primary markets, and this could also play out in equities.
“There are regional biases, in equities in a similar fashion to FICC,” says Wicks. “There are regional differences between some solutions and finding the right solution that fits globally is one of the challenges. If you can find a solution that knits together those existing solutions that are more regionally focused, that could be very helpful.”
Although the adage ‘fix your roof when it is not raining’ suggests now is the time for markets to tackle this issue, the lack of commercial imperative could also delay things further, relative to more costly priorities.
“What you’re saving this year is likely to be a little bit of time from a few people, infrequently,” says McCartney. “In 2021 when the market had a peak flow problem, and then this was massive because the man hours saving was huge. Roll forward to 2023 and it’s really saving money at the margin. If there’s a real economic driver, then people will move pretty quickly.”
Werner Eppacher, global head of trading, DWS Group.
Werner Eppacher, global head of trading, DWS Group.
DWS Group’s global head of trading discusses the ways in which trading, talent and tech come together, the war for talent and the need for data.
What is the ‘secret sauce’ for a successful trading desk in a multi-asset trading environment?
While you have got to have traders that specifically trade equities, trade credit, trade rates – and I would not necessarily divert from this makeup – I think you need to have talent, and traders, that are able to distinguish between assets and have a high-level view of procedures, processes and technology.
You need to have traders that are able to leave their silo, and think in terms of new technologies, because there is a lot of potential when it comes to automation and creating efficiencies with nascent and up-and-coming technologies.
You need talent that has the right training, the right ‘DNA’, and also a certain technological skill set as well. Perhaps they are not afraid at looking at code, or even coding themselves. They can work across various asset classes and they can think process, not just execution. I think those sorts of talents are critical. And it is not just more experienced and senior traders that are able to do this.
I think those are all good targets for an agile for a large trading desk, to identify those traits. Mixing those traits with traders that possess decades of experience can really help desks confront and deal with whatever type of crisis comes their way.
Talent is clearly a substantial part of any desk’s success – what hurdles or barriers are there for getting the right people on to trading desks?
There is certainly a war for talent, especially across Europe and other developed hubs. Finance is not necessarily the number one destination for smart, driven people nowadays. Somebody with a natural interest in financial markets, combined with good quantitative and IT skills is what many sectors are looking for. These days, this skillset is in high demand, not just for trading desks, but for technology firms, too.
And there are certain requirements for working on a trading desk – you are bound to market hours and you may not have the flexibility that is afforded to you by working in Big Tech, for example. You need to synchronise your off-desk time, you need to make sure that the desk is properly covered, and therefore the hybrid working model is simply not always possible. These requirements may act as hurdles or barriers for potential talent. Even working from home may have limitations as communication is absolutely key, not to mention governance and supervision concerns. Because Big Tech firms can offer this flexibility and ‘work-life balance’, the needs of financial services firms and trading desks may act as a barrier to potential talent coming into the industry.
How can trading desks future-proof their strategies and technologies?
On a trading desk it is important that you have technologies that are programmable. Whether you have direct access, or you have the skills to adapt and change the technology, or you have a very agile IT department that understands your changing needs and is able to keep up-to-date with technological advancements – you need to be able to evolve the technology at your disposal.
Secondly, access to data. Particularly creating a golden source of truth for transaction data that is enriched by all sorts of additional data, whether that is transaction cost analysis (TCA) data, outside market data, data from venues – enriching your transaction data to the largest degree possible. And then to make that data accessible and visual so traders can learn from it. Especially for a large desk such as our own, with more than 2 million transactions a year, the amount of data you are creating is an asset. There is so much information in data that you can learn from, draw conclusions and adapt your execution style in order to increase the quality of execution.
Lastly, having proper documentation in place is important, especially if you are embracing automation. Bringing all that together – having the right technology in place, continuing to have the right talent mix at the desk, having a proper change process in place, which includes the whole governance and control framework, all of those moving parts – is important. Taking that, and understanding the importance of both pre-trade workflow and post-trade workflow, recognising that you must not only invest in the execution piece of the puzzle, will help future-proof trading desks.
Hubert De Jesus, global head of market structure and electronic trading at BlackRock, talks us through the top trends to watch for in market structure this year, warns us against well-intentioned over-reaching, and explains what BlackRock is doing to futureproof its trading desk against upcoming pressures.
What are the biggest themes/developments to watch out for this year in terms of market structure? What is on your radar and why?
There is so much going on in the market structure space that it would probably be more expedient to list the items that we aren’t watching. That said, in 2024 we are anticipating the finalisation of a slate of regulatory measures; a few of the key ones are the SEC’s equity market structure proposals, Basel III endgame, and the active account requirements in EMIR 3.0. While these reforms are well-intentioned, they warrant careful review due to the possibility of unintended consequences, like reduced or fragmented liquidity, which could increase costs for end-investors.
Hubert De Jesus, BlackRock
We are also following developments in recently adopted rules, such as US Treasury (UST) clearing and the European consolidated tape (CT), because the detailed technical specifications and implementation of the FICC clearing model and the CT will be a key determinant of success for these initiatives. We believe UST clearing would benefit from expanding access to FICC sponsored clearing, establishing a done away clearing model, and updating the FICC rulebook to protect end-investors from the default of a sponsored member. Likewise, we believe that the long-term effectiveness of the CT will depend upon the creation of a proper governance structure and the addition of the pre-trade and post-trade content that investors require to interact with the market.
The past few years has also seen a resurgence in the participation of individual investors, particularly in the options markets. While a more diverse investor base is beneficial for markets, it’s important that the elevated levels of trading activity are adequately supported by the underlying market structure. We believe that there are improvements which could be made in investor education, market access, disclosures, and guardrails to create a more robust options ecosystem.
What are your views on the SEC market structure reforms – what are the key impacts on the US market and how can the reforms be improved?
We are generally supportive of the SEC’s efforts to enhance disclosures and evolve regulations to reflect modernisation in market structure. For instance, we believe that a ‘one-size-fits-all’ approach to tick sizes and access fees is suboptimal and that the content of core market data on the consolidated tape should be expanded to include odd lot quotations, auction information and depth-of-book data. Further, appropriately calibrated disclosures improve transparency, investor confidence and reforms, which promote central clearing and shorten the settlement cycle in order to reduce market risk.
However, when the reach of proposals is overly broad, even well-intentioned regulations may ultimately harm investors and damage markets. We believe that reducing the minimum pricing increment for securities which are not tick-constrained will result in greater fragmentation, increased costs for investors, and excessive message traffic that taxes market infrastructure. We also believe that expanding the definition of broker-dealers or exchanges to entities that do not truly perform those functions will be costly and burdensome for industry participants and detrimental to liquidity. It is our view, therefore, that the scope of several proposals should be narrowed considerably to avoid negatively impacting market structure.
What are the most critical elements and why?
Many of the proposed reforms are interrelated, with overlapping effects which should be evaluated holistically if they are jointly adopted. For example, a reduction in access fees will change the cost-benefit analysis of the proposal on volume-based exchange tiers. Acceleration of round lot reforms will affect the quoted bid-offer spreads used to calibrate tick sizes. Revised definitions for exchanges and broker-dealers would broaden the scope and burden of Rule 605 and best execution reforms. Further, while each proposal’s individual impact on liquidity may be limited or tangential, the cumulative effect of all these reforms may be significantly more harmful. To avoid unintended consequences, the aggregate impact, particularly to end-investors and market liquidity, across all the proposals should be rigorously assessed.
Additionally, although the requirements of each rule may be distinctly different, there’s substantial overlap in the staff required to implement these reforms. For instance, the technical or operational staff producing the disclosures for short positions, beneficial ownership, and security-based swaps are likely to be the same individuals.
We would recommend sequencing the implementation of final rules to mitigate unnecessary disruption for market participants and to allow for further fine-tuning of any intersecting effects.
T+1 is coming up in May – how will this affect global interaction between Europe and the US? How is BlackRock preparing?
We have been and continue to be supportive of the shift to T+1 settlement. A shorter settlement cycle will reduce risk, lower capital requirements, improve liquidity, and increase market efficiency for the industry. These are all positives – and some would say inevitable – in a digital world.
There’s no denying that mismatches in settlement cycles between markets in North America and the rest of the world, particularly across funds and securities, will create complexities. However, these can be resolved by the industry and our view is that centralised market facilities can play an integral role in helping to mitigate possible increases in settlement fails and financing costs for investors. As an example, extending the 6pm ET cut-off for submitting payment instructions to the CLS system, and by extension, to custodian banks, would make it easier for market participants to settle their FX funding trades on a payment-versus-payment basis and minimise Herstatt risk.
BlackRock has been working for months to review and ensure that all aspects of our investment process continue to operate as intended under a T+1 regime. In addition to taking steps to assess our operational readiness, we have been actively engaging with trade associations, counterparties, and clearing and settlement platforms to evolve industry practices and develop global alignment on initiatives that will ensure a seamless transition to shorter settlement cycles.
Europe is finally on the road for a consolidated tape. What lessons can Europe learn from the US? How will a CT and publication of the EBBO improve access to data and (by extension) liquidity?
Every market is unique; a model which works for the US may not function as effectively elsewhere, so we would not recommend adopting a cookie-cutter approach to the CT. However, after nearly half a century of operating a consolidated tape, there are definitely a few key takeaways to note from the US experience.
First and foremost, the foundation for an effective CT is a robust and inclusive governance framework. A model that gives the entire industry, especially the buy side and the sell side, a seat at the table is essential to ensuring fair and effective outcomes and a tape that continues to operate impartially for the benefit of all market participants. Effective governance is also needed to drive sufficient investment in data quality, technology, and latency to avoid creating a two-tiered market data ecosystem.
As it pertains to content, it’s important to look at where the US is heading to meet the needs of investors in today’s markets, not where it’s been. At a minimum, the CT should contain all the essential information, such as indicative auction prices/imbalances, depth-of-book data, or an EBBO, that investors need to interact with the market; otherwise, its utility will be severely handicapped from the start. A consolidated tape only augments market resiliency if it furnishes market participants with the necessary pre-trade data to facilitate the routing of orders to other venues during a marketplace outage. Further, if investors are unable to rely solely on the CT as a standalone, authoritative source of data, its credibility will be undermined and conflicts of interest may arise with proprietary data feeds.
A CT that makes visible the true extent of liquidity and pricing when trading decisions are made will especially benefit individual investors. If implemented properly, the consolidated tape has the potential to be transformative for Europe by strengthening best execution, increasing market transparency, and improving competition between marketplaces.
What do you think are the biggest influences on the electronic trading landscape right now, and how is it evolving?
It will probably come as no surprise that the proliferation of artificial intelligence (AI) has been one of the most prominent developments in the electronic trading landscape. We increasingly see broker-dealers incorporating machine learning techniques into their algorithms and using smart order routers to identify novel data patterns, calibrate routing behaviour, and optimise performance. At the point of execution, exchanges and trading venues have also been launching new AI-driven order types or matching mechanisms.
This has been accompanied by an uptick in regulatory interest regarding AI and machine learning to understand how market participants utilise these tools. However, the language currently being used to define AI is too vague, as it could just as easily be applied to conventional econometric models generated by simple computer programmes or spreadsheets. We believe that a clear taxonomy around AI would be beneficial both in addressing this challenge and promoting innovation. Clear definitions would support regulations and ensure that they target new developments rather than traditional technologies, while also reducing the risk of disproportionate burdens for market participants.
As markets continue to evolve and become more complex, we’ve also observed a heightened need for better pre-trade analytics and data. Today’s markets require a deeper understanding of where and how to optimally access liquidity; traders need to know how much liquidity is truly accessible, how to engage with specific trading venues, or how much volume has migrated to the close. In fact, a core focus for BlackRock has been improving our suite of analytics and pre-trade tools to assimilate this data and augment our trader decision-making process with better market intelligence.
What are the key challenges for institutional buy-side firms when it comes to sourcing data – and using it effectively?
One significant set of challenges has always been the cost of acquiring data and the administrative burden of complying with licensing terms. Most data providers have exclusive rights to their content, creating an uncompetitive market that is disproportionately skewed against consumers. Data providers are unconstrained in their ability to charge excessive fees and impose unfavourable licensing terms. As a result, data is typically priced according to the value of the information to subscribers and users are charged multiple times for the same data for different categories of usage or for making the data available in different applications.
However, the biggest challenge is probably the overall effort of managing data once it has been brought into a firm. Common issues include difficulty retrieving data or struggles with poor data quality. In a large organisation, data may also be hard to locate or there could be duplicated work streams when many teams are utilising the same dataset. To pre-empt these challenges, BlackRock has focused on developing an effective data strategy and assembling a skilled team of data engineers to build a robust data architecture.
Industry legend Dan Royal will step back from his role at Janus Henderson at the end of this year, after more than 20 years at the firm. He will be replaced by Hugh Spencer, who is relocating to Denver, USA to take on the role.
Dan Royal
“After more than 20 years at Janus Henderson and 40 years in the financial industry, Dan Royal will be retiring at the end of 2024. He will remain in his current role and will maintain his responsibility set until his departure on December 31, 2024,” a spokesperson for the firm confirmed to Global Trading.
“Dan is a valued member of the Janus Henderson Investments team and helped shape the culture of the firm since he first joined Janus in 2001.”
Hugh Spencer
Spencer, currently head of Asia equity trading, will take on the role of global head of equity trading and will relocate to Denver in mid-2024. Spencer has been with the firm for 13 years and has 19 years of financial industry experience. “This extensive single-firm experience, coupled with his long-standing partnership with Dan, positions Hugh and the Global Equities Trading team exceptionally well in ensuring a natural and effective transition,” said the firm.
“Succession planning is a strategic priority at Janus Henderson.”
The London office recently saw its own reshuffle, with the promotion of Glen Pattison to EMEA head of equity trading following the departure of Richard Worrell to LSEG.
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