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FIXGLOBAL.COM

Q2 • 2016 • Issue #58

G LO B A LT R A D I N G

Bringing The Sell-side To The Buy-side John Christofilos, Head Trader, AGF Investments Inc. AXA IM, PICTET ASSET MANAGEMENT, TROY ASSET MANAGEMENT, FRANKLIN TEMPLETON, BARINGS ASSET MANAGEMENT, INVESCO, ARDEVORA ASSET MANAGEMENT ALSO INSIDE :

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GlobalTrading’s Editorial Think Tank Dear Readers,

Bill Hebert Alpha Omega Financial Systems, Inc. Co-Chair, FIX Trading Community Global Membership Services Committee

In previous issues of GlobalTrading we explored and offered commentary on the evolution of buy-side trading technology and the functional migration of electronic trading and other processing features from the sell-side to the buy-side. In this current edition we discuss, from a buy-side perspective, more of the cultural and strategic business factors both driving and accompanying those changes. Of particular interest is how the buy-side trading desk, once more of an administrative liaison between portfolio managers, analysts and the broker community has expanded its responsibilities to include more of what brokers traditionally provided including order routing / liquidity seeking, market structure expertise and transaction cost analysis. As you will see, some sell-side traders have even migrated to the buy-side, where their expertise is often in demand. In parallel, and in a very competitive environment, sell-side firms are responding with greater specialisation of their own service models including the more definitive requirements of a buy-side client base increasingly more reliant on its own trading and processing technology. Also in this quarter’s journal we elaborate on some of the dynamics affecting the fixed income markets, including the evolution of institutional bond trading, best execution methodology, and challenges and progressions in the standardisation of fixed income market data. The overarching topic of MiFID II and what to expect in the coming days and months also figures in prominently. In addition to a number of other relevant topics, we are thankful for contributions covering risk management in clearing, the changing dynamic of post trade operations, rationalising global connectivity costs, innovations in quality assurance testing and the global impact of LEI’s.

Carlos Oliveira Brandes Investment Partners

Please enjoy this edition of GlobalTrading. As always we appreciate your interest, support and contributions to GlobalTrading and the FIX Trading Community.

Best Regards, Emma Quinn AB

Greg Lee Barclays

Bill Hebert Alpha Omega Financial Systems, Inc. Co-Chair, Global Member Services Committee, FIX Trading Community

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Publishers’ Note GlobalTrading is proudly published by HM Publishing in support of the FIX Protocol and the FIX Trading Community. GlobalTrading is the official quarterly publication of the the FIX Trading Community, however, the content does not necessarily represent the opinions of the FIX Trading Community. The opinions expressed in this publication are not necessarily those of the publishers or of the institutions of the contributing author. Although care has been taken to ensure the accuracy of the information contained within the publication, neither the publishers, authors nor their employers can be held liable for any inaccuracies, errors or omissions; nor held liable for any actions taken on the basis of the views expressed, or information provided within this publication. No part of this publication covered by the publisher’s copyright may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, be they graphic, electronic or mechanical, including photocopying, without the written permission of the publisher. Any unauthorised use of this publication will result in immediate legal proceedings. All Rights Reserved © 2016


SOCIETE GENERALE PRIME SERVICES PROVIDING CROSS ASSE T SOLUTIONS IN E XECUTION, CLE ARING A ND F I N A N C I N G AC RO S S E Q U I T I ES, F I X E D I N C O M E, F O R E I G N E XC H A N G E A ND COMMODITIES VI A PHYSICA L OR SYN THE TIC INSTRUMEN TS. CIB.SOCIETEGENERALE.COM/PRIMESERVICES

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CONTENTS 5

FOCAL POINT

5 Bringing The Sell-side To The Buy-side - John Christofilos, AGF Investments Inc. 9 The Shifting Sell-Side To Buy-Side Responsibility - Neil Bond, Ardevora Asset Management 13 Oases Forming On The Liquidity Landscape - James Cooper, Troy Asset Management 17 Fixed Income Best Execution Methodology - Carl James, Pictet Asset Management 19 The Evolution Of The Buy-side Trader - James Li, Baring Asset Management

49

68

OPINION

ASIA

33 Addressing The Market Data Cost Challenge In Fixed Income - Sassan Danesh and Kuhan Tharmananthar, eTrading Software

59 Changing Workflows, Changing Roles - Tony Cheung and Lee Porter, Liquidnet

35 Innovation In Quality Assurance: What Is The Impact On Trading Technology? - Iosif Itkin, London Stock Exchange Group 39 Driving Latency Monitoring Across The Marketplace - David Snowdon, Metamako

61 The Changing Dynamic Of Post-Trading Operations - Dean Chisholm, Invesco 63 Better Than Average - Belinda Fong, Credit Suisse 65 Exchange Of Ideas: HKEX Hosting Services Ecosystem Forum 2016 - Will Haskins, GlobalTrading

EUROPE 43 Unifying Emerging Markets - Grigoriy Kozin, Otkritie Capital International Limited

68 Driving IOI Reform - George Molina, Franklin Templeton FRAGMENTATION

INSIGHT 45 Rationalising Global Connections To Drive Costs Down, Visibility Up - Craig Talbot, Hatstand Consultancy

70 Asian Equity Trading Snapshot

23 The Evolution Of Fixed Income - Lee Sanders, AXA IM 25 Connecting Market Participants In The Evolving Fixed Income Landscape - Ganesh Iyer, IPC

49 MiFID II – What The Industry Can Expect Over The Next 600 Days - Dr. Sandra Bramhoff, Deutsche Börse AG

72 Company Profiles

29 Best Execution in MiFID II - Arjun Singh-Muchelle, Institutional and Capital Markets, Investment Association

AMERICAS

MY CITY 76 Toronto, Ontario, Canada - John Christofilos, AGF Investments Inc.

31 The Global Impact Of LEIs - Chris Pickles, Bloomberg

52 Managing Risk In Clearing - Malcolm Warne, Nasdaq 54 Moving Beyond The Regulatory Headache - Christian Voigt, Lewis Richardson and Henri Pegeron, Fidessa

INDUSTRY

74 FIX Trading Community Members


Multi-asset trading and investment management solutions for the world’s financial community. fidessa.com


FOCAL POINT | 5

Bringing The Sell-side To The Buy-side With John Christofilos, Vice-President and Head Trader, AGF Investments Inc.

More Buy-side Interviews

Looking back, my career developed on the trading floors in the financial district of Toronto, Canada. Fresh out of university, I began as an input operator, I was promoted to phone clerk and eventually became a licensed floor trader. I gained experience at Versus Technologies, E*TRADE Institutional and Canaccord Genuity. As my career evolved, so did technology. It was a pivotal time in the sector as we tried to figure out how technology would impact the business and how the role of the traditional sales trader would change.

I looked at these changes and advancements in technology as an opportunity and transitioned to the upstairs trading desks and started a career on the brokerage side in both sales and trading. An opportunity to influence change at AGF In 2013, I made the move to AGF Investments Inc. (AGF). It was a great opportunity to work on the buy-side and I believed I could influence change and leverage my background in electronic and sales trading.

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Although AGF had operated a certain way for a long time, they wanted technology to play a bigger role in investment management. I helped them find the best and latest trading desk solutions. At the same time, the firm knew the methodology of trading was changing and liquidity was becoming more scarce globally, so I helped them understand and utilize all available liquidity pools for their clients and portfolio managers. In this new role, I wanted to show that the buy-side was as knowledgeable and informed about what is transpiring and changing in our business. Traditionally, brokers have been seen as the keepers of the ‘secret sauce’ when it comes to market structure and order routing. But, today the buy-side is asking questions and have a better understanding of what’s occurring in the market. As well, they have the technology to thrive in this ever-changing landscape.

“Traditionally, brokers have been seen as the keepers of the ‘secret sauce’ when it comes to market structure and order routing. But, today the buy-side is asking questions and have a better understanding of what’s occurring in the market.” In essence, what I’ve tried to do is bring a little sell-side to the buy-side. We take care of every order that hits our desk like a sell-side trader would when they receive an order from a client. The only difference is my clients are my portfolio managers and analysts. A new technology plan During my first six months at AGF, I was tasked with implementing a new technology plan for the investment

GLOBALTRADING | Q2 • 2016

management department. I analysed all parts of the trading desk. I noted what was working and suggested what parts needed to improve. Ultimately, it was determined that both our EMS and OMS needed upgrading. We went through a lengthy process to determine what options best suited AGF, from trading to portfolio management to operations and settlements. Today, we have end-to-end solutions and everything is done electronically. We also introduced a new TCA process. This helps us monitor every trade that hits our trading desk. We review them at a firm level on a quarterly basis, at a desk level on a monthly basis and at an individual trader level on a weekly basis. I also stay on top of our trades with daily spot checks. Staying on top of advancements in technology has been a running theme throughout my career. At AGF, we are continually monitoring new developments and conduct a more formal review every 24 months. This timeline allows our technology and operations groups to research enhancements, while still supporting our current infrastructure. Ideally, I would like to create a five-year technology plan, but the landscape is changing too quickly. With experience, I know how and when to use certain techniques on the trading desk to gain an edge and how to decipher value versus noise. When discarding the noise, we look for what’s useful and how we can use that to achieve the best execution for our clients and for our portfolio managers. Communicating with the Portfolio Managers Communications is key at our trading desk. Working in a real time environment, we want to ensure that our portfolio managers and analysts know that we’re on top of the markets at all times. During my time at AGF, I’ve looked for ways enhance the way we share information between the trading desk and portfolio management department. My experience has taught me the importance of sharing knowledge. Our job requires us to act quickly and make informed decisions. In order to do this, we need to share information. Collaboration is a must on any desk. We operate as a team and I am proud of the way we communicate.


FOCAL POINT | 7

John Christofilos, Vice-President and Head Trader, AGF Investments Inc. On the trading desk we rarely tell a portfolio manager or an analyst what stock to buy or sell. What we offer are three things: market intelligence; liquidity intelligence; and stock-specific intelligence. When we get an order, we share with the portfolio manager and/or the analyst what we know about that particular name; where we are in a market, where we are with this name, who’s been trading the name. The relationship between the trading desk and the portfolio manager has to be vibrant and in real-time. We have information on our desk that the portfolio manager may not know. We need to share that information with them to ensure they are part of the process. When we have an order of any significant size or importance, we discuss it at the trading desk and with the portfolio managers and analysts. We work together to determine the best way to trade each particular order. For example, we ask ourselves: Is it

on a block basis or do we do it electronically? Are we looking for facilitation capital or can we just work it in the market? Are we going to use the algorithmic tools or are we going to go to the open market? We also look at nine different pre-trade parameters that allow us to make the most intelligent decisions for our portfolio managers, our analysts and ultimately our end clients who entrust us with their money. Managing the sell-side The reality of my job is that we have to make quick decisions. We work in a real-time environment where money is made and lost in seconds. This approach can be unsettling for our partners on the sell-side, but this process works and allows us to trade and execute the most effectively. If you look at our currency, which is our commission dollars, we want to spend every single dollar most efficiently. We want to pay brokers for the value

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8 | FOCAL POINT

and services they provide. The relationship must be professional and reciprocal from both sides. At AGF, we have a formalised broker voting system that is used by our traders, portfolio managers and analysts. Our broker list had 125 brokers in 2013 and it is now down to 75 brokers globally. Ultimately, we’d like to take that to 50 and reward our best performing brokers for their service. Our process is dynamic, which allows me to have open conversations with our partners about their success or failure during a given voting period.

“The relationship between the trading desk and the portfolio manager has to be vibrant and in real-time. We have information on our desk that the portfolio manager may not know. We need to share that information with them to ensure they are part of the process.” I consider the relationship with our broker-dealers as a long-term partnership that both sides have to work at constantly. The partnership is more attuned to a marathon than a sprint. Today, the sell-side and buy-side have the same technological solutions. The days of the buy-side being disadvantaged because of a lack of content are long gone. If you look at the brokers that support us and help us, they all have fully functioning technology experts that update us on a regular basis to any regulatory or market structure changes. It’s a very delicate balance on the sell-side, however, if they figure out what the buy-side is looking for and adjust to support it they’ve got a winning formula.

GLOBALTRADING | Q2 • 2016

Buy-side partnerships In Canada we have an organisation called the Buyside Investment Managers Association (BIMA). It is comprised of 25 of the largest money managers in Canada and meets twice a year to discuss regulatory changes and market structure. Our discussion points are summarized and shared with regulators and the exchanges. This dialogue has given the buy-side a powerful voice and both the regulators and exchanges are spending more time listening, interacting and building a partnership that benefits the industry as a whole. As the industry changes, we’ve had to be more proactive on both the trading and regulatory side and make an effort to interact with regulators, exchanges and brokers. Over the course of my career, I’ve learned that development goals vary at each organisation. It really depends on the philosophy of the firm and is often shaped by the Chief Investment Officer (CIO). At AGF, our approach is balanced and thoughtful, supported by many years of industry experience. At AGF, we are evolving and growing as a firm. From my trading desk to the office of our CIO Kevin McCreadie, this means staying on top of the latest trading, regulatory, market structure and technology developments to continually add value for our clients.


FOCAL POINT | 9

The Shifting Sell-Side To Buy-Side Responsibility Neil Bond, Head Trader, Partner, Ardevora Asset Management

Of the 25 years I spent working on the sell-side, most of it was spent on program trading and algos, which are quite intimately linked. Algos were originally developed for program trading desks but the buy-side were given access to them very soon after. Why make the move to the buy-side? After all those years on the sell-side, I wanted a change that would be suitably challenging but where I wasn’t a complete beginner. I had been speaking to the buy-side for a very long time so I wanted to have a shot at what they were doing. Rare switch Despite many aspects of the role being very similar, it is quite a big transition to move from the sell-side to the buy-side. If a trader is going the other way – from the buy-side to the sell-side – they are doing so as a valued customer. Going from the sell-side to the money management side is trickier, while you may well have helped those people to trade effectively in the past, the move seems to be more difficult to negotiate.

One of the issues I faced when trying to make the switch was investment firms wanted someone who already had buy side experience. This is becoming less of a hurdle as more sell-side traders make the switch. When I did make the jump I could see how many more moving parts there were that brokers don’t get to see such as compliance checks, fair treatment of accounts, management of prime broking relationships and areas like cash and exposure management which I had to learn quite fast. Moving to the buyside allowed me to focus my aims and align them with the rest of the team around me, free from the conflicts of interest that arise from the silos commonly found on the sell side (where a sales trader can be stuck between a client that pays commissions and a trader working for the bank that pays his wages). In the current principles based regulatory environment good to be part of a genuinely cohesive team where the only aim is to provide the best return for our investors.

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Neil Bond, Head Trader, Partner, Ardevora Asset Management As a broker, if I didn’t find the stock, that tended to be the end of the story; you go back to the client and tell them that you can’t find the stock. If this happened on the buy-side however, there would be ramifications. It might be necessary to buy or sell something else instead which could affect your other positions – so it is far more involved than I had anticipated. Getting brokers on-board is also more difficult than I expected and it is necessary to justify reasons for building new relationships with brokers. In addition, I had no experience of the relationship between traders and fund managers, and I needed to understand what they want from a trading desk and the best way to deliver what they need. Open communication between the two teams is crucial for success. There are many advantages of having experienced the sell-side for so long; particularly understanding what happens to orders when they go across to the sell-side. I have a detailed knowledge of how the sell-side operates, what their options are and how difficult it is for them to operate in particular circumstances and these are all

GLOBALTRADING | Q2 • 2016

aspects which can be shared with my firm and which ultimately gives us more control. Ardevora’s trading turnover was fairly small when I arrived, but AUM has grown fast and our blocks and programs are now comparable to much larger firms. In order to move away from simply sending orders out to brokers, Ardevora started to build up a wider range of broker relationships and increased use of electronic trading. The company began using dark pools to find liquidity and accessing the expertise of firms like Liquidnet and other dark pools to stay under the radar and have a more passive trading approach. We implemented a more analytic decision process when using risk programs, understanding when to avoid risk, measuring trades and understanding whether the choices made were the right ones. My sell-side skills have helped our trading desk become more scalable to meet the requirements of a higher AUM. Exchange relationships 20 years ago there were no algos, no dark pools nor MTFs. There were no high frequency traders or electronic liquidity providers and no one was directly


FOCAL POINT | 11

competing with the exchanges. With MiFID I the trading environment changed dramatically, but the exchanges have been around for a long time and they are good at defending their positions. With the technological revolution in the market, the exchanges are developing fast to stay ahead of the technological curve. An exchange’s primary role is to bring entrepreneurial companies onto the market, to facilitate the provision of capital to those firms. After that, their role is to provide a stable marketplace within which to trade those equities. As long as they keep on doing those two things without abusing their monopolistic position, they’re fine. However, if they get too greedy, market forces and regulations will intervene to increase competition. One unintended consequence of the regulation has meant a very fragmented market has developed, but the exchanges are responding with developments such as Turquoise BDS, midday auctions and hidden pegged order types to draw liquidity back to the primary exchange. Transparency The proliferation of low touch offerings has resulted in cost savings; however the buy-side having a higher level of control means an increased level of responsibility. The market has become a great deal more sophisticated in so far as the end users of the algos need to understand what is happening with their order once it goes into an algorithm, the venues that it is going to and all the different order types that those algos could be using. There is a vast level of execution data generated that needs to be gathered, analysed and monitored. Buy-side traders should have a high level of knowledge about what is happening to their orders. The regulators asked the industry who is responsible for best execution and, unsurprisingly, the buy-side said the sell-side did and vice versa! So the regulator has decided that both buy and sell-sides need to take increased responsibility for best execution and trade management. As a result, the buy-side is starting to adopt many of the sell-side’s tools and so ultimately each side should be held to the same level of accountability as the other.

“The regulators asked the industry who is responsible for best execution and, unsurprisingly, the buy-side said the sell-side did and vice versa!” many buy-side firms for sales trading. They have access to what my competitors might be doing. As a result of that ‘information asymmetry’ there will always be a need for brokers. The future for the buy-side In the future, being able to demonstrate best execution – not simply having a best execution policy – will weigh heavily on both sides. The market will continue to evolve rapidly and there is now a two-way pull due to the new venues, new order types and new systems that are being created very quickly as solutions to the problems the industry is facing but it takes time to get these new projects to critical mass as significant contributions in terms of resources are needed from within the industry. One curious by-product of the current evolution is that while the buy-side has to go through the sell-side to access exchanges, their direct relationship with exchanges is growing stronger. It will be interesting to see how these direct relationships develop especially if investment banks are excluded from collecting research payments from trading commission. MiFID II is going to require that firms demonstrate best execution, which means they not only have to do the right job, they also have to gather all the data and analyse it; which is neither cheap nor quick. That requirement will impact far more on the smaller firms than it will on the larger firms and raises the barrier to entry quite high.

One key difference between buy and sell side is the access to liquidity venues available to each side. The buy-side can access many more liquidity pools than one broker can alone, because not all brokers share their pools. On the flip side, the sell-side has access to a great

Q2 • 2016 | GLOBALTRADING


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FOCAL POINT | 13

Oases Forming On The Liquidity Landscape James Cooper, Head of Execution at Troy Asset Management argues that institutional dealers are refusing to concede defeat in their struggle to cope with a challenging liquidity environment.

Barely a day passes without new commentary on the scarcity of liquidity in financial markets. Broker dealers in particular have been keen to point out how difficult it is nowadays for buy-side firms to implement trades quickly, efficiently and with minimal impact. This is especially the case for fixed income trades but the observation is made about equity markets too. Recent flash crashes (such as August 24, 2015) have been seen as symptoms of the liquidity crisis and have shaken investors’ and regulators’ faith in the well -functioning market objective. Ample liquidity and an ability to execute trades effectively are important for the broader economy as a robust market place facilitates capital formation by corporates both large and small. But the question remains, is there really a liquidity crisis or is there, as many observers have suggested, merely a problem with “the plumbing”? Is trader behaviour and market structure merely being slow to catch up with a changing regulatory environment? Are there grounds to believe the industry will adapt to solve the problem? The reasons behind the perceived liquidity problem are well publicised but are worth quickly revisiting.

Volumes have declined since 2009 for a number of reasons. Firstly, the G20 rules on use of capital by investment banks have had a significant impact on volumes through different channels; the ability of fixed income broker dealers to hold inventory and offer acceptable spreads to their institutional clients has significantly diminished. The same rules though have impacted equity traders too and market-making desks are being much stricter about how and to whom they offer their balance sheet. Scarcity of bank capital is felt further down the chain too, as hedge funds – traditionally a good source of trading flow – find it harder to tap into those constrained prime broking balance sheets. Secondly, the Volcker rule has decimated proprietary trading. There are virtually no “internal hedge funds” left among the London-based banks and these reliable commission payers have left a significant hole in trading activity compared to the pre-crisis and preVolcker years. Thirdly, hedge funds have, on average, lengthened their average holding period. Ritesh Shah of Citadel (Asset Management) had this to say in a recent interview.

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James Cooper, Head of Execution, Troy Asset Management “More broadly, given the higher transaction costs resulting from these shifts, we have moved towards more fundamental-based, longer-duration investing as opposed to model-based, shorter-term investing; our strategies as well as our personnel reflect that new reality”.i The move towards a buy and hold mentality by hedge funds like Citadel are generally leading to less activity than previously. Finally, the activity of retail investors has slowed to a trickle in recent years. These participants used to demonstrate reasonable turnover rates but have now mainly entrusted their investment decisions to the lower turnover mutual funds. But liquidity is not merely about volumes. Information leakage has been a large and ever growing problem. The recent advances in HFT techniques have meant that in 2016 an institutional equity order in the US must run at 3% of volume or less for it not to be detected by the more predatory traders. This is a i

“Information leakage has been a large and ever growing problem. The recent advances in HFT techniques have meant that in 2016 an institutional equity order in the US must run at 3% of volume or less for it not to be detected by the more predatory traders. This is a seismic change on 2007, when institutional dealers were routinely passing orders with instructions to participate at 33% of volume.” seismic change on 2007, when institutional dealers were routinely passing orders with instructions to participate at 33% of volume. Phantom liquidity Impact costs have become almost impossible to control in the current environment because of the febricity of the Continuous Limit Order Book (CLOB); whilst spreads may be narrow, displayed order book liquidity is truly a mirage: cancellation rates have been a hot topic in recent years, but for as long broker algos are designed to deliver price improvement and dodge negative selection, and for as long as electronic market makers cancel at the first sign of momentum, the CLOB will remain a dangerous place from which to draw water. It was hoped that dark pools would help with information leakage, but institutional investors have been badly let down. Trade sizes have plummeted

Top of Mind Interview, August 2, 2015 – Goldman Sachs Global Macro Research

GLOBALTRADING | Q2 • 2016


FOCAL POINT | 15

and the short term reversion is little different from the CLOB reversion. The final piece of the liquidity, or impact cost, equation is volatility. Here it is reasonable to expect volatility in its various forms (but best measured by the VIX) to start rising after recently hitting all-time lows. Heightened volatility widens spreads and increases total costs of execution. So given the decline in volumes, the lack of order book robustness and a likely increase in volatility, it is difficult to see how the institutional dealer can adequately and safely quench his thirst. Well in fact there are significant grounds for optimism on all these fronts. Volumes on the uptick The chart above shows how volumes as a percentage of total free float have actually been improving (modestly but steadily) for more than two years. The data above is for the FTSE but the pattern is almost identical for the S&P and Eurostoxx 50.

It is difficult to isolate exactly the reason for the modest inflexion in volumes but there are three possible explanations. Firstly, High Frequency Trading (HFT) firms are becoming significantly better capitalized. Companies like Jump Trading and Virtu have joined Citadel as robust, well-funded institutions in their own right. Secondly, the recent good health of CTA (trend following) businesses and other systematic strategies has meant greater assets under management in that segment and greater resulting trading volumes (especially visible in the first two months of 2016). Thirdly there is an inkling that institutional dealers are daring to come to the water’s edge more frequently. There are two reasons why institutional dealers might be trading more. Firstly, they are benefitting from the impressive development of the investment banks’ Centralized Risk Books (CRB’s) that have been honed over the past five years. These have been particularly helpful for executing transition or programme trades but they also provide a useful source of liquidity when the bank’s risk is later unwound into the market. Secondly, institutional dealers are finding alternatives

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16 | FOCAL POINT

to the two main sources for European trading in the last 25 years, which have been the CLOB and the single-stock market maker. We have already looked at the failings of the CLOB but it is worth remembering that the construct only came into existence to the UK with Sets in 1997 and arrived in the US five years later and so does not need to be a permanent fixture. As for the single-stock market maker, the value of this liquidity source has diminished as he or she finds it almost impossible to unwind his risk without creating impact and holding up the client from continuing with their business. The new (and renewed) liquidity sources The valuable liquidity sources for the new era are fourfold: 1. Venues and brokers that offer Conditional Order Types 2. End Of Day Auctions 3. Frequent Batch Auctions 4. Reformed Protocol for Broker “Indications of Interest” (IOIs) Conditional Order Types Liquidnet, POSIT have gained significant institutional market share over the last 10 years (Liquidnet celebrates its 15th birthday this year). Turquoise BDS too has made excellent strides in the last two years and these three are set to be joined by BIDS (backed by BATS in Europe) as a significant force. These mechanisms allow for large privately negotiated trades to be negotiated away from the CLOB. These can be viewed as forming the basis for “Dark Trading 2.0” after the failure of the first version and they will all thrive under the proposed MiFID II pre-trade transparency rules. End of day auctions Institutional dealers are often pilloried by the sell-side for migrating their flow to the closing auction. But the biggest challenge for institutional dealers is not intra-day alpha generation but actually limiting overall impact. If up to 15% of the day’s volume is transacted in the close and an institution can participate at more than 15% of that expected auction volume without moving the price (vs 3% for the CLOB), then the auction provides a good source of liquidity. Development of frequent batch auctions Whilst conditional order types look set to meet the

GLOBALTRADING | Q2 • 2016

needs of those trading in the dark, the frequent batch auction solution looks set to provide a lower impact solution for lit trading. Information leakage and market manipulation are likely to be far reduced compared to the CLOB. National exchanges such as the Korean stock market have already fully adopted the model, Turquoise Uncross (strictly a dark venue) has been extremely successful and BATS is rolling out its own version and the signs are encouraging. The US is focusing on “speed bumps” (invented by IEX) for the CLOB currently, when batch auctions already perform the same function but in a more robust and transparent manner. Greater use of reformed broker IOIs. Those on the IA/AFME working group should be applauded for safeguarding the future of this uniquely valuable and significantly European facility. In recent years the very existence of IOI’s was threatened by the proliferation of falsified orders. Institutions neither responded to nor submitted an indication because they knew they were giving away significant information with little chance of trading. The new industry protocol will mean greater hit rates and lower reversion. The future is bright Challenges clearly remain and institutional investors are still finding it much more difficult to source liquidity than was the case 10 years ago when solutions were amply provided by the investment banks. Over the past 18 months however the outlook has started to improve. Thanks to the innovation, courage and determination of venues, brokers and institutional investors, answers are being found; the old regime of failed dark pools, febrile limit order book and disadvantaged market makers is coming to an end. A landscape where low impact agency trading makes its welcome return is slowly emerging.


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FOCAL POINT | 17

Fixed Income Best Execution Methodology With Carl James, Global Head of Fixed Income Trading, Pictet Asset Management

The methodology of equity TCA appears to be being supplanted straight into fixed income – yet we know this way of thinking simply doesn’t work. MiFID definition of best execution, describes the process whereby price is an important component, but it’s not the sole component. In terms of terminology, it would be better to use best execution ‘methodology’ or best execution ‘benchmarking’ instead of TCA. What many in the industry don’t realise is the extent to which fixed income is a completely different asset class (with a number of different instruments) compared to equities. In addition, the reason that instruments are bought and sold is different for fixed income as compared with other asset classes. The question of best execution methodology begins with the choice of execution strategy. Is it agency or principal? If agency, is it in a synthetic central limit order book or is it a dark pool? While decision-making, firms need to use the underlying data to support their reasoning. Traders need to improve how they use the data that they have already at their disposal. If a trade in a similar name worked well in a dark pool, it could be

worth trying the same again. Similarly, if it worked well through an RFQ using a particular set of brokers, then they could try those brokers again to see if the liquidity is still there. If a firm examines the active inventories and the hit ratios of winning bids and non-winning bids, there is suddenly a huge amount of data available that will lead to a defensible position of why the firm used Broker X and Broker Y; this should then lead to a better informed strategy and a chance at a better overall outcome. It is a layering process which becomes a more dynamic set of inputs and outputs, rather than simply a tickbox exercise to reach whatever benchmark is being targeted. Traders are therefore actually able to demonstrate that sensible decisions are being made all the way down the decision-making process. Free data There is a vast amount of data that asset managers can buy, but this would clearly have a budgetary impact. There is also a considerable amount of free data that buy-side firms have access to because they have already been given it. The first set is their own hit

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18 | FOCAL POINT

“A more holistic approach to best execution methodology is just one of the areas where firms can make wholesale improvements in their approach to technology and data, and better use the data that they already have access to.” resulting from those results, means that more proactive steps will surely follow.

Carl James, Global Head of Fixed Income Trading, Pictet Asset Management ratio. Firms can examine a broker’s profile to see how well they perform, whether they are the best broker for example, and then they can examine how they fare in terms of other brokers etc – this all gives additional colour. In terms of other data, the axes and the inventories that are being sent to the desk, if the firm is able to systematically capture this data, then actual flows and fills can be used to detect and recognise patterns in quotes and spreads. If it is possible to detect changes in what is being traded, then we can work out where a broker is in terms of their positions. Firms do need to be a little more autonomous to pull the data together in order to analyse it. This is part of the ongoing behavioural development of the buy-side, and it is time that these changes were fully embraced. The responsibility of the buy-side to take ownership of this area, not just from the viewpoint of collecting the data, but analysing that data and taking action

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Attitude versus technology As more and more CEOs, CIOs, compliance officers and finance officers realise how important it is to trade correctly, then there will be an uptake in the numbers of firms taking ownership of that on the buy-side. This is partly a reflection of the maturity of the industry. There is more automation, lower margins, fewer people and generally a more efficient product. As regulation continues to tighten and the technology continues to improve, the industry needs to keep reevaluating itself and driving further forwards. What the industry needs to do is to start capturing the brains that are heading towards Silicon Valley for their careers rather than towards finance. A more holistic approach to best execution methodology is just one of the areas where firms can make wholesale improvements in their approach to technology and data, and better use the data that they already have access to.


FOCAL POINT | 19

The Evolution Of The Buy-side Trader With James Li, Head of Asian Dealing, Baring Asset Management The early buy-side trader was originally more of a processing role between the portfolio managers (PMs) and the broker before evolving into today’s specialist, alpha generating, professional trading role. The catalysts for evolution came as a result of the growing complexity of market structure, increased adaptation of technology and tighter regulation. The buy-side, cognisant of all of these factors realised the advantages that specialised market professionals would add to performance and the protection of client assets. As the buy-side firms began looking at execution quality and the mitigation of operating risk, the buy-side trading desk has become more integrated with the investment teams to generate alpha to portfolios, whilst operationally looking at how processes could be improved to reduce the dependence on outdated manual processes, simply because they had always been done like that. The buyside trader has had to evolve into the space between the PM and the broker, with responsibilities including deciding on the appropriate execution strategy to pursue, where to source liquidity whilst minimising information leakage and then post-trade, analyse the quality of the execution and take away any lessons from the conclusion.

Rather than rigidly sticking to one trading benchmark, fund managers realised that different market conditions, such as changes to volatility or momentum require a variety of approaches, recognising that traders could add value to the investment process. The use of benchmarks has also evolved over the years due to the ever changing market landscape, from a traditional scheduled based VWAP approach to a more price sensitive arrival price or PWP approach. Whilst historically there was typically one main principal benchmark used in TCA measurement, to gain a true picture of the quality of the execution, this analysis has evolved into looking at multiple measures to achieve a clearer picture of the effectiveness of different strategies being employed. From this we can learn how to tweak our process to increase the alpha generated from the investment decision. I feel this approach gives my team the freedom to utilise their skill-sets and market knowledge in the pursuit of best execution as opposed to being constrained by a more narrow measure of their performance. Changing relationship with portfolio managers Communication is always the key and we encourage active dialogue between the portfolio managers and

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20 | FOCAL POINT

“Whenever portfolio managers put on a trade, the dealing desk should be in a position to understand what they are trying to achieve – whether it is a regular distribution of a cash inflow across positions or an investment decision with a time urgency.”

James Li, Head of Asian Dealing, Baring Asset Management trading desk. As client mandates are getting more complex and market structure is ever changing, we look at positioning ourselves to help the portfolio managers focus on their investment decision. In reality, we are providing high touch sales trading to the portfolio managers. Whenever portfolio managers put on a trade, the dealing desk should be in a position to understand what they are trying to achieve – whether it is a regular distribution of a cash inflow across positions or an investment decision with a time urgency. To help the PMs with the investment decision process, the dealing desk can reflect the opportunity to trade block liquidity in core names or give colour on market noise. That is part of the value proposition a buy-side trading desk should bring. Changing sell-side relationship With the introduction of new regulations and technology, there may be a need to look at the range of counterparties we trade with. Our dealing desk has commission sharing agreements set up with most of the global brokers in which best execution has become

GLOBALTRADING | Q2 • 2016

more important than ever. Best execution involves looking at the duration of an order and examining how to achieve the order with minimal market impact. It involves careful examination of all the tools available: electronic trading, block trading, crossing networks, agency versus principal trading. Regulation has forced the buy-side to examine and justify those choices a lot more carefully. We place considerable emphasis on brokers that provide us with intelligent execution consulting and block liquidity. One of the biggest challenges facing any buy-side trading desk is sourcing blocks to trade and we do need to use our counterparties’ expertise to locate liquidity, against the backdrop of increasingly fragmented markets. Driven by regulation It is difficult to underestimate the impact of regulation, particularly on the buy-side. Conversation is now taking place around the impact of MiFID II and other global regulation on best execution and transparency requirements, and the impact here in Asia needs consideration too. We can also examine the wider electronic trading rules, looking back particularly to the SFC’s introduction of electronic trading rules. Those rules meant that once signed up to a broker’s algorithmic trading products, the emphasis is very much on the buy-side trader to understand how those products work and how they


FOCAL POINT | 21

might impact the market. In Europe, there is now a similar consultation exercise for asset managers to comply with the new systems and control guidelines issued by ESMA and similar work being carried out by such bodies as the PRA. This has been a major shift from a buy-side perspective, as the previous ability to subscribe to a multitude of different electronic trading services in the market has been replaced by a more subjective approach to handpick those few who will best serve our needs and even these are reviewed on a regular basis. It is crucial we carefully examine which brokers (from a TCA or a coverage perspective) are maintaining the standards we need them to meet. The trading tools we use on the desk are a lot more targeted and precise. For instance, we may subscribe to a broker but we won’t subscribe to the whole algorithmic suite, only to those algos that are to be used on a regular basis. Driven by technology Each industry goes through a paradigm shift and trading is no different, with technology playing a big part. At Barings, we are a big supporter of using technology to enhance performance and mitigate risk in a cost effective manner. Whereas buy-side desks used to predominantly use high touch sales trading, there has been increasing use of electronic trading over the years to the point where we are customising algorithmic strategies with brokers. This year, I would like to further deep dive into individual markets to see where our electronic usage rates are. Ideally, developed markets which trade in narrow spread such as Japan, HK, and Australia should have higher usage rates than the rest of the region. Barings is also actively participating in various industry initiatives. Our Head of Dealing, Adam Conn in London, has chaired a FIX Trading Community working group working to provide automation of new issue applications and allocations in both equities and fixed income, and in both the primary market and secondary placings process. We also participate in joint Investment Association and AFME working groups to bring standardisation to IOI definitions and industry oversight of electronic trading in Europe, similar to what we have developed in Hong Kong.

become the hottest topic this year. I am not exactly sure how this will reshape the industry but I believe it is going to have a huge impact at some point. What qualities we look for in traders Aside from a basic aptitude to trade and the ability to process information in a timely manner, strong communication skills (both delivering and listening), especially with the PMs is a priority. Understanding market structure and the impact of changes in global and local regulation are increasingly vital in the ever

“Whereas buy-side desks used to predominantly use high touch sales trading, there has been increasing use of electronic trading over the years to the point where we are customising algorithmic strategies with brokers. This year, I would like to further deep dive into individual markets to see where our electronic usage rates are.” changing market landscape. . Innovation is effectively problem solving so the ability to work as a member of a team is critical. As markets change, new skillsets such as being technology savvy or someone who has a strong quant background who can analyse and identify trends from large amount of data will help us find answers to new questions. Most importantly, the best traders need an open mind and be prepared to continually learn whilst maintaining a degree of humility.

It will also be interesting how new initiatives such as Symphony for messaging will develop. Blockchain has

Q2 • 2016 | GLOBALTRADING


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INSIGHT | 23

The Evolution Of Fixed Income

With Lee Sanders, Head of Execution FX and UK and Asian Fixed Income Trading, AXA IM Regulation is an increasingly important and dominant part of the trading world. New regulatory requirements dealing with transparency around fixed income markets are going to be hard to prepare for. The pre-trade transparency side of MiFID II and then the post-trade side will provide the fixed income world with considerable challenges. Liquidity remains a principal concern. The first two months of this year have been some of the hardest since 2008 in terms of sourcing liquidity and that’s before the new regulation comes into force. The delay to MiFID II gives the industry longer to prepare for these changes, but as the deadline draws nearer and nearer, we are thinking more and more about how we will have to adapt to the way we trade. Buy-side mind set change In terms of a longer frame of reference for the evolution of fixed income trading on the buy-side, a few years ago I was speaking with a market practitioner who said that we should hire some equity traders in fixed income trading to better deal with the changing market structure, and at times I can see how we have moved in that direction in terms of trading and market structure. There are a variety of metrics examining what we do, but one of them, which is outstandingly clear, is that fixed income orders are fragmenting in a meaningful way. It is hard to find the balance sheet to take down orders so there are two choices with regard to the way we trade: either break the order down and try to find the aggregated liquidity or work it as an order. The banks don’t want to take balance sheet risk. They would rather bypass that risk if they can and act more like agents.

What is clear to us is that more of the inventory sits with the buy-side hence it might be worthwhile if the buy-side traded more with the buy-side. However, there still seems to be a reluctance from the buy-side to trade with one another even in the dark or on platforms. In addition, the buy-side is more aggressive on pricing in the dark than with their more established liquidity providers. The buy-side views other buy-side firms as competition and are less likely to want to leave anything on the table. The buy-side will never be pure market makers as that is not the business we are in. However, there could be a change to the extent that the buy-side become a price maker and this is the direction the industry should be heading towards. The development of bond trading means that there is nothing wrong with orders coming in from the fund manager and our posting them on an aggregated liquidity environment and staying firm on that price. The investment bank model is changing which could be a good thing for market structure. Regulation and capital constraints are helping to facilitate that and it is all key to the industry’s continued evolution and development. Next developments Risk is effectively ‘warehoused’ when firms all move in the same direction, so the firms that may do well could be ‘contrarians’ – those who make prices and decisions opposing the direction of flow. However, it is difficult to see this method being effective given the size of the books being moved around by the largest asset managers in Europe. The next wave of development could come from those contrarian investors and opportunistic liquidity

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24 | INSIGHT

“More patience is required by the buy-side; if fund managers have time orders can be worked to completion at the market level but this may be compromised if time is an issue.” but there has been an emergence of buy and maintain products, and short duration products. Lee Sanders, Head of Execution FX and UK and Asian Fixed Income Trading, AXA IM providers as they come into trading platforms and put their liquidity on systems for traders to find. Certain banks are reinventing their business model into a more hybrid agency model, but they could also be called opportunistic liquidity providers. This model allows them to potentially take advantage of market conditions with a more prohibitive bid offer spread. More patience is required by the buy-side; if fund managers have time orders can be worked to completion at the market level but this may be compromised if time is an issue. There are many different definitions of liquidity and price, immediacy, bid offer spread etc are key but one I like to use is that liquidity is the confidence that we will be able to sell something which we bought at a fair price at a given point in the future. Other areas of interest are transaction cost analysis and liquidity points. There are some excellent pieces of work around optimum trading times being prepared by think tanks. Another key development is the change to our management style relating to how the industry manages fixed income. We still have active portfolios

GLOBALTRADING | Q2 • 2016

One of the metrics which we use to show liquidity is our trades fully executed on the day. As an example, if liquidity were poor, we could say that a figure below 50% of trades completed on the day would illustrate that liquidity was poor – and we have never been below 92%. But AXA IM is an established asset manager and does have an advantage. Most banks have been discussing the 80/20 breakdown where around 80% of revenue comes from 20% of the client base. Increased regulation could cut that tail away as banks could simply stop servicing those smaller clients therefore smaller asset managers could be at a huge competitive disadvantage come January 2018 – no one will want to send liquidity their way because of the new transparency regimes. Sell-side rationalisation The rationalisation taking place across most of the banking sector could be perceived as positive. Banks that want to be everything to everyone in every market are likely to experience problems with that model. But fundamentally MiFID II is at the forefront of everyone’s mind. It frames all those other things which take place day-to-day; the liquidity conversation, the research conversation, the market structure conversation etc – it all comes back to MiFID II.


INSIGHT | 25

Connecting Market Participants In The Evolving Fixed Income Landscape By Ganesh Iyer, CAIA, Global Product Marketing Director, Financial Markets Network, IPC

More than 60% of Fixed Income firms will spend 15% or more of their annual budgets on new technology in the year ahead according to a recent report from Worldwide Business Research. Why are technology investments demanding such a big chunk? New regulations have made connectivity for sourcing market liquidity an ever more important component to trading success. Profound changes in market structure, regulation and business models have significantly affected capital markets following the global financial crisis in 2008. No asset class or product, spanning from equities, fixed income, the foreign exchange markets, commodities and their derivatives, has been immune from experiencing major shifts. The changes have been particularly pronounced within the fixed income markets with a push towards increased transparency, rigorous risk management practices and a stronger regulatory regime. Given these factors, we are now seeing several major trends in the global fixed income markets: • Traditional market makers are retreating due to stricter capital requirements and leverage limits. • Shrinking dealer balance sheets have minimised liquidity. • New institutional players, including non-bank entities, are attempting to fill the void left by exiting major dealers. • The market is fragmenting with new platforms attempting to facilitate liquidity. • Traditional trading models are being supplemented with increased buy-side to buy-side trading.

The very active secondary debt market is heavily dependent on communication, collaboration and connectivity in trading government securities, mortgage-backed securities, asset-backed securities, corporate bonds, convertibles, money markets and credit derivatives. In today’s financial environment, investment managers, dealers, liquidity venues, custody banks and clearing/depository organisations require reliable infrastructure in order to effectively execute fixed income trading strategies (Figure 1). This Fixed Income Ecosystem is further complicated by the vast range of buy-side firms trading the asset class – hedge funds, asset managers, pension funds, sovereign wealth funds, corporate treasuries, foundations, endowments, insurance companies, family offices and even private equity firms. Figure 1. Fixed Income Trading Ecosystem

As a result of these far-reaching changes, fixed income players now require increased connectivity throughout the trade lifecycle and access to a ready-made ecosystem of diverse market participants to drive the search for assets and conduct transactions. More and

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26 | INSIGHT

more fixed income traders are taking advantage of specialised technology and managed services to source liquidity, generate alpha and mitigate risk. In summary, groundbreaking technology solutions are now taking centre stage to address increasing challenges firms are facing in trading fixed income securities. Innovative technology solutions facilitate liquidity and support compliant all-to-all trading by linking market participants to one another. Managed connectivity, communications and collaboration solutions are particularly important in the fixed income market as trading strategies become increasingly complex. Below we explore four different fixed income strategies which showcase how connectivity and access to a ready-made ecosystem is pivotal to successful trade execution and alpha generation. Swap spread arbitrage A swap spread arbitrage is a complex strategy that involves an arbitrageur taking positions in an interest rate swap, a treasury bond and a repo rate (Figure 2). The first leg of the strategy is the swap spread - the spread between the fixed rate and the interest rate of the treasury bond. The strategy’s second leg is the floating spread which is the difference between LIBOR and the repo rate. The difference between the swap spread and the floating spread is the arbitrageur’s profit. Figure 2. Swap Spread Arbitrage Why is Connectivity Critical? This strategy relies heavily on leverage to amplify potential profits and hedge funds implementing a swap spread arbitrage need reliable connectivity to prime brokers. In general, communications and connectivity form the backbone of a successful swap spread arbitrage strategy given the multiple counterparties involved. MBS Arbitrage A mortgage-backed security (MBS) strategy consists of buying MBS and hedging the interest rate exposure with swaps. Changes in clearing, reporting and trading requirements for interest rate swaps have transformed the landscape for the asset class. Why is Connectivity Critical? The different entities that play a role in the interest rate swap trade

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lifecycle need to connect and communicate with one another. Capital Structure Arbitrage This strategy takes advantage of the mispricing between a firm’s debt and equity by buying an undervalued security and selling the same firm’s overvalued security and profiting. Why is Connectivity Critical? This cross-asset trading strategy centres on reliable access to fixed income and equity liquidity venues.

“The most successful fixed income traders generate alpha not only through their use of various investment strategies but also through the implementation and use of state-of-the-art communications solutions and managed services.” Convertible Arbitrage Convertible bonds have features of fixed income, equity and options. A typical convertible arbitrage strategy involves taking a long position in an underpriced convertible bond and a simultaneous short position in the underlying stock to neutralise equity risk. This strategy can quickly become complex since arbitrageurs often have to hedge risks associated with a number of other factors including volatility, interest rates, foreign exchange rates, credit spreads, stock dividend yield and credit recovery rate. Why is Connectivity Critical? Like the other strategies discussed here, communications and connectivity play a vital role in the execution of a convertible arbitrage strategy since multiple asset classes are often involved. Additionally, implementing effective


INSIGHT | 27

Ganesh Iyer, CAIA, Global Product Marketing Director, Financial Markets Network, IPC hedging and risk management depends on reliable connectivity and communications. Investing in technology helps source liquidity, link market participants and enable all-to-all trading Given the dynamics in the fixed income asset class and the number of complex strategies being utilised, there are several specific areas where institutional investors, hedge funds and asset managers are employing innovative communication solutions such as financial extranets, Ethernet services, managed virtual private networks, voice recording and data archiving. These solutions enable:

• Facilitating superior communications between fund managers and prime brokers to facilitate securities lending and margin financing. The most successful fixed income traders generate alpha not only through their use of various investment strategies but also through the implementation and use of state-of-the-art communications solutions and managed services. Technology that provides connectivity throughout the trade lifecycle and access to a diverse financial ecosystem is critical to effective investment of the trillions with which institutional investors and asset managers have been entrusted.

• Maintaining reliable connectivity to brokers/ dealers, investment banks and liquidity venues to generate alpha, source liquidity, achieve best trade strategy execution and discover prices. • Efficiently accessing market data and trade lifecycle services such as order management, execution management, risk management and portfolio management systems. • Improving collaboration among traders, analysts, portfolio managers, economists and risk managers to execute investment strategies and manage risk.

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INSIGHT | 29

Best Execution In MiFID II With Arjun Singh-Muchelle, Senior Advisor, Regulatory Affairs, Institutional and Capital Markets, Investment Association

There are two main requirements which have an impact on the buy-side with regard to MiFID II and best execution. The first is within the MIFID-delegated acts, which look at our ability to ascertain best execution from our brokers. That means looking at the application of best execution to other financial instruments, as previously there were no requirements to demonstrate best execution for non-equity instruments. There is now an expansion of those requirements into cash bonds, derivatives, FX forwards and so on. We are now required to demonstrate best execution on those instruments as well whereas previously, it was not the case. We are now looking towards third party providers to offer TCA for FX or TCA for cash bonds etc. To date, these service offerings have been somewhat lacking, so we have started from scratch for non-equity instruments. We are also wary of the application of equity TCA to non-equity instruments. One of the reasons for this is that equity TCA is often focused on using VWAP as the primary benchmark whereas (in our view) for equity best execution, VWAP should not be the only benchmark. It may also be difficult to simply copy these concepts across into non-equity instruments, but that is what is being offered by the third party TCA providers. In addition, the way one executes an FX forward contract or executes an illiquid corp or sovereign bond is different to how one would execute an equity instrument. The regulators have also redefined best execution from all ‘reasonable’ efforts to all ‘sufficient’ efforts. It is not clear what the difference means but the regulators have purposely changed the definition. As a result, additional thought will have to be applied to the consequences of that linguistic shift; do we have to plug into every execution venue in Europe to meet that requirement, no matter how small the exchange might be? There are many shallow books on exchanges and venues across Europe, and we need to know whether we must start plugging into all the execution venues in

order to see whether we can get a better price. It would require new systems development to actually plug into, for example, the Bratislava Stock Exchange. Technically, it would also mean providing additional information to other market participants (which is not normally provided), which would increase the probability of information leakage. There is also the additional impact of the cost of market data in real time from the additional venues, which is a considerable political issue and without a consolidated tape this remains difficult and expensive. There are some provisions for a consolidated tape for equities in MiFID II, but there is no mention of a non-equity consolidated tape offer for bonds, FX or derivatives. Reporting requirements The second issue relates to the reporting requirements for best execution under RTS27 and RTS28. RTS27 is data that goes from the broker or venue to the asset manager. RTS28 is best execution data from the asset manager to the underlying clients – to the funds. The concern with RTS27 is the way it is currently formulated as unexecuted client orders will be made public. In our view, an unexecuted order should never be made public because it gives a false impression of whether a venue or broker is actually within our ‘Top 5’ or not. It also provides additional information to other market participants of holdings that we may have tried to execute previously (that may have been unsuccessful) and/or where we have used an RFQ for a fixed income order, as we would use the RFQ process as a valuation tool. Another issue with RTS27 is that a Systematic Internaliser Operator would have to disclose all transactions (in aggregate format), even if they were large and had benefited from the large in-scale order protections – all that information will now be made public. Even though there is an in-built delay of at least three months, it is not a sufficient amount of time for brokers to unwind the positions they have taken to facilitate our trade, which then has a downward impact on asset managers. If brokers are going to be exposed

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“There are some provisions for a consolidated tape for equities in MiFID II, but there is no mention of a non-equity consolidated tape offer for bonds, FX or derivatives. ” Arjun Singh-Muchelle, Senior Advisor, Regulatory Affairs, Institutional and Capital Markets, Investment Association

to additional or undue market risk, that impacts upon their ability to make markets for us at efficient prices. The concern we have with RTS28 is more technical. At a high level, the concern relates to who is ever likely to read this information. In the UK there is a ‘pension disclosure code’ – an annual statement given to our providers and everyone with a holding in the pension fund, which in reality is very rarely read by anyone. We will now be required to provide them with an additional 35-40 pages of best execution data. This would contain information about whether the firm acted in an aggressive or passive capacity, what percentage of the trades were with the Top 5 etc. We are also required to disclose any close links with brokers or venues without having any comprehensive definition of what ‘close link’ means. For example, does a shareholding in the London Stock Exchange now need to be disclosed as a close link? There are other technical issues around delegated executions. If a fund manager is managing a fund domiciled in Luxembourg on behalf of a US client and the order is generated in London but the execution was delegated to the in-house dealing desk in Hong Kong, then is that included in the fund manager’s RTS28 reports or not? We don’t know. If amongst the top 5 brokers, three of them are Morgan Stanley (Morgan Stanley New York, Morgan Stanley London and Morgan

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Stanley Singapore) can they be aggregated into one as Morgan Stanley? These are the sorts of issues and concerns we have around the best execution reporting requirements. Global ramifications In our conversations with regulators across the EU, we have referred to the potential impact on global asset managers and other regulators. And whilst talking about US, Asia-Pac brokers and regulators, I don’t think they fully understood the ramifications of the best execution requirements on their zones either. In addition, RTS27 rules say that the asset manager is legally obliged to receive the information, meaning that a broker must provide it in the first place in order for it to be received by the asset manager. But there is no legal compulsion on a US or an Asia-Pac broker to provide that information. So if a US broker refuses to provide that granular data, then who will be held legally responsible – will it be the US broker or the Europeandomiciled asset manager? These issues give the impression that the policymakers have not necessarily appreciated the extent of the technical and financial challenges that will be faced by asset managers in order to achieve best execution, or at least to demonstrate their achievement of best execution.


INSIGHT | 31

The Global Impact Of LEIs By Chris Pickles, Bloomberg Open Symbology Team Identity Management is the most important subject for the financial community to address over the next ten years. So many different industry themes come back to the core topic of identifying the “who” and the “what” of financial services activity. This is critically important largely because financial institutions today are often unable to identify uniquely many of the elements of their business operations. Whether the headline is Cybersecurity or Blockchain or Regulatory Compliance, or simply Operational Efficiency, the topic of Identity Management is fundamental to any and all of the above being feasible. When Lehman Brothers was in severe difficulties back in 2008 it was selling off high-risk trading positions in order to get itself out of increasing trouble. However, it wasn’t aware that the some of the counterparties to which it was selling off some of those high-risk positions were actually other divisions of Lehman Brothers. Ask a major bank if it has a single consolidated system for managing client and counterparty data, and the reality is that they may have hundreds or thousands of different internal systems for that purpose (two major global banks each said that they have over 4,000 systems for this). Identifying uniquely what they are trading is a further challenge, particularly as investment firms have each developed their own internal identification systems for many of the financial instruments that they have to deal with across all asset classes. Making change happen in any industry sector is always a complex and lengthy process. Where change requires introducing standardisation across organisations, national borders and vested interests, the process can – and in the financial sector, too often does - take decades. However, one aspect of the financial services sector that today not only enables change but drives industry change is the fact that it is a regulated sector, and regulations have become an increasingly critical driver of industry change. The global Legal Entity Identifier (LEI) standard and system was created in response to the demand by

governments to have regulations that work and that can be policed effectively. This was not “demand” as in “customer demand” but an insistence by governments of major economies that a solution for uniquely identifying legal entities internationally should be generated immediately. Government representatives and regulators committed to including the requirement to use LEIs in future legislation and regulations, so financial institutions could ensure that they can amortise their investment in implementing LEIs across more and more of their business and compliance activities, ie LEIs would help to enable increased operational efficiency overall. Some key principles of the global approach to LEIs have been different to those used for other standards. Good governance was a key issue from the start, and is often a topic that is easier to address when a new standard is created with no legacy. The Global LEI System was created with pan-industry international governance as well as effective competition as core characteristics. Its governance structure and principles were also created to allow for speedier change and improvement to the overall approach taken, so that as flaws or limitations were found they did not end up being “legacy” that held back the effectiveness of the system. Data quality of entity identifiers has been a challenge from even before the beginning of the global LEI system. Market participants found that there were flaws and limitations in the approaches of existing national agencies whose function included identifying legal or business entities. In some cases these related to specific issues such as how up-to-date the information was, while in others they related to more general issues of data validation and of data quality management overall. Even under the existing Global LEI System there have been some clear issues related to data quality, and these are already being addressed by the Global LEI Foundation (GLEIF). Gradually the use of LEIs by regulators is being increased as new national regulations are introduced, such as Dodd-Frank Title VII reporting. EU regulations,

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32 | INSIGHT

“Some key principles of the global approach to LEIs have been different to those used for other standards. Good governance was a key issue from the start, and is often a topic that is easier to address when a new standard is created with no legacy.�

Chris Pickles, Bloomberg Open Symbology Team as the primary example of regional/multi-national regulations, are beginning to have perhaps the most significant impact on the growth of usage of LEIs. EMIR and MiFID II/MiFIR are both examples of this, but requirements to use LEIs now extend beyond the Financial Markets sector, eg in the EU for EBA reporting. However, one should not look at LEIs as just an initiative to identify counterparties and clients. The aim of governments and regulators is to avoid a repetition of the 2008 crash, and identifying who is in the market is only one of the building blocks that is required. An ultimate aim of regulators is to have a multidimensional modelling environment that regulators internationally can use to monitor risks and what is happening in the financial markets. That modelling environment needs to include data not only about market participants but also about financial instruments that they are using and trading and about the nature of risks themselves. The need is also recognised for greater granularity of data, including identifying parent/subsidiary hierarchies and the relationship between the legal entities that issue

GLOBALTRADING | Q2 • 2016

financial instruments and the instruments that they issue. Having data of all types in a standardised format that can be fed easily and quickly into this environment is a fundamental necessity. This is equally true for financial institutions. The world of market infrastructures and service providers today has a plethora of proprietary and uncoordinated data standards that have resulted in investment firms having to create their own internal approaches, processes and systems for identifying entities, financial instruments and risks. The move towards greater standardisation by regulators with real and effective governance of the way that standards are applied and identifiers are issued enables firms to take a more standardised approach themselves to data management. With regulatory requirements for the adoption of data standards already coming into force, now is the time for firms to plan their strategy and direction for how they apply data standards to manage data within their organisation to assure their future.


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Addressing The Market Data Cost Challenge In Fixed Income By Sassan Danesh, Managing Partner, and Kuhan Tharmananthar, Product Development, eTrading Software Recent years have witnessed an inexorable rise in the electronifcation of trading, driven by a trinity of regulatory, technological and cost pressures. The benefits to investors have been significant, including speed of execution; reduced explicit transaction costs and improved price discovery. However, alongside these benefits has been the ever growing cost of connecting and consuming the data required to operate efficiently in the new electronic world. Much of this data is essential: It is data that defines the instrument being traded; it is data and connectivity to it that reveals potential prices from different brokers; it is data that captures actual trade prices and market closing levels. It is not surprising that this data is now valuable and that an entire ecosystem has sprung up surrounding the generation, maintenance, distribution and consumption of this data. The challenges associated with the high cost of data are not new to the equity markets, which have been wrestling with this problem for many years. However, the increased electronification that is now occurring in fixed income markets is threatening to create the same challenges for OTC markets. The timing is therefore ideal for the community to start discussions on creating a fixed income market data ecosystem with a more optimal cost structure and data governance model for all market participants. Reducing market data costs through collaboration Part of the reason for today’s high market data costs rests in the structure of the market data ecosystem: raw data is provided by brokers in various formats; various data vendors then clean, reformulate and enhance this data before selling it to market participants including those who generated it. This enriched data is delivered via proprietary channels and using custom formats. Market participants embed these proprietary formats into their own systems, building complex mapping and verification/scrubbing tools of their

own to validate and clean data from different sources so they can build a single picture of the markets. This provides an opportunity for the market as a whole to collaborate to create a standardised distribution mechanism to simplify the ecosystem and drastically reduce market data costs to end-users. However, any successful initiative that wishes to simplify this ecosystem must address the needs and sensitivities of the key stakeholders, including the sell-side (typically the data originators); the buy-side (typically the data consumers); and ideally also the data distributors (typically data vendors who provide the connectivity and value-added services to end users). Taking the needs and sensitivities of each stakeholder in turn: Buy-side: The fragmentation of fixed income markets is driving the buy-side need to access market data from as wide a set of data sources as possible, and to be able to sift through this data systematically. The buy-side therefore have an in-built incentive to promote such cost reduction. However, given the disparate sources of market data, a key challenge for the buy-side is to receive this data in a standardised format based on open standards to allow aggregation across data sources and to avoid individual vendor lock-in that can result in increased costs. Sell-side: Fixed income market data is typically generated by the market-making desks of individual brokers for their client base in a particular product. Typically, the broker does not charge for providing this data as it is a pre-requisite for client trading. Indeed, the broker has an incentive to supply the data in the most cost-effective manner to ensure as wide a dissemination to their specific client-base as possible. However, given the risk of information leakage and data being passed to other market actors that the dealer does not have a relationship with, a key sensitivity for the sell-side is ensuring an appropriate data

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34 | OPINION

Sassan Danesh, Managing Partner, eTrading Software

Kuhan Tharmananthar, Product Development, eTrading Software

governance wrapper around any data distribution mechanism.

4. Low fees through a utility model that ensures the benefits of scale and the value of the data are captured by end-users

Data vendors: The cost of establishing connectivity to sell-side (data originators) and buy-side (data consumers) is a major challenge for vendors. Reduced connectivity costs can allow vendors to focus their investments on value added services such as TCA or other pre- and post-trade analytics and to market such services to the larger client base that becomes possible as a result of simplified connectivity. However, a key sensitivity for vendors is in ensuring that their business models can be made consistent with an ecosystem in which connectivity has become commoditised. The right model of industry collaboration Crafting a collaborative model that meets the aforementioned needs and sensitivities is a challenge. Luckily, the industry already has an example that it can emulate: Neptune, an initiative by a group of market participants to distribute pre-trade axe/ inventory, provides a model that addresses many of the critical requirements discussed above: 1. A standardised, open-source data format to simplify the consumption of data from multiple sources 2. A data governance model to address information leakage concerns 3. Reduced connectivity costs and interoperability with EMS & OMS vendors via the use of FIX to allow vendors to provide value-added services such as reference data or additional analytics

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Of course market data has its own specific needs as well, such as providing for industry governance over the creation of the composite price. Such a composite can accelerate the adoption of buy-side TCA and bestexecution analytics, since these are predicated on the availability of a clearly defined and reliable industry ‘mid’. Therefore a successful collaborative model must also address the creation of an appropriately balanced governance structure for an industry composite. And finally The key question, given the theoretical benefits of such a collaborative model, is whether the industry is ready to launch such an initiative. The debate continues, but what is clear is the increased industry receptiveness to establishing open standards and industry utilities that make life easier for all participants whilst still providing scope for each firm to compete on top of the richer market infrastructure that such standards and utilities create.


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Innovation In Quality Assurance:

What Is The Impact On Trading Technology? By Iosif Itkin, Exactpro CEO, London Stock Exchange Group This article focuses on how particular changes in quality assurance might affect trading technology. There are plenty of discussions on Internet-of-Things, Cloud and Web. However, software verification for exchanges and brokerage platforms is closer to home for Exactpro. Here are some interesting QA trends: • FrAgile process • Crowd-sourced testing • Formal methodologies • Cognitive technology When it comes to start-ups and web-industry, agile methods are favoured. They do not necessarily mean better products, but they can make software developers much happier. The outstanding keynote address of GTAC 2011, Google’s test automation conference, claimed that “test is dead”, and that FrAgile is the new agile. Reid Hoffman asserted that “if you are not embarrassed by the first version of your product, then you’ve launched too late”.

He went on stating that we need to test our ideas first before building the product right. The point is to have an established user community by the time your competitors get a well tested product. Extensive user pool is one of the key elements of crowd-testing. The idea is simple – just deliver your product to the community and collect instant feedback on your software, both the upsides and downsides. To do it efficiently, one would have to rely on sophisticated code instrumentation and data collection. Otherwise it impedes you from thoroughly processing crowdsourcing output and becomes an exercise in futility. Is it feasible to use FrAgile process and Crowdtesting in finance? Can we afford an algo running amok burning money which could very well result in prosecution? Maybe we should take a different course of action. Perhaps, what we need is the very opposite of agile. Areas like transport, medicine, nuclear power should exercise more rigorous controls. This leads to the creation of an environment, conducive to the evolution of quality assurance methods. Advances in model checking mean the end of guessing game. Last year, one TABB Forum posts pondered on why we are not using mathematics and computer science similar to what NASA uses to design a safe autopilot?

Google Test Automation Conference GTAC 2011: Opening Keynote Address “Test is Dead”, Alberto Savoia

Is it not embarrassing that we have financial market crashes at the same time as spaceships explore the heliosphere? We can invest heavily into formal methods and expect financial software that is more reliable. Nevertheless, one has to keep in

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36 | OPINION

NASA’s New Horizons: during its very successful Pluto mission the spacecraft experienced a software anomaly and went into safe mode on July 4, 2015

mind that in defiance of all of the formal methods, the New Horizons probe experienced a shutdown that made it lose contact with Earth for three days. Thus, expecting your systems to fail is the only way to enhance the quality of your software.

Nick Bostrom, Ethical Issues in Advanced Artificial Intelligence

So where do we go from here? Is it possible to be faster without compromising safety? Can other industries teach us anything? If not the computer industry, maybe the show business has an answer. Some of you may be familiar with the characters of Battlestar Galactica and Sarah Connor Chronicles, their Doomsday scenario and the people who ran into some serious confrontation with technology. Had they not relied on the same technology that tried to kill them, the characters would not have lasted until the finale. They were guarded by systems with the same level of sophistication as those they were fighting

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“Our risk control and test instruments should not be inferior to what will hit us. Having a good robot on your side is the only way to survive the robot apocalypse.” against. This is the mentality that we should adopt. In the context of a complex platform, it is imperative to build software to test our software. Our risk control and test instruments should not be inferior to what will hit us. Having a good robot on your side is the only way to survive the robot apocalypse. So, can we estimate the impact on the trading technology? Developing testing instruments and monitoring tools should have the same priority as developing the trading platform itself. It is possible to use agile methods and continuous integration if the system is designed with testability and risk control in mind. At the very least you can deploy, start, restart and configure it automatically. In addition, it is crucial to be able to shut the system down if necessary. Do not expect formal artefacts from the agile process. Instead, have a parallel stream to develop the necessary test harness. Software engineering in the test approach proposed by Google is very close to building software to test software. We can implement formal verification, theorem proving, static analysis and other approaches, but the software will break anyway. What’s more, the absence of sufficient monitoring and kill switches is what turns a problem into a disaster. For the sake of audit and regulatory requirements, we develop passive testing tools. Instead of generating messages themselves, they capture the traffic and store it for further analysis. Passive testing tools can collect all the evidence you need.


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Use passive testing tools to collect audit trails

It is paramount to ensure that your trading system can co-exist with the tools. Passive testing tools can serve as both surveillance and client on-boarding systems. They can also be used for crowd-sourcing. If your test environment is open to others and you have a strong passive test capability you will be able to gain a lot of valuable feedback without even having to ask. The Technology Services division of LSEG incorporates MillenniumIT, GATElab and Exactpro.

This gives the Group a unique set of software from all three companies at our disposal, which we can use to build test infrastructure for any system. Take testing of trading algos, for example. We can deploy one or several scalable matching engines to function as market simulators. We can utilise GATElab’s algopath or an Exactpro tool called Minirobots to act as market participants. They can both replay some data and at the same time mimic a realistic market impact. In addition, we can have latency and front-running proxies for better test diversity.

LSEG Reference Test Harness for Algo Trading Systems

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38 | OPINION

“Hypothetically speaking, one can run an infinite amount of tests and execute a wide range of scenarios, except that we all have limited time as well as limited hardware.” possibilities. They are used to find the optimal test scenario subset for a trading platform. They can also be utilised in enhancing the test set along the changes in the system under test and in the surrounding markets. Iosif Itkin, Exactpro CEO, London Stock Exchange Group

It is possible to take the next version of the algo and put it to the test. However, what is the point of running it once? Markets are not deterministic, neither are well-simulated markets. Every time tests are executed, there will be a slightly different result. For this reason, multiple replays are necessary to assess the quality and efficiency of the software. This is where everything falls into place: 1. Efficient restart and testability to enable unattended test execution 2. Machine-readable specifications to synchronise all the tools and formally iterate the possible tests 3. Passive testing capabilities and, potentially, market surveillance to capture and store all the relevant metrics (both P&L and system related ones) Hypothetically speaking, one can run an infinite amount of tests and execute a wide range of scenarios, except that we all have limited time as well as limited hardware. There are two more quality assurance trends, though, cognitive technology and mutation testing, that allow us selecting an efficient limited subset of tests from an infinite number of

GLOBALTRADING | Q2 • 2016

EXTENT Conference - Software Testing and Trading Technology Trends


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Driving Latency Monitoring Across The Marketplace With David Snowdon, Founder, CTO, Metamako

A hundred microseconds has become the target accuracy for trading systems’ trading reports – after much debate that is what the regulators have settled on. However modern markets operate at a much faster pace, and for the regulators to be able to understand the ordering of events the accuracy of those timestamps must be much more accurate. They want to be able to reconstruct what happened in the market with confidence, but the current greater requirement of 100 microseconds is just too broad to be able to do so. Without becoming too technical, a system using 10G Ethernet – the predominant standard for communication in modern markets - gets 64 bits of data every 6.4 nanoseconds – 6.4 billionths of second. It’s a fundamental part of the way that communication occurs. That means that Every 6.4 ns a block of data is transferred – part

of a message. Within that 6.4 ns, the timing is much less significant. Effectively, two packets which begin to be transmitted during the same 6.4 ns period will appear as simultaneous to the system which is receiving them. It’s a position which is arguable from the fundamentals of the way in which computers communicate. That’s about 10,000 times more accurate than MiFID II’s hundred microsecond requirement. In a hundred microseconds you can easily get an entire order to the exchange, and on some exchanges it’s possible to execute an entire order, get the response back, and place a second order and both orders would be considered to be simultaneous within the regulations! While the present requirements are not sufficient for the stated purpose, the required accuracy can be adjusted. In some sense, this is only the beginning…

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“A firm without network visibility is a firm which can’t understand its own behaviour, since the boundary of the network is the definitive point at which the trade can no longer be affected.” As time goes on and firms become more comfortable with the technology, the nirvana of traceability can be achieved. While this won’t achieve the goal in the near term, this is a huge step forward. Competing with HFT There’s been a lot of debate surrounding market makers and high frequency trading generally. To compete in the modern world firms need to have good information and analytics to base their optimisation decisions on. Can you imagine a floor trader relaxing with a coffee during a market crash? It might be comfortable, but it’s hardly the way to succeed. A firm without network visibility is a firm which can’t understand its own behaviour, since the boundary of the network is the definitive point at which the trade can no longer be affected. Firms have a responsibility to their customers to get it right, and the requirement of accurate time reporting is a chance for these to have a solid understanding of what works and what doesn’t. Behaviour versus cost The technology is not the issue for the majority of firms. If a house is looking to be absolutely at the cutting edge and they’re only relying on latency to get an advantage, then, yes, they need to put a lot of money into the technology. But on a basic level, the technology that’s required to be competitive is not expensive.

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David Snowdon, Founder, CTO, Metamako The HFTs are the disruptors of the trading world. They are the Ubers, Googles and Facebooks. They are using technology to do things better than the slow firms. Their company culture is agile and they are technically aggressive. Their employees are highly motivated to perform and more… they’re willing to take technical risks. Driving the change The current regulatory drive is bringing significant attention to the issue of accuracy of network monitoring and time stamping, and if that drives firms down to the microsecond or nanosecond accuracy level, which is achievable without a massive investment, then it’s a very positive step. Forward looking firms are looking at MiFID II not as a burden, to meet the letter of the regulation, but an opportunity to push the technology internally and get a number of other benefits from the data. These firms are going much further than what’s actually required to meet the specification.


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More than that, firms are not just looking at Europe. They’re looking worldwide. Again, this is an opportunity to understand what’s going on and apply that knowledge to improve the process Future latency The speed of light is constant, given distance and medium. The debate though is who hits the end of that fibre first, which is where you get to start trading. You can have a substantial response time from the exchange but still care about how consistent your own internal switches and trading systems are. Once firms get their heads around the problem of basic latency monitoring and consistency, they will start to push further than the regulation requires. Without measurement, it’s impossible to implement effective improvements.

“Once firms get their heads around the problem of basic latency monitoring and consistency, they will start to push further than the regulation requires.”

The regulators have done well to bootstrap the process, but if we want to understand who did what, when, and in what order, then this is just the beginning. We’ve got four orders of magnitude to go.

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Unifying Emerging Markets Grigoriy Kozin, Director, Head of Prime Services at Otkritie Capital International Limited examines lessons that can be learnt from Russia by other emerging markets. It is relatively easy for international clients to access the Russian market compared with other emerging markets. This is partly due to the role of brokers such as ourselves who are based in London. At Otkritie, we serve mainly international institutional clients and we take steps to alleviate the difficulties of trading in Russia. When talking about emerging markets, there are three key components which make the markets more accessible and attractive to international clients. The first is the macroeconomics of the country; the political situation and the resulting impact on liquidity. In Russia there are a diversified set of asset classes but the current geopolitical situation in Russia, the drop in the oil price and the devaluation of the ruble, mean that cash equity does not look very attractive in terms of valuations, and as such we have seen a sharp drop in volumes. At the same time however, geopolitical turbulence usually brings with it increased volatility to the FX markets. As a result of this, the Moscow Exchange moved focus to a range of FX products such as FX SPOT and FX futures which became main revenue bringers for the exchange. This volatility leads to a huge increase in turnover in that part of the market, and as such this is currently one of the main areas of interest to international clients, specifically hedge funds and proprietary trading firms. Since 2011 there has been a dramatic turnaround in the volumes of index futures versus FX futures: on the Russian market, index futures used to have a market share of more than 75% and FX around 15%. But this year, index futures only make up 20% of market share and FX futures are now responsible for more than 70% of volume. It is difficult to see how other emerging markets could follow this practice, as the volatility of FX is closely related to wider monetary policy. The Russian central bank is trying to maintain relatively independent monetary policy, which helps with confidence in

trading, even if it has spurred on the volatility. By way of encouraging liquidity and trading in other areas, the Russian markets recently started to develop exchange traded funds (ETFs) which are now a fast-growing investment vehicle. We believe that for international clients who would like experience of the Russian markets, these ETFs could be an interesting product with which to start trading to mirror the index. There are Russian index-based ETFs and ETFs based on Russian Euro bonds either hedged into the ruble or hedged into dollars, and this is a rapidly growing area for us.  Market structure The second of the three key components is infrastructure; both trading infrastructure and wider market and settlement infrastructure. The Moscow Exchange has made huge improvements over the last five years in terms of ease of access for international clients. Five years ago, there was T+0 settlement with full pre-funding. There was no central depository and there were many infrastructure problems which meant that, for international clients, the Russian market was an inconvenient place in which to trade. So in 2012, a central depository was launched. Shortly thereafter in 2013 central counterparty was introduced on the Moscow Exchange it achieved T+2 settlement cycle with partial pre-funding. They subsequently opened the door for the European clearing houses so that clients could clear their trades with international clearing houses. All these factors made the Russian market a much more convenient place to trade for international clients. The regulators and the Russian exchange helped to close the market structure gaps between the Russian and the European markets. This is a valuable lesson for other emerging markets; best practices, especially those of a large neighbouring regulatory area such as Europe, should be adopted to help ease trading across those markets. However, there are still a number of things that the Moscow Exchange needs to do in order to attract more international clients. Official global clearing membership was introduced in 2014 on only one market (of three) and it should have been introduced across all markets in order

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44 | EUROPE

us. The Russian central bank does seem to be moving in the same direction in terms of its regulation. In 2015, the Central Bank signed a memorandum of understanding with IOSCO which seeks to drive global cooperation and increase transparency when clients are undertaking cross-border operations.

Grigoriy Kozin, Director, Head of Prime Services at Otkritie Capital International Limited to reduce the risk for market participants trading on the Moscow Exchange. Legislation The third component is legislation and taxation. Together with the Moscow Exchange, we are working hard to introduce best practices in terms of regulation of the financial sector and of legislation into Russia. The Central Bank is doing a reasonable job in this regard in terms of regulation. Taxation in Russia, compared with other emerging markets, is relatively straightforward. It is in line with the approaches announced by the Organisation for Economic Cooperation and Development (OECD), so it is generally unified with the European approach. Again, there is still much work to be done here, specifically relating to the taxation of listed derivatives and other assets, but we are moving quite fast and in the right direction. The progress made over the last five years has been significant. New legislation is being developed to regulate dividend payments, which will make it simpler to understand when and where dividends are paid. This is happening with the help of the Moscow Exchange and our international clients and obviously, the brokers who are bringing international clients into Russia. Becoming global Otkritie Capital International is required to be fully MiFID II compliant given that we are a UK regulated broker, but as such the benefits of unifying regulatory standards between Europe and other emerging markets are clear to

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However, as a European broker we have many more concerns about MiFID II compared with those of local Russian brokers or local Russian market participants. Overall, we can see that the borders between the Russian and international markets are becoming less pronounced. One of the main goals of the Moscow Exchange is to bring back liquidity to local markets, rather than having so much of the volume traded through GDRs. A couple of years ago, more than 50% of most liquid stocks was traded internationally in forms of ADRs and GDRs. Now what we see is increasing volumes moving back into local shares which means that even for international clients and large funds seeking to invest in Russia, it becomes more convenient to trade locally rather than to trade internationally. Sooner rather than later, Russian markets will become more like developed markets than emerging markets. Removing sanctions will help of course and will boost the economy. For example, with FX settlement, one of the biggest problems is that the Russian ruble is not a CLS-clearable currency which means it requires larger limits for banks to settle rubles and usually, it takes more time settle than CLS clearable currencies. This development would significantly help integrate Russia more deeply into international financial markets. In conclusion, first of all, there needs to be clear commitment on the part of the government to help international clients. It needs to be reflected through better legislation and taxation approaches for international clients. In addition, the local market has to learn from experiences of other international markets in terms of market infrastructure. Provided that the economy is affordable for clients it will bring international investors.


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Rationalising Global Connections To Drive Costs Down, Visibility Up

Craig Talbot, Global Head of Trading - Systems & Connectivity at Hatstand Consultancy insists a global connectivity review can identify options to reduce footprint, improve resilience, minimise complexity, eradicate duplication, and save significant costs.

Over the past fifteen years, investment banks have seen a massive expansion in global connectivity, encompassing hundreds of links to exchanges and buy-side clients as well as infrastructure to backup sites. This complex connectivity infrastructure is business critical, delivering reliable resiliency, but is also very expensive, from hardware to leased lines and exchange memberships. There is, without doubt, both significant duplication and underutilisation of these key resources. In an era of increased governance and demands for better resource utilisation, there are tangible opportunities to consolidate this infrastructure. But with poor visibility of the way in which lines are being used by trading and data applications, banks struggle to identify key areas for consolidation.

Cost and complexity The days of generous Information and Communication Technology budgets are a very distant memory for any investment bank. In the post GFC meltdown era of limited resources and heightened regulation, every organisation is balancing demands for cost reduction and better resource utilisation with escalating compliance requirements for improved visibility, accountability and near perfect resilience. Yet the legacy of those heady days of rapid expansion remains. Over the years every investment bank has connected to a large number of European, Asian and North American markets; while every asset class and each specialist area may have developed its own connectivity infrastructure with no reference to the rest of the organisation or the connections already in place. But does any organisation really need six

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“Can an organisation be confident that it has eradicated every single point of failure? How can an investment bank respond to both internal audit and regulatory demands for improved accountability and resiliency without total, end to end visibility?” Craig Talbot, Global Head of Trading - Systems & Connectivity at Hatstand Consultancy separate connections to the Chicago Mercantile Exchange (CME) or four to EUREX? Is it really justifiable to have dedicated connections for each specialised trading function or asset class? The issue is not only cost – although the unnecessary overspend runs to millions of dollars every year. Duplication and complexity add risk. Can an organisation be confident that it has eradicated every single point of failure? How can an investment bank respond to both internal audit and regulatory demands for improved accountability and resiliency without total, end to end visibility? And, to be frank, just how agile is the organisation when the global connectivity picture is so confused? In an era of increasing volatility, the lack of visibility across this incredibly complex, resource demanding connectivity infrastructure is becoming a major concern. Application utilisation The governance inspired sharing of resources and infrastructure between asset classes, from equities to

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bonds, fixed income to derivatives has become well established over the past few years. Yet in the majority of investment banks connectivity remains largely untouched. The problem is that while many organisations have a clear picture of the overall physical infrastructure in place, few, if any, have a detailed idea of the way in which that infrastructure is being used. Detailed physical to application mapping is lacking. Where are the areas of under-utilisation? Are there bandwidth problems that could cause downtime? How much duplication exists between asset classes and specialised trading functions? There are significant opportunities to reduce the connectivity footprint to both cut recurring costs and simplify the infrastructure. From rationalising connections to each exchange to replacing expensive dedicated leased lines to vendors by leveraging the existing or upgraded internal network, the majority of investment banks could pay back the cost of a connectivity review in less than a year. In addition, a global review process should by default improve resilience by improving utilisation understanding and flagging problems of bandwidth redundancy. The key is to map connections to utilisation, a process that requires a cross-function review and fact finding process that incorporates not only the known


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connectivity state but also detailed understanding of application utilisation across trading groups, client services, market data applications and institutional services. Furthermore, a thorough investigation that also includes an analysis and understanding of business trading requirements (across the full trade lifecycle) would result in the decommissioning of specialist platforms. Simplify and consolidate Given the over complexity of most investment banks’ connectivity infrastructure, it is important to start small, in one region, for example, rather than attempting a global project up front. Once the review process has gained true insight into the application utilisation across trading groups, client services, market data applications and institutional services, recommendations can be made, for example, to reduce connections, cut leased lines and reroute via the corporate WAN, or address an identified single point of failure. With confidence in the model the organisation can then expand into a global project. For any Chief Technology Officer, the financial model is compelling: a global connectivity review should deliver not only payback within the first year but also recurrent savings. Over and above the cost savings, the review provides on-going benefits. Consolidating suppliers and infrastructure reduces the footprint, and hence the need for extensive support staff. Critically, the business has a vastly improved audit trail as a result of improved visibility and gains the benefit of improved resilience. Furthermore, the holy grail of real-time application utilisation reporting can be factored in. With full transparency, it is far simpler and easier to meet regulatory and auditor demands for information about backup processes, resiliency and redundancy models and response plans. A global connectivity review and remediation not only saves significant money but transforms the speed and cost of regulatory accountability.

“Consolidating suppliers and infrastructure reduces the footprint, and hence the need for extensive support staff. Critically, the business has a vastly improved audit trail as a result of improved visibility and gains the benefit of improved resilience. Furthermore, the holy grail of real-time application utilisation reporting can be factored in.” existing infrastructure is not a long term option. In addition to the regulatory demand for better resilience and visibility, organisations face ever increasing demands for savings and better resource utilisation – a challenging requirement at a time when global instability is creating new pressures in areas of business change and agility. Whether the priority is cost saving, compliance or agility, there is a huge opportunity for investment banks to review the state of global connectivity environments.

CTOs are, of course, wrestling with any number of cost cutting and compliance requirements. But it is worth considering: when was the connectivity infrastructure last reviewed? Ten years ago? Longer? From mergers to new business lines, the complexity for many investment banks is becoming untenable, and simply piling more connections on top of the

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MiFID II – What The Industry Can Expect Over The Next 600 Days By Dr. Sandra Bramhoff, Senior Vice President, Cash Market Development, Deutsche Börse AG If you google ‘MiFID II’ more than half a million results will be returned. The amount of information that is available seems vast but the industry still awaits the publication of some of the most important details: the final Level II measures. These include 28 RTS (Regulatory Technical Standards), 8 ITS (Implementing Technical Standards) as well as Delegated and Implementing Acts. The industry is under particular pressure regarding the modifications needed for IT systems in order to comply with the forthcoming requirements. By proposing to delay the application of MiFID II by a year European legislators have acknowledged that significant system changes need further time. Brussels is feeling the pressure: National Competent Authorities (NCA’s) need nine months to transpose the requirements into national law. Therefore, Member States and the European Parliament are considering postponing the date for transposition into national law also by one year that is to 3 July 2017. The process also envisages a period of six months between the transposition into national law and applicability itself. In order to keep the envisaged timeline, all Level 2 measures need to be published before end of September 2016 to give market participants as well as authorities sufficient time to adapt to the new technical and legal requirements. However, one would be mistaken in believing that once the Level 2 measures are released the industry will have full clarity. The “details of the details”, which are the Level III measures in form of ESMA guidelines and Q&As, are yet to be drafted and will

be important to fill the remaining gaps and to contribute to a shared understanding among NCAs of how to interpret and apply the new provisions.1 Nevertheless, it is unlikely that the final Level III measures will be published before the end of this year. MiFID II impact With the introduction of a trading obligation for shares, the double volume cap mechanism2 and thresholds for the Systematic Internalisers (SI)3 , OTC trading in shares will almost vanish. OTC trading will only be allowed if trading is non-systematic, ad-hoc, irregular and infrequent. So where will those that traded OTC trade in future? Will the lit markets (Regulated Markets and MTFs) benefit or will the Systematic Internaliser (SI) regime experience a revival? While Regulated Markets and MTFs will have to follow a new tick size regime (which overall implies very low spread-to-tick-ratios) SIs are exempt. Hence SIs can execute all orders of a specific client at any price better than its publicly disclosed quotes. In case matched principal trading would be allowed under the roof of the SI, clarification on this is expected with the forthcoming Delegated Acts, current broker crossing networks would be able to continue (if required) to interpose between buyer and seller in such a way that they are never exposed to market risk. Furthermore, although the quote display requirements will increase, there will only be a small quote size, i.e. for a very liquid share it would only be 10% of standard market size which is easy to fulfil. While the industry still awaits clarity with regards to final SI thresholds4 it remains unclear how the internal

1

A first consultation on transaction reporting, reference rata, order record keeping, and clock synchronisation ended in March 2016, but there is yet more to be expected in 2016. 2 The forthcoming rules suggest capturing trading in dark pools once 4% and 8% caps are reached. First market estimates suggest that trading in European shares under Reference Price Waiver and Negotiated Trade Waiver will be impacted.

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Dr. Sandra Bramhoff, Senior Vice President, Cash Market Development, Deutsche Börse AG matching platform fits into the world of MiFID II. The Level I text states that investment firms that operate an internal matching platform need to authorise as a MTF. So if the SI thresholds are not met broker crossing networks will be able to continue trading OTC as long as their trading is non-systematic, ad-hoc, irregular and infrequent and if they are not running an internal matching platform. If the Delegated Acts will provide more clarity of what an internal matching system actually is, remains open as of today. While in future investment firms will have to trade shares either on Regulated Markets, MTFs or SIs, the trading obligation does not apply to fixed income. However under MiFID II an additional trading category, Organised Trading Facility (OTF), will be available. The OTF is meant to capture all types of organised execution which is currently not provided by existing venues. Both organisational as well as transparency requirements will apply to ensure efficient price discovery. In comparison to Regulated Markets and MTFs the OTF category 3

“The list of additional requirements, such as synchronisation of business clocks, license requirements for high frequency trading firms, revised best execution rules, just to mention a few more, is long. Some of these have higher impact than others but eventually will require a considerable time for implementation.” provides discretion over how orders are placed and executed. While it also allows to some extent dealing on own account (other than matched principle)5 it is strictly forbidden that the same legal entity that operates an OTF operates a SI. Like for equities investment firms that deal on own account by executing client orders outside a trading venue have to register as a SI. With regards to the new bond transparency rules the industry might actually see a phase-in approach for the disclosure requirements of liquid, non-liquid and size specific (SSTI) instruments that were originally proposed by ESMA. ESMA has now until mid-May to revise the draft standards that were published at the end of September 2015. The rules on open access might also change the current post-trading landscape. Trading venues will in future be required to provide access to those CCPs that wish to clear transactions on those trading venues. Liquidity might be directed to the trading venue with the most attractive Post-Trade offering. Competition will increase

If an investment firm internalises on a frequent and systematic and substantial basis by meeting certain thresholds based on number of OTC transactions and OTC trades for specific instruments the forthcoming rules require it to set up a SI. 4 The final rules will be part of the Delegated Acts. 5 Dealing on own account is partially permitted with respect to illiquid sovereign debt instruments.

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on all layers of the value chain, for trading, clearing and settlement. The introduction of market maker agreements and market maker schemes will considerably change the concept of liquidity provision. While today liquidity provision takes place on a voluntary basis, investment firms that are engaged in algorithmic trading and pursue a market making strategy6 will in future be required to enter into an agreement and to continue making markets during stressed market conditions. Venues will be obliged to provide incentives during those stressed market conditions.7 Only in times of exceptional circumstances such as extreme volatility market makers will not be obliged to provide liquidity. Today trading venues generally stop the performance measurement during these times. Although most venues in Europe already apply order-totrade ratios (OTR) the introduction of not only a number based but also a volume based order-to-trade-ratio will be new to most. Trading firms will be required to carefully adjust their strategies if they want to avoid breaching them, as a single breach per day would mean a violation of the OTR regime. Investment firms as well as trading venues will be required to maintain extensive records of data, especially those ones that operate a high frequency algorithmic trading technique will be impacted. The industry needs to prepare to store terabytes of data! The requirements to report transactions to the competent authority will be widened by including those financial instruments that are admitted to trading or traded on a trading venue (i.e. Regulated Markets, MTFs, and OTFs) or where the underlying is a financial instrument, basket or index traded on a trading venue. Investment firms will also be obliged to include a wider range of data fields in those reports. Competition will increase with regards to service offerings of reporting solutions through Approved Reporting Mechanisms (ARM).

“Trading venues will in future be required to provide access to those CCPs that wish to clear transactions on those trading venues. Liquidity might be directed to the trading venue with the most attractive PostTrade offering. Competition will increase on all layers of the value chain, for trading, clearing and settlement.� rules, just to mention a few more, is long. Some of these have higher impact than others but eventually will require a considerable time for implementation. In a nutshell With more than 1000 pages of new and revised rules the industry has a lot to absorb over the next 600 days: the impact on market structure is considerable. Although the draft RTS and ITS are available and the Delegated Acts are expected to be released in a step-wise approach this quarter, the industry needs clarity in terms of final rules. The details of the details are also not yet expected before the end of this year and not to forget implementation of MiFID II into national law.

The list of additional requirements, such as synchronisation of business clocks, license requirements for high frequency trading firms, revised best execution 6

Investment firms pursue a market making strategy when dealing on own account, continuously posting firm, simultaneous twoway quotes of comparable size and at competitive prices in at least one financial instrument on a single trading venue. 7 Those market making schemes only apply to liquid shares, ETFs and Equity Index Derivatives that are traded in continuous trading.

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Managing Risk In Clearing With Malcolm Warne, Vice President, Product Manager, Risk Management, Nasdaq There are three main regulatory and market drivers currently affecting clearing houses. The first relates to the forthcoming Basel 3 regulatory changes which will make it more capital effective for banks to clear products. There will be a greater capital incentive to clear products which did not exist before that will encourage CCPs to offer more sophisticated offsetting products. The second issue is the management and clearing of interest rates swaps, which is coming into play for more currencies and which will have a greater impact in the coming months. In some cases, clearing is mandatory and banks will have to clear an increasing number of products. The third regulatory driver focuses on the IOSCO set of guidelines that were developed a couple of years ago and which affect intra-day margining and portfolio margining. These guidelines raise the bar in terms of accuracy of CCP risk calculations, so the CCPs will naturally move closer to real time and will also produce increasingly sophisticated margin models. These three issues combined are driving CCPs towards multi-asset clearing, for banks to clear more through them, and for CCPs to offer more sophisticated and faster margin solutions. There is also a market-related driver to consider. Banks and their clients are being encouraged by the market to use their capital more efficiently. If, for example, a bank is able to clear interest rate swaps and interest rate futures at the same venue and receive some portfolio offsetting between them, that will lower their margin requirements. It means they post less collateral compared to clearing those two products at different venues and not getting that relief. Many CCPs now offer margin relief if more products are cleared through them, which lowers collateral requirements for the banks and that drives more business for them. The industry is within reach of a ‘tipping point’ in the sophistication of clearing; as so much more is being

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cleared, products like capital relief and cross margin become much more interesting. And given that more is being cleared, it makes sense for banks and CCPs to investigate how they can do this as capital efficiently as possible. Pressure on CCPs CCPs are starting to offer a wider range of products, listed and OTC, and as a result of that developing new margin model sophistication. Many CCPs are moving towards a value-risk model for OTC derivatives. Many CCPs are looking at ways to optimise margin requirements across different margin regimes. Calculating the optimum set of positions from a listed account to move across to an OTC clearing account to lower the margin requirement for the clearing members requires fast and portfolio based margin models. Another aspect is that banks are looking more closely at their choice of venues. CCPs are providing incentives to make the CCP a bit more ‘sticky’ for the clearing member. In addition, they are looking to add more value to their services to make them more attractive compared to the competition. Regulation or market in the driving seat? Four or five years ago CCPs recognised the need to centrally clear interest rate derivatives, and that it had to happen quickly. They realised that they could make a lot of money from such products and new levels of sophistication, so they welcomed the prospect of having an OTC clearing offering quickly. One problem with the regulatory drive is that it has been much slower than expected which has meant that the market drivers have been slower too. CCPs are looking at these areas again to examine how they can provide this service at a lower cost, and how to make it more attractive by lowering capital requirements by having clearing across listed and OTC trades. If a clearing house is able to calculate margin and risk in real time, it means they can be less conservative when setting margin requirements as they are able to react quickly to changes in the market. This is of benefit to


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Malcolm Warne, Vice President, Product Manager, Risk Management, Nasdaq banks by lowering the amount of capital required without putting any further risk into the system. Secondly, if a default does occur, knowing risk in real time and being able to very quickly macro-hedge defaulting clearing members’ portfolios insulates the market (basically the CCP and the non-defaulting clearing members) from further losses because the defaulted CCP’s positions have been hedged. Again, this benefits the market significantly. Legacy infrastructure The amount of time taken to change the infrastructure towards being increasingly real time will vary widely between clearing houses. The more legacy the environment that a house is moving, the harder it will be. It is difficult to have real time risk without having a clearing system that is capable of giving out real time positions. But, there is certainly interest amongst CCPs to change. Many of the risk systems currently in place are old and the costs involved to change them to meet the IOSCO and other regulatory guidelines are prohibitive. As a result, many CCPs don’t have much choice but to move away to a modern vendor solution, but the migration isn’t easy.

“The best case scenario is a single margin model into which CCPs can plug new products quickly and easily. This will allow them to broaden their product range as new products will be eligible for clearing quickly and efficiently without having to change the way that the margins are calculated.” so the CCP and their clearing members can compare the two before making the switch. Long term future The best case scenario is a single margin model into which CCPs can plug new products quickly and easily. This will allow them to broaden their product range as new products will be eligible for clearing quickly and efficiently without having to change the way that the margins are calculated. CCPs that can offer new products for clearing without having to significantly change their risk model are the houses that will succeed, especially when it is done within a marginefficient and capital-efficient framework. There is an evolutionary change taking place and it will be very interesting to witness the response of the regulators and market participants. A good example of this is the forthcoming Deutsche Borse- LSE merger. The issues are whether to have a wide range of CCPs with multiple choices of venues, or is the market happy with one or two huge players? If one of those players did fail, it would put a huge amount of strain on the financial system.

At Nasdaq, one of the things we do is to run the old margin model and the new margin model concurrently,

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Moving Beyond the Regulatory Headache With Christian Voigt, Senior Regulatory Advisor, Lewis Richardson, Derivatives Product Manager, and Henri Pegeron, Product Manager, Derivatives and Compliance, Fidessa

Christian: Firms should start to think of regulation as more than just a headache. Regulatory change is not a one-time event, it is a continuous process – once MiFID II is out of the way, there will be new regulations rolling out across Europe, Asia and the US. Firms need to work out how they are going to deal with the changes to regulation on an on-going basis and those firms that set up the right processes to prepare themselves appropriately will be best placed for the future. As an example, MiFID I never mentions the words smart order routing. However, if ten years ago someone had read the details and understood what it meant for the market, they would have anticipated the rise of smart order routing in Europe. Those kinds of market opportunities will always be there for firms who are able to understand the implications of regulation. From a US angle, how are firms developing to stay ahead of regulation? Henri: To add to Christian’s point, firms with people who understand global regulation and its implications are ahead of the game. Much of the time regulations are looking to create rules after the fact. By having a clear understanding of what the regulators are attempting to

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accomplish, a firm has an advantage and knows that it can prepare to operate under those rules. The firms that can suffer are those trying to be reactive to regulation, as opposed to working with it and understanding that regulation is about creating consistency and efficiency. A firm that is continuously upgrading its systems in order to meet regulatory criteria is very unlikely to find the regulation as much of a headache and it becomes more of a maintenance exercise. In the US, for example, the regulators have seen that some companies are creating opportunities in the listed derivatives market, as they introduce rules around registration and risk controls; if you have read the comments of the CFTC this should not come as a surprise. Those firms that understand that regulation is cyclical, and part of the business lifecycle, can read into the regulatory changes and create positive opportunities for themselves. How can Asia-Pac firms become more proactive with regards to regulation? Lewis: In terms of being proactive, it is true that Asian regulators and the exchanges are not moving as quickly as their US counterparts, and that is something


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Christian Voigt, Senior Regulatory Advisor, Fidessa

Lewis Richardson, Derivatives Product Manager, Fidessa

international exchanges are trying to leverage. ICE has set up an exchange in Singapore to allow clients to leverage the regulatory arbitrage between Asia and Europe and the US.

“Standardisation brings with it the opportunity to call in third party providers who can design consistent industry solutions. Instead of falling behind because you can no longer keep up with the regulatory burden on your own, standardisation opens up an opportunity – firms might want to reassess how they tackle it.”

Asian brokers also see an opportunity to try and get ahead of regulations where they see things changing in Europe and the US; certain clients are no longer able to work with European or US brokers and so many brokers in Asia are taking on that business. Do you think that the impact of regulation is more strongly felt by smaller firms? Lewis: Some of the mid-tier Asian firms are seeing ahead of time what is likely to happen in a year or two once regulations such as MiFID II come into force in Europe. They are trying to be proactive now. However, it is probable that smaller firms will struggle to keep up with the new regulations and the opportunities they create, as they won’t have the same economies of scale as the larger firms. Henri: What is also interesting is the way the regulation has been written globally means that the industry is

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becoming ever-more standardised. The regulators are trying to standardise aspects such as risk controls, exchange rules, trade processing, order monitoring, compliance and reporting. A lot of overhead is created with these types of regulatory requirements, especially for firms that may not have been the target of regulation in the past. Standardisation brings with it the opportunity to call in third party providers who can design consistent industry solutions. Instead of falling behind because you can no longer keep up with the regulatory burden on your own, standardisation opens up an opportunity – firms might want to reassess how they tackle it. The smaller firms in all regions, be they brokers or buy-side firms, will start looking towards using solution providers for many of their regulatory concerns.

“In the US, we were a little more apprehensive given that Dodd Frank and the broader derivatives initiatives caused a number of regulatory headaches. But now, five years on, people are starting to realise that regulation is not something to shy away from but essentially to digest, understand and find ways of adapting to.” Christian: There’s always a regulatory pendulum swinging in the market. At one end it favours the small firms and at the other it favours the larger firms. At the moment, particularly when it comes to global trading (for example where an Asian investor using a European broker wants to access an American exchange), firms

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Henri Pegeron, Product Manager, Derivatives and Compliance, Fidessa need to leverage their size in order to stay ahead of the regulatory curve. However, we mustn’t forget that in each of these regions there is a sizeable domestic market where Europe only wants to invest in Europe, and so on. These domestic markets are an area where smaller brokers or buy-sides could grow. Stripping out the regulatory complexity by focusing on one region instead of many means that whilst a smaller firm might not be able to serve all clients they would gain considerable cost advantage because of lower overheads. This approach presents a real opportunity for the smaller players. So firms are refocusing on their core competitive advantage? Christian: Yes, and this is a global trend, where everybody concentrates on their unique selling proposition. At Fidessa, for example, we are well placed as a technology provider because it is our area of expertise. Smaller brokers are generally very good in their specific market, while other firms might specialise in providing a global standardised service across all markets and that’s why they focus on that.


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In that sense technology and advances in outsourcing are enablers, allowing everybody to focus on the one thing that they’re really good at.

process of preparing as much as they can now, so that when it gets closer to the go-live date there will be spare resources to react to market demand.

Lewis: In Asia there are a number of single market brokers that focus on just Thailand or Taiwan and so on. As those markets grow and begin to attract global interest then the global brokers wanting to access those markets start looking for partners. What’s next for the small market broker? They might start to look to expand into other markets or regions, or to go global. The challenge for them is they have to start looking at the regulations in new regions, they have to figure out how to access those markets, and they start to look for the best solutions and technology to help them grow in each area. Many struggle beyond their home markets, whether a single market or outside Asia, because they don’t necessarily have the in-house expertise, and that is when they start looking for outsourced solutions to help them.

Lewis: We have seen with a number of our clients that where regulation might be stricter in one region, then they will adopt that standard globally. A good example of this relates to the rules around data security and data protection in Singapore; they are much stricter in Singapore than they are anywhere else in the world.

Henri: Announcements published since Regulation AT indicate they are trying to introduce globalisation to the US futures industry which has traditionally been more regional. To Christian’s point, many futures market participants focus on a distinct aspect of their home market. In the US, we were a little more apprehensive given that Dodd Frank and the broader derivatives initiatives caused a number of regulatory headaches. But now, five years on, people are starting to realise that regulation is not something to shy away from but essentially to digest, understand and find ways of adapting to.

Christian: We’ve just experienced a period of five to seven years where each region has made significant changes to its regulatory framework. The likelihood that the outcome is neatly aligned across borders is very slim. Looking forward optimistically, many of those differences should be smoothed out over time. The longstanding debate between the US and Europe over the acceptance of US CCPs or EU CCPs is one example. After more than three years’ debate, the EU and the US finally came to an agreement. Identifying and adapting to those differences will be difficult for a business to manage, but the regulators have a mutual interest in aligning to a common standard. Therefore, I’m optimistic that those issues will be resolved in the future. Henri: Risk is just one component of the cost to operate in the global landscape. Companies dealing with global regulations have to be aware of how the rules interact with one another. They have to be prepared to spend the time, money and energy in ensuring that they keep up with regulation because there is always a risk of regulatory impact between what might otherwise be similar business practices across jurisdictions.

To what extent do firms have to guess what the regulator is going announce? Christian: There are many finer details which are still being negotiated not only by the regulators but also the legislators. As MiFID II is so large there are inevitably a significant number of outstanding issues to be resolved. However, having said that, there are a lot of things that can be done. While we don’t have certainty in some areas, there are others where there has been real progress. This is encouraging considering that firms need to be ready by January 2018. The customers we speak to are all in the

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Changing Workflows, Changing Roles By Tony Cheung, Head of Quantitative Analytics, Liquidnet, Asia Pacific, and Lee Porter, Head of Liquidnet, Asia Pacific The start of 2016 has proven difficult for most investors in APAC, to say the least. Not for a decade has the Hang Seng Index seen a worse first two months to the year, with the drop universally slamming large and small cap stocks alike. China followed up a botched attempt to install circuit breakers with a significantly dialled down GDP target – hardly a sign of confidence. And now Japan is showing signs of Abenomics fatigue with negative interest rates not helping to boost markets. While it might be easier for mom-and-pop investors to wait out the storm, institutional investors are faced with tough decisions on what to do with their positions today. And equally important, how to do it. According to results from a recent HKEx survey, institutional investors made up a major part of the trading in Hong Kong – coming in at 51% of all market trading. Retail and proprietary trading (bets placed by brokers’ using their own money) made up the balance, and actually became more active in a very volatile 2015. There is a strong likelihood that some of this was from the residual euphoria associated with ShanghaiHong Kong Connect but with indices on both sides of the border plunging, volumes dried up. Daily Southbound trading via Connect fell to less than 1.7 billion HKD from a peak of about 13 billion. Barring a significant turn of events this year, trading by institutions should clock in at a higher rate than last year with retail and proprietary flow stepping back. We believe this reduced pool of liquidity will make portfolio manoeuvring by institutions significantly more difficult. In absolute terms, the ownership of Hong Kong companies by major fund managers may not be high, but relative to trading volumes the holdings can be staggering. For the constituents of the Hang Seng Index, the top 20 major shareholders (excluding family members, strategic partners, and government entities)

own anywhere from about 30-days to 400-days of shares in Average Daily Volume (ADV). Normally, an instruction from a portfolio manager to buy or sell a single day’s worth of ADV is enough to make traders cringe at the potential market impact. Needless to say, liquidity becomes a major concern when wholesale changes to portfolios are required. And this is just the story for Hong Kong. Other markets in the APAC region have not been spared the problem of lower activity, and its impact is especially pronounced in emerging markets with volumes dropping anywhere from 15% in India to 37% in the Philippines compared to the first two months of 2015. In these days of lower trading volumes, head traders are increasingly searching for new ways of unlocking liquidity. The role of the head trader Surprisingly, a head trader’s involvement with day-today trading has also been on a downtrend despite the increasing workload of trading in tougher markets. Head traders nowadays approach Liquidnet to discuss workflows and trends rather than haggle on prices and shares. This shift away from the traditional “handset on each ear” image of the head trader is an indication of structural changes within buy-side organizations. First, as the markets covered by the typical trading desk in APAC become increasingly complicated, buy-side desks can no longer digest and react to every single rule and regulation change in an efficient manner. This is where the heads of desks create value by liaising with peers and brokers to ensure all available information is looked at from every angle, drawing on their collective knowledge and experiences rather than going it alone. Second, and more important, money managers are more than ever emphasising operational efficiency,

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Tony Cheung, Head of Quantitative Analytics, Liquidnet, Asia Pacific

Lee Porter, Head of Liquidnet, Asia Pacific

realising that the difference between a good and an average year can very well be reduced to how smoothly a desk is run. To achieve this efficiency, more resources are now being invested into systems and processes. The holy grail of each head trader is to establish a platform where his or her team can focus on sourcing the best liquidity in any types of markets.

flows both locally and regionally. For example, while solely relying on algorithms might have worked well for last year’s “Big Era” in Hong Kong’s market volume boon, executing in larger blocks today will serve traders better as liquidity reverts to the norm. For head traders, we believe broker evaluations will place increasing emphasis on block crossing successes in addition to algorithm performances. Advanced transaction costs analyses can be used to measure block qualities not just on a P&L level but also on the degree of signalling around the print. Especially for overnight APAC traders, there is nothing better than the ability to place an order confidently expecting both quality block and algorithmic executions.

While it is widely accepted in the buy-side circle that the best liquidity comes in the form of block trades (a single trade in large quantity as opposed to a handful of smaller lots), from our experience not all blocks are quality liquidity. A recent study we conducted in Australia uncovered that some block trades reported by brokers can cause the stock to swing as much as 40-50% more than its typical trading pattern over the short term. If information about a potential block trade hits the market, it will send signals to predatory traders who can trade in front of that block and adversely affect that price. The only proven way to execute a block without signalling the market that there is a large buyer or seller is for the two trading parties to negotiate directly with each other. Buy-side traders in APAC will need to continuously adapt their workflows according to trends in money

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The Changing Dynamic Of Post-Trading Operations With Dean Chisholm, Regional Head of Operations, Asia Pacific, Invesco Across the post-trade platform, the same trends of the last two to three years are continuing. At a macro level for asset management there has been continued growth in passive products. As a result of this, more products are being sold which increases the volume of trading, which inevitably leads to smaller ticket sizes and an increased level of trading across portfolios. At Invesco, we are having to balance on a more regular basis which has a knock-on effect on the back office because there are more trades to process. At a recent global asset managers’ operations conference in Bangalore, discussion focused on the trend towards the gradual globalisation of processing. Much of the processing is moving offshore, away from the trading teams, into global processing centres, mainly in India with some in Malaysia and the Philippines. Traders tend to stay close to the markets with proximity to the trading hubs. Currently a very large firm will probably have four or five hubs through Asia; they need one in Japan as it is hard to trade Japan unless you are there, Australia is in a different time zone, and then there will be teams in Hong Kong or Singapore. Depending upon the size of the firm, they may also need local market traders in countries such as Indonesia. However, there are moves within the industry to pull together the processing. The aim is to have a common processing centre behind the front office, ideally in a low cost location. Some support for the trading desk would be left behind and the fund managers would stay in-country, but the bulk processing would move out. The largest firms are likely to have two hubs – one somewhere cheap in North America and one in India. People strategy There’s a wider philosophical push when considering where to set up a processing hub. One strategy is to find a city with a good university population; to try and

keep the costs down and to leave only a few people close to the traders in New York or San Francisco etc. If a firm has ten hubs with five people in each hub processing trades, those five people will be pretty stressed each day. One person may be on leave for some reason, so there may actually only be four people who will end up firefighting to get things done. When that firm moves to a central hub, condensing ten locations into one, there will be, say, 50 people sitting and working together. The firm can then think more objectively about how they recruit, more specifically about graduate recruitment so they can access a different generation of people. If a firm isn’t on a global platform for operations and settlement, then it will be trying to get onto a global platform. Traditional centres such as Singapore, Hong Kong and Tokyo all have ageing populations and not that many people at the bottom level coming into the industry. Experience has shown that in India there are many more people who are IT literate and confident in using modern tools; so finding ways to automate transactions is making progress there. There is also conversation there around robotic automation processing that can be developed when there is some slack in the system. There are therefore two trends to watch – one is the cost trend, which is forcing staff out of high cost locations. And there’s the second, which is a positive feedback loop of building that global hub and tapping into new recruitment and processing models. Once a firm is on a common platform, it can move to the next level of realisation, which is that it requires different people. The focus is no longer on processing the transactions, it is now about automation of those transactions which requires staff with a different skillset entirely.

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“There are therefore two trends to watch – one is the cost trend, which is forcing staff out of high cost locations. And there’s the second, which is a positive feedback loop of building that global hub and tapping into new recruitment and processing models. ” Dean Chisholm, Regional Head of Operations, Asia Pacific, Invesco In today’s modern front office, there should be no excuse for errors because a trader keys in the wrong execution price – if there is a decent front end platform, it should all be automated. Traders can then spend time on the execution quality and the difficult tail of orders which they are trying to achieve. An effective global hub and processing environment can have a similar effect on the back office. Market structure Asia has been on T+2 settlement for some time now and the rest of the world is starting to catch up and move to T+2. When changing settlement cycles, the first pressure is on the market structure. In a T+1 environment that will have an impact on the firm, if the team is processing large volumes and variable levels of volume, they will have no choice but to automate or find themselves in difficulties very quickly. To this end, the brokers probably automated before the fund managers because of these huge volumes. The large fund managers are now virtually all automated or are investing heavily in order to achieve full automation. Regulatory pressure has been driving the derivatives world. The reality at the moment is that Asian markets are probably a bit behind Europe and North America

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and each of those markets is taking a slightly different approach to reporting. There is considerably more stress in the derivatives environment and so that is where the focus tends to be from a settlement angle. Unity of markets The reality is that the world is made up of many different countries with widely differing political aspirations. In terms of wider settlement and the macro environment, it will not be possible to standardise things like Bank Holidays or times zones. Focusing on Asia, it is unlikely that the Japanese will use the RMB in our lifetime. Realistically, the industry is probably nearing the limit of how far markets can come together. However, it should be possible to reach a place where T+2 will be the longest of the equity settlement cycles. In addition, there will be some linearisation in a number of the more restrictive markets so they become more ‘normalised’; examples include the gradual opening up of China and Taiwan. However, traders will be more concerned with liquidity and volatility than the actual market structures, because since the global financial crisis, volatility and liquidity have always been the primary concern.


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Better Than Average By Belinda Fong, AES Sales, Credit Suisse

In an ever-changing market place, we keep a close eye on trends and changes to better direct our business. For that we trove through a vast amount of data on a daily basis. Strategy selection is one of the key metrics we look at. There is one statistic that our clients are oftentimes surprised by: the popularity of VWAP. Last year, amidst widening spreads and dwindling volume, a whopping 53% of AES flow in the region was VWAP. Ever since its inception at the turn of the century, the humble strategy that aims to help you be average remains the cornerstone of any algorithmic trading suite. It is still the go-to strategy of choice for a passive over-the-day outcome that is mathematically the “Minimum Cost” way to trade. Misconceptions of VWAP For something used so frequently, there are nevertheless a couple of common ideas about VWAP that are misconstrued. The first thing is market impact. For a given timeframe, VWAP is the slowest possible way to trade for completion. It is also preferable over TWAP as it follows the well-established volume smile, so you are not too aggressive during the middle of the day, unnecessarily increasing market impact. All well and good if your size is small and can stay hidden. However, in the current low liquidity environment, most trades are of sizeable ADV percentage if not multi-day; as the ADV% of your order increases, so does the impact. Our numbers show that once you go above 5% of participation your performance on VWAP starts to deteriorate. But where does the impact come from? Most VWAP strategies run on a historical volume schedule with limited real-time consideration. This means that even though the bid only has 1,000 shares, a

buy VWAP order that needs to trade 10,000 shares right now will go right ahead to post and subsequently cross the spread to keep to schedule, thereby impacting the price and signalling to the market. Do price points matter? The second key point is that the price you trade at is in fact irrelevant to the implementation of VWAP. This can seem counter-intuitive at first. One of the questions traders often have around over-the-day executions is, why did I miss VWAP if the market consistently came my way? I have been buying as the price got lower, should I not have beaten the benchmark? The answer is, of course, no. What drives VWAP performance is being able to accurately match the intraday volume profile. There is a fair amount of literature on price and volatility in the search for alpha, which has somewhat diverted the conversation from volume. Volume is one of the most unpredictable aspects of markets. The life of a trader would be vastly different if he or she knew how much a stock was going to trade on the day. You can think of a full day VWAP order as a series of smaller orders of 5-minute periods. How much is allocated into each bucket makes up the trading curve. Assuming that you match the average price of each period, you can still slip against VWAP if your 5-minute buckets are not distributed correctly over the duration of the whole order. VWAP execution can essentially be reduced to a problem of choosing an optimal trading curve and minimising volume slippage. A dynamic and adaptive solution Current VWAP tactics slice orders according to a stock’s historical intraday volume profile. In general the trading

Q2 • 2016 | GLOBALTRADING


64 | ASIA

“There is a fair amount of literature on price and volatility in the search for alpha, which has somewhat diverted the conversation from volume.” curve of a VWAP order is determined on order arrival and will remain static for the rest of the order life time. A departure from heavy reliance on historical data is inevitable for a smarter way to trade this ubiquitous benchmark. To accurately implement VWAP, algorithms will need to adapt and dynamically adjust your participation rate on the day. In this evolved form, VWAP algorithms will comprise of a historical component and a dynamic one derived from current market conditions. Additionally, trade signals can be captured and used to make adjustments to the trading curve to minimise the drift in volume trajectory versus the actual day’s volume. The opportunistic framework Much can also be learnt from the advance of more opportunistic algorithms for intelligently seeking liquidity. Encapsulated in our ongoing work on the Opportunistic Framework, an underlying structure for tactics that adapts to an expansive set of trading environments through smarts around the real-time order book; opportunistic tactics that are agile in their reaction to changing real-time conditions will help keep impact low regardless of size. These algorithms also have spread capture as their prime objective, given high spread cost in the region. This is achieved by dynamically posting at multiple levels to maximise queue priority and improving near-side fill rates. When it comes to paying the spread, tactics will only get involved when opportunities are right. In response to the faster and volatile nature of current markets, we have recently augmented and fine-tuned the behaviour to be more agile. Interval VWAP figures for our flagship strategy within this framework supersedes traditional algorithms with little deterioration as spread widens. Opportunistic VWAP Bringing the Opportunistic Framework together with dynamic scaling of the intraday trading profile, we get a

GLOBALTRADING | Q2 • 2016

Belinda Fong, AES Sales, Credit Suisse

VWAP algorithm that has the best of both worlds. Starting the day according to historical profile, it will use real-time statistics to continually adjust future participation buckets as the order progresses. A trading envelope will bind the dynamic trading curve depending on the liquidity of the stock while allowing discretion for best performance. For stock that has poor profile stability, this allows us to capture unpredictable volume. The dynamics of individual slices would inherit opportunistic behaviour, with the algorithm seamlessly weaving them into the order book reducing signals and spread cost to a minimum. Spread-crossing decisions are driven by proprietary quantitative logic and closely monitored for optimal results. With little volume slippage, this is a nimble and agile way to trade VWAP that we are confident will consistently produce significantly above average performance.


ASIA | 65

Exchange of Ideas: HKEX Hosting Services Ecosystem Forum 2016

The prospect of a Shenzhen-Hong Kong Stock Connect hung over the HKEX Hosting Services Ecosystem Forum. While the market waits for the regulators and the authorities to finalize that plan, traders, technologists and solution providers gathered to discuss new exchange initiatives, trading technology and regulatory updates. New platforms, data Equities turnover originating from hosting services averaged 45% of total turnover in March 2016, with 49.5% of derivatives trading taking place via HKEX’s data center, reported Jonathan Leung, Senior Vice President and Head of Hosting Services, HKEX. 125 Exchange Participants are using hosting services currently, with the number of Category-C, or small, brokers rising, Jonathan Leung shared in his opening remarks. After consolidating three legacy data centers into the only exchange-owned tier-4 data center in Asia Pacific, HKEX has continued with its 100% market availability track record. Furthermore, the exchange opened up to three telecom carriers to provide SDNet/2 service, Richard Leung, Managing Director and Co-Head of IT,

HKEX explained. SDNet/2 is the network infrastructure supporting HKEX’s trading, clearing and settlement, and market data services and providing reliable and cost effective network services to all exchange participants, clearing participants and information vendors alike. A new cash trading platform, currently planned to be available for testing in 2017 and open for production around the end of that year, will reduce latency substantially, Richard Leung said. The new Nasdaq Genium platform has increased capacity that allows the exchange to introduce new derivative products this year. The derivatives clearing system was also upgraded to shorten the day-end maintenance window, enabling trading hours on futures platform to extend to 11:45pm, and further, if needed, Richard Leung told attendees. The Orion Market Data system for Cash and Derivatives markets offers low latency data service directly via the data center or information vendors as well as providing the market data of multi-asset classes, according to Winnie Leung, Vice President,

Q2 • 2016 | GLOBALTRADING


66 | ASIA

mechanism, which will limit Hang Seng Index and H-shares index stocks’ price moves after a price spike, will be launched in August 2016 to hopefully leave trading firms time to prepare for a Shenzhen-Hong Kong connect, should it be announced. Nianlong Weng, Assistant to the Managing Director, China Investment Information Services (CIIS) introduced the China Investment Information Platform, which offers market data access inbound for mainland investors and outbound for overseas investors.

Left to right: Murat Atamer, Bank of America Merrill Lynch; Jay Hurley, State Street Global Markets; Chris Lee, HKEX; Andrew Freyre-Sanders, CIMB Securities Ltd.; Simon Williams, BlackRock Market Data Licensing, HKEX. With more and more exchange participants and buy-side firms pursuing low latency market data, HKEX introduced the OMD Free Trial Programme for Premium and Fulltick Datafeeds and Historical Full Book in November 2015 to allow this group of market data end-user to experience the OMD low-latency datafeeds for 3 months free of charge. “We have recorded a healthy increase in the subscription of our OMD premium datafeeds since then.”

As a subsidiary of the Shanghai Stock Exchange, CIIS provides tiered data access, from partners including China Securities Index, Dalian Commodity Exchange, Zengzhou Commodity Exchange, CFFEx and Deutsche Bourse. Automation and balance Technology spending and market resilience were the main themes of the panel on trading and technology hosted by Chris Lee, Senior Vice President, Client and Marketing Services, HKEX.

The Shanghai-Hong Kong Stock Connect is seeing increased diversification, reported Christopher Hui, Managing Director, Project Management, HKEX. Southbound trading, which initially lagged northbound, is picking up while the stocks traded are gradually shifting away from A-H share arbitrage as investor preferences continue to develop, Hui noted. Hui believes the Stock Connect plan will continue to thrive for four reasons: the redeployment of mainland wealth into capital markets from banking and insurance; rising mainland outbound capital markets investment; increased international participation in mainland markets; and Hong Kong’s unique position as mutual price discovery venue and offshore RMB risk management center.

Richard Leung, Managing Director and Co-Head of IT, HKEX

A first phase of a closing auction covering certain large-cap and mid-cap stocks and all ETFs will start 25 July 2016, but short-selling will not be permitted, explained Roger Lee, Managing Director and Head of Markets, HKEX. The exchange’s volatility control

For Simon Williams, Director, Head of APAC Equity Trading for BlackRock, solutions that automate compliance, operational and risk controls allow traders to improve implementation and get better trading outcomes for clients.

GLOBALTRADING | Q2 • 2016

Brokers are spending on dark pools and blocks, rather than selling product suites, claimed Andrew FreyreSanders, Managing Director, Head of Equity Execution Services for CIMB Securities. Sometimes bear markets eliminate excess, he quipped.


ASIA | 67

Many foreign investors still find China complicated and expensive to access, explained Dean Chisholm, Regional Head of Operations, Asia Pacific, Invesco. Simplifying access through one method without daily restrictions and either direct or indirect short-selling would make a big difference. The new CSRC regime wants to sit back, learn from global best practice and proceed with no sudden movements, noted David Rabinowitz, Head of Electronic Trading and Market Structure, Asian Equities, UBS. China can learn from HKEX’s light touch approach, added Philip York, Chief Executive Officer, Alt 224 Group. Jonathan Leung, Senior Vice President and Head of Hosting Services, HKEX

The technology arms race has dampened down in FX because a few microseconds doesn’t guarantee an advantage, explained Jay Hurley, Regional Head of eFX, APAC, State Street Global Markets. Exchange resilience has improved because redundancy is better built into systems now, argued Murat Atamer, Managing Director, Head of Electronic Trading, Bank of America Merrill Lynch. The balance between speed and safety must also not be forgotten, he added. If exchanges provide speed via thinner risk layers, traders are encouraged to reduce risk layers.

Hui recommended exchange participants prepare for the Shenzhen-Hong Kong Connect by learning more about the Chinese market’s dynamics and composition. HKEX services investors and issuers from around the world, so it keeps an eye on developments around the world, Hui said. The key is not to look at China for just what it is, but what it will be, he added.

Exchanges are more resilient, Freyre-Sanders agreed, but end-to-end resiliency should extend further into the trading lifecycle. By taking ownership of the end-to-end experience, exchanges can engage with vendors to improve through providing more testing, for example. As evidenced by the failed response of many market participants to the Swiss National Bank’s recent intervention in the FX market, participants may be more resilient but the market place may be more fragile, Hurley suggested. No sudden movements The day’s final panel on recent regulatory developments implications for Hong Kong and Chinese trading was moderated by Jessica Morrison, Co-Chair of the Asia Pacific Exchanges and Regulatory Subcommittee, FIX Trading Community, and Head of Asia Pacific Market Structure, Analytics and Commission Management, Deutsche Bank.

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68 | ASIA

Driving IOI Reform With George Molina, Director of Asian Trading, Franklin Templeton As a buy-side group, we have been working on IOI reform for over four years, trying to find the best guidelines, drawing up a code of conduct and planning to push those reforms out into the industry. For a while, progress slowed due to disagreements over the definition of “Indication of Interest”, specifically around the natural/non-natural flow. Over the last three to four months however, progress has picked up again after the Investment Association and AFME in Europe worked on a code of conduct for IOI. Here in Asia, we have met as a buy-side group three times in the last six weeks and are due to release guidelines at our forum in May. We have also been working with the sell-side, who have taken up the initiative, as well as Bloomberg, who are running an IOI system from their terminal. The next stage is to push the reforms out to the rest of the industry. Real IOIs The main concern the regulators have is about what is real and what is not real. This concern is warranted, because it is important that the liquidity is there when the broker puts out an IOI, and it is a good starting place to begin constructing these new standards. Whether this should be regulated behaviour or a behaviour driven by the industry is an interesting question. On the buy-side, we would like to take this initiative and drive forward our interpretation of IOIs. Having said that, we have been trying to do this for several years, and still haven’t come up with a proper code. The problem with IOIs has always been the lack of transparency because of the perceived interpretation that brokers sometimes were fishing with IOIs – that they weren’t real. But on closer examination, it appears that they were not fishing, it was just the way in which they interpret their flow. For some brokers, if they were going to commit their capital and hedge a position, they would need to buy those shares, and as such would send out an IOI. For others on the

GLOBALTRADING | Q2 • 2016

buy-side, they may not actually have that position. It comes down to the different interpretations of what an IOI is, which is why we are trying to put these guidelines in place. Another problem relates to the updating of IOIs. For example, an IOI is sent out in the morning. As the day progresses, you would expect to see the size of the IOI decrease as it is updated, but that does not seem to happen. Why aren’t those IOIs being updated? Why aren’t they more accurate or more transparent? This may relate to the cost of the systems. System costs are high and there doesn’t seem to be much of a technology budget on the sell-side to develop them. It will ultimately fall to the houses that have already been working on this for several years to design and implement better systems. Much of the reform effort involves altering the existing parameters in systems that people are currently using to make them a more workable framework that people can continue to use without having to redesign systems from the bottom up. And as MiFID II comes along, there will be increased scrutiny on why specific brokers are chosen by the buy-side. We have the flow in place, but an IOI is going to be another tool which can be used to prove to our clients and the regulators why we are working with a specific broker. It is the buy-side taking further control of its liquidity – a trend that is likely to continue. It hasn’t been easy to come up with the definitions and it has been a real challenge trying to find a solution that the brokers agree on. Previously, we had given anonymous feedback to the brokers when we felt that the IOI wasn’t transparent enough. Unfortunately, that didn’t work as Bloomberg had made the ranking buy-side trader information public. New technologies Standardisation of transparency works both ways.


ASIA | 69

IOIs from buy-side to buy-side. There are many ways in which IOIs can reduce market impact by increasing anonymous flow back to both the buy-side and sell-side. This is also helping to bring back some of the liquidity sitting on the trader’s pad which they are not willing to stop, because of concern that it might be leaked. Another thing that is important with IOIs is that everybody has to participate. If there is a broker or a client who does not want to use IOIs, then they should not be receiving IOIs from anyone else. This was a challenge faced by the industry where some firms were asking to see everything but not letting brokers show their flow. The role of the broker The ultimate responsibility lies with the broker as they have to know how much of the flow should be shopped to which type of client. There can be too much information on IOIs, and the buy-side needs to trust the broker’s expertise here. George Molina, Director of Asian Trading, Franklin Templeton

The buy-side can see more clearly whether what the brokers have is real or not real. The sell-side is then better able to judge interests from the buy-side and as such know who they should be targeting with the IOIs. It is likely that the IOS landscape will become more competitive when there is more widespread recognition that IOIs are an important tool for both the buy-side and the sell-side.

IOIs need to be made to work successfully. Given that they have been around for over ten years, the information is out there but in order to find the best way of execution, we need to make it useful for everyone. One concern is how this would impact the smaller brokers. In terms of technology cost, a smaller broker might be at a disadvantage if they do not have these tools. This is where the FIX Trading Community plays a very important role. As they continue building up their coding to accept more of these different IOI definitions, this will ultimately make it easier for the smaller buy-side and sell-side firms.

Execution management systems will already have the IOIs installed and it is simply a matter of these systems being further upgraded. A key feature is that this is an area that has not been driven by specific regulation, which means that developers can develop new products with relative freedom. The future of IOIs As IOIs grow in importance, there are likely to be further developments regarding how they work: they can become target IOIs, or actionable IOIs. Depending upon regulation and on where the trading desk sits, they may also end up being anonymous

Q2 • 2016 | GLOBALTRADING


70 | FRAGMENTATION

GLOBAL FRAGMENTATION AT A GLANCE

MARKET SHARE ANALYSIS, Q1 2016

Note: The analysis is based on lit venues only for Europe and USA, and lit and dark for all other regions. Venues with smaller than 0.01% market share are not included in the charts but are included in the calculations.

GLOBALTRADING | Q2 • 2016

Source: Fidessa


FRAGMENTATION | 71

A SNAPSHOT OF EQUITY TRADING IN ASIA The total value of stocks traded on Asian exchanges in the first four months of 2016 has been fluctuating. The small decline seen in February was followed by a healthy recovery in March. The Chinese markets contributed substantially, with the Shanghai and Shenzhen exchanges accounting for more than half of the total value traded in that period.

Exchange, saw values of nearly 500% in March, double the value of the second Chinese market, Shanghai Exchange, which achieved over 250% in the same month. Tokyo and Korea followed, both in the range of 100 to 150%.

Top traded stocks in Hong Kong and Japan by turnover and number of shares.

Source: Fidessa

Q2 • 2016 | GLOBALTRADING


72 | RESOURCES

Industry Resources Bloomberg Tradebook

Bloomberg Tradebook® is a leading global agency broker that provides anonymous direct market access (DMA) and algorithmic trading to more than 125 global liquidity venues across 43 countries. With unique tools and unrivaled standards of

IRESS

IRESS is an innovative, reliable and respected technology partner providing connectivity, trading, wealth management and market data solutions globally. Established

Fidessa group

Exceptional trading, investment and information solutions for the world’s financial community. 85% of the world’s premier financial institutions trust Fidessa

GLOBALTRADING | Q2 • 2016

execution, we seek new ways to deliver value to both the buy side and sell side—it’s about putting you first in challenging times. Founded in 1996, Tradebook offers its customer base trading solutions for equities, futures, options, fixed income and foreign exchange (FX) to actively manage complex trading strategies globally. Tradebook has been ranked as

across 14 offices worldwide IRESS provides fully managed financial services technology to a complete range of clients including large multinational investment banks, asset managers and brokers. IRESS offers an extensive suite of FIX routing solutions all connected by our open global SmartHub network. to provide them with their multiasset trading and investment infrastructure, their market data and analysis, and their decision making and workflow technology. We offer unique access to the world’s largest and most valuable trading community of buy-side and sell-side professionals, from global institutions and investment banks to boutique brokers and niche hedge funds. $20 trillion worth of

the top Broker for global equity trading in the Institutional Investor best execution league tables for the fifth year in a row. Waters Technology awarded Tradebook as Best Agency Broker in 2015. It also won the Wall Street Letter awards for best Futures ISV, Options Trading Platform and FX platform. Contact details: www.bloombergtradebook.com

Our order management and execution systems (OEMS) paired with our comprehensive real time risk and limits engine gives clients the power and flexibility they need to manage complex order flow with confidence. Contact details: www.iress.com

transactions flow across our global connectivity network each year. Fidessa’s unrivalled set of missioncritical products and services uniquely serve both the buy-side and sell-side communities. Contact details: info@fidessa.com www.fidessa.com/contact


RESOURCES | 73

Itiviti

Itiviti is a world-leading technology provider for the capital markets industry. Trading firms, banks, brokers and institutional clients rely on Itiviti technology, solutions and expertise for streamlining daily operations, while gaining sustainable competitive edge in global markets.

With 13 offices and serving more than 400 customers worldwide, Itiviti was formed by uniting Orc Group, a leader in trading and electronic execution, and CameronTec Group, the global standard in financial messaging infrastructure and connectivity. From its foundation in 2016, Itiviti has a staff of 400 and an estimated annual revenue of SEK 700 million.

FIX Flyer develops and operates advanced technology for managing complex, multi–asset, institutional securities trading using highly scalable software and network technologies. Since 2005, as an agile technology provider, we have partnered with our 170+ clients worldwide, including UBS, Barclays, TD Ameritrade, Fidelity, Berenberg, Unicredit, GBM, Interacciones, Bank of

GlobalTrading

Thought leaders’ perspectives pack the GlobalTrading journal with the latest in industry trends, buy-side insight and global electronic trading news, however, it is only the tip of the iceberg of our offering.

Itiviti is owned by Nordic Capital Fund VII. Contact details: www.itiviti.com

Itiviti is committed to continuous innovation to deliver trading

America Merrill Lynch, Goldman Sachs, and more to build high quality, feature-rich software.

FIX Flyer

infrastructure built for today’s dynamic markets, offering highly adaptable platforms and solutions, enabling clients to stay ahead of competitive and regulatory challenges.

Flyer has built a team of operational experts who manage and provide Managed FIX software-as-a-service. Our subject matter experts create and operate FIX servers for you to realize the full potential of our software to deliver the highest level of service and return on investment. The FIX Flyer Engine is the first FIX server designed to manage high volume, ultra low latency trading networks and ECNs, easily scaling to thousands of connections.

www.fixglobal.com offers our entire searchable archive of industry contributions, meaning that over 10 years worth of leadership commentary and content is available in an accessible format, entirely for free.

FIX Flyer also provides the Daytona trade surveillance monitor, the F1 Risk Control Gateway, the Ignition regression test and certification tool; the Flyer Online hosted Order Management System, and the Flyer Trading Network. FIX Flyer has headquarters in New York City with offices in Boston and Hyderabad, India. Visit fixflyer.com for company information and to request a free demonstration. Follow us on twitter.com/fixflyer. Contact Details: www.fixflyer.com

discussion? Contact us about our Face2Face Executive Roundtables. @FIXGlobalOnline and GlobalTrading Journal. Contact details: yulia@fixglobal.com www.fixglobal.com

Interested in meeting your prospects and clients in a neutral setting for a thought-provoking

Q2 • 2016 | GLOBALTRADING


74 | FIX TRADING COMMUNITY MEMBERS

FIX Trading Community Members *Premier Global Members marked in bold

360T Asia Pacific 42 Consulting Pte Ltd Accedian Networks Activ Financial Actuare AFME- Association for Financial Markets in Europe Albourne Partners Ltd Algomi Algospan Ltd AllianceBernstein Alpha Omega Financial Systems, Inc American Century Investments Ancoa Software Aquis Exchange ARQA Technologies ASIC Australian Securities Exchange AXA Investments Managers Ltd B2BITS EPAM Systems Company Baillie Gifford & Co. Banco BTG Pactual Banca IMI SpA Banco Itau S.A Bank of America Merrill Lynch Barclays Baring Asset Management BATS CHI-X Europe Baymarkets AB Beijing RootNet Technology Co., Ltd. BGC Partners BlackRock, Inc. Bloomberg L.P. Bloomberg Tradebook Blue Ocean Company BM&F BOVESPA BNP Paribas Bolsa de Valores de Colombia Bolsas y Mercados Españoles (BME) Brandes Investment Partners LP Bridline Brook Path Partners, Inc. BSE Limited BT Bursatec SA de CV BVI Cameron Edge Cantor Fitzgerald Capital Group Companies, Inc. Cedar Rock Capital Charles River Development Chicago Board Options Exchange

Chi-X Global Inc CIBC World Markets INC CIMB Securities Cinnober Financial Technology AB Citi CL&B Capital Management Clearing Corporation of India Ltd CME Group Colt Technology Services Compagnie Financiere Tradition Connamara Systems LLC Convergex Corvil CQG Credit Suisse Crown Jewels Consultants Ltd CSC Daiwa SB Investments Daiwa Securities Group Inc. DATAROAD Dealogic Delta Capita Deutsche Bank Deutsche Boerse Group Digital Currency Labs Digital Realty (UK) Limited Dimensional Fund Advisors Drebbel DTCC Eastspring Investments (Singapore) Limited Ecodigi Tecnologia e Serviços Ltda Edelweiss Securities Limited Egypt For Information Dissemination Equinix Esprow Pte. Ltd. ETLogic Ltd ETNA Software Etrading Software Ltd EuroCCP Euronext Paris SA EuroTLX Exactpro Systems EXTOL Eze Software Group EZX Inc. FIA (Futures Industry Association) Fidel Softech Pvt Ltd Fidelity Management & Research Co Fidelity Worldwide Investment Fidessa Group First Boston Group FISD Fiserv FIS formerly SunGard FIX Flyer LLC FIXNETIX FIXNOX Flextrade UK Ltd

Premier Global Members

GLOBALTRADING | Q2 • 2016

Forex Capital Markets, LLC FpML Franklin Templeton Investments Gamma Three Trading, LLC GATElab GETCO Asia GFI Group Inc Goldman Sachs & Co. GreySpark Guosen Securities Ltd Hatstand HM Publishing Hong Kong Exchanges & Clearing Limited HSBC Bank PLC HSBC Global Asset Management ICAP ICMA (International Capital Markets Association) IG Group Holdings PLC Ignis Asset Management Incisus Capital Partners Indata Recon LLC Informagi AB InfoWare Infront AS ING Bank Instinet Integral Development Corp. Interactive Data Intercontinental Exchange (ICE) International Securities Exchange (ISE) Investment Management Association Investment Technology Group (ITG) Ipreo IPC Systems IRESS Limited IS Investment ISITC ISO Itiviti Jefferies J.P. Morgan Jordan & Jordan JP Morgan Investment Management (J.P. Morgan) JSE Limited KB Tech KCG Holdings Kotak Securities LCH Clearnet Linedata Liquidnet LiquidMetrix LIST Group LSE Group M&G MACD Macquarie Securities Limited


FIX TRADING COMMUNITY MEMBERS | 75

MAE - Mercado Abierto Electronico S.A. MarketAxess Markit Marshall Wace Asset Management Mawer Investment Management Metagen Metamako MFS Investment Management Mizuho Securities Morgan Stanley Investment Management Morgan Stanley MTS SpA NASDAQ OMX Neonet NICE Actimize Nikko Asset Management Nomura Asset Management Nomura Nordic Growth Market (NGM) Norges Bank Investment Management OCBC Securities Private Ltd. OMERS OMG (Object Management Group) On Budget and Time Ltd Ontario Teachers’ Pension Plan Board Onix Solutions [OnixS] Options Clearing Corporation Options Technology Ltd Oslo Bors ASA Oyak Securities Pantor Engineering AB Peresys (IRESS) PFSoft Pioneer Investments Portware Primary E Trading Principal Global Investors Putnam Investments Quendon Consulting R3CEV R Shriver Associates Rabobank International Rapid Addition Ltd. Raptor Trading Systems, Inc. RBC Global Asset Management REDI Technologies Royal Bank of Canada Capital Markets S&P Capital IQ Real-Time Solutions Santander Global Banking & Markets SASLA (South African Securities Lending Association) Schroders Sequant Shanghai Stock Exchange SIFMA SimCorp Singapore Exchange SIX Swiss Exchange

Skandinaviska Enskilda Banken AB Sloane Robinson smartTradeTechnologies Societe Generale Southeastern Asset Mgmt Spring Securities International AB SR Labs SS&C Technologies Standard Life Investments State Street eExchange Solutions State Street Global Advisors State Street Technology Zhejiang Sumitomo Mitsui Trust Bank SWIFT Sycamore Financial Technology Symphony Communication Services LLC Systemware Innovation Corporation (SWI) Taiwan Stock Exchange Tata Consultancy Services Telstra Global The Continuum Partners The London Metal Exchange The Nigerian Stock Exchange The Realization Group The Technancial Company The Vanguard Group Thomson Reuters Tokyo Stock Exchange Tora Trading Services Tower Research Capital India PVT Ltd TradeHeader, S.L. Tradeweb Trading Gurus Trading Technologies TradingScreen Traiana (ICAP) Transaction Network Services, Inc. Transatron Systems Trax trueEX Group LLC Tullett Prebon Group Ltd Turquoise TWIST UBS Investment Bank ULLINK Versitrac Systems Corporation VOEB Volante Technologies Warsaw Stock Exchange Wellington Management Company Winterflood Securities XBRL Xetra (Deutsche Börse) Zeopard Consulting

New Member FIX Trading Community wishes to welcome the following companies to its growing worldwide membership. For more information, please visit: www.fixtrading.org

Accedian Networks www.accedian.com

Crown Jewels Consultants Ltd www.cjcit.com

Delta Capita

www.deltacapita.com

SS&C Technologies www.ss&ctech.com

The London Metal Exchange www.lme.com

VOEB

www.voeb.de

Premier Global Members

Q2 • 2016 | GLOBALTRADING


76 | LAST WORD

My City

Toronto, Ontario, Canada By John Christofilos, Vice-President and Head Trader, AGF Investments Inc.

Best thing about your city? The Multi Cultural scene. We have great communities filled with the Worlds Cultures and Traditions. From Little Italy to Greek-town to Little Portugal we have it all, and then some. Worst thing about your city? Traffic. As a city that has no southern access because of the Lake , we are confined with entry only from the East, West and North. Toronto is also growing as quickly as any city globally. All this translates into gridlock from time to time. Getting to work? I live North of the city so depending on the day, I usually drive, but occasionally

GLOBALTRADING | Q2 • 2016

will take the train to mix it up a little. Either way it’s a 4:00 am start to the day. View from your desk? Among the concrete jungle of downtown core, I also have a Great view of Lake Ontario and all its glory. As well as the Rogers Centre, home of the American League East Champion, Toronto Blue Jays !!!!! Where to take your clients/brokers for dinner? We have a myriad of great “foodie” choices but a good steak is always welcome. Hy’s, Jacobs or Harbour Sixty are my favourites.

And a relaxed spot with friends and family? Walking the beautiful waterfront or the miles of trails that wind through our city, or shopping in fashionable Yorkville. Best place to stay when in town? The Ritz or the Shangri-La are always comfortable and fun and offer great views of Toronto. Best tourist spot? We live in Canada so it goes without saying that The Hockey Hall of Fame is extremely popular. Also the CN TOWER - once the world’s tallest free standing structure, is still a landmark when visiting Toronto.


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