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Q3 • 2016 • Issue #59


Building A Global FX Hub

Christian Schoeppe, Head of FX Trading EMEA, Deutsche Asset Management


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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

Many of us may feel fortunate to have had a “front row seat” to the progression which electronic trading and the adoption of FIX have effected in financial services worldwide. However, in previous years when we attended or presented at the numerous conferences and events covering the various related topics, a question often posed to speakers was “where do you see technology in our industry in one, or five, or ten years?”. Devising credible answers could be challenging and required us to use our imaginations or somehow extend what currently seemed “state of the art” into its next logical variation. “Electronic trading in non-equity asset classes”, “more intelligent algos”, “light speed trade and market data processing” were popular, while generally acceptable responses, and hard to judge as just being creative guesses. In fairness many of the predictions, though categorical, were accurate at the time. Little did we know what was coming. As you will see in many of this edition’s articles in GlobalTrading, technology, as applied in our industry is once again impressing us with its ability to transform and adapt. From the use of AI at the fund management level, the adoption of Blockchain in trade processing, cloud based hosting, quantum computing and the urgent and dynamic demands to address cybersecurity threats, we are very clearly in an evolving era.

Carlos Oliveira Brandes Investment Partners

Marcus Consolini, Managing Director, ULLINK

Along with the focus on current technologies and influencing factors, we are very thankful for contributions highlighting developments in FX electronic trading and TCA, outsourcing of dealing, the launch of Luminex and the buy side’s increasing interest in market structure solutions, a look ahead to the FIX / Electronic Trading Conference in Japan, and several other topics of interest. 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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5 Building A Global FX Hub - Christian Schoeppe, Deutsche Asset Management


36 Keeping The Dealing Desk Ahead Of The Regulatory Curve - Francis So, BNP Paribas Dealing Services, Asia Ltd, and Hubert Rotivel, BNP Paribas Dealing Services


63 Broadening The Base: Using The Entire Trading Lifecycle To Improve Execution - Will Haskins, GlobalTrading

10 The Evolution Of TCA In Foreign Exchange - John Radle, and David Biser, Campbell & Company

39 Transforming Post-Trade - Marcus Consolini, ULLINK EUROPE

66 China’s Changing Scope - Stephane Loiseau, Societe Generale, Asia Pacific 69 Multi-Asset Executions Across Asia - Kent Rossiter, Allianz Global Investors

13 Staying Ahead Of The FX Technology Curve - Christopher Matsko, Portware

41 Raising The Standard For Cybersecurity - Michael Cooper, BT Radianz, Lisa Toth, Hatstand, a Synechron Company, and Chris Bok, Jordan & Jordan

72 Looking Towards The Japan Electronic Trading Conference On 5th October In Tokyo - Hiroshi Matsubara, Fidessa

47 Innovations in Blockchain Infrastructure - Johan Toll, Nasdaq 、 AMERICAS

74 The TSE Small Tick Program – Impact And Consequences For Japan - Firas Hadj Taieb, and Gael Vasseur, Nomura

49 Finding The Right Mix: Outsourcing Technology In A Changing Regulatory Environment - Peter Waters, GlobalTrading



17 No Humans Allowed - William Mok, Christy Ai and Stefen Choy, The Tech Trader Fund 21 Queue Position And Algo Slices: Like Taking Candy From A Child (Order) - Will Haskins, GlobalTrading 23 The Art And Science Of Trading - Jacqueline Loh, Schroders 25 Benchmarking the Value of A Buy-side Trader - Tom Kingsley and Gabriel Kan, Bloomberg Tradebook OPINION 29 Building Transparency On The Buy-side - Joe Kassel, AMP Capital 33 The Algorithmic Environment In India - Sanjay Rawal, Open Futures

54 Changing Metrics - Jonathan Clark, Luminex 57 Making Liquidity Work - Clive Williams, T Rowe Price 59 Building A Buy-side Community - Jeff Estella, MFS Investment Management ASIA 60 Welcoming Asian IOI Reform - Canute Dalmasse, Goldman Sachs

76 Evolution in Japan: Tick Size Pilot INDUSTRY 78 Company Profiles 80 FIX Trading Community Update 82 FIX Trading Community Members MY CITY 84 Frankfurt-am-Main, Germany - Christian Schoeppe, Deutsche Asset Management

At the heart of the financial markets IPC has one of the largest, most diverse and fastest growing Financial Markets Clouds in the world Connecting more than 6,000 market participants in 700+ cities in 60+ countries


Building A Global FX Hub With Christian Schoeppe, Head of FX Trading EMEA, Trading & Product Development, Deutsche Asset Management

More Buy-side Interviews

Deutsche Asset Management’s global ‘hub and spoke’ model began development three years ago with the introduction of a trading desk in New York for the Americas. Last year a trading desk was added in the UK as an addition to the central Frankfurt hub, and this year a further desk was opened in Hong Kong. There are advantages to this ‘follow the sun’ trading approach. Prior to this, in Frankfurt we had to operate very early and very late hours which, from a coverage perspective and an investment technology angle, were difficult to manage through a centralised hub 24/5. In addition, the

relationship between our traders and PMs as well as our brokers, was not as intense as it might have been with a live trading desk on the investment platform in the regions. Regarding FX as an asset class in its own right has remained a clear industry trend after 2008 as well when we started working on a new execution concept by analysing the internal and external flows for the product across our various departments. Our goal was to centralise flows at a dedicated execution centre of



“Regarding FX as an asset class in its own right has remained a clear industry trend after 2008 as well when we started working on a new execution concept by analysing the internal and external flows for the product across our various departments.” excellence. Secondly we always wanted to leverage the rise of electronic trading in the industry enabling investors to access markets that were once the preserve of a few major banks. For FX, we applied an efficient approach to utilise and extract the most benefit from best-in-class execution systems, especially for the very liquid currencies inside the G10. This is also true for any additional ones with similar liquidity patterns outside the G10 such as Mexico e.g. which are traded around the clock. Our aim is to execute the majority of such trades, including up to bigger bulk ticket sizes mostly using via our automated tools built in Frankfurt instead of additionally transferring trades to the New York and Hong Kong desks. As a result, more than 85% of global foreign exchange business is executed through Frankfurt. So the focus of the regional trading desks in America and Asia is, first to securities but also to provide live execution, which is not covered by European working hours. By leveraging local expertise for our global PM platform, funds receive better access to liquidity, better market colour and trade idea generation. Global Roll-out Since initiation of our Frankfurt FX desk our execution volume has surged. It is now possible to absorb significantly increased ticket numbers, as recently experienced on a single Brexit event, via our continuously enhanced execution technology without adding additional trader headcount. The biggest improvement for the Deutsche Asset Management investment platform has been the global installation of a new order management system (OMS) which has


enabled us to operate trading, settlement, and portfolio management functions on one unified data platform without any of the interface problems we used to experience when those departments all operated on different systems. Now there is an OMS for the whole global platform of Deutsche Asset Management and there has been significant improvement, particularly in the handling of OTC products. On top of the OMS, there are different execution management systems which are applied. Deutsche Asset Management’s central trading hub in Frankfurt has always aimed to trade in as automated a fashion as possible. However, the majority of FX trading volumes in Europe are still executed with a manual touch of experienced traders’ expertise through competitive RFQ, RFS or via direct broker lines. Nevertheless almost 30-40% of the order business is already executed in an automated manner without human trader intervention. For such small- and mid-size ticket business we utilise traditional hourly fixings, such as the WMR, in addition to automated RFQ channels. The fixings business has been in the spotlight over the past two years and new regulation has been successfully introduced to cover this area. As a result, the industry has experienced a stabilisation of the fixing offerings through new FSB regulation. If we examine volatility and liquidity profiles for those hourly fixings, there used to be unusual spikes so we decided to avoid certain fixings with irregular volatility profiles prior to the FSB modernisation. Since the new regulation, there have been almost no abnormal volatility patterns and the impression in major parts of the FX industry is that the new regulation has taken this product out of the spotlight and stabilised it with very solid results for our benchmark investors in need of a low-cost point-in-time execution. Regulation and TCA Data As trading in FX becomes more automated and fragmented across brokers and venues, the need for transactional data analysis is increasingly being fuelled by regulation and market structure complexity. Today, at Deutsche Asset Management our execution and brokerage governance process is extremely rigourous. Our governance committee meets monthly, it is made up of all member departments of our investment and support functions including portfolio management, risk, settlement, and compliance. They work to verify that the firm’s fiduciary policies and procedures framework


Christian Schoeppe, Head of FX Trading EMEA, Trading & Product Development, Deutsche Asset Management are addressed appropriately whilst trying to achieve the best trading results for our investors. Transaction cost analysis (TCA) needs to be seen within this context of optimal execution for the various investor groups across our main client pillars in Active, Passive, and Alternatives investment management. In addition to our internal TCA we constantly evaluate what independent TCA providers can do to support our pre- and post-trade analyses. Conceptually we try to approach TCA from two angles; in addition to measuring against indicative reference prices provided by Bloomberg and Reuters as a standard, we additionally modernised the framework for executable reference prices for the growing number of trades in competition. In this context we refer to performance analytics rather than TCA which implies a ‘cost’ and does not suggest any savings for buy-side traders. Everyone in the industry knows that there’s still much work to be done but we feel we are on the right path: striving for more transparency which will result in better conduct. Regulation is important because it ensures that all industry participants are in-line with certain fundamental standards.

“Since the new regulation, there have been almost no abnormal volatility patterns and the impression in major parts of the FX industry is that the new regulation has taken this product out of the spotlight and stabilised it with very solid results for our benchmark investors in need of a low-cost point-in-time execution.” Q3 • 2016 | GLOBALTRADING


When I started at Deutsche back in 2000, there was already a conduct framework of policies and procedures that we were required to follow on the sell-side – as well as on the buy-side where I moved in 2004. Such a framework was not in place industry-wide however, and a new Global Code of Conduct for the FX industry was just released in its first version by the BIS, supported by the major central bank’s FX working groups, covering both the buy- and the sell-side including best practices. Major input for the GCC was delivered through the ECB’s FX contact group here in Frankfurt where Deutsche Asset Management is a member. A significant code work exercise has been undertaken with a well acclaimed first result showing how serious the FX industry has been undertaken this opportunity to improve and change for the better. Within the asset management industry, there are also some considerable changes taking place around the use of data. Under the new regulations the buy-side will be required to ensure that this data is available to clients as well. At Deutsche Asset Management, the data has always been available because we have always used it to see where we are profitable, where we can automate further, or where it makes more sense in an illiquid emerging market asset class to have an experienced trader executing our trade. That is why we try to attach experience and skilled traders to larger and more complex transactions on the one hand, and automate trades where there doesn’t need to be a human touch on the other. Building on the model Moving forward, the approach Deutsche Asset Management will continue to take in FX is to look at the different liquidity profiles of the underlying pairs and analyse how to handle each of them in the most efficient way. Then it is important to select the right business partners to support our efficiency in executing the bucket. We have seen various providers exit certain areas in the past few years because they were not relevant to their business model anymore. For example, instead of attracting massive volume, some banks only want to support the tier 1 real or fast money clients on their platforms. MiFID gave us a duty to change the picture to achieve the best execution framework of a competitive broker list and not only use internalised channels even through custodians. We now have a very competitive broker list where 90% of our FX business in Frankfurt is executed with the top 20 names on the Street. This is a very efficient way of using the top

providers as the average execution cost is now only a third of what it used to before the initiation of our desk. In spite of liquidity fragmentation we are currently still in an environment where we can benefit from technology enhancements and the narrowing of spreads achieved through the major industry trend of digitalisation. Christian Schoeppe joined Deutsche Bank AG Sales & Trading in 2000 after studying Business Administration in Cologne/Bonn. Prior to his current role, Christian served as an International Equities and Foreign Exchange (FX) Trader at DWS Investments, and Head Trader FX at Deutsche Asset Management in Frankfurt thereafter. Christian won Foreign Exchange Trader Of The Year at the 2016 Alpha Trader Forum Awards, and has been on the the European Central Bank’s FX Contact Group since 2015, and TradeTech FX Advisory Board since 2014.



The Evolution Of TCA In Foreign Exchange With John Radle, Global Head of Trading and David Biser, Senior Trader, Campbell & Company The foreign exchange (FX) market, notorious for being dynamic, fragmented, and competitive, has become increasingly electronic in recent years and now more naturally lends itself to Transaction Cost Analysis (TCA). In the past, trading was driven by voicebased market-making and any sort of implementation shortfall was difficult to quantify. Measuring the quality of FX execution is becoming more attainable and is also becoming a requirement as the market continues to have stricter guidelines around FX trading activities. When trading electronically, the relevant data and trade details are going to be more granular. As technology and analytics improve, so too will the usefulness of TCA. As an example, we gather all the individual fills and can measure to what degree we are passive as opposed to aggressive. But trading is a process more than it is a single outcome; point-in-time analysis is important but it is often more meaningful when comparing traders/liquidity providers/algorithms over longer time periods. Interpretations will vary when evaluating implicit costs, but the point is that we can now take a wider range of data points into account and make modifications as market dynamics change. Finally, all these technological developments are coupled with increased scrutiny of trading by both the regulators and clients. Transaction Cost Analysis studies have been adopted by many in the market to provide a certain level of confidence in trade execution. This emphasis is the reason it is important to have tools to show best execution. Data handling Cleaning, managing and analysing data presents a significant challenge. However, Campbell & Company has a long history as a strong quantitative manager. We have leveraged our capabilities on the research side to effectively carry out those deep dives on the underlying currency pairs and liquidity providers. FX TCA can be difficult for electronic trading because of the lack of consistency – comparing measurements will be less meaningful if each provider has a different liquidity pool. Furthermore, each algo has its own logic so it may be difficult to determine whether it was poor


algo performance that produced a sub-optimal result or whether it was because of limited liquidity during a trade. As more pressure is exerted on providers, there are certain elements that are becoming more standardised when producing TCA. Particularly when they offer algorithmic execution solutions, banks are increasingly taking prudent measures to evaluate their liquidity sources and to remove those venues that could adversely affect fills. There is an impetus for people to provide that information so that algo users can get the best price possible given the strategy and their respective liquidity pool. Recently we have been working with the banks and firms like Pragma to get feedback on venue analysis and fill rates and have subsequently used this information to complement our TCA. This gives us a different perspective than solely using sell-side TCA. We rely upon the use of algorithmic trading across a diverse set of venues and methods of execution and believe it is important to have a method to independently evaluate trades. Sell-side conversations Using TCA in an increasingly granular fashion has been a great way for us to give feedback to our liquidity providers, particularly our banks. For example, a bank may be streaming into a liquidity pool and believe they are streaming competitive prices. Even if they are away from the market by the smallest of margins, we may not be transacting with them. We have excellent relationships with our banks and in these circumstances know they welcome any feedback. We have seen banks move up the ranks dramatically just by making minor adjustments to their price stream. It has been a good opportunity for us to have productive conversations and to provide valuable feedback based on our unique experience. The business continues to be driven, in large part, by relationships though now we have substantially more data and metrics to enhance the dialogue. The banks appreciate and understand that the buy-side


John Radle, Global Head of Trading, Campbell & Company

David Biser, Senior Trader, Campbell & Company

“We have seen banks move up the ranks dramatically just by making minor adjustments to their price stream. It has been a good opportunity for us to have productive conversations and to provide valuable feedback based on our unique experience.”

we are dealing and how we can reduce costs for our strategies and for our clients.

wants to execute as efficiently as possible and are viewing execution quality more objectively. They are moving towards increased transparency and using the information provided by us to improve executions and reduce market impact.

It is unlikely that we will ever be totally satisfied with our TCA. We are always looking for ways to improve – to look deeper into the microstructure of the market and to calculate where we can possibly gain an edge and thereby achieve better executions for our investors. We have achieved major successes in TCA already but there is more valuable work to be done. Our aim is to continue to evolve and, as the market changes, ensure that we always get the best execution for our clients by using TCA in the most productive way possible.

The spreads provided by the banks are, in part, due to how the market participant interacts with the liquidity provided. As we do more business and as they become more comfortable with our style of trading, the banks are more willing to engage in a mutually beneficial dialog. Listening to feedback makes them more competitive in the long run and we get better execution and more options for our investors. TCA plays such a pivotal role as we want to understand where/why

The future The proliferation of non-bank liquidity sources means the market dynamics are changing and adds additional complexity. Relationships with banks will always be important and we value that they are a stable source of liquidity, but these additional liquidity providers are stepping up and taking a significant role in market making. Increasingly, we are seeing emerging markets that were not traditionally traded electronically made available in execution algorithms. As liquidity improves and the average daily trading volumes increase, we would expect to see more markets begin to trade electronically and already pricing has begun to improve within certain pairs.



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Staying Ahead Of The FX Technology Curve With Christopher Matsko, Head of Foreign Exchange Trading Services, Portware

I joined Portware in August last year and before long, I started digging into the platform and its operation. It became clear that Portware had sound technological know-how: it had all of the advanced execution capabilities for equities and futures, and had applied those execution tools to its FX trading platform, creating a premier multi-asset EMS. Without getting into material specifics, the result was growth in FX: both in clients and in interest in the solution. What Portware needed more of to bring this momentum to fruition was a certain facility with the underlying FX business landscape, to better anticipate client needs and distil various streams of feedback into viable products. The FX module within our EMS was originally fit for purpose for macro hedge funds and firms with prime brokers. It was also possible to key into Portware’s API and carry out automated algo trading and RFQ streaming programmatically, from client-proprietary black box models. By executing in this fashion with a Prime handling the settlement details, a firm has the freedom not to have to worry about the operational element of the trade. However, the decision was soon made that the platform needed to expand its client reach and become ‘stickier’ as a true multi-asset enterprise platform, so they took a strategic position to focus on their core client base, namely Tier 1 asset managers. We then talked to these clients to see how we could help them solve their execution problems, and we found that the limitations

in executions were purely a result of an operational gap in the real money FX community: front office traders didn’t focus on the complex workflows in the middle and back office. What was needed was a facilitation layer underneath the execution layer. That multi-allocation space is very complex and takes considerable effort to get right. Splitting a 30-allocation order into five tranches with various execution venues and liquidity pools is difficult, and there is opportunity in the market for platforms that can help simplify and streamline this process. The biggest challenge we face is the complex nature of the market place: marrying the OMS and its rules, allocations vis-à-vis the banks’ side of the trade, and blocking and splitting out those trades into the right allocations. Our platform is FIX-based but we have to do all the development work to tie the layers together between the banks and the buy-sides. Much of this work is custom to a given client or bank, but this gives us flexibility too. From a technological perspective we are ahead of the curve in equities with artificial intelligence running automated executions, but this level of automation (interweaving AI execution capabilities) hasn’t yet been applied to real money FX, as many firms don’t envisage AI-assisted FX execution on a big asset manager’s desk. In my opinion, these institutions don’t yet have the same level of trust in machine execution given the inherent



relationship-driven nature of the FX market and that’s perfectly natural. Some firms are very progressive and tech-driven and ahead of the curve, but some aren’t and we need to balance that. The problem of allocations sits behind much of our technological development; taking a large order and slicing it into an algo trade, an RFQ trade, and a bank stream trade and then tying them all back their original allocations is a considerable challenge. We are working toward a solution to that problem. It will be very interesting to see how things progress once these more advanced execution methods can be taken up by the real money buy-side community. Another area of development concerns fixing trades. Fixing trades have evolved from a very manual process to one that can be smartly automated and given a more mechanical process. Automating fixing trades allows traders more freedom to focus on and manage other large risk positions in their book. In other words, automation helps eliminate noise or distractions for trades which might otherwise be considered a “nuisance.” Even though there have been serious issues around the WMR, it is still being used to get large block positions executed at a defined mid-rate (plus commission). Unless a firm is focused on generating alpha or any type of return on those executions, then the best way forward is to simply automate those trades, as quite often asset managers don’t realize the fixing trades are already going into algos as is. All Portware needs to know are the times and the bank pools and rotations and fixing trades can all be done automatically. Trends in the market Bank algos present an interesting issue with a diversity of opinions among the larger buy-side firms. Some buy-sides advocate the usage of bank algos as they feel they get a stable rate across diverse liquidity and can hit benchmarks, whereas others say they don’t want to give the bank too much information as the banks ‘can do whatever they want with it’… so we have to try to provide access to both solutions and the challenge is in finding the balance. Given the relative unease or mistrust in the way trade information is handled by market participants who control the most FX volume, Portware began to consider possible solutions for that problem. We proposed


“The biggest challenge we face is the complex nature of the market place: marrying the OMS and its rules, allocations vis-à-vis the banks’ side of the trade, and blocking and splitting out those trades into the right allocations. Our platform is FIXbased but we have to do all the development work to tie the layers together between the banks and the buy-sides. Much of this work is custom to a given client or bank, but this gives us flexibility too.” diversified liquidity with minimal information leakage. As an example, we allow clients to formulate their own unique electronic communications network (ECN), combining relationship-based RFQ and streaming liquidity as well as access to third-party anonymous ECN’s (think FastMatch / Hotspot), as well as nonbank LPs. A large asset manager can then cut a large position into smaller slices and work them into various liquidity channels at their discretion; this helps control information leakage and improves executions, which is as much about taking control of that information as it is about transparency and impact on the market. The best way to control market impact and information leakage is to control how much information a firm divulges to a liquidity pool. The ability todiscreetly interact with liquidity channels is the same as the ability to control the flow of information into the market place. The traditional RFQ model is in slow decline because traders want to have more discretion in trade


Christopher Matsko, Head of Foreign Exchange Trading Services, Portware execution rather than just clicking a button and leaving execution to a third party’s black box. Trades can now be automated according to a given desk’s rules of engagement, and traders can focus on the less liquid, more difficult trades on their blotters. The ongoing trends in FX are a natural evolution of the ‘more with less’ process and automation trends across the wider industry. Firms are being forced to narrow their specialization into core businesses, and they need the rest of the process to be as automated as possible. The issue of FX TCA has been around for a long time. In a fragmented marketplace there is ongoing debate over what TCA actually means, and because there is no “volume-at-price” data in the FX market (as well as other OTC markets), benchmarking and analytics run the risk of becoming more subjective. Despite this risk, it is still the case that the best way of finding out the cost of trading is by including a firm’s own data set in any analytics, in addition to third-party market and reference data. This is as true in FX as it is in equities and any other asset class. Now, there are challenges specific to third-party data in foreign exchange (e.g. validating execution size, credit relationships, anonymous vs. relationship-based executions, etc.), but we should not throw the baby out with the bath water. It is always best to use a healthy mix of market and reference data and proprietary execution and benchmark data, as this gives the firm colour from the marketplace alongside comparisons to their own mid-rate and their own reports, which are best for measuring a firm’s own improvements over time.

“The traditional RFQ model is in slow decline because traders want to have more discretion in trade execution rather than just clicking a button and leaving execution to a third party’s black box. Trades can now be automated according to a given desk’s rules of engagement, and traders can focus on the less liquid, more difficult trades on their blotters.” view which banks gave optimal spreads at a particular time of day in their traded currencies based on their execution methods; RFQ, algos or streaming. The next logical step is to take those inputs, apply pretrade analytics given current market conditions, and put a smart order router (with an AI wrapper) on top of it to execute a trade at the lowest cost given the characteristics of the order. With a good data feedback loop, a trader can more intelligently feed trades into the market given their size and the market liquidity conditions. The future of the FX market will incorporate automation, artificial intelligence, and TCA, much like what is under way in equities and other asset classes. It’s about creating a common thread over the entire life cycle of a trade, and of trading holistically, so that the results of one trade inform the next, and a firm can constantly tweak and improve execution. Nobody is quite there yet but change is coming, and this is where the future of cutting edge development lies.

So, for example, by combining the results of recently executed trades and some historical data, a firm can


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No Humans Allowed

With Co-Founders and Managing Partners of The Tech Trader Fund, William Mok, Christy Ai and Stefen Choy William Mok has a unique background in gaming. He has been ‘hacking’ games since he was 12 years old: Starcraft, Age of Empires, etc. and creating scripts and avatar AIs to play in his place in the multiverse game environment against hundreds of other players. When he was 18, he discovered trading. He realised that it was similar to the games he had played, only instead of hundreds of players, there are millions of other players (traders) in the market to play against, and the market itself was akin to the gaming environment. William wrote Tech Trader based on his own experiences and how he viewed the ‘physics’ of the market – logic-based instead of rule-based so that the script would be flexible, adaptive and anti-fragile. Tech Trader’s goal wasn’t necessarily to find the most profitable trade or to maximise every single trade. It was merely to ‘survive’ in the environment, to be able to keep on playing and winning, and adapting to the moves of the other participants in the market. Hence, the conservative nature of its approach to the market. It is cautious before entering a trade as it doesn’t want to ‘die’ or experience ‘game over’ as PnL is equivalent to a ‘life’ in the game environment. The key characteristics of Tech Trader’s operation are: • Full autonomy AI that behaves more like a child or a creature than anything mechanical or data driven. • AI with three components: Senses, mind and imagination. Many other AI systems limit their operation to building the senses (machine vision, natural language processing, etc) and not going further by adding decision making and creativity through simulation (many scientists or quants don’t even think imagination exists in this context). • Smart data not big data. Learning through imagination as well as experience. • No adjustments, no human discretion, no tweaking at all of the technology. Many firms are able to automate their trading process through the use of technology; by writing an algo in order to connect the fund up with the appropriate prime

William Mok, Co-Founder and Managing Partner

“As a result of extensive networking, we have come to realise that we might be the world’s first fully autonomous hedge fund with absolutely no human intervention whatsoever.” brokers and write the API. What we have is a ‘fully autonomous’ operation whereby it is the role of Tech Trader, our AI, to handle the entire decision-making process – from deciding which names to buy, sell or short to choosing when to execute the trade, at what price, size, etc. Simply automating the trading process would imply that the traders or PMs are still making the



Christy Ai, Co-Founder and Managing Partner decisions on timing, sizing, price and picking or choosing the names, but Tech Trader automates everything; with our AI the decision-making process component is completely out of our hands. As a result of extensive networking, we have come to realise that we might be the world’s first fully autonomous hedge fund with absolutely no human intervention whatsoever. We’ve spoken with some of the top AI startups in the space and they tell us that they have never come across any AI in their decades of experience that can run with absolutely no human intervention or updating. As such, we have been focusing more on our technology as it appears to be extremely unconventional: from being fully transparent as a ‘glassbox’ to the approach to AI itself being unorthodox, which we now call ‘Conative Artificial Intelligence’. It is much more human and child-like in that it doesn’t necessarily read or crunch numbers but it does whatever it takes to adapt and survive much as a creature would. It doesn’t use large amounts of data or require numerous trials because it learns through experience and imagination – it is smart data instead of big data. The analogy we give is that a person doesn’t need to experience touching fire to know that it will hurt and neither would our AI. Some machine learning scientists have said that the issue is just that more data is needed, whereas our system would never need that experience to learn in the first place.


“There has been much in the press about fully autonomous cars and automated wealth advisers etc, but no-one seems to think it possible that we might go all the way and replace the entire hedge fund operation (investment and portfolio managers included) with a machine.” There has been much in the press about fully autonomous cars and automated wealth advisers etc, but no-one seems to think it possible that we might go all the way and replace the entire hedge fund operation (investment and portfolio managers included) with a machine. Recently, we participated in a panel on which we could see clearly that other hedge funds and wealth managers were agitated by the possibility that AI could run with no tweaking for years on end; it was just not realistic to them and highlights that they are nowhere near achieving anything of that sort themselves. Tech Trader has been very successful. Last year after an unprecedented down turn in the market, Tech Trader ended up 30% as it was able to find agnostic alpha in the market. The numbers speak for themselves and indicate how Tech Trader has been able to adapt to higher volatility and a higher VIX environment, showing that it is able to change and adjust itself without human intervention or the manipulation of algorithms. There have been difficulties – we are innovators in this field, and older more traditional investors on Wall Street have been slow to accept that the technology exists here and now. It is a challenge to teach investors how our technology differs from that which they have previously experienced: technology as merely a tool for humans to use vs. Tech Trader which completely replaces humans altogether. Hence, we offer full transparency of our portfolio and positions for all our


limited partners so that they can see clearly how Tech Trader works and behaves. The future of AI In terms of the next level for the wider industry, there will be a gradual phasing out of many human traders as machines, algos and AIs replace them in the market. We

“It is our belief that AI-based trading is the future of trading – it is more efficient, less traders/PMs will be required to watch the markets and it will replace many of the current market participants. What is interesting though is that, despite the growing presence of AI-programs in the market, we believe the effect and impact it will have in the markets themselves will not be that noticeable.” see AI replacing many white collar workers and disrupting the workforce in a similar way to machinery and equipment replacing blue collar jobs historically. Uber is already utilising self-driving cars, which is causing disruption and replacing drivers in the transportation industry – we can envisage something similar happening in the financial services industry. Obviously AIs will differ, they will vary from creator to creator and will perform differently, but it is likely that this technology will replace many human traders and their jobs instead of being simply a tool or an instrument to assist traders.

Stefen Choy, Co-Founder and Managing Partner It is our belief that AI-based trading is the future of trading – it is more efficient, fewer traders/PMs will be required to watch the markets and it will replace many of the current market participants. What is interesting though is that, despite the growing presence of AIprograms in the market, we believe the effect and impact it will have in the markets themselves will not be that noticeable. The whole point of AI is to replicate current activity and make the same trading decisions as a human trader. As such, our AI behaves in a way that we would trade in any given instance. As an example, at a recent AI conference, Audi built two self-driving racecars using the same engineers, same specification, same materials, same software, everything was the same. However, when they then tested them around the track, they found that one was clearly more aggressive than the other, despite being built by the same engineers. As such, we think that even if the market participants all used some sort of AI – whether as a tool, or completely replacing themselves – there will still be enough variety and range, and that the impact and effect on the market will be negligible.



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Queue Position And Algo Slices: Like Taking Candy From A Child (Order)

An exclusive discussion with Haim Bodek, Managing Principal, Decimus Capital Markets. By Will Haskins, GlobalTrading Every buy-side trader has been there. You see the bid, you try to hit it and it disappears in front of you. Haim Bodek explains how it’s done. High frequency trading (HFT) strategies modelled on the Chicago Futures pits and enabled by bespoke order types allow firms using them to exit trades moving against them and rejoin the queue at the top to wait for favourable market conditions. And the key to the whole strategy? A ready supply of orders behind them in the queue – child orders created by the slicing algos used to execute many buy-side orders. How does this work? For this HFT strategy, knowing queue position is alpha. Firms using this strategy calculate their queue position in real-time, Bodek told a room of buy-side traders. Another key are hide-and-light order types, which allow an order to sit at the top of the queue in a market’s order book.

An HFT options trader and SEC whistleblower, and Managing Principal of Decimus Capital Markets, Bodek was following up on his recent keynote presentation at the 14th Asia Pacific Trading Summit, organized by the FIX Trading Community. Against a rising bid, Bodek explained, these HFT firms’ high queue position allows them to execute first and capture the spread. When the bid is falling, their high queue position acts as risk management, allowing them to flip out – change from a liquidity provider to a liquidity taker – and exit the position against the order behind them in the queue, paying only the transaction fee. Such strategies are rarely economically viable except on trading venues where transaction fees are low or subsidised by liquidity rebates. The buy-side’s dilemma Buy-side traders’ complaint is often that it looks like they are being front-run – as soon as they trade, the



“Effectively stripped of proprietary trading desks, most brokers would have to amortise the cost of development through higher execution fees for buyside flow.” market moves away from them. More than one buy-side desk has shared evidence with regulators, but the HFT firms using this strategy typically escape punishment. From a regulatory perspective, the firms using these strategies are not front-running because they have simply changed from being long on the market to short. In a market environment where the buy-side have increasingly sought to take more ownership of the execution process, Bodek believes trading desks at asset managers and hedge funds should consider what lengths they are willing to go to in search of a remedy. One option is to avoid venues that provide supercharged order types catering to HFT. However, in the US, where the use of such order types is concentrated, orders have to go to the venue with the National Best Bid or Offer (NBBO). When a buy-side firm attempts to route an order to a preferred venue when the market is moving the risk of an inferior queue position is not the only concern. Often the price has already moved away and the preferred venue returns an error message to the buy-side trader’s desk indicating that this venue does not have the NBBO, according to the SIP. The SIP or Securities Information Processor is an official public reference price, but it is just one option allowed by the SEC to meet best execution mandates. Firms are also allowed to recreate the NBBO from their own data feeds, which creates an information arbitrage between HFT firms aggregating and analysing lowlatency data feeds and firms trading based on data in the SIP. The other option for buy-sides tired of paying the spread to HFT firms is to trade at comparable speeds


Haim Bodek, Managing Principal, Decimus Capital Markets and levels of sophistication, for example, calculating queue position in real-time. For algos that slice large orders into smaller child orders to minimise market impact, child orders might utilise direct market connectivity enhanced by an FPGA layer and low latency network interfaces rather than executing through an EMS run over software. The question is who pays for this expensive execution system? Effectively stripped of proprietary trading desks, most brokers would have to amortise the cost of development through higher execution fees for buy-side flow. This would also shift control of execution back to the brokers contrary to the recent trend. Until buy-side firms are clear which option is the most cost effective and achieves the best execution outcome for their portfolio managers and end clients, a so-called HFT tax will continue to be levied on child slice orders.


The Art And Science Of Trading By Jacqueline Loh, Head of Asia Trading, Schroders Technology has completely changed the way traders go about their jobs. The modern trader is tech savvy and able to handle the various types of platforms and trading venues now present on his/her desk. Trading desks are much quieter places; phones hardly ring while communication with brokers takes place on electronic chat. Matches for the other side of the trade are done electronically. When they are found (often heralded by a pop up alert on one’s computer) negotiations too take place electronically. As trades are electronically sent from the traders’ order management systems (OMSs) and execution management systems (EMSs) to the executing venues and back again, errors are minimised, leaving the trader to focus on the task of trading. The ability of trading systems to electronically capture timestamps and live prices has spawned a whole new world- the science of trading performance measurement. As trading algorithms continue to improve, more of trading has become automated. The more liquid names eg, where order sizes are less than 5% median daily volume(MDV) can be traded by algorithms in most markets. Orders which are half a day’s volume or more will require trading by hand and looking for blocks. For most markets in Asia, trading in small cap stocks will still require much manual intervention. In Japan, where high trading frequency (HFT) prevalence is an added challenge, it is even more important to stay in the market for only short periods of time.

Instinct vs technology Electronic venues continue to evolve, making it easier to look for matches even in the less liquid names. Although pre-trade analysis might be of some help in valuing a block of stock of several days’ volume, pricing is still subjective and requires exercise of a trader’s judgement. The traders’ broker relationships also add value here, in sourcing and placing blocks of stock with information disseminated to the right people and controlled impact costs. Bayes Theorem, pattern recognition and machine learning will drive the new generation of trading algorithms. However, I think block pricing under different market conditions will still require some human skill and judgment. Trading by instinct is good and will always remain so. However, the use of transactions cost analysis (TCA) can further refine that skill by identifying the situations in which that has worked well and situations where it hasn’t. As human beings, it is natural for us to keep remembering our successes, but not so much our failures. We will always tend to remember the time we beat our benchmark by 100 bps but perhaps not the 10 times we underperformed by 10 bps. The ultimate end game It’s all about getting better. The end game must be about increasing trading quality for the benefit of



Jacqueline Loh, Head of Asia Trading, Schroders clients. The art of trading is in the trading of small cap and illiquid stocks, the science is in the use of quantitative forms of performance measurement to keep moving forward. Performance measurement is always an emotive issue. Yet, performance measurement is a very necessary evolution of trading processes. It is an admission that traders are not infallible and we are always looking for ways to improve. The objective of using TCA in any review is never to devalue the broker relationship but to numerically record the successes made possible by that relationship. Equally, it gives the buy-side trader an insight into the successes (or not) of those strategies employed, and the trader’s inherent strengths and weaknesses. The future will see the trader making increasing use of technology to achieve scalability and higher execution quality. Scalability will be achieved as EMSs become more advanced, allowing enhanced real time monitoring of larger portfolios of stocks over wider parameters. Development of advanced algorithm portals will offer insights into how algorithms interact


“Trading by instinct is good and will always remain so. However, the use of transactions cost analysis (TCA) can further refine that skill by identifying the situations in which that has worked well and situations where it hasn’t. As human beings, it is natural for us to keep remembering our successes, but not so much our failures.” with the market. As the science of trading performance measurement grows in increasing sophistication, frameworks for comparing algorithms will be developed, identifying best in class algorithms, as well as the trading environments they work best in. Machine learning and artificial intelligence platforms will also allow more different variables to be taken into account in algorithm design. The modern trader’s skill will lie in adapting his/her strategies accordingly to achieve optimal results in a circle of continual improvement. When science meets art in the guise of the modern trader, the benefits are higher standards in the industry and satisfaction of a job well done for the trader.


Benchmarking The Value Of A Buy-side Trader By Tom Kingsley, Global Head of Sales and Gabriel Kan, Quantitative Analyst at Bloomberg Tradebook How much value does a buy side trader add to the investment process? According to a recent Bloomberg Tradebook survey of buy-side clients, more than half of respondents (56%) evaluate trader performance using the classic TCA vs benchmark prices. However, this simple benchmarking method does not properly represent the risk that a trader is taking to achieve the return. One popular evaluation alternative is to compare the Sharpe ratios; the average performance divided by the standard deviation. However, an inefficiency of the Sharpe ratio calculation is that it does not account for order profiling, meaning a trader may appear to perform better simply because he is in an easy market. A buy-side trader should be rewarded, however, by how he performs relative to the difficulty of the orders. Thus, we have identified three components that are important to evaluate execution performance: 1. Performance measure 2. Risk measure 3. Order profiling

We propose a new approach to combine the three criteria in a united framework (Figure 1). This approach is a parallel analogy to the Capital Asset Pricing Model (CAPM) that is commonly used to evaluate investment alpha. First, we select a benchmark and calculate performance of each order as standard TCA. Then we set a so-called “index strategy” and evaluate its performance for each order. Finally, we run a regression on the order performance vs the index performance to obtain alpha and beta. Alpha will be the net value added after risk adjustment, and beta is a measure of risk with respect to the index strategy. We calculate the index strategy performance as the peer average (Figure 2). For each of our own trades, we consider peer orders with a similar order profile in the last 30 days. Then the index performance is calculated as the average in the peer group. Figure 3 illustrates the time series of the peer average together with individual orders. The idea of this approach is to

Table 1. Asia Trader Forum 2016 poll survey



Figure 2. Index strategy as peer average Figure 1. A risk-adjusted alpha-beta framework to evaluate execution performance

reward traders who outperform in a tough market, and penalise those who underperform in an easy market. Table 2 shows the results by running the alpha-beta model on Hong Kong orders in 2015. After the risk adjustment, B-Smart, a dynamic liquidity seeking strategy, provides the best performance. B-Smart also takes the most risk across the strategies. On the other

Figure 3. Relative performance vs peer averages


hand, VWAP strategy gives the lowest alpha and almost zero beta. This suggests that a static VWAP strategy is not taking much risk but does not add much value either. In our framework, alpha represents the net value added by a buy-side trader. It does not generally equal the classic performance measure vs a benchmark, but only in special cases. One example is when accessing unique liquidity or using a unique strategy. In this case, the correlation to the peer performance is low and the


Tom Kingsley, Global Head of Sales, Bloomberg Tradebook

Gabriel Kan, Quantitative Analyst, Bloomberg Tradebook

Performance vs. Arrival Pric e Strategy




Alpha – Avg

VWAP Participation Arrival Price B-Smart

-24.0 bp -9.8 bp -10.6 bp -10.9 bp

-22.6 bp -9.1 bp -8.6 bp -7.2 bp

0.07 0.03 0.14 0.27

1.4 bp (5.8%) 0.7 bp (7.3%) 2.0 bp (19.2%) 3.8 bp (34.4%)

Performance vs. VWAP Strategy




Alpha – Avg


-11.3 bp

-10.8 bp


0.5 bp (4.4%)

Participation Arrival Price B-smart

3.0 bp 5.9 bp 4.1 bp

3.2 bp 6.6 bp 4.6 bp

0.09 0.29 0.24

0.3 bp (8.8%) 0.7 bp (11.7%) 0.5 bp (11.7%)

Table 2. Risk-adjusted performance vs Arrival Price and VWAP. Average = simple average performance in the sample period. Alpha = risk-adjusted performance. Beta = sensitivity to the peer performance.

overall performance will become 100% alpha. The skill of a buy-side trader to outperform others by accessing unique liquidity with a unique strategy will be reflected via alpha on a risk-adjusted basis. This is analogous to the alpha that fund managers deliver by outperforming the index.

“Performance, risk and order profiling are the essential elements to evaluate execution performance. The proposed alpha-beta approach is a unified framework to account for the three elements at the same time.” While buy-side traders are equipped with different trading strategies and exposed to different market conditions, the new approach attempts to provide a consistent evaluation method across buy-side traders and desks.

Performance, risk and order profiling are the essential elements to evaluate execution performance. The proposed alpha-beta approach is a unified framework to account for the three elements at the same time.





Building Transparency On The Buy-side With Joe Kassel, Global Head of Dealing and Exposure Management, AMP Capital

It is fair to say that Australia has had a unique vantage point to observe the long march towards unbundling and the looming regulatory changes in Europe. These changes will shape how an investment manager’s clients’ commissions can be used going forward. Spared from the entrenched practice of soft dollars in other regions, and their questionable usage of times past, the local industry has effectively adhered to agreed industry norms within a principles based regulatory framework.

jurisdictions and whether to adopt local requirements locally or the most onerous requirements globally.

It is clear, however, that the Australian market will be impacted by European regulatory changes. The focus now is on what this means for the industry and regulation here as Australia creates its own local requirements. For firms such as ours, with trading operations in Sydney, London and Chicago, the bigger conversation is also about how to respond to requirements in other

Until now, Australia’s response has been to provide increasing transparency to clients in terms of how commissions are used and how much commissions are paid. Buy-sides have been able to demonstrate to clients that commissions are used only for research for their own benefit while absolutely cutting out any questionable uses that might have been a feature under previous norms in other markets.

From our discussions with our trading counterparties and with our clients when they conduct operational due diligence on us, it seems clear that European rules will become the effective regulation that global clients will expect Australian firms to adhere to.



“It is important to our firm, for example, that our clients continue to benefit from our scale and that there is a satisfactorily transparent pricing mechanism for research applicable to all investment managers.” Joe Kassel, Global Head of Dealing and Exposure Management, AMP Capital

Perhaps the single most effective measure to demonstrate how seriously we have fulfilled our fiduciary duties in this area has been our proactive regular review and adjustment of commission rates with counterparties. For example, a recent AMP Capital study looked at our weighted average commission rate paid to brokers over the last 25 years and showed that the average commission rate for equity trades over that time frame has fallen by one basis point per year. According to the study, clients have seen a 25 basis point drop in commission rates over the last 25 years. For an actively managed fund this equates to a 25bp performance boost per annum attributable to lower explicit trading costs. The unbundling discussion aside this is a very concrete outcome for our clients. The regulators’ role We believe that it is very appropriate for the regulator to actively review conflicts of interest in investment management as well as take action when a principlesbased approach has not worked. What is still unclear,


however, are the impacts and steps to implementation of a prescriptive approach to assigning budgeted dollar amounts for particular items of research, and the segregation of anticipated client commissions accordingly into research payment accounts. It is important to our firm, for example, that our clients continue to benefit from our scale and that there is a satisfactorily transparent pricing mechanism for research applicable to all investment managers. That said, Australian buy-sides are well placed to meet anticipated regulatory requirements and certainly, our firm is. We disclose to clients our trading activity, trade commission uses, commission rates, as well as any services received. Adapting further, though, to a more prescriptive, standardised, itemised, fixed priced research regime is work that still lies ahead for all investment managers. Global agreement Will there be a unified global regulation on CSAs and unbundling? Probably not. But in order for fixed budgeted dollar amounts, unrelated to the value of trading, to work, the buy-side needs a standardised solution. As a large firm it is also important that none of our clients subsidise research provided for any of our other clients. As a firm, and for our clients in aggregate, passing on the benefits of our scale in the market and our efforts to negotiate low commission


rates ensure that we are not subsidising research provided to other asset managers just because we happen to be the big fish in a small pond. It is also worth noting, smaller research providers are unlikely to see a negative impact because we see the trend of the percentage of commissions going to specialist research firms continuing to increase.

“Further evolution on commission usage should be expected. Sell-side firms cannot afford to maintain prior service levels after unbundling. By reducing their offerings or restricting it to buy-sides willing to pay for it, sell-sides will eventually settle on a balance.” Smaller asset managers, on the other hand, who traditionally relied on bundled research, will face a number of tough decisions. Increasing internal research capability will be a financial challenge for small and medium-sized asset management firms. At AMP Capital, our ability to generate our own independent research is a definite advantage.

a clear understanding of our research needs, our clients’ commissions are spent more efficiently. Further evolution on commission usage should be expected. Sell-side firms cannot afford to maintain prior service levels after unbundling. By reducing their offerings or restricting it to buy-sides willing to pay for it, sell-sides will eventually settle on a balance. Effects on the buy-side Whether we view it from the perspective of a regulator or a client, transparency is the goal. That push will not go away any time soon. In the last three years AMP Capital set up trading desks in Chicago and London, in part to be closer to the regulatory requirements in each market and verify – both for clients and regulators – that we are adhering to the highest standards in the markets that we operate in. Transparency has had and will have many manifestations for trading desks: with whom, how and where we route orders, how we access markets, our ability to access all sources of liquidity, our execution processes, our analysis of trade outcomes versus expectations, the true cost of trading and importantly, our usage of research. In the past we may have jealously guarded our proprietary research and market insights. These were our intellectual IP – they were our edge . Now, at all turns, we seek to share our insights, processes and expertise with our clients. This transparency is our new edge because that is what will help build trust and understanding with our clients and enable us to better help them meet their investment goals into the future.

The long term impact will be felt on the sell-side. Already brokerages have downsized research departments, as bulge brackets directly reduce their coverage of stocks in anticipation that a lesser percentage of their commissions will be eligible to pay for that research. As their customer and an investor, we more actively coordinate with our brokers on how we receive research and what research we value most. By providing



The Algorithmic Environment In India With Sanjay Rawal, CEO, Open Futures

Over the course of the last year, complaints have surfaced about preferential access to Indian markets, and trading patterns that were not as the regulator expected. As a result, there has been a certain amount of push back on the industry. The regulator in India, the Securities and Exchange Board of India (SEBI) tends to be more proactive than other regulators, and as a result they have decided to look more closely at various aspects of algorithmic and high frequency trading (HFT) to ensure its suitability for the Indian markets by means of a detailed consultation. Another area of regulatory concern is that there should be no preferential access to Indian markets. An additional issue is whether there are added benefits for the markets, given that algorithmic trading is prevalent. The Indian regulator wishes to discuss these points with the marketplace. It will be an interesting consultative process because, depending on the proposals, they may or may not be conducive to helping market micro-structure.

From recent interviews, we understand that the regulator is looking at a two-tier system or a minimum resting period: for example, mini-auctions for very short periods of time. Once the consultation is published, trading participants will be able to comment on whether the proposals make sense from an Indian and a global perspective. We understand that the Chairman of the regulator is looking towards IOSCO for guidance and best practice. Hopefully, the consultation process will take a reasonable length of time because the longer they take to discuss this with the general public and market participants, the wider the range of perspectives they will have to analyse. For example, a retail broker’s perspective might actually contain a misunderstanding of what HFT or algorithmic trading is. There needs to be a legitimate, broad marketplace that allows people to articulate their points of view whether they are retail traders, a mutual fund, an HFT group or a proprietary trading group. If the marketplace is transparent and functions on that basis, then we should get a better market for all types of investors.



“There needs to be a legitimate, broad marketplace that allows people to articulate their points of view whether they are retail traders, a mutual fund, an HFT group or a proprietary trading group.” Ideal market structure At Open Futures we believe in transparency. Creating more restrictions only benefits the trader with the wrong type of edge. From the point of view of a high frequency trader – how do they make money? They make money because they have access to great technology and successful models. They are not going to make money if their models are not profitable no matter how fast they can trade. Transparency and access should be highlighted and promoted rather than increasing the number of hurdles in the way. Having said that, if there is a legitimate concern that somebody is getting hurt because a firm did something wrong, then of course, they need to create the right hurdles. But if a retail customer is being hurt because someone is doing trading of a particular nature, then there needs to be evidence to support that. There are at least 80 research papers released in favour of algorithmic/HFT and there will be plenty with the counter view. In general, the reason why regulators worldwide have chosen not to interfere with the market micro-structure beyond a point is precisely because of the way it functions as a whole. Look at the current market – first the lot size increased which forced the volume to shrink, then the Securities Transaction Tax was increased on options which meant that option volumes started to come down.


Sanjay Rawal, CEO, Open Futures

Now, if the changes to options trading are being done because the regulator doesn’t want retail to be speculating in the option market, at least there is a definite argument for it. We may well disagree, but at least there is a sensible discussion to be had. But, insofar as algorithmic trading goes, the evidence suggests that it has not led to any inefficiency in the Indian market nor overseas. It has not led to traders becoming disenfranchised because other traders use an algorithm. This is an age of progress. We ought not restrict those who are trying new technologies, new algorithms and innovative ways of trading. If there is a legitimate concern about protecting retail traders, then the articulation of that concern should not necessarily be via preventing algorithmic trading or HFT in the form we see today. If there is specific abuse, then the market and the regulator can work together to find that person and proceed against them. However, we very much hope that the consultation process finds evidence to suggest that retail is not getting hurt. The role of an exchange The role of an exchange ought to be to create a transparent, fair, ‘equal to all’ market place. In all seriousness, at Open Futures we believe that co-location (co-lo) is actually one of the biggest levellers. Co-lo means that everyone is dependent


This is the most important role of the exchange.

“If there is a legitimate concern about protecting retail traders, then the articulation of that concern should not necessarily be via preventing algorithmic trading or HFT in the form we see today.” on their own brains and their own ability to leverage technology and mathematics. In the past there were differential access mechanisms, so if a firm were connecting to an exchange which didn’t have co-lo, and they were connected using exchange lines, it meant that someone sitting five kilometres from the exchange would benefit more than someone sitting 5,000 kilometres away. Differential access was built into the system. Co-lo ensures that differential access does not happen. We have discussed this issue with the exchanges and have suggested that they give subsidised access to co-lo to every broker they can. The reason for this is simple. Let’s say a small broker indicates that they are suffering because they don’t have co-lo access. If the exchange put in servers at a lower cost than that of leasing lines to the exchange, it becomes impossible for a retail broker to say they don’t have access. There should be no question of a differential level of access. However, we don’t agree that if a firm can pay, then they should be able to access data faster. Everyone should be allowed to pay for data at a certain rate. With co-lo, access to data is much faster because we are sitting next to the exchange compared to someone sitting 1,000 kilometres away.

It is our hope that the exchanges and the regulators will deliberate at length over the discussion papers when they are released. It should not be the case that they have decided what they are going to do already. After considered discussion, people will begin to realise that algorithmic trading does provide liquidity and that it allows the markets to trade even more volume. Trading more is not necessarily wrong. This is a marketplace and it is supposed to have all the constituent elements of a marketplace. It is very unlikely that the regulators will choose to do anything that is not backed by extensive research by renowned trading experts both in India and overseas. For example, if there is a two-queue system, then the first fundamental rule of an exchange, which is price/time priority, would be broken. When an order is received which is of a higher or lower price, then it gets priority. If an order is received at the same price which, for example, is sent at time T and another is sent at time T+10 seconds, then T should get priority. It is vital that the regulators go into the marketplace and find out what market participants actually think. The marketplace will certainly respond with proof that algorithmic trading doesn’t affect the market in the manner that they think. Anyone who works with a large amount of data and looks at the market data from that angle will find the same evidence that we have found.

Once the exchange indicates that everyone is free to access it, then there will be open access to the same data. The point is that the exchanges need to understand this and maintain a fair, transparent and equal marketplace.



Keeping The Dealing Desk Ahead Of The Regulatory Curve Francis So, Head of Dealing, BNP Paribas Dealing Services, Asia Ltd, and Hubert Rotivel, Global Head of Dealing, BNP Paribas Dealing Services discuss ongoing regulatory challenges, and how the dealing desk can evolve and provide an alternative to execution orders. Francis: Many of the challenges that we are currently facing in Asia are related to local regulation, but equally, in general trading, firms are facing many of these same regulatory issues globally as well. When referring specifically to China, the issues of concern are those regarding the Chinese regulators and their approach to the market. For example, earlier this year the market sold off aggressively and the regulators came in to implement a circuit breaker mechanism without much market consultation which obviously failed. Currently, there is increased collaboration between regulators and market participants where the regulators are more open to input from external parties such as brokers and the buy-side. The budget for compliance has been growing but, with the adoption of new technologies that are required from a compliance point of view (both in terms of monitoring but also from an execution standpoint with regards to best execution), regulation is becoming increasingly costly. Hubert: Transparency is really the topic of the moment in Europe. What the regulators want to achieve with MiFID II is transparency. MiFID I put in place competition but there were difficulties implementing transparency on the market. With MiFID II, the objective is to achieve transparency on the pre-trade and post-trade. These same developments will eventually come Asia’s way. There are some markets in which it is likely to be easier to implement, such as Japan and Australia, which are already organised in the same way as Europe with liquid markets and some dark pools.


In terms of best execution, most regulators are now focused on asking investment firms and trading desks to ensure that they can provide evidence of best selection of broker for the trade. It is likely that the regulators will become more and more focused on this important issue and it will become essential for investment firms and trading desks to be able to provide this type of evidence. In Europe, this evidence is linked to the mission criteria. When choosing a broker, you need to be sure that you can justify the decisions made in terms of broker choice. On the equities side, it may be that a particular broker can fulfil a market order most quickly and efficiently or another who might be able to reduce the impact on the market or one who might be the best provider of a particular algo for a market order. If, as is likely, this will come to Asia in the future, it will be because the regulators were inspired by what they saw in Europe. Indeed, there has already been some contact between the APAC regulators and European regulators and in each case there are certain topics which are being continually revisited by regulators. This pattern often happens and it drives homogeneity of trading policy and rules which also takes account of local needs and market structure. Francis: Many markets in Asia are ID based markets already. For example, China, Korea, Taiwan and Malaysia – these are all ID markets in which the regulators (if required) can get down to the detail of who the underlying investors are. In Hong Kong, they are also exploring the idea of an ID market but the question of whether it would be at a firm level or individual level still needs to be answered. The


Francis So, Head of Dealing , BNP Paribas Dealing Services, Asia Ltd

Hubert Rotivel, Global Head of Dealing, BNP Paribas Dealing Services

general trend is that the regulators’ main aim is increased transparency in terms of who is doing what.

Hong Kong, it was decided that we apply the same logic in Europe, so a workshop was organised with the brokers. At that European workshop we did due diligence and assessments of the different algos as we had done for Hong Kong and all the different locations benefit from the experience of the others.

What can firms do to get ahead of the regulatory curve to implement global best practices? Francis: We are fortunate in that we are part of a global organisation. So there are global best execution policies which are followed in Europe as well as in Hong Kong. Even though the rules do not necessarily apply to Asia yet, at BNP Paribas we still follow those best practices. In terms of systems, there is also just one global order management system, so we have a view of what our Paris and London colleagues are doing and each of them has a view of what we are up to. In the event of a failure, each zone can cover for the other. This is just part of contingency planning and best practices that have been set in place. Hubert: Just to confirm what Francis said, we share the responsibility to ensure that there is a team examining best practices and procedures across different locations. It provides an audit trail, as the first level of control is shared by three different desks in London, Paris and Hong Kong. For example, when we examined the algo trading regulations in

It is very important that we apply this process across all locations. When we choose a tool, for example an Execution Management System (EMS), it will be considered not necessarily solely for one location but for all locations that could facilitate the workflow. It all relates back to efficiency. This process of integration began back in 2011 when the investment teams became global and it is vital that we continue to train our teams using this logical approach. In each team, a specialist is identified for each different market and so we have people who are specialists in foreign trading and electronic trading. There will also be those who specialise in emerging markets and there will be some in the European small and mid-markets; they will know how to find liquidity more traditionally, how to develop good relationships with brokers based



on trust, but they will also have the ability to use technology to source liquidity more technically. Francis: The most important issue here is communication between the dealing desks. For example as a result of the HK SFC regulations regarding algo trading, we carried out a review of all of our brokers; ensuring that they met the required regulatory and compliance checks. In addition, it

“The core business of fund managers is to evaluate and choose stocks so some asset managers may feel that dealing is not necessarily a core function.” was necessary to ensure that the dealers in Hong Kong had sufficient knowledge and training on the use of different broker’s algos. We have also implemented pre- and post-trade checks on the broker as an additional layer of control. Because we started this process first and had access to all the information, we were able to provide this to Europe and show them what was happening in Hong Kong. This is how we keep one step ahead of the regulators. We look at what is being applied by the regulators and see how we can adopt those best practices elsewhere. Take MiFID II for example, even though it is European-centric, here in Asia we are looking at those best practices and examining which of them can be applied within Asia. Will there always be regional differences? Hubert: Definitely – market structure is different from region to region. The market is becoming increasingly global so it is likely that best practice will become more transparent but underlying differences will remain. The regulators have to know what’s happening in their own markets but they will look to other regions for inspiration. This is evident in how they are increasingly regulating the buy-side and sell-side in similar ways to other regions.


Francis: Yes, market structure will continue to vary from region to region but the emphasis that the regulators are putting on the buy-side relates to events that may not have happened in those jurisdictions. That is why the buy-side is now increasingly responsible for taking control of their executions. What does the dealing desk start to look like? Francis: There are now additional cost pressures on the buy-side in general but in particular firms need to increase spending on technology in order to keep up with market changes. As a result, asset managers are looking at different ways of reducing overall costs, from the trading area all the way to the middle and back offices. Some firms are considering outsourcing some functions; particularly fields that may not necessarily be part of the core business. The core business of fund managers is to evaluate and choose stocks so some asset managers may feel that dealing is not necessarily a core function. Therefore, they may want to outsource the dealing function as well as the middle office and back office functions. The reasons why firms look to delegate away the dealing function vary. Apart from the cost, the extent of regulation may be a factor, as well as market access. For example, a European firm looking to invest in Asia might well outsource the dealing function to a company like ours instead of setting up a dealing desk in Asia with its associated fixed costs. We would then be able to provide the execution capabilities and also continue to act as their internal dealing desk. In addition, we would continue to have a relationship with the fund managers in order to help them improve on the execution side and to continue to access the liquidity required. Other firms are in-sourcing their assets – in particular, pension funds which typically have outsourced funds to other fund managers who are now considering in-sourcing part of their assets. They are building up their investment capabilities but they don’t want to have the burden of setting up different dealing desks in different regions.


Transforming Post-Trade By Marcus Consolini, Managing Director, ULLINK The post-trade landscape is undergoing radical transformation: shrinking trade settlement windows, new compliance requirements around auditing and reporting, the need for risk aggregation across asset classes and systems, and the increase in low-touch/ DMA trading are just some of the forces reshaping today’s ecosystem. As a result, sell-side and buyside firms are re-considering their middle office workflows. In addition they are re-considering what the middle office does; as the workflows are re-defined, so are the technologies needed to support them. So what are the requirements and the challenges that sell side firms have to overcome? There are three areas that most will be focused on when implementing a middle office solution: Automation and Exception Management The implementation of a fully automated solution on top of a robust exception management framework. With the global trend of migration to a shorter “T+2” settlement window, firms will have one day less to perform their middle and back office operations. This has a big impact on operational processes - the concurrent increase in volumes means that automation and STP has never been so critical. It effectively equates to trying to cover a longer distance in a shorter time, despite already operating at maximum speed and capacity. So, a change in technology is inevitable. STP is now required from front to middle and customers will soon all be expecting same day affirmations, regardless of the time of the trade. This means the processes of

booking, allocation, confirmation, fees calculation and affirmation must be automated from end to end. As it stands, with the enormous variance in technology support across firms, issues can still occur anywhere in this process. Therefore, a solution must come from a flexible exception management framework, where the sell side operator can still manually intervene over part or all of the process - for some or all of the flow - and still be given the tools to perform operations by lots rather than one by one. In the end, the solution should enable - at the very least - the automatic booking, allocation, confirmation and affirmation of a trade in real time. If the STP can be extended one step further and push settlement instructions to the back office in real time, then the loop is closed. Risk Management The implementation of a cross-asset, cross-platform solution that can consolidate post trading operations and better manage and monitor risk exposure. A growing trend amongst market participants is that of increased diversification of trading across asset class, market, time zone and currency. And whilst there are many front office platforms available to trade multiple asset classes, the main challenge that exists is from a risk perspective and how to consolidate across those multiple platforms. How does a firm accurately assess risk exposure resulting from trading activity, when there is no aggregation between trading systems at the front office level? To deal with this,



Marcus Consolini, Managing Director, ULLINK solutions to manage risk and real exposure efficiently in the post trade world need to involve consolidation, and because it’s in the middle and back office where trades are converging that it makes sense to have this consolidation implemented at this level and away from the front office level (where it doesn’t belong). Auditing and Reporting A growing requirement from governments and regulators is for increased transaction reporting as well as audit trail / reference data collection. Data generated by front office systems is generally dispersed and rather difficult to aggregate and compile. Reasons for this include liquidity fragmentation, deployment of smart order routers and multiplication of sponsored client trading through firms’ own systems. However, since all this data converges around the middle office, it can be compiled at that level. As a general rule, and although some convergence has taken place, front office systems remain specialised and generally incompatible with each other. They are either designed for a specific asset class, market, or type of product (e.g. listed or unlisted etc.). This means that given the lack of rationalisation in the front office world, it is effectively impossible to adequately address current (and future) reporting requirements. This is where the middle office becomes the ideal (and preferred) area for a solution. It is a natural convergence layer and is able to address the ever increasing demands from regulators to produce reports against all participants and their market activity.


“......while the level of technology support for middle and back office workflows has traditionally been relatively unsophisticated, the ever changing requirements from both regulators and trading participants are now forcing significant changes to workflows and the technology the middle and back office uses to manage post-trade activities.” In conclusion, while the level of technology support for middle and back office workflows has traditionally been relatively unsophisticated, the ever changing requirements from both regulators and trading participants are now forcing significant changes to workflows and the technology the middle and back office uses to manage post-trade activities. Given these changes, many firms are having to re-think their model for managing technology infrastructure. Cost and complexity of trading mean only very few will have the resources to build and maintain home-grown systems. It is not all doom and gloom though as market participants can now benefit from vendor solutions that can reduce costs and guarantee a solution that is managed by experts in accordance with industry needs and standards. In addition, vendors can also help deploy efficient cost management methods down to the actual deployment themselves - so instead of deploying a large vendor system internally, firms can take a standardised, outsourced, and potentially modular solution which will make the integration easier. It is these many nuances that are now pushing the vendor community to support the development of Middle Office solutions that are needed in the market place.


Raising The Standard For Cybersecurity Michael Cooper, CTO BT Radianz, Lisa Toth, Global Head of Regulation and Risk, Hatstand, a Synechron Company, Chris Bok, Consultant, Jordan & Jordan examine ongoing changes to the cyber security landscape, and how the industry can work together to combat the risk. Michael: The Cybersecurity landscape remains complex and problematic. Barriers to entry for those wishing to disrupt, attack and exploit vulnerabilities are being almost constantly lowered. This is compounded through effective use of collaboration in the exchange of information and with rapid dissemination and innovation of exploits. Further, the volume of criminally incentivised, as opposed to disruptive/ opportunistoriented attacks seems on the increase. So the challenge of sustaining security has become more difficult, more complicated but increasingly important. Alongside this is an increased awareness and recognition of that risk, coupled with an expectation that firms must address this. One consequence is that obligations and responsibilities have become broader and more onerous to execute. Legislators and regulators are continuing to raise both expectations and mandates. Lisa: In light of the high profile cyber events that have been in the news recently, all across the globe we are seeing central banks reminding their members that they must have robust cyber security, governance, policies and procedures in place. We are also seeing countries examining the regulations they already have in place and looking to set up further rules. The Hong Kong monetary authority announced earlier this month that this year it will be publishing a cyber security assessment framework, a similar step to the FFIEC. The regulators are definitely taking note and are looking at their member firms to ensure that cyber security is embedded within their culture, policies and procedures. SEC and FINRA have put cyber security preparedness as a high priority for their 2016 exam review, and in the UK, the FCA announced that its member firms are not doing enough to protect themselves from cyber breaches. It is

therefore likely that we will see many more fines being levied against firms with insufficient policies and procedures and as well as against those firms who have experienced cyber breaches and subsequently failed to remediate the issues. There have been three cyber security-related fines imposed by the SEC recently. Last year, $75,000 was applied to a regional broker/dealer, in January 2016 there was a fine of $100,000 against a fin tech firm and more recently, a large investment bank was fined $1 million. The scale of the fines is increasing rapidly. Michael: Clearly the regulatory position is evolving and becoming more stringent as regulators seek to incentivise markets and market participants to respond. Alongside of this, there is clearly more regulatory content to consume, and this is not entirely aligned globally. So while the intentions are right, there is additional complexity in different timescales, expectations and specification - additional complexity in an already complex area. Lisa: In April, IOSCO released a report highlighting some of the key global regulatory initiatives that are underway and continually use NIST as an example of a robust framework. While IOSCO doesn’t actually come out and recommend that everybody base their cyber security framework on NIST, they are publishing them as examples. Michael: There are also a number of forums being set up within different sectors and parts of the market which are regulatory-inspired. In addition, there are entities like IOSCO seeking to do something at the macro level and there are others trying work at a more micro level. So there is more activity overall, not just in



assessments and then testing their response plans. If they go through these preparatory steps they will find that the amount of time it takes to identify and resolve a breach will significantly reduce. Investment up front will reduce potential exposure to a cyber breach at the back end. Michael: The market has made considerable progress but obviously there is still a long way to go. Some of this is around security practice; how firms need to operate and the decisions they must consider and ultimately make. There is a big step up required before this practice becomes industrialised. Firms are doing it more than perhaps they were before, but there’s still much more to be done.

Michael Cooper, CTO BT Radianz terms of regulation, but in terms of the industry’s response to it. Identifying solutions Michael: I believe that most people will have a decent awareness of the issues and risk presented by cyber security - particularly following some of the recent bigger, more publicised events. The challenge for firms is to identify what they can do given the resources, knowledge and assets they have. Lisa: To look further at this, it comes down to how sophisticated firms are in terms of their cyber practice. Some firms view cyber risks as purely a technical or IT solution, so they put in place firewalls and anti-malware and think that they are protected – but there is so much more to it than that. Firms do need to have IT solutions in place, but they also need clear governance, policies and procedures, and in addition they must have suitable response plans in place. These should be embedded as part of their business continuity and disaster recovery planning. Firms should have a risk register, and be able to identify the types of cyber security risk that they face. Then they should create threat scenarios and test against them. Firms should be doing penetration testing, vulnerability

“The market has made considerable progress but obviously there is still a long way to go. Some of this is around security practice; how firms need to operate and the decisions they must consider and ultimately make.” Role of the working group Michael: We have a responsibility and a role to play here. We recognise that this is a complex multidimensional problem. In addressing this, we facilitate knowledge-sharing by enabling people to ask questions to which we try to supply answers that are communitycentred in nature and around best practice. Chris: Last year, the working group focused on updating the 2008 Security White Paper. It found that many of the answers to the outstanding questions were still relevant but needed to account for changes in technology and more sophisticated malicious 3rd parties. So we developed a number of threats scenarios which we believed adversaries could employ to attempt to



Lisa Toth, Global Head of Regulation and Risk, Hatstand, a Synechron Company penetrate a FIX network. We outlined why we believe that FIX has mitigations in place and that it is essentially self-correcting from the functional point of view. It included diagrams and architectural illustrations showing how we believe that FIX is self-protecting. In addition, we also wanted to educate the community regarding the cyber security landscape. To do this, we developed a cyber security regulatory subgroup led by Lisa which has done a great job of updating the community with regulatory initiatives that will affect various member firms. Lisa: Part of that emphasis is the focus on individual responsibility. We wanted to get the message across to our FIX members that if they “see something – say something”. If there’s an issue relating to FIX, then we want that to work its way straight back up through the cyber security working group. Michael: We want to educate through sharing. We want to enable people to share appropriate experiences so that as a community and as an organisation, we are operating at a higher level because we are taking advantage of that shared knowledge to distil best practice.


“Part of that emphasis is the focus on individual responsibility. We wanted to get the message across to our FIX members that if they “see something – say something”. If there’s an issue relating to FIX, then we want that to work its way straight back up through the cyber security working group.” In this context, collaboration and sharing is probably one of the few ways in which we can obtain something like parity with those seeking to attack our infrastructure and exploit vulnerabilities in the services we use. Another point is that this type of forum takes place behind closed doors and firms are sharing with their peers. The third point is that we are seeing very large and advanced organisations being successfully attacked and exploits being run against them. This is not a reflection on them as organisations but it emphasises that the problem we face is very severe. Lisa: All firms need to sit up, take notice and ensure that their houses are in order and that they are protecting their key assets – especially their clients’ data. Michael: There’s a good underlying point here that raising the bottom line to ensure a higher standard consistently across the industry is absolutely the best thing to do. Organisations have got to operate beyond the boundary that these protocols are referring to, so hardening systems, being responsive to fixes, to code, etc.


Lisa: It really is a matter of when, not if, a firm will be breached. The implications are not only financial, they are also reputational and can ultimately have a detrimental impact on a firm’s client base. Building security Chris: The regulators have made it clear that established security is not a ‘one size fits all’ solution. They do a good job of allowing firms to build security around their own particular needs. For example, a high frequency trader will have different security requirements than those of a retail broker and so on. What firms need to do is to develop internal security procedures. These could be as straightforward as educating employees not to expose sensitive information, by not leaving passwords on their desks so that non-secured staff can see them etc. It really is the case that people rather than technology are the weak link in many firms’ cyber security infrastructures. Lisa: A good place for a firm to start so that they can identify gaps in their defences is by doing a risk assessment. They can then put in place a road map or a project plan to close those gaps based on where they want to be as regards their level of cyber defence. Michael: That risk assessment is key to understanding what the commercial and reputational etc risks are. Once the risks are understood, then a firm can make intelligent decisions about addressing them.

The FIX Cybersecurity Working Group was convened January 22nd 2015 with a remit to consider the consequences of a deteriorating security landscape with regards to FIX protocol and transactions. The purpose of the group is to discuss current industry practices and the issues/challenges currently facing the industry, to disseminate knowledge and agree common mechanisms to address issues. With these objectives in mind the working group initially focused attention on understanding and engaging different parties who support the dissemination of information of relevance in a cyber security context. The working group also reviewed previously published guidance [the FIX Security White Paper], which was subsequently reissued with minor edits and augmented with illustrative cenarios to aid understanding.

“It really is a matter of when, not if, a firm will be breached. The implications are not only financial, they are also reputational and can ultimately have a detrimental impact on a firm’s client base.” Lisa: Also, the costs associated with addressing those risks must be considered: does it make sense economically? If not, the decision must be made to either accept the risk or put in place some form of mitigation. But at least a firm is going in with its eyes open. Michael: Another point to make is that this isn’t a ‘do it once and it’s fixed forever’ solution. Firms need to recognise that they are in a very rapidly evolving industry. They need to think about how to make risk assessment an integral part of their organisation so that it has consistency and is continuously maintained.

For 2016, attention has turned to: • Maintaining awareness (and sharing insights) regarding regulatory developments across the globe – and there is an active sub-group that collates this for sharing with the broader working group community. • An encryption sub-group considering the manner in which encryption should be deployed (in the event participants so choose) – the goal here is a “cookbook” with advice regarding configuration, key management, alternatives and decision points. The aim is to publish a cookbook and guidelines for the encryption of FIX transactions by the end of 2016.



From a FIX perspective, our view is that if we can help to raise the standards, then that will help contribute to firms’ understanding of the problem. And in order to do this, we need more people to get involved, we want to get more experiences and knowledge disseminated. As an industry we then have increased intelligence with which to address the problem. Chris: As an example, we have members from the buy-side, sell-side and vendors who are all working together to create a standardised encryption capability that buy-side and sell-side can use to communicate with each other. I think that if we are successful in this endeavour then it will be a huge contribution to the community.

“......we have members from the buy-side, sell-side and vendors who are all working together to create a standardised encryption capability that buy-side and sellside can use to communicate with each other. I think that if we are successful in this endeavour then it will be a huge contribution to the community.” Creating a community Michael: One key development that is occurring is the shift in onus and responsibility across the community. There’s an expectation of activity, and almost a mandatory requirement for a community response. Market participants have more of an obligation and responsibility to directly take charge of the security landscape and to foster that collective response. Part of this is the “See Something, Say Something” principal Lisa mentioned earlier, as we need to share information, and build that community. Therefore we expect a material change in the manner in which the


Chris Bok, Consultant, Jordan & Jordan industry responds. It is very important at a community level to be able to identify new exploits and disseminate that knowledge. We also need to work collectively as a community to establish the standards to which and in which we wish to operate. Chris: The regulators have provided the industry with excellent guidance regarding methods firms should consider when developing internal cybersecurity controls. Firms for the most part now understand that if they don’t take positive steps they will lose clients and put themselves at risk at exposing themselves to malicious 3rd parties. Because cyber security poses such a systemic risk to the financial industry, firms must share information, and it is important to note that firms should not be afraid to share as then firms can incorporate that wider information into their own cybersecurity controls. Firms can and should learn from each others’ events. This is the community we should be striving to create.


Innovations In Blockchain Infrastructure With Johan Toll, Business Development & Product Management Blockchain, Associate Vice President at Nasdaq

Nasdaq recently launched the Nasdaq Financial Framework, which is the base for all our blockchain initiatives, both internal as well as external initiatives by our customers. It is a framework that is focused on forward compatibility and continuous change. It makes it easier for an operator of an exchange, a clearinghouse or a CSD to integrate with the blockchain and launch new applications and business ventures. The framework provides the customer with the flexibility to add new applications of their own and to integrate existing legacy applications. Nasdaq’s aim is to be able to leverage blockchain technology in a harmonised way, offering our customers the same structure to help alleviate the implementation issues customers might have with introducing such a new technology into their infrastructure. All the applications that sit on top of the Framework, from trading through clearing, risk and CSD, can utilise the blockchain functions through one harmonised core service. Other core services it offers are standardised connectivity and a harmonised data store. It lets the business applications focus on their business functions rather than data access or the technical details of how to access the blockchain. We believe that our approach will also enable us and the users of the framework to harmonise the way each application, regardless of where it sits in the trade lifecycle, communicates through the blockchain. The core blockchain service also enables interoperability across blockchains and independence to the blockchain implementations. Putting the Blockchain into action The Framework facilitates innovation and speeds up the time-to-market for us and our customers to use the blockchain. Nasdaq is currently leveraging the use of the blockchain in a number of distinct initiatives across our organisation to make operational improvements for us and our customers.

The Nasdaq Linq initiative is leveraging the blockchain in our Nasdaq Private Market (NPM) and enables the issuance and instantaneous transfer of private shares and other liquidity events, over the blockchain. Linq tracks the ownership of assets where the only evidence of the shares’ ownership is within the blockchain – without this structure,

“As a common fabric for communication and improved financial processing, blockchain technology is not just a buzzword. We truly believe it is one of the greatest innovation catalysts driving change impacting the global market infrastructure.” many shares are today recorded on paper and stored wherever the owner prefers. This is a fully dematerialised system where everything is written into the blockchain. As far as we know, this is the first system to fully issue company shares into the blockchain, where there are actual liquidity events recorded. Proxy voting or e-voting is another initiative where applying blockchain is improving service. The e-voting solution focuses on the important “Know Your Client” process as many new clients are on-boarded to the



e-voting blockchain platform. For example, the owner of 1000 shares may have the rights for 1000 votes, and the votes are treated as an asset in the blockchain. So for each share the corresponding amounts of votes are issued to the blockchain, and then the owner of 1000 shares receives 1000 votes on their blockchain account. During the general meeting they can directly cast their votes to the yes or no bucket as an example. Because this is run on blockchain, this transaction can be complete on a mobile device or computer anywhere in the world with each vote transaction recorded in an immutable way for easy monitoring. This is a rapid evolution of a complex process of vote distribution and casting. From a regulatory perspective, blockchain technology provides efficiency and the transparency that regulators and company owners need to monitor and track how each vote was cast and when. From a proxy voting perspective, there are other huge benefits that blockchain provides because there are a large number of beneficial owners that delegate voting to third parties. The blockchain alleviates a number of issues around proxy voting and tracking the delegation of votes. For example, smart contract logic stamps the votes from the true shareholder onto a smart contract. This smart contract stipulates that the designated proxy has the right to transfer the votes within the smart contract to the yes or no bucket for the general meeting. The smart contract also states that at any time the true owner of the votes can withdraw the rights, withdrawing the votes from the smart contract back to their own account. These initiatives are based on the same Financial Framework with harmonised data storage and access as well as the entitlement of the draft. Operating on the same infrastructure and data store enables firms to integrate across multiple platforms. While this blockchain framework will initially issue assets and track ownership with smart contracts logic built directly on top of that, we are exploring the underlying functionality to solve other issues and bring efficiencies to other areas of the trade lifecycle. Another example and area where we believe blockchain can bring significant benefits and that we are currently exploring is in collateral management. By moving collateral management onto a blockchain-based solution, intermediaries are reduced and time to process collateral moves reduced to a minimum, which reduces risk, free up is collateral currently in transit and increases transparency across the process. We also believe that the blockchain technology can facilitate more cooperation between different market operators globally for a more efficient way


Johan Toll, Business Development & Product Management Blockchain, Associate Vice President at NASDAQ

of handling complex and costly cross border transactions that we currently see today. As a common fabric for communication and improved financial processing, blockchain technology is not just a buzzword. We truly believe it is one of the greatest innovation catalysts driving change impacting the global market infrastructure. As more market participants start to use the blockchain technology and harmonise across frameworks, market operators can more easily integrate systems for potential cost savings, new revenue streams, cooperation as well achieve regulatory improvements and transparency. It is an exciting time as we await the full impact of blockchain technology and we are thrilled to be at the centre of it all.


Finding The Right Mix:

Outsourcing Technology In A Changing Regulatory Environment

A roundtable write-up by Peter Waters, Managing Editor, GlobalTrading No firm is capable of managing its entire technology stack in-house, this much was agreed early on at the GlobalTrading roundtable hosted in June in New York to discuss outsourcing and its ongoing role in managing technology for firms. Exchanges are much better able to manage technology internally, but even this becomes increasingly challenging as they look to global markets. The participants at the roundtable represented a range of buy-side, sell-side and exchanges, and each realised that there are differing approaches to the role of outsourcing technology, and what should be managed in-house by way of competitive differentiation, and what can be commoditised and bought in from a technology provider. That each firm has a slightly different mix of what they want to build and what they want to buy itself enhances the nature of the marketplace, and firms deciding on different answers to the same question is what keeps competitive differentiation alive. The firms in the room though all generally concluded that one of the key measures is the ability to have simple solutions that are easy to integrate into current workflows, and those that can be

customised to fit in with the outlook and philosophy of the firm. One buy-side attendee used the analogy of a pyramid of core functionality, whereby a firm can view its technology as either being in the core function of its firm, or it is a peripheral piece that is added competitive advantage. The commoditised functions can be brought in, but the competitive pieces at the top of the pyramid need to be developed internally, and thus the firm ends up moving those boundaries back and forth and realises a hybrid model of technology. As the elements that are competitive advantage evolve, and other elements become more standardised, the key is the ability to maintain an evolving relationship with the outsource provider to encourage that flexibility. One ongoing discussion point was the level of responsibility for each of the participants in the chain of technology in the event of outages or regulatory scrutiny, from vendor to the sell-side through to the ultimate end client. While it was generally agreed that the majority of the emphasis sat with the sell-side, there was an acknowledgement that increasingly this emphasis is shifting to the buy-side, and more



Elliot Noma,

Managing Director, Garrett Asset Management, LLC

As the investment world adopts more and more of the new technologies, it has become harder for individual firms to acquire the talent and systems to stay competitive. Use of private server farms have evolved into streaming data analysis using deep learning algorithms applied to unstructured data running on public clouds. Each of these technologies requires specialised expertise and new configurations of resources. In the future these challenges may become even more daunting with new technologies such as quantum computing and blockchains poised to cause major changes in how we trade, invest and process transactions.

Josh Schubkegel,

Head of Execution Services Technology, KCG Holdings, Inc.

Increasingly, we see our clients looking to us to “outsource” their execution services, using our algos and routing expertise as they work their clients’ or their own orders. This is a great fit, since these firms can focus on serving their desks or their own clients, and gain an advantage by leveraging us for what we do best – trading efficiently and very effectively sourcing liquidity - both from our internal sources and the wider marketplace.

Adrian Facini,

Head of Product Management, IEX

While we think of managed services in the financial space as providing connectivity, FIX infrastructure, execution, risk management, and compliance, to name a few, the roundtable broached new areas of managed services that included cloud-based facilities and on-site analytics. Regardless of the service, the group agreed that a strong partnership between service provider and customer was paramount in enhancing and evolving services for the future.



George Rosenberger,

SVP, Global Head of Managed Services, Itiviti AB

I thought the panel was great. It was clear that the panelists and participants were very supportive of Managed Services. Some firms seem to use Managed Services more than others. The key differentiator between the Firm’s and their commitment to using third-party providers seems to come down to their willingness to delegate control on a function to someone else as well as organisational trust. That decision point seems to be based off how “core” that function is to the Firm’s overall business. It seems that most wanted to maintain control of their trading infrastructure but all seemed willing to outsource FIX connectivity, market data and other non-core related functions.

Leo Li,

Product Implementation Manager, Vanguard

Another example and area where we believe blockchain can bring significant benefits and that we are currently exploring is in collateral management. By moving collateral management onto a blockchain-based solution, intermediaries are reduced and time to process collateral moves is reduced to a minimum, which in turn reduces risk, frees up collateral currently in transit and increases transparency across the process. We also believe that blockchain technology can facilitate more cooperation between different market operators globally for a more efficient way of handling complex and costly cross border transactions than we currently see today.

As a common fabric for communication and improved financial processing, blockchain technology is not just a buzzword. We truly believe it is one of the greatest innovation catalysts driving change impacting the global market infrastructure. As more market participants start to use blockchain technology and harmonise this across frameworks, market operators can more easily integrate systems for potential cost savings, new revenue streams, cooperation as well achieve regulatory improvements and transparency. It is an exciting time as we await the full impact of blockchain technology and we are thrilled to be at the centre of it all.


Americas Trading Briefing 2016 November 14th | State Street Global Markets | Boston The Americas Trading Briefing in Boston will provide an unrivalled opportunity for industry representatives to participate in a forum where the real issues, challenges and opportunities impacting the region's electronic trading community will be addressed. Building on the success of the last Boston event in 2015, this half-day briefing will provide a series of panel sessions and offer an interactive program that addresses market needs, providing impartial, high quality content; the knowledge and experience of industry leading speakers; and networking opportunities throughout the event and into the evening at the post-event cocktail party, with 130+ delegates expected.


Regulatory and Compliance Impact on the Buy-Side

Transformational Trends and Changing Technologies on the Buy-Side and Sell-Side

Changing Cost Factors and Impact on the Moving Landscape

Trading and Liquidity Access in the Bond Markets

REGISTRATION OPEN! FREE passes are available for representatives of Buy-Side firms and Regulators. An allocation of FREE passes is available for all FIX Trading Community Member firms. Additional Member Passes: $249 | Non-Member Passes: $449

Supported by our sponsors:

For more details and to register visit:

Germany Trading Briefing 2016 November 17th | Steigenberger Frankfurter Hof | Frankfurt Following the success of previous events in this


Brexit – What Now for the German Markets? How can Frankfurt benefit?

Unbundling the Bundled Research Model

Changes to Derivative Trading Landscape Global Technical Community update

representatives from across the region’s

Mapping Support for MiFID II

investor, broker, regulator, trading venue and

vendor communities who will benefit from the

Fixed Income

Plus much, much, more!!

region, FIX Trading Community will return to Frankfurt this autumn with the Germany Trading Briefing. This sell-out event will attract 150+ senior

knowledge and insight of 25+ expert industry speakers. An exhibit hall featuring the latest products from the region’s leading solutions providers will also play host to extensive networking opportunities

REGISTRATION OPEN! FREE passes are available for representatives of Buy-Side firms and Regulators.

throughout the day and into the evening at the

An allocation of FREE passes is available for all FIX Trading Community Member firms.

post-event drinks reception.

Additional Member Passes: £175 | Non-Member Passes: £350

Supported by our sponsors:

For more details and to register visit:


Zhuang Zhuang,

Managing Director, Global Head of Equity Trading Technology, Jefferies LLC

The diversity of participants at the roundtable made it very interesting—sell-side peers and buy-side clients, along with the inclusion of traders and technologists from a range of firms, provided a real mix of backgrounds and skills, resulting in a varied and informative conversation. Overall the industry trend seems to be moving toward using big data and business intelligence solutions to arm the traders and sales traders so they can be more effective in covering more clients with better insight. Similarly, using technology to cut bottlenecks and improve processes and overall productivity is also being used to improve margins. At Jefferies, our level of outsourcing varies according to the maturity of the markets we are in, what regions we cover, and our business model—all of these things affect just how much technology we want to build ourselves versus where we want to partner with outside industry experts. For example, we develop in-house in those areas where we feel we can offer a competitive advantage and differentiate ourselves— matching our client positioning on where we best compete in algo development and routing logic—and where we choose to partner with vendors and industry experts, including exchange gateways and network connectivity. Every firm is trying to find the right balance, and this roundtable helped us see what other firms are thinking about and how those approaches differ.

responsibility for the technology is growing across different participants. Whether this will result in a shift of sell-side technologists to the buy-side remains to be seen, but there is certainly room for development on both sides of the Street to ensure well integrated and controlled technology. The conclusive theme was, as it has been for some time, that firms are continually trying to have to do more with less. Budgets are smaller, teams are smaller, and markets are increasingly complex and heavily regulated. How firms shift some of their technology to outsourcing, and how that can be used and standardised to help with second level functionality such as compliance and back office technology, will be a defining conversation ongoing across the industry. The balance between stable technology and innovation, and between risk and security are the two

main variables that vendors have to attempt to take into account when talking to clients, and the sell-side and buy-side have to examine internal policies and philosophy and decide which precise mix of this balance they want themselves. The attendees of the roundtable each agreed that their precise mix and approach will be different, but all need to take a more detailed look at their technology, and what can be outsourced.



Changing Metrics With Jonathan Clark, CEO, Luminex

Increasingly we are seeing the buy-side take more responsibility for its orders – how they’re handled, where they go, who sees them and so on. In order to fully understand this, it is important to step back and consider the origins of Luminex; why it was set up and what it is trying to fix. Luminex was born out of the question of how could we address market structure issues related to efficient sourcing of block liquidity, and whether we could help address these issues by creating a buy-side utility. The vision was for a buy-side owned and operated platform, not driven by profits, but simply by the notion that the buy-side could offer a more transparent and cost-effective solution by creating a community of likeminded high-quality firms that shared the same objective. Could they come together and put their flow into a platform to trade with one another and do it at effectively utility prices? Ideally it would be self-sustaining and would save execution costs to the clients. In addition, there were already frustrations with ‘traditional’ block trading. Traders were having a hard time trading blocks and they were concerned that when they did send block


orders to trade, there might be transparency issues, and the possibility of information leakage with orders that could make the markets move away from them before they could get their order filled. These kinds of transparency-related issues led to the effort to “raise the bar” by creating a platform where the buy-side could trade with increased trust and confidence. Luminex was being founded at the same that many of the ATSs were facing issues; there had been sanctions, and some had been fined and were effectively forced to close, so there were certainly growing concerns that we felt needed to be addressed from a confidence point of view. At that time, I was on the buy-side at BlackRock and was part of the initial group that had been approached to go out to the community to find out if there was a consensus about these issues of concern. Nine firms ultimately offered to work together towards solving these difficulties, and committed to funding the initial start-up of Luminex. The platform was announced in January of 2015, and we went live on 3 November 2015. We have been very pleased with the results so far.


“The vision was for a buy-side owned and operated platform, not driven by profits, but simply by the notion that the buy-side could offer a more transparent and cost-effective solution by creating a community of likeminded high-quality firms that shared the same objective.” Jonathan Clark, CEO, Luminex Measuring success There are a variety of ways of calculating success of any given ATS platform. I know most people would use volume figures from the start, but that isn’t the best way to look at Luminex. It’s important to note that Luminex is open only to asset management firms with more than $1 billion in AUM and a focus on long-term investing. We have a strict minimum trade size of 5,000 shares. We don’t allow broker dealers or high frequency traders to participate either, so comparing us by looking only at volume numbers misses the point, to a large degree. I look at different metrics, particularly average print size. Today, our average print size is about 32,000 shares per print, which is a very good number because it means we’re doing what we set out to do – allowing people to trade large blocks. The top quantity that’s coming in (that is, the order that traders are sending to us) often exceeds 150,000 shares per order. So there is certainly a commitment to trade which is good to see but we are also pleased with the trend of growth. However, it is also challenging because changing trader behaviour is very difficult and requires our sales team to be in touch with clients on a daily basis. This means they have to travel to meet with the clients and ensure they are comfortable with the platform. We appreciate that this will not happen immediately, and that it will take time to develop further.

What we are doing is trying to change the conversation we have with firms. Firms that expect immediate volumes or instant success, those that ask “I sent an order, why didn’t I get it filled immediately?”, will have a more challenging experience on the platform. Those firms that understand what we are trying to achieve are the firms that will have the greatest success. When we communicate with them, because they’re sending in multiple orders a day, they are resting their order for a good duration of time; they are ultimately the ones that will have the most success. A firm that sends in one order per day or maybe one a week in some esoteric name, will have a much less positive experience. It is our job to convince them that if they want to improve their chances of a hit, they should change that pattern of behaviour, and that just takes time and patience, and our Board recognised that this is going to be a long term build, and we’re funded that way. We have found, on average, over 50% of the prints that occur here will end up being a top five print on the day in a given security. This is a good way of looking at a metric that most often, people don’t tend to think about. It is a wider conversation than just headline volume figures and ultimately, we want to trade large



“Ultimately, however, traders have to come equipped with the right mind-set. It is our job to remind those who are only concerned with volume figures of the full story, so that they can re-engage and continue to move along the path towards success.” blocks that are meaningful. After only six months, to have half of our prints be in the top five prints for the day means we have had an immediate impact and we are doing what we promised we would do for the sourcing of block liquidity. I’m not prepared to denigrate the continuous market. In most market centres around the world, there are very efficient means to execute order flow, but it’s also a very efficient means of executing smaller lots. With that in mind, those firms (especially bigger institutions that need to move larger pieces of stock) are going to need other pools to do that and the open market isn’t really the most efficient place to execute large blocks of stock. What we are trying to argue is that we are a clean, healthy and effective platform for traders to consider when looking to trade blocks. There are of course other ATS providers that do offer block services, but what we are trying to do is distinguish ourselves in a variety of ways. As I mentioned earlier, our pool, in effect, is solely the buy-side community. Our platform comprises investors with a long-term investment horizon and therefore proprietary flow, market makers, HFT etc; are not in our pool. Other pools have a number of different participants in their pool, while we are trying to maintain a very tight-knit community where people can feel comfortable trading. However, I’m not going to dismiss


equity markets and market complexity, because again, it is a very effective way of trading smaller orders in a continuous fashion. Our average order size is in stark contrast to that of many ATS operators. Their volume statistic – the average sales size, average order size – looks a lot like exchanges, around 300 shares vs. our 32,000 shares. This is a completely different model than many of the broker-dealer sponsored dark pools. Ultimately, however, traders have to come equipped with the right mind-set. It is our job to remind those who are only concerned with volume figures of the full story, so that they can re-engage and continue to move along the path towards success. Expansion We have a number of European clients who trade US products from European soil, and we are continuing to expand our focus in this area and I hope to see that number continue to grow over time. The reception has been very positive so far, and we are going to spend some more strategic time in that market to explain the benefits of trading through Luminex. During those trips to Europe and when speaking to global managers here in the US, we are being asked when we will launch a European equivalent, whether it’s in the UK or mainland Europe or possibly even Asia or Latin America. We definitely see an opportunity to do more with our platform over the long term, either as relates to foreign equity markets or other asset classes, but those are longer term opportunities. In the short term, the Board and our team are focused on getting Luminex established as a consistent, successful platform here in the U.S. Getting it right here is what’s critical and, six months in, we are all focused on smoothing out the wrinkles you deal with in any start-up and continuing to build our customer base. If we demonstrate success here, we’ll keep an open mind about what other geographies or products make sense expansion-wise.


Making Liquidity Work By Clive Williams, Global Head of Equity Trading, T Rowe Price We joined Luminex partly because there are a large number of ongoing regulatory challenges around dark pool trading, and we needed a new venue to trade how we wanted. One difficulty we see is that dark pools are not really dark, they are more grey. The one thing that we have always argued is that dark pools should be for blocks, and there should be no leakage of information. That is where Luminex can come in and be advantageous; we have a minimum fill size of 5,000 shares, we have price improvement. It ticks all the boxes for us and gets back to that more instinctive feel of what a dark pool should be. However, the challenge for any new venue is attracting enough initial users. Luminex does not have the client base that, for example, Liquidnet has. They have 450 and we’re closer to 150. Integrating new firms and their execution management systems takes time, and building that critical mass is a big challenge. But the growth will occur because much of the reason behind Luminex comes back to how firms want to use a dark pool. Firms should feel comfortable in resting an order in a dark pool. If a desk is just pinging a pool, the chances of them actually hitting a contra order are very small. The system is only going to be able to operate if people are comfortable putting flow in there and letting it rest. That’s the problem with the market as it currently stands as it has got so short term that people aren’t properly using dark pools; people want continuous execution and it is a challenge to change that mind set. We would rather, if a trader had liquidity that wasn’t doing anything, they would reside that order on a pool where we have the potential to find a contra and do a block size trade rather than just leaving it on the blotter doing nothing. Luminex is building out the clients that have a similar approach; we have been pretty clear as to who we’ll accept on the system and who we’ll not accept.

Clive Williams, Global Head of Equity Trading, T Rowe Price This is partly why Luminex is purely focused on the US right now as well. We have to get the US right as we have to learn to crawl before we can walk. Given all of the regulatory changes, even just examining the ongoing information coming out of Europe, the caps on dark pools that are within MiFID II for example, it is all very unclear and the implementation deadlines are rapidly approaching. I understand that if a firm is a European asset manager or trading European equities, they want more options to execute block sized trades, because the options in Europe are less than in the US. There’s the desire for Luminex to therefore move to those markets, but it’s a matter of getting the capacity right in the US first and then we can transport a more finished model. Obviously there is a large regulatory drive in the US talking about transparency and routing and the buyside gaining a better understanding of that. The one problem the buy-side may have overlooked is that if we ask for the data and we get it, we need to put in the effort to understand what that data is telling us. It’s not just a box ticking exercise. The buy-side is going to have to make some investment to try and understand their trade data and how they can effectively use the data; e.g. how smart order routers operate, and having a deeper understanding of market structure follows from that.



Building A Buy-side Community With Jeff Estella, Director of Trading Analytics & Investment Operations, MFS Investment Management To roll back the clock to October 2013, we were approached by Fidelity Trading Ventures regarding a new platform for trading. They were using some data to think about long-term institutions and the liquidity challenges they have with both traditional exchanges and with the different intermediaries that are in the marketplace now. They were asking if there was a potential to have an efficient platform that doesn’t have a profit motive to match buyers and sellers. One that could match long-term fundamental investors, in a single environment where it was possible to take the frictional element out of the equation. Fidelity Trading Ventures approach 20+ institutions. After many months of non-disclosure agreements and meetings, nine firms were able to come together to form the consortium that would become Luminex. MFS got involved because this was focused around an opportunity to reduce the friction in matching buyers and sellers. We have a passion for innovation and change and wanted to help bring that to the market through our involvement in the consortium. Could this potentially help MFS’ clients? The answer is yes, but more importantly, it could help the entire marketplace. This is about the greater good for long term-focused investors. The first milestone of success is already past us. We were able to get a significant number of long termfocused institutions to commit their names and their financial resources to this industry consortium, to creating what is essentially a utility. That in and of itself is the first milestone. The next milestone is building out scale. Luminex continues to follow up with institutions it originally sought out back 2013 as well institutions that expressed an interest in participating on the platform after it launched. This system only works if the network is big enough. We need a diversified flow in there, with buyers and sellers in the same security at the same time, on an anonymous basis. While we’ve heard the speculation that if it is all long term-focused

Jeff Estella, Director of Trading Analytics & Investment Operations, MFS Investment Management

institutions that have a buy rating on XYZ security, there could be zero odds for Luminex to have the ability to cross the trade. However, we’ve found that the data shows that there is a diversified number of orders in the system at all times, on both sides of the trade. We’re creating an environment with like-minded firms that are looking to trade on an institutional block level. They’re more focused on a fundamental view on a security. We think it’s a very attractive proposition if we can put two different long-term market participants together that have a different view on that security at that point in time, with the least amount of friction, relative to other peer-to-peer systems. One would think that those two institutions may consider using an offering such as Luminex.



Welcoming Asian IOI Reform By Canute Dalmasse, Head of Execution Services Asia Pacific, Goldman Sachs In May this year, the Asia Trader Forum [ATF] (buyside trader’s consortium) released their framework and guidelines for an IOI Code of Conduct and Best Practices. In addition to that framework, George Molina previously noted in this publication that “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”. At Goldman Sachs we believe the focus for IOIs should be on quality not quantity, offering a genuine source of contra side liquidity for clients. There should be clarity and tradability of all IOIs sent, ultimately incentivising clients to respond with the confidence that they will find the liquidity they seek. The release of industry best practices is an important development for the viability of IOIs in Asia and these guidelines should be wholly embraced by all market participants. Systematic use of qualifiers on all messages sent and specifically, using the ATF recommended methodology to identify when an IOI should be considered natural or non-natural is of utmost importance. In our view, the Sell-side should work collectively and invest in the infrastructure to implement the guidelines for market best practices over an IOI’s lifespan. By collectively embracing the new framework, IOIs will become an ever more important tool for helping institutional clients and their end investors source real liquidity, reducing market impact and trade costs. Proposed reforms - Scenarios: The ATF’s published ‘IOI Code of Conduct and Best Practices’ outlines four scenarios under which potential IOIs can be classified. The key distinction across these scenarios is whether an IOI should be flagged as natural or not. Industry practices have varied to date on what constitutes a natural IOI with differing interpretations on the types of flows that qualify. The new code makes a distinction between agency flows and facilitation unwinds of actual positions that can be flagged as natural,


versus facilitation risk hedges and unrelated facilitation initiation flows that should not. By making these distinctions, the ATF Code of Conduct tries to draw clear lines as to what can acceptably be considered as natural going forward. - Order Qualifiers: Enabled by advances in trading technology, the ability to seek and match against appropriate liquidity flows has become a common feature used by the buy-side. It is for this reason that the guidelines also specify data points to be set on individual IOIs that assist in the trading decision process. In addition to natural / nonnatural tagging, IOIs should display price limits, order size and type and trading instructions (e.g. Limit, Working with More Behind) using industry standard tag values. The goal of qualifiers is to help clients more effectively interact with natural liquidity. - Best Market Practices: Underpinning the ability for buy-side firms to trust that IOIs are accurately described and are being properly worked are a series of 15 best market practices. These practices can be broadly grouped together as workflow and control features with care for client information. Execution controls Interaction with IOIs should be managed via access controls and have appropriate flow segregation with clients grouped on a tiered basis. Access to the IOI ecosystem should be two-way, for instance, viewing of IOIs by a counterparty that is not also allowing their own orders to be advertised via IOIs should not be permitted. To maximise transparency brokers should also offer clients the option to reflect their own IOIs back to them. We believe these controls are best implemented through flow automation, allowing audits against active orders from which the IOIs are generated and removing the risk of human error. Additional functionality or policy should ensure that an “in touch with” categorisation is only used where a client’s continued interest to trade has been confirmed, and not by default.


“Brokers that can adapt to market standards and operate on a best-practice basis will have a value-add above those that do not.” Operational features Execution workflows may need to be modified to support the new best practices; however there are valid concerns underlying the buy-side’s need for more robust functionality. For example, a commonly cited issue is that an IOI becomes stale. In order to ensure accurate and up-to-date information, refresh times on IOIs should be less than 15 minutes. Use of qualifiers should be systematic and standardised to aid in consumption. If a broker cannot populate designated FIX tags, their systems should reflect the same qualifiers in a comment field. Care of client information The very nature of IOIs is a passing of information and as such brokers should exercise appropriate care and control. Systems should enforce minimum and maximum IOI sizes with respect to a given stock’s ADV and further tailor quantity as appropriate to each client or client tier. In addition, brokers should consider the time value of information and thus the importance to each client tier. Why this matters to the sell-side - Clients: With the release of the Code of Conduct and Best Practices memorandum our clients have spoken on what they expect from the sell-side. The sell-side now has clear guidelines in the absence of a standardised regulatory framework. Many sell-side firms are already currently operating under parts or all of the new best practices, making harmonised implementation within reach. - Change: With change comes opportunity. As confidence levels grow on the buy-side there is potential for increased usage of IOIs as a liquidity sourcing tool. Brokers that improve their execution capabilities by adopting these measures will be well positioned to capitalise on these changes.

Canute Dalmasse, Head of Execution Services Asia Pacific, Goldman Sachs - Value-add: It is well known that the buy-side continues to consider their brokerage relationships against the backdrop of an ever evolving regulatory landscape. Brokers that can adapt to market standards and operate on a best-practice basis will have a value-add above those that do not. Industry support and adoption - Sell-side support: In order to realise the full benefits of increasing IOIs as a buy-side liquidity channel the sell-side community should also come together to adopt these new standards. The members of Asia Trader Forum have worked hard to map the best practices. Sell-side industry groups should now work to ensure their members understand this framework with the goal of a sensible implementation in a reasonable timeframe.


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Broadening The Base:

Using The Entire Trading Lifecycle To Improve Execution

GlobalTrading Hong Kong Roundtable Write-up Regulatory developments are amplifying pressure on trading desks to offer their shareholders and clients greater returns. At the same time, a newfound willingness for collaboration and a restructuring of the trading desk from a human and technological perspective hold out hope for greater efficiency.

(CSRC), for example, feels pressure to collaborate in ways they did not before the market crash of 2015. Discussions of instituting an ID market in Hong Kong, recent programme trading rules and the much maligned and quickly shelved circuit breaker mechanisms are all areas where the CSRC is more open to external input than before.

Generously sponsored by BNP Paribas Securities Services, and kindly hosted by the Hong Kong Exchange (HKEX), nineteen buy and sell-side participants gathered under the security of Chatham House rules to share their experience and insights into improving execution across the trading lifecycle.

“It is important that the Hong Kong regulators appreciate how to rationalise the balance between the improved oversight of an ID market and the operational efficiency of features such as an omnibus account,” noted Stephanie Marelle, Executive Officer, Hong Kong Branch, Regional Head of Clearing and Custody, BNP Paribas Securities Services Hong Kong.

Asian regulatory priorities: managing trading behaviour Regulators in Asia are often short on experience and resources. They prefer to add caution in the form of further regulation while they catch up. For example, brokers in Hong Kong have to keep logs of changes to algos for 2-3 years. The onus is on the market to work with local regulators or the local regulators will be tempted to simply follow the US model. The Chinese Securities Regulatory Commission

Because of the ID requirements in Korea, Indonesia and Taiwan, many traders prefer to work through Delta1 desks to create positions instead of trading directly on the exchange. The real question is whether the regulators want a pre-trade ID or a post-trade ID. Legal Entity Identifiers (LEIs) in Europe offer a similar case study for comparison. Draft requirements for European LEIs include national insurance provider for each trader, trader’s home address and date of birth.


64 | ASIA

protect retail investors has encouraged as many as 250 HFT firms to start trading in Hong Kong While most industry participants understand the issues with HFT, but there is no upside for the regulators to take risk and move markets forward. There is a culture of aversion to failure among regulators. Market participants understand the benefits of HFT, but there is no sufficient mechanism for sharing those benefits.

The LEI discussion is all the more pressing given these rules are not far away, provided you believe the implementation dates. Asian trading desks typically follow the same workflow as their US or European headquarters, but local data privacy laws can be an issue. Many trading operations would benefit from further integration of front, middle and back office data as real-time information becomes a norm. For many Chinese asset managers, their small scale in Europe and high existing costs may lead to a withdrawal from certain non-Asian markets. China is built on an ID market so the regulators can generate reports on trading behaviour with the push of a button. After the market crash in the summer of 2015, the Chinese regulators traced trades back to certain High Frequency Trading (HFT) players for prosecution. The CSRC thinks HFT is bad and there are insufficient protections for investors in markets where HFT is prevalent. “The discussion of HFT in China is often inaccurate because many proprietary traders operating HFT or similarly sophisticated models are grouped into the retail trading basket because they are sole traders,” suggested Chris Lee, Senior Vice President, Global Markets Division at HKEX. In China, the market is one-directional because of a lack of adequate hedging instruments. In Hong Kong, often more than one investor view will be active at the same time meaning HFT does not only push in one direction and amplify either gains or losses. Meanwhile, the CSRC’s focus on policing HFT to


There is progress in the region, as evidenced by the Australian Securities and Investments Commission’s (ASIC) evolution from one of the most shrill HFT detractors to a more rational perspective on the strategy. Even Korea is beginning to open up to the prospects of HFT. Even a cursory study of high and low liquidity events demonstrates the need for proper market structure research through fundamental analysis. The CSRC appears to be caught between pursuing greater knowledge or greater stricture. Collaboration and Efficiency: a win-win for all Fortunately, the market is now in the same room with the regulators when these issues are being discussed. “The Shanghai-Hong Kong Stock Connect was a significant milestone for collaboration across borders within Asia. The Shanghai-Hong Kong Stock Connect was also a catalytic moment for HKEX to expand the size and scope of the counsel they receive. Within HKEX, there is a conscious shift to viewing Exchange Participants as clients and focusing more on service. The exchange is bringing additional intelligence in-house. Hong Kong aims to be an offshore risk management tool for China via HKEX futures and options,” observed Kevin Rideout, Managing Director and Head of Client and Marketing Services for HKEX. In the past, risk management was always handled on the trading desk. Market risk, which is simpler to manage, is still handled on the trading desk while operational risk is much harder to manage and cannot be left to the traders alone. Regulators will expand the total amount of data they manage, and as such their role is not to make conclusions from such data but to spur conclusions from market participants.

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“In the past, risk management was always handled on the trading desk. Market risk, which is simpler to manage, is still handled on the trading desk while operational risk is much harder to manage and cannot be left to the traders alone.” The fastest growing costs for trading firms are compliance and new technology, and unfortunately, the cost burden tempts firms to stall further investments which in turn breeds risk. The costlier risk, by far, is the long-term threat to poorly assembled compliance and technology systems. “Despite this, it is important not to view increased compliance costs as merely about meeting regulations, but as part of the investment needed to build a robust and sustainable business,” noted Jeff Sayed, Chief Operating Officer, Equities Asset Management Services, Asia Pacific for Bank of America Merrill Lynch. The business side of trading is embracing greater technology in its processes. As they consolidate platforms into their Order Management System, more information can be readily shared within the firm. “Consolidation of platforms is also likely to lead to greater efficiency for trading desks,” suggested Patrick Shum, Head of Trading Systems Asia Pacific at Fidelity International. “In addition, working with outside partners to handle non-core business tasks is one way asset managers are lowering their cost burden and acquiring best-in-class systems, however, business size will differentiate what is relevant and needed,” suggested Francis So, Head of Dealing, BNP Paribas Securities Services Hong Kong.

The New Look Desk Responding to the lessons of greater collaboration and technological investment, the trading desk now has a ‘new look’. “The human mix on the trading desk is changing in ways not previously seen. Unbundling means that the trading desk can define its own value. Where quants used to be a support function to sell-side trading desks, we are now seeing quants hired to both buy- and sell-side trading desks,” noted Andrew Freyre-Sanders, Head of Equities Electronic Execution Services for CIMB Securities. “The technology team is part of the business process today, so the business can no longer make decisions on their own,” explained Shum. At the same time, new technologies such as blockchain will soon become an alternative to self-clearing solutions and banks today are proactively participating in the discussions. The discussion concluded, for trading desks and the technologists that support them directly or indirectly, innovation is knowing where you’re good and focusing on it – sound regulatory practices, market collaboration, data integration and smart technology. Buy and sell-side are embracing a holistic view of the trading lifecycle more than ever before. This will be the key to satisfying changing regulatory demands, generate greater return on equity and provide improved execution for internal and external clients.

As a counterpoint, in Silicon Valley, for example, collaboration is in businesses’ DNA, while banking is unrepentantly competitive.


66 | ASIA

China’s Changing Scope With Stephane Loiseau, Head of Cash Equities and Global Execution Services, Societe Generale, Asia Pacific

International investors have differing views and impressions as to China’s development among global equity markets. Following the MSCI decision process, perceptions among European and US investors differ widely from regional investors in Asia. Asian investors are more open to the Chinese market, both in terms of market structure and investment opportunity, than their European and American peers. US investors, hurt by the 2015 equity turbulence, are skeptical to engage again with China. Asian investors are more open to trading China first because they benefit from the location and second, because they likely have less choices: as a firm in Asia, ignoring Chinese equities’ size and influence on other markets would be imprudent. Asian investors are also growing more comfortable with China’s microstructure improvements. Such improvements weighed heavily on MSCI’s decision not to include A-shares in its Asia index yet. For international investors, MSCI inclusion is a proxy for institutionalised accessibility to Chinese markets. Over the years and certainly in the last two reviews, MSCI were evaluating accessibility and microstructure in A-shares. While much has been done already, there is a roadmap for realising further gains. The Shanghai-Hong Kong Stock Connect for example, has technically been a success. Progress has been slow at the beginning, but the enhanced SPSA enhanced


model announced in April has resolutely expanded accessibility to additional investors. Stock Connect is a material improvement for access to the A-share market. However, macroeconomic trends in China have hindered an increase in accounts from translating into increased volumes. Investors appear to be gearing up for increased interest in China, therefore they want to be ready for any sudden influx. The Chinese regulators have also recently clarified beneficial ownership rules, which has been a legal barrier for many international investors. Finally, the rules about suspensions of individual names has also been clarified, adding another productive market structure improvement. Shanghai and Shenzhen have revisited their suspension rules to avoid the mass suspensions international investors and MSCI specifically highlighted as a hindrance to investability. This change brings the Chinese market closer to par with most global markets or at least similar to Hong Kong, which is familiar to many investors. Education campaign The Hong Kong Exchange has actively educated international investors about the strengths of the Chinese markets. The Hong Kong Exchange has a significant part to play in communicating the latest updates from China, including the regulatory changes.

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Stephane Loiseau, Head of Cash Equities and Global Execution Services, Societe Generale, Asia Pacific Hong Kong’s position as an entrepôt for Chinese markets remains attractive because it is still seen as having privileged access. Yet the interest in H- and A-shares is spread across pockets of assets. However, investors will judge the market on the experience of trading in that market. Unfortunately, a number of investors were intimidated by last year’s turbulence. Overcoming this sentiment will likely be the biggest challenge. Concerns about the Chinese economy and markets are only one part of the equation. Education on trading microstructure can be the easiest to address because there is investment interest, provided investors find the right vehicle. Broadening the range of investment ideas in Hong Kong, Shanghai and Shenzhen will also deepen the number of constituents and instruments, easing trading impact. The impact of retail In 2015’s volatile Chinese markets, retail trading played a significant role spreading news and company information and the corresponding over-focus on retail investors by certain listed firms. On the back of the

“Shanghai and Shenzhen have revisited their suspension rules to avoid the mass suspensions international investors and MSCI specifically highlighted as a hindrance to investability. This change brings the Chinese market closer to par with most global markets or at least similar to Hong Kong, which is familiar to many investors. ” Q3 • 2016 | GLOBALTRADING

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so-called national team’s involvement, it is clear larger investors have now a more prominent role in A-shares compared to past years. As a result, retail trading’s importance faded after the June decline began. China is not alone among Asian markets with high levels of retail participation, meaning those firms with experience in the region were able to trade with greater confidence. Hong Kong’s newly minted circuit breakers, locally referred to as a Volatility Control Mechanism (VCM), is

“Even though the daily quotas have not always been filled, they may be raised to make the Connect more credible and attractive for institutional investors, relative to QFII and RQFII.” an attempt to taper volatility spikes, particularly those driven by retail reactions to company news. Given the close levels of coordination, after Hong Kong implements the VCM, China is likely to revisit their retail markets afterwards. After China’s difficulty with circuit breakers in January of 2016, Shanghai and Shenzhen will aim to improve on their original implementation. Future of Connect Even more important as a driver of market structure change may be MSCI’s 2017 A-share inclusion ruling. In an attempt to pre-empt challenges from MSCI, China and Hong Kong may accelerate Stock Connect’s Shenzhen launch and expansion. The technical specifications for Shenzhen connect were recently published by the Hong Kong Exchange signalling the high priority given to Shenzhen readiness. Meanwhile, the Chinese regulators wait for the right time to make the announcement. The A50 and the CSI300 indices, used both regionally and domestically, contain a large number of Shenzhen stocks which today cannot be traded on ShanghaiHong Kong Stock Connect.


Expectations are that the Connect scheme will add more Shanghai stocks to cover a larger percentage of the market capitalisation. Even though the daily quotas have not always been filled, they may be raised to make the Connect more credible and attractive for institutional investors, relative to QFII and RQFII. While the CSRC has not indicated an intention to offer unrestricted access at this stage, raising the quota would give investors greater comfort and flexibility. Packaging with the other Stock Connect improvements, the Shenzhen announcement may be followed by a bond connect, and an ETF Connect. Hong Kong’s role Despite the considerable column space devoted to UK-China bilateral discussions, we believe the Hong Kong Exchange will remain the privileged hub for access to China. Even in the sibling rivalry between Shanghai and Hong Kong, when it comes to international expansion, Hong Kong seems to be the chosen gateway. If the initiatives discussed earlier are delivered soon, Hong Kong’s status may be bolstered by additional capabilities authorised by the mainland. Hong Kong’s secondary competition with Singapore seems focused on derivative products as Singapore has some of the largest derivative contracts on the Chinese domestic A50 index. However, if Hong Kong has the ambition to close this gap, it is expected to create competing derivative products to track Chinese indices in particular. Until MSCI decides to include A-shares in its Asia index, Hong Kong is China’s main access point. After MSCI inclusion, an expanded Stock Connect will still channel flows through Hong Kong. In the long term, the real question may be whether an open China will need any gateway at all.

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Multi-Asset Executions Across Asia With Kent Rossiter, Head of Asia Pacific Trading, Allianz Global Investors

It is important to remember that this is a people business and that relationships are essential regardless of the asset class being traded. Without longestablished and tight broker relationships, it can be more difficult to achieve solid allocations on primary deals, or for banks to assist when an order is bigger than conditions warrant, and get pricing inside the spread during tough times. TCA measurement of fixed income trading is as much a challenge for us as it is others in the industry. This is not helped by very sparse trading in many of the securities and the general lack of transparency. The fixed income markets have been trading OTC for decades and it is unlikely that they will transform into the ‘ticker-tapes of equity-type’ trading or become a transparent market overnight. At Allianz Global Investors (AllianzGI), we have adjusted our trading behaviour to reflect the realities of the markets. We are confident in our processes and trading discipline, and that we are able to get the best outcome for our clients when trading bonds. Our bond brokers are evaluated not only for their trading acumen, but also their research and sales servicing abilities; there has to be a balance between both factors. In equity trading, commissions are paid and CSA programs have been set up. However, this isn’t currently available for fixed income in the same way. We have had to find ways to reward both the fundamental and economic research provided by bond brokers, but still achieve best execution. Where possible, the focus is on brokers providing the holistic fixed income service. In FX markets, almost all our major currency trading takes place electronically. Some restricted currencies are still traded using voice trading via phone or IB chat. Merging desks Our Asian-based peers are increasingly showing interest in what AllianzGI Asia Pacific has been doing for years; that is, trading multiple assets from a single desk. From a

practical point of view, this makes sense because we use the same systems and staff. With trading volumes sporadic and lumpy (i.e. some days dozens of bond trades and other days there may only be a handful), it would be inefficient to have a fully staffed trading desk so specialised that they couldn’t execute and assist on other trading products during slower times. Our traders do have designated markets and products but they are also flexible and well-rounded enough to execute other products. A key feature of our set-up was the merger of our trading desks in Hong Kong, Singapore, Melbourne and Tokyo into one single desk, now based in Hong Kong. It made more sense and improved communication having traders side by side as this balanced out the flow on the team. Our regional bond investment team is headed by CIO for Fixed Income Asia Pacific, David Tan from our Singapore office, yet all the trading takes place out of Hong Kong. Within Asia, we execute orders from portfolio managers based in Hong Kong, Singapore, Taipei and Tokyo. Issues of Asian USD-traded corporate bonds are usually traded electronically through various platforms. Sometimes we have more success electronically with sell orders than buys, probably because the dealers lack inventory in those names and are hesitant to sell short. It is evident that dealers continue to be risk-adverse: coming into year-end, liquidity further dries up as dealers prefer flat books. One of the benefits of electronic trading is that multiple brokers can be approached much more quickly than could be achieved manually via separate IB chats. However, electronic trading of Asian local currency bonds has not yet developed enough to trade successfully that way all the time, with the exception of perhaps some SGD or HKD bonds. Even with increased activity from our multi-asset portfolio management team based in Tokyo, we still trade much more in corporate bonds than sovereign bonds.


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“Running a multi-asset trading desk inevitably means there are more topics in which our traders have to specialise. There are so many in fact, that the work has been allocated so each trader focuses on a different subject, developing them into the ‘go-to’ trader for that area. ” Without a significant change in the behaviour of investors, the traditional model of using brokers is likely to be part of the Asian fixed income landscape for years to come. The markets are ‘fractured’ mainly due to the lack of control of bond markets and the amount of inventory. There are some initiatives slowly gaining traction to match orders: either scrape the order blotter, or potentially even the inventory of institutions who are likely to be trading the same bonds, but in opposite directions. Blotter scraping for equities has grown increasingly over the last decade and is now a wellestablished practice. It is likely to gain a similar following in fixed income as investors become more comfortable with the idea. We are looking to invest more effort and technology into matching up potential Indications of Interest (IOIs) of investor positions. Many end-investors may not be able to imagine a market so fluid that there are market makers and genuine investors out there making bids on the positions they hold. There are many valuable initiatives coming through but they need more take-up from users. There are also competing interests depending on where you are in the cycle. The vested interest from banks to keep bonds trading OTC resulted in relatively slow take-up, and considerable resistance to the move towards electronic trading. Politics is also a factor; for example if one government legislates that their countries’ bonds must be exchange-traded, then that is just one element of what the desks handle. The Chinese markets are a good


Kent Rossiter, Head of Asia Pacific Trading, Allianz Global Investors

example of how hard it is to get people to trade bonds on exchanges. The China interbank bond market (CIBM) which trades the same bonds as are listed on the Shanghai & Shenzhen bond markets, still have the lion’s share of trading volumes. It is clear that bonds can trade in many ways, with different types of broker and market participant – there is a singular lack of consistency in this ‘fractured market’. This is quite unlike Hong Kong equities where nearly all the equities are going to the exchange with the exception of blocks, and even those get reported on the tape. The development of bond trading platforms and tools is very valuable, and we are moving in the right direction but progress is slow. Some effort is being made to reduce the number of different bonds available, although anyone at DCM may disagree given the multitude of new issues they have to deal with daily. It will require the maturation of existing bonds and the retirement of a large number of issues before we really find much success there. With fewer bonds, there is a better chance of being able to trade them more systematically. Right now, it is comparable to the housing market where each and every house is different and you have to look at each one differently. What is needed is a more uniform approach (as it already exists for equities) so that each

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and every bond isn’t another ‘house’ per se but an ‘apartment’ with known dimensions and specifications, and you can buy it or sell it without actually having to visit the property. AllianzGI uses internal systems to share research calls globally and also ensures that traders and fund managers have the correct information and contacts to trade those markets. Traders share, with their main brokers, watch-lists of stocks they are most interested in and they also monitor lists of the largest and most important firm holdings so they can keep the global teams up to date. Kunal Ghosh, Head of AllianzGI’s Systematic Equity Portfolio Management Team (divided between Singapore and San Diego), gives us an example: “I got an early morning head’s up from Kent Rossiter about some news and downgrades on a stock held in the funds. The news was disappointing and the stock was also deteriorating in our quant screening so we were able to react quickly. It takes AllianzGI’s corporate values to heart, being able to ‘understand’ the stock drivers, ‘act’, by using the news intelligently, and work together ‘as one’. We were able to get out near the day’s highs before the stock slid further throughout the day.” A single trading desk also helps with compliance monitoring, fostering product knowledge between each other and across different markets between traders – something that would be more difficult if we were in separate locations. There is a unified TCA benchmark within AllianzGI globally, but this doesn’t mean that teams in different locations can’t have different preferences. Equally, there are further regional differences between the fund managers and the traders; for example, a ‘careful discretion’ (CD) from European or US portfolio managers may actually be executed quite aggressively, whereas a CD from Asian-based PMs may mean that they are more willing to spread the orders out over the trading session.

Until a couple years ago however, there was no reason to roll out an entire derivative trading team in Hong Kong. Once we started trading our first stock options, we saw the number of accounts trading futures increase too. We then traded our first total return swap and also started trading some cross currency swaps. Since launching our global multi-asset futures trading strategies from Asia, it made perfect sense to coordinate these trades with our other global derivatives traders. So where we identify a need within AllianzGI, the systems and knowledge are already in place to roll it out relatively quickly. Skill-sets on the desk Running a multi-asset trading desk inevitably means there are more topics in which our traders have to specialise. There are so many in fact, that the work has been allocated so each trader focuses on a different subject, developing them into the ‘go-to’ trader for that area. We have built these skill-sets on the desk, so whether it’s the application process for IGB’s bond quota or trading NDFs and restricted currencies, we have specialists on the desk who can be tapped for their specific knowledge. The more products there are, the more complex and time-consuming the set-up, legal documentation and monitoring become. For example, if we are looking at a new product for our multi-asset team (e.g. commodity futures or bond ETFs), we can initially trade ‘screen prices’ because order sizes will be modest. As assets grow, so will trade sizes and we will need to access liquidity off exchange (OTC) in a different way, i.e. with CME commodity futures by registering on CME Clearport Clearing, and trading with market-makers, or for bond ETFs, potentially by redemptions and creation of the underlying as opposed to on-screen market making. We are continually striving to do more to offer our clients the solutions they need. We call this AllianzGI 2.0 which is a best practices program of skill-building and bringing our services to the next level – staying ahead of the competition by being ‘best in class’.

Overriding global policy vs. regional practice Historically, our Frankfurt and European teams used more derivatives than other regions, though our US colleagues have also been trading derivatives from New York for years. So too, have the other desks for the trading of futures and single stock options.


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Looking Towards The Japan Electronic Trading Conference th On 5 October In Tokyo

By Japan FIX Trading Community Regional Committee co-chair, Hiroshi Matsubara, Marketing Director, Japan, Fidessa

A couple of key factors have contributed to the global market turmoil (i.e. oil prices, a slowdown in the Chinese economy and US interest rate hike), and these factors have certainly made a very challenging year for trading the Japanese market. As Abenomics and the QE (Quantitative Easing) policy by Bank of Japan are perceived to have recently stumbled a little, Japanese equities have been suffering from shrinking market liquidity and the market is getting quite behind with market performance compared to major markets in the rest of the world. Wider moves towards changing the market structure of Japanese equities trading seems to have somewhat stabilised over the last couple of years. The FFI (Fidessa Fragmentation Index) for Nikkei 225 constituents shows a figure of around 1.1, recently whereas it used to show over 1.2 a couple of years ago, meaning trading is becoming more concentrated. The introduction of smaller tick sizes for the TOPIX 100 universe by JPX in 2014 shifted the liquidity of large caps from PTS, the alternative execution venues, into


the primary market (PTS share is now 3- 4% for the Nikkei 225 universe). In the meantime, the broker dark pool execution percentage of Japanese equities is estimated to remain roughly constant (around 7 % for Nikkei 225) over the past couple of years. The smaller tick size program by JPX also affected HFT trading with market-making strategies and saw some tendency by these participants to stay away from trading Japanese equities. However, the universe of HFT trading has been expanding into mid and small cap shares and the presence of HFT in Japanese equities trading remains well established (the majority of institutional orders are now coming through the co-location service offered by JPX). The use of low touch electronic trading (DMA and DSA), along with access to broker SOR and dark pools, has penetrated into almost all domestic asset management firms in Tokyo. Electronic trading of OTC fixed income instruments is making progress and ETP (Electronic Trading Platforms), the Japanese version of

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“The agenda is in the process of being finalised, but we are planning to invite keynote speakers from the JFSA (the Japanese Financial Services Agency), JPX (Japan Exchange Group) and university professors......” SEF in the US, for trading Yen IRS (Interest Rates Swap) started operation last autumn. In the meantime, by following the ongoing direction of the regulatory review by the SEC and CFTC in the US and MiFID II in Europe, the discussion of a regulatory framework on market structure issues (e.g. HFT, algos and dark liquidity) is now taking place, led by the Japanese regulatory authority. We anticipate some conclusions towards the year end. In order to provide Tokyo market professionals with the opportunity to share updated information on the latest market developments and peer-to-peer networking opportunities, the Japan Regional Committee is currently preparing to host another biennial Japan Electronic Trading Conference in the autumn. Our previous trading summits hosted by the Japan Committee always attract a large number of delegates, and this year we expect between 500-600 to attend. The event is widely recognized as the main event focused on institutional trading in the country. The Committee’s volunteer team (which consists of 13 brokers, a buy-side and four vendor firms) have been spending a lot of time and effort to prepare for the event.

Hiroshi Matsubara, Marketing Director, Japan, Fidessa

Exchange Group) and university professors (on the issues of HFT and corporate governance) and feature panel sessions to discuss key issues of electronic trading that both buy- and sell-sides are facing today (e.g. “Best executions and TCA”, “The latest trading platforms”, “The latest equities electronic trading”). We also intend to catch up with some of the latest discussions related to FinTech by featuring sessions on “AI usage on algorithmic trading”, “The future of Blockchain technology” and “FinTech for retail markets (e.g. Robo Advisors)”. We look forward to seeing many of the readers of GlobalTrading at the event venue in Tokyo in October.

The agenda is in the process of being finalised, but we are planning to invite keynote speakers from the JFSA (the Japanese Financial Services Agency), JPX (Japan


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The TSE Small Tick Program – Impact And Consequences For Japan With Firas Hadj Taieb, Head of Product Solutions, Execution Services, Nomura and Gael Vasseur, Head of Products Strategy, Execution Services, Nomura The Small Tick Program introduced by the Tokyo Stock Exchange (TSE) between January 2014 and September 2015 has deeply modified Japan’s market microstructure and the way domestic and international investors interact. Launched in three phases, the program progressively reduced the tick size of TSE stocks by a significant factor of 2-10 times. Before the TSE changes, alternative venues had significantly smaller tick sizes than the TSE, which allowed market makers to quote within the TSE spread and attract liquidity by naturally providing investors with price improvement. At this time, PTS volumes were above 9% of TSE while dark pools claimed around 6%. The overall market share of alternative venues was growing. On the TSE, because the tick sizes were large there were significant price jumps between each quote, and relatively large spreads. These induced traders to wait, so the queue on the exchange was very important and many algos were tuned for patience. After the tick size change, TSE spreads shrank by about 65%, helping to reduce some of the trading costs. The liquidity that was accumulated (i.e. the orders queued) at the few price levels available before the change began to spread across several more granular levels. Traders can now choose where they want to execute, among multiple prices. In addition, sending the whole order at one price level is often no longer an option as the market can detect the order, increasing the chances of adverse price movements. With every microstructure change, the trading environment is impacted and investors need time to adjust. We believe that the participants most affected by the changes were market makers, who faced smaller spreads and higher intraday tick level volatility, creating more challenging market conditions to provide liquidity on the TSE. At the same time, flow to PTS venues


decreased as the price improvement incentive for investors also diminished. Meanwhile, investors faced liquidity issues as the visible liquidity shrank. However, they welcomed these changes as trading costs decreased. While HFT firms were recalibrating their models and adjusting their strategies, Nomura enhanced client algos and included new features to take advantage of the new microstructure (smaller spreads, thinner order book, higher tick volatility). Improvements in the logic had to ensure that the algos perform as well as before for the stocks with unchanged tick sizes, while allowing a very different behaviour for the stocks affected. Various features, such as advanced order placement preventing information leakage during TSE order placing, revised signals and logics to take liquidity, new logic to interact with dark pools, and a focus on impact reduction instead of spread cost savings were required after the TSE tick changes. In particular, examinations of multiple price levels and introductions of artificial intelligence signals were implemented to help traders capture small price movements and forecast them in the coming minutes. Now that the microstructure is stable, investors are evolving, liquidity is coming back on to PTS and dark venues, and volumes are increasing. Changing tools Traditionally, domestic asset managers used VWAP as the main trading benchmark. It is passive in nature and has a relatively low impact by spreading the order during the whole day. On the other hand, international investors often use arrival price as their benchmark for better control of the execution price and avoidance of market risk. However, this accelerates the execution pace and controlling market impact becomes more important. Whatever the benchmark used, Institutional Investors including the Japanese buy-side constantly express a need for liquidity, especially as the markets get faster,

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Firas Hadj Taieb, Head of Product Solutions, Execution Services, Nomura

Gael Vasseur, Head of Products Strategy, Execution Services, Nomura

“After a long period of recurring changes, Japanese microstructure is expected to stay stable. Circuit breakers and short selling regulations that could affect the microstructure have also been recently modified.”

appreciate dark pools as a means to reduce the volume executed on the main board and limit market impact. Moreover, when spreads are small, the cost saving is less relevant than the overall pressure they put on the price on the main exchange.

while tick sizes, spreads and the order book get thinner. Finding additional sources of liquidity and blocks is their first priority. However, the price difference based on varying benchmarks complicates this search for natural liquidity and, despite a common need for liquidity, often posts a challenge for brokers to help domestic and international investors to interact with each other. In recent months, a convergence has begun and certain domestic Japanese portfolio managers are now switching to the arrival price benchmark and Nomura is helping them during this transition. Domestic and international investors’ trading patterns are aligning, especially in the way traders use dark pools. Investors

Domestic asset managers are now actively moving to a more aggressive style. If they see an opportunity to cross a whole order in a dark pool, they will do so while trying to execute on the exchange. That opens the door to more and larger blocks available in the dark pool which is what offshore investors have been looking for. Future of the markets After a long period of recurring changes, Japanese microstructure is expected to stay stable. Circuit breakers and short selling regulations that could affect the microstructure have also been recently modified. Overall, circuit breakers have been in place for some time in the Japanese market. Similar to other regions, the Japanese regulators are currently reviewing the status of electronic trading in line with the introduction of Europe’s MiFID II regulations. Electronic trading’s omnipresence justifies regular, accurate assessments of how electronic flow is managed, who are the main players and what risk controls are in place to ensure healthy markets.





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.


Source: Fidessa


MARKET STRUCTURE EVOLUTION IN JAPAN: TICK SIZE PILOT It has been two and a half years since the Tokyo Stock Exchange (TSE) introduced a pilot scheme to align their tick sizes with those of the PTSs in Japan. With the TSE’s tick size having previously been set at 1 JPY compared to the 0.1 JPY typically available at Japan’s alternative venues, the scheme also brought them into line with other international markets where tick sizes are standard. Prior to the launch of the programme in January 2014, PTSs were achieving a combined market share of between 8 and 10%, reflecting demand for smaller trade sizes in highly liquid stocks.

Since the introduction of smaller tick sizes TSE’s share of trading has increased and indeed in many stocks they have regained almost 100% share of the market. These dynamics are reflected in a lower FFI value of 1.10 in June 2016, compared to the 1.20 in June 2013 for stocks listed in Japan.

Illustrating the impact of the tick size pilot, the value of trading in Canon stocks on the TSE increased by more than 5% compared with its pre-2014 levels at the expense of the PTSs.

June 2016

June 2013

Source: Fidessa



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80 | FPL

Global Trading – Half year 2016 report By Tim Healy, Global Marketing and Communications Manager, FIX Trading Community guidelines were initially produced in 2012 and have been enhanced since then following feedback from members. This latest stage of the initiative is important as the use of FIX becomes truly multi asset class both at-trade and post-trade.

Tim Healy, Global Marketing and Communications Manager, FIX Trading Community When I was writing a preview of the year ahead for 2016, I wrote that 2016 was likely to be busy and volatile given how January was unfolding. The year has flown by and for the FIX Trading Community it has been marked by a number of successful events, new working groups, ongoing work in initiatives and increasing interest from the marketplace in the work that members have undertaken. London, New York and Hong Kong have provided the locations for three tremendously successful events. Close to 2,000 delegates have attended the three events proving that the value of educational and networking events is core to the community. Technology and innovation are major themes for the membership and addressing the challenges of cybersecurity, the potential of blockchain and the burden of addressing regulation are not just regional issues. Looking ahead in Q3, Mumbai, Stockholm and Chicago will be the venues for FIX events in September. Whilst October will see FIX conferences held in Tokyo and Sydney. The community truly does span the globe and our events for organised by the members, for the members. The FIX working groups have been convening regularly. As a colleague of mine always says “this is where the magic really happens”. The true value of being involved in the community can really only be seen or heard on these calls, where the different market participants meet to discuss challenges and issues in the marketplace. Below I will cover some of the highlights of this year-to-date. The Global Post Trade Working Group are now in the final stages of producing further guidelines for the use of FIX in post trade for a number of different asset classes including equity swaps and options. The original equities


The Cybersecurity Working Group has become extremely active in 2016 and the group members have concentrated efforts on encryption methods, most relevantly Stunnel encryption and router-to-router hardware encryption as well as key storage / key management. The headlines on the threat and reality of attacks have been numerous recently. As will be discussed in this publication elsewhere, the effects of communication and collaboration will be beneficial as FIX members discuss the on-going threats. The Global Buy Side Working Group saw a changing of the guard for the leaders as three new Co-chairs took up their positions in EMEA and a new co-chair for the Americas has taken over to continue the work of their predecessors. The award-winning IPO Initiative continues to make strides and gain more attention from both the market and regulators. Earlier in the year, the Financial Conduct Authority (FCA) in the UK published its interim conclusions on investment banking and the work done by FIX to create a more efficient, less error-prone process for the allocation process has not gone unnoticed. Additionally, the execution venue initiative has moved out from under this group as we are hearing from brokers that their clients are asking for increased granularity in the data so opening this initiative to the broader FIX membership is key so that we can understand the issues across the board in order to get our documentation reflective of what we face in these markets. The expanded group has just recently launched. Whilst looking at the interaction with the regulators, it would be remiss not to mention the work done by the different MiFID subgroups that have been in existence for just over 12 months. Although the timeframe for the implementation for MiFID II has changed, the work being done has continued in earnest. Late in 2015, the MiFID Clock Synchronisation Working Group’s initial goal was publicised - enhancing the FIX Protocol to support higher time stamp resolution to enable market participants

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to be MiFID II compliant. This proactive enhancement highlighted FIX’s ongoing commitment to assist the market with the changing regulatory environment. Additionally, the real value of the FIX Trading Community can be seen in the crossover work being done in a number of the working groups. The MMT Steering Committee are now pushing forward to have a fully MiFID II compliant version of the MMT standard that came under the FIX umbrella in early 2014. Together with the MiFID Transparency Working Group, the aim is to ensure the regulatory technical standards (RTS 1 and 2) are adhered to for pre- and post-trade transparency.

“2016 will no doubt be an incredibly busy year. For all of the working groups and initiatives I have mentioned here, there is a list of at least another 10-15 going on across the globe. The FIX Trading Community remains as relevant as it ever has done as the market looks to us to provide the independent, neutral, business focused platform to debate current issues. As always, I encourage you to find out more about us –” The Best Execution Working Group have worked through a number of different scenarios to provide guidance on reporting obligations for the buy-side, sell-side and execution venues and who will be required to report. This is no easy task given the amount of variables per asset class. Given the scope of both asset coverage and market participant, the working group is also liaising with the reinvigorated TCA Working Group and trade associations to promote their work and ensure no duplication of effort. As the year progresses, it is likely there will be further MiFID working groups initiated as the market looks to the

community to provide that competitive-free platform to discuss the challenges that are confronting them. With regards to new initiatives, a new technical working group started this year to set a standard to map the FIX semantics to JavaScript Object Notation (JSON) encoding. The JSON Encoding Working Group is now making good progress toward providing a Javascript Object Notation encoding of FIX. In recent years, JSON has become a dominant representation of information for the API economy and internet based services. One of the most promising areas of innovation has come from the FIX Orchestra Working Group. Orchestration is the technical term for describing the behaviour of a protocol. There have been frequent calls for a machine readable rules of engagement that can describe the message flows, the message structure under various usage scenarios, conditionally required fields, and the conveyance of state. At the behest of Jim Kaye, the Global Steering Committee Co-chair and John Greenan, long term industry consultant, this led to the formation of the FIX Orchestra Working Group. The working group is set to submit Release Candidate 1 to the Global Technical Committee for approval. The goal of FIX Orchestra is to improve operational efficiency, reduce the time while improving the effectiveness of testing a FIX Service and reduce the time it takes to certify trading partners. In short, the hope is that the FIX Orchestra initiative will reduce the cost of FIX ownership. The FIX Orchestra effort triggered a number of proposed changes to the FIX 2010 Repository structure and as a result there will be a 2016 Repository edition that will be released in a Release Candidate format shortly after the Release Candidate for FIX Orchestra. 2016 will no doubt be an incredibly busy year. As I write this, the uncertainty surrounding financial markets across the globe has caused volatility to increase massively following the UK’s decision to leave Europe. Geo political tension across the region could herald a period of anxiety in the markets. From a FIX perspective, it will be important that we keep a business as usual attitude. Our members value the independence and neutrality. There may well be changes in the direction of regulation and, as an organisation, we will continue to work with regulators across the globe to ensure that we address any changes appropriately.



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 Association of International Wealth Management of India 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 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 Colonial First State Global Asset Management 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 Realty (UK) Limited Dimensional Fund Advisors Drebbel DTCC Eastspring Investments (Singapore) Limited EBS BrokerTec Egypt For Information Dissemination Equinix Esprow Pte. Ltd. ETLogic Ltd ETNA Software Etrading Software Ltd EuroCCP Euronext Paris SA EuroTLX Exactpro Systems 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 FpML Franklin Templeton Investments

Premier Global Members


FXCM Global Services LLC 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 Indian Association of Alternative Investment Funds 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 Linedata Liquidnet LiquidMetrix LIST Group Lloyds Banking Group LSE Group M&G MACD Macquarie Securities Limited


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 National Physical Laboratory 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 Orbis Investment Management Limited 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 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 SS&C Technologies Standard Chartered Bank 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 Vela Trading Technologies Versitrac Systems Corporation VOEB Volante Technologies Warsaw Stock Exchange Wellington Management Company Wholesale Markets Brokers’ Association 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: Association of International Wealth Management of India

Colonial First State Global Asset Management

EBS BrokerTec

Indian Association of Alternative Investment Funds

Lloyds Banking Group

National Physical Laboratory

Orbis Investment Management Limited

Standard Chartered Bank

Wholesale Markets Brokers’ Association

Premier Global Members



My City

Frankfurtam-Main, Germany By Christian Schoeppe, Vice-President and Head of FX Trading EMEA, Deutsche Asset Management

Best thing about your city? Definitely its diversity as probably being one of the smallest metropolises in the world, in which there are lots of different cultures to discover at close hand. On the one hand Frankfurt has the the largest financial center and second-largest airport on the continent, on the other it’s the historical city of coronations, Goethe and the Frankfurt School. The open and hospitable atmosphere in Frankfurt stems from its centuries-old role as a trading center. Worst thing about your city? As a result of the growing demand for real estate in Germany there’s a lot of construction work going on these days around the city causing at times quite heavy street traffic and public transport limitations. On the other hand Frankfurt is trying to create more space for bike traffic - watch this space.. Getting to work? Compared with the megacities in Europe


Frankfurt is a commute-friendly city of short distances even from the surrounding Taunus mountains area. As a Rhineland-born west German I always loved to live nearby the nice little river Main close to the center of the city, so the ride to the office is easy - depending on traffic and weather I go by bike or car, or occasionally jump on the bus or train. View from your desk? Our building is located near the most international and perhaps also most exciting Station district, and from our office we have great views of Frankfurt’s trademark high-rise buildings’ skyline. Since 1998 it’s also the seat of the European Central Bank, which is my favorite architectural view. Where to take your clients/brokers for dinner? Go to the nearby Fat Bull for a nice steak, or the Breeze if you fancy a pan-Asian experience. Roomer’s and and Fleming’s Club are favorites for extraordinary cocktails and

views thereafter. And a relaxed spot with friends and family? Summer is the best time to enjoy a lot of outdoor sports and culture events by visiting one of the numerous festivals or barbecues at the Sachsenhausen river or in the Westend parks and streets - and visit a soccer game of Eintracht Frankfurt and enjoy the unique atmosphere at the Waldstadion. Best place to stay when in town? Villa Kennedy and The Jumeira are ranked highest amongst our visitors at the moment for comfort and views. Best tourist spot? Directly opposite the high-rise buildings, on the other side of the Main, a unique collection of riverbank museums has been developed and these are devoted to different works of music art, from classical to modern. And the next café or restaurant is also not far way.

Building A Global FX Hub  
Building A Global FX Hub