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GlobalTrading’s Editorial Think Tank Dear Readers, The financial industry continues to undergo rapid change in response to technological innovation, cost pressures and competition, as well as regulatory requirements. In recent years, much of the initiative has been taken by the sell-side and vendors, eager to persuade their clients about the merits of their apparently distinctive systems and models.

Bill Hebert Co-Chair, Global Member Services Committee, FIX Trading Community

Sometimes this has led to an entrenched orthodoxy of thinking that, arguably, suits incumbent service providers and the big investment banks with financial muscle. This includes a belief in the preference of multi-asset trading over single-asset platforms, of providing welded order and execution management systems rather than an integrated, mix-and-match of channels, the importing of equities market methodologies to measure trading costs in other asset classes and, even, the ultimate demise of human agency in the face of more efficient automation. However, the buy-side is becoming more discriminating about the products and services on offer, and more vocal about their own needs. Orthodoxies are being challenged. Fund managers are embracing the opportunities provided by the application of Fintech, adopting not just the technology but also the attitudes of the companies that conceive or incubate them. They are also aware of the importance of sensible regulation that prevents exploitation, but doesn’t stifle enterprise. Cybersecurity, especially, is a priority.

Carlos Oliveira Brandes Investment Partners

Greg Lee Barclays

Buy-side firms also want to find and install order and execution management systems that are most appropriate to the businesses that they individually operate. Vendors recognise this, and seek to advise rather than impose. Automation continues to facilitate more efficient trading practices, finding liquidity and reducing dealing costs to the advantage of investors. However, market knowledge and understanding and human networks developed over time and with experience are equally important. All market professionals appreciate the tremendous benefits of new trading technology, but most want to be its master not its slave.

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Michael Corcoran ITG

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Bill Hebert Co-Chair, Global Member Services Committee, FIX Trading Community

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CONTENTS 5

26

33

OPINION

INDUSTRY

5 Asset Managers Embrace Fintech - Bill Stephenson, Franklin Templeton Investments

23 Multi-Asset Trading: Art Or Science? - Joseph Bacchi, Acadian Asset Management

10 Managing Complexity Through Automation - Damian Bierman, Portware

26 Disruption Within A Regulated Industry - Tan T-Kiang, Grasshopper

44 Multi-Tasking For Successful Implementation - Tim Healy, FIX Trading Community 46 FIX Trading Community Members

FOCAL POINT

EUROPE 13 Dealing With Transition - Ambrose Tan, Aberdeen Asset Management (Asia)

BUSINESS STRATEGY

14 Liquidity Is At the Heart Of Asia’s Latest Trading Evolution - Michael Corcoran, ITG Asia Pacific

INSIGHT

29 Valuing Market Knowledge - Carl James, Pictet Asset Management

MY CITY 48 London, United Kingdom - Cathy Gibson, Deutsche Asset Management

31 Redefining The Trading Stack - Ben Jefferys, IRESS AMERICAS 33 If A Tree Falls In The Forest - Chris White, ViableMkts

16 A Buy-Sider’s Market - Michael Chin, Thomson Reuters

36 Straight From The Source - Michael O’Brien, Nasdaq

19 The Achilles Heel Of The Trading World - Brian Ross, FIX Flyer

ASIA 39 The Changing Impact Of Best Execution Requirements - Rupert Walker for GlobalTrading

28

42 Sophisticated Tools For Individual Investors - Jon Evans, BT Private Wealth Markets

48


FOCAL POINT | 5

Asset Managers Embrace Fintech By Bill Stephenson, Senior Vice President, Global Head of Trading, Franklin Templeton Investments

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6 | FOCAL POINT

Disruptive technologies and innovation will enhance speed, scale and accuracy in active asset management, and alternative data will create new sources of alpha. Active and passive investments have moved in and out of favour through various cycles, but at Franklin Templeton, we have always been active in how we think about managing client assets, from security selection all the way through to the dynamic implementation of those strategies on the trading desk. It has always been about technology, data and analytics, but most recently, it has been about faster and more automated technology, alternative datasets, and robust pre- and post-trade analytics. Although we have prided ourselves as being on top of the latest trends and innovations, we have also known that there were likely many great ideas that were unheard. There was no dedicated neutral, noncommercial forum to bring our peers, competitors, innovative ideas, and new thought leaders together in a collaborative setting. That was the genesis of the AIR (Alpha Innovation Required) Summit, first held in early 2014. Last December, we hosted our third annual event in Ft. Lauderdale, Florida. It was attended by about 185 professionals from around the world, and was deliberately kept smaller than other more mass market conferences. With executive support from the top ranks of Franklin Templeton, our president, Jenny Johnson, kicked off the event by describing how innovation is driven by bringing thought leaders together so that we can learn from each other in a collaborative and reflective environment. A community of people who want to think critically about innovation and the future of active management is imperative to our success as an industry. And the true measure of that success is the execution of these ideas, which is by far the hardest step in actual innovation. While the event covered the general topic of innovation within financial technology (Fintech), our focus went deeper. It examined technology that helps a trader, portfolio manager, analyst, or risk manager make a better or faster decision. This sub-

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section alone is massive, where we vetted hundreds of companies a year, but eventually selected 20 to present. In addition, more of the innovation is appearing globally. Five of the presenters in 2016 were from outside the US, up from four and two in 2015 and 2014, respectively. The 20 ideas presented can be truly disruptive within investment management if the vision can be realized by their founders and the potential users of that technology, such as firms like ours.

“Disruptive technology can dramatically change how asset managers pick securities, how they might construct portfolios and how they might trade in the marketplace.” The meaning of disruption By disruptive, we mean technology that can dramatically change how asset managers pick securities, how they might construct portfolios and how they might trade in the marketplace. This could require different skill-sets, but in order to truly innovate, the industry must overcome the fear that certain job functions might change or evolve faster than individuals can learn them. The most disruptive technology will bring speed, scale, and accuracy to a new level. It will also be accomplished with data that doesn’t yet exist or data that isn’t structured to be consumed in a productive way to make real decisions. That is why it will likely become more important for asset managers to build an infrastructure to find, scrub, normalize, model, and inject this data into an existing and proven strategy. Basically, it is the formation of a research and development hub with a team of data experts, quants, data scientists, and investment personnel that understand the full investment process, including the existing “secret sauce”.


FOCAL POINT | 7

Bill Stephenson, Senior Vice President, Global Head of Trading, Franklin Templeton Investments

This is not just plugging a black-box into a fundamental approach: it is about integrating new sources of information that can help better predict fundamental inputs into an investment process. This is no simple task, because it requires a significant investment in people and technology, along with a strong culture that embraces new approaches.

of time in the way it has for decades in the past. The shelf-life for an alpha-generating strategy is becoming shorter, which has been running in parallel to the amount of time it now takes for information to travel. Not only is information dissemination faster than ever, but insight is created from it across a range of data points - almost instantaneously.

Every year we have held the AIR Summit, the feedback at the end of the event is the same: everyone is a bit overwhelmed with the feeling that they are so far behind and by how much they didn’t know existed. It can be staggering to hear how individuals and companies are re-inventing how and why decisions are made, in more and more unconventional ways.

Innovation not only drives our process, it also drives new products faster than ever. Investment products created specifically around new data sets, such as social- or crowd-sourced data, are leading investment managers to find new ways to leverage sentiment to create alpha.

New alpha However, as decision making is re-invented, there may not be a historical process that will stand the test

We call it “new alpha” because outperformance in the future will be driven by new or alternative data sets that are created from potentially unconventional sources. Those sources might be GPS tracking smartphone applications, satellite imagery, car

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8 | FOCAL POINT

affect our process as it will spawn new and improved strategies faster than we could have ever created in the past. The challenge is determining where machine learning fits in the process without creating too much of a black-box approach. At the latest AIR Summit, participants frequently recalled the new HBO series called Westworld, where human-like robots were programmed, as part of a game, to be emotionally nuanced in order to appear more human. As the parallels between the show and the innovations we were discussing for those two days appeared to converge, it seemed that perhaps decision-making could become even more automated in the future, with alpha driven by how well your “bots” can interpret new information in a more human-like way.

“The shelf-life for an alphagenerating strategy is becoming shorter, which has been running in parallel to the amount of time it now takes for information to travel.” insurance information or credit card transaction data - to name just a few. Some of these data sources might not even be considered “alternative” anymore since new primary sources of data seem to be created and monetized regularly, some of which might have been considered useless “exhaust data” in the past. Machines learning to be humans Data scientists, or the professionals who extract insights from data, seem to be hooked on artificial intelligence or, more specifically, machine learning. With machine learning it is all about leveraging data and predictive analytics, and then systematically “learning” and modifying behaviour in the future based on the new insights gained from the data. This could be the most interesting and disruptive force to

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If we consider how far algorithmic trading has come during the past 15 years, maybe the “bots” will eventually be better than humans across multiple dimensions of our investment decision making process. For now, however, we agree with businessman and philanthropist Paul Tudor Jones, who recently said, “No man is better than a machine, and no machine is better than a man with a machine.” Blockchain potential No discussion about Fintech and disruption is complete without mentioning blockchain, which has been one of the most globally-hyped innovations over the past year or so. From the Australia Securities Exchange’s use case for settlements and clearing to the UK’s suggestion that this kind of distributed


FOCAL POINT | 9

ledger technology could help collect taxes, issue passports, and register land – the opportunities within finance and elsewhere are exciting. Yet, although there will likely be significant innovation in and around blockchain technology in finance, such as smart contracts, the impact of it within investment decision making could be much further out into the future. However, given all the research and development (expected to exceed $1 billion by banks in 2017), regional “hack-a-thon” events, and hundreds of global patent applications, it wouldn’t surprise us if AIR 4.0 will feature more on blockchain technologies that touch the investment process.

Whether it is in the trading function or elsewhere in the investment management process, innovation isn’t going away. A different type of thinking, with alternative tool-sets and the associated skills to create new alpha will be in high demand, and a significant investment in pushing forward these innovations will benefit end clients. Embracing Fintech, no matter where in the world it might be developed, is really our only option not just to compete, but to ensure active management thrives.

Finally, if we take a step back and think about all this innovation in the context of a trading operation, then trade execution is where alpha can be created or lost - it’s where the rubber meets the road. It can involve timing, emotion, speed and a host of other factors that can be improved with data, automation, technology, and of course human interaction.

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10 | FOCAL POINT

Managing Complexity Through Automation By Damian Bierman, Head of Asia-Pacific, Portware

Technology provided by third-party systems improves trading efficiency and enhances execution alpha. Buy-side dealing desks, tasked with achieving the goal of best execution, face very real challenges in the face of increased trade volumes and ever-rising complexity. Buy-side cost structure is under pressure around the globe, so adding more headcount is often not the answer. The need to manage large volumes of increasingly complex orders and execute them with quality presents an ideal opportunity for technology to fill the gap, delivering the kind of intelligent trade automation which allows trading operations to scale. Below a certain notional value, for instance, a human trader is unlikely to add much value to a trade. They are not making the best use of their precious time, and likely incurring an opportunity cost in diverting their

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attention away from a more difficult trade where their skill and expertise can drive more incremental value. The challenge, then, is to filter out the noise and provide traders with an alternative way of examining their orders. The aim here is to help identify where the high-value opportunities for intervention lie, and let automation do the rest. In certain ways, trading is already moving towards exception-based management. Technology can be applied to create a framework of intelligent rules that analyses orders when they come in and, if they fit certain criteria, automatically allocates the orders to different buckets for intelligently automated execution. In this scenario, the trader is only notified if something goes wrong, or if a material event occurs that could impact price in an unexpected or unpredictable way, giving the trader a chance to get ahead of it.


FOCAL POINT | 11

Artificial intelligence and predictive analytics to optimize algorithmic trade execution Algorithmic trade execution is another important area where technology is driving efficiencies and performance. A typical institutional buy-side trader could easily have 12 or more broker algo suites on their desk. However, it is almost impossible for a trader to know at any given point in time, with statistical certainty, the optimal strategy to be used to execute a particular order—a challenge that is compounded by the volume of orders they are working on over the course of a normal day. Furthermore, it is not realistic to expect a trader to master the myriad nuances of all of the strategies offered by their brokers. Understanding these

Damian Bierman, Head of Asia-Pacific, Portware

The adoption of this framework has proven efficient, and Portware’s largest clients now automate as much as 70% of their trades. The residual 30% of their order flow that is managed manually is, not surprisingly, the really hard stuff where human expertise has the greatest impact. The traders get to focus their energies squarely on the orders where they’re going to make the most difference, which is both measurable and valuable—and typically, these orders are more satisfying for the trader to work. Other techniques coming into play are centred around synthesizing a wide range of internal and external data points to help trading desks determine both how and where to execute their orders. These take into account factors such as broker commissions payments, or ranking brokers based on past performance for a specific name, sector or capitalization band, and then using those factors to devise a weighting system that determines where a given order should be routed.

“Technology can be applied to create a framework of intelligent rules that analyses orders when they come in and, if they fit certain criteria, automatically allocates the orders to different buckets for intelligently automated execution.” strategies to the degree necessary to deploy them optimally over time for a single order—let alone for an entire day’s worth of trades, many of which will have different characteristics, and often quite different factors influencing price movements and thus the trader’s ability to maximize alpha capture (or minimize alpha degradation, as the case may be)—is a tall order, and technology can help ease the burden. In fact, helping to alleviate that complexity, while at the same time allowing a trader to get the very best from their algo provider of choice – who no doubt has

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12 | FOCAL POINT

poured lots of R&D dollars into the continued development of their execution strategies – is at the heart of some of the most exciting work going on in trading platforms today. The cutting edge of execution technology today offers the ability to work within a particular broker’s algo suite, applying principles of artificial intelligence and predictive analytics to understand not only the key factors likely to impact a given trade, but also take into account the intentions and the style of the portfolio manager that identified the alpha opportunity in the first place. This all feeds models which tailor the execution profile for each order that a trader feeds into the system. Once the schedule for an order is determined, the trade is implemented across the different strategies available to it over the life of the order. Whereas a human trader might only have the bandwidth to look at a given order a handful of times throughout the day – perhaps changing strategies a couple of times at discrete intervals – a system with intelligent capabilities will have the ability to monitor all orders continuously, running a tight feedback loop, tracking execution outcomes in real-time against a set of criteria and dynamically adjusting the execution strategy and its associated parameters automatically, in order to maximize alpha capture. Creating a single, unified trading workspace During the past two-to-three years, clients have told us time and again: “I don’t want my traders looking at two systems anymore.” While it’s perfectly acceptable for the middle office to keep the order management system (OMS) on their desk, and fine if the portfolio managers have it to monitor their positions, the trading desk should not need direct access to both an OMS and execution management system (EMS) in order to trade. Instead, the message we’re hearing is that for any activity a trader might need to conduct in the OMS, whether that’s splitting out an order from a particular account, or aggregating a group of orders for a more streamlined execution, or managing allocations back to the OMS for post-trade processing, the preference – and sometimes even the mandate – from our largest clients is to be able to access these functions directly via the execution platform where they do their actual trading.

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Not only is this “single workspace” concept becoming more evident in the interplay between the OMS and EMS, but we find it also applies to external systems that provide traders valuable colour and insights crucial to efficiently executing their trades. Whether that’s incorporating pre-trade analytics from one or more providers, integrating data from market microstructure experts which can assist traders in seeking liquidity, or acting quickly when material news breaks on a stock they’re tracking, traders have come to expect decision support throughout the trading day.

“Not only is this ‘single workspace’ concept becoming more evident in the interplay between the OMS and EMS, but we find it also applies to external systems that provide traders valuable colour and insights crucial to efficiently executing their trades.” Ideally, all this market information, colour, and insight is synthesized from multiple sources and made available to the trader in the EMS—their trading cockpit—in real time, allowing them to harness the power of that information, making it alertable and, ultimately, actionable.


FOCAL POINT | 13

Dealing With Transition Ambrose Tan, Head of Central Dealing for Equities, Fixed Income, Treasury, Aberdeen Asset Management (Asia) What are the main factors now affecting the dealing desk function? The rapid changes taking place in the regulatory environment and keeping up to speed with these developments are having the greatest impact. As a global fund manager, the inconsistencies in different jurisdictions means we face the additional task of adhering to local laws without breaching others, for instance Dodd-Frank and the European Market Infrastructure Regulation. Is your task becoming easier, or are the benefits of more automation and more sophisticated technology outweighed by regulatory pressure, compliance monitoring and performance assessment? Although advances in automation improve operational efficiency and price transparency, dealing is still bound by strict regulatory, compliance and performance requirements. Automation can address the science of dealing but not the art. What are the best consequences of new technology? The buy-side now has much better access to liquidity and tighter dealing spreads, particularly in foreign exchange. There is still a long way to go, especially in the credit market which remains a game of axes. Do market knowledge and personal networks still have an important role for dealers? They are absolutely relevant and, in fact, essential. An in-depth knowledge and understanding of markets gives the dealer an edge in decision-making for trade execution. How is the dealing desk’s relationship shifting with your company’s portfolio managers? While the portfolio managers make the investment call, the dealing team are their eyes and ears on movements within the trading environment. This relationship remains and is even more critical with increasing information flow these days.

Ambrose Tan, Head of Central Dealing for Equities, Fixed Income, Treasury, Aberdeen Asset Management (Asia) How is the dealing desk’s relationship with vendors and service providers changing? We are demanding more from them as a result of tougher and an increasing volume of regulatory requirements. Also, services and products supplied by vendors are easily replicated and have low-entry barriers - as long as you have enough cash for capital investment. What can be improved or what would you prefer the market dialogue to focus on? Public forums within the buy-side are few and far between - and I wish there were more of them. Is your job becoming more fun or more stressful? Definitely fun, but with it comes the stress. It keeps the dementia away!

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14 | BUSINESS STRATEGY

Liquidity Is At the Heart Of Asia’s Latest Trading Evolution

By Michael Corcoran, CEO, ITG Asia Pacific The pendulum has finally swung to a model where buy-side trading is a valued function in its own right, so brokers must adapt to serve their clients effectively. In Asia Pacific (APAC), institutional trading costs are typically higher than in other regions and have a material impact on fund returns. Fund managers with good Asia trading performance are saving an average of 50 basis points versus those with poor trading performance—enough to move a fund from negative to positive return over the past three years.1 As returns have compressed, managers have needed to look increasingly at reducing the costs of how they put their investment decisions into action. Additionally, best execution requirements are now being driven onto managers not just by regulators, but by investors globally requiring high standards and demonstrable proof of efficient trading processes. Backed by the sweeping changes spreading across borders from Markets in Financial Instruments Directive (MiFID) II’s requirement to unbundle research from trading, the slow drip of asset managers overhauling their APAC trading desk processes has become a constant stream. 1

This new model makes the sole objective of a buyside trading desk the delivery of efficient execution to maximise the investment return, rather than a payment mechanism for other activities. At more APAC firms than ever before, buy-side trading is now considered an activity in its own right, with a discrete existence as a cost and value centre. Particularly now that the shackles of directing trades for research obligations are being unlocked, the pressure on buyside trading performance is stepping up to new levels. A new service model ITG’s execution-only brokerage model has always placed excellence in trading performance as its top priority, but we too must evolve as our clients’ requirements change. We have seen a particular shift in the value placed on liquidity sourcing, and a more pragmatic approach to the broker coverage model to help service those liquidity needs. Buy-side desks increasingly expect a high-touch sales trading style of service from their electronic coverage, suggesting the term “low-touch” should be wiped from the trading dictionary. Our independence and execution-only focus have allowed us to quickly respond. In Asia Pacific, we

Trading cost data sourced from ITG’s Global Peer database of more than 180 buy-side institutions. Fund managers with Asia trading performance in the top 30% save an average of 50 bps versus managers with performance in the bottom 30%. When mapped against annualized performance rankings from Morningstar Fund Selector Asia-ex Japan equity funds, the cost savings over three years, versus fund performance, can move a fund from negative to positive return, and from the 51st to the 38th percentile of performance ranking.

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BUSINESS STRATEGY | 15

“Operating a centralized coverage that extends to single stocks, program and electronic trading ensures a steady and reliable experience for clients across all three execution channels.” offer a coverage model that maximises liquidity opportunities for clients through a consistent, unified service across all execution channels. Operating a centralized coverage that extends to single stocks, program and electronic trading ensures a steady and reliable experience for clients across all three execution channels. They can choose whether they want a single touch point or product-specific support, and they can decide who within their ITG coverage team can see what piece of their trade flow and at any point in time. This drives liquidity sourcing opportunities across trading channels, as client coverage staff collaborate in the client’s interest. Importantly, we are also investing heavily in technology tools that identify real-time liquidity opportunities, enabling our traders to work across trading channels as an extension of the buy-side desk. Harnessing technology We have also seen rapid regional adoption of technology that focuses on liquidity sourcing. POSIT Alert, ITG’s anonymous institutional block-crossing platform, has already set and subsequently beaten its own daily records for value traded in APAC in January and February 2017, demonstrating the ongoing increase of liquidity being transacted through the platform. Now operating in 11 APAC markets, and 37 markets globally, we continue to invest in POSIT Alert to improve the user experience and add new and different liquidity.

Michael Corcoran, CEO, ITG Asia Pacific Asia and Australia—can be presented with relevant liquidity opportunities without having to devote time to looking for needles in haystacks. Because the technology is smart enough to recognise when two or more buy-sides have potential to trade with each other, block opportunities can be discreetly offered within the buy-side community without showing their hand to the street. Furthermore, we are devoting investment and resources to algo development and customisation across APAC and globally. Clients will benefit from algo refinement that improves their trade performance, which in APAC includes new tools for list-based trading, specialist consultation on performance-driven strategy selection models and data-driven changes to strategies that optimise passive fills and spread capture. As asset managers in APAC focus increasingly on measuring and proving trading performance, and finding liquidity, ITG will continue to evolve the service we provide and the products we offer to deliver value for our clients.

The key to success is the scale and reach this technology can bring to the traders’ desktop. Asset managers trading Asian equities from all corners of the globe—including Canada, the U.S., Europe,

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16 | INSIGHT

A Buy-Sider’s Market By Michael Chin, Managing Director, Global Head of Trading, Thomson Reuters

Fund managers are gaining the upper-hand over trade order and execution systems vendors who respond with flexible technology. A significant change is underway in the relationship between the buy-side and the providers of the technology to process trade order management and execution. Budgetary constraints, stricter compliance oversight and the momentum towards extending electronic trading to a wider range of asset classes and geographical jurisdictions make fund managers more demanding. Meanwhile, the number and variety of systems offered by vendors mean they can be more selective. In addition, technology expenditure is shifting from the sell-side to the buy-side, and as a result, vendors are forced to reassess their client base and product suite.

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An increased demand for timely and accurate analytics and risk management emphasises the need for a seamless integration of data throughout the investment cycle, from the front- to the back-office: pre-trade idea generation, execution, post-trade confirmation, end-of-day compliance and final settlement. The buy-side has greater choice, mixing and matching order management systems (OMS) and execution management systems (EMS) from different vendors to meet their specific requirements, opting for the combination most appropriate for the scale and focus of their businesses. This conclusion might seem counter-intuitive. After all, many vendors have invested in and promoted onestop, fully-integrated OMS and EMS systems. But in reality, OEMS products have often proved unsatisfactory because of the inherent differences in


INSIGHT | 17

“A better alternative is to offer discrete OMSs and EMSs that can be synchronised to provide a seamless process that accommodates the different roles that each system plays in a transaction.” Michael Chin, Managing Director, Global Head of Trading, Thomson Reuters

functionality of the two systems and because they often lack the flexibility needed by individual buy-side firms. A better alternative is to offer discrete OMSs and EMSs that can be synchronised to provide a seamless process that accommodates the different roles that each system plays in a transaction. OMSs within buy-side firms transmit trade order communications between portfolio managers and their dealing desks, and provide pre-trade and post-trade workflow to support internal operations. EMSs are at the point of interaction between the dealing desk and the market, managing and executing orders in real time.

standard electronic language for order communications and trade execution. In the staging process, the OMS interacts with the EMS. A portfolio manager has a trade idea, notifies the OMS, and the details appear on the dealer’s EMS screen or blotter. Before it arrives, automated risk checks are undertaken to ensure fund covenants aren’t breached and counterparty limits aren’t exceeded, as well as basic verifications such as confirmation that there is enough cash available to make a purchase or sufficient securities to make a sale. When the transaction is completed, details of the trade then flow back from the EMS to the OMS to update positions and profit & loss. Second, the EMS operates in real time. The trader slices up the order using algos, and the EMS manages information updates immediately. Access to real-time market data and the ability to rapidly filter noise are essential to make trading decisions especially in a low latency environment populated by high frequency trading.

Integrated process There are three main functions within the transaction process, from pre-trade to execution to post-trade that must be incorporated in a successfully joined-up OMS and EMS.

However, this can cause a disjunction in a buy-side firm’s internal process, because most OMSs are not designed to handle real time updates which can lead to a bottleneck in the process.

First, there is staging, which is the link between the OMS and EMS leveraging the FIX protocol, the

Third, the combined system has to meet regulatory requirements for achieving best execution. Transaction

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18 | INSIGHT

cost analysis (TCA) is typically conducted through a real time interactive tool within the EMS that includes a course-correction facility, and supplements the post-trade compliance check.

traders an edge, according to the Greenwich Associate report ,“Move Over, Neighbor: EMS Establishes Residency on the Desktop” (April 2016). Furthermore, it found that seamless integration of the front-middle-and back-office systems is no longer considered a luxury, but are instead a basic requirement.

“In a highly competitive in an ideal world, a fully-integrated OEMS marketplace, vendors are under Although that reduced complexity and costs would meet that need, the options increasingly available to buy-side constant pressure to deliver firms means that they can construct their own unified system and modify or augment it as they enter new more features and functions, markets or trade new asset classes electronically. integrate more tightly, provide more data, cope with different “Technology expenditure is asset types, and reach more shifting from the sell-side to markets.” the buy-side, and as a result, vendors are forced to reassess This desire and requirement for accurate and their client base and product trustworthy real time data provides some vendors an opportunity as buy-side firms adopt open, mix-andsuite.” match OMS and EMS platforms. They can safeguard information integrity by channelling content that is a “single source of truth”. However, in a highly competitive marketplace, vendors are under constant pressure to deliver more features and functions, integrate more tightly, provide more data, cope with different asset types, and reach more markets. The buy-side’s cross-asset trading capabilities are rising and they have an increasing choice of execution strategies. A survey of buy-side traders by a leading independent consultancy last year found that as equity execution venues and tools proliferate, traders want more control over order handling. Active traders require trading functionality such as configurable trading blotters, real-time depth of market data, charting, and alerts. Traditional OMSs provide the baseline capabilities to route orders via brokers’ algorithms, but lack the additional controls and colour that give active equities

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The current environment is sobering for vendors who are used to dictating terms, but provides an opportunity for fund managers to leverage advances in integration tools to adopt a best-of-breed OMS and EMS strategy that suits their own particular purposes.


INSIGHT | 19

The Achilles Heel Of The Trading World

By Brian Ross, CEO, FIX Flyer

Image © Paramount Pictures

There are key measures you can take to protect against cyber-attack and ensure that you are not the weakest link. The legend of Achilles has it that he was dipped into the River Styx by his mother Thetis in order to make him invulnerable. His heel wasn’t covered by the water and he was later killed by an arrow wound to his heel. Although the legend is ancient, the meaning is germane today. Our networks, firewalls and institutions continue to harden, but the world’s most famous hacker knows the truth of cybersecurity. “Companies spend millions of dollars on firewalls, encryption and secure access devices, and it’s money wasted; none of these measures address the weakest link in the security chain,” says Kevin Mitnick, a once notorious hacker and now a computer security consultant. Attackers are smart. They don’t target walls. They hammer against the weakest points of entry. Your trading network is a point of entry and it needs a complete chain of security. Cybercrime is arguably the top systemic threat facing the global financial markets and associated trading infrastructure. Predictions abound of major bank failures as a result of cyber-attack. Finance has long relied on a small number of security measures, mostly focused on heavy security at the edges of the network. But you must find your Achilles heel, if you want to avoid being a big headline in 2017.

Links in your chain Understanding how to secure your trading network means understanding how each link in the chain connects. If your local network is secure, an attacker will attempt entry through your clients. The path of least resistance sees the most aggressive attack. There are eight core components of a strong chain of security: • Attack Vector • Trading Networks • Authentication • Verification • Encryption • Integrity • Air Gap • Incident Response Attack vector Your “attack vector” is the exposed “area of attack” for your FIX network. Minimize your attack vectors as much as possible without impacting your ability to do business. Expose only necessary ports to necessary networks, employ strict firewalls, and implicitly distrust any networks you don’t control. If it’s not your network, it had might as well be public. This is probably the strongest area in trading networks today. Financial institutions rely heavily on security at the network edge. It is important to restrict your exposure to trusted extranets. In the words of Ronald Reagan: “Trust, but verify.”

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20 | INSIGHT

Trading networks Be it VPNs, extranets, leased lines, FIX networks, or cross-connects, your trading network has to reach your clients. The most important thing is to understand the security ramifications of each connection. Does your connectivity provider perform penetration tests? Is the traffic encrypted? Is the connection secured? Encryption is best placed directly on the host and source ends but rarely is this implemented in trading extranets.

“Understanding how to secure your trading network means understanding how each link in the chain connects.” Audit and document your connectivity vendors just as you would your own network. They are an active part of your overall security posture. Authentication The FIX protocol is notoriously weak in authentication. Most FIX connections rely primarily and sometimes solely on cleartext FIX tags 49 and 56: SenderCompID and TargetCompID. Since changing the protocol, or even the software, is often not an option, a solid approach is to use multiple authentication factors. CompIDs, FIX passwords, and source IP/port aren’t perfect, but in combination they are far more effective than clear text CompIDs alone. VPN credentials, SSL certificates, or other more secure means are an improvement.

Brian Ross, CEO, FIX Flyer credential?” A FIX tag is easily discovered (or even guessed) and trivially duplicated. A valid SSL certificate is much more difficult to spoof, with the added benefit of preventing “man-in-the-middle” attacks. Extranets verify that the network you’re talking to is owned by who they say it’s owned by, but they don’t verify what’s inside that network. FIX secured with TLS/SSL can verify the application itself. Encryption Much of the traffic in trading networks is via FIX, which by default is “in the clear.” Anyone with access to any hop of the network can see the data. Perimeter encryption (VPNs) or security (leased lines, extranets) only protect the data over that connection: not in the full path.

Verification Where authentication is difficult with FIX, good verification can mitigate the danger to a significant degree. Even if a client authenticates with valid credentials, are you sure they’re who they say they are? Proving who is on the other side of a connection is an important and often neglected aspect of trading network security.

Wherever possible, leverage protocol encryption. TLS/ SSL is supported directly by modern FIX engines. Even when it isn’t a native option, tools such as stunnel can provide TLS encryption for existing applications. This becomes especially important with sensitive data like pending trades or personally identifiable information (PII).

The question you must ask yourself is: “how easy would it be for a rogue application to mimic this

Integrity Every part of the network you control must be

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INSIGHT | 21

monitored to maintain trust and integrity. This includes your servers and applications. The moment trust is lost in any component of a trading network, the entire environment is potentially compromised. One of your first challenges is to know you are under attack. Intrusion detection systems must be deployed, maintained, and monitored. A stable trading network has baseline levels of expected activity: deviations from this baseline are cause for investigation. Is a previously unused port suddenly listening for connections? Is there unexpected network traffic outside of market hours? The only thing worse than a compromised trading network is when you don’t even know you are compromised. Proactive monitoring can prevent breach attempts as they occur and before they are successful. Air gap Most connectivity options for trading networks provide just that: connectivity. These are direct connections linking two networks. This is a significant danger for trading institutions. Any vulnerability in your system could be exploited by malicious network traffic through direct connections. Wherever possible, “air gap” your most critical infrastructure and avoid direct connectivity from uncontrolled sources. Security is best achieved with an application air gap, often in the form of a FIX engine. Any inbound network packets never touch your trading systems without passing through this application air gap. Counterparty FIX messages are read by a secured FIX engine, and separate FIX messages are sent from that engine to your trading infrastructure. The application serving as the air gap provides a powerful layer of security. Its client-facing interface can be hardened against likely intrusion vectors (for example, buffer overflows or system-level network vulnerabilities), while clean validated trade information is communicated onward to the trading infrastructure. Incident response Plan for disasters even as you work to prevent them. An incident in your trading network is a serious problem. But, far more dangerous is the lack of a coherent response to an incident. You will never be judged by the thousands of successfully avoided

intrusions. Your only record will be your response to the one that got through. Perform regular analysis of the risks to your trading network. What would happen if a client’s network were compromised? How should your operations team respond to a warning from the Intrusion Detection System? What is your template for the post mortem? Every member of your team should know what their responsibilities are in the event of an incident. Any confusion around procedures will delay your response when every second counts.

“You will never be judged by the thousands of successfully avoided intrusions. Your only record will be your response to the one that got through.” Cover your heel If an aspect of your security is strong, a smart attacker will seek an easier path. You have to know where your heel is - your enemies certainly will. Consider auditing and documenting the chain of security in your trading network. If there’s one area that finance is weakest, it’s the “air gap.” Institutions rely so heavily on using secure extranets that they end up trusting whatever comes in over them. Ask your operations team if you have direct connections today. If so, is there a logical gap between your counterparties and your critical trading systems? Deep defence is the future of cybersecurity. Making even a marginal improvement to cover your heel provides the highest return-on-investment in trading network security.

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OPINION | 23

Multi-Asset Trading: Art Or Science? By Joseph Bacchi, Head of Multi-Asset Trading and Investment Operations, Acadian Asset Management

A reliance on electronic tools creates a danger that the human qualities and expertise of a multiasset trading desk are not fully harnessed. Multi-asset class trading is certainly not a new concept, yet it is one that is gathering steam as trading enterprises look not only to expand capabilities and access, but in some cases to narrow headcount and broaden responsibilities. So, the question is: what exactly is the right trading desk model? There are some that contend multi-asset traders should be able to trade any product in any asset class - that is, equity and fixed income - the definition of a generalist. Others endorse a desk consisting of a blend of specialists and generalists with traders that have an overarching knowledge of certain tradable

instruments coupled with those that “sweat the small stuff” – flow versus focus. Both versions are certainly attainable, but are either the right option when put in the context of trading and overhead costs, execution quality and robust relationships with the sell-side? There is a third option, one that is achievable and addresses the demands and needs of a firm that wants the knowledge and flexibility a full service multi-asset class trading desk can provide with the focus realised in a single asset class format. The solution is an asset class generalist who acts as an investment product specialist, or “Genspec.” This is a trader who knows in detail the execution and operational landscape of the specific asset class they travel (equity or fixed income, not both), yet can dig for the gems to add value to the investment process and, ultimately, the client. Here it is critical that a

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24 | OPINION

“The advancement of electronic trading has given us speed that could not have been foreseen at conception, access to liquidity from multiple sources never envisioned and a narrowing of spreads spurred by increased competition for flow.” sharpened quality of execution as well as market and product understanding be the standard, not the broad quantity of knowledge. It is this type of trader that is essential, for he or she understands both the art (the relationship) and the science (execution) of trading.

“science” is completely necessary to any successful multi-asset enterprise (or any trading discipline for that matter), but the focus need not be solely on this one path. The acceleration of the mind-set of bringing as much trading in-house as possible is a natural progression of the electronic age. “Just give us the tools we need and we can do it better and cheaper,” the buy-side says. Who can argue with that? More control and greater access at a potentially lower impact point is a worthwhile pursuit regardless of the investment discipline or marketplace. But, does this thinking run the risk of pushing the pendulum too far from what truly makes a multi-asset class desk unique and viable?

“A Genspec is a trader who knows in detail the execution and operational landscape of the specific asset class they travel, yet can dig for the gems to add value to the investment process and, ultimately, the client.”

The science For the better part of ten years the advent and advancement of electronic trading has transformed the way trading is approached, monitored, benchmarked and executed. It has given us speed that could not have been foreseen at conception, access to liquidity from multiple sources never envisioned and, in most cases, a narrowing of spreads spurred by increased competition for flow. Electronic venues have worked to help all traders not only execute trades in a more efficient and cost effective manner when compared to some traditional methods, but with partners who share the same aim of increased trading effectiveness on behalf of the end client. Or so we thought.

The art The answer is yes. Most market participants are aware of the issues that are still inherent in trading electronically, so that alone should lead to caution before putting all of one’s eggs in that basket. For the multi-asset trader, balance is the key. Here is where the traditional relationships with the sellside, those that are often incorrectly viewed as archaic and costly, strike that necessary balance.

Electronic trading and enhanced capabilities in equities, futures and foreign exchange, have given the buyside trading community access and control like it has never had before. The baby steps into the fixed income marketplace should yield better results as lessons from the equity rollout are documented. This

Trading multi-asset requires an understanding that is born from knowing that one solution, whether that be product type, trading venue or broker relationship, does not solve all. Having options - in trading tools (order and execution management systems, alternative trading systems), in products

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OPINION | 25

(listed/over-the-counter (OTC)/structured) and relationships (traditional/derivatives/electronic) – is the best arrow in the quiver. Here’s the “art.” Access to capital, natural flow, inventory axes, as examples, lend options not only for better execution quality, but to better relationships with the broker community as core competencies are discovered

“Trading multi-asset requires an understanding that is born from knowing that one solution, whether that be product type, trading venue or broker relationship does not solve all.” and can be fully utilized in the future. These are factors that promote the now fading human touch. Since all assets types do not trade electronically, such as OTC and structured products, building these necessary partnerships with the sell-side helps the multi-asset trader in two important ways. First, it provides greater access to trade ideas that can work to reduce overall trading costs while gaining the desired exposures. Second, it increases the knowledge footprint of the enterprise not only by gaining access in potentially better, more esoteric ways, but allows for an increased awareness of the regulatory and operational environments that is critical to any trader these days, especially for those that trade in grey areas, such as OTC. The second point is an exciting by-product of this balanced solution, because it is the trading desk where intuitive, problem-solving, exposure enhancing ideas originate. Being the effective repository of execution quality and end-to-end trade processing is invaluable and permits greater communication with, as well as greater confidence

from, supported investment managers. It will also spur conversations with investment professionals who are interested in learning more about gaining traditional exposures in non-traditional ways. Striking the balance Concentrating too heavily on any one element of trading restricts both innovation and opportunity. Successful multi-asset trading efforts should be a combination of the right environment, the right tools and the right relationships. The focus is to be a front-to-back expert in the asset class one trades; to have access to liquidity and products that lends options to the trade process and yields cost effective results; and an understanding with the sell-side that they are partners, not adversaries. Crucially, they are partners that provide ideas and solutions, yet partners that must accept and agree that the client is the most important part of any trade, not their own revenue stream. It is here that art indeed blends with science and where the “Genspec” trader lives and thrives.

“Access to capital, natural flow, inventory axes lend options not only for better execution quality, but to better relationships with the broker community as core competencies are discovered and can be fully utilized.” Why be a slave to the pendulum when you can be its master?

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26 | OPINION

Disruption Within A Regulated Industry By Tan T-Kiang, Chief Technology Officer, Grasshopper

Financial innovators face pitfalls and hurdles to compete successfully in a highly regulated environment and it’s not for the faint-hearted. Customers around the world claimed to have lost $2.4 trillion in February 2014, when Mt. Gox, a Tokyo-based bitcoin exchange and the biggest in the world at that time, closed trading and took down its website. The decision was made just days after all withdrawals had been suspended and Mt. Gox CEO Mark Karpeles had resigned from the board of the Bitcoin Foundation. Of the missing $2.4 trillion, only about $91 million has ever been recovered to distribute to claimants. Considering that all the Bitcoins in the world only add up to $7 billion, or 0.3% of the claim amount, the mystery surrounding this notorious incident involving the controversial currency is a timely reminder about the dangers of any decentralized and unregulated environment.

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The fact that it occurred within the finance industry, one of the world’s most regulated industries, is a clear warning that we should not disregard the regulations that serve to protect the most vulnerable members of society, even if they seem to hinder and fetter disruption more than innovators and entrepreneurs would like. Of course, disruption itself is an inherent feature of the world today, and an irresistible force in many industries. However, it is a significantly more achievable endeavour and its consequences are more benign in some industries than others. For example, within the technological sector itself, the gaming ecosystem has been singled out for cultivating disruption. With an ever-evolving customer base, that is increasingly diverse but still bound by a collective identity that promotes a high comfort level with adaptation and change, the gaming industry has grown from strength-to-strength.


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“After all, innovation stems from free-thinking, creativity and the capacity to allow for failure – all of which do not meld well with the stiff regulations that govern finance.” In terms of creating compelling content and capturing market share, everything - from content channels to gaming devices - has been disrupted. Long-established gaming heavyweights such as Nintendo and Sony are suffering an erosion of their businesses as relatively new players such as smartphone companies enter the market. In contrast, heavily-regulated industries, such as finance, do not explicitly encourage innovation. After all, innovation stems from free-thinking, creativity and the capacity to allow for failure – all of which do not meld well with the stiff regulations that govern finance. Perhaps, the lack of free food and scattered beanbags in traditional financial firms makes it difficult to attract the top technological talent necessary to drive such change. But jokes aside, it is tough to innovate from within an entity that is so heavily regulated. Many financial institutions have had to pick the necessary evil of diverting their resources into regulatory compliance rather than invest in innovation. Forced into a position where their technological advancement measures are mostly reactive, banks and exchanges have been fending off rising competition from externally-led digital disruption, especially from the burgeoning Fintech sector, where companies have gained significant traction and recognition. These include major players such as Apple, Google and Alibaba, all of which offer payment services that were previously only provided through old-style financial institutions.

Tan T-Kiang, Chief Technology Officer, Grasshopper

Despite the entrenched obstacles that limit the industry’s potential to drive innovation, traditional incumbents that do not increase their level of digital innovation to promote agility and advancement can be sure of one thing – they will pay the ultimate price of becoming obsolete. Incentives to innovate Ranging from automated teller machines, to online banking, to online payments for credit cards, banks around the world have shown that they are willing to adopt new technologies, even if the complex nature of banking systems means it is difficult for these institutions to implement digital disruption. Exchanges, once dominated by established institutions, have been highly adaptable in terms of altering course.

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28 | OPINION

The London Stock Exchange remodeled itself as a clearing and data operator rather than a traditional stock exchange. Futures exchanges such as the Chicago Mercantile Exchange surpassed traditional stock exchanges in value and acquired them, and other exchanges, such as the Singapore Exchange, moved from being primarily open-outcry trading platforms to fully-fledged technology-driven exchanges providing fair trading practices.

“Large entities should work with smaller startups, and indeed, some have already pioneered the use of sandboxes or formed partnerships with fledgling companies to work together on projects and trials.” Meanwhile others, for example the Tokyo Stock Exchange, are investing in revolutionary technology such as blockchain, which they hope could change the way exchanges do business. Moving forward, organisations should collaborate to leverage on their respective strengths. Large entities should work with smaller startups, and indeed, some have already pioneered the use of sandboxes or formed partnerships with fledgling companies to work together on projects and trials. For instance, last year, DBS Bank in Singapore opened DBS Asia X, an innovation hub that has project pods and co-working spaces, that will house 40 startups that were part of an accelerator programme created and run by the bank. Startups can lean on the infrastructure that larger organisations can provide, such as their

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“We should not disregard the regulations that serve to protect the most vulnerable members of society, even if they seem to hinder and fetter disruption more than innovators and entrepreneurs would like.” hardwire expertise in regulatory compliance, established market presence and capital resources rather than building them from scratch. And larger organizations would do well to learn from the startup culture of agility, being willing to embrace failure, and working with iterative improvements without knowing how the end product is going to look like – all traits which are fundamental to innovation and change. Startups that have entered the financial industry and are discouraged by the maze of austere regulation should take heart. For startups that do not have the strength to innovate in an environment strewn with obstacles, it might be a wiser and, perhaps, an easier choice to pick another industry that is not quite as regulated. However, those who believe they possess the necessary mettle, and are able to find the right partners and the best staff, might achieve results that will change the world we live in as well reaping lucrative rewards.


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Valuing Market Knowledge

By Carl James, Global Head of Fixed Income Trading, Pictet Asset Management

Applying equities methodology to measure transaction is unsuitable for diverse fixed income markets, and instead the focus should be on process and dealer expertise. The launch of Markets in Financial Instruments Directive (MiFID) II will herald wholesale, revolutionary changes for fixed income trading. Yet, few dealing desks and even fewer portfolio managers realise the extent of the tectonic shift that will soon re-shape their familiar landscape. An important tenet of MifID II is the unbundling of research and dealing commissions: fund managers will pay directly for the data and analysis they receive from the sell-side, rather than indirectly through channelling orders to brokerage as a reward for their service. Achieving provable best execution will become a key responsibility for the buy-side dealer. The problem is that there is not a clear convention for valuing sell-side fixed income research or how to measure the best transaction price at any given time, which means it is difficult to verify that unbundling has occurred. And it is naïve to think that practices in equities markets can simply be replicated by bond fund managers. Yet, most transaction cost analysis (TCA) service providers are offering systems that attempt to do just that, and hence they fall into a classic error. Generally, they apply variations of an equity metric such as volume weighted average price or implementation

shortfall. They are simply supplanting an equity methodology to fixed income trade analysis. Instead of obsessing about price, TCA should focus on the process to demonstrate that a best execution methodology has been achieved. This is exactly what MiFID II describes as best execution. Checks should be made on the steps taken by the dealer from when they receive an order from the portfolio manager to when they complete it in the marketplace. The process requires judgment based on data analysis and skill derived from experience, not on simply ticking boxes to satisfy a simplistic and narrow view that equity TCA delivers, for example, obsessing about price to the detriment of all other decisions. The fixed income process also follows a logical sequence: a dealer determines whether to trade principal or agency depending on broker axes available; a request for a multiple or single price quote might be conditional on the liquidity of a particular bond issue and the risk that information leakage could disturb the market and distort the price; and a dealer must decide how to incorporate best “hit-and-miss ratios” in counterparty selection. Fixed income is in fact multiple asset classes, whereas equity is a single asset class. Of all bonds a tiny minority trade more than once a day. Therefore, a different style of trade analysis is required, as it is impossible to be certain that a trade was transacted at the best possible price at a specific time. (This is true in any market in the world). There are many different

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30 | EUROPE

“The problem is that there is not a clear convention for valuing sell-side fixed income research or how to measure the best transaction price at any given time, which means it is difficult to verify that unbundling has occurred.” dealing desk is integrated with portfolio managers’ strategies: it is embedded rather than reactive. Carl James, Global Head of Fixed Income Trading, Pictet Asset Management price-reference benchmarks, but none are perfect or universally used. Instead, validating each stage of the trade order and execution process will provide better analysis for dealers to adapt their trading strategy, and clients can be shown substantive evidence of best execution. Dealers embedded in portfolio process The fixed income dealer’s role is changing and, after implementation of MiFID II will become even more central to the investment process. In pre-trade, they provide metrics such as axes, hit and miss ratios and market understanding to help with decision-making. In post-trade, they have a monitoring duty, ensuring that execution is successfully completed, and shining a diagnostic warning light if something goes wrong. Crucially, the dealer also acts as a liquidity consultant, in constant dialogue with the portfolio managers using data analysis to identify liquidity, which brokers have good hit ratios or close miss-ratios and how to transact an order appropriate to an individual portfolio manager’s investment style. In fact, increasingly the

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Moreover, the buy-side should become a price-maker as well as a price-taker. It can post its interests or axes on one of several dealing platforms, improving the opportunities to meet a broker or another buyside participant and hence find alternative sources of liquidity. The financial industry in general and fixed income, in particular, is developing at a rapid pace, and is currently going through a classic maturing phase: increased automation; more regulation; lower margins; less people; and potentially a better product or outcome. The equity markets evolved many years ago and do offer a map or set of guidelines, but not a blueprint for bond trading. The fixed income market is diverse in types of instruments and how they trade. Therefore, participants can learn from the mistakes and inadequacies of the equity markets and deliver their own specific solutions, such as a best execution methodology. Yet whatever way the landscape shifts, the effectiveness of the dealer will be critical over the next few years.


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Redefining The Trading Stack By Ben Jefferys, Head of Trading Solutions, IRESS

Market participants need to take a clear, objective look at their own individual requirements before selecting an appropriate trading system.

accepted that in order to best serve clients now and in the future the solution may in fact be to use separate systems that openly communicate across the stack.

Market complexity and escalating regulation are forcing both brokerages and fund managers to install new dealing technologies. The orthodoxy, in part promoted by influential service providers, is that an integrated multi-asset trading system is the panacea.

To understand why, it is necessary to clarify the purpose of the OMS. In the first instance, its role is to manage order workflow, routing and execution to and from counterparties, exchanges, algo engines and dark pools. In addition, it should control risk and its design must be robust to capture uptime and resilient to ensure minimal disruption.

Typically, we are told that it is the role of the order management system (OMS) to collate order flows from all asset classes within one channel. However, although this is suitable for some firms with sufficient size to bear the high costs of investment and organizational structure to warrant a combined process, it is often less appropriate for others. Unfortunately, many firms feel they have limited choice, compelled to use compromised or over-purposed solutions which are inflexible and hard to change by entrenched supplier incumbents or in-house solutions. Contracting commission pools for institutional brokers, means there is even further consolidation. Moreover, financial markets are highly segmented and tiered which can mean that all-encompassing multiasset OMSs can complicate rather than rationalise processes. Instead, it makes sense to re-define the trading stack. We should firstly recognise that not all sell-side firms are the same, nor are their clients. So it should be

But, the selection of the best OMS depends on other factors too. It needs to be open and flexible, yet easily controlled so that clients’ individual risk can be managed. It must also be scalable and adaptable to changing future requirements, which means it should work for the benefit of the user in all circumstances. Too often a firm is stuck with an OMS that is no longer efficient, unable to swap it for a better system because of prohibitive cost or overwhelmed by the complexity of transferring. Critical to the ultimate decision is whether to opt for a single- or multi-asset model. If multi-asset then what does that really mean? It is especially important now, because the industry is in a state of flux, having to reassess operational practices and structures concurrent with regulatory changes, notably Markets in Financial Instruments Directive (MiFID) II, while making sure it is well-placed to adapt or exploit unforeseen later developments.

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32 | EUROPE

“Many firms feel compelled to use compromised or overpurposed solutions which are inflexible and hard to change by entrenched supplier incumbents or in-house solutions.” Ben Jefferys, Head of Trading Solutions, IRESS Adapting to change In these fluid times, when all industry participants have to make often costly adjustments, it is right to re-evaluate the trading stack and incorporate an ability to react to future structural changes with minimal disruption. There are several key issues to address if considering a multi-asset platform, but they all lie within one fundamental question: does that option really suit my requirements? In fact, am I totally clear on my requirements? For instance, if you need flexibility and specialisation, but lack the economies of scale or the ability to change the whole trading stack at the same time, then an all-encompassing multi-asset OMS might not only be a pipe-dream, but also expensive, defeating the objective of lowering costs. A sell-side firm – even a tier 1 investment bank - whose clients trade different asset classes need to clearly understand what multi-asset capability is required. It’s not a one-fits-all scenario. Indeed, many clients look for specialisation in certain asset classes while maintaining an ability to handle others in a simpler form. Matching your trading stack to your firm’s core capabilities and structure is key. It is not uncommon to see different OMSs used across the asset classes traded by the sell-side. This model has ramifications for the traditional middle office. But it need not be directly coupled to the OMS whereby each system used has its own middle office

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function. Instead it is shared by each vertical system. The sell-side can then bring it all together post-trade when the middle office becomes agnostic to the trading process. At all times this middle office layer remains informed; it is not a disconnected process. This model creates an independent middle office function, integrated with several discrete OMS and execution management systems (EMS). This normalises the middle office workflow and interaction with third party trade processing agents and with of course the back office giving the sell-side full control and flexibility of their post trade process. Another way of redefining the trading stack that we see is to incorporate middle office processing into the back office. If the latter has already been rationalised or restructured, it perhaps makes sense to extend its functionality to cover all aspects of the post-trade lifecycle. When these designs are coupled with an open EMS strategy sell-sides can implement a powerful yet perfectly flexible and specialised multi-asset solution that isn’t limiting in the future. However, there is a fine line between delivering specialisation and flexibility, and introducing cumbersome complexity. Problems often occur when in-house systems are introduced in a piecemeal fashion. To avoid them, it is essential to build your structure like a Lego edifice, making sure the parts fit together according to a plan in order to create the whole.


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If A Tree Falls In The Forest By Chris White, CEO, ViableMkts

Illuminating the true costs of corporate bond electronic trading requires expanding the criteria for evaluating platforms. In the not so distant past, there was a lively debate regarding the usefulness of electronic trading in the corporate bond market. Gradually, as key developments like the introduction of List RFQs (request for quotes) by MarketAxess illustrated the potential market-wide benefits of electronic trading, the tectonic plates that upheld the traditional concept of corporate bond trading shifted. Currently, electronic corporate bond trading has not only evolved to become an essential component for secondary trading, eTrading is considered by many to be the panacea for resolving the perceived corporate bond liquidity crisis. The $64,000 Question (needs adjustment for inflation) The value proposition for corporate bond electronic trading has been most compelling for large, buy-side institutions. Therefore, it is no surprise that increasing eTrading adoption is a priority for many major asset managers. However, at the core of this strategy is a lingering question that grows more important with each year that electronic trading becomes more established: What does it cost to trade corporate bonds electronically? It is very surprising that as buy-side institutions laud

corporate bond electronic trading, very few fixed income asset managers know the true details of their transaction costs. In other modernized markets like equities, asset managers must be intimately aware of transaction cost details for electronic trading for two crucial reasons: 1) Electronic transaction fees can have a material impact on fund performance 2) Finding the best possible price for electronic trading is a part of the “reasonable diligence” mandated by FINRA’s best execution requirements For buy-side institutions to properly incorporate electronic trading into their long-term strategy for corporate bond trading, the current blind spot regarding the true costs of electronic trading must be resolved. More electronic trading volume, more problems On today’s most dominant corporate bond RFQ platform, the original cost model was simple. Dealers paid a subscription fee to have access to buy-side client inquiry, plus a per-trade transaction cost whenever their response to an RFQ resulted in a trade. Buy-side clients were only charged a very small subscription fee (normally waived if they performed a minimum volume of trades per month) and were charged nothing for sending and trading RFQs. All was well in the early days, but as platform activity grew, a flaw in the pricing structure became obvious.

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The more corporate bond dealers embraced electronic trading by responding to, and winning, buy-side RFQs, the more it cost them. Something had to be done to share the RFQ cost burden between dealers and buy-side institutions or the momentum in electronic trading would have come to a halt.

Hear No Transaction Costs, Speak No Transaction Costs, See No Transaction Costs The solution was simple, but brilliant. Embed a transaction fee in the RFQ workflow, never make the cost visible to the buy-side client and collect the transaction fee from the dealer. Wait….what?

It’s so hard to say goodbye to yesterday Creating a model that shifted some of the RFQ trading costs to the buy-side was no small feat. Under the previous cost structure, buy-side institutions were absolved of any material fees, so naturally, there was tremendous push back to the concept of a buy-side transaction fee.

Let’s use a crude example to illustrate the process:

The second challenge was logistical. If an explicit buy-side transaction fee were to be charged on every electronic corporate bond trade, the executing asset manager would have to the transaction fee to the accounts they represent. It is common for a medium to large sized asset manager to represent 100s or even 1000s of sub accounts, which makes properly coordinating bond allocations a Herculean task. Adding more complexity to the account management process by including transaction cost allocations was (and remains) a non-starter for large buy-side institutions.

“For buy-side institutions to properly incorporate electronic trading into their long-term strategy for corporate bond trading, the current blind spot regarding the true costs of electronic trading must be resolved.” Ultimately, the solution that resolved the obstacles facing a buy-side corporate bond transaction fee is the current source of opacity in today’s market.

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Step 1 A buy-side client sends an RFQ bid-wanted request for $200,000 WMT 10 year bonds

Step 2 Dealer receives RFQ and provides a bid of $102.35

Step 3 Before delivering the dealer response back to the buy-side client, the platform adjusts the bid by reducing it from $102.35 to $102.25 (less $.10)

Step 4 Client receives $102.25 bid for their $200,000 WMT bonds and accepts

Step 5

The platform eventually invoices the dealer for the $.10 difference on the WMT trade, plus any other transaction fees collected through other trades.


AMERICAS | 35

If a trade occurs without a visible fee, was it free? Under the then new and now current corporate bond RFQ pricing model, two very interesting paradoxical questions arise: 1) Is this “price adjustment” a transaction fee or not? 2) Are buy-side clients paying? Before we answer the first question, let’s first review the definition for transaction fee: “A charge an intermediary, such as a broker-dealer or bank, assesses for assisting in the sale or purchase of a security” In the example provided, the platform assisted in the sale of the WMT bonds. As compensation for this service, the bid for the buy-side client’s bonds is adjusted lower than the intended bid of $102.35, with the platform realizing the difference between the intended bid and traded bid ($102.35 – 102.25 = $.10 paid to the platform). This is most definitely a transaction fee. The buy-side not seeing the cost doesn’t change that.

“The solution was simple, but brilliant. Embed a transaction fee in the RFQ workflow, never make the cost visible to the buy-side client and collect the transaction fee from the dealer.” As for the second question, from the perspective of the buy-side, the price adjustment inhibits their ability to trade against a more favourable price. This means the buy-side institution and all the clients they represent ARE paying to trade corporate bond RFQs, even if they don’t sign a check against a physical invoice.

Chris White, CEO, ViableMkts with Finra best execution requirements”. This is based on a theory that simply building a network through electronic trading and expanding the network through broader adoption and open protocols realizes the best possible price. To a point, yes, having more participants responding to an RFQ can help improve pricing, but there is a saturation point where the cost benefit of more participants is de minimis when compared to a material reduction in the platform transaction fees. The path towards achieving best-execution in corporate bond electronic trading starts with expanding the criteria for evaluating platforms. Strictly measuring the soundness of a platform based on the number of dealers and average daily volume is woefully incomplete. Platform transaction fees, actively traded Cusips and quality of dealer participants are just a few of the areas that need to be included in the evaluation process. If done properly, any buy-side institution will be able to avoid significant waste and optimize their performance by finding the most appropriate electronic trading environment for their order flow.

Proponents of corporate bond electronic trading will tell you that there is “Growing evidence of the cost savings that can be achieved on electronic platforms may also be helping to align buy-side liquidity provision

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36 | AMERICAS

Straight From The Source By Michael O’Brien, Vice President, Head of Product Management, Global Risk & Surveillance, Nasdaq

Results from Nasdaq’s annual survey on compliance trends is a wakeup call for firms that are unprepared for new regulations. In today’s environment, compliance officers in financial services firms face an array of short-term and longterm challenges. They play a multi-faceted role not only in protecting their organization’s reputation, but also in avoiding legal and regulatory fines and penalties. Going forward, their role will become even more important, so they will need to keep up a high profile. And with regulations getting tougher, and attempts at manipulating markets becoming more sophisticated, they need to leverage advanced technology to accomplish their objectives. These are some of the trends Nasdaq and Aite Group uncovered in Nasdaq’s 2016 Global Compliance

GLOBALTRADING | Q1 • 2017

Survey: Inside the Mind of the Compliance Officer. For the second year, Nasdaq reached out to senior compliance officers in hundreds of firms to try to understand their objectives, organizational structure, budget, regulatory concerns and surveillance processes. The results are based on 114 responses from 82 sell-side firms, buy-side firms and corporates in the U.S., Asia-Pacific, the U.K. and Canada. Most of the respondents concentrate on general compliance or trade surveillance and monitoring, but other areas include anti-money laundering (AML), front-office business, compliance IT/technology and electronic communications. The survey verifies that the compliance role has become more visible, and compliance officers are providing input into strategic decision making. Many respondents – especially those in sell-side and


AMERICAS | 37

buy-side firms – noted that they report directly to the CEO. They frequently collaborate with executive management and have a seat at the table in executive discussions.

“Sell-side firms are more likely to collaborate with the front office on trade monitoring or with business departments, while buyside firms are more likely to collaborate with the legal department.” Moreover, compliance teams are collaborating with other departments including the front office, risk management, legal and executive management. Sell-side firms are more likely to collaborate with the front office on trade monitoring or with business departments, while buy-side firms are more likely to collaborate with the legal department. Vertical collaboration was found to be more common among corporate entities than in investment banks/ brokerages and buy-side firms/advisors. From respondents’ perspective, the compliance department’s most important function is upholding and protecting the reputation of their firm. However, they also believe their firms’ management to be slightly more concerned with regulatory fine avoidance, overall. Interestingly, sell-side firms are most likely to be concerned with reputational risk, whereas corporations are most likely to be concerned with avoiding regulatory fines. Rising regulatory challenges Yet, compliance officers clearly face major challenges when it comes to fully understanding regulation and

how it impacts the firm. Only 16% of survey respondents said that they believe their firm is completely prepared for regulatory changes and implementations to come into effect over the next 12 months, which is extremely worrying considering the amount of investment in compliance resources during the last year. Buy-side firms, in particular, were notably more concerned about new reporting and requirements associated with regulations than both sell-side firms and corporates. Since the financial services industry is global, firms look at regulatory procedures holistically, but the survey reveals that specific areas of concern have shifted. In 2015, it was mainly Dodd-Frank that was consuming compliance officers’ resources. But in 2016, the focus shifted to Markets in Financial Instruments Directive (MiFID) II and Market Abuse Regulation (MAR), which are in the beginning phases of implementation and include several new requirements that are much more stringent and explicit compared to past regulations. One would expect compliance budgets and spending to have increased significantly at most firms across the board. But it is surprising by how much: in percentage terms, spending often exceeded the increase in the firm’s revenue. Budgets are forecasted to increase even more over the next 12 months, albeit at a slightly lower rate. Sell-side compliance budgets are expected to increase slightly less than buy-side firms and corporations over the next year, probably because they are farther up the maturation curve. So how are they going to be spending their budget in the next 12 months? The results indicate that firms will likely become more focused on trade surveillance, AML, regulatory alerts and Know Your Client (KYC). Surveillance technologies, followed by staffing, are expected to be the top areas of investment. About three-quarters of respondents already utilize automated processes and specialized technology for trade surveillance, and they will likely continue to implement both technology and systematic processes in this area. Interestingly, 49% of respondents from the buy-side reported that their traders are executing more trades directly and relying less on their sell-side partners for execution. In addition, 74% reported that they are satisfied or very satisfied with their ability to monitor

Q1 • 2017 | GLOBALTRADING


38 | AMERICAS

“Only 16% of survey respondents said that they believe their firm is completely prepared for regulatory changes and implementations to come into effect over the next 12 months.” programs. One could argue that it will be essential as new regulations come into effect. Michael O’Brien, Vice President, Head of Product Management, Global Risk & Surveillance, Nasdaq

trading activity in listed securities and OTC instruments. However, the survey found that trade supervision, employee/personal trade compliance and electronic communications surveillance are less likely to be automated, so we can expect increased investment in these areas. Currently, sell-side firms are far ahead of corporations and buy-side firms when it comes to automating electronic communications surveillance and AML, so those types of firms will likely be playing a game of catch-up. Notably, buy-side firms are lagging in monitoring electronic communications. Overall, we see increased visibility and collaboration as a positive trend. Financial firms of all types need to do their part to prioritize compliance and make it a strategic initiative, because it is so critical to ensuring fairness, market integrity and investor confidence. Collaboration helps to break down the silos that tend to undermine the effectiveness of compliance

GLOBALTRADING | Q1 • 2017

Clearly compliance officers are taking their job of managing reputational risk and avoiding regulatory fines very seriously – as they should. No one wants to see their firm’s name in a news headline associated with a scandal or, perhaps even worse, be subjected to a regulatory investigation. Still, the results of this year’s survey should be a call to action for firms – sell-side, buy-side and corporations alike – that are unprepared to cope with new regulations in the next 12 months. Now is the time to work with regulators, partners, peers and vendors to educate themselves and stay informed. Those that do not already have automated processes and specialized technology need to get onboard because humans cannot possibly keep up with the volumes and speed of today’s markets. If you would like to read the full report, you can download it at http://nasdaqtech.nasdaq.com/2016-GCS-IB


ASIA | 39

The Changing Impact Of Best Execution Requirements A roundtable write-up by Rupert Walker, GlobalTrading

Collaboration is essential to meet the regulatory challenges affecting the trading process and to ensure technology integration is effective and beneficial. The move towards connecting and amalgamating systems and functions along the trading process and across asset classes seems irresistible. Regulatory requirements, cost pressures, broader investment mandates and operational logistics are driving the integration of technologies both within and between brokerages and buy-side clients. The objective is to achieve seamless and efficient trade order management, execution and settlement that minimises expenses for clients and reduces errors throughout the chain. However, the implementation of measures to attain this ideal outcome reveals new problems, raises questions about what is attainable and casts doubts on the linear nature of this apparently ineluctable trend. In a fast-moving, but often confusing landscape, collaboration among all participants, including buy- and sell-side front and back offices, compliance and legal departments, regulators and vendors is essential. Although the industry is driven by competition, cooperation is needed to meet the challenges posed by

expectations as well as the application of the technologies themselves, agreed panellists at GlobalTrading roundtable discussion hosted by Singapore Exchange (SGX) and sponsored by BNP Paribas Securities Services on 16 November 2016. The changes underway cannot be underestimated. Integration is taking place horizontally across asset classes, which involves adapting to single sources of data yet multi-asset portfolio strategies; and vertically, making front offices more reliant on additional alphageneration from back office information and efficiencies. The catalysts are the globalisation of fund management, regulators’ insistence on best execution and transaction transparency, and higher buy-side expectations as it gains access to the types of technology that was previously supplied by brokerages. Meanwhile, third-party service and product providers need to be more flexible. They can no longer assume clients will make an exclusive purchase across the whole order, execution and post-trade management system; instead they are more likely to mix-and-match from different vendors. Aggregation of systems might make sense if a buy-side client has full connectivity, but less so if its systems are already dispersed among several vendors.

Q1 • 2017 | GLOBALTRADING


40 | ASIA

Most especially, regulatory impositions, such as MiFID II, are transforming the working environment. Their all-encompassing nature leaves few departments within a buy- or sell-side firm untouched, so more internal stakeholders are involved in decision making processes, from strategy to implementation to monitoring. Staff must also be flexible and learn new skill-sets to cope with an overload of information, to comply with new rules and understand the implications of the complex technologies that are being introduced. This creates pressures on time, distracting staff from their areas of expertise and increasing the potential for errors. One response is for both buy- and sell-side to be more ruthless: reducing their number of vendors and counterparties. Meanwhile, firms are tending to develop human capital internally rather than buy expertise from outside. Recognising Limitations Another reaction is perhaps more fundamental. It is

easy to think that the amalgamation of systems is inherently desirable because it is predicated on an assumption that technology consolidation will lead to perfect trade processes. However, there is a growing acceptance that the ideal cannot necessarily be attained and that idiosyncrasies among asset classes and the diversity of pre- and post-trade procedures in different markets mean that complete integration is neither desirable nor feasible. For instance, in Asia buy side execution is not flawless. Success typically relies on local market knowledge and the skilful use of tactics by individual traders, especially in the bond markets. Although the changing dynamics must be accommodated, it makes sense to keep things simple and perform those tasks well. In the past, the emphasis was on installing the biggest and fastest systems, but now the focus is on filtering, ensuring that systems are adopted that are most suitable and relevant for both sell-side and their clients. Some firms are using multi-asset platforms, while others prefer to retain single-asset platforms

Mostapha Tahiri,

CEO and Regional Head of Asset and Fund Services in Asia, BNP Paribas Securities Services, Singapore

Change is underway throughout the trading industry, with consequences across the value chain of the investment process. We can expect more integration between front and back offices, between buy-side and sell-side. There is a need to adapt the business models of brokerages, the strategies of vendors and the interaction of all participants with the regulators. Successful outcomes can only be achieved with collaboration between all key players.

Ambrose Tan,

Head of Central Dealing for Equities, Fixed Income, Treasury, Aberdeen Asset Management Asia Limited

The speed of innovation is exponential, and human capabilities are struggling to keep up. Each firm must work out the prioritisation that suits its own and its clients’ needs, but the sharing of information and collaboration across the industry is critical.

GLOBALTRADING | Q1 • 2017


ASIA | 41

Josephine Kim,

Head of Asia Electronic Sales, Bank of America Merrill Lynch

Best execution is an evolutionary process, not a single destination. It is about the access to data and its interpretation, and the form it takes requires communication among all market participants and achieving a balance.

Li Renn Tsai,

Senior Vice President, Head of Fixed Income Trading, SGX

The problems we face in the fixed income markets are even tougher than for practitioners across other asset classes. The markets are often fragmented, illiquid and opaque, so we have a long way to go.

TK Yap,

Executive Director & Head of Institutional Business, OCBC Securities

There needs to be a greater focus on how to achieve clients’ objectives within the regulatory framework, rather than just concentrating on what needs to be done to ensure regulatory compliance.

which might be less efficient but are less vulnerable to error. Nevertheless, regulation is driving a shift towards consolidation and cannot be ignored despite practical experience that suggests that separation might be best. In Asia, there is state of flux as stakeholders try to determine the best systems to meet regulatory requirements yet ensure operational effectiveness. These will also have to accommodate new disruptive technologies, such as machine learning and AI, as well

as compliance with evolving mandates for “green” or other corporate governance investments. In any case, trading desks are now central to the investment process. Once considered a cost centre, they are now a potential source of value.

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42 | ASIA

Sophisticated Tools For Individual Investors

By Jon Evans, Head of BT Private Wealth Markets

The next logical step in the evolution of execution services is to their application in private banking. The progression of extracting value from trade execution has followed quite a remarkable course within a single generation. In the mid-1990s, fund managers were grimly hanging on to their entitlement to place orders directly to broker sales desks. As the complexity and intensity of that role escalated and the increasingly burdensome requirements of risk and compliance took hold, this jealously guarded function was prised away. The solution lay in specialist “central dealing” teams who interpreted and translated fund manager intentions into concise dealing instructions that were conveyed over telephone lines to sales trader desks for execution. Paper tickets and spreadsheets gave way to order management systems and pre-determined broker panels. Physical time-stamps and manual recording of instructions and trade executions gave way to email and platform messaging. The rate of change that followed was nothing short of breath-taking. By the end of that decade the finance industry was not only in the grip of the dotcom bubble but was looking for a connectivity solution of its own. The answer lay in the establishment of standard protocols by which machines could speak to each other. Although there was widespread awareness, it was a struggle to grasp the magnitude of what had happened. For the first time, orders could be electronically routed

GLOBALTRADING | Q1 • 2017

from institution to broker and almost immediate updates flowed back to the buy-side trader. This development was a watershed. With this enhanced level of oversight came greater responsibility. The buy-side trader began moving away from the fund manager’s clerk and started to add real value by executing well and preserving portfolio alpha. That efficacy previously provided by the sales trader swiftly moved to the institutional desk and, as their internal recognition grew, buy-side traders demanded more visibility and better tools. What followed was unsurprising. Commissions and broker staff numbers declined, the reliance on automated trading technology grew. It was only a matter of time before the fully connected institution demanded direct access to the algorithms that had been provided by the sell-side and had made the magic happen. This shift led to a rapid increase in the quality and level of specialisation on institutional desks as the more professional buy-side trader lobbied for solutions to the limitations raised by incumbent exchanges. The established model was broken and needed to catch up to a new world order of data-crunching trade cost analysis and rapidly declining latency. Expenses fell, leading to a proliferation of exchange traded funds, online retail platforms and, most recently, robo-advisers. Migration to wealth management Furthermore, individual investors grew more confident in their ability to access financial data and many decided to move away from their reliance on the professional


ASIA | 43

“Increasingly, wealthy individuals insist on the same level of execution capability from their private banker as the institutional fund manager had previously.” Jon Evans, Head of BT Private Wealth Markets fund manager and began more closely scrutinising whether the returns and fees represented good value. Those investors, who were wealthy and sophisticated enough, wanted to direct the nature and tempo of their investable assets. Nowhere was this shift more apparent than in Australia where high and ultra-high net worth individual wealth amounts to over $1 trillion and the levels of superannuation per head are among the highest in the world. However, investing your own money is not easy: it requires skill and patience, and when it comes to that point where your money meets the market, it requires a high degree of specialist knowledge. The upshot is that, arguably, the migration of those buy-side attributes has at least one more leg of the journey: the private bank. Increasingly, wealthy individuals insist on the same level of execution capability from their private banker as the institutional fund manager had previously. Specialist trading desks that service these clients now seek to deploy institutional grade execution processes directly to the private investor.

experienced execution specialist, algorithms, alternative venues, block trades and new issuances. And just as the institutional buy-side desk stood by their fund manager, private bank clients want un-conflicted market intelligence that’s delivered on their terms. Nor are these requirements limited to equities. Increasingly they extend to fixed income, hybrids, foreign exchange, structured products and international markets. Frequently, the investor seeks to reduce concentration risk in a specific instrument and requires bespoke protection or cash extraction derivatives written and delivered over the counter. Although the tilt to self-direction in the industry is clearly progressing, it’s not a matter of choosing automated services or bespoke services: it’s about getting the right mix. It is common for a high touch service to be supplemented by online and ultra-low touch offerings such as robo-advice to satisfy client needs for personalised support and self-direction. Existing broker relationships are retained to complement the process. However, one overriding consideration prevails: there really is no substitute for having access to high end execution capability. It is essential to have a trading desk with the best available people and processes if you’re serious about investment performance. Just ask any fund manager.

Often these people run multiple entities: self-managed superannuation funds, family trusts, foundations and charities - so the size of their assets can often match those of an institutional investor. Naturally, they’ve done their homework. They demand access to an

Q1 • 2017 | GLOBALTRADING


44 | FIX

Multi-Tasking For Successful Implementation

By Tim Healy, Global Marketing and Communications Director, FIX Trading Community FIX Trading Community is taking the initiative as markets prepare for the impact of MiFID II and meet new challenges. The second half of 2016 saw a significant uptick in meetings and calls relating to the impending Markets in Financial Instruments Directive (MiFID II) regulation. What became clear, is that the marketplace is keen for FIX to provide some practical answers to the implementation questions and members have stepped up to work collaboratively and set down on paper, guidelines, best practices and workflows. Additionally, changes to the FIX Protocol will occur with new tags and new values for existing tags in order to pass required information between investment firms and venues. Clearly, 2017 will be another busy year for the FIX Trading Community and its members. By the time this article is published, the first in a series of extensions to the FIX Protocol will have been published which covers a number of the requirements of MiFID II, particularly RTS 22 and 24. Without going into specific detail here, what is worth noting is that FIX is endeavouring to make sure that all firms who are under

GLOBALTRADING | Q1 • 2017

MiFID II obligations will have the ability to be compliant in an efficient manner. FIX is ubiquitous in trading and it is important that the enhancements to the Protocol are available for all investment firms. Regulators are keen to see a standardised approach to the solutions that investment firms use to meet their obligations and a unilateral, rather than bilateral, approach is far more sensible and efficient. Away from the regulatory aspect, there were a number of other initiatives during 2016 that members worked on, the aim for these being to bring even greater efficiencies to processes and workflows. Last August, new guidelines were released for the use of FIX in post-trade processing for multi-asset classes. The Global Post Trade Working Group has been working on providing a standardised and detailed set of guidelines for futures, equity swaps and FX equity options for some time now and, with the release of this new document, FIX has addressed issues by providing a common workflow with minimal differences across asset classes. Market participants will be able to reduce risk and have


FIX | 45

the ability to leverage off their current FIX infrastructure in place for trading and, by doing so, minimise implementation time and costs. The Cybersecurity Working Group was particularly active last year. It is a topic that is never far from the news and the headlines and it is important that FIX Trading Community addresses these concerns and encourages information sharing among its members. In addition to updating the FIX Security White Paper earlier in 2016, the working group has been drafting guidelines for the use of a Transport Layer System (TLS) protocol with FIX. TLS is a rich protocol with many features and options and allows for new security functions to be added and vulnerable functions to be dropped. Collaborative efforts FIX Orchestra was conceived as machine readable rules of engagement between counterparties. Anyone who has worked with FIX in onboarding, testing and certification will understand that some of the workflows can be time consuming. The aim was to create a much more efficient process with machine readable rules of engagement with the intention to cut time to onboard counterparties and improve accuracy of implementations. At the end of 2016, the working group was producing a technical standard proposal that will be reviewed and released in 2017.

“Regulators are keen to see a standardised approach to the solutions that investment firms use to meet their obligations and a unilateral, rather than bilateral, approach is far more sensible and efficient.�

Tim Healy, Global Marketing And Communications Director, FIX Trading Community of writing this piece, discussions are underway with a trade association to create a governance structure for maintenance and assigning values and to create symbology which would be used for digital currencies. In a similar way, the Trade Cost Analysis (TCA) Working Group has been working with a buy-side trade association on the original TCA for Equities Best Practices document that was released a few years ago. This new input will serve to enhance the already detailed document and the working group are now keen to move forward to relook at TCA for other asset classes. As you can see, there is a strong air of collaboration in the marketplace at present. FIX is not a lobbying body or a trade association, but is a trade standards body that brings together the actors in the market, as well as the vendors, and affords them the opportunity to look at how the use of standards can address and solve real issues in the market. This neutrality has been recognised by the regulators and trade associations and FIX members are working with both to ensure coordinated action to keep any potential duplication of effort to a minimum. As an inclusive organisation, FIX welcomes new members so if you are not a member of FIX Trading Community and wish to help shape the future of trading, please contact us at fix@fixtrading.org to learn more.

The Blockchain and Digital Currency Working Group have been working on a number of different initiatives relating to post trade and symbology for digital currencies. Although nothing has been firmed up as

Q1 • 2017 | GLOBALTRADING


46 | FIX TRADING COMMUNITY MEMBERS

FIX Trading Community Members *Premier Global Members marked in bold

360T Asia Pacific 42 Consulting Pte Ltd Accedian Networks Activ Financial Actuare AFME- Association for Financial Markets in Europe Albourne Partners Ltd Algomi AllianceBernstein American Century Investments Ancoa Software Aquis Exchange ASIC Association of International Wealth Management of India Australian Securities Exchange AXA Investments Managers Ltd B2BITS EPAM Systems Company Baillie Gifford & Co. Banca IMI SpA Banco Itau S.A Bank of America Merrill Lynch Bank of Ireland Barclays Baring Asset Management BATS CHI-X Europe Baymarkets AB Beijing RootNet Technology Co., Ltd. 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 Devexperts Digital Realty (UK) Limited Dimensional Fund Advisors Drebbel DTCC Eastspring Investments (Singapore) Limited EBS BrokerTec EDMA Europe Egypt For Information Dissemination Emagine Consulting Equinix Esprow Pte. Ltd. ETLogic Ltd ETNA Software Etrading Software Ltd EuroCCP Euronext Paris SA EuroTLX Exactpro Systems Exane BNP Paribas 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 FIX4WARDS FIX Flyer LLC FIXNETIX FIXNOX Flextrade UK Ltd FpML Franklin Templeton Investments FXCM Global Services LLC

Premier Global Members

GLOBALTRADING | Q1 • 2017

Gamma Three Trading, LLC GATElab GETCO Asia Goldman Sachs & Co. GreySpark Guosen Securities Ltd Hatstand HM Publishing Hong Kong Exchanges & Clearing Limited HSBC Bank PLC HSBC Global Asset Management ICMA (International Capital Markets Association) ICE Data Services 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. Intercontinental Exchange (ICE) International Securities Exchange (ISE) 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 LMAX LSE Group M&G MACD Macquarie Securities Limited MAE - Mercado Abierto Electronico S.A. MarketAxess Markit Marshall Wace Asset Management


FIX TRADING COMMUNITY MEMBERS | 47

Mawer Investment Management MDSL 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 QuantHouse Quendon Consulting R3CEV R Shriver Associates Rabobank International Raptor Trading Systems, Inc. RBC Global Asset Management REDI Technologies Research Exchange 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 SimCorp Singapore Exchange SIX Swiss Exchange Skandinaviska Enskilda Banken AB Sloane Robinson smartTradeTechnologies Societe Generale

Softsolutions! Srl Southeastern Asset Mgmt Spectracom 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 Swedbank Robur Fonder AB SWIFT Sycamore Financial Technology Symphony Communication Services LLC Systemware Innovation Corporation (SWI) Taiwan Stock Exchange Tata Consultancy Services Telstra Global The Continuum Partners The Investment Association 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 TP ICAP TradeHeader, S.L. Tradeweb Trading Technologies TradingScreen Traiana (ICAP) Transaction Network Services, Inc. Transatron Systems Trax Tullet Prebon (TP ICAP) Turquoise TWIST UBS Investment Bank ULLINK UniCredit Vela Trading Technologies Verne Global 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: www.fixtradingcommunity.org

Bank of Ireland

www.bankofireland.com

Devexperts

www.devexperts.com

EDMA Europe www.edmae.org

Exane BNP Paribas www.exane.com

ICE Data Services www.theice.com

LMAX

www.lmax.com

MDSL

www.mdsl.com

QuantHouse

www.quanthouse.com

Research Exchange

www.researchexchange.com

Spectracom

www.spectracom.com

Premier Global Members

Q1 • 2017 | GLOBALTRADING


48 | LAST WORD

My City

London By Cathy Gibson, Director and UK Head of FI Trading, Deutsche Asset Management

Best thing about your city? You are spoilt for choice: theatres, museums, art, history, dining, dancing, culture, shopping, parks and river walks. There is always something to see, experience and enjoy.

a brand new building in the Victoria district in the City of Westminster. From there I will have a view of the hustle-and-bustle close to St. James’s Palace, Buckingham Palace, the Houses of Parliament and 10 Downing Street.

Worst thing about your city? Housing isn’t cheap, whether renting or buying – especially if you want a short commute.

Where to take your clients/brokers for dinner? Given the diversity of cuisine available, it depends on your taste and appetite at any particular time. There’s a great Indian restaurant called Amaya and a fantastic French place called La Petite Maison, both in Mayfair. When it comes to dinning you’re spoilt for choice.

Getting to work? I live in central London, so travel to work on the tube which, I have to admit, is a love/hate relationship. Great when it is running on time and I get a seat; horrible otherwise. View from your desk? Currently I don’t have one, but any day now we will relocate out of the City of London to

GLOBALTRADING | Q1 • 2017

And a relaxed spot with friends and family? Kew Gardens. It is one of the world’s most famous botanical gardens, located in south-

west London and great place to relax with friends. On the way in you pass a village green where, if you are lucky, you can watch the English playing their national game - cricket. Best place to stay when in town? I recently came across the Chiltern Firehouse in Marylebone. It’s a small boutique hotel in a converted fire station, very atmospheric and being in central London the location could not be better. Great for drinks or dinner too. Best tourist spot? One of the first tourist things I did when I arrived in the UK was to visit the Tower of London and it still stands out. Founded in 1066, the Tower has served variously as a royal palace, prison, armoury, treasury, menagerie, Royal Mint and home of the Crown Jewels.



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