GlobalTrading 2014 Quarter 2

FIXGLOBAL.COM

Q2 • 2014 • Issue #50

G LO B A LT R A D I N G

Will My Next Trader Sit In A Data Centre?

Mark Northwood, Global Head of Equity Trading at Fidelity Worldwide Investment

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GlobalTrading’s Editorial Think Tank Dear Readers, Prior to the implementation of Regulation NMS in 2007, the inefficiencies in the US markets were characterised by a combination of different factors. For example, exchanges and a growing number of alternative execution venues such as ATS’s and ECN’s were outgrowing their historical and operational frameworks; the listed and over-the-counter/dealer markets were competing, but not providing fair access to each other for price discovery; and best execution, especially for institutional traders, was more often a quest than a consistent and realistic objective.

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

John Goeller Bank of America Merrill Lynch

Betsy Anderson Ignis Asset Management

Reg. NMS, MiFID and other, similar global market reform initiatives were intended to change the inefficiency paradigms, but while improving the situations at hand, led to an entirely different set of circumstances with their own respective benefits and challenges. Quantitative and algorithmic trading is a technological arms race, dark pools have become the norm for institutional anonymity, HFT is still a very popular while controversial topic of discussion, and we’re all reading books like Dark Pools and Flash Boys to try and understand what is actually going on, whether it’s “good” or “bad”, and more importantly how it all affects us and financial services in general.

In this edition of GlobalTrading we have some related and very thought provoking contributions which consider the more contemporary trading, technological and operational working models within global market structure and its continuous progression. We have an interesting perspective on buy side trading and the potential for the “Automated Trader” to become more of a reality; and along with some other regional topics share some insight from the Hong Kong Ecosystem Forum on technology and market integrity.

Please enjoy and thank you as always for your interest, support and contributions to GlobalTrading and the FIX Trading Community.

Greg Lee Deutsche Bank

Carlos Oliveira Brandes Investment Partners

Best Regards,

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

Rob Laible Macquarie Group

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Publishers’ Note GlobalTrading is proudly published by HM Publishing in support of the FIX Protocol and the FIX Trading Community. GlobalTrading is the official quarterly publication of the the FIX Trading Community, however, the content does not necessarily represent the opinions of the FIX Trading Community.

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CONTENTS 6

FOCAL POINT

6 Will My Next Trader Sit In A Data Centre?

- Mark Northwood, Fidelity Worldwide Investment

12

OPINION

34 Circuit Breakers And Closing Auctions: Reforming Hong Kong’s Marketplace - Andy Maynard, CLSA

12 IEX: Redefining The Modern Trading Venue - Ronan Ryan, IEX

- Kent Rossiter, Allianz Global Investors

38 Exchanges And Data: Maximising Value - Eva Saidac, NASDAQ OMX

Canadian Regulator’s Best Execution Survey

- Wendy Rudd, IIROC

16 Trading Today’s Markets - Robert Karofsky, AllianceBernstein

Hong Kong Regulation - Emma Quinn, AllianceBernstein

30

46 Alpha Innovation Required: The Inaugural Conference

Big Data Survey Findings ASIA

54 HKEx Ecosystem Forum: Technology And Market Integrity 59 Asia Trader Forum 60 Kuala Lumpur: The Internal And External Drive For Reform

EUROPE

18 Shining A Light On Market Structure - Anthony Godonis, Aberdeen Asset Management

40 MiFID, MMT And European Market Reform - Arjun Singh-Muchelle, Investment Management Association

64 Summary Of FIX Current Initiatives

INSIGHT

22 Flash Forward! Risk Technology Moves Beyond The Market Access Rule - Brian Ross, FIXFlyer

The FIX Trading Community And MMT - Jim Kaye, Bank of America Merrill Lynch

AMERICAS

25 Large Tick Assets: Implicit Spread and Optimal Tick Size

- Khalil Dayri, Antares Technologies - Mathieu Rosenbaum, University Pierre and Marie Curie 30 The Case For Test Symbology

- Eugene Finkelman, J.P. Morgan

- Gary Stone, Bloomberg Tradebook

- Michael Rude, REDI Technologies

FIX TRADING COMMUNITY

FRAGMENTATION 66 Dark Liquidity In Australia

RESOURCES

71 Company Profiles

44 Who’s Responsible For Transparency - John Kelly, Liquidnet

34

46

HIGHLIGHTS “The human trader has effectively been at full capacity for years; a bottleneck at the centre of an enormous flow of information, which needs to be tied together, understood and acted upon.” P.6 Mark Northwood

“On the back end of things, we’re doing a lot of different toxicity studies and we’re getting vast amounts of day to day data. We’ve ordered a fleet of data servers and we’re starting to look at IEX analytics and how we can best present the flow on our venue.” P.12 Ronan Ryan

“Typically the buy-side is not very vocal in terms of what they want to see; the brokers are normally our eyes and ears to the exchanges. But a positive result from this conversation will be unified communication in terms of talking to regulators and exchanges” P.18

Anthony Godonis

“People should be responsible and know what they’re using; there’s no doubt about that. If you have 10 providers that each provide 10 algorithms, the chances of you understanding a hundred algorithms in enough depth is just not possible.”

P.36 Emma Quinn

“On the issues regarding capital markets however, asset managers, as fiduciaries for their clients, have doubts on whether MiFIR/D II will ensure efficiency and free and fair competition in financial markets.” P.40 Arjun Singh-Muchelle

6 | FOCAL POINT

Will My Next Trader Sit Assessing the potential for trade automation on the buy-side desk.

By Mark Northwood, Global Head of Equity Trading at Fidelity Worldwide Investment When FIX launched in 1998, buy-side desks at traditional asset managers were still adding direct phone lines to their dealer boards, and order and execution management systems (OEMS’s) were often spreadsheets, copied from paper order tickets with actual time stamps. The order routing process of the day was this: [buy-side reads order –> calls/copies details -> sell side re-enters order].

FIX enabled a rapid evolution, starting with the removal of the fallible transmission of order details between humans. The next evolutionary step saw the buy-side trader given the choice to remove the sell-side trader from the process by routing an order with FIX to a box in a data centre where an algorithm (algo) took charge of order placement decisions. The next step could be to remove the buy-side trader from the process as well, resulting in a “no touch” flow.

We know that automation has revolutionised many industries including our own with exchange order matching, market making and arbitrage activity all now handled by machines. So could it work on a centralised trading desk servicing many investment disciplines, and is this where the pursuit of “best execution” is leading us?

The buy-side trading process Regulation sets us all the goal of achieving “best execution”. This term seems valid for small marketable orders, but acquires extra dimensions when applied to large institutional orders. At Fidelity Worldwide Investment we target an optimal balance between net price, volume, speed and certainty for each order.

Simple enough, right? Of course it isn’t, as the optimal result is impossible to determine in the complex, competitive system known as the market. An order book in the market is generally in a state of “fragile” equilibrium: a stable, mean reverting quote distribution persists until one (or more) trader’s algo is too aggressive, triggering a volatility spike as other algos

GLOBALTRADING | Q2 • 2014

react instantly. Such action by one individual’s algo may be in their interest but can disrupt the market for others and tempt them to dial up their aggression as well, adding fuel to the HFT machine. “Best execution” means continuously assessing how the strategy is behaving, and adapting it.

When an asset manager trades for its clients, the best result combines: 1) a good decisions to buy and sell positions, and 2) intelligent and cost-efficient implementation of those decisions.

The two steps have been segregated into specialist skills as firms have grown. Measuring the impact of different types of trade activity on fund performance is essential.

This work is most effective if it spans the entire process, assessing the trading decision itself and not just the execution step.

Traders can then use that analysis to identify ways to improve the decision making step. For example that analysis might show that the so-called fast money tends to over-price news announcements as it anticipates the response by investors, and price reversion is likely hours or days later. Traders could then use such evidence to recommend a disciplined approach when reacting to the “market moving stories” being pushed out by the media and brokers to encourage impulsive activity. So the starting point for further automation is to accurately profile each decision from the Portfolio Managers (PMs) in terms of the many internal attributes which may be relevant to it, plus the external conditions prevailing at the time it is received. This profile will drive the selection of a target execution strategy, incorporating “fair price” bands linked to expected alpha. This would provide more value than an estimated cost, and gets us closer to what could be termed “best execution”.

Human versus machine Today the trader’s desktop is dominated by large screens.

New products and services are pushing more and more information through a graphical interface to a human

FOCAL POINT | 7

In A Data Centre? user with only two eyes, expected to pick what is important from millions of pixels, with a reaction time of 200 milliseconds. The human trader has effectively been at full capacity for years; a bottleneck at the centre of an enormous flow of information, which needs to be tied together, understood and acted upon. That is not to say that human involvement is no longer vital. It is, and I will show this by comparing the relevant capabilities of a good trader to a concept Automated Trader, or “AT”.

The AT envisaged here is more than an autorouter sending small %ADV orders to an IS algo*.

The AT would comply with handling practices for common order combinations, determine an execution strategy from the order profile, continuously check the current state of each order against its target state and assess possible alternative states. Such a “cognitive” OEMS is not yet a reality for asset managers, but many of the required components are in active use at firms engaged in HFT and other systematic trading desks. The proposition is that the time has come to explore whether AT could play a significant role on the buy-side. A subjective comparison of the two contenders follows.

More Buy-side Interviews

Q2 • 2014 | GLOBALTRADING

8 | FOCAL POINT

Features and functions

Trader

Automated Trader

Key attributes

Intelligence, instinct, intuition, curiosity, innovation, speculation, perception, emotion, common sense, adaptability

Speed, reliability, consistency, precision, diligence, compliance, focus, lack of emotion, fault intolerance

Decision making

Heuristic: high level processing, based on experience, intuitive judgement. Can exhibit behavioural bias. Good at identifying cause as opposed to correlation

Logic: pre-defined decision process, can incorporate feedback at light speed as factors vary, rapid access to a large set of data, king of correlations

Input/output

Visual or audio input only. Output via keyboard, mouse and voice recognition.

Potentially multi-lingual, uses jargon. 200 ms latency, can exhibit fat fingers!

Digital, conversion to/from several languages including speech is possible with correctly configured converter. Microsecond latency, or less is possible

Processing speed

Rapid interpretation of graphical data, calculations slow and multi-tasking ability is limited, men especially (allegedly!)

Light speed, millions of calculations per second, rapid access to many connected data sources, parallel processing, advanced modelling

Up time

10-12 hours/day, less on Fridays, interrupted with bio-breaks. Several weeks of vacation outage. Expensive and time consuming to replace and train

24/7 if required with no complaint, some outages for updates and maintenance, easy to replace, upgrade and scale up

Accuracy

Good, but may vary with task, workload and life factors - sleep, mood. Errors occur where information moves between the screen and the brain

100%, within the range of scenarios anticipated.

BUT the many dependencies highlight the risk of catastrophic failure, see below

Dependencies & risks

Experience and judgement, good information sources, clear instructions, network of human relationships. Human error. Directly or indirectly uses algos to place orders in market. Increasingly reliant on exception alerts and checks built in to the OEMS

100% accurate coding and quant work by other humans, good data in, precise, standardised instructions, high speed network & comms, high availability hardware. The key safety feature is detecting when the current state does not qualify as a “normal” state and stopping

Problem solving

Strong: can apply solutions learned in similar situations in the past

Limited to standard, anticipated events. Artificial Intelligence would liven things up though

Cost

Direct cost has stabilised, but cost of IT, space and organisational support (legal, compliance etc) is rising. Adding a trader is cheaper than implementing a new system

The sky is the limit, but AT does require a team of expensive handlers to function: those IT specialists to run it and quants to feed it

Oversight

Traders are good at spotting things that just don’t seem right, this is hard to replicate in code without massive rule sets

The AT is good at spotting things that don’t fit with the model of the normal state. The AT may not know what to do next

GLOBALTRADING | Q2 • 2014

FOCAL POINT | 9

Comment Beautiful mind versus smart circuitry. Each has its place in the team, playing to their strengths The interaction of human and algorithmic decision making is playing out in the markets. AT is taking ground but is not yet fully autonomous The AT wins this on speed and consistency, but input from, and output intended for a human PM will be a challenge

The AT wins this test on sheer horsepower, but will stall if unforeseen situations or exceptions are encountered The AT wins again, sorry

The AT should win this easily but the BUT is very significant. Eliminating human error is creating a conundrum, see below Lots of overlap but in reality a human trader is better equipped to work around the loss of a component. The problem is that the more the OEMS does, the less “hands on” the trader is, losing the connection with the orders. So systems become the primary risk in either case The trader will continue to lead in this area, but the AT may help with scenario testing The buy-side firm bears any incremental cost and risk, whilst the client funds would capture any performance benefit. Proprietary traders have a more direct profit incentive Trader wins here and I see this as a key focus of the role in the future

Mark Northwood, Global Head of Equity Trading at Fidelity Worldwide Investment Broking is a human specialty, so could an AT interact as effectively with a broker, or would a good buy-side trader have better access to information about client flows because of their relationship? A solitary AT in the high and low touch world of today would struggle. But if other firms embraced the concept and more market practices were dragged into the electronic age, AT could operate in a world of message traffic between venues offering a variety of continuous and auction mechanisms for different types of transaction. Block deals could perhaps be offered directly to investors by institutions in specially structured dark auctions, following targeted marketing based on investors’ recent search history... Back in the real world, much of the time the other side of the trade doesn’t yet exist. Sometimes a deal will only come together with a little selling, and that remains something that certain humans have always been good at!

The optimal process An engineer would solve this by designing a process with the human trader doing what he or she does best, and the AT playing to its strengths: The traders monitoring the filtered stream of highly processed information on a single dashboard highlighting exceptions, opportunities arising from others’ clumsy trading , and illiquid names. The AT seamlessly blending new orders into the Auto-OEMS, maintaining integrity of the allocation process without incurring delay and cost from intraday bookings, and making continual adjustments to the price and aggression settings on its trading algorithms as conditions change.

The target operating state for the AT is derived from the

Q2 • 2014 | GLOBALTRADING

10 | FOCAL POINT

analytical profiling described earlier, as are the breaches which trigger intervention. The notable risks would be mitigated through multiple safeguards: constraining the interactions between human trader and machine, independently supervising every part of the process in real time, and instantly suspending activity which violates the normal state.

Canadian Regulator’s Best Execution Survey

“The human trader has effectively been at full capacity for years; a bottleneck at the centre of an enormous flow of information.”

A significant re-engineering of the process would be required, but it is already best practice to record and track the key human inputs, so decisions become electronic instructions flowing through a system. As each component of an AT was developed, it would be inserted into the process under the watchful eye of the specialist trader. The obvious impediment is the huge investment in time and money which would be required, as this would be supplementary to the time and cost of running the business. Experience of the complexity of handling institutional orders, and with getting today’s algos to perform consistently suggests this effort cannot be underestimated. Regulators, for obvious reasons, would also have concerns and are likely to add restrictions and a burden of proof before such trading technology could be widely adopted by the buy-side. Car drivers make fatal mistakes every day, but there will be public outcry the first time an autonomous vehicle causes a crash.

Conclusion The buy-side trader will still have a key role to play in years to come, as will the OEMS but the partnership will evolve as each learns new skills from the other. Over time, the trading system will learn what it needs to take over the order handling and micro-decisions during order execution. Traders will increasingly focus on supervision of the system performance, and using much improved data to consult with PMs, advising on the trade timing and strategy, steering complex orders, assessing market activity for opportunities and only rarely intervening directly in an errant trade execution. *jargon: algorithmic trading strategy targeting an execution price close to the market price when the order is placed, minimising the Implementation Shortfall.

GLOBALTRADING | Q2 • 2014

Wendy Rudd, IIROC Senior Vice President, Market Regulation and Policy A number of IIROC dealer members have requested additional guidance on best execution compliance, given that changes in technology and market structure have increased order handling complexity in recent years.

By conducting an anonymous survey of all dealer members who execute secondary market trades for clients, IIROC was able to gather information quickly about current practices and learn how dealers are achieving best execution for their clients in a multimarketplace environment.

IIROC focused the survey on considerations that affect best execution, including the use of smart order routers, order handling practices, governance and decisionmaking around best execution, access to lit and dark marketplaces, and how dealers treat marketplace fees and rebates. (Maker/taker marketplace fee models are prevalent in Canada.)

The survey is particularly important because the findings will help guide development of further IIROC rules, guidance and policies on best execution.

Certain survey results may lead us to focus on how dealers disclose information to their clients, especially

FOCAL POINT | 11

Frequency of meetings to determine best execution approach.

Category of Dealer Member (Number of Firms)

Ad Hoc

Meet at least Quarterly

Meet Annually

Never meet

100%

0%

0%

0%

Discount Broker (8)

17%

50%

17%

17%

Institutional (31)

45%

26%

10%

13%

Integrated (14)

31%

44%

6%

13%

Managed Account (2)

50%

0%

0%

50%

Proprietary Trading (1)

100%

0%

0%

0%

Retail (18)

50%

17%

17%

11%

Retail Type 1 and 2 Introducers (7)

57%

0%

14%

14%

Total Participants with Best Execution Process (85)

45%

25%

11%

13%

Corporate Finance (4)

This table is excerpted from IIROC’s Best Execution Survey Results. A complete summary of survey results can be found on IIROC’s website, at: http://www.iiroc.ca/Documents/2014/7ee6a32a-09e1-4545-a27d-a8435634c84c_en.pdf

information that could help investors better understand how their orders are handled by their dealer.

Also notable is that, despite the rules that are in place in Canada that would enable investors to receive price improvement when trading with dark liquidity, we found reluctance on the part of some dealers to consider opportunities to trade in dark pools.

Future policy work by IIROC may also include a focus on the level of supervision being undertaken by dealers to ensure best execution is being achieved.

Criteria Influencing Institutional Routing Strategy Participants that are engaged in institutional trading and use a SOR (total of 55) were asked to rate on a scale of 1 to 10 the importance of selected criteria in influencing routing strategy for institutional orders entered during regular trading hours (9:30 a.m. to 4:00 p.m.).

The second tier of important factors included: • client preference (7.7 and 43% rating it a ‘10’); • historically demonstrated liquidity in a security (7.5 and 25%); • latency of execution (7.2 and 24%); and • latency of data (7.0 and 22%).

The third tier of important factors included: • potential crossing/internalization opportunities (5.5 and 12% rating it a ‘10’); and • cost/opportunity to capture rebates (5.1 and 6%).

The least important factor was “a firm’s ownership or potential ownership of a marketplace (1.9 and 3%).

“Order-to-trade ratio” was another reported minor factor influencing institutional routing strategy.

The top tier of important factors included: • current likelihood of execution (8.8/10 and 49% rating it a ‘10’); and • price improvement opportunity (8.2 and 38%).

Q2 • 2014 | GLOBALTRADING

12 | FOCAL POINT

IEX: Redefining The Modern Trading Venue With Ronan Ryan, Chief Strategy Officer, IEX

How are your relationships across the Street developing?

The buy-side is an essential component to ongoing market change. A few years ago the buy-side started asking, “Where are you routing my order?” This has morphed into a demand for more granularity and more control over their orders. By virtue of the fact that the buy-side originated the order, they are owed an explanation of what happens next, and I think IEX is part of the next metamorphosis of this trend. As long as the buy-side continues to realise that they are the key to affecting change in the markets, I think it’s a win-win for everyone.

As we went to roll out the platform, the buy-side helped us get the brokers to connect. So from day one, we had virtually every broker connected to us, which is rare for a venue that’s not owned by the broker community. The buy-side is asking us how best to use IEX; they are the ones helping us with some suggestions. They are working with brokers to configure custom algos to better utilise IEX. So it has just been phenomenal how involved the buy-side has been in this process, and continues to be so.

GLOBALTRADING | Q2 • 2014

And the relationship with the sell-side?

It’s been fantastic. We’re buy-side owned but we only have sell-side subscribers. We currently stand at 69 connected brokers with more in the pipeline. Of the dark pools in the US we’re the only one not owned by the brokers, so this sell-side adoption to our venue is critical to us as we didn’t create a Liquidnet whereby the buy-side comes directly to us. The sell-side at the beginning showed some reservations over us being yet another venue to connect to, but now that we’ve shown some legs and we’re printing some volume, the feedback from the brokers is great. In no way is it the intention of IEX to pit the sell-side versus the buy-side. The only way for this to scale and scale for the greater good of the market and both the buyside and the sell-side, is if we remain neutral.

The sell-side is also setting up meetings for us to meet with their buy-side clients and helping us better configure their systems to interact with IEX. So it’s become very consultative: they are considering our opinion and don’t feel we’re ramming a platform down their throat.

FOCAL POINT | 13

Ronan Ryan, Chief Strategy Officer, IEX

Is there a critical mass for an exchange, and are you there yet?

We’re at a point where we’re breaking even on several days, but I would say there is a “rising tide lifts all boats,” effect. We have a critical mass in terms of the number of brokers and the constituents that are connected to us, but it would be somewhat reckless to start sending vastly more volume to IEX. You need to dip your toe into the water, then dip another toe into the water and slowly build flow.

We currently have the biggest brokers connected to us, but they’re not all going to throw a few hundred million shares our way. We recently ended up at around 0.6 of a percent of overall ADV, which is still big for a venue as young as IEX. What is happening is that the reallocation and the amount of orders that we’re getting, (both the size of the orders, how long each order rests and how many orders we’re getting from the brokers) is growing; not always day by day, but week by week for sure. So it’s a matter of proving ourselves, earning more volumes: the ball is firmly in our court. The buy-side is working with the

sell-side to create custom algos to maybe oversize IEX a little bit more than they would otherwise.

In our first six months, we’ve matched over 3 billion shares. Considering we are a venue that has no broker ownership, no high frequency firms who own us, it’s pretty remarkable but we haven’t let out a sigh of relief yet. If we end today at this volume, we’re making a little bit of money but we haven’t really affected any change. So we’re very happy with where we are, based on the trajectory of how fast we have got here, but we still have a long way to go.

To what extent are you having to redefine how an exchange measures itself against its peers?

We’re still a dark pool and there’s no standardisation as to how dark pools or exchanges report their statistics, which is a difficulty. So, for example, average trade size can be measured in several different ways; we have IEX statistics and we put out daily stats that are very consistent with what other venues put out because that’s what people expect to get from venues.

We also monitor the standard things; we routinely do a hundred thousand share

Q2 • 2014 | GLOBALTRADING

14 | FOCAL POINT

prints, our biggest print to date being around 428,000 shares. The feedback from the buyside when they’re on the side of those trades is very positive; they’re absolutely thrilled.

On the back end of things, we’re doing a lot of different toxicity studies and we’re getting vast amounts of day to day data. We’ve ordered a fleet of data servers and we’re starting to look at IEX analytics and how we can best present the flow on our venue. We have only been operating six months so we don’t claim to have all the answers, but we’re doing a huge amount of analytics, we’re taking all the direct feeds, we save every trade, we’re trying to come up with a better way to measure because at the moment, it’s all about volume and there are certain strategies out there that are just manufactured volume. A common question we are asked is: if IEX is supremely successful, aren’t we going to take volume out of the market and will that impact liquidity? The answer is yes, if IEX went mainstream across all US equity markets, it would take volume out of the market, but it wouldn’t impact liquidity. A lot of volume out there is someone buying from one seller to sell to another buyer in a fraction of a millisecond, which is providing liquidity to a certain extent, but it is unnecessary provision, unnecessary mediation.

So, while we are making an impact because we’re disruptive, we need to learn the industry ourselves in our capacity as venue operators before we go out and tell people what those new benchmarks are.

Is there a point at which something needs to change in terms of regulation, or is this something that’s best served by market solutions?

Clearly our belief is in market practitioners and market solutions. The market doesn’t need or want broad stroke regulatory change. However, we are very supportive of the regulators at IEX and they’re supportive of what we’re doing. What I would say is that the SEC has become far more data driven. So instead of using white papers to base opinions on, now they’re taking in a lot of the data. They’re doing a lot of that analytical work too. We’re very happy to see that the regulators are open to looking at the data but they’re also open to market solutions.

On high frequency trading, we find ourselves defending high frequency trading more often than

GLOBALTRADING | Q2 • 2014

not because it’s another broad stroke definition. In our opinion there are good high frequency strategies, there are some predatory high frequency strategies, there are some that I would call unnecessary high frequency strategies, but there is no single target to shoot at. You have to build a market whereby those unnecessary or those predatory strategies are negated by technology. We are 100% protechnology. We have many high frequency guys working at IEX. There are 34 of us; probably 75% of us are technologists and we took the approach: what would a predatory strategy need to survive? What would it need for an arb opportunity? How do you referee a market so that those things can’t happen?

“Clearly our belief is in market practitioners and market solutions. The market doesn’t need or want broad stroke regulatory change.”

We don’t do maker-taker; we don’t have a whole range of order types. But it’s impossible for any industry practitioner to make a call on who is “good”, “bad” or “unnecessary”. It is probably unreasonable to expect regulators to do it on their own.

Neither speed nor technology is the enemy. Even at IEX, here we are taking in and normalising the market data in 260 microseconds. We’re delaying something by 350 microseconds. That doesn’t mean that low latency technology is bad. It’s just a potential loss of utility. The introduction of technology has had a positive impact. Trading is cheaper. You can’t really argue that, but what we’re saying is that the utility could be greater if certain elements were cleaned up.

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16 | FOCAL POINT

Trading Today’s Markets With Robert Karofsky, Global Head Equity Trading, AllianceBernstein There’s never been a better time for people to invest and transact in the market; the market is as efficient as it’s ever been and trading costs are at an all-time low.

We use dark pools significantly. I think dark volume as a percentage of overall volume is close to 35%, and we’re not exceptional in that. There’s less leakage in dark pools as we’re not exposing our orders to abuse.

It doesn’t mean that dark pools are evil, it just means that there’s information leakage in the lit and we need to use a combination of all these tools to trade. The best and most sophisticated buy-side trading shops, of which we believe we are one, set nothing in stone.

You start trading and you learn throughout the day.

If you don’t find natural liquidity, you trade quietly.

Maybe you trade anonymously, you’re trading electronically, you’re probing, you’re exposing your orders to dark venues and sometimes you just get out of the market altogether. The best way to trade without impact is to be unpredictable and anonymous and that’s what we try to do. We try to be unpredictable, we try not to leave our footprints and so that means doing things differently every day.

Do you think more firms are starting to realise just how important the trading is as an integral part of the overall investment process, or do you think there will always be firms adopting a more fundamental approach?

Robert Karofsky, Global Head Equity Trading, AllianceBernstein desks and the PM’s and analysts pays enormous dividends. There are a lot of firms that look at it this way and I think those are the most successful firms.

I think that it depends. Some PMs think that they own the alpha: they press the button and they decide where they want to get in and get out. We know it couldn’t be further from the truth. I think that the one benefit from all of the noise around high frequency trading and Michael Lewis’s book, is it raises the subject of trading, and it lets people know how complex it is.

If you don’t know where your orders are being executed and if you’re not monitoring accelerated venues and sell-sides, then you’re behind the times and you are obviously making yourself vulnerable to the predators in the market place. That’s why we have invested in our own quantitative trading team and they are constantly evaluating and monitoring these variables and making us highly effective in the market place.

Connecting and navigating all this with terminology in microseconds and microwave technology is daunting; it’s not easy and trading is extraordinarily important. You can look at it two ways: adding alpha or protecting alpha. For me there’s no difference; greater collaboration and coordination between the trading

There are problems in the marketplace though, and I think instead of saying the market’s rigged, it is better to say that there are problems with the market; you have multiple, different economic schemes at different exchanges, and you’ve got multiple order types at various exchanges, which create an environment

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FOCAL POINT | 17

where some people can have an advantage over others. It’s not always the case but it’s certainly a less than perfect marketplace; there are areas to improve and we should all be striving to reach that. This is not to say the market is rigged; there have always been people that have had advantages versus other folks and that’s never changed.

we need to be careful. Saying something is evil and needs to be carved out of the system is too much.

There are some subtle things that can help level the playing field to all participants, but we don’t want to do something that makes people leave. We have got to be very careful to reiterate, trading costs are lower than they’ve ever been – isn’t that the most important thing?

High frequency trading and electronic market making is just an extension or technological evolution of upstairs market making and specialists. We were at a much greater disadvantage under that regime; trading on a stock exchange with specialists who could see the order book at all times. We had one place to trade and they saw the whole picture and nobody else did, and they had their purpose. They had a lot more information than other people and they were a for-profit organisation. So why can’t electronic market makers also make a profit? The way they make profits is by very quickly sizing up supply and demand and taking advantage of that, and buying low and selling high; that’s the way it’s always been done.

How much is regulation being reactionary to populist sentiment?

It happens, but it’s always been happening. If I am working an order with Merrill Lynch and Morgan Stanley calls me and says they’re a buyer of the same stock that I’m trying to buy with another firm, I call that firm and get more aggressive. So that happens within 30 seconds but what is the difference?

People are using information to their advantage.

“If somebody’s scalping you for a penny, it doesn’t matter if they’re scalping you for a penny quickly or slowly.”

There are things that can always be improved but you have got to be careful. Look at the use of steroids in baseball; the regulator called this into question and now the integrity of the entire sport is in a mess. The attack levied by the governing body almost backfired – they could have just tried to control the situation more subtley. If a system basically works, we need to accept that there are always going to be people that use the current environment to their advantage at the expense of others. This is never going to change.

The irony of the current situation is that everybody, including myself, had to Google what’s faster, a millisecond or a microsecond. Who does this really impact? I do agree that there are predators in the market, and some of the high frequency firms are predators. They arbitrage, they exploit the difference in data feeds between the direct exchange feed and the consolidated tape and those things aren’t good, but I do believe that it is often just one high frequency firm versus another. If you look at profits by high frequency in trading firms, they have significantly decreased over the years. It’s a fraction of what it was.

We have built-in systems that tell us when we’re getting gamed, when fill rates aren’t working; when people are running in front of us, we know this. If high frequency firms are speeding up, one positive consequence of that is we’re getting our signals faster as well. It doesn’t work the other way. If somebody’s scalping you for a penny, it doesn’t matter if they’re scalping you for a penny quickly or slowly.

It’s not a perfect system but the question is, what makes a perfect system? If you get rid of high frequency trading by doing certain things, then we go from 6 billion shares traded a day to maybe 3 billion. Is that good for people? You can ask is volume liquidity, or is liquidity volume? I don’t think anyone really knows the answer to that, but it’s somewhere in between so

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18 | FOCAL POINT

Shining A Light On Market Structure With Anthony Godonis, Senior Equity Trader at Aberdeen Asset Management the same situation as the buy-side. We would see a million offered in a given stock, but we’d realise that there’s no way to actually get that whole million. So brokers can’t make a market in that stock because they’re continuing to lose money due to the lack of actual available volume showing on the screen. It is the same situation even when we trade electronically.

What we see on the bid or offer available, is simply not available when we try to interact with it. It disappears.

Typically the buy-side is not very vocal in terms of what they want to see; the brokers are normally our eyes and ears to the exchanges. But a positive result from this conversation will be unified communication in terms of talking to regulators and exchanges.

Anthony Godonis, Senior Equity Trader at Aberdeen Asset Management I don’t think markets are broken, I just think they are very complicated. They’re complicated to the point where we really need to sit back and think about all of the intermediaries within the market, across the 13 exchanges, various pricing models and many dark pools.

There doesn’t appear to be much transparency in terms of understanding just what happens to your order.

The recent conversation around IEX is encouraging as it has a lot of people asking the right questions. So, while I don’t think that markets are broken, I do think that they can become a lot more forthcoming in terms of how orders are routed, how algos choose certain venues, and why things are routed the way they are.

This is the first time that brokers find themselves just as frustrated by the lack of transparency as the buy-side, in regard to accessing liquidity. Brokers offer less risk because there is simply less volume available to offer. I think the issue is that they aren’t willing to take risk because they are experiencing

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In terms of specifics, we have to ask why should some exchanges have inverted pricing models or order types, but not others? Some orders via routers/algos may go ahead and execute on a particular exchange, not necessarily to jump the queue, but to get involved; as they start crossing the spread there are now signals sent out to the market. Without uniform pricing and order types, there doesn’t seem to be a level playing field.

A big part of this inconsistency is driven by Reg NMS. The question is should we rely on brokers to do our routing? I don’t know. I think changing this would alter the relationship between the buy- and sell-side. For instance, if the buy-side starts taking on all the routing on their own, what role would the broker play in terms of helping us execute trades? It becomes about us just using their pipes.

So what is the role of the broker?

There will always be a need for someone to take on risk on both the buy-side and sell-side. I think that if things change to the point where the sell-side knows that they can actually get the published volume that they’re looking at, you might not just see more block trades occurring, but potentially more volume will go back to the exchanges as well. And I don’t think trading on the exchanges is a bad thing; you have much better price discovery there than you do somewhere else.

For instance, on some of the dark pools when there is a lag in time, we have to ask what the best way to

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20 | FOCAL POINT

measure them is. The more volume that stays in the exchange the better opportunity you’re going to have for larger volume trades. I don’t think that’s a bad thing.

This wider conversation is very encouraging for investors because it has ramifications globally.

The US is supposed to be the most efficient market in the world, but this whole high frequency conversation having been exported globally, is affecting every asset class. It’s encouraging to know that there is now a really big focus on it.

What would be on your shopping list to change market structure?

Well, I think a lot of internalisers should attempt to force liquidity back on to the exchanges. I think that would be positive. When you can bring buyers and sellers together in one place, it’s better for price formation, and it’s better for volume. Even if you look at auctions: I don’t know many people that don’t agree with how the auction process works whether it’s countries that have VWAP auctions for 20 minutes or those that just have the Dutch auctions. I don’t necessarily think that’s a bad thing because everyone is on a level playing field. You put in your order, there’s price formation, there’s discussion and you’re not alone. Everyone is included.

A similar situation happens in Brazil, where there are certain parameters that drive an auction. There can be intraday auctions, and when everyone knows what those parameters are, everyone feels like they’re on a level playing field. Admittedly there is only one exchange, but if you trade over a certain amount of the outstanding shares, or the price moves more than a certain percent on a block trade, or if more than a certain percentage of moving volume gets traded; it goes to auction.

It could be one minute, two minutes, it could be one day, two days but everyone knows what the rules are. And I think that we should be aiming to get to a point where everyone knows what the rules are explicitly. We have 13 different exchanges with different pricing and different order types. It’s over-complicated. The market is simplifying some of this on its own initiative: there’s been some consolidation amongst exchanges which I think will probably continue, especially if the rules change, which will probably result in more volume going back to the exchanges.

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“The more volume that stays in the exchange the better opportunity you’re going to have for larger volume trades.”

And the buy-side is getting much sharper as to where their money is going?

I think that the most encouraging part of the current situation is that the buy- and sell-side are equally encouraged to find out answers to get a better solution. There are certain aspects of executing trades where there’s a relationship involved and it definitely adds value. In this unique situation, the sell-side brokers are having as much difficulty executing as we are. We are all agreed; things need to be made more transparent and the rules need to be more explicit and less complicated.

The role of the buy-side trader is to execute trades with the least amount of impact possible. When you trade a block, it isn’t all about speed: you have a conversation, you negotiate and come to an understanding of what the price is going to be and why, what the volume is and you put it on the tape and move on.

It’s difficult when there are no blocks to be had; what’s the best answer other than trading the closing auction?

You sit there and work something in the pipes which leads to all the noise and leakage from the market.

I don’t know what the best outcome would be, but it’s encouraging to know that it’s not just one buy-side shop or one sell-side shop out there deciding everything.

Whatever the answer is going to be, it’s going to be positive because it’s going to bring a lot of things to light; information, transparency, clarity.

I think it will be very good for market structure.

22 | INSIGHT

Flash Forward!

Risk Technology Moves Beyond the Market Access Rule

By Brian Ross, CEO, FIX Flyer Pre-trade risk management is not new to the sell-side or exchanges, but the way it is implemented continues to evolve. Since the Market Access Rule 15c3-5 was enacted, the solutions that were implemented were done on a pre-trade level. However, the complexities of the market today and the compliance within the spirit of the rule call for improved technology for both pre-trade and post-trade surveillance.

resulting in skewed pricing and returns. Being able to monitor and stop this kind of abusive behavior is important. But managing risk is more than just setting limits and waiting for an alert to be triggered, like a speed bump that lacks awareness of previous patterns of information. An effective trade surveillance platform detects deviations from established trading patterns and possible manipulative trading.

The Flash Boys book by Michael Lewis and the subsequent debate highlight the fact that investors have lost faith in the integrity of the markets within and beyond the borders of the US. But investors have not given up completely. They want the trading community, made up of themselves, brokers, exchanges, dark pools, and regulators, to offer solutions for keeping them safe.

Compliance officers and trade support desks must be empowered with tools to effectively monitor for suspicious activity in near real-time. In today’s highvolume trading environment, trade surveillance tools must scale extremely well in order to be effective under unusual, suspicious trading conditions.

Institutional investors are concerned with market participants who leverage predatory trading tactics

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Investors expect that brokers, exchanges and regulators are working together to create a fair market with equal access. And the brokers, exchanges and

Brian Ross, CEO, FIX Flyer

dark pools need to prove to all investors that they are doing everything they can to provide a comprehensive risk management program. And all of this must be done while the buy-side develops ever more sophisticated technology to capture alpha.

“Trade surveillance personnel must be empowered with tools to effectively monitor for suspicious activity in near real-time.”

FIX facilitates a holistic view of risk Up until now, pre-trade risk management has been streamlined for equities. We are moving beyond this one dimensional approach. Today a broker needs to aggregate exposure across multiple asset classes – meaning equities, options, futures, fixed income, commodities, and currencies. Derivative markets face the same fundamental issues as equity markets, such as risk and orderliness; the technology can be extended with a minimum investment.

In the US and other developed markets, regulation and oversight of derivative markets is less mature than that of equities markets, making pre-trade risk management and trade surveillance systems a critical concern for brokers, exchanges and regulators. For example, derivative products continue to shift to exchanges, such as certain swaps to Swap Execution Facilities (SEFs), pre-trade and post-trade risk management must be put in place.

FIX makes it possible to get a single view across clients and asset types. Although the characteristics of the various asset types can be very different, the workflow for orders across the different asset types is very much the same. FIX is the lingua franca for trading across asset classes, simplifying risk management across asset classes

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RISK MANAGEMENT

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24 | INSIGHT

and facilitating a holistic view of trading activity. A FIX-based platform can provide a centralised view of all of a counterparty’s trading and positions in real-time. This protects the broker from a client exceeding its financing intraday or a client from an excessive margin call. The broker is also able to use this consolidated view to manage other risk and compliance related items, such as corresponding clearing.

“All participants are responsible for risk management and market surveillance because everyone has a stake and everyone shares the same goal.”

FIX is effective at allowing different payloads within the same workflow, dealing with all of the idiosyncrasies at many firms, and allowing for nuances in the data. While that variability can sometimes complicate the normalisation of data, imagine how much worse it would be without FIX. A big moment in understanding pre-trade risk came when the FPL Americas Risk Management Working Group released the Recommended Risk Control Guidelines in June of 2012. The document targeted brokerage firms in the US that were looking for best practices and a common nomenclature. Since then, we successfully introduced it into emerging and frontier markets and it has accelerated the dialogue around risk for both the brokers and exchanges. In addition, it allowed vendors like FIX Flyer to educate and engage this new community who wanted to be compatible with global standards. This is an excellent example of how the FIX Trading Community has gone beyond data definitions and protocol specifications into real business workflow.

Integration is easier with a properly defined FIX interface.

FIX is common all over the world. Implementing pre-trade risk workflow when the local OMS can accept the workflow in FIX makes integration standard. For example, we have integrated the same core logic in Mexico and Turkey and even though each market is different, each with their own regulatory rules, we can provide a workflow, data dictionary and an integration that works. New

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pre-trade risk DMA gateways along with critical trade surveillance technology let local brokers provide a great experience to the users and lets the emerging and frontier markets plug into the world’s capital market systems.

It takes many to create a trusted global market.

All participants are responsible for risk management and market surveillance because everyone has a stake and everyone shares the same goal.

Trust in markets comes from transparency and mutual alignment of individual interests. For example, an institutional buy-side trader trusts that markets are fair and brokers act in their interests, or they will take their business to someone who does. When discussing pre-trade risk with a large broker, we have been told “If all of my clients were Fidelity and Wellington, then we would not need risk controls. When we attract business from other firms, we need to keep it safe for everyone.”

If participants don’t help ensure markets are effective, the result will be more heavy-handed oversight and regulation.

We are in a time where there is a lot of focus on HFT. Failures in electronic trading can be attributed to poor programming; a lack of rigorous testing; or people deliberately programming their systems to gain an unfair advantage. Those in the latter camp are just using the markets as a tool – if that tool is unavailable then they’ll find another. The fact is that the tool is not the problem, but the people are. A single counter-party can wreak havoc with a system malfunction or questionable trading behaviors, causing investors to lose trust in the market.

As we described before, the global capital markets have become complex and interconnected as technology has reduced the barriers to trade in local markets and across global borders. Exchanges and governments in frontier and emerging markets are eager to attract capital. But they are looking to the developed countries to use the same general structure and understanding of risk controls.

Thankfully, new technology is being applied to shore up the integrity and performance of the global capital markets.

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Large Tick Assets: Implicit Spread and Optimal Tick Size

By Khalil Dayri, Antares Technologies and Mathieu Rosenbaum, Laboratory of Probability and Random Models, University Pierre and Marie Curie (Paris 6) This paper is based on the article [1].

Abstract We provide a framework linking microstructural properties of an asset to the tick value of the exchange. In particular, we bring to light a quantity, referred to as implicit spread, playing the role of spread for large tick assets, for which the effective spread is almost always equal to one tick. The relevance of this new parameter is shown both empirically and theoretically. This implicit spread allows us to quantify the tick sizes of large tick assets, to anticipate the

consequences of a change in the tick value, and to define a notion of optimal tick size. In particular, our results allow us to forecast the behaviour of relevant market quantities after a change in the tick value and to give a way to modify it in order to reach an optimal tick size. Thus, we provide a crucial tool for regulators and trading platforms in the context of high frequency trading.

1) Tick value, tick size and spread On a given market, the tick value of an asset is the smallest interval between two prices. It is a well-defined

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quantity, measured in euros, dollars, etc. However, when it comes to actual trading, the tick value is given little consideration. What is important is the so-called tick size. A trader considers that an asset has a small tick size when he “feels” it to be negligible, in other words, when he is not averse to price variations of the order of a single tick. In general then, the trader’s perception of the tick size is qualitative and empirical, and depends on many parameters such as the tick value, the price, the usual amounts traded in the asset and even his own trading strategy. Thus, the tick size is basically a subjective and ill-defined quantity. Nevertheless, we can still distinguish between small and large tick assets.

Indeed, an asset is usually said to have a large tick when its bid-ask spread is almost always equal to one tick .

This work focuses on large tick assets and addresses the following questions: - For small tick assets, the spread is a good proxy for the tick size. In the case of large tick assets, for which the spread is essentially equal to one tick, how to quantify the tick size?

- There exist some special relationships between the spread and some other market quantities. However, they are not valid for large tick assets since the spread is mechanically bounded from below by the tick value.

How to extend these studies in the large tick case?

- When the tick value changes, what happens to the microstructure of the asset?

- Can we define an optimal tick value?

zones, see [3]. In this model, there is an underlying latent price, called efficient price, representing at any time some average opinion of market participants about the value of the asset. Depending on the position of the efficient price in the bid-ask spread, market orders are buy orders only, sell orders only, or can be of both types.

The implicit spread is defined as the size of the interval where both buy and sell market orders can occur.

Furthermore, it is shown to be equal to 2ηα, where α is the tick value and η is the microstructure parameter of the asset which summarizes all its microstructural features (high frequency volatility, correlations of the returns, ...) see [3]. The parameter η lies between 0 et 1/2 and the larger η, the less intense the microstructure effects are. Furthermore , η can be very easily estimated from market data as follows: η = Nc / 2Na, where Nc is the number of continuations on the considered time period, that is the number of (last traded) price moves whose direction is the same as the one of the preceding move, and Na is the number of alternations, that is the number of price moves whose direction is opposite to the one of the preceding move.

On various large tick assets, listed on different exchanges, we show that the relationship between spread and volatility per trade still holds very well, provided that the conventional spread is replaced by the implicit spread 2ηα, see Figure 1.

2) The spread-volatility relationship and its consequences In general, for small tick assets, over a given time period, the average spread is proportional to the volatility per trade defined by σ / √ M, where σ² and M stand respectively for the cumulated price variance and the number of trades during the considered time period.

From a theoretical point of view, this relationship can be well understood using a market makers / market takers dichotomy, see [2, 4]. Empirically, it is impressively well satisfied on data, see [2]. However, this relationship does not hold for large tick assets. Indeed, in this case, the spread is almost always equal to one tick and is therefore artificially bounded from below.

Implicit spread We introduce a notion of implicit spread, playing the role of spread for large tick assets, for which the effective spread is almost always equal to one tick. This parameter arises from the model with uncertainty

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Figure 1: The cloud (ηα √ M, σ): volatility σ plotted against ηα √ M. One point corresponds to one day (in 2009). We can see that for each asset there is a linear relationship between the volatility per trade. and the implicit spread. The black line is the line y = x.

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Analysis and interpretation We offer an interpretation for our striking empirical relationship in the framework of the model with uncertainty zones. This is done through a simple equilibrium equation for the profit and loss of market makers and market takers. Indeed, we can show that the average ex post cost of a market order is (α/2) –ηα Then it can be proved that the average P and L per trade of the aggregate market makers is equal to (α/2) -c (σ /√M) +φ. where c is a constant of order 1 or 2 and φ> 0 corresponds to extra compensations of the market makers related to their inventory control. Thus, the profits of the market makers being the losses of the market takers, we derive ηα =c(σ /√M)- φ.

In the classical approach, the ex post average cost of both limit orders and market orders is zero. In contrast to this, our relationship states that for large tick assets, market orders are costly whereas at the aggregate level, limit orders are profitable (but of course individual market makers do not easily get gains because of the large size of the best queues in the order book).

Explaining microstructure effects A very well-known stylised fact of high frequency data from large tick assets is the systematically decreasing behavior of the so-called signature plot (the realised volatility over a given time period when the sampling frequency decreases).

Many models try to reproduce this phenomenon , but very few explain it. Our approach enables to show that this decreasing behavior is equivalent to the inequality η ≤ 1/2.

According to the preceding equations, this in fact means that market orders are costly whereas limit orders (at the aggregate level) are favorable. This asymmetry between both types of orders always holds for large tick assets.

Indeed, one cannot have η> 1/2 since it would imply that market makers lose money. In that case, they would simply increase the spread to remedy this.

3) Forecasting the effects of a change in the tick value The tick value issue Fixing the tick value is an intricate problem. On the one hand, if the tick value is very small, some market

Khalil Dayri, Antares Technologies participants do not hesitate changing marginally the prices of their limit orders in order to gain in priority. This leads to unstable order books where traffic is very high. Such an environment is very discouraging for traditional market makers for which it is very hard to set quotes. This can induce severe economic consequences, in particular for small or mid cap companies. Indeed, quoting them may not be worthwhile for classical market makers in such an unfavorable market. As a result, the quality of the liquidity on such stocks can be very low. Such a situation is also difficult to manage for the exchange, which has to deal with overloaded platforms. On the other hand, a tick value which is too large prevents the price from moving freely according to the views of market participants. This creates needless frictions and sloppiness in the price (strong mean reversion at the high frequency level), and also favors speed (race to the top of the book). Moreover, market takers pay a large extra cost in order to obtain liquidity.

If the tick value is not satisfying, exchanges often have the possibility to change it. Such a modification implies changes in various market quantities (number of trades, spread, liquidity, etc). The first thing the platform designer needs to do is to define the desired effects of this change of tick value, which is already a difficult question. Even in the case where market designers have a clear idea of the ​​ situation they want to reach, they still face the problem of

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28 | INSIGHT

the way to reach it. Indeed, it is commonly acknowledged that tick values ​​have to be determined by trial and error and that the success of a change in the tick value can only be assessed ex post, on the basis of the obtained effects.

Thus, only few predictive models have been designed in the literature and the consequences of a change in the tick value have been essentially studied from an empirical point of view. We offer in [1] a methodology that we believe will help exchanges choose the correct tick value.

Starting from a large tick asset, we provide a closed form formula for the optimal tick value.

The forecasting formula In the case of large tick assets, our approach enables us to forecast ex ante the consequences of a change in the tick value on some market quantities, in particular the crucial parameter η which quantifies the intensity of microstructure effects. Let us start from a situation where the tick value is α0, the microstructure parameter is equal to η0 and the daily number of trades is M0. Assuming the long term volatility and the daily turnover do not depend on the tick value, if we change the tick value from α0 to α , we get the following prediction formula for the new value of η: η ≈ η0 (α0 / α) ^ (1-β / 2), with β a parameter between 1/2 and 1 depending on the shape of the implicit supply and demand curves. This formula has been successfully tested on the Bobl contract, which changed tick value on June 15, 2009, see Figure 2.

“Defining an optimal tick value is a very complicated issue. Indeed, different types of market participants can have opposite views on what is a good tick value. Thanks to our framework, we can suggest a reasonable notion 4) Optimal tick value Optimal tick value formula Defining an optimal tick value is a very complicated issue.

Indeed, different types of market participants can have opposite views on what is a good tick value. Thanks to our framework, we can suggest a reasonable notion of optimal tick value. Of course the optimality notion we are about to define is arguable and we do not take into account some elements, for example the fact that a given asset can be traded on different platforms, with possibly different tick values ​​(however, note that according to recent regulatory proposals, it could be required for the tick value of a given asset to be the same on all trading platforms).

Nevertheless, we still think it is a first quantitative step towards solving the tick value question. We consider that a tick value is optimal if: - The (average) ex post cost of a limit order is equal to the (average) ex post cost of a market order, both of them equal to zero.

- The spread is stable and close to one tick.

Such a situation can be seen as reasonable for both market makers and market takers. Indeed, it removes any implicit costs or gains due to the microstructure. Moreover, having a stable spread close to one tick prevents sparse order books which can drive liquidity away.

Figure 2: Testing the prediction of η on the Bobl futures. The blue line shows the daily measures of η during 12 days after the change in tick value. The red and green lines are the daily predictions associated to the future tick value during 12 days preceding the change in tick value, for values ​​of β respectively equal to 1 and 1/2.

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It is easy to see that getting an optimal tick value is equivalent to have η = 1/2 together with a spread which is still equal to one tick. Thus, we refer to this last situation as the optimal tick size case. Note that in term of the microstructure parameter η, the optimal

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gives the right order of magnitude for the relevant tick value of a given asset.

Optimal tick value for small tick assets A crucial point in our approach is that when changing the tick value of a large tick asset, the spread remains equal to one tick as long as market makers make profit with such a spread. So the spread (in tick unit) is invariant when the tick value is modified. For a small tick asset, when enlarging the tick value, both the spread and the number of trades adjust so that the spread and the volatility per trade have of the same order of magnitude. The way these two variables are jointly modified is intricate and this is why our method cannot, a priori, be used for small tick assets. However, let us stress the fact that it is still possible for the exchange to use a two steps procedure in the case of a small tick asset: Mathieu Rosenbaum, Laboratory of Probability and Random Models, University Pierre and Marie Curie (Paris 6) tick size is the same for any asset η = 1/2, whereas the optimal tick value depends on the features of the asset.

Remark that in the optimal situation, we can show that the following properties follow for the microstructure: - The last traded price can be seen as a sampled Brownian motion.

- Consequently, the signature plot is flat.

Starting from a large tick asset, our approach enables us to reach the optimal tick size situation. Indeed, it is possible to obtain η = 1/2 and a spread close to one tick by changing the tick value only assuming that η increases continuously when the tick value decreases. Then, when modifying the tick value, the spread remains equal to one tick as long as α / 2-ηα ≥ 0. Indeed, if α * denotes the largest tick value such that η = 1/2 then for all α> α * market makers make positive profits with a spread of one tick and consequently maintain this spread Then, we obtain the following formula for the optimal tick value leading to η = 1/2:

- Step 1: Enlarge sufficiently the tick value so that the asset becomes a large tick asset.

- Step 2: Use our methodology for large tick assets.

To contact the authors: khalildayri@gmail.com mathieu.rosenbaum@upmc.fr Bibliography [1] Dayri, K., and M. Rosenbaum, 2013, Large tick assets: implicit spread and optimal tick size, Preprint.

[2] Madhavan, A., Richardson, M., and M. Roomans, 1997, Why do security prices change? A transaction-level analysis of NYSE stocks, Review of Financial Studies 10, 1035-1064.

[3] Robert, CY, and M. Rosenbaum, 2011, A new approach for the dynamics of ultra-high-frequency data: The model with uncertainty zones, Journal of Financial Econometrics 9, 344-366.

[4] Wyart, M., Bouchaud, JP, Kockelkoren, J., Potters, M., and M. Vettorazzo, 2008, Relation between bid-ask spread, impact and volatility in double auction markets, Quantitative Finance 8, 41 - 57.

α ≈ α0 (2η0) ^ (1 / (1-β / 2)).

Of course we do not pretend that in practice, applying such rule will exactly lead to an optimal tick value (in our sense). However, we do believe that this simple formula

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30 | INSIGHT

FIX RISK MITIGATION SYMBOLOGY WORKING GROUP

The Case For Test Symbology With Michael Rude, COO REDI Global Technologies, Gary Stone, Chief Strategy Officer, Bloomberg Tradebook, and Eugene Finkelman, Executive Director, Electronic Client Solutions, J.P. Morgan Michael: Regulators are increasingly focused on electronic trading systems, and are enforcing rules and regulations to govern the processes, procedures and controls to promote a more stable trading environment. Market participants are generally responding with a more rigorous software development lifecycle and with improved documentation and testing practices. The net effect of these changes could be a more controlled, compliant and stable marketplace.

That said, there is opportunity for improvement around go-live testing. Market participants who are releasing system changes to production are required to perform a pilot test to ensure the system is performing as expected. However, most exchanges do not allow ‘test’ orders in production, or any order that does not have an economic purpose. Absent the availability of test symbols in production, market participants are limited in their ability to validate market readiness before the market opens.

It’s not entirely clear why the exchanges resist the adoption of test symbols in production. In some cases, it’s because the addition of test symbols requires technology changes for the exchange. But it seems incongruous to have such extensive rules and

GLOBALTRADING | Q2 • 2014

regulations governing the development of electronic trading systems, but such limited tools to evidence the efficacy of our systems in a live environment.

Gary: I cannot understand why regulators are silent on this. There are regulations that we cannot test with live orders. Yet we are forced to because we have no other method of testing connectivity. Fragmented markets are also a real concern. Regulators need to standardise the test tickers across markets in a single asset class for Smart Order Routers to understand that they have connected and are sending appropriate orders IN PRODUCTION. Just because beta works, it is an assumption that it will work in production.

Origins Michael: Whether it’s from an execution standpoint or from a clearing standpoint, it is universally viewed as a systemic risk if we can’t test systems across asset classes. There are certain test symbols that are available for use on NYSE for example, but such use is not permitted globally across asset classes.

While we are happy to acknowledge that it makes perfectly good sense to test your systems, at the moment, before we start rolling out into production we’re not allowed to do that last leg; we’re not

FIX RISK MITIGATION SYMBOLOGY WORKING GROUP

INSIGHT | 31

They should be listed, have standard identifiers (Rics, ISINs, etc..) and should support standard order types in those markets.

Exchange incentives?

Eugene: This would help exchanges to make their environments safer, raise overall market confidence and establish consistent protocols for everyone to follow.

Michael Rude, COO REDI Global Technologies allowed to certify in a live environment. Even the brokers aren’t allowed to send in “test orders”; they have to be real orders with real economic purposes behind them.

Eugene: Whether testing a change or validating production status, market participants need a safe way for interacting with production environment.

As part of the FPL Risk Mitigation Symbology Working Group, we are in discussions with one of the exchanges right now trying to connect two and two together: we want to test and a dedicated symbol to test will help in that effort. If we do testing, should it be a dedicated symbol or other random symbols? Not everyone sees the need to use test symbology just yet.

Achieving all this will provide an edge for early adapters as it would be an innovative and effective tool a liquidity venue can offer to clients in helping them address their risk concerns, which may in turn lead to increased flow and participation in such venues.

Michael: It’s possible that exchanges could have an economic incentive- for example, the Hong Kong Stock Exchange charges for the use of its test environment.

So the top level aim of the entire project would be that live testing symbols be used so that you don’t have to test orders live; which increases the stability of the orders that are going in, builds confidence in your own systems and also builds confidence in the market itself?

Eugene: The whole project is designed to provide the industry with a safe means of validating production environment, by establishing test symbology for all asset classes and recommended best practices around use of such symbology. This helps to establish a consistent and reliable business process thus reducing the risk behind production changes and increasing confidence for market participants.

How will these work?

Eugene: The working group has put out requirements around the creation and expected behavior of these symbols.

Gary: It could be argued that Knight would not have happened if they could have linked to a test ticker and ran before using real tickers.

At a high level, the key is for these instruments to mimic the exact behavior of any other instruments on that market, except these would be zero-funded no-risk securities.

Why hasn’t this being done already?

Eugene: Participants need time, resources and money to make this happen. This could mean establishing processes to make sure that they have everything

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RISK MITIGATION SYMBOLOGY WG

They should be available for trading regular market hours in addition to pre and post market sessions where participants can route orders on these and receive standard electronic acknowledgements and executions.

32 | INSIGHT

FIX RISK MITIGATION SYMBOLOGY WORKING GROUP

Gary Stone, Chief Strategy Officer, Bloomberg Tradebook

Eugene Finkelman, Executive Director, Electronic Client Solutions, J.P. Morgan

available to support this. For example, there’s not going to be natural liquidity out there so you need to be able to provide liquidity for these test symbols. It starts out with the exchange or whatever liquidity venue first. If at least we have one, two, three venues going then we can use this in turn to start having buy-sides, sell-sides or OMSs supporting this.

where if an issue is encountered intra-day firms can send test orders to confirm everything is backup prior to resuming live trading.

One of the points to be discussed is whether the exchange could set a threshold on their side: if there are concerns that someone could flood the system with a big volume of test orders they can set up thresholds to only take X number of tests. That should be part of the best practices around this, for the exchange to think through.

The best practices document is being scrutinised by one of the big exchanges right now. Best practices include recommendations for all market participants to use this test symbology for verification of all production changes whether implemented by buyside, sell-side, OMS or the exchanges themselves.

Verification of connectivity and systems are part of this. This could be used by firms in the morning as a start of day check to make sure that they are connected properly and that everything is working as expected. Then as a tool for post outage verification,

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If you create a test symbol that you can use to place an order, get an execution, and complete the allocation and clearing process - you can then truly test out every piece of the infrastructure within the lifecycle of the trade to ensure that everything is working as designed.

What’s next?

Eugene: The aim of the working group is to have test symbology across all asset classes; Starting with Phase1, and the current focus, to at least have these available for electronic order routing and execution on the major markets. With the ultimate goal of the whole project to be able to do the full end to end lifecycle, including allocations, clearing, et cetera.

34 | OPINION

Circuit Breakers And Closing Auctions:

Reforming Hong Kong’s Marketplace Andy Maynard, Global Head of Trading and Execution Services, CLSA, looks at the two major market structure changes facing Hong Kong At the end of the day, the overriding premise of an exchange has to be the integrity of the market.

Instilling confidence in the exchange is key, for market participants to trade on and invest in, and also to protect investors’ confidence and their assets when they go into the market outside the normal market dynamics of profit and loss. On the other hand, I do feel somewhat sympathetic to the view that stocks should rise and fall on their own merit as well.

Circuit breakers are, in some ways, a mechanism used to delay where a stock is going to end up eventually anyway; it just makes the change occur in a more orderly process. So, if you look across Asia, do the markets that have circuit breakers benefit from the fact that they have this extra protection? I would argue no. The reality of those markets is that everybody trades on the understanding that there are circuit breakers in place. I cannot say for sure that from an institutional point of view any of our clients look at those markets with extra confidence. As long as circuit breakers are done in a way that allows investors to also sell stock when they find there is adverse news

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on the name that is fine. If it is down 10% and they want to sell it down 10%, I feel that they should be able to do so, rather than being blocked from trading, only to watch it move down another 10%.

There is a very fine line between a free market and one that is constrained by circuit breakers. It’s going to be very difficult for any regulator to appear to have a foot in both camps. Do you profess that you’ve got a free and open market where stocks can do whatever they want to do based on the fundamentals of the stock, the geopolitical scenario, the overall economic global scenario, and the local scenario, or do you say, no, stocks only move in the 5% range every day, and that’s it? I feel that Hong Kong will have to try to come to a common understanding about what’s right for the market; what’s right to attract investors into the market so people don’t feel that it’s a controlled environment, and at the same time, protect investor confidence. This seems to me to be a reaction as part of a wider trend of extra regulation for the market, which is really being driven from the US. Are we going to get to a point where Asian markets are over-regulating based not on what’s happening in their own markets, or even in their regions?

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It is also good for the brokerage community to regulate their own parameters in terms of trading mechanism risk, and I think that should be done totally separately from a circuit breaker mechanism. You should have parameters and risk profiles set up, and you should have internal circuit breakers to stop the wrong button being pushed on your system. Similarly, when a DMA client flows in, you should have parameters set up. The counter argument is that this is fine for the bigger brokers because they have the technology spend to implement such controls, and I agree that as a result, it is difficult to appease everybody.

However, we’ve potentially walked down a road of protecting the integrity of the market based on a reaction to something that hasn’t actually happened in Hong Kong.

Andy Maynard, Global Head of Trading and Execution Services, CLSA The Hong Kong stock exchange is a very different market to a venue like NASDAQ or NYSE. As long as circuit breakers are implemented in a way that protects investor confidence, no matter whether it is institutional or retail, I would have no problem working with them. Obviously I feel investors should also be able to sell stock that’s down 20% if the stock is moving down. There are plenty of examples of that across Hong Kong; where stocks have been in a free fall and never come back. Would circuit breakers stop that?

There are also many questions around the implementation of the breakers: is a 5% movement OK? What happens if it’s 5.1%? Does that mean that you can’t sell the stock? The high percentage of retail activity is also a key consideration.

In the 22 years I’ve been in Hong Kong, the exchange has worked almost perfectly. The Hong Kong stock exchange will suspend a stock very quickly if there’s enough adverse movement. To me, they already have some sort of delayed circuit breaker mechanism in place. Stocks get suspended a lot here. With the recent events around the Mainland exchange, the market had time to pause and time to analyse what was going on in the market and what was going on in the fundamentals of the relevant stocks. In that scenario, would a circuit breaker have stopped that event? No. Would it have exacerbated it? Potentially.

I think stocks should be able to find their own level.

Closing auction The closing auction is something I feel Hong Kong desperately needs, and has needed from the outset.

They have an opening auction, but no closing auction.

You look at so many markets across Asia where a very significant amount of the overall trading volume is done on the close, without much price volatility, and we can’t find a mechanism that’s able to do that in Hong Kong.

Asset managers have a guaranteed benchmark set by a client, and they have to achieve it. There is more risk in Hong Kong because we don’t have an auction. This means we need to be more aggressive in the close, which means we are adding to volatility just so we don’t lose money.

The closing mechanism as it is right now makes it more volatile because you can’t afford to be passive; you could be 20 basis points on one side and 30 basis points off the other side. You add that up across 100 stocks with the dollar size of these trades and you could end up with a very good day or a very bad day. Hence, I feel that the closing auction is necessary for a developed market.

Institutional clients base their whole performance and fund NAV on the closing price. Most countries have a mechanism to allow for the incorporation of that function.

In order to promote investor confidence in the equity market, we need a closing auction. Rather than regulating HFT, everybody wants to know the closing price of stock. That helps everybody evaluate their investment.

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36 | OPINION

Hong Kong Regulation With Emma Quinn, Head of Asia Pacific Trading, AllianceBernstein How do the SFC Algo regs look six months on?

From a buy-side perspective it meant firms were minimising their administrative burden by reducing the number of brokers that they use. My personal view is that people will now start adding more brokers, if they haven’t already, now that they’re over the hump of the administration.

I’m not one of those people but I do think others will take that initiative.

Will people start innovating again?

No: I think people are going to pause and realise that they are quite happy with the more vanilla product that they’ve got. Responsible officers will want to make sure they understand every aspect of the algorithm that they use and are unlikely to want to do anything with more exotic algos and experimental technology.

SFC first or innovation already paused?

When people feel personally responsible for a spike in the market, for example, from a small change to an algo, it can scare you.

People should be responsible and know what they’re using; there’s no doubt about that. If you have 10 providers that each provide 10 algorithms, the chances of you understanding a hundred algorithms in enough depth is just not possible. No one can know it in that much detail. In my experience you find that traders tend to use a maximum of 10 anyway: from the general algo list you might use two IS ones that you like, and two sniper ones (and maybe an over the day algo as well), but at the end of the day you don’t need too many varieties.

Unintended consequences that the SFC may not have thought about?

I haven’t seen any unintended consequences that the SFC may not have thought about: I think the SFC intended people to be more responsible for their algorithms. The result has been that people taking responsibility for their own actions within the market.

One aspect that may not have been considered fully is the implications for those trading out of Hong Kong into other jurisdictions that are captured by these rules.

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Emma Quinn, Head of Asia Pacific Trading, AllianceBernstein And how does that feed into the current conversations around circuit breakers and closing auctions?

It’s interesting that there was only one party that was left out of the SFC algo regulations, and I would like to think that the Hong Kong stock exchange would do what most other developed markets in the world have done and introduce circuit breakers. The risk is that the buy-side do all the right things, the broker does all the right things and something happens between when the broker sends their message from their system to the exchange. The exchange is your last line of defence. There are four participants in the chain, including vendors, and one of those, the exchange, has been left out of this completely.

How does that feed into the dark pool regulations?

This has obviously got a lot more publicity after the “Flash Boys” book and the way exchanges would like volume to be 100% back on their markets, but it’s not an issue in Hong Kong. You only have to look at the numbers; not a huge percentage of the market is done in the dark.

How about retail flow going into the dark?

I don’t think that they will allow retail in there. If I was a retail person, I would of course like to improve my pricing with the use of dark pools. If trading at mid you’d always do better than the offer or better than the bid, depending on which side you’re on.

With that being said, dark pools are more about block trading; they are not about the small orders. It is more for doing the big blocks in an anonymous form.

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Kent Rossiter, Head of Regional Asia-Pacific Trading, Allianz Global Investors on circuit breakers What would you like to see from circuit breakers in Hong Kong? Dynamic, static, market level, instrument level etc.

I’d like exchange circuit breakers to kick in at the single stock level to avoid unwarranted sharp moves which are more often the result of a fat-finger or input error than an intentional action. There may be actual cases where stocks move sharply on actual news, but even in these cases it’s not unusual for the stocks to overshoot because the quote liquidity isn’t heavy enough to take the one-sided and skewed orders. I’m not saying I recommend the Taiwan model of randomised batch-auctions about every ten seconds or so as opposed to continuous trading as done in most exchanges, but it’s a solution worth consideration and backed by some academic studies.

How do regional variations affect you?

There’s little conformity among the Asian exchanges now and I don’t think they are going to make effort on circuit breaker uniformity. This is fine with me.

“The eventual solution will probably be dynamic and may use the overall market’s level as a reference point.”

When a stock encounters a sudden sharp move, a cooling off period, say for a few minutes where the stock locks at a price before being allowed to move a few percentage points further, may be a good idea. There’s some debate to determining the right ‘time out’ for traders to pull orders, change limits, or adjust strategies, but it’s probably better to have some rational human thought to the trading instead of it being driven solely by the fastest automated computers in the blink of a second.

What should be the key considerations for the exchange?

One key function of the exchange should be maintaining orderly markets. So it’s up to the exchange, and the regulator if they want to chip in, to come up with some thresholds for what they consider rational moves in single stock trading.

Flash crashes and subsequent cancelling trades on stocks that get crushed or rise too significantly don’t make any exchange look professional.

Implementing a mechanism so all stocks have the ability to reach clearing prices on exceptional news or in the minutes running up to the market close is a challenge. The eventual solution will probably be dynamic and may use the overall market’s level as a reference point.

I think proper controls should be set at the broker level, but it’s more important for the exchanges themselves to also have certain rules that are adhered by all brokers instead of leaving to every brokers own interpretation of what would cause an unorderly market.

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38 | OPINION

Exchanges and Data: Maximising Value With Eva Saidac, Product Management, NASDAQ OMX How are big data management and data trends affecting exchanges?

We see that the perception of data is substantially changing across all industries at a very rapid pace. There has been an exponential growth of data in the last few years with the proportion of unstructured data growing the most. That’s why firms really want to tap into those wider sources of data; it could be news, it could be video, it could be social media. Simply put it could be all different types of data that you can’t easily structure into a database. But they’re very interesting and valuable.

“The exchange industry is naturally managing and making new headway with structured data, but unstructured data can be very interesting from a strategic business perspective. However, technology challenges remain.”

For exchanges specifically, they’ve been dealing with high data volumes and high data update frequencies for a very long time. That’s part of the core business of an exchange; even if it is not a particularly large exchange, the volume of data builds up very quickly. Add along all historical data on top of that, and you get huge volumes as well as new complexities with the growth of low latency data.

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Eva Saidac, Product Management, NASDAQ OMX The exchange industry is naturally managing and making new headway with structured data, but unstructured data can be very interesting from a strategic business perspective. However, technology challenges remain. Investments are needed in order to capture and manage all relevant data, including unstructured data, and that obviously needs to be supported by relevant business cases.

The truly interesting thing is when you put all the data, regardless of structure or source, real-time or historical, in the same context, you can start to discover things that you previously couldn’t before.

From an internal perspective, business insight and

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intelligence will support decision making, but it can also be an effective tool to provide superior client support as well as a means to provide valueadded offerings. It is a great opportunity for an exchange to utilise all the data that they already have in the best possible way, but also to tap into new opportunities so they can serve their client base with new data related offerings.

Increased focus on data driven by exchanges, regulation and client demand Obviously one can’t directly compare markets like the US, Europe or Asia etc. too specifically, but factors driving capital markets’ increased data focus include regulation which demands large data to increasingly be made available at any given time. Market participants need to find appropriate solutions and providers to assist

“One area driving the evolving use of unstructured data we see is the market surveillance function. ” with these obligations and exchanges could be the optimal supplier for such services.

Exchanges want to leverage their assets, provide better services and, which is always going to be the best driver; stemming the possibility to create and provide new client services that can create revenue streams on their own. Exchanges could further leverage the fact that they are the main source of much data – including the data sets from listed companies, the instruments’ reference data and corporate actions, as well as the vast amount of market data itself. I think that data receivers value the opportunity to obtain the most critical set of information directly from the source and this can be used by the exchanges to broaden their data related offerings.

buy-side use more data and data elements in their research and investment strategies; and sell-side supplement their trading strategies with more data sets as well as use data to simulate and test them. An additional example is commodity trading which is highly dependent on data derived from sources of non-exchange generated data, with a large portion being unstructured, such as production and consumption projections, weather forecasts, news etc. These are examples of needs that exchanges can find new ways to serve.

How are exchanges utilising structured versus unstructured data?

The focus has traditionally been, and is of course still very much, on structured data in the exchange industry and there are new opportunities in that space alone. One area driving the evolving use of unstructured data we see is the market surveillance function. For instance, in the event of a market alert, the possibility to research the event further by accessing and searching data that was not easily detectable before such as news, emails and social media etc. to further discover connections between the data. This could be highly relevant when automatically scanning for suspicious trading patterns.

To summarise what do you think will happen next within the data space for exchanges?

The big data wave is on its way and the exchange industry is no exception with a clear strategic demand for many different aspects of data. I think if an exchange doesn’t fully leverage the opportunity, someone else will step in and do it. In general exchanges want to provide more services, and I think the reason data is such an important topic right now is the depth and breadth of its potential.

Everything within an exchange is about data, it’s a core fundamental for the marketplace, and it is now a new great opportunity to maximising its value further.

Capital market firms overall have to manage the data that stems from their regulatory obligations;

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40 | EUROPE

MiFID, MMT And European Market Reform

By Arjun Singh-Muchelle, Senior Adviser, Regulatory Affairs, Institutional & Capital Markets, Investment Management Association restrictions on high frequency trading; stringent rules on market abuse; introduction of equivalent treatment of investment and insurance products and ensuring a high-level of investor protection.

Arjun Singh-Muchelle, Senior Adviser, Regulatory Affairs, Institutional & Capital Markets, Investment Management Association It was a bright cold day in October 2011 as the clocks were striking 10:00 when MiFIR/D II was unveiled by Commissioner Michel Barnier.

Over two-and-a-half-years later, on an equally bright and cold afternoon in April 2014, the European Parliament finally voted through the Level-I text of MiFIR/D II. There is a lot in the legislative proposal that will go some way to ensure stability in the market;

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High-level investor protection The EU Parliament’s confirmation that key investor protections are to be extended to insurance-based investments and structured deposits is very important and will benefit investors widely. We have always maintained that having different disclosure and conflict regimes, simply because some products were historically classified as insurance-based or deposits and not seen as investments, failed to look at the issues through the experiences of investors and savers.

By 2017, most of these differences will have gone. The PRIIP KID Regulation, in particular, will ensure that investment funds, insurance-based investment products and structured products will all have similar pre-sale disclosure requirements and this could come into force as early as late 2015.

On the issues regarding capital markets however, asset managers, as fiduciaries for their clients, have doubts on whether MiFIR/D II will ensure efficiency and free and fair competition in financial markets.

Before going in to the details, one point needs to be made up front: asset managers only ‘trade’ on the market as fiduciaries and as agents; that means, they do not

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“Were one to call a spade a spade, these pools would be called by their more representative name ‘institutional liquidity pools’ - for that is their purpose; providing institutional investors with an alternative liquidity pool.” trade on their own behalf, but rather, have a legal and contractual obligation to manage assets in the best interest of their clients (the vast majority of whom are long-only, unidirectional funds such as pension funds).

It is their legal responsibility as fiduciaries therefore, that has framed our thinking and positions on MiFIR/D II. The contentious ‘dark pools’ Were one to call a spade a spade, these pools would be called by their more representative name - ‘institutional liquidity pools’ - for that is their purpose; providing institutional investors with an alternative liquidity pool.

The underlying assumption of the volume cap mechanism is that there is no difference in the needs of global institutional investors and Mrs Jones, who may invest €200-a-month. For the seasoned market watcher, this is utterly ridiculous.

The proposed volume cap mechanism limiting the ability of asset managers to trade in institutional liquidity pools will have a negative impact on the equity market, which was not a primary cause of the financial crisis.

The restriction on the use of these pools limits investors’ abilities to trade what are often illiquid or bespoke

trades. The cap will force these trades on to primary exchanges where they will face the adverse effects of having to trade with competing traders who will be able to see them coming. This will increase transaction costs for investors and make it more expensive to trade.

It is always important to recall that these pools allow investors to reduce the market impact of their trade and therefore the associated transaction and execution costs which benefit the end client. Research by LiquidMetrix has shown that these pools (in February 2014) offered an average price improvement of 14.21 basis points when compared with the best lit venues across Europe.

As such, the IMA is calling for a phased-in implementation to the volume cap mechanism. On 1 January 2017, make the most liquid asset classes subject to the volume cap. On 1 June 2017, make the less liquid asset classes subject to the cap and finally, on 1 January 2018, make the remaining, least liquid asset classes subject to the cap. It is our view that a tiered, phased-in approach is necessary to mitigate any and all adverse effects of the volume cap mechanism. As order sizes and depth across primary exchanges have dramatically declined in recent years, the choice to trade blocks in such pools has become (and will remain) increasingly important.

In trying to increase access to market funding for SMEs in Europe, the volume cap mechanism achieves the opposite.

In fact, all of the top 15 names hit hardest by the volume cap are listed on the FTSE 250 and FTSE Small indices.

Since over 90% of European equities trade on primary exchanges with only a small proportion of the European equity market (9.46% in February 2014) traded in institutional liquidity pools, we have always maintained that post-trade transparency is more of a major concern than pre-trade transparency for asset managers. This is why the IMA has officially endorsed Market Model Typology (MMT) as the minimum standard for post-trade transparency.

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42 | EUROPE

Market Model Typology MMT will take the various post-trade flags from the different European exchanges and convert them to a single, unified post-trade language. This way, a riskless principal trade on Euronext will be converted to the same post-trade flag as a risk-less principle trade on the LSE. By creating such a harmonised standard for post-trade transparency for the European equities market, MMT will be the first step towards achieving a consolidated tape across Europe.

The largest failing of MiFID I in relation to markets was the lack of a consolidated tape in Europe. Asset managers have been promised such a tape for decades but neither regulators nor data providers have delivered. MiFIR/D II does very little to solve this failing. The new legislation has split the tape requirements into two; one tape for equities and another for fixed income. The earliest asset managers will have these tapes however, is not until 2020.

It is not just the equity market that will be affected by these rule changes. Fixed income markets will also face significant structural changes.

The European bond market is already relatively illiquid, with liquidity concentrated in primary issuance with a rather shallow depth on the secondary market.

The pre-trade transparency requirements for these markets will have a detrimental impact on the already scant liquidity. The implementation of the pre-trade transparency requirements for fixed income therefore, needs to be treated with caution. Mis-calibrated pre-trade transparency requirements may have (and probably will have) a disruptive impact on the fixed income markets.

Efficient calibration of post-trade transparency, of what has actually occurred in the market, is far more important (and useful) to investors, rather than pre-trade information that may have no bearing on market realities.

Finally, to the ‘flash boys’.

A lot has been written about high-frequency traders. But speed is not in itself a bad thing. In fact, during times of severe market stress, speed is vital. There is however, a big difference between those who use algorithms to trade (such as asset managers who may use Order Routing Systems) and those proprietary traders who depend on high frequency algorithms to exploit minute price differences in very small size of trades. The latter of these is unhelpful. As liquidity takers, proprietary highfrequency traders may make effective and meaningful bid-offer crosses difficult for asset managers.

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“Through generating revenue from allowing high frequency traders access to primary exchanges, the latter are contributing to the problem rather than equally participating in mitigating any adverse effects that arise from the prevalence of ’fair-weather liquidity’.”

Primary exchanges aren’t off the hook here, either.

Through generating revenue from allowing high frequency traders access to primary exchanges, the latter are contributing to the problem rather than equally participating in mitigating any adverse effects that arise from the prevalence of ’fair-weather liquidity’.

As with most financial legislation however, much is left to the European Securities and Markets Authority (“ESMA”). With over 100 regulatory technical standards and delegated acts that ESMA will need to draft and the European Commission to adopt, ESMA is facing a rather large task. ESMA however, has limited resources and a small number of staff. This will make it all the more important to make full use of the information that market participants can provide.

The IMA is working with other trade associations from both sides as well as a number of trading venues to ensure that we are, collectively, able to assist ESMA by providing it with the data and evidence it will need to ensure the effective implementation of MiFIR/D II. A lot has been said about the delicate balance to be struck between stability and efficiency and free and fair competition on the markets. However the two go hand-in-hand so it is a false comparison.

Through creating efficient markets that engender free and fair competition between all actors, whilst putting in place stringent rules on market abuse, axiomatically leads to stable markets. Together they generate economic growth and development.

The FIX Trading Community And MMT Jim Kaye, Co-Chair of the FIX Trading Community Global Steering Committee and Director of Execution Services, Bank of America Merrill Lynch

By Jim Kaye, Co-Chair of the FIX Trading Community Global Steering Committee and Director of Execution Services, Bank of America Merrill Lynch

What are the principal consequences of MMT becoming a FIX standard?

There were two main drivers for this from an MMT perspective. One was to provide the opportunity to leverage the FIX Trading Community’s broad member base to assist with the ongoing development and adoption of the standard. The other was to move the MMT standard under the FPL Trust. This already covers the FIX Protocol and other FIX standards and basically ensures that the MMT standard will remain open and free to use for the entire industry.

consolidation difficult and increased the likelihood that different implementations of a consolidated tape would come up with different data. This is clearly just one piece of the jigsaw but an important piece nevertheless.

“This is clearly just one piece of the jigsaw but an important piece nevertheless.”

Are there any implications for pre-trade as well?

We’ve discussed pre-trade and it’s certainly an area for consideration. Though the MMT in its current form is very much geared towards post-trade data, i.e. the classification of trades, there is an interest in similarly normalising the classification of quotes pre-trade. Aside from that though, there is significant overlap in terms of the business usage guidelines which are an important part of the standard. Many of the discussions and decisions around those in the post-trade area are relevant to the pre-trade space and we intend to leverage that as part of any pre-trade work.

How will this development feed into post-trade efforts around the consolidated tape?

It solves a long standing issue regarding the standardisation of classification of trade data. This issue has historically made data

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TRADE DATA STANDARDISATION

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Who’s Responsible For Transparency?

By John Kelly, Chief Operating Officer at Liquidnet The growth of electronic trading has provided many benefits to equity investors by creating new market efficiencies and reducing trading costs. But it has also led to a complex web of venues, liquidity types, and trading strategies that have contributed to a loss of confidence among investors globally. And while it may sometimes feel like “us vs. them”, it is in the interest of institutional trading firms to work with regulators to restore confidence and clarity to our market structure.

Indeed, market participants should take the initiative without waiting for regulatory action. One place to start is transparency and control over liquidity interactions and use of customer information.

Since the beginning of regulated markets, institutional investors have needed mechanisms to trade their large blocks away from the “open outcry” of the exchange floor. These institutions - that manage billions of dollars of pension and mutual fund assets on behalf of millions of investors, often trading in block sizes

GLOBALTRADING | Q2 • 2014

exceeding 200,000 shares – still need to be matched away from the retail market so as not to cause price volatility for the rest of the market and trigger adverse price movements.

With the digitisation of markets, institutions now have a multitude of trading venues in which to trade.

However, each of these venues caters to different, and sometimes contrasting, trading needs. And, while some platforms serve their original intent of providing institutions with a venue to trade large blocks, most have become destinations for algorithms that slice blocks into pieces, indistinguishable from the trades found in the displayed world of the exchanges. The highly competitive, complex, and interconnected market structure results in block orders being transformed into small orders that move quickly from one venue to another before eventually executing.

This results in information leakage, adverse price movement, and an erosion of fund performance.

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Market fragmentation has also presented challenges to regulators in defining the types of transparency that are, or are not, beneficial to the overall market structure.

It is difficult for regulators to implement “level playing field” rules common to all participants and venues while giving consideration to the large number, variety, and codependency of trading venues. In such an environment, regulation could easily become a web of micro-managing rules that impede efficiency rather than stand as broad and powerful principles that enhance transparency and improve market structure.

For institutional investors – who have the greatest need for market transparency, the complexity of today’s market structure itself has resulted in increased needs for transparency and, at the same time posing greater difficulty in defining and standardising transparency across different business models.

Recently, we have seen some examples of regulators establishing sound principles that strike the right balance between individual participant protection and fostering broader market transparency and efficiency. One example is FINRA’s rules for new reporting standards for venue trading volumes that include an appropriate delay; two to four weeks, depending on the underlying liquidity available for a particular stock. Regulators in Canada and Australia have been successful in their efforts to improve the use of dark pools by implementing rules that govern trade size and establish price improvement requirements for dark trading.

Each venue is different. The operators of each trading venue are not only best placed to understand individual customer needs and how they interact with liquidity and the various trading technology solutions, but also these venues have a responsibility to their clients to communicate this. One way forward is for the venues to develop tools that give customers ultimate control over how markets are accessed and how their data is managed and utilised.

Liquidnet recently launched “Transparency Controls”, a web-based interface that provides clients with the ability to set their preferences for interacting with different types of liquidity and the different purposes for which we may use their data to create opportunities to trade. The options are detailed and the system sets preferences in real time. We believe this new level of transparency and control pushes existing industry standards and addresses the concerns of the institutional community as well as regulators.

John Kelly, Chief Operating Officer at Liquidnet

Still, the industry needs to do more. There needs to be an industry-wide focus on protecting and respecting client information. Trading venues need to be responsible guardians of what is, essentially, proprietary information.

They should have clear and transparent principles on how they interact with venues, liquidity, and how their information is used. Importantly, they should give their clients complete control over these parameters through simple, user-friendly tools.

Institutions have every reason to expect this, and trading venues have every reason to provide it as a matter of good business practice rather than simply the result of regulator pressure.

Both regulators and market participants crave a new level of trust and transparency in the markets. Trading venues themselves must take a more active role in creating it.

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Alpha Innovation Required:

The Inaugural Conference

By Peter Waters, Managing Editor, GlobalTrading The concepts of big data and social media are generating a lot of interest in the world of financial services. Just how to make use of the vast quantities of data being generated every day, and how to harness the power of new technologies to create new trading ideas is at the forefront of every buy-side firms agenda.

With that in mind, Franklin Templeton Investments put together an event between the 25th and 27th February 2014 with a single focus in mind. The “Alpha Innovation Required” summit pulled together more than 20 of the most cutting edge vendors in new digital technologies, with some of the world’s largest asset managers and top tier brokers to discuss just how to move forwards. Pulling back to view technology holistically and productively is just as much of a challenge as the eventual application of the technology.

The event was collated by Franklin Templeton’s Director of Global Trading Strategy Bill Stephenson who spent the preceding months reaching out to colleagues up and down the Street to gather the most exciting names, and to receive countless demos. Spread over two principal days, the first was a time for the innovators to present their ideas and products. Each of the vendors, split into five separate categories, spoke for 10 minutes and took questions on why their idea is worthy of further attention. The second day was a chance to drill into details with specific vendors that each delegate chose to sit down with. The extra-long sessions provided much more detailed demos and analysis of the precise trends that led to the tools being developed.

What data?

With masses of data being created 24 hours a day 7 days a week, just which sources of data a firm chooses from is a slew of decisions in itself. Big data is generally categorized into two streams; structured and unstructured. As one speaker said, structured data is the easiest to use, but the problem is that everyone else has the data. Unstructured is much more challenging, but infinitely more rewarding.

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Twitter is one of the largest, and most obvious sources of trading inspiration, but the sheer quantity of data, and judging its quality, is seemingly an insurmountable task. Some of the presenters have developed different ways to manage the volume of data, and to separate out the valuable from the useless. The Icahn Apple tweet is valuable information, a retweet several days later is less so, and a tweet from a fake account can be deliberately misleading.

Another firm takes news from over 22,000 outlets, although not including Twitter, and feeds out to firms breaking news and summaries that tie together disparate strings of information into actionable content. The key is in choosing the right inputs, and constantly striving to ignore the fake signals. Through their system they broke potential investment news hours before it reached the mainstream newswires.

Mat Gulley,

Head of Global Trading, Franklin Templeton Investments

“

I strongly believe technology whether defined by big data, artificial intelligence, complex processing or visualization is going to have a continued dramatic impact on trading and the investment process and we would rather be leading than following as it evolves. The buy-side trader of 2020 is very likely not going to be recognizable by the buyside trader of 2014 and I think people understand they must rethink their strategic outlook. The days of pontificating about a dark pool, trade increments or block trading will be consumed by thinking about the investment process holistically and how engagement, collaboration and processes of investment teams will collide and benefit through technological innovation. This is where we need to be spending our time and that is why a forum like AIR appeals to the largest and most forward thinking money managers in the world.

”

Once the data has been gathered it needs to be cleansed and analyzed in order to have value. And these systems need to be constantly getting better at their jobs. A process called machine learning comes into play, by which the algorithms that pore through the data teach themselves what is most valuable. For example with Twitter, each tweet gets read and re-read through careful examination by algorithms that are constantly learning and improving so that the input can be ranked and made useful – what content other uses respond to most, or key names and accounts associated with market moving events. This process is one of the major driving forces of constant evolution in this space, as the tools themselves become better at their jobs by design, and feed clean outputs to other developers, who translate that information into a form that can be used by human eyes, and straight into algorithmic trading engines.

Visualisation If there is one tool which can be said to be at the heart of the entire financial services industry it is probably Excel. One theme of the event was how these latest innovations in big data management are trying to move beyond this reliance into more accessible and visual forms of interacting with the data.

Jeff Estella,

Director of Global Equity Trading, MFS

“

This was a unique event. Most of these events are organized by industry trade groups, which always tend to focus on a number of well-established players. This event offered a platform for innovative companies to introduce their products to a diverse group of asset managers and broker-dealers. It forced many of the attendees to step back and think about the use case for some of these new products and how they might be incorporated into their investment process.

”

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Matt Lyons,

Global Trading Manager, The Capital Group

“

It was a very interesting opportunity to see emerging technology, specifically in big data and visualisations, as we are working towards developing such tools for our trading desk. It was good to meet the vendors and to directly ask them questions, and good to meet with my peer group and exchange views. I also brought a few of The Capital Group’s IT professionals into the conversation which helped to generate plans for our firm.

”

With the exponential growth in research reports, trading information, data management, and a whole raft of other information that takes up both time and screen real estate, traders and PMs are always on the lookout for tools that can display information quickly and concisely. By simply using 3D modelling and selecting a color palate that is designed to be appealing to the human eye, huge amounts of data can be much more instinctively controlled.

The simple amalgamation of such data is also a vital changing process. With huge volume of research reports and analysts models moving across the buy-side desk, how can the PM layer their own perceptions on top of the data, and keep easy track of reports that may have arrived into an already crowded inbox weeks or months ago? Automated data management systems that keep tracks of keywords and linkages between records are all now making this possible.

The upshot is that the PMS and traders can enjoy immediate access to a wealth of data in a form that is far more flexible and can be modified to each individual user.

Action Ultimately everyone on the buy-side is looking for one of two things – an idea for what to trade, or a way to get more money to be able to trade.

A key phrase from the event that struck a chord with many attendees was “human latency”, which is essentially the concept of being able to just speed up the human part of the equation. Making it easier for the trader to see what is happening and where their involvement is needed. A parallel trend is the growing amount of technology that is able to

Alfred Eskandar, CEO, Portware

“

This was a superb event – terrific speakers, format and delegates. Franklin Templeton has pushed the conversation about challenging the status quo to the masses.

”

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Join the FIX Trading Community and enjoy the unique opportunity to participate in the development and promotion of FIX. Help to drive change and shape the future of the trading environment by becoming a member and participating in the decision-making processes.

FIX Trading Community is the non-profit, industry-driven standards body at the heart of global trading. The organisation is independent and neutral, dedicated to addressing real business and regulatory issues impacting multi-asset trading in global markets through standardisation, delivering operational efficiency, increased transparency, and reduced costs and risks for all market participants.

Demonstrate your firm’s commitment to FIX Trading Community by becoming a member of this unique organisation.

www.fixtradingcommunity.org

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streamline workflow away from the desk itself, automatically selecting algos and venues for trading, pushing the liquid vanilla orders out without input according to the PM’s opinion of where the stock will go and the trading environment of that day.

Data is being generated faster and in greater quantity than at any other time in human history, but the tools and technologies to harness the beast are rapidly developing. Their transition to financial services has just begun, but if the vendors and delegates at this conference are anything to go by, there is a wealth of demand and a plethora of potential solutions out there.

Steve Grob,

Group Strategy Director, Fidessa

“

It’s interesting to see that, whilst we are approaching the limits of physics in terms of latency, the explosion in information shows no signs in slowing down. This means that completely new approaches are required in how we view and manipulate structured and unstructured information moving forwards

”

Jeff Jonas,

IBM Fellow, Chief Scientist, Context Computing

“

I see data like puzzle pieces. The more pieces you can get your hands on that relate to each other the better the picture one can develop. The real trick however is getting more puzzle pieces than your competitor and then using this more rich context to make better decisions faster.

”

Rick Tacelli,

Director of Sales, StreamBase Americas

“

This event is unique, it’s not a bunch of vendors hanging their shingle, it’s business leaders discussing innovations and trends that will impact how they generate alpha. And Ft. Lauderdale in February was a welcome reprieve!

”

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GlobalTrading Big Data Survey Results GlobalTrading Survey Findings: Big Data Trends in Electronic Trading Industry. By Yulia Kuksina, Global Sales and Marketing, GlobalTrading.

In April 2014 the GlobalTrading journal conducted a survey of senior market participants with the objective of understanding recent trends in big data and analytics in electronic trading. Senior representatives from the buy-, sell-side, exchange, and vendor community contributed their opinions on the matter.

The key overall message from the survey was that automation is a growing trend on the trading desk. It was a unanimous reply from respondents. In addition all of the respondents supported the view that managing big data was either essential (50% of respondents) or important (another 50%).

The survey has also supported the recent trend of using big data for improved decision making processes with around 30% of respondents agreeing that it is a key business driver to use this type of technology at their firms. Regulatory compliance was the second most important driver of big data. Among other important drivers for implementing big data technology the respondents identified risk management and prevention and experience/historical analysis. Operational improvement topped the list of somewhat important business drivers for using big data, although it was the last on the list of most important priorities.

Key Business Drivers for using Big Data Technology Operational improvement

4.3% 12.5%

Forecasting Experience/historical analysis

16.6%

Risk management

16.6%

Regulatory compliance

21% 29%

Decision making support *Most important business drivers as identified by respondents.

The survey has also looked at the top priorities associated with data management. Standardisation was identified as one of the top priorities. Surprisingly data protection did not score highly.

Top Business Priorities for Data Management Trustworthiness

8%

Sikplification

12.5%

Protection

12.5%

Access

16.5%

Inegration

16.5%

Standardisation

34%

*Most important priorities as identified by respondents.

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Spending Trends on Big Data, Data Anaytics and Cloud Technology 90% of respondents predict spending to increase. And the majority of respondents see use in the combination of outsourcing with building capability in-house as their likely future big data implementation strategy. The survey also supported the trend for the higher uptake of cloud technology in the industry with around 40% of respondents already using cloud and about 60% of respondents predicting spending on cloud technology to increase in the near future. Data protection remains one of the key concerns with regards to moving data storage to the cloud.

In your company, how do you think spending on Big Data will evolve?

Will remain the same

12.5%

87.5%

Will Increase

In your company, how do you think spending on Data Analytics will evolve?

Will remain the same

17%

83%

Will Increase

How do you think your company’s spending on Cloud Computing will evolve?

Not sure

Will remain the same

Will Increase

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16.7%

20.8%

62.5%

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Over 80% of respondents are already using data analytic tools and 90% of those who do not are considering using them in the near future.

Does your company use any Data Analytic tools?

No 17% Yes 83%

According to the survey, the usage of historical analytic tools in the electronic trading industry dominates the use of predictive by around 20%. 90% of respondents believe that historical analytics tools are more reliable than predictive ones.

Which Data Analytics do you think is more reliable?

Predictive

9%

Historical

91%

Regardless of the growing buzz around social media, 70% of respondents do not see value in integrating data from social media.

Do you see value in integrating data from social media?

Yes 30% No 70%

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HKEx Ecosystem Forum: Technology And Market Integrity

The 20th of March saw HKEx host their annual Ecosystem Forum conference. This event brings together the exchange and the industry to talk about the latest developments in technology and services in Hong Kong.

The conference altered its normal format slightly this year, while including a range of presentations and speeches from HKEx senior staff, there were also two panel discussions, which focused on regulation and changing electronic trading patterns in Hong Kong and the wider region.

The event opened with remarks by Jonathan Leung, Senior Vice President and Head of Hosting Services at HKEx, with an update on the latest technology being employed at the exchange. The day was mostly focused around the continuing rollout of the Orion suite of technologies being employed by the exchange.

Kim Man Li,

Co-head of Electronic Trading and Head of Equity Execution Services Product Development, Bank of America Merrill Lynch

“

This forum held by the HKEx allows all participants of the HKEx from asset managers to technology vendors and everything in between to interact and share ideas and information about the things they care about on a day to day basis. Within the algo panel, we were able to touch upon some very topical items such as regulation, risk controls to provide a safer environment and even playing field and structural changes that would improve the overall working of the market. Overall it was very well received and also sparked some engaging interaction from the audience.

”

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Richard Leung,

Managing Director and Co-Head of IT Division, HKEx

“

It was a great opportunity for HKEx to provide an update to our participants and industry partners on our latest business initiatives and explain how HKEx Orion Technology Initiatives can support their business growth.

”

The Orion Central Gateway is one of these flagship technologies, which was elaborated upon throughout the day, including its support for FIX and precisely how it will function and be rolled out. The other central technology was the Orion Market Data initiative, and its move into derivatives data. These updates are coupled with the new push for the Orion Trading Platform, which HKEx hopes will update the trading platforms used on the exchange with greater functionality and the latest technology.

The first panel of the day focused on changing regulation throughout Hong Kong and Asia, taking a broad view of the drivers of regulation, be it retail, specific market incidents, or just the stability and integrity of the market as a whole. As a result though is the changing answer to the questions of “who is responsible when something goes wrong?” – as we have seen from the SFC’s algorithmic regulation that came into force January 1st, responsibility is being shifted much more definitely towards the buy-side and electronic trading vendors, but there was still a call for the exchange to shoulder burdens as well. The precise balance of what checks sit where is a matter for continued debate, but generally the exchange’s later comments regarding circuit breakers and reinstating a closing auction in Hong Kong were well received as being the right steps in this direction.

Jonathan Leung,

Senior Vice President and Head of Hosting Services, HKEx

“

The Ecosystem Forum provides an opportunity for all Exchange Participants, buy-side trading firms, and ecosystem members to interact and communicate face-to-face. The power of the ecosystem resulted in many creative ideas emerging from the Forum.

”

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Rob Laible,

Division Director and Head of Electronic & Program Trading for Asia at Macquarie Group, and Co-Chair of the FIX Trading Community Asia Pacific Exchanges and Regulatory Working Group

“

I think whenever you can get a good cross section of market participants together and exchange ideas, usually something informative comes from it. There are a lot of ongoing changes in our industry so every once in a while it is good to take a step back and evaluate what it all means.

”

On the Orion Market Data platforms specifically the drive is towards the customisation of the exchange’s products to specific segments of the market, breaking out products to meet specific needs of users. Latency is also being improved through faster feeds and a new messaging protocol.

One of the most widely attended sessions during the day was looking at market integrity. HKEx said in the session that they were closely examining the reintroduction of the closing auction in Hong Kong, and looked at the various reasons why a closing auction should be brought back, and the potential form that the auction might take. By way of international comparison, Hong Kong is the only exchange in the 23-member MSCI developed markets list without a closing auction. The exchange is expected to begin consultation in 2014.

The other area of interest in the same presentation was the introduction of circuit breakers, which are a contentious point with various markets in the region introducing different checks. Carried over from an earlier panel on where responsibility for trading errors sits, the exchange is looking at circuit breakers, but it would not be drawn on their precise nature. The debate is broadly around two areas; what should sit at

HKEx Current Closing Mechanism

Importance of Closing Mechanism

• Median of 5 snapshots prices in the last minute of trading

• Determines closing price, which is used for portfolio valuations & benchmarking (e.g. index tracking funds) • Significant equity flow requires execution at closing price ~11% equity flow (incl. daily market on close and rebalancing orders) • Closing price determined by a single price g Volume and supply/demand not considered

Issues with Current Mechanism

• EPs cannot execute Market on Close (MOC) orders at closing price due to current calculation methodology g tension between EPs and their clients • Tracking error for index funds g Hamper return for investors

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Dr. Hongsong Chou,

Teaching Faculty Member at the University of Chicago, and Managing Director, Citic Securities, ITAQS

“

I think the panel was effective not only in that all panelists are multi-year industry veterans in the field who are knee deep in this business in the region, but also in that both panelists and audience seemed quite candid on the challenges that the industry is facing.

”

the market level, and what should sit at the instrument level. In terms of specifics these boil down into issues of whether the bands should be dynamic or static, what instruments should be included in their calculation, and what should happen when the bands are triggered. There are many questions around circuit breakers, but again the exchange will consult in 2014.

The second panel of the day looked at the changing nature of electronic and algorithmic trading in the region.

One key development is around how the SFC’s algo regulations have changed electronic markets and technology since their introduction on January 1st. When the point was put to the panel on whether the regulations have stifled innovation, the general consensus appeared to be that the rules were too loose before, and that fewer and simpler algos might actually be a good thing on the market. The main takeaway was that technology is there to make trading better, safer, and more reliable for everyone, and regulation can back up that role.

The day was attended by over 400 market participants and combined the best new content from the exchange with a number of great keynotes and panel discussions.

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Asia Trader Forum Asia TraderForum (ATF) is a private membership group formed in 2012 by the buy-side for the buy-side and run by Institutional Investor for heads of buy-side trading at international asset management firms. The membership’s mission is to help support the development of fair and efficient markets throughout the Asia-Pacific.

With twenty four members across asset management firms representing well over $500 billion USD in assets under management in Asia, ATF represents a broad view of international buy-side participants.

The group serves as a medium for buy-side traders in the Asia-Pacific region to discuss issues of common concern and express their views with a common voice. Since its establishment, ATF has been reaching out to regulators and exchanges throughout the Asia-Pacific region to start ongoing dialogues on market structure, policies and procedures while also conducting surveys and research for its members on trading and brokerage practices.

“With twenty four members across asset management firms representing well over $500 billion USD in assets under management in Asia, ATF represents a broad view of international buy-side participants.“

“ATF members are working to come up with a viable closing auction mechanism for Hong Kong that could be easily supported by HKEx and the SFC. ​“ managers to ensure that they understand those systems.

ATF joined with the Alternative Investment Management Association (AIMA), the Asia Securities Industry and Financial Markets Association (ASIFMA), FIX Trading Community and the Hong Kong Investment Funds Association (HKIFA) to create a template to assist brokers, and for fund managers to comply with the rule. Brokers can complete this standard questionnaire and transmit it to their buy-side clients using Markit Counterparty Manager; the clients can then electronically indicate that they have received and reviewed the information.

HKEx is the only exchange within developed markets without a closing auction mechanism. Due to a previous failed attempt at implementing a closing auction mechanism in Hong Kong, HKEx has been hesitant about putting one in place without the support of local broker associations. ATF members are working to come up with a viable closing auction mechanism for Hong Kong that could be easily supported by HKEx and the SFC. Contact details; Tel: +852 2842 6950 Fax: +852 2842 7056 Email: info@iihongkong.com

The Asia TraderForum was one of five professional associations that worked to create a due diligence template to assist the buy- and sell-side to comply with new Hong Kong Securities & Futures Commission (SFC) regulations. Effective January 2014, the SFC require brokers to show that they have proper management and controls for the electronic trading systems and investment

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Kuala Lumpur: The Internal And External Drive For Reform In late March GlobalTrading hosted a roundtable in Kuala Lumpur to examine the best practices for electronic trading in Malaysia. Attended by Bursa Malaysia, the Securities Commission Malaysia, and a range of local buy-side and sell-side firms and with attendance from regional FIX Trading Community members, the event focused on the changing nature of electronic trading in the region, how Malaysian firms can capitalise on regulatory changes in Singapore and Hong Kong, and new technology being made available to the region.

With electronic flow already between 30-40%, Malaysia is firmly established in the electronic trading arena but, when compared to developed markets in the region which see 70-80% electronic trading volume, there is clearly still a lot of development potential. New technology will be at the forefront of such development, as increasing foreign flows look to access Malaysia’s markets.

One key alignment needs to be made by domestic firms with their regional and international partners, as flows increasingly move both from Malaysia throughout the region, and as funds look to enter Malaysia; facilitating standardisation of technology and increased electronic capabilities are essential to allow this increase in business. This needs to happen in both the front office, with clean reliable market data and proper risk controls, and the middle and back offices.

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Reform needs to be driven within firms as well, as systems need to reflect changing market practices around STP and risk control. A general trend across the financial services industry is that each market participant is much more responsible for their own trading and technology – the burden is moving onto the buy-side and vendors, and not just sitting with the brokers, and this needs careful management within firms to ensure that pre-trade risk is managed correctly.

One thread throughout the panel discussion was that change takes time and effort – no firm can change institutional habit and technology overnight, so firms need to make sure that they are prepared for future

Philippe Thomas,

Managing Director, ULLINK and Frédéric Villain, General Manager, Southeast Asia, ULLINK

“

We’re witnessing visible changes in Malaysia’s brokerage and trading environment: more sophisticated local customers looking at investing overseas, including by taking complex arbitrage positions, more interregional trading through the ASEAN link, more global capital attracted to Malaysia’s palm oil and petroleum brand names, more competition between local and global players charging ever fewer basis points, and a push for better technology spearheaded by Bursa Malaysia. In a word, Malaysia is opening up to competition on all sides, like most other regional markets nowadays. These tough challenges can become great opportunities for those who think ahead of their current requirements, and try to find the answer to the questions “what’s next?” and “how do we prepare for it?”. Making the right choices in that respect is key to running a thriving business in the near future.

”

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Hasan Rauf,

Head of Sales, APAC, OMGEO

“

As an industry, it is important we continue the dialogue on how to improve efficiency and decrease risk in the trade process.” Stated Hasan Rauf, Head of Sales, APAC. “Across emerging markets in South East Asia, including Malaysia, there are varying levels of post-trade automation. In fact some market participants continue to rely on telephone or fax for critical posttrade functions, exposing their firms to operational risk. This is starting to change, and we are seeing momentum build in markets, as markets like Malaysia seek to improve infrastructure.

”

“

Malaysia has a strong domestic market, with 70% of trades executed domestically, yet cross-border challenges remain, as Malaysian firms commence acquisitions to build regional presence across the APAC community. Further diversification in asset classes and investment options help to ensure they are competing with neighbouring countries.

”

“

As Malaysia strives to become the sukuk hub for the Middle East and Asia pacific region, it will require an infrastructure that can support global business and growth. Automation in operations is paramount in this market, and the only way that firms will be able to compete domestically and internationally.

“

”

It’s a community effort, and Omgeo is working hard with both local and international firms to increase awareness of the benefits of STP, whereby trades flow from execution to settlement with little or no manual intervention, reducing risks and costs for the industry. After all, the technology and best practices exist today to connect firms across markets and asset classes, so we need to work together as an industry to drive improvements.

”

challenges before they arise. In a market like Malaysia that means balancing the local environment and specific nature of the retail/institutional mix and foreign flows with regional and global trends.

Regional regulatory reform, such as the algorithmic regulation in Hong Kong, and the T+2 shift in Singapore, will also have an effect in Kuala Lumpur, and firms would be wise to look ahead to potential regulatory change.

The major takeaways from the event were focused on the infrastructure of attendee firms – don’t rely too heavily on a single vendor for software or market data. Transparency is a global trend, and firms are wise to begin opening up to ensure that regulators and clients alike are aware of changing requirements. This feeds into a continuing trend around unbundling of services, which while still slow on the uptake in Asia will continue to grow. Malaysia is well placed to continue to grow as a regional market, but it needs to be aware of changes happening in Hong Kong and Singapore, and make sure that technology is standardised and compatible to ensure maximum market growth.

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ASIA | 63

Raymond Tan,

Vice President, Trading Solution Services, Technology & Systems, Bursa Malaysia

“

One of the key take-away from this event was the understanding of the buy sides’ criteria when selecting a sell side to work with. The sharing sessions from both sides and the technology providers were packed with valuable insights into the crux of electronic trading. This event was organised professionally and from my perspective, it was a fruitful one.

”

Josephine Kim,

Director, Head of Asia Electronic Trading Sales, Asia Pacific Equities, Bank of America Merrill Lynch

“

In Asia, we have lesser roundtable discussion opportunities available to the industry leaders. Given how each market is so differently structured and how fast they are evolving, this kind of forum would play a critical role not only to bring everyone to the same level of understanding but to help spearhead which direction we should be moving to.

”

Levent Mehmet,

Head of Sales, Southeast Asia, Interactive Data

“

Interactive Data was very pleased to participate in GlobalTrading Malaysia, in this exciting time for Electronic Trading in Asia Pacific.

It was a fantastic opportunity for industry panelists to discuss the increased focus on risk management in Electronic Trading and the discussion included how financial institutions are looking to outsource solutions, achieve greater transparency and benefit from consistent data throughout the enterprise.

”

Q2 • 2014 | GLOBALTRADING

64 | FPL

Summary of Current FIX Initiatives

By Tim Healy, Global Marketing and Communications Manager, FIX Trading Community TCA Working Group At the beginning of the year, the TCA Working Group completed the Best Practice guidelines for TCA for Cash Equities. Since then the co-chairs have reached out to the FIX Community for volunteers to expand the document for Currencies, Futures and Options and Fixed Income. There has been an excellent response from the Community and three new sub committees will soon be formed. Additionally, the Group would like to encourage widespread adoption of the guidelines and is talking internally on the best way to do this and will propose a mechanism for self-certification.

Tim Healy, Global Marketing and Communications Manager, FIX Trading Community The FIX Trading Community’s Working Groups and Committees have had a busy Q1, continuing the work they have been doing in 2013. A number of existing initiatives continue to be worked on whilst new ones have been kicked off. Addressing new regulation is still very much a focus for the groups, however, a number of initiatives are also concentrating on the streamlining of various different processes involved within the pre-trade, at-trade and posttrade work flows. Below is a brief summary of some of the highlights of the work the Community is focusing on.

Global Technical Committee The Committee has been focused on the next generation of the FIX Protocol. This release will be more than just an update to previous versions of the Protocol but is the final framework that will allow combinations of all supported FIX standards and versions. The vision for FIX 6 is that FIX 6 engines will be able to natively talk FIX 4.2, FIX 4.4, FIX 5.0 SP2 with those counterparties that have not upgraded yet and talk FIX 6 with those that have. The Global Technical leadership is currently brainstorming how best to take this work forward.

GLOBALTRADING | Q2 • 2014

OTC Products Committee In the Fixed Income space, the current initiative is to introduce ITCH semantics into FIX. As some of the more liquid fixed income markets start to exhibit characteristics suitable for HFT, there has been a demand to incorporate some of the features of other established industry protocols into FIX. Therefore, we are working on creating a set of extensions to FIX that bring the best elements of the ITCH protocol into FIX. The work is focused on fixed income venues, but will be applicable beyond Fixed Income.

In Foreign Exchange, there are discussions with the industry to create best practices for the exchange of counterparty credit limit information on inter-dealer FX venues such as EBS and Reuters. The idea is to enable automated kill-switches from FX risk/trading platforms to inter-dealer venues, allow integration of internal credit/risk platforms with inter-dealer venues and, ultimately, lower risk and increase controls around counter-party exposure management for FX. High Performance Working Group The High Performance Working Group is looking at adding high performance capability to FIX. The approach is to look at different aspects: new binary encodings to minimize message size and latency, new session layer focused on high

FPL | 65

performance requirements, application layer updates to minimize semantic verbosity.

So far, a few application layer enhancements have been approved through the Global Technical Committee, three different binary encodings are available for public review (draft standard for ASN.1 encoding, second iteration for Google Protocol Buffer and Simple Binary Encoding) and the first iteration of a session layer proposal is being finalized within the working group.

“The Committee has been focused on the next generation of the FIX Protocol. This release will be more than just an update to previous versions of the Protocol but is the final framework that will allow combinations of all supported FIX standards and versions.”

Post Trade Working Group Having successfully updated and reissued the guidelines for Equities in 2013, it is clear from many industry participants that FIX is now the cornerstone for a rapidly increasing volume of post trade workflow.

It is the preferred model of many buy-side firms to adopt a workflow that connects them directly to their brokers. With this capability now available, some buy-sides are now processing more than 50% of their equity trades using FIX. Members of the working group now seek the opportunity to expand the usage across other buy-side firms and across other areas of their businesses, and subgroups of the working group are now working on documenting and agreeing the standards for four other asset classes including Fixed Income, Derivatives, Equity Swaps and FX.

MMT Technical Committee (TC) members are in charge of maintaining the MMT data model that is designed to cover all trade types in Europe. Clear and unambiguous definitions are documented for all trade types to allow industrywide consistent implementation.

In addition, MMT TC members produce comprehensive tables mapping existing proprietary data feed logic against the new MMT standard.

Some coordination work is performed as well in order to support the implementation of MMT codes in native data feeds operated by trading venues and their subsequent downstream integration in feed and display products operated by vendors.

Global Buy Side Working Groups Toward the end of last year, the distinct regional (Asia Pac, EMEA and US) working groups combined to form the Global Buy-Side Committee as many of the themes discussed regionally had global implications. As an example, the Execution Venue Initiative comprises a number of aspects including capturing order routing data and a review of the existing best practices documentation with a focus on Tags 29, 30 and 851. The Committee has been working with global exchanges to discuss the addition of test symbology to the environments. US Regulators have also shown interest in the concept of a production test symbol to mitigate risk when new code or processes are introduced. Additionally, there is an initiative to achieve better transparency/ risk management of the IPO process. There has been much interest generated as of late to standardize Fixed Income FIX messaging and there is an on-going review process to see where the main issues lie with a focus on the Buy Side work flow. Finally, given the increased focus on the Buy Side regulations in the electronic trading pace there have been discussions about creating a Buy Side Regulatory sub Committee.

All of the groups offer a neutral industry forum encouraging open discussion and participation from all member firm representatives. If you would like to know more or are keen to get involved, please feel free to e-mail us at fix@fixtrading.org.

Market Model Typology (MMT) Working Group The Market Model Typology (MMT) initiative aims at standardizing the content of individual trade messages across equity markets in Europe. This means making sure that trades of similar nature get flagged the same way irrespective of who is the data producer (trading and reporting venues).

Q2 • 2014 | GLOBALTRADING

66 | FRAGMENTATION

GLOBAL FRAGMENTATION AT A GLANCE

LIT VALUE BREAKDOWN (Q1, 2014)1

1 2

Venues with a market share lower than 0.01% are not shown on the diagrams but are included in the calculations Borsa Italiana trading after hours

GLOBALTRADING | Q2 • 2014

Source: Fidessa

FRAGMENTATION | 67

DARK LIQUIDITY IN AUSTRALIA Following the introduction of ASIC’s price improvement rule in May 2013, dark trading volumes in Australia saw an initial drop but have since recovered. Interestingly, ASX owned dark pool Centre Point has seen its share of dark trading in the country’s main index (S&P ASX 200) almost double from 4.8% in April 2013 to more than 8% in April 2014. With Chi-X Dark achieving more than 2% in that index, the combined share of the two dark venues has passed the significant threshold of 10%.

S&P ASX 200

A steady increase in consideration and a decrease in the total number of trades since the beginning of 2013 has pushed Centre Point’s average trade size up. This indicates an overall increase in block trading activity which is unsurprising given that the price improvement rule only applies to trades below block size. Alongside some smart innovations introduced by the venues themselves, conditions are ideal for the growth of block trading.

At the individual stock level, there are a number of highly liquid instruments trading on dark venues over the market average of 10%. As shown below, 15.42% of Telstra stock has been traded on dark venues since the beginning of this year, with 12.95% of that traded on Centre Point

Source: Fidessa

Q2 • 2014 | GLOBALTRADING

68 | FIX TRADING COMMUNITY MEMBERS

FIX Trading Community Members *Premier Global Members marked in bold

360 Treasury Systems AG ABN Amro Clearing Actimize Inc Actuare AFME- Association for Financial Markets in Europe Albourne Partners Ltd Algomi Algospan Ltd AllianceBernstein Alpha Omega Financial Systems, Inc American Century Investments Ancoa Software ANZ Aquis Exchange Armanta ASIC AUDITime Information Systems Australian Securities Exchange AXA Investments Managers Ltd B2BITS EPAM Systems Company Baader Bank Aktiengesellschaft Baillie Gifford & Co. Banca IMI SpA Banco Itau S.A Bank of America Merrill Lynch Barclays Bank of Montreal Baring Asset Management BATS CHI-X Europe BAXTER Solutions Baymarkets AB Beijing RootNet Technology Co., Ltd. BlackRock, Inc. Bloomberg L.P. Blue Ocean Company BM&F BOVESPA Bank of Montreal Bolsa de Valores de Colombia Bolsas y Mercados Españoles (BME) Borsa Istanbul A.S. Brandes Investment Partners LP Bridline Brook Path Partners, Inc. BSE Limited BT Bursatec SA de CV BVI C24 Technologies Calm Global Information Technologies Ltd Cameron Edge CameronTec Cantor Fitzgerald

Capital Group Companies, Inc. Caplin Systems 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 CLSA Limited CME Group Commerzbank Compagnie Financiere Tradition ConvergEx Group Corvil CQG inc Credit Suisse Daiwa SB Investments Daiwa Securities Group Inc. DATAROAD DealHub Depository Trust & Clearing Corporation/ EuroCCP Deutsche Bank Securities Deutsche Boerse Group Devexperts Dimensional Fund Advisors Eastspring Investments (Singapore) Limited Ecodigi Tecnologia e Serviços Ltda Edelweiss Securities Limited Egypt For Information Dissemination EMCF- European Multilateral Clearing Facility N.V Enmetrica Orion K.K. Japan Equinix Espirito Santo Securities India Esprow Pte. Ltd. ETLogic Ltd ETNA Software Etrading Software Ltd Etrali Trading Solutions EuroTLX Exactpro Systems EXTOL Eze Software Group EZX Inc. FIA (Futures Industry Association) Fidel Softech Pvt Ltd Fidelity Management & Research Co Fidelity Worldwide Investment Fidessa group Financial Technology Solutions First Boston Group First Derivatives FISD Fiserv FIX Flyer LLC Fix8

Premier Global Members

GLOBALTRADING | Q2 • 2014

FIXNETIX Forex Capital Markets, LLC FpML Franklin Templeton Investments Fubon Securities Ltd Gamma Three Trading, LLC GETCO Asia GFI Group Inc Goldman Sachs & Co. Greenline Financial Technologies, Inc. Guosen Securities Ltd Hatstand HM Publishing Hong Kong Exchanges & Clearing Limited HSBC Bank PLC ICAP ICMA (International Capital Markets Association) IG Group Holdings PLC Ignis Asset Management Informagi AB InfoWare Infront AS Instinet Integral Development Corp.

Intelcheck Services Inc. Interacciones Interactive Data Intercontinental Exchange (ICE) International Securities Exchange (ISE) Investment Management Association Investment Technology Group (ITG) IPC Systems IRESS Limited IS Investment ISITC ISO J.P. Morgan Jordan & Jordan JP Morgan Investment Management (J.P. Morgan) JSE Limited K & K Global Consulting Ltd (K&KGC) Kanonkod KB Tech Knight Capital Group Kotak Securities Landesbank Berlin AG LCH Clearnet Linedata LiquidMetrix Liquidnet London Market Systems London Stock Exchange Group M&G MACD Macquarie Securities Limited MAE - Mercado Abierto Electronico S.A. Marex Spectron

FIX TRADING COMMUNITY MEMBERS | 69

MarketAxess Market Prizm Markit MFS Investment Management Mizuho Securities MOEX Morgan Stanley Investment Management Morgan Stanley MTS SpA NAB NASDAQ OMX Newedge Group Nikko Asset Management Nomura Asset Management Nomura Nordic Growth Market (NGM) Norges Bank Investment Management OCBC Securities Private Ltd. Omada Capital OMERS OMG (Object Management Group) OTAS Technologies Omgeo On Budget and Time Ltd Onix Solutions [OnixS] OnX Enterprise Solutions OpenSettlement GmbH Options Clearing Corporation Orc Group Oslo Bors ASA Pantor Engineering AB Patsystems Peresys (IRESS) Perseus Telecom PFSoft Portware Pravega Financial Technologies, Inc. PropelGrowth Proquote Putnam Investments Quendon Consulting R Shriver Associates Rabobank International Rapid Addition Ltd. Raptor Trading Systems, Inc. RBC Global Asset Management REDI Technologies Robin Associates Royal Bank of Canada Capital Markets Royal Bank of Scotland RTS Realtime Systems S&P Capital IQ Real-Time Solutions SASLA (South African Securities Lending Association) Sberbank CIB Shanghai Stock Exchange SIFMA SimCorp Singapore Exchange

Singapore Mercantile Exchange SIX Swiss Exchange Skandinaviska Enskilda Banken AB smartTradeTechnologies Societe Generale Software AG Spotware Systems Spring Securities International AB Squawker Limited SS&C Tradeware Standard Life Investments State Street eExchange Solutions State Street Global Advisors State Street Technology Zhejiang Sumitomo Mitsui Trust Bank SunGard SWIFT Systemware Innovation Corporation (SWI) Taiwan Stock Exchange Tata Consultancy Services Technistock Philippines, Inc. Telstra Global The Continuum Partners The LaSalle Technology Group, LLC The Nigerian Stock Exchange The Technancial Company Thomson Reuters TickSmith Corp TMX Atrium Tokyo Stock Exchange Tora Trading Services Tradeflow AB TradeHeader, S.L. Tradeweb Trading Technologies TradingScreen Traiana (ICAP) Transaction Network Services, Inc. Transatron Systems trueEX Group LLC TSX Inc. (Toronto Stock Exchange) Tullett Prebon Group Ltd TWIST UBS Investment Bank ULLINK Velocimetrics Versitrac Systems Corporation Volante Technologies Volta Data Centres Wellington Management Company Winterflood Securities XBRL Xetra (Deutsche Bรถrse) Yambina Limited Yieldbroker Zeopard Consulting

New Member FIX Trading Community wishes to welcome the following companies to its growing worldwide membership.

For more information, please visit: www.fixtrading.org Algospan Ltd

www.algospan.com

Bridline

www.bridline.com

C24 Technologies www.c24.biz

Dimensional Fund Advisors www.dimensional.com

Enmetrica Orion K.K. Japan www.enmetrica.com

Espirito Santo Securities India www.espiritosantoib.com

Omada Capital

www.omadacapital.com

OpenSettlement GmbH www.opensettlement.org

Quendon Consulting

www.quendonconsulting.com

Squawker Ltd

www.squawkertrading.com

Velocimetrics

www.velocimetrics.com

Yieldbroker

www.yieldbroker.com

Zeopard Consulting www.zeopard.com

Premier Global Members

Q2 โ ข 2014 | GLOBALTRADING

G LO B A LT R A D I N G Reach your clients across the electronic trading community

10,000

33%

Global Readers

4,600

sales@fixglobal.com subscribe@fixglobal.com

Buyside Readers

6,000

Online Readers Monthly

www.fixglobal.com

Americas

% EMEA % Asia

RESOURCES | 71

Industry Resources Bank of America Merrill Lynch Trader Instinct™

The Global Equities Trading and Consulting Platform When you execute with Bank of America Merrill Lynch, you have a global platform of trading

HKEx Group

HKEx Group is a leading operator of exchanges and clearing houses, and one of the world’s largest exchange groups by market capitalisation. The Group includes HKEx, the company that operates

Fidessa group

Exceptional trading, investment and information solutions for the world’s financial community.

85% of the world’s premier financial institutions trust Fidessa

professionals and tools to help you access the natural liquidity provided by one the world’s largest private client and institutional networks. Our Trader Instinct™ platform helps you to achieve high quality execution by drawing on our expansive market presence, knowledge and experience, trading acumen and strategies, financial capital and liquidity destinations. All

continually adapting to real-time market signals to align your trade objectives and conviction.

Hong Kong’s securities and derivatives markets and is the frontline regulator of companies listed in Hong Kong. In addition, HKEx provides clearing and settlement services for exchangetraded and over-the-counter products through its clearing houses. The Group also owns the London Metal Exchange, the world’s premier base metals market, and is an equal jointventure partner with the Shanghai

and Shenzhen stock exchanges in China Exchanges Services Company, which develops crossborder indices based on products traded on the three markets.

For further information, please visit www.hkexgroup.com.

to provide them with their multiasset trading and investment infrastructure, their market data and analysis, and their decision making and workflow technology.

We offer unique access to the world’s largest and most valuable trading community of buy-side and sell-side professionals, from global institutions and investment banks to boutique brokers and niche hedge funds. $12 trillion worth of

transactions flow across our global connectivity network each year.

Contact details: Email: dg.apes_et@baml.com http://ba.ml.com/instinct/ Asia +852.2161.7550 Europe +44 20.7996.4521 U.S. +1.212.449.6090

Contact details: www.hkexgroup.com

Fidessa’s unrivalled set of missioncritical products and services uniquely serve both the buy-side and sell-side communities.

Contact details: info@fidessa.com www.fidessa.com/contact

Q2 • 2014 | GLOBALTRADING

72 | RESOURCES

FIX Flyer

With over 180 clients worldwide, including UBS, Barclays, Berenberg Bank, GBM, Larrain Vial, Bank of America Merrill Lynch, Goldman Sachs, and JP Morgan, FIX Flyer develops advanced technology for managing complex, multi–asset, institutional securities trading using highly scalable software and network technologies. FIX Flyer provides the

ConvergEx Group

ConnEx is ConvergEx Group’s fullymanaged technology solution for broker-dealers. Streamlining the onboarding life cycle for clients, our experienced professionals are committed to helping to reduce clients’ connectivity-related expenses.

As a third-party, broker-neutral managed services provider, we act as an intermediary between brokerdealers and their network partners.

GlobalTrading

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

GLOBALTRADING | Q2 • 2014

high performance Formula One Risk Gateway; Exchange Adapters built for global DMA; fully outsourced Managed FIX services; the Daytona trade monitor and compliance surveillance platform; Flyer Online web-based connectivity for multiasset trading. The Flyer Engine is the first FIX server designed to manage high volume, ultra low latency trading networks, easily scaling to thousands of connections. FIX Flyer provides 24 hour support, and partners with Equinix, the leading

global data center provider and network–neutral connectivity. FIX Flyer is an IBM Business Partner with real world experience on the high performance Power platform.

FIX Flyer has headquarters in New York City with offices in Boston and Hyderabad India. Visit fixflyer. com for company information and to request a free demonstration.

Follow us on twitter.com/fixflyer.

We configure connectivity for clients, tailoring infrastructure to meet business goals and requirements including cost reduction, connection engineering and FIX customization.

Clients receive access to sophisticated tools that monitor their orders, while a web-based dashboard provides transparency into the onboarding lifecycle. ConnEx technologies and knowledgeable support group helps ensure that interfaces remain connected.

expenditures and minimize risk.

Outsourcing connectivity allows clients to focus on core business objectives and worry less about upgrades, hardware changes, scalability, redundancy and FIX customization. ConnEx also offers a pre-trade risk management module that helps clients address regulatory requirements.

Managing operations for customers, ConnEx helps firms save on capital www.FIXGlobal.com offers our entire searchable archive of industry contributions, meaning that over 10 years worth of leadership commentary and content is available in an accessible format, entirely for free.

We are also pushing out the latest industry-led thought leadership through our

Contact Details: www.fixflyer.com

Contact details: For more information, contact George Rosenberger at 212.468.7726 or via email at grosenberger@convergex.com

Twitter feeds (@FIXGlobalOnline) and our LinkedIn group (GlobalTrading journal). These are forums for free-flow debate and to engage with industry peers on the burning issues of the day.

Contact details: yulia@fixglobal.com tom@fixglobal.com www.fixglobal.com

Sophisticated Solutions for Broker-Dealers A Single Point of Contact to Consolidate and Manage Your FIX Connectivity Empowering you to: 

Reduce Overall Expenses



Streamline The Onboarding Lifecycle



View All Connections Through A FIX Monitoring Dashboard



Administer Real-Time, Pre-Trade Risk Management



Utilize Compliance Surveillance and Reporting Utilities

For more information about ConnEx, contact us at connex@convergex.com.