GlobalTrading 2014 Quarter 3

Out Of Equities: Evolution Into Fixed Income And CurrenciesChris Rice, Global Head of Trading, State Street Global Advisors

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Q3 • 2014 • Issue #51

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Dear Readers,As buy-side desks continue to concentrate their trading into fewer offices with fewer traders, there has been a deep and necessary drive towards more efficient and analysed multi-asset trading. The debate however continues to be over what skills from the traders, and technology from brokers and vendors, are best suited to the task and how these elements are evolving over time.

Our Q3 edition deals with a range of multi-asset trading angles, from our cover story with Chris Rice of SSgA looking at how his firm, a global leader in institutional asset management, has amalgamated their desks and taken a very deliberate step to drive their conversations forward with vendors and brokers, through to a section focused on electronic trading of bonds.

Looking more broadly at the conversations buy-side firms have with their technology providers, we compare the larger buy-side firms’ approach to those of the smaller houses. There are some surprises in just how similar the two are in their relationships, but also how different they can be.We also have a number of pieces focusing on the Hong Kong Shanghai connect program, examining the concerns of the buy-side, across to wider questions and benefits, that should be on the radar of every market participant.

There is also a section on post-trade processing including coverage of GlobalTrading’s second post-trade roundtable in Hong Kong. As Europe moves to T+2, we look at how technology needs to integrate better with the front office, and how the buy-side are looking to create a more structured middle office technology stack. These articles are part of our push to look at how trading is changing, not just in a single asset class and not just in a silo of front office or back, but the integration and evolution of how the barriers between these elements of a trading desk are dissolving over time.

As always we are grateful for your interest in, and support of Global Trading and the FIX Trading Community.

Best Regards,

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

GlobalTrading’s Editorial Think Tank

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Carlos OliveiraBrandes Investment

Partners

Emma QuinnAllianceBernstein

Rob LaibleLiquidnet

HIGHLIGHTS“We are trying to stay on top of that efficient frontier of electronification and to push that frontier out by being very active with market participants, with vendors, and also regulators, because a successful solution will rely on all of these groups.” P.6

“As institutional traders who are primarily concerned with best execution and the efficient flow of capital from one investor to another, my team only needs a few simple order types to get the job done effectively.” P.21

Chris Rice, State Street Global Advisors

Bernie Bozzelli, Teacher Retirement System of Texas

“If you want an optimum market then you want all the buyers and all the sellers in the same place at the same time, it obviously makes sense to have that period to be relatively small.” P.30

“As the buy-side squeezed the sell side on costs, the responsibility for algo use moved to the end user. With this responsibility comes the need to understand the tools you are using, not just the algos themselves, but the pre and post trade analytics too.” P.33

Martin Ekers, Northern Trust

Neil Bond, Ardevora Asset Management

“Everyone was very excited to hear of another mechanism to access China, but once people got into the detail, there were some things about the structure that would mean that QFII and RQFII are definitely going to remain a key element of institutional access to China.” P.53 Emma Quinn, AllianceBernstein

“

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CONTENTS

FOCAL POINT

6 Out Of Equities: Evolution Of Technology And Concepts Into Fixed Income And Currencies

- Chris Rice, State Street Global Advisors

10 Initiatives In Fixed Income - Paul Squires, AXA Investment Managers

13 Evolving Into A Multi-Asset World - Richard Coulstock, Eastspring

Investments Singapore

17 Seeking Clarity In Bonds - Trevor Leydon, AVIVA Investors

19 The Accelerated Growth Of E-Trading In The Credit Markets

- Fabien Oreve, Candriam Investors Group

INSIGHT

21 Regulation vs. Market Solutions - Bernie Bozzelli, Teacher Retirement

System of Texas

23 Trading Bitcoin - Dave Chapman, ANX

26 Measuring Change To Find A New Path - Ben Jefferys, IRESS

OPINION 30 Changing The Questions - Martin Ekers, Northern Trust

33 Maximising Our Buy-side Skill-sets - Neil Bond, Ardevora Asset Management

Tailor Made Technology - Glen Beamson, Abu Dhabi Investment

Authority

35 Beware The Effects Of Unintended Consequences

- David Rabinowitz, UBS - Sanji Shivalingam, UBS

POST-TRADE

38 Hong Kong Post-Trade Roundtable

42 Post-Trade Processing: Updating The Long Tail

- David Pearson, Fidessa

44 Towards An Efficient Back Office - Brian Godins, HSBC

FIX For Allocations And Confirmations - Scott Atwell, American Century

Investments

AMERICAS

46 Strategic Imperatives For Trading Compliance Executives In 2015 And Beyond

- Cromwell Fraser, NICE Actimize - Sherie Ng, NICE Actimize

ASIA 49 Shanghai-Hong Kong Stock Connect:

An Unprecedented Challenge, An Unprecedented Opportunity

- Nick Ronalds, ASIFMA

53 Hong Kong Connect: More Questions Than Answers

- Emma Quinn, AllianceBernstein

55 Shanghai-Hong Kong Stock Connect - David Gilmour, Deloitte

57 Changing Tick Sizes In Japan - Junya Umeno, Blackrock - Hiroshi Matsubara, Fidessa

Phase 2 Outcomes - Makoto Nagahori, Chi-X

60 FIX Trading Community’s 12th Annual APAC Trading Summit

PRODUCT OVERVIEW

64 Multi-Protocol Automated Testing as Strategic Competitive Advantage

Esprow

FRAGMENTATION

66 Japan’s New Tick Size Programme

INDUSTRY

71 Company Profiles

6 13 21

33

GLOBALTRADING | Q3 • 2014

6 | FOCAL POINT

With Chris Rice, Global Head of Trading, State Street Global Advisors

Beyond Equities: Evolution Of

Technology And Concepts Into Fixed Income

And CurrenciesMore Buy-side Interviews

Q3 • 2014 | GLOBALTRADING

FOCAL POINT | 7

Moving to the second tier of less liquid instruments: small cap equities, emerging markets currencies, high yield corporate bonds; price and size discovery isn’t going to necessarily happen in a screen-based way, or a virtual limit order books, or a central limit order book. You have to take a different approach by picking up the phone a bit more which takes more time but you have to get more creative.

This then starts feeding into the technology and to the Order Management System (OMS), because the OMS is the control station for all the trader’s activity. The OMS allows you to build your strategy, but it also gives you a glimpse into the

future. When you ask “What is possible within fixed income?”, even if you have a Request for Quote (RFQ) market, there may be other order deployment methods that could be created to push orders from a fragmented dark space into a more communal and transparent space for execution.

Because fixed income is not exchange traded, there are many order characteristics we’ve talked to dealers about in terms of gaining more insight to their inventories in a streamlined fashion using simple software which would allow them to present their inventory in a way that enables us to react and respond electronically, or at least to better understand the breadth and depth of it.

What is the progression across asset classes?Greg Berman from the SEC likened the equity market to the operating system for an iPhone, and the apps that iOS handles as the instruments that go through the exchange of the iPhone. For non-equities, there is no iPhone equivalent – no central operating system or nerve centre. There’s over the counter for currency and over the counter for fixed income.

“Currency appears to sit in the middle; if you’re thinking of G10 currencies where dealers can provide streaming prices into a virtual limit order book, currencies are actually the nearest cousin, if you will, to equities.”

How can concepts from equities evolve into other asset classes?At State Street Global Advisors I head up a global trading team with desks in Boston, London, and Hong Kong. Our trading philosophy is based on one really basic concept – to trade in the best interest of our clients as efficiently as possible. This philosophy was a core tenet that drove us to bring our global desks onto one common technology platform, across regions and asset classes for equities, currency and fixed income.

The primary focus of our traders is on client and portfolio manager objectives and market context and designing a strategy to accomplish their goals.

There has been a vast change in the technology and regulatory environment over the last 15 years which has helped to decrease transaction costs in US equities, which we look at as an evolutionary model that could be applied to other asset classes.

How does this feed into technology?We look at asset classes in terms of liquidity. The listed market is the most liquid asset class because of the market structure that has evolved over time. So we approach other asset classes similarly and if you’re in currencies, for example, you can create something similar to the concept of a virtual limit order book, simply by working with various vendors.

It is a bit more difficult within fixed income, but if you cut across the top and look at liquid instruments that are exchange traded or over the counter, a common approach would be to electronify them to the greatest extent possible. If you have the equivalent of a central limit order book for an exchange or virtual limit order book for currencies within fixed income, you create the potential for a whole universe of bonds to trade.

On credit in particular, there are very liquid corporate issues that will trade, but for every equity issue there can be hundreds of debt issues. For example, General Electric common stock is very liquid (daily average value traded is roughly $750MM USD) but their debt issues are very fragmented; you can’t think about trading the debt in the same way.

Generally electronification makes the following more possible on these markets:• Improves transparency.• Increases order control and execution.


8 | FOCAL POINT

Chris Rice,Global Head of Trading, State Street Global Advisors

Currency appears to sit in the middle; if you’re thinking of G10 currencies where dealers can provide streaming prices into a virtual limit order book, currencies are actually the nearest cousin, if you will, to equities.

There is sufficient liquidity at a touch to virtualise and create a screen-based market because liquidity is there. When looking at topics around market structure challenges for equities, a lot of them relate to currencies: for example the high frequency presence or fill ratios. This “equity recipe” can then be integrated into currency in the same way, through electronification and equitisation.

We are trying to stay on top of that efficient frontier of electronification and to push that frontier out by being very active with market participants, with vendors, and also regulators, because a successful solution will rely on all of these groups. We have engaged in very productive dialogue with our regulators across regions on these topics.

How does this feed into conversations with the sell-side and vendors?Everything we do at SSgA is technology-enabled and we have primarily taken a buy versus build approach. John Wysocki, our Head of Cash, Compliance, Fixed Income and Trading

Technology and I are attached at the hip so we can realise our vision for technology and aggregation of liquidity. We have a strong foundation with our order management system, and have stayed with one vendor as we’ve expanded out into currency and fixed income. This is a global discussion within the firm; liquidity issues and secondary market liquidity are big challenges. Revolutionizing an industry that is nearly 150 years old will take time and teamwork.

Equities are highly electronic, so our conversations with vendors are more around fine tuning than re-engineering. In fixed income, we are very proactive in contemplating solutions that would not only benefit our clients, but the broader market.

A few years ago had a conversation with a start-up company as well as an established electronic trading provider and suggested they get in a room together. The vendor was working on a pricing methodology based on Bayes theorem, or ‘nearest cousin’ pricing. The idea was to take trading data from many sources and build curves on similar bonds and come up with a theoretical price of where they would be trading in the market.


FOCAL POINT | 9

State Street approached a well-established vendor in the electronic trading space which understands the surrounding challenges, and we asked them to apply their intellectual capital to create a solution to cross bonds. The plan never came to fruition due to various challenges and changes, but it’s a good example of how we’ve taken this out to the market to explore new ideas.

What’s different about our approach today is that we pursue electronification proactively and if we can play a role in engaging with our peers, vendors and other market participants to discuss ways to apply concepts from equities to fixed income, we will.

We are not the only firm pursuing this approach and over the last few years, buy-side and sell-side firms met and talked about a lot of these issues and worked on how to think through them more efficiently. And there were ideas of crossing and more efficient transmission of inventories. The result of this is that we are having more active and productive conversations. While the buy-side has been driving many conversations, the broker dealers are also being very proactive and the vendors want a partner. This is happening across all the asset classes, but in particular within fixed income.

How do these conversations vary across different regions?SSgA has clients all over the world covered by multiple regulatory regimes, and you have to think about what kind of input they are giving at a regional level and how that informs your global strategy. What we try to do is identify how for

liquid instruments, for equities, the rules in the US may be different to the UK or Europe or Hong Kong. In equities, 90% of our activity in the US happens electronically. And again, this is a function of asset composition.

I’d estimate that this percentage is 70% electronically in equities across the three regions. In some markets, electronic connectivity has matured or is in a different phase from a local market perspective and what a vendor can offer in terms of upgrades and tools to us.

What does the future hold?At the end of the day, our primary goal is to get the best possible result for our clients. We have to constantly look at all markets going forward across asset classes and to push for the changes we think will create the most efficient markets possible.

We are constantly looking for examples of what works in fixed income, currency and equities and considering if there is an application in another asset class. We examine where we could take those conversations with vendors, market participants, regulators and exchanges into a new direction to make it more efficient.

The future holds many more of those conversations. We are also continuing to push that efficient frontier on electronification for central limit order books or virtual limit order books. It could also be that we work with other vendors to expand market access. Many of the trading protocols in fixed income are expanding to connect more efficiently.

What you’re going to see is market efficiency continuing to grow. The conversations so far are just the tip of what is possible and I believe the buy-side will continue to take a more active role in driving these discussions.

The pace of change will increase because of a much more engaged buy-side, sell-side and vendor community. The brokers in our market have also been very responsive and proactive in their approach. While there are many different views on how change will take place, the end result will require collaboration and technology.

“We are trying to stay on top of that efficient frontier of electronification and to push that frontier out by being very active with market participants, with vendors and also regulators, because a successful solution will rely on all of these groups.”


10 | FOCAL POINT10 | FOCAL POINT

instruments being recycled has diminished, and clearly the capability of banks to facilitate or intermediate between issuer names, different durations and different coupons has shrunk. While it is a little extreme to say so, it looks like we’re going to continue to move towards an agency model; you can see that the sell-side has become much more discerning in where they are providing their limited capital.

One of the general focuses, therefore, is not just on what might replace the intermediation that banks previously offered (and I think we have approximately 30 different vendor initiatives ongoing at the moment in various guises), but equally, to see if there’s a way to unpack more of that 97 percent of inventory that is very passive in the portfolios of investment managers. While it should be recognised that one of the fundamental differences between fixed income and equities is that a lot of fixed income instruments are bought to be held until maturity, this pursuit of increased liquidity should not be underestimated.

The buyside trader is traditionally quite passive in that the PM either holds dormant bonds or decides to make specific changes and sends orders to be executed. So

We are currently trading around 80% of our fixed income credit orders electronically with over 90% for government bond orders. They are executed through our OMS, which uses FIX connections to the RFQ platforms such as MarketAxess and TradeWeb, providing us with an STP environment. We have had this in place for a number of years which has become something of a norm across the buy-side that have the resources to put towards this kind of connectivity.

What is more significant to the fixed income trading market are the constraints that have been put on investment banks in the way they can use their balance sheets, due to regulation such as Basel III. This has an impact on liquidity and the quotes we get from those electronic platforms or the quotes we get by voice. They clearly don’t have as much balance sheet to use as they have in the past and that significantly constrains liquidity, or at least the capability to recycle inventory.

This is how we arrive at a situation whereby 10 percent of the fixed income bond universe which was historically “in play” at any one point between the buy-side and the sell-side, has shrunk to around 3 percent. The universe of

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12 | FOCAL POINT

perspective, deliver a solution that is platform agnostic. So for example a trader acknowledges their order and is alerted if there is anything on a crossing network. The consolidated view of market prices not only gives pricing information to execute the crossing order but, if there is none, then forms the virtual book which will dictate the subsequent execution decision (potentially for example using an algo but equally useful if trading via voice). Electronically various filters could be applied according to your own preferences. We think such an approach lends itself to connectivity and therefore FIX data standards will be very useful to keep technology costs from spiralling.

The dialogue is very fluid. It’s very dependent on the buy-side and sell-side collaborating to take it to the next step because there’s certainly interest and Sassan is doing a great job at the hub of that exploration. Then we have seen some great prototype work from our EMS provider so we are very excited about the future market structure of fixed income trading but it needs a tangible commitment by stakeholders to really move it forward. That will be the acid test.

Paul Squires,Head of Trading, AXA Investment Managers

between the two objectives of trying to release dormant bonds that rest passively in the portfolios and simply looking at liquidity when the trader receives an order to execute, is clearly some margin where there is some inventory the fund manager may look to recycle if they think they can improve yield, duration, exposure or anything else that might enhance performance and it’s that bit where there is a very interesting innovation at the moment. How you achieve that goal and which one of the numerous initiatives is going to be successful is the biggest unknown, but there is certainly increased optionality from, for example, the order book structure (BondMatch), crossing opportunities (Liquidnet) and variants thereof (for example Algomi), in addition to the RFQ approach, all to some extent an illustration of the new paradigm for fixed income trading.

The regulatory pushWith the MiFID II ESMA level 1 text already delivered, I’m not sure how much more further regulatory change there will be. A key driver has been for heightened transparency which impacts our consideration of what will be required by 2017 on both pre- and post-trade. This has started to influence our thoughts around gathering a composite view of prices from multiple venues and banks (pre-trade) to how we could ‘smart order-route’ to secure the best execution for our clients based on those prices.

What are the FIX initiatives?One of the recent developments we have benefitted from is the use of FIX to send fixed income OTC orders (CDS, IRS etc) to the RFQ platforms that support those instruments. This extends the scope of STP from the cash universe already mentioned with the connectivity provided by our EMS provider. On the same theme of mitigating operational risk, Adam Conn at Barings, as co-Head of the FIX Trading Community EMEA Investment Management Working Group, is leading the work on bringing FIX to the IPO/New Issue process. Also within the FIX Trading Community Sassan Danesh, who runs the fixed income stream within the FIX Trading Community, is very pivotal in that role in a wider sense and of course the FIX Trading Community is a community that involves the sell-side, buy-side, vendors and exchanges.

One of the things we’ve been talking about is the role FIX can play as a data standard, which might make execution between banks themselves easier, as well as enabling the buy-side to access more pools of liquidity. So the protocol is an element of what might allow all market participants to interact and from our


FOCAL POINT | 13

To begin a discussion on our current multi-asset world, it is worth recalling just how dealing desks initially began to evolve. There was no miraculous moment of divine creation. Buy-side dealing desks emerged slowly from a primordial soup of regulatory and compliance issues, flung into a hostile world controlled by volcanic fund managers wary of losing

control of an important aspect of their investment process. These were primitive times, the trading planet was ruled by dinosaurs. “Paper

tickets” and “time stamping machines” were considered cutting edge. Prophets forecasting a future of electronic trading and a

glorious world of compliance, risk management and counterparty limits would have been interred for their own safety.

Initially, dealing desks would have consisted of one or two people and perhaps a shared Bloomberg terminal

with focus generally on equities and possibly a little foreign exchange. Dealers would have been viewed

very much as being no more than a cost centre, adding little or no value to the front office team.

Slowly, attitudes changed, a trading benchmark would have been applied to executions and, over

time, desks began to demonstrate that value was added by having dedicated dealers paying full attention to execution quality. The next stage of evolution would be for dealing heads to participate in regular team meetings with investment heads and perhaps present capabilities to existing and potential clients. No longer soupy amoebas, dealers began to progress up the food chain.

Moving on from those early formative days, recent times have seen further

changes in the Asian equity trading landscape which have required

dealing desks to become increasingly sophisticated.

Regulatory changes,

Richard Coulstock, Director, Head of Dealing at Eastspring Investments, Singapore, examines where multi-asset desks came from, and what the future holds.

Evolving Into A Multi-Asset World


14 | FOCAL POINT

competition to established exchanges, algorithmic trading and increased usage of execution analytics and commission sharing agreements have all combined to make Asia a dynamic and challenging trading environment requiring an increased toolkit and skill set for those of us covering this region.

With regards to toolkits, dealing desks will need an advanced EMS (Execution Management System), possibly to complement and enhance the functionality of an OMS (Order Management System). These systems allow traders to execute electronically, access various dark pools and perform both pre- and post-trade analytics with a view to continually seeking to improve execution results. For a dealing desk not to have access to all relevant pools of liquidity is verging on negligent and could be considered a dereliction of duty in terms of trying to achieve “best execution”. But to access those pools properly and to monitor their behaviour, you need the appropriate tools.

When we look at a buy-side desk in Asia now, compared to ten years ago, in evolutionary terms we have gone from inventing the wheel to warp drive in less than a decade.

Changes in the equity world also involve exchanges themselves. New markets are opening up and existing exchanges are looking to connect. The ASEAN Link and the proposed Shanghai-Hong Kong Mutual Market Access scheme are two examples of these developments. Exchanges and regulators are also more aware of the changing landscape as competition increases and innovations such as high frequency trading require close scrutiny.

In addition to the changing equity landscape, further developments are starting to creep into non-equity asset classes. In the foreign exchange world, asset managers are thankfully moving away from models whereby custodians execute all FX trades or FX is treated as an end of day sweep up, an annoyance that has to be dealt with in order to facilitate trading in other asset classes.

There has been an increasing awareness that FX matters. Part of this has been driven by court cases in the US, where custodial FX trades, executed on a standing instruction basis, were found to have been failing in certain respects. Here at Eastspring Investments, we have been progressive in terms of introducing foreign exchange execution measurement into our work processes, measuring both trades executed by ourselves and those in restricted currencies still executed by custodians. While this is a more complex process than in the equity world, largely due to the lack of transparent exchanges, we are now sharing analysis with counterparties and are using results to find ways to improve our processes.

“When we look at a buy-side desk in Asia now, compared to ten years ago, in evolutionary terms we have gone from inventing the wheel to warp drive in less than a decade.”

Richard Coulstock,Director, Head of Dealing at Eastspring Investments, Singapore

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Our fiduciary duty to our clients to attain best execution has seen a drive towards electronic and algorithmic trading with foreign exchange execution analysis now an embedded part of our workflow. The analysis aspect is still work in progress as issues such as benchmarking are more complex than in the equity world. However, it is clear that foreign exchange trading has advanced significantly, will continue to do so and that changes in bond trading from a global perspective have also begun.

If we concentrate on the Asian environment, bond trading is certainly less advanced than in the US or in Europe. There are a number of reasons for that, issues from both the buy- and sell-side. From the sell-side, banks are used to trading bonds in an OTC fashion. Moving to a more competitive, transparent and measurable environment may not be in their economic interests. On the buy-side, unlike in the equity world, dealers are unused to a world of change. In the bond environment we are in the early stages of evolution. Perhaps the first stage has been for many of the larger asset managers, ourselves included, to set up multi-asset trading desks instead of having fixed income managers execute for themselves, or to have dealers as an embedded part of the fund management team.

I believe that separate identity for dealing teams is a crucial stage of development.When we look at the overall landscape we cannot forget regulators and exchanges. They too have their role to play. For the purposes of this article, I shall leave regulators largely aside, except to say that regulatory changes will hopefully push

traditional OTC flows onto listed platforms. Transparent, listed trading is crucial in both reducing manual errors and in providing a platform upon which to build execution analystics.

In the exchange world, Eastspring Investments is based in Singapore and we have found our local exchange to be increasingly progressive and engaging. Singapore is Asia’s largest FX trading centre, and SGX today offers both listed FX derivatives and OTC clearing services for FX Forwards. SGX Derivatives Clearing (SGX-DC) is the first Asian clearing house authorised as a Derivatives Clearing Organization (DCO) by the CFTC (U.S. Commodity Futures Trading Commission). In addition, SGX has initiated a thorough study of electronic trading of Asian bonds with a presentation in New York entitled “Are investors becoming more comfortable trading less liquid bonds electronically?”. A conclusion of the SGX is that their research indicates there is strong evidence that electronic trading in Asian bonds and in the Asia region is rapidly growing, albeit from a lower base than in Europe or indeed the US.

Interestingly, The Straits Times recently ran an article calling for a more reliable bond trading market with increased transparency and highlighting issues such as wide spreads and large lot sizes.

It is clear that the bond market is evolving and will continue to do so and this can only be in the interests of both retail and institutional investors. Improved efficiency, tighter pricing, increased transparency and lower overall costs are obviously in the interests of all investors.As a final point, trading on electronic platforms will make integration of multi asset desks an easier process and more readily allow for cross-asset training of buy-side dealers. The Age Of Dinosaurs will finally be over, buy-side dealers will have completed another stage of evolution.

“Transparent, listed trading is crucial in both reducing manual errors and in providing a platform upon which to build execution analystics.”


FOCAL POINT | 17

investor is even greater because we can have the capacity and capabilities to construct an investment portfolio which delivers against the outcomes that the clients talk to us about, be it income, capital growth or protection against inflation.

On the trading front the summer period in more recent years has seen the issue around lower capacity of market players to provide liquidity through warehousing inventory being exacerbated.

This combination of the absence of market participants and the consequences of various stakeholders altering the ability of the sell side to act as intermediaries adds risks to the system and could have unintended consequences. The traditional role of intermediaries along with other participants was and still is very important, as they could, at times, have acted as a mechanism to avoid markets gapping down.

Bond trading issuesWe wouldn’t say there are problems with bond trading at present, rather there are things that we are acutely aware of, particularly as we are in summer and that is historically a period of lower liquidity. Many seasoned hands are discussing the risks around the hunt for yield pushing less cautious investors into spaces where greater or different risks can lie unseen unless you have suitable expertise or insight. The shrinking of yields to the current levels, the re-emergence of covenant ‘lite’ and the wall of less sticky money entering some areas of the bond market over the last few years are all examples of things which are featuring more prominently in people’s minds.

If corrections were to occur this could be a harsh lesson for some investors who are less well prepared. These challenges mean that the value of an asset manager like Aviva Investors to an underlying

With Trevor Leydon, Head of Investment Risk and Portfolio Construction, AVIVA Investors

Seeking Clarity In Bonds


18 | FOCAL POINT

Technology can be transformational, it can lead to new and exciting developments but as we have seen with some electronic trading developments over recent years it is not without risk. In the reputational sphere, firms need to understand the changes, the challenges, the risks and also, the returns from these developments.

Transparency in trading and inventories?The measuring of liquidity is proving to be a major challenge within the industry in general and amongst bond managers in particular. Recent regulatory changes such as attempting to quantify liquidity profiles of funds for investors is something that we strongly support. However we appreciate that it requires assumptions in modelling and ultimately using an element of professional judgment to supplement somewhat limited information. Anything which can assist the industry in this space is going to receive a lot of attention and support, pooling of anonymised information in terms of liquidity would allow investors greater transparency around whether they are being correctly compensated for liquidity or more importantly the lack of it. At Aviva Investors we are fortunate to have an array of expertise and talent which has devoted considerable efforts to developing measurement techniques in this area however, we still recognise that it is an areas where collectively as an industry we should seek to do more.

“Finding that optimal level of regulation in a market that evolves as quickly as the global electronic financial markets requires international co-operation between regulators and also the participants.”Trevor Leydon,

Head of Investment Risk and Portfolio Construction, AVIVA Investors

We don’t believe that there are problems that are unique to the electronic markets, rather the migration from the phone based market to electronic platforms will take time: markets where there are less market participants, such as some emerging ones, these will not move as quickly as some of the developed markets such as G7 Gov’t bonds. This is because until there is enough liquidity in those markets participants are not comfortable showing their hand to the wider market. As these concerns fade through increased participation this will be less of an obstacle to markets going mainly electronic.

Regulation, market structure solutions, and new technologyThere is always a balance between regulation and allowing the markets to provide solutions. That is a balancing act that can be incredibly difficult to achieve as rules that are designed with the best of intentions can have completely unintended consequences in the real world on investors. Likewise market provided solutions can take time where there are competing goals and objectives. Finding that optimal level of regulation in a market that evolves as quickly as the global electronic financial markets requires international co-operation between regulators and also the participants.


FOCAL POINT | 19

Large institutional investors have been trading with more electronic tools in the credit markets since the financial crisis. Over the last five years, the low interest rates that have stimulated investors’ appetite for yield have taken corporate credit issues to very high levels. Investors have never held so many bonds. As a result, multi-dealer trading systems have innovated and new functionalities have been introduced around pre-trade information and price discovery. Today, buy-side traders instinctively consult runs messages, indicative quotes and dealers’ axes in those platforms. Some asset managers have taken the opportunity to upgrade their order management system and enhance straight-through-processing to absorb large order flows without increasing costs.

The most popular electronic trading tools are the multi-dealer platforms that have attracted a large spectrum of dealers, from global banks to regional banks. Some regional banks have managed to increase market share in their home market. Technology has been important in helping asset managers gain access to a wider range of liquidity providers. More competition and more specialization in business segments have forced the largest dealers to improve efficiency and technology using dynamic pricing algorithms for small orders in liquid instruments. Unlike smart order-routing in equities, electronic trading is rather uniform in the bond markets, where small-to-medium size transactions occur mainly through requests-for-quotes (RFQs) to dealers. Despite a wider presence of dealers in these platforms, the reduction in secondary market liquidity has been more visible since asset managers started to focus on transaction cost analysis. Asset managers’ trading desks have also received more demands from pension funds and mutual funds for price improvement inside the bid-ask spread disclosed by the existing platforms.The liquidity issues in the secondary corporate bond market and the number of “rejected” or “passed” orders have been more frequent recently – for a couple of reasons:

1. Banks have reduced their inventory of bonds due to Basel III regulations: they have less capacity to take bonds in their balance sheet and they may have less willingness to trade sometimes due to more stringent risk management.

2. Post-trade information in European bonds is insufficient: asset managers can only rely on their internal statistics to target the dealers that are most likely to transact specific instruments. Information is not optimal for investors on instruments they have never traded before.

The Accelerated Growth Of

E-Trading In The Credit Markets:

Perspectives And ChallengesBy Fabien Oreve, Global Head of Trading, Candriam Investors Group


20 | FOCAL POINT

As the new regulations require banks to take fewer risks with their own resources, it is important to add fluidity in the credit markets. Agency trading through order books can be an interesting means of gaining access to a wider range of participants in the secondary market; it can also add transparency to the calculation

of transaction costs. However, agency trading will be a sustainable solution for asset managers only if order book providers continue to innovate.For small-to-medium size orders, technology is the most important part of direct execution in equities, but you need a combination of technology and a relationship with the broker-dealer in corporate bonds. If you place a limit order and you are best bid or best offer, you will get some human support from the broker-dealer’s team behind the system, but at the same time your order should be reflected automatically across conventional multi-dealer platforms. As many bonds structurally are not for sale, the probability of an order fill in a particular instrument may be low. A smart device should therefore also suggest that you replace the current order with another one in a similar instrument available in the trading system.

The evolution of market structure in the European credit markets is on-going but it will take some time to make electronic trading in the less liquid corporate bonds more efficient. Post-trade transparency for this asset class is another important feature that will help investors improve transaction cost analysis. However, the challenge here is transparency calibration or how to produce publicly post-trade reporting with an appropriate time delay for less liquid trades and large-size transactions. There are many more corporate bond issues outstanding than equities, which would be a permanent challenge for any European entity in charge of providing post-trade data. The ESMA (European Securities and Market Authority) consultation paper about MIFID II & MIFIR regulations contains a section on the “post-trade transparency requirements for non-equity instruments” and is a great opportunity for asset managers to outline their practical views.Making alternative trading systems coexist with conventional multi-dealer platforms and voice-trading will bring more flexibility and efficiency to the execution of corporate bonds. Adding transparency to the European post-trade data with different levels of information – depending on the nature or size of the trade – will make corporate bond liquidity more likely to happen in the secondary market.

“The evolution of market structure in the European credit markets is on-going but it will take some time to make electronic trading in the less liquid corporate bonds more efficient.”

This article originally appeared on the Candriam Investors Group blog

Fabien Oreve,Global Head of Trading, Candriam Investors Group


INSIGHT | 21INSIGHT | 21

With Bernie Bozzelli, Director of Trade Management, Teacher Retirement System of Texas

Regulation vs.

Market Solutions Fragmentation in the US marketsWith over 50 potential venues (exchanges, dark pools, and electronic communication networks) available to execute US stocks, it’s reasonable to suggest markets are too fragmented and are due for some consolidation. However, I think it’s important to point out that in our experience, trading costs (both explicit and implicit) in US. equities have generally been declining over the last several years and compare very favourably with the rest of global developed markets so we should not lose sight of the realised benefits from increased competition.

Market Solutions or Regulation? While I believe US markets are among the most efficient markets in the world, there is definitely room for improvement and I believe that improvement should probably be led by a combination of regulatory changes and market solutions. The Investor’s Exchange (IEX) team has shown that market based solutions do work and can affect change to improve market structure but the pace of change can be slow. The benefit of an enhanced regulatory environment is it can be applied to the entire market structure and the change happens almost instantaneously. For instance, I believe the markets would immediately benefit if the SEC would mandate that exchanges provide market data to

participants at the same time and mandate that exchanges remove High Frequency Trading (HFT) friendly order types. (I fully understand this is much easier said than done so this is not a criticism of the SEC.) As institutional traders who are primarily concerned with best execution and the efficient flow of capital from one investor to another, my team only needs a few simple order types to get the job done effectively.

I think regulators are doing the best they can to better understand markets. The SEC and others have very limited resources and the impact of HFT is not the only item they are trying to address. It’s somewhat disingenuous to use the power of hindsight to criticise regulators for the unintended consequences of prior regulatory changes. I don’t recall anyone citing these risks as Reg. National Market System (NMS) was being approved.

Market StructureWe are a global, multi-asset class trading desk at Teacher Retirement System of Texas which means we have experience in several markets that present some type of obstacle to us, however, as US equity markets are very efficient when compared to the rest of the


22 | INSIGHT

world so I don’t consider US market structure an obstacle.

Processes and StrategiesWe are constantly evaluating and enhancing our internal processes to ensure that we are delivering on our best execution mandate. Even before HFTs became a concern, we were dealing with predatory type practices from other market participants such as specialists, broker dealers and fast money hedge funds. One of the most beneficial changes we made several years ago was to decouple research from execution by using a Commission Sharing Agreement (CSA) structure to pay for research. Prior to this change, we used trade execution to pay for research which meant we had to trade with the firm that provided the research. That did not always result in best execution. Under our current structure we only trade with firms that have demonstrated an ability to provide best execution.

We currently use three different external Transaction Cost Analysis (TCA) providers to evaluate the quality of our execution. For example, we use TCA providers to help us evaluate how efficiently our traders and our brokers are able to source liquidity across multiple venues. We also use TCA to identify price action patterns associated with our different portfolio managers. This allows us to then develop optimal execution strategies specific to individual portfolio managers and strategies. Finally, we use TCA to compare our execution quality vs. a peer universe of similar funds.Technology is also crucial. Currently, we use Bloomberg as

“As institutional traders who are primarily concerned with best execution and the efficient flow of capital from one investor to another, my team only needs a few simple order types to get the job done effectively.”

our Execution Management System (EMS) provider because it provides most of the analytics we need and it can accommodate all the asset classes we trade on the desk; however, we are constantly evaluating competing EMS products to ensure we are using the right technology.

As far as specific trading techniques designed to mitigate cost associated with HFTs, it’s important to fully understand the logic behind the smart order routers and algorithms we use on the desk. Also, we need to not be predictable. If we were to use just one strategy over a day to execute an order, chances are an HFT or other predator firm would sniff it out and run ahead of us so it’s important to change strategies and back out of the market at certain times. Also, sometimes simple is better. Instead of using a dark aggregator or algo that sends indications to multiple destinations, use a simple Direct Market Access (DMA) strategy with a limit price.

Bernie Bozzelli,Director of Trade Management, Teacher Retirement System of Texas

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INSIGHT | 23

Dave Chapman, COO of Bitcoin exchange ANX answers a range of questions on the cryptocurrency and its role in institutional trading.

Trading BitcoinIs it possible to achieve an institutional level of liquidity?We developed our platform from the ground up to be institutional-ready. We’re seeing an increasing number of corporates and institutions engaging the bitcoin space. It’s also one of the reasons we’re actively developing our FIX API’s. In saying that, we’re today facilitating large institutional orders by means of block trades; some on exchange, some off exchange. The liquidity in bitcoin today is still too primitive to shift large orders without moving the market.

What remains clear however is how much illiquidity in bitcoin is owing to the lack of it not holding fiat currency status. Bitcoin’s market value and turnover are still trivial by currency standards. Bitcoins average daily trading volume across the major exchanges is somewhere between 20 and 50 million US dollars per day. Comparatively, the average trading volume of FX Futures on the Chicago Mercantile exchange is around 33 billion for Euros alone.

I’ll be the first to admit, there are few financial asset classes that share the tiny market cap in terms of size that bitcoin currently maintains and that equally exhibit bitcoin’s impressive volatility. Provided this small market cap however, bitcoin will definitely fall foul to market manipulation and will do so for some time. We often hear about this manipulation in the media and its negative impact on the crypto currency. However market

manipulation is not new to bitcoin, nor is it a problem that only affects small, new and experimental markets (e.g. one only has to examine the numerous and still ever-present scandals that afford themselves to the likes of interest rates, precious metals etc.).

We’re now witnessing numerous bitcoin ETF’s requesting approval from the regulators, and we’re now also seeing derivatives and options products being made available.

Bitcoin may appear very much a consumer, retail market, however we’re seeing the corporate and institutional sides show far more interest and I anticipate that momentum continuing in to this year and beyond.

What are the algo trading possibilities?Algo trading is definitely active on bitcoin exchanges. One can rely on the various API’s offered by the bitcoin exchanges to develop their own strategies. On the inverse however colo services are not really necessary right now for arbitrage between exchanges. We’re talking sub-second latency at best, not sub-millisecond, though I anticipate colo services will be offered as the opportunities to arbitrage prove more difficult to profit from.

Who regulates, controls the bitcoin ledger?The bitcoin ledger, known as the block chain, is a transaction database shared by all nodes participating in a system based on the Bitcoin protocol. A full copy of the


24 | INSIGHT

Transparent and neutral – All information concerning the Bitcoin money supply itself is readily available on the block chain for anybody to verify and use in real-time. No individual or organisation can control or manipulate the Bitcoin protocol because it is cryptographically secure. This allows the core of Bitcoin to be trusted for being completely neutral, transparent and predictable.

Is ANX trustworthy?Founded in June 2013, ANX has grown into one of the most used bitcoin exchange platforms. According to Bitcoincharts.com, ANX is the seventh largest bitcoin exchange in the world by volume.

It is ANX’s mission to promote a healthy eco-system by providing value-added bitcoin exchange services to the public. ANX is also lowering the barriers to bitcoins and other crypto currencies adoption by increasing ways for consumers to acquire and access crypto currencies. ANX introduced the world’s first physical Bitcoin Retail store, the world’s third Bitcoin ATM machine, a multi-currency online bitcoin exchange platform, as well as mobile Apps for crypto currencies. ANX have also just launched the world’s first bitcoin debit card allowing ANX customers to spend bitcoin at any traditional retail, POS, or online

block chain contains every transaction ever executed in the currency. With this information, one can find out how much value belonged to each address at any point in history. There is no central body or regulator who overseas or controls the block chain; instead every user of Bitcoin oversees and validates it.

Why would one use it over a traditional currency?Payment freedom – It is possible to send and receive any amount of money instantly anywhere in the world at any time. No bank holidays. No borders. No imposed limits. Bitcoin allows its users to be in full control of their money.

Very low fees – Bitcoin payments are currently processed with either no fees or extremely small fees. Users may include fees with transactions to receive priority processing, which results in faster confirmation of transactions by the network. Additionally, merchant processors exist to assist merchants in processing transactions, converting bitcoins to fiat currency and depositing funds directly into merchants’ bank accounts daily. As these services are based on bitcoin, they can be offered for much lower fees than with PayPal or credit card networks.

Security and control – Bitcoin users are in full control of their transactions; it is impossible for merchants to force unwanted or unnoticed charges as can happen with other payment methods. Bitcoin payments can be made without personal information tied to the transaction. This offers strong protection against identity theft. Bitcoin users can also protect their money with backup and encryption.

Dave Chapman,COO, ANX

“Bitcoin may appear very much a consumer, retail market, however we’re seeing the corporate and institutional sides showing far more interest, and I anticipate that momentum continuing through this year and beyond.”


INSIGHT | 25

merchant along with the ability to withdraw cash from any one of the millions of standard ATMs available around the world.

ANX is committed to enhancing its development and innovation capabilities to strengthen its global branding. Finally, ANX is a licensed Money Services Operator with a rigorous stance towards KYC and AML compliance.

What security measurements does ANX have?Security is of paramount importance to ANX. Every element of our operation has been methodically designed for optimum security. This includes all factors including physical intrusion, exhaustive vetting and background checking of staff members, the cold storage of coins and validation of withdrawal requests, and dedicated awareness to recurring security threats such as social engineering, phishing, and remote zero day exploits to name only a few.

Our staff are trained to detect suspicious transactions and requests and are procedurally qualified to comply with KYC and AML policies.

For those technically minded or curious, some of the security aspects we utilise are detailed below (some of our security elements will not be disclosed):

SSL Encryption: We use 128-bit encryption to encrypt all communication between our customers and our platforms. This is the highest encryption available and is used as the gold standard for all secure communication on the net.

State of the Art infrastructure: The ANX platform is hosted on dedicated servers in Tier 1 data centers. We do not use shared servers, nor do we employ services from Cloud providers.

Passwords: We do not use MD5 hashing to encrypt your password. To avoid common weaknesses, our proprietary procedures are designed to provide our customers with the peace of mind that comes from our security implementation.

DB Security: Our databases are encrypted and protected against SQL injection attacks. We also do hourly backups and send backups off site to multiple locations.

Business continuity planning: We have process and controls in place to deal with outages or attacks. Our site and funds are totally segregated. All customer crypto funds are maintained in cold storage, thus invulnerable to hacking attempts.

DDOS protection: We leverage one of the world’s strongest forms of protection against Distributed Denial of Service attacks. We do not pretend to do this by ourselves and partner with multiple third parties who have proven to mitigate some of the largest DDOS attacks in internet history.

Regular Stress and Soak Testing: Our technology is immediately scalable. Our regular stress testing has proven it achieves low latency processing and we’ve soak tested to over 10 million transactions within a 24 hour period. Translation: our engine and underlying infrastructure can handle load, and lots of it.

We employ a proprietary design to ensure that in the very unlikely event of a site breach, this does not result in access to online wallets or cryptos. We will not provide details to avoid providing potential attackers any insights; however the terms “air gap” and “complete segregation” may offer some hints. Additional information on the ANX exchange and their FIX offerings can be located at ANXPRO.com

“All information concerning the Bitcoin money supply itself is readily available on the block chain for anybody to verify and use in real-time. No individual or organisation can control or manipulate the Bitcoin protocol because it is cryptographically secure.”

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26 | INSIGHT

By Ben Jefferys, Head of Trading Solutions, IRESS

Measuring Change To Find A New PathWhether you look at it from a global, regional or local perspective, markets have changed a lot in recent times. A lot of this is to do with newer regulatory requirements but in markets where more than one exchange competes there has been a lot of competitive innovation too. With no sign of the rate of change slowing anytime soon could there be a better way for the industry to move forward? To explore this we first

take a look at the effects of recent regulatory change on trading volumes and patterns.

Despite slight increases in overall market volume, the value of share trading today is averaging lower than where it was a year ago. Some brief periods of increased volatility supported higher volumes but relatively speaking markets remain quiet. Still the


INSIGHT | 27

world where newer alternative exchanges are competing with the incumbent exchange. The newer alternative exchanges need market makers passively resting in their order books at the same or better prices than the incumbent so that broker smart order routers will target these exchanges. As prices move around on the incumbent exchange the market makers tend to move in sync on the alternative exchange adding to its ‘busyness’ whilst not transacting as much volume.

Because the messaging rate has remained reasonably stable whilst the volume on Chi-X is slowly growing it is a positive result for those supporting competition. The market is becoming more confident in trading away from the incumbent exchange. Market makers are supplying more liquidity by sitting passively with more volume. At the same time sell side brokers are also happy to post liquidity into these exchanges driven primarily by cheaper execution costs and a reduced queue time for stocks where this counts.

But these last 12 months have also been interesting from a post regulatory change point of view. In May 2013 ASIC changes regarding off market crossings for dark liquidity took effect. ASIC have recently made public comment on these changes in “Report 394 – Review of recent rule changes affecting dark liquidity”. A lot of focus has been put into trading around the new block special tiers but it is equally interesting to look at the effect on trades below block size that are now referred to as trades “with meaningful price improvement”.

ASIC were concerned with the amount of off market trading taking place away from the lit exchanges of ASX and Chi-X and for amongst other reasons its effect on price formation. Previously below block size crossings could take place at the best bid/offer and within the spread. The rule changes sought to address the situation and protect market quality by limiting what can be done off market and encouraging brokers to post liquidity back onto the lit exchanges. Nowadays these off market crossings below block size can only trade within the spread and offer a meaningful price improvement.

Looking at some sample data helps illustrate just what the effect has been. Telstra is a great example to use because it is well fragmented not only due to its size but also because of the way it trades. Telstra is a “queue stock” where establishing priority for passive orders is important.

number of transactions across the board continues to rise as the markets further fragment. We now have well over a year of trading since the Australian regulator ASIC made changes to off-market transactions relating to price improvement and block sized trades.

Message rates on the Australian exchanges have remained stable for 2014. By looking at the number of create, amend and cancel messages on each exchange we see both ASX and Chi-X exchanges are following a similar level of activity this year. Even though the ASX is effectively a busier exchange in terms of the headline number of messages it looks a little different when we compare it to the actual amount of volume transacted on each exchange.

Here we can look back a bit further to the start of 2013 and see that the total Chi-X volume has been slowly increasing whilst the total ASX volume even though being more volatile is slowly decreasing. Overall Chi-X still trails ASX in terms of market share but the message rate on Chi-X relative to its traded volume is higher than the ASX giving it a higher order to trade ratio. What we see here in Australia is really no different to what we see in other markets around the


28 | INSIGHT

Prior to the rule changes vast amounts of Telstra traded via NX crossings that could be done at the bid or offer. Brokers would always try and establish queue priority but then jump the queue and cross with an opposing order when the opportunity arose. The immediate effect of the rule change was a sharp drop in the number of below block size crossings. In fact these ‘NX’ crossings were down +60% the following month. Since then the number of NX crossings has remained fairly stable. It’s worth noting that in this example we don’t include what were known as ASX Priority Crossings that would extend the effect of the change as some broker crossing engines still used this order type at the time.

It is also interesting to look at how the competing exchanges fared with these changes. Again using Telstra we have taken a snapshot of trading for the month leading up to the rule change in May 2013 and then compared it with a year later. Below is the breakdown of all TLS.ASX trades for the months of April 2013 and April 2014.

From the earlier chart we could see that the number of crossings dropped off a cliff and the same is evident here. The proportion of trades executed as an NX crossing in April 2014 is far less than a year before. Successfully for

ASIC some volume has returned to the lit order books – or what we refer to as the Central Limit Order Book (CLOB). The same goes for other types of trades that have all increased to the detriment of the NX crossings. ASX Centre Point continues to grow and the same for Chi-X’s integrated order book that offers automatic price improvement (marked as HL for Hidden Liquidity).

Accessing the order booksWhilst a lot of the focus for the sell side in Australia has been regulatory change there has been a whole lot of exchange innovation thrown into the mix - a common theme seen throughout the world where incumbent exchanges are competing to protect their market share whilst new entrants are doing everything they can to take it from them.

These innovation changes typically appear as either new order types or even new liquidity pools and venues. Today there is plenty of choice when it comes to where and how to send an order to market albeit in an overall diminishing pool of liquidity.

In Australia not so long ago the available order types were straightforward and looked something like the table below:

ASXLimitBest MarketUndisclosed

Compare that to today where we have competition across exchanges and all of a sudden there are many more choices on how and where to create an order:

ASX Chi-XLimit LimitBest Market on CloseMarket to Limit IcebergUndisclosed UndisclosedIceberg NearPointXAuction Imbalance FarPointXCentre Point Limit Mid-PointXCentre Point Market Centre Point Dark Limit Centre Point Block single fill Centre Point Block multi fill Limit Sweep Limit Sweep with Dual Post


30 | OPINION

Changing The QuestionMartin Ekers, EMEA Head of Dealing, Northern Trust looks at trading, benchmarking, technology and what the buy-side can do to keep themselves up to date.

Sharp practice on the trading floorAs a long only trader, I have concerns around some trading where illusory liquidity is being provided. Some short term trading behaviours are not conducive to optimal market structure, for instance the posting of liquidity in multiple venues with an immediate cancellation of orders in the majority of those locations, once one location is interacted with. They understandably have to post in all the venues to ensure they make the transaction, and that, in itself is obviously defensible. But I suspect what often happens is that, as well as cancelling the other orders, they then go and buy many more than the 100 shares they sold irrespective of whether it is a small loss, to position themselves in the market to be able to offer more stock at higher prices. This behaviour doesn’t help anyone other than the high frequency traders who are trying to make some money on the back of a perceived genuine order.

The free market side of me says that in an open market place if somebody buys something and sells something they take on risk and they make some money out of it. If they’re buying stock that I should have bought and selling it to me at a higher price because I am giving them the opportunity to do so by sending signals and behaving like an elephant in a china shop, there’s no shame on them but shame on me.

I also have concerns that the markets may trade for a longer period of time than is optimal; even the US market, which is open for six and a half hours a day, has significant lows in its trading patterns and yet London and most of Europe are trying to hang on to eight and a half hours a day. I would argue that the genuine order flow that is looking to trade on any given day would participate at a higher level in a reduced trading day, and actual liquidity would be improved significantly.

30 | OPINION


OPINION | 31

A decade ago people were speculating if we’d be able to trade 24/7. Now you can trade many things 24/7, but the price you have to pay in terms of impact and spread increases significantly. If you want an optimum market then you want all the buyers and all the sellers in the same place at the same time, it obviously makes sense to have that period to be relatively small.

The role of new technologyClearly, we have to use technology to help us avoid being caught out. What you can’t do is legislate for other people’s behaviour. There is some behaviour that is clearly either illegal or certainly morally questionable. I think the regulators should continue to challenge and investigate the people with dubious short-term trading behaviours because they are the ones that are likely to be detrimental to market structure. What other investors need to do is to make sure that they are using the necessary tools to make sure they don’t leave themselves open to abuse.

We use technology to make sure that if we are going into a dark pool, we want a minimum order size. We might use limit prices more than we would otherwise, By way of example, if a stock is showing at 5/6 and you’re happy to buy at 6, by sending that order “at market” you risk buying 100 shares at 6 and the other 19,900 at 6½ or 7, due to someone with questionable ethics and some very smart technology spotting that you are starting to buy the 20,000 at 6. They then beat you to the venues offering the vast majority, and take them to their own account. This enables them to position in the market to sell them back to you at a fractionally higher price. So we will often use limits to ensure this doesn’t happen, on what might have previously been referred to as a market order. This in itself is sometimes fraught with difficulty, as if you’re unable to buy your 20,000 at 6, (because you put a limit over it), with the added pressure of the fund manager following up with “Did you manage to buy my stock at 6?”, you may have to admit, “Actually no, I got a hundred shares but now it is being offered at 9.” So clearly this approach has made the trader’s life more challenging, just for them to continue to execute, what you would have regarded as straightforward orders. The differences between large and small buy-side firmsIt’s always hard to know but I would imagine that a small asset manager almost certainly won’t have invested in a technology of his own, but uses tools that are available from the brokers and banks to empower

them. There are a variety of broker neutral platforms out there that allow you to use their own algorithms or those from brokers. So you could be a relatively small asset manager with a relatively small trading team and provided you’ve looked at what’s available, you’ve pretty much got all the tools that you’ll ever need.

Benchmarking - the next challengeOne of the fascinating things to me about trading is the fact that it’s not so much the results you get or the

Martin Ekers,EMEA Head of Dealing, Northern Trust

“If you want an optimum market then you want all the buyers and all the sellers in the same place at the same time, it obviously makes sense to have that period to be relatively small.”


32 | OPINION

performance number you produce. It’s not so much how did I do versus arrival point, or how did I do to close; the real question is, why are you trading to a particular benchmark? Why are you trading these to a closing benchmark, why are you trading VWAP, or why are you trading implementation shortfall?

The challenge should be around asking why somebody has chosen a particular benchmark and why it is a valid benchmark for that order. So the regulators might be better focused challenging not so much buy-side desks performance numbers but challenging their strategies and their benchmarks. It’s so easy to say you averaged the same as everyone else did today, but the question should be asked why were you buying them over a day when you could have done it in 5 minutes or an hour? People spend a lot of time trying to tell me that their algorithm is better than somebody else’s and I always say that I think the differences between one person’s shortfall algorithm and another person’s shortfall algorithm is so negligible as to not matter. The key is why you were using a shortfall algorithm or volume participation algorithm or a closed algorithm or alternative.

The Unintended Consequences of RegulationThe biggest challenge for the regulator is the unintended consequences of regulation, but I think that they’ve learnt lessons from previous actions. By way of example, we can look at commission unbundling and the FCA crack down on managers’ use of commission dollars to pay for research and pay for corporate access. Active managers may decide actually that they don’t need to be taking anywhere near the amount of research that they have been taking.

“It’s not so much how did I do versus arrival point, or how did I do to close; the real question is, why are you trading to a particular benchmark?”

I don’t think the buy-side can fix these problems, all we can do is make sure we are not leaving ourselves open to abuse. You’re always going to have challenges in any market place of any nature where people are trying to make money. A consolidated tape would definitely be a benefit. However regulators have to be very careful. To illustrate this point, the US regulator wanted a consolidated tape in place and to some extent, they have it. But it’s practically meaningless due to the sheer amount of data, and the regulator’s insistence that market participants interact with the best price. This is irrespective of the size and quality of the order and the location of the venue. The potential information leakage from venues, has meant that, in the US’s very fragmented environment, it’s actually become harder to trade in any meaningful block size in the US.

Considering where I would like Europe to be: all the buyers and all the sellers in the same place at the same time, with that exchange not being a profit entity but being effectively owned by its users. The more money the entity makes, the cheaper it becomes to transact on it.It may even be that the profits generated there are paid out to users would be a perfect scenario. I can’t think of a way we would get back there, but if the community all decided from the 1st of September we were all going to instruct our brokers to only place our orders on one venue(and everyone did it) that would work! The alternative venues would dry up and it would then seem to be a very efficient market with everyone resting on the same place. The risks are that the one venue you go to starts abusing their monopoly, or that participants break ranks and post elsewhere “just in case” This would creates pockets of activity elsewhere that you feel you have to interact with because you don’t want to miss out. Let’s just say it’s a tough one.


OPINION | 33

party TCA tools to analyse trades over a longer period, particularly for peer comparison.

Ardevora funds are just over three years old and have recently surpassed the $1bn mark, so we are a relatively small firm but we are able to leverage technology, either in house or provided by brokers, that closes the competitive gap with larger firms greatly. We use Bloomberg AIM as it has multiple tools that you need for trading, and it also gives you what you need with regard to pre-trade analytics, and

Neil Bond, Equity Dealer, Ardevora Asset Management

Maximising Our Buy-side Skill-setsThe buy-side has made huge leaps forwards in the last five or six years –their reliance on the sell side has reduced and now they are using the same tools and skill sets as the sell-side, and this is why a lot of people are moving across to the buy-side; control of trading is moving in-house. There are lots of things that have led to this – mergers in banks and money managers have led to much bigger orders flows through fewer partners – more program desks used algos with higher rates, so algo control moved to the buy-side to manage that cost, but they had to acquire the skills and people to monitor the trading with algos and to do the analytics pre- and post-trade. The consolidation of money managers and brokers led to a growth in program trading which in turn led to the proliferation of algos. As the buy-side squeezed the sell side on costs, the responsibility for algo use moved to the end user. With this responsibility comes the need to understand the tools you are using, not just the algos themselves, but the pre and post trade analytics too.

When orders hit the blotter I have already got the capabilities to analyze order characteristics – expected market impact and %ADV etc and I can use that information to slice and dice the flow into different strategies. The easy stuff can go through a vanilla strategy – VWAP, TWAP etc and the trickier stuff we can work ourselves according to the best strategy – IOIs, who has been trading the name, and trying to find a more sensible way to do the trades. We do like to use a lot of the dark pools for that as the anonymity levels the playing field between small and large players. We also split orders over different dark pools to find liquidity and minimize impact. We use in-house tools to monitor performance throughout and after a trade, and we look to see what we can do better and why. And we use 3rd

Neil Bond,Equity Dealer, Ardevora Asset Management

“As the buy-side squeezed the sell side on costs, the responsibility for algo use moved to the end user. With this responsibility comes the need to understand the tools you are using, not just the algos themselves, but the pre and post trade analytics too.”


34 | OPINION

and we are actively hiring from both the buy- and sell-side to further strengthen our capabilities. In addition to people skills we are transitioning to a more pragmatic approach to architecture, buying products when our requirements are well known or market standard and developing our own software to add value when we have bespoke needs.

Public funds sit in a unique position. While many are large in terms of assets under management, they are often relatively light in headcount and thus perhaps suited to more nimble smaller vendors than more heavyweight providers. As such, there is definitely a space for mid-sized vendors who can provide a more tailored service whilst providing the economies of scale and re-use of best practice that a vendor implementation can bring.

In addition, whilst best of breed technology is desirable, the reliance that a smaller team has on external vendors means that best of breed support will be more important in the long run. Software vendors that grasp this will end up growing business for the long term.

Glen Beamson, Chief Technology Officer at ADIATailor Made TechnologyOne of the by-products of an evolving investment model is an acceleration in the rate of change. Our role is not only to provide a first class technology service today but also to implement processes and planning to react to a potentially different set of requirements tomorrow. As the breadth of investment products widens, this agility becomes ever more important.

The danger of agility of course is that you try to do too much, too fast in an unstructured way. To counter this, the approach that we have taken is to build business-specific units, able to move at a speed relevant to each business line. Our focus is on hiring and training individuals with proven front-line experience who can demonstrate a strong innovative flair, primarily in business analysis, architectural design and project management

“...whilst best of breed technology is desirable, the reliance that a smaller team has on external vendors means that best of breed support will be more important...”

during the trade it can monitor performance and do post-trade analytics and TCA. Those tools help massively, and our size is often not a problem as a large proportion of our trades are executed anonymously in dark pools.

The biggest difference between small and large firms is the extent of bespoke automation of trading and monitoring. However there is a lot that we can achieve without a high level of customization.


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Beware The Effects Of Unintended ConsequencesBy David Rabinowitz, UBS Head of Direct Execution Services Asian Equities and Sanji Shivalingam, UBS Head of Algorithms and Analytics Asia Pacific.

The effects of a raft of exchange-led and regulatory inspired changes over the last 18 months in the Asia Pacific region is slowly filtering through not only to market microstructures themselves but also to market share compositions. Change is necessary for financial markets to maintain market integrity and stimulate liquidity. Catalysts, incentives, roadblocks and reversion metrics, will influence market participants as to the exchanges and venues in which they trade. Yet in addition to the desired outcomes, the changes have potential to bring about unintended consequences. Over the past six months throughout Asia, exchanges have implemented structural changes and introduced strategic initiatives in an effort to entice market participants. They have included: tick size reductions in

Indonesia (06 January 2014) and in Japan (14 January 2014 and 22 July 2014); an increase in continuous auction matching sessions in Taiwan (24 February 2014 change to 10-second matching from 15-second matching in July 2013 and 20 seconds prior to that); liquidity provider (LP) and market maker (MM) incentive schemes in Singapore (01 June 2014); lot size changes in Korea (02 June 2014); and the introduction of a stock connect mutual market access (MMA) program in Hong Kong and Shanghai.

Some initiatives have brought about positive outcomes, such as improved benchmark performance as a result of tighter spreads in the case of Indonesia (from 65bps in 2013 to 26bps in 2014) and an intentional focus on trading large cap benchmarked constituents in the

OPINION | 35


36 | OPINION

case of the MMA scheme. However, others have led to increased costs. In response to a decline in ASEAN market share (Singapore now comprises 28% of the ASEAN market as opposed to 43% in 2009), the Singapore Stock Exchange (SGX) has sought to attract liquidity providers and market makers with incentive schemes (by offering rebates on clearing costs and exchange fees). A possible unintended consequence is that the institutional client base, a mainstay of the market, risks being disenfranchised and faces a rising clearing fee structure. A US$10m trade that, previously, would have cost US$468 to clear now costs US$3,250. A decision to change the composition of the market has unintended consequences.

It is inevitable that as microstructures shift, volume curves need adjustment, spread validations require recalibration, quote stability checks become more sensitive and smart-order routers require more sophisticated multiple level sweeping and posting logic. A potential knock-on effect of change is the dislocation of liquidity as the order book fragments. Many structural changes have been accompanied by a general increase in the velocity of trading (i.e. the number of interactions over a given period) and a continued reduction in the average trade size. For example, in Korea, SK Hynix, which traded 11k prints

per day prior to the board lot change, is now printing an average of 20k orders. The knock-on effect has been for the average trade size to decline from 1.5m KRW to 1.1m KRW across the Kospi200 index.

Regulatory changes in Australia have been positive for local market structures. The Market Integrity Rule (MIR) changes, introduced in May 2013 by the Australian Securities & Investment Commission (ASIC), aimed at ensuring a level playing field for brokers and exchanges in Australia. While the regulator imposed a set of rules for all in dark, it has also prompted an increase in volumes in Centre Point over broker lead pools.

An unintended consequence of the dispersion of liquidity in Australia, given the increased activity within the alternative Chi-X Australia exchange and within Centre Point, is an inherent rise in market-making flow within the different venues. Such non-traditional systematic funds are “long agility” and are often able to capture inefficiencies in new environments that Institutional investors are generally slower to react to and compete. As broker offerings are enhanced and smart-order routing features are developed, a more accurate reflection of the true market economy should emerge as evidenced by the rise in passive posting on Chi-X which increased from 5% in May 2012 to almost 40% in May 2014.The merger of the Tokyo and Osaka stock exchanges combined with the concerted effort on the part of the Japan Exchange Group (JPX) to level the playing field with the PTS (Chi-X, JapanNext) has had unforeseen effects on the market in Japan. In an effort to minimise market disruption, implementation is taking place in two phases. Phase I, which was completed in January, brought about a welcome reduction in spreads but it also resulted in a spike in the number of quote changes. In many cases, the number of market data events (new/amend/cancels) increased by 150% while the quote sizes declined by a factor of 10.Phase II is clearly going to have a larger impact than the initial phase. Market data events are expected to increase to the point where the cost of the hardware required to implement the changes may become excessive. Furthermore, as mandated spreads contract, liquidity providers may find it more difficult to maintain current activity levels and profitability. It also remains uncertain how it will affect competition among the venues, with PTS volumes expected to decline in the affected names. Market structures in

David Rabinowitz,UBS Head of Direct Execution Services Asian Equities


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Asia Pacific are more diverse than in any other region. Spread costs in Thailand average 45 basis points relative to a 13 basis point spread in Japan. While the US is dabbling with a wider-spread pilot program to enhance liquidity in the small and mid-cap segments, Japan is moving in the opposite direction by seeking to attract institutions with sufficient technology spend to keep up with the structural changes.

Some investors remain concerned as to with whom they are interacting. In-house analysis of market-share composition in Hong Kong has revealed the emergence of new market share providers tied to the single-stock options market-making licenses granted by the Hong Kong Stock Exchange.

While roadblocks, including stamp duty and throttle mechanisms, have constrained the “high frequency” component of the market in Hong Kong, the structural changes created by new market entrants is becoming ever more apparent. These include an increase in the number of single-stock options market-making licenses where the cash hedge is entitled to a stamp duty waiver and a short-sell tick rule exemption. Similar to Korea, since December 2013, the unintended consequence of the license has been for average trade size to decline rapidly and the average number of trades to increase significantly as the increased velocity results in a disruption of liquidity on the order book. China Mobile, for example, has observed 44 trading days in excess of 7.5k trades per day in the past six months. It took more than five years (back to December 2008) for China Mobile to register a similar number of executed trades. With respect to market making activity, we argue that such electronic market-making activity, while constructive in that it enhances market liquidity and stability has, nonetheless, changed the manner in which participants interact with the order book.

In June 2014, dark liquidity in the Hong Kong market accounted for just 1.8% of overall turnover. Concerns surrounding price formation and price discovery have more to do with the consequences of these licenses being granted rather than liquidity residing off-exchange in broker-led dark venues. The SFC consultation on alternative liquidity providers (ALPs) is attempting to redress imbalances in the dark trading segment in Hong Kong. The intentional effects of retail and non-institutional flow being excluded from interacting with broker-led ATS venues has resulted

in a marked drop in Hong Kong ATS turnover. It could be argued that such retail and non-institutional flow remaining on the displayed market is beneficial for price formation for all participants. Yet the unintended consequence is the creation of a two-tiered access model that excludes certain segments from participating in the ATS segment in Hong Kong; a move that runs counter to the global shift to prevent inherent conflicts in providing beneficial access to certain client segments.

As market structures change, liquidity will reside with those most adept at adjusting to the demands of exchanges and regulators. However, it is abundantly clear that efforts to increase market liquidity have a ripple effect on both the short and long term costs of trading. As exchanges compete for relevance, the most pertinent consequences of change may result from the unintentional effects of these strategic initiatives.

Note: All data sourced to UBS unless otherwise stated.

Sanji Shivalingam,UBS Head of Algorithms and Analytics Asia Pacific


38 | POST-TRADE

On the 4th June the GlobalTrading journal hosted its second annual post-trade roundtable. Last year’s was welcomed by a black rainstorm, and this year’s was met with fierce sunshine. Whether the weather reflects market mood or not remains to be seen.

The roundtable focused on a number of major issues that reverberate across the trade lifecycle and into the back office. The main topic under discussion revolved around the split between automation within a firm, offshoring processing to a cheaper environment, and outsourcing processing altogether. As is often the case, a careful balance must be found between saving costs and cutting back on functionality . The fundamental point remains that no matter what processes are moved where, and what is automated entirely or partly, the responsibility for post-trade compliance and risk management has to stay within a firm.

There was also a conversation around the changing value of labour within the firm: the value calculation between offshoring labor intensive processing to a cheap market where there is a high staff turnover, and keeping the work in a more expensive environment with better staff retention that encourages staff improvement is changing.

A major consideration leading on from this point is that in the case of controversy (eg Libor fixing, FX rate scandals), it is often the case that these areas won’t be fixed until a person in a firm is made personally responsible or accountable for such transgressions. This is often forced by regulators. Culture

Hong Kong Post-Trade Roundtable: Putting Together The Pieces

By Peter Waters, Managing Editor, GlobalTrading


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Michael Karbouris,Head of Business Development, Asia Pacific, NASDAQ OMX

“The post trade space is all too often treated as distinct from all other aspects of trading. But it’s getting harder to ignore the impact that more demanding regulations are having on the entire trade and post trade value chain. Vendors play a critical role in helping firms automate post trade, and compliance is now a vital component. The entire risk and compliance stack needs to be taken into consideration, from pre trade risk controls to market surveillance, and even through to eComms surveillance.

This is particularly true in a world where regulators have front and center focus on things such as market manipulation. No asset class is immune as we’ve seen from regulators attention to LIBOR and FX manipulation. It’s also important as market structure in Asia changes, for example with the introduction of China Connect, issues will arise from applying China markets regulation to north bound trading and vice versa. The industry can benefit by outsourcing compliance and surveillance technology to cost effective technology. In that way banks and brokers can focus on other aspects of the post trade processing chain, and even focus their time on those aspects that provide a competitive advantage.”

within a firm does not drive compliance and surveillance technology forwards; the technology exists, but its uptake is limited until regulation forces firms to engage. As was said in the room, everybody believes that lighting will strike somewhere else first. It remains to be seen how many billion dollar fines it takes before surveillance and compliance becomes an area where global firms start to implement solutions ahead of the regulators. As is often the case however, the technology and people that the regulators have access to, needs to rapidly increase in level and complexity to enable regulators to properly monitor and control their jurisdictions.

Dean Chisholm,Regional Head for Operations, Asia Pacific, Invesco

“Efficient post trade processing is all about end to end business optimisation, not just the back end or the front end. Data issues must be addressed to optimise both parts. A good mechanised trading life cycle is an essential foundation so data issues can be tackled and processes standardised. The more processes that can be commoditised, then the easier it is to gain economies of scale.

Any participant’s solution will be combination of what to do in-house onshore, offshore or outsource. Different players will have solutions and always retain responsibility. ”


40 | POST-TRADE

Jean Remi Lopez, Sales & Planning Execution Manager, Omgeo

“Much has been said about the challenges that the regulatory tsunami brought about globally, but the silver lining is the opportunity for industry participants to lay their businesses flat and review what they are best at. Post-trade operations, which are becoming more standardised, are increasingly leveraging trusted central utilities and services which not only spread the cost but encourage best practice.”

Stuart Knowling,COO Asia, Instinet

“The theory of commoditisation of the back end is just that, a theory. In practice the different local regulations and market structures in Asia make it difficult to implement one solution across an entire region. Shanghai-Hong Kong Connect is a prime example of that with different settlement mechanisms and processes now needing to be combined. The Shanghai – HK Connect project looks great on paper but is going to create complexities on the back end to manage the differences between the markets. The aggressive time line to implementation and the large number of unanswered questions also makes it a challenge, but a challenge that the market knows it needs to overcome.”

It was widely agreed that an area that needs attention first is the standardisation of technology and terminology. There are ongoing efforts to push the uptake of FIX in allocations and confirmations, and standardize models and the way different elements of software talk to each other to alleviate many issues that arise during automation and outsourcing.

With increasing trades across asset classes and across different arms of the firm, the legacy silos that divided up responsibility and trading from the middle and back offices have to become a thing of the past. If systems cannot communicate with each other, it becomes very difficult to holistically manage risk and exposure across a firm, and it becomes almost impossible to properly monitor costs and commissions, especially across markets as disparate as Asia’s.

In summary, the event was a chance to discuss such theoretical matters against such market moving backdrops as the Hong Kong – Shanghai Connect operation that is unfolding in Hong Kong and regulation that is coming out of Europe and the US. It is a time for change and evolution in post-trade processing, and once the pieces are all put together, firms should be able to really see the difference and leverage real benefit.


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Endre Markos,Head of Execution to Custody at Citi

“The industry is waking up to an evolutionary convergence of the various functions within the financial markets’ numerous engines. While expansion and specialisation helped propel the industry, it created silos that over time started to create a larger than desired drag. A scientific and holistic view of all the processes and activities is now emerging as the only assurance of margin protection

and continued excellence. Very much the same way, that traders and fund managers came to work much closer together over the last decade to optimise and align investment and trade strategy, more divisions will need to follow suit. Front, back, middle office and ancillary services need to optimise the overall trading and investment process and their rapidly multiplying regulatory requirements. The alpha gain from any further sharpening of the trading weapons may dwarf the return that can be realised by better understanding of the costs, streamlining the compliance requirements and design the trade lifecycle to run in the overall most cost efficient ways. This will without doubt challenge some practices, strategy decisions and organizational beliefs or structures but ultimately, survival remains optional. Proper use of the right technology and the entry of the digital generation into the workforce will not just help this but makes this transformation unavoidable.”

Peter Morris,EVP Global Head of Utilities and Managed Services, SmartStream

“The pursuit of post-trade cost reduction and efficiency for both the sell and buy sides is a well-established priority but the demand for greater performance with less financial/operational resource is an ever growing constant. Traditional post execution costs and operational margins are approaching exhaustion in providing further savings and efficiencies; firms have to take TCA approaches further along the transactional cycle and better integrate the front office to the post trade, post settlement processes – right down to analysis of transaction fees, management of expenses and invoicing. Better management of trade costs and efficiencies can provide significant financial savings, enhanced trade funding, better regulatory compliance and real competitive advantage.”


42 | POST-TRADE

With David Pearson, Strategic Business Architect, Fidessa

Post-Trade Processing: Updating The Long Tail

One key area of concern is that there are a large number of smaller asset managers whose traditional technology footprint is quite light and whose appetite to invest in technology has traditionally been limited. By continuing to operate a manual process after the point of order distribution, they are a real challenge for the brokers because they represent a disproportionate operational cost. By supplying their allocation instructions on spreadsheets or emails they don’t see the need at the buy-side end to sort out a problem that they don’t have.

David Pearson,Strategic Business Architect, Fidessa

There is a concern around this because in a T+2 environment there is less time to sort out a manual process; this process represents one particular area where the procedure could go wrong simply because you’re spending too much time on what ought to be a fairly straightforward operational area.

Can the buy-side get up to speed?This time last year some of the exchanges said they would do T+2 in October 2014 rather than the deadline in 2015 and initially people said “we already do it for some markets, like Germany, so it could be rolled out” but as organisations have put their process under the microscope they realise that there are areas where they could see difficulties. The regular day to day stuff that is happening now will continue to be done, but it is the unusual trades around the edges that will suffer – unusual currencies, markets, and investors in distant time-zones are all areas where T+2 could be a real problem.

There are multiple focal points here – the sell-sides are starting to recognise some of those problems, but for some investment managers where you have third party admin going on, where firms are the buy-side for their own funds and for third parties, they have a problem with this administration. I think that the sell-side recognises that they might have to step in to improve the process – some smaller buy-side firms still think the problems lie with the sell-side; but they will start to understand this change should they see their costs rise because of higher levels of settlement failures as the sell-side has to push back on manual processing – if they hurt someone in their pockets the buy-side has to react, and it might take that to get them to upgrade and improve their processes.


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were unwilling to make that investment and where they seek to improve their business process. That innovation will roll through, building on those industry-agreed standards.

Are firms still separating front from back in their thought process?Many of the smaller businesses outsource the back office function, and one thing revealed to us is that no one really identifies a middle office on the buy-side . Many of those firms will outsource part or all of the client servicing and settlement process, and there is a very strong division put in between front office and the rest. There is a growing realisation of the need to integrate these things together, so front and middle become more seamless enabling better trade processing that will benefit the back office as well. Innovative vendor software will help bridge that gap and help the smaller fund managers, and through the outsourcers they will see the benefit of more integrated post-trade processing. The outsource providers have a significant throughput and reducing costs improves their value within that business – a collective shared cost of ownership across their clients.

It is interesting when you start to discuss certain issues with the larger fund managers. Issues like the creation of a middle office function for post-trade pre-settlement, making better use of that data that is now available and that information that you are storing in that middle office function. This may help these firms deal with other issues, particularly on the regulatory side. Firms looking at what they have to do in terms of upcoming regulation recognise the opportunity that a middle office solution addresses to solve problems that are still being analysed.

How do the deadlines and timelines impact development?These firms almost need to feel the pain to see what they could possibly gain – when people get to T+2 and they see the reality of where additional operational manual processes are rapidly having to be put together to cope with difficult scenarios. I think we’ll see the right kind of solutions being developed to help firms overcome that. What we’ve tried to do is build the cornerstone framework for processing, and as other areas come to light we’ll be in a good place to help solve the problems of those businesses. But we need to get to October 8th to see where those conversations become more real.

Operational staff have shown themselves very adept at getting things sorted but potentially in a relatively inefficient way. The business will be done and trades will be settled, but the cost will be inefficiency in manpower and time, and this is where solutions can make a difference.

Regulatory pressure has focused the industry on ensuring that it can efficiently handle the post trade workflow in a T+2 environment. We’re seeing now in Europe and the US, innovation coming through from operators and vendors alike. Building on the agreed standards laid out by bodies such as the FIX Trading Community, Fidessa has its new AMS service specifically to provide that kind of affirmation processing that actually ought to enable asset managers , big and small, to take control of technology where they

“some smaller buy-side firms still think the problems lie with the sell-side; but they will start to understand this change should they see their costs rise.”


44 | POST-TRADE44 | POST-TRADE

T+2 is a step towards an SDA model which is more efficient and lower risk, although the regulatory focus is currently on implementing T+2 on the sell-side, exchange and MTF/OTF trades. While buy-side and OTC client transactions are expected to follow suit and move to T+2, it is not a given. Dialogue within the market, and between broker dealers and buy-side participants, must be constructive and continue to focus on the negative implications of not settling the client side T+2, to make sure it does happen.

There are also an ever-increasing number of vendor solutions emerging to help insulate broker dealers from ‘manual client processing’. Most large players are now using industry solutions such as CTM, SWIFT GETC and FIX to facilitate SDA and ensure all allocations are booked and agreed on trade date. There is however a ‘tail’ of manual clients which continues to provide trade information by more antiquated means - spreadsheets, CSVs, PDFs and even free format e-mail. Helpfully, some vendor solutions provide a technology outsourcing capability that translates these into a standard sell-side format (usually FIX). This gives broker dealers straight through processing (STP) and helps them to interact more smoothly with that ‘tail’ of clients.

By Brian Godins, Global Head Equities Operations, HSBC

Towards An Efficient Back Office

For at least ten years there has been debate around the manual nature of processing client side business. The ‘operating model triangle’ – where executing brokers (EBs), buy-side participants and custodians all work towards same day affirmation (SDA) – might more appropriately be called the ‘Bermuda Triangle’, given its inefficiencies. Lethargy in communication between the participants; a lack of protocols and standards in the matching model; and a general lack of consistent and quality data result in many trades going far past T0 for matching, affirmation, confirmation and/or allocation. The trade date process is then further complicated by third-party buy-side middle office outsourcing, and the prime broker dynamic.On specific asset classes, derivatives have actually seen more progress towards efficiency in SDA than more vanilla securities such as equities and bonds. This is thanks to increased scrutiny from regulators on derivatives, and an industry-led push towards new market solutions which facilitate SDA and lifecycle management. While complex derivatives products still need attention, with more protocols and solutions (like FIX) to follow, most agree that vanilla securities lag behind on SDA. This is perhaps testament to the power of formal regulation in creating focus, maturity and a rapid pace of product development.


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There are still a few questions around these solutions, such as, who should ultimately pick up the cost? Will broker dealers get their correctly formatted message in a timely manner? Do these solutions really get to the heart of the challenge at buy-side firms? Do they help improve STP from point of execution or will there still be many hands touching these trades through the process? We’re solving a problem, but are we solving the root of the problem? It will be interesting to see whether these questions develop into broader concerns.

Either way, we are certainly seeing steps forward, and we should encourage these types of solutions on buy-side transactions, to enhance the SDA rate where uptake of industry standards and protocol is not forthcoming. As regulators’ expectations around SDA become clearer, and perhaps more prescriptive, we may see a more forced change in approach. Until then, it is clearly in the industry’s interest to move beyond the old model of manual trade processing, for the sake of a more efficient marketplace.

Brian Godins,Global Head Equities Operations, HSBC

Scott Atwell,Manager FIX Trading and Connectivity, American Century Investments

FIX For Allocations And ConfirmationsBy Scott Atwell, Manager FIX Trading and Connectivity, American Century Investments

The benefits of increasing the use of FIX for allocations and confirmations include efficiency gains, improved straight-through processing, and quicker identification of issues, all of which provide significant risk reduction and cost savings.

We have approximately 20 brokers that support this. The key measuring stick for us is, of all the confirms that we have, what percentage of those have moved to this automated matching solution. For American Century, we have had over 75% of our confirm flow via FIX during the last eight months.

If you are a buy-side firm thinking about trying to implement this flow, you can be successful, because all the major sell-side firms support this. And because they have already implemented this, they are eager to use and provide that for other buy-side firms.


46 | AMERICAS46 | AMERICAS

Multiple high-profile probes into alleged market abuse cases are dominating headlines worldwide, across different asset classes that include currency markets, interest rates and commodity markets.

Breaches have become a norm with market manipulation, and rogue trading is proliferating. LIBOR-fixing scandals and instances of banks censured for fixing the Singapore Interbank Offered Rates (SIBOR) have made risk and compliance a recurring theme for market participants and regulators.

By Cromwell Fraser, Director of Trading Floor Portfolio of NICE Actimize and Sherie Ng, Managing Director, South East Asia & Hong Kong of NICE Actimize

Strategic Imperatives For Trading Compliance Executives In 2015 And Beyond

The call for greater transparency and accountabilityAs a response to the increasing malpractice transpiring in the markets, regulatory authorities have tightened their scrutiny on financial institutions, calling for greater transparency and governance across the entire trading process. This focused scrutiny includes such regulatory frameworks as Dodd-Frank’s new rules for over-the-counter (OTC) swaps, The Securities and Futures (Amendment) Ordinance 2014, as well as amendments to the Securities and Futures Act in Hong Kong.


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The spirit behind all these new rules is that regulators want that increased transparency coupled with the processes that will mitigate risks and create a level playing field for market participants. Financial institutions are now being made to be more accountable for their traders’ rogue trading and misconduct; with punitive measures in place to ensure their compliance.

These scenarios have created a new urgency for financial institutions to radically transform current surveillance practices, to ensure that they are not lagging behind when compared to the speed of the 21st century trading environment.

Conventional trade surveillance has focused more on

post-trade analysis. However, with trading platforms evolving digitally to allow for high frequency trading and real-time trade execution, surveillance must keep improving to be one-step ahead of this transformation.

Three priorities for heads of risk and trading compliance Chief compliance and risk officers realise that in order to meet these new challenges, they need to carefully review their current risk compliance frameworks. In formulating an effective compliance strategy, they should keep the following three pointers in mind:

1. Business and regulatory alignment of the risk and compliance strategy

In order for firms to balance business objectives with regulatory compliance goals, a pragmatic and cost effective approach is crucial, especially in the light of the increasing volumes of transactions across geographies,

development of new asset classes and the changing local regulations across the globe. Therefore, when building their compliance framework, risk and compliance officers should adopt robust models that are able to adapt quickly to meet both global and local changes in regulatory standards.

Implementation of real-time system controls to minimise risk exposures and flexible deployment options on cloud-secured or on premise should also be part of the approach.

2. Direct line to CEO and board for complianceWith compliance and risk mitigation programs become a more urgent agenda item requiring attention of the Board of Directors, it is important that Heads of Compliance are empowered with sufficient resources to ensure corporate compliance and ethical conduct.

These resources should include a direct line to the Board of Directors, unfiltered access to specific information and the authority to carry out their work. It is also imperative for a compliance department to work closely with the risk department to effectively mitigate risk from a compliance perspective for all global initiatives.

Cromwell Fraser,Director of Trading Floor Portfolio of NICE Actimize

“Financial institutions are now being made to be more accountable for their traders’ rogue trading and misconduct; with punitive measures in place to ensure their compliance.”


48 | AMERICAS

3. Crafting a holistic and all-inclusive surveillance framework

The surveillance of communications is a huge capability that should be better leveraged by compliance teams. Combined with trade-activity surveillance, it can “connect the dots” between suspicious trade activities and communication interactions, allowing compliance teams powerful insights to detect and stop market manipulation or fraudulent behaviour much faster than ever before.

One of the leading financial institutions in Europe has started utilising new communications surveillance technologies. Using an innovative benchmark monitoring solution, they were able to discover connected conversations in about 30 minutes and complete the necessary evaluation in three days, where before, using other technologies and manual methods utilised at the bank, this same process had taken more than four months and 480 man hours to achieve. This resulted in a 160-times faster investigation process, along with significantly reduced costs.

Firms need surveillance technology such as this in order to match the sheer scale, speed, lines of communication and trade information present today, to allow comprehensive and accurate insight across multiple data sources. A single surveillance platform can help firms achieve a holistic view of unwanted behaviour with a single investment and lower the total cost of ownership.

The growing scale of trade volume, combined with and the new complexity of global regulations, has created an escalating need for surveillance technology across both trade communications data. A holistic and all-inclusive surveillance framework could potentially help financial institutions save billions of dollars in fines and reputational loss. And in the case of rogue trading, trade and communication surveillance does more than provide a timely intervention — it also acts as a strong deterrent compared to a post-trade investigation since a trader knows they are being monitored.

While regulatory requirements are still evolving and may pose additional challenges to market players in the future, the objective is clear: to protect the credibility of financial markets and prevent unlawful market abuse from damaging the confidence of market participants.

Sherie Ng,Managing Director, South East Asia & Hong Kong of NICE Actimize

“The growing scale of trade volume, combined with and the new complexity of global regulations, has created an escalating need for surveillance technology across both trade communications data.”


ASIA | 49ASIA | 49

authorities in Hong Kong and the Mainland, are engaged in intensive preparations. Along the way they’re finding enough quirks in the Stock Connect scheme to present some challenges.

Technical and legal challengesOne unique aspect of the scheme is the method of access. Elsewhere, if an investor in say, London wants to buy shares in a stock on the Tokyo Stock Exchange her London broker will execute the order by using a correspondent broker in Japan who is a member of the Japanese exchange. The Japanese broker executes the trade and provides clearing and related services for the London correspondent broker. For Stock Connect, however, the London broker would use a correspondent not on the Mainland but in Hong Kong, and the Hong Kong broker will execute “Northbound trades” (those

By Nick Ronalds, Managing Director, Equities, ASIFMA

Shanghai-Hong Kong Stock Connect: An Unprecedented Challenge, An Unprecedented Opportunity

China is about to throw open the door to its equity market to the world. Just as investors today in Tokyo or Toronto, say, can invest in each other’s stock markets, soon they and other like-minded investors will be able to add to their portfolios shares of Aolus Tyre, Zijin Mining and any of the other 566 eligible companies of the Shanghai Stock Exchange (SSE). The other half of the initiative is that Chinese investors will get access to shares of the Hong Kong Stock Exchange. Announced on April 10 with an expected lead-time of six months, the “Shanghai-Hong Kong Stock Connect” initiative should go live in October.

What could be simpler than opening a stock market? A lot it turns out. All the players — brokers, investors, the Shanghai and Hong Kong Stock Exchanges, regulators and other government


50 | ASIA

headed to the SSE) via a special purpose vehicle (SPV) of the Hong Kong Stock Exchange rather than a mainland broker. In effect, the Stock Exchange of Hong Kong (SEHK) becomes the agent to execute and hold the SSE shares for all transactions.

Southbound trades, transactions by Mainland Chinese investors buying or selling shares on the SEHK, work analogously. A Chinese investor’s broker executes the trade using an SPV of the Shanghai Exchange. (See illustration)

The path an order takes to be executed may seem like a minor variation, but in this case it gives rise to some not-so-simple questions. Take the Hong Kong broker, who is subject to Hong Kong laws and is regulated by the Securities and Futures Commission. The Northbound trades are executed in Shanghai and are hence subject to Chinese law and regulation by the China Securities Regulatory Commission (CSRC). How will the CSRC exercise regulatory oversight over the Northbound trades originating from traders outside the Mainland? The CSRC and SFC will without doubt strengthen a cooperative relationship to address such novel regulatory challenges.

Another jurisdictional quirk stemming from the structure of the scheme has to do with what lawyers call “security interest in property ownership”, which means, “how do I know the

shares being held are legally mine?” What gives rise to the question is that the shares will be held, not by the investors themselves or their custodians, but by CCASS, the SEHK clearing entity, on behalf of the ultimate investors in an account within the Shanghai Exchange’s clearing entity Chinaclear. Developed country legal systems have long recognised such “nominee account” structures, where Bank A, for example, holds property such as securities that are recognised as belonging to the customer, the beneficial owner. If Bank A goes bankrupt, creditors can’t lay claim to the securities because they are not assets of the bank but of its customers. However, no such nominee structure exists under Chinese law. Hence investors and intermediaries are grappling with the question of how to protect their security interest in the shares. This ambiguity can and doubtless will be resolved. The SEHK has made clear in public and written statements that it disavows any ownership claim on Stock Connect shares held by CCASS. The ambiguity will likely be dispelled when Chinaclear publishes provisions in its rules addressing the

Nick Ronalds,Managing Director, Equities, ASIFMA

Source: HKEx


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question. The CSRC approves Chinaclear’s rules so such a provision would have the sanction of Chinese regulation and settle the matter.

Another rather technical quirk has to do with the fact that shares bought and owned via Stock Connect are not fungible with those purchased onshore via such vehicles as QFIIs or RQFIIs. Brokers and customers need to treat Stock Connect A shares as separate from QFII and RQFII A shares all the way from execution through the middle and back office so that no possibility of intermingling exists. Aside from the need to re-program systems, this in turn calls for new “symbology” on the part of data vendors such as Thomson-Reuters, Bloomberg and others who have to create unique codes for the millions of securities traded around the world, such as RICs (Reuters Identifier Codes), SEDOLs codes, and MICs (Market Identifier Codes).

Uncertainty about taxes has also raised questions. A capital gains tax of 10% is in Chinese tax law but Chinese tax authorities have not been enforcing it for some years. In principle the authorities could announce retroactive collection of the tax. The trouble is should that happen, the investors who incurred the tax may or may not be in the market any longer, and brokers may well lack the information they need to calculate the tax even with the best will in the world. Customers can switch brokers, after all, or use more than one,

so that none of the customer’s brokers have the full picture. Similar issues apply to business (VAT) taxes. The possibility that brokers could be held liable for customer back taxes that they can neither verify nor collect is an off-putting prospect for brokers’ risk and legal teams, to say the least. Clarification from the State Administration of Taxation would lift the uncertainty.

Differences in settlement and infrastructure will also call for some adjustments. In the Mainland market, Chinaclear knows the location of all stocks down to the client level. When a client sells, the shares in the account are earmarked. This prevents accidental sales beyond the amount owned and means delivery fails are impossible. However, Chinaclear will not be able to see through to the ultimate client accounts for Stock Connect because the shares are held in an omnibus account by CCASS, as described above. Hence, to prevent fails sellers will be required to pre-deliver stocks to their brokers at least one day prior to the sale. This runs afoul of customary practices and in some cases institutional investment policies. It also creates significant operational challenges for clients, brokers, and custodians—as well as additional costs.

Then there’s the settlement cycle. Chinese stocks settle and transfer from seller to buyer on the trade date, but money settles the following day, on T+1, a cycle known as “Free of Payment” (FOP), in

Source: HKEx


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contrast to the more usual Delivery vs. Payment (DVP) where stock and cash move simultaneously. Institutional clients accustomed to DVP have to decide whether one-day’s exposure to their broker is acceptable commercially and consonant with their investment policies. Alternatively the broker could finance the proceeds of a sale and pay clients on the trade date, creating synthetic DVP, but then the broker is out the money for a day. Brokers and clients can adopt various fixes, such as T0 payment and delivery, but any fix comes with some combination of credit risk, operational headache, and cost.

Dealing with quotaStock Connect is a pilot project and initially, at least, a daily quota of 13 billion RMB and an aggregate quota of 300 billion RMB will set limits on Northbound purchases. (The Southbound limites are 250 billion and 13 billion RMB respectively.) The SEHK plans to disseminate remaining quota balances every five seconds. This creates execution risk as investors will have to take into account the possibility that an order may not be executed if either the daily or aggregate quota might breach its limit. As the pilot demonstrates success, the quotas will doubtless be expanded and eventually eliminated altogether. In addition, foreign investors may hold at most 10% of any company stock and must report their holdings to the CSRC when their holdings reach 5%.

“The Shanghai-Hong Kong Stock Connect is a bold project, unique in a number of ways. Its structure and function features a number of quirks that over the long term will likely be mere blips in a historic initiative.”

Buying Renmimbi to pay for the SSE stocks also involves more than meets the eye. Northbound investors have to pay for their purchases or get paid for stock sales in offshore RMB, or CNH. CNH are RMB balances that have accumulated offshore over time as a result of trade. Although CNH and onshore RMB, or CNY, are both Renmimbi, CNH cannot be used for onshore transactions on the mainland and vice versa. As a result, the exchange rates of CNH and CNY often do differ slightly, and they also have different yield curves. This quirk means that the effective prices in terms of Northbound investors’ home currencies may differ from those based on the onshore exchange rate. Investor education on this point will be advisable and both brokers and customers will want to keep an eye on CNH liquidity as they plan their Northbound buying strategies.

The Shanghai-Hong Kong Stock Connect is a bold project, unique in a number of ways. Its structure and function features a number of quirks that over the long term will likely be mere blips in a historic initiative. The Hong Kong Exchange is working overtime to ensure success, engaging vigorously with the industry to educate brokers and clients and to address concerns. The Shanghai Stock Exchange, the world’s fifth largest exchange by turnover in the first half of 2014, is similarly engaged while adjusting its mindset to the novel prospect of a global customer base. Regulators in Hong Kong and Beijing are forging a closer relationship to make the scheme work. Stock Connect is a pilot, but the odds are high that it will evolve into a thriving two-way channel of investment into and out of China. Bringing stocks of the world’s second largest economy, largest by some measures, to investors around the world for the first time is bound to have a transformative effect on the global equity landscape for all players.


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Securities Clearing Corporation’s custody account, with their name on the share register. Under Chinese property law, the share register is the way to legally recognise ownership and, there is no concept of beneficial ownership being different to legal ownership. This means that if I ever had to get into a dispute in the Chinese courts, it is unclear how my ownership rights would be treated. It has not been confirmed that I will have control over the voting rights. Capital gains tax is still to be clarified by the tax authority.

Even if I wanted to use the Connect, I can’t physically do so. Say hypothetically I have 15 accounts with different global custodians. First of all I need to set up some sort of sub-custodian relationship across the board. Since there is a requirement to have the stock in the brokers account pre open on T, I’ve got to get all these accounts to agree that I can set up a sub-custodian relationship so I can transfer my shares to that sub-custodian, probably on T-2 depending on where the custodian’s located.

This is not a process that we have in place here, or in any other market. It makes it almost impossible to implement because we ask, “Is this really how we want to be spending our time and resources when we have QFII?”

So there are the structural challenges, and then there are the technological challenges as well. For example, if I have my QFII account and then the same account also wants to deal in Shanghai on the Connect, I have to then differentiate between those two holdings. So when it comes onto my blotter, I then have to know that some are .HK and some are .SHH in the same names. The Shanghai holdings I can only trade through one broker even though it says I can trade it with three. The Hong Kong holdings I need to have some way to show which broker (if I decided I wanted to set up a multiple sub-custodian relationships to get best execution and trade

With Emma Quinn, Head of Asia Pacific Trading, AllianceBernstein

Hong Kong Connect: More Questions Than Answers

There was a lot of excitement when the Hong Kong-Shanghai Connect scheme was initially announced because QFII and RQFII have a lot of restrictions. It’s difficult to get quota, and for repatriation, the daily or monthly flows depend on which licence you have. Everyone was very excited to hear of another mechanism to access China, but once people got into the detail, there were some things about the structure that would mean that QFII and RQFII are definitely going to remain a key element of institutional access to China. The Connect will stay as a second product, simply because there are things that the long only buy-side need clarified or changed in order for them to actually transact using the Connect. The A-shares will sit in China within the Hong Kong

Emma Quinn,Head of Asia Pacific Trading, AllianceBernstein


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benchmark to the close because you want to have the position by the open of the next day. The daily quota gets used up in the morning, so therefore you can’t enter any more buys orders, what do you do? You can’t put in any market price on close orders. There could be a chance that there is still quota left for the close but if everybody piles in on an inclusion day, or the day before an inclusion day and the quota is gone and you cannot get your buy orders in, you can’t meet any benchmark.

The daily quota is based on buy orders minus sell executions with an adjustment made for unexecuted buy orders once the order has been cancelled. There are concerns that some could enter out-of-market buy orders to use up the quota, even though the exchange are going to be monitoring.

There is progress on many of these issues, and the industry and all the associations are working together. We all like the concept and we all want an easy way to invest in China, but we have to think about alternate ways of achieving it and improving on the process.

with more one broker) I actually placed shares with one or two days before I can sell. I also just don’t know two days before what we’re going to sell and as a consequence, I can’t react to market events when I’m selling.

And, my personal view is that many of these will remain outstanding for a while.

Because of the MSCII decision not to include China in the emerging market indices there is definitely more time and a firm incentive to have a look at the structure. I think the long only buy-side managers would say that this doesn’t give them a clear way to access the Chinese market, especially with concerns around the capital gains tax and the ownership questions that remain.

Broker challengesOctober is not very far away. From a broker point of view they’re trying to ready themselves because there are a lot of hedge funds that can trade on swap, so they’ll do it that way and get around the pre open position check requirement. The fact that they can work around having to set up the custodian relationships by using swaps is something like a prime broker relationship. For a long only account this is something new; for hedge funds, it’s not. So for hedge funds this is probably an easier way to access the market, and for brokers it may be a way to free up some quota capacity for their QFII to redeploy into the fixed income markets. So the brokers are trying to work it out but I haven’t had a broker yet come to me and say “I’ve got the answer”.

I think we also want clarification on what stock codes will be used and how we’ll make sure of that in our systems. There is also the Free of Payment (FOP) issue. I transfer my shares, will I get the cash the next day? Do I have to go back and check to see whether I’m allowed FOP and what technicalities follow, whether I need some sort of legal document around that? Do I just set up a Renminbi cash account for each client account? How much more counter party risk, ownership processing, and paperwork is there around the beneficial owner in China? How can I ensure that we don’t buy and sell the same day? What happens if, in the morning, I buy for an account, then, in the afternoon, I get a cash float and I have to sell out? Am I allowed to do this under the rules?

Quota and benchmarkingOne key area is around the quota, and around benchmarking on the MSCI index includes China; you

“Everyone was very excited to hear of another mechanism to access China, but once people got into the detail, there were some things about the structure that would mean that QFII and RQFII are definitely going to remain a key element of institutional access to China.”


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the new requirements before they can consider going live. For Hong Kong investors, the scheme implies that they cannot perform short selling and intraday turnaround trades.

Considerations – have business requirements been written? Have all systems been

enhanced? Have all operations procedures been updated? Have all internal sign offs

been obtained?

• Ownership – the scheme states that all stocks will be held in an omnibus account at CCASS under the account of the HKEx clearing entity. The use of the proposed nominee structure is not unusual in developed markets but such structure does not exist under the Chinese law as all stock holdings in China are held at the investor level. HKEx has stated that they do not and will not have any ownership over the shares but until the Shanghai depository “Chinaclear” updates the existing rules the ownership of shares will still remain ambiguous to investors.

Considerations – have legal and compliance reviews of existing client documentation

been conducted to ensure alignment with the ownership rules? Have the risk and

compliance departments been consulted on the implication of omnibus holdings? Has

operations department considered how to report to clients under the new account

structures?

• Settlement - there are differences in the settlement structures between Shanghai and Hong Kong. The Shanghai settlement mechanism does not follow the current Hong Kong settlement cycles. The main difference is that Chinese stocks settle and transfer on trade date with the money settlement occurring on T + 1. This means it is not a delivery versus payment structure and clients will have a credit exposure to the broker for one day until the final settlement. There may be various workarounds between the clients and brokers but these are not currently clear and any structure will create risk, operational challenges and additional costs.

Considerations – have settlement processes been reviewed and updated? Have your

reporting and settlement systems been enhanced? Have you connected and agreed

with other market participants, such as custodian service providers over the procedures

for the future? Have you obtained the sign off from operations and risk management

departments?

• Fungibility of Shares – another important issue for investors is that shares purchased via the Shanghai – Hong Kong Stock Connect program are not fungible with shares bought onshore

By David Gilmour, Principal, Deloitte

Shanghai – Hong Kong Stock Connect

The Train Is Coming ! Are the Tracks ready and clients on the station ready to board?In April 2014 at the Asian Economic Forum in Boao, Premier Li Keqiang announced the launch of the Shanghai – HK Stock Connect Pilot scheme. The scheme was proposed to be launched in October 2014 (subject to final confirmation), six months from when it was announced.

It is worth noting that this so called “Through Train” stock trading initiative was proposed seven years ago but was put on hold for a number of reasons. Subsequently, the Chinese regulators allowed limited access to the offshore equities markets by creating the QFII and QDII schemes.

As you would expect, with the tight timeframes involved, many market participants have been preoccupied with overcoming the challenges to prepare for the new scheme and secondly to confirm readiness, especially in the context of managing the different types of risks and briefing all clients about the implication of participating in the scheme.

Some of the critical areas that are being considered include:

• Trading – Order execution is the first hurdle. Two industry wide connectivity tests with the Hong Kong Stock Exchange have been scheduled for August and September. For stockbrokers hoping to become the first batch of entrants, they need to enhance their internal system to cater to the different trading rules while creating new stock codes to separate holdings and establishing internal control and procedures to perform pre-trading checks as required by the Shanghai Stock Exchange. Considerations – have business requirements been written? Have all systems been enhanced? Have internal UATs been completed?

• Pre trading rules and checks – prior to any buy order placement, the broker will need to confirm that the client account has the required amount of RMB/CNH. Likewise, the broker will need to confirm that shares are available in the client account prior to any sell order placement. Whilst common in the stock exchanges in Shanghai and Taipei, it is not the current requirement in the Hong Kong market. Participants will need to ensure that internal risk management, credit and settlement systems can cope with


56 | ASIA

brokers may complicate the tracking of tax obligation and it is possible to be imposed by back taxes after all positions have been sold and cash-settled. The market is still awaiting clarification from the State Administration of Taxation to enable brokers and their clients to understand the procedures and implications of participating in the pilot scheme. Hong Kong brokers will need to ensure that they fully explain to clients the known situation and anticipated risks before the scheme goes live.

Considerations – have business requirements been written? Have tax consultants

been engaged? Have all systems been enhanced and internal UATs been

completed? Has client reporting been defined and designed? Have you obtained

sign off from internal Tax department? Have operational procedures been

updated?

The overall reaction from many market participants to the prospect of more free and open access between the two exchanges has been extremely positive, ironically as it was in 2007 when it was first proposed. Up to 100 brokers have expressed their interest in being the first batch of participants in this pilot scheme.

The pilot scheme between Shanghai and Hong Kong is another groundbreaking step to open new opportunities for Mainland and international investors and create a viable mechanism for investing in Mainland stock markets with offshore RMB. The Through train is coming, are you ready to be on board?

via QFII and RQFII vehicles. Therefore shares cannot be comingled and it is expected that different code / symbols will need to be established to enable participants to easily separate the trading and holding of shares.

Considerations – Have client briefings been conducted? Have new codes been

established to separate the onshore / offshore holdings? Have databases been

updated for all systems? Have procedures been agreed to track holdings?

• Quota Risk – the initial quotas for Northbound trading are set at RMB 13 Bio per day and RMB300Bio in aggregate. Southbound limits are set at RMB10.5 Bio per day and RMB 250bio in Aggregate. Aggregate quota control only applies to buy orders, sell orders will be allowed regardless of the quota levels. The aggregate quota will be calculated at the end of each trading day.

Daily Quota is calculated real time during the trading day. There are 3 scenarios brokers and investors need to note if the daily quota is <=0: • The exchange will reject all new buy orders during the

pre-opening session• Suspension of all buy orders input during the market hours• Buy orders already input in the CSC before suspension will

not be affected Quota information: The HKEx proposes to distribute

market updates to brokers every 5 seconds. Brokers will need to monitor these limits and be able to capture updates to their execution and risk systems.

Considerations – have business requirements been written, systems enhanced and

internal UATs completed, client reporting defined and designed, risk sign offs

obtained, operational procedures updated and clients briefed?

• Foreign Ownership Another key issue to address is the foreign ownership limits. Brokers and clients will need to monitor the foreign investor holding limit per the mainland regulations. Following changes to the official limits (June 2014) are set at 30% for the total holdings by all foreign investors in a single stock. And the single investor limit per stock is set at 10%. Investors need to track limits across all holdings i.e. (QFII Qualified Foreign Institutional Investor+ RQFII Remimbi Qualified Foreign Institutional Investor + SH – HK Stock Connect holdings) , i.e. all accounts held with custodians and brokers if more than one is to be used.

Considerations – have business requirements been written, systems been enhanced

and internal UATs completed, client reporting defined and designed, risk sign offs

obtained and operational procedures updated?

• Tax – another critical area that needs clarification is Capital Gains Tax (CGT). It is stated in Chinese law that there is a 10% CGT but Chinese tax authorities have not been strictly enforcing the collection of the CGT. The use of multiple

David Gilmour,Principal, Deloitte


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The implementation schedule of TSE’s “small tick-size program” has been divided into three phases. Phase 1 began on 14th January this year with narrower tick-size for TOPIX 100 instrument universe priced at and over 3,000yen. Phase 2 was implemented on 22nd July, introducing decimal pricing for stocks priced under 5,000yen in the TOPIX 100 universe. Phase 3 will review the results of the Phase 2 and decide if they are to implement optimized tick-sizes outside the TOPIX 100 names in line with the launch of the new arrowhead system, scheduled in mid-2015.

JPX summarized changes observed with the 39 issues that were subject to tick-size changes out of the TOPIX100. After the implementation of Phase 1, JPX saw significant drops in spreads for those 39 issues. The more highly liquid an issue, the more drastically the spread reduction was affected. The number of orders for Phase 1 issues increased significantly (by 2-3 times). The number of executions also increased but not as much as number of orders. There was a drop of the execution ratio immediately after Phase 1 but it is gradually coming back. No significant increase of trading values itself was observed after January as Phase 1 issues still account for around 25% on average of all the listed stocks after the tick size reduction.

From a market data point of view, it has become quite difficult to view the whole picture of market depth with smaller tick sizes. From market data users’ perspective, if client orders are algo traded then there is no need to

With Japan FIX Trading Community Regional Committee co-chairs, Junya Umeno, Director, Head of Trading, Tokyo, Blackrock, and Hiroshi Matsubara, Marketing Director, Japan, Fidessa

Changing Tick Sizes In Japan


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The ongoing debate around HFT in general does not make much sense as different HFT strategies are affected differently by market microstructure changes. Smaller tick sizes make it difficult to create profits for market-making strategies while HFT, with statistical arbitrage strategies, should be benefiting from this latest change in tick sizes.

The outcome of Phase 2 with the introduction of decimal tick sizes on JPX should be a big milestone for the direction of future liquidity fragmentation in Japan and it will be interesting to see what happens with PTS trading and HFT liquidity after this hot summer.

follow market depth with human eyes. Though there is no significant impact on how to look at the data, the results of algo execution should lower transaction costs with smaller spreads. JPX says that there is no intention to price all listed stock in decimal tick-size, as they are adopting the phased periods to determine optimal tick sizes for the whole universe.

In terms of buy-side trading, as manual DMA trading becomes more and more difficult because of of these small ticks, more demands for DSA and broker discretionary algo trading is expected.

If you look at the FFI chart on the 30 names affected by the small tick program, they show around 0.15 constant drop in FFI since the small-tick implementation in January (see chart). This clearly means that the trading share of those 30 names is coming back to the main market from PTS. JPX says that the goal is to create a healthy trading environment that benefits all the retail and institutional investors with lower transaction costs. In the US, tick sizes are being broadened for illiquid stocks. In fact, traditional US tick spreads have been considered too narrow while Japanese ticks had been too broad compared with actual prices. Both markets are expected to land at the optimised tick-sizes despite those two opposite directions.

Some media reported that the tick-size reduction on JPX was targeted to increase liquidity from

HFT. However in reality, many HFT firms (especially in regard to market-making strategies) have seemed to be refraining from trading in Japan since Phase 1. Those market-making HFTs are said to be reviewing and re-tuning their algos as they cannot make money out of the smaller spreads.

Hiroshi Matsubara,Marketing Director, Japan, Fidessa


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Phase 2 OutcomesSince the introduction of TSE’s tick size program, we have seen three key developments in Japan:1. Greater interest amongst investors in trading mid

cap names on PTS’s. 2. Increased interest from key technology providers

and local brokers in accessing alternative markets 3. Investors placing greater focus on execution costs

and achieving better execution quality.

For the month of July 2014 Chi-X average number of symbols traded reached 1678, up from 1330 in January 2014. This is a trend we expect to continue as firms embrace an ability to efficiently access liquidity across multiple markets.

Traded Value Ratio of TOPIX names ( After the primary tick size

change : 7/22-7/28 )

Market share in mid-cap names reached surpassed 10% market share in several well know names, with over 89% of the trades capturing Price Improvement.

Symbol Name Value Market Share Avg PI % PI

8377 HOKUHOKU 181,848,100 17.6% 14.52 94.7%

5007 COSMOIL 160,900,200 16.4% 16.51 97.2%

8327 NINPC-BK 400,892,100 15.2% 13.35 89.5%

2651 LAWSON 962,617,400 13.4% 3.07 89.6%

7532 DONQUIHD 748,409,000 12.8% 4.07 89.3%

We are encouraged by the trading community’s response to the most recent set of changes in tick sizes, as investors intensified their search for Price Improvement opportunities and lower cost of execution; as a result alternative venues are well positioned to attract new liquidity.

Our technology partners have also embraced these changes and capitalised on the tick size changes by proactively offering their customers, many of which are local broker dealers, access to Chi-X Japan. We are excited to see brokers redefine best execution by connecting to markets that offer them access to greater liquidity.

We operate markets in both Australia and Canada where tick sizes are harmonised. We believe that over time the TSE’s tick size program will enable local and retail brokers access to alternative venues and promote fair and equal competition.

Makoto Nagahori,COO, Chi-X Japan

“We are encouraged by the trading community’s response to the most recent set of changes in tick sizes, as investors intensified their search for Price Improvement opportunities and lower cost of execution.”


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Picking Up The PiecesThe Hong Kong FIX Trading Community Conference was a very well attended and rounded event, with a number of major themes and conversations resulting. Amongst the key themes include the changing burden on the buy-side. This theme generally examined the fact that the onus and burden of regulation continues to shift towards the buy-side, as does the burden for technological understanding and in some cases, development. This has major consequences for the buy-side trader’s required skillset, and this aspect of the trader continues to change, not only to continue to sourcing blocks, but to understand shifting market structure and technology.

The second major theme of the day was the ongoing aspect how the sell-side are having to continually “do more with less”. This is part of a result in changes to how sell-side firms are paid, such as through increases in CSA uptake and increasing demand for high-touch service from low-touch desks. “Blended” desks fit

some, but not all of these changing needs, but they also introduce commission/payment complications. There is also a changing emphasis on regional desks on the sell-side: shifting technology teams and traders to cover more markets from centralised locations. This is a subtle shift away from headcount reduction alone, but how firms are having to be smarter with the headcount placement.

The third principle theme of the day was that exchanges and alternatives continue to innovate, and often create many questions (and opportunities) while doing so. Examples of such innovation include the Hong Kong-Shanghai Connect program, which has generated a vast amount of interest across the region; however many questions remain about the precise workings of the program, and much remains to be done for many firms to be confident of being ready in time. On a global level IEX and “the book” continued to generate interest and controversy, and create many questions around the precise nature of market structure that is desirable. While the book itself was not much of a revelation to the industry, it has spurred a much wider conversation which will continue especially in the US and Europe. The common view is that there’s a bit of sensationalism at work, and education is key to retain confidence in the markets.

The final overarching theme was that collaboration between industry participants was a key message in virtually every session. New innovations, regulation, and market microstructure changes are too much for any one participant to handle and optimise. Constructive – and often data-backed – dialogue and consultations are increasingly important for the industry.

The full conference writeup can be found at www.fixglobal.com, and to download the presentations please follow the link: http://www.fix-events.com/HongKong/agenda.aspx and enter the passcode: GLOBALTRADING

“Amongst the key themes include the changing burden on the buy-side. This theme generally examined the fact that the onus and burden of regulation continues to shift towards the buy-side, as does the burden for technological understanding and in some cases, development.”

FIX Trading Community’s 12th Annual APAC Trading Summit


ASIA | 61

Dark PoolsEmma: I expect dark pools to remain for any broker who wishes to offer a full service model. I also expect to see them move away from being mainly used as an internaliser for algorithmic flow to block trading pools.

The Onus for Best Execution: Buy-side or Sell-side?Emma: We have always taken our duty to put our clients’ interests first very seriously. This has not changed. What has changed is the expectation that we can demonstrate this. Given this has not changed we do not believe the value that sell-side trading brings to the buy-side trader to diminish. The role of the sell-side is to ensure that the value that they are providing stays relevant.

Sam: The onus for best ex has always been with the buy-side. We are a fiduciary to our clients and are held to ensure we achieve the best outcome for them. The role of the sell-side has been to help us achieve best execution, whether that’s through providing market insight and colour, finding natural liquidity or building better tools. Based on the market and conditions in those markets and depending on our needs, the value of any one of those areas will increase or decrease.

Liquidity in Asian Markets Emma: Liquidity is a factor we consider in all markets and is not just limited to Asian markets – you can have liquidity issues in small cap stocks in developed markets. We have a dedicated internal quantitative trading team who constantly review our transaction costs across all markets.

Sam: Any framework for evaluating best ex will need to take into account liquidity conditions for a given market. We constantly look at our t-cost models to ensure that our models are accurately predicting our actual trading costs.

The Changing Role of the Sell-SideEmma: I believe that the recent years have forced the sell-side to review their business models. Whether it is certain asset classes, markets or division of roles. Each firm will need to make the decision that suits the majority of their client base and understand that the days of being all things to all people are behind us. I certainly expect to see sales traders needing to provide a more rounded service than just matching VWAP orders.

Buy-side Panel Follow-Up

Emma Quinn,Head of Asia Pacific Trading, AllianceBernstein

Sam Kim,Head of Trading & Liquidity Strategies Asia Pacific, BlackRock

With Emma Quinn, Head of Asia Pacific, AllianceBernstein, and Sam Kim, Head of Trading & Liquidity Strategies Asia Pacific, BlackRock


62 | ASIA

Sam: We believe that there will be a convergence of skillsets for the various types of execution roles. Different firms will structure their execution offering differently based on their business models, but we anticipate more firms will look to cross-train their salespeople across the different types of execution roles.

Fragmentation in AsiaEmma: In Asia we can see the benefits of a little fragmentation. In some markets the mere threat of

ASIC uses data analytics to assist with policy formulation at all stages of its development. The use of data analytics ensures that our policy decisions are based on identifiable and measurable market outcomes. This enables us to better detect, understand and respond to market issues.

Over the past five years, we have used data analytics to inform major markets policy projects, including:• market competition reforms (Report 215

Australian equity market structure);• market structure reforms (Report 311 Response

to submissions on CP 179 and CP 184 Australian market structure: Draft market integrity rules and guidance); and

• dark liquidity and high-frequency trading taskforces (Report 331 Dark Liquidity and high-frequency trading (REP 331)).

ASIC: The Use Of Analytics In Policy Formulation And ReviewUsing data analytics also assists us to conduct post-implementation reviews of policy changes to ensure that intended outcomes are being achieved and that initial policy concerns no longer remain.

Although data analysis may provide a sound basis for decision making it is not a substitute for consultation. Each of the policy initiatives we have taken has been accompanied by consultation with industry. This includes formal consultations, as well as soft soundings and workshops.

Other regulatory tools ASIC relies on to ensure our financial markets are fair and efficient include: surveillance, enforcement activity, stakeholder engagement, guidance and education. The depth of our regulatory toolkit ensures that financial investors and consumers can be confident in the integrity of our markets.

competition saw the incumbent exchange innovate and lower costs. This is great for our clients. I do not expect to see the level of fragmentation that we see in the US or EMEA: however I would like to see monopolies disappear via some healthy competition.

Sam: We believe that a certain amount of fragmentation is beneficial as it introduces competition into the marketplace. However, fragmentation for the sake of complexity is an unnecessary development and does not benefit our clients.


ASIA | 63

The Role Of An ExchangeJenny Chiam, Head of Securities, SGX

Today’s world is globally connected and money can flow anywhere whether you are a retail or institutional investor. This is a challenge for the smaller exchanges where growth is linked somewhat to size of the economy and the growth potential. Cutting prices does not necessarily mean more interest in your market. As I mentioned on the panel there is a critical mass of liquidity and the immediate focus for SGX is to improve the cost of trading by reducing market impact costs. The key objective of the introduction of market makers into our cash market is to help lower the cost of trading for our investors overall. Australia and Japan have seen competition come in but the entry of competition occurred at turnover levels that are multiples of SGX today. Pricing should and will be adjusted where it make sense for a product development strategy.

The retail investor in ASEAN is increasingly tech savvy and upwardly mobile and seeking opportunities in their home market, within ASEAN and globally. It is hard to quantify as trading flows tend to go via the various broker intermediaries in the respective ASEAN

countries but we do see more engagement and interest especially through our educational efforts to improve financial literacy overall. All the ASEAN exchanges have stepped up their educational efforts to encourage the public to own businesses via stocks and improve capital formation; the fundamental role of an exchange.

Jenny Chiam,Head of Securities, SGX

“There is a critical mass of liquidity and the immediate focus for SGX is to improve the cost of trading by reducing market impact costs.”


64 | PRODUCT OVERVIEW

Multi-Protocol Automated Testing as Strategic Competitive Advantage

TECHOLOGY DELIVERY PIPELINE

DELIVER APPLICATIONS FASTER AND BETTER

As financial firms in all tiers come to realize that trading technologies are the bridge between business ideas and client fees, those who can cross this bridge faster will inevitably win the clients and their fees.

The Technology PipelineThe engine of profitability that turns ideas into profits is now a “Technology Pipeline” akin to an assembly line through which innovative business ideas are implemented and delivered to clients. The shorter the pipeline, the larger and quicker the fees.

Regardless of the tactical model, Agile or Waterfall, its stages are the same: business analysis, development and testing.

Building the shortest pipeline and guaranteeing its uptime, regulatory compliance and quality while pushing business ideas through is a challenge faced by many firms trying to remain competitive.

The Nozomi Enterprise Testing platform (ETP) shortens this Technology Pipeline by drastically reducing testing cycles from weeks and months down to minutes and across all business areas: capital markets, treasuries, wealth management, payments, retail and everywhere else technology is the fundamental driver.

IDEA BA DEV TESTING REVENUES

IDEA BA DEV REVENUES

Whether the owner of a sports car is engine-savvy or not, what’s taking him or her to the finish line faster is a well-tuned engine made of nuts and bolts. Similarly, regardless of whether the IT department is only considered a cost-centre, the modern engine of banking is made of interconnected software systems and a well-tuned Technology Pipeline will reflect business ideas to the bottom line faster.

The Nozomi platform gives users the means to deliver revenue-generating ideas faster to clients, transforming Test Automation from a cost harmonization exercise to a Strategic Competitive Advantage.

Future-Proof ExtensibilityNozomi is composed of client/server applications that centralize testing activities within one framework and can be leveraged across all business lines. Because of its unique multi-protocol capabilities it connects to financial systems across the widest range of technologies: FIX, SWIFT, Fidessa, Murex, TIBCO RV/EMS, Informatica UMS (29-West), Solace, MQ, ActivFinancial and proprietary protocols.

Nozomi protocol plug-ins enable the same toolset to be deployed to other areas of the business easily.

Front-To-Back coverage across all business lines is what makes Nozomi ETP unique in the market today.

The Nozomi suite of applications includes Nozomi Studio, a workstation application to create tests and system simulators.

The Nozomi Execution Server to schedule execution of tests and for data reporting.

The Nozomi Simulation Server to deploy system simulators that create a virtualized environment of downstream systems.

And the Nozomi Certification Server, where client on-boarding and certification is carried out automatically for FIX and other protocols.


PRODUCT OVERVIEW | 65

As a case in point, a leading Japanese bank has integrated Nozomi ETP within their delivery pipeline. By achieving fast automated testing of strategic business applications they are able push trading ideas through their architecture faster than the competition.

Because of its modular architecture, Nozomi can be deployed to different business areas in stages: e.g. starting with FIX and moving downstream though the front-office, middle-office, back-office, and settlement systems; and then horizontally to F&O, FX, FICC, Risk and other verticals.

Power and ease-of-useIn order to deliver the most benefits to the largest audience the design principles underlying the Nozomi roadmap maintain the right balance between ease-of-use and powerful functionality. Nozomi achieves this with a simple and intuitive graphical UI that does away with scripting and programming, coupled with a modular architecture that permits the addition of new functionality via plug-in modules and packages for custom testing commands. This way both developers, business analysts and QA practitioners can use the same toolset for all testing activities.

A client-driven roadmapBecause support for new protocols and custom commands is added via plug-ins users can collaborate with Esprow to expand capabilities to proprietary systems and unique testing requirements.

The current technology roadmap includes integration of GUI testing applications, 3rd-party systems, mainframe connectivity and data reconciliation testing.

Nozomi can be deployed in enterprise, managed and hosted

modes and is supported by Esprow professional services and

our network of global partners.

ROI & Purchase ProcessTypical ROI period for the Nozomi

platform is 3 months from the go-live and during the purchase

process clients have access to Cost/Benefit Analysis, Case Studies, Customer Testimonials, Proof-of-Concepts and Application Demos.

Multi Protocol

Extensible

Powerful

SWIFT, TIBCO, Informatica, Fidessa, ActivFinancial, Solace, Kaazing, HP, Murex and others are registered trademarks of their respective owners.

Their use in this advertisement is not meant to imply sponsorship or endorsement by the trademark owners.

Nozomi ETP Protocol-Independent Libraries

FIX

Fidessa OA

Kaazing

SWIFT

HP QTP

TIBCO RV

TIBCO EMS

Murex

Solace

JMS (MQ)

Nozomi Studio

www.esprow.com


66 | FRAGMENTATION

GLOBAL FRAGMENTATION AT A GLANCE

LIT VALUE BREAKDOWN (Q2, 2014)1

1 Venues with a market share lower than 0.01% are not shown on the diagrams but are included in the calculations2 Borsa Italiana trading after hours Source: Fidessa


FRAGMENTATION | 67

THE IMPACT OF JAPAN’S NEW TICK SIZE PROGRAMMEIn January this year, Japan’s primary exchange (Tokyo Stock Exchange) introduced smaller tick sizes for TOPIX 100 constituent stocks in an attempt to win back market share from the alternative venues, or PTSs. Since the introduction of this programme the primary exchange has built on its existing majority share in this index with the PTSs seeing a reduction in their relative market shares. Even some of the most liquid stocks (such as Canon) trade more on the primary market now than they did last year, so it looks as though this initiative has achieved its aims.

Prior to January 2014 the minimum tick size on the alternative venues was ten times smaller than that of the primary exchange. Historically the PTSs have also had smaller average trade size, both in terms of number of shares and value (JPY). After Phase I, the minimum tick size on Tokyo was reduced from 1 to 0.5 JPY. In July (Phase II) this was cut further to 0.1 JPY, a level equal to that of the PTSs and in line with other international markets.

Source: Fidessa


68 | FIX TRADING COMMUNITY MEMBERS

FIX Trading CommunityMembers*Premier Global Members marked in bold

360 Treasury Systems AG ABN Amro ClearingActimize Inc Actuare AFME- Association for Financial Markets in Europe Albourne Partners Ltd Algomi Algospan LtdAllianceBernstein Alpha Omega Financial Systems, Inc American Century Investments Ancoa SoftwareANZAquis Exchange ASIC 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 LynchBarclays Bank of MontrealBaring Asset Management BATS CHI-X Europe Baymarkets ABBeijing RootNet Technology Co., Ltd. BlackRock, Inc. Bloomberg L.P.Blue Ocean Company BM&F BOVESPA BNP ParibasBank of Montreal Bolsa de Valores de Colombia Bolsas y Mercados Españoles (BME) Borsa Istanbul A.S. Brandes Investment Partners LP BridlineBrook Path Partners, Inc. BSE Limited BT Bursatec SA de CV BVI C24 TechnologiesCalm Global Information Technologies Ltd Cameron Edge CameronTec Cantor Fitzgerald Capital Group Companies, Inc. 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 Dimensional Fund Advisors Eastspring Investments (Singapore) Limited Ecodigi Tecnologia e Serviços LtdaEdelweiss Securities Limited Egypt For Information Dissemination EMCF- European Multilateral Clearing Facility N.V Enmetrica Orion K.K. JapanEquinixEspirito Santo Securities IndiaEsprow Pte. Ltd.ETLogic Ltd ETNA Software Etrading Software LtdEtrali Trading Solutions EuroTLX Exactpro SystemsEXTOLEze Software Group EZX Inc. FIA (Futures Industry Association) Fidel Softech Pvt Ltd Fidelity Management & Research CoFidelity Worldwide Investment Fidessa group First Boston Group First Derivatives FISD Fiserv FIX Flyer LLC Fix8FIXNETIX Forex Capital Markets, LLC FpML Franklin Templeton Investments Fubon Securities Ltd

Gamma Three Trading, LLCGATElab GETCO Asia GFI Group Inc Goldman Sachs & Co. Greenline Financial Technologies, Inc.GreySpark Guosen Securities Ltd Hatstand HM PublishingHong Kong Exchanges & Clearing Limited HSBC Bank PLC ICAP ICMA (International Capital Markets Association) IG Group Holdings PLCIgnis 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 TechKnight Capital Group Kotak Securities LCH Clearnet Linedata LiquidMetrix Liquidnet London Market Systems London Stock Exchange Group M&G MACD Macquarie Securities Limited MAE - Mercado Abierto Electronico S.A. MarketAxessMarket Prizm MarkitM-DAQ MFS Investment Management

Premier Global Members


FIX TRADING COMMUNITY MEMBERS | 69

Mizuho Securities MOEXMorgan 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 CapitalOMERSOMG (Object Management Group) OTAS TechnologiesOmgeo On Budget and Time Ltd Onix Solutions [OnixS] OnX Enterprise Solutions OpenSettlement GmbHOptions Clearing Corporation Orc GroupOslo Bors ASA Pantor Engineering AB Patsystems Peresys (IRESS) Perseus TelecomPFSoft Portware Pravega Financial Technologies, Inc.Primary E Trading PropelGrowth Proquote Putnam InvestmentsQuendon ConsultingQuod Financial 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 ScotlandRTS Realtime Systems S&P Capital IQ Real-Time SolutionsSASLA (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 GeneraleSoftware AG Spotware SystemsSpring Securities International ABSquawker 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 ExchangeThe Technancial Company Thomson Reuters TickSmith CorpTMX Atrium Tokyo Stock ExchangeTora Trading Services Tradeflow ABTradeHeader, 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 LtdTurquoise TWIST UBS Investment BankULLINK VelocimetricsVersitrac Systems Corporation Volante Technologies Volta Data CentresWellington Management Company Winterflood Securities XBRL Xetra (Deutsche Börse) Yambina LimitedYieldbrokerZeopard Consulting

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

BNP Paribaswww.bnpparibas.com

GATElabwww.gatelab.com

GreySparkwww.greyspark.com

M-DAQwww.m-daq.com

Quod Financialwww.quodfinancial.com

Turquoisewww.lseg.com/areas-expertise/our-markets/turquoise

Premier Global Members

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RESOURCES | 71

Industry Resources

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

to provide them with their multi-asset 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.

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

Contact details:

[email protected]

www.fidessa.com/contact

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 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.

Contact details:

Email: [email protected]

http://ba.ml.com/instinct/

Asia +852.3508.7550

Europe +44 20.7996.4521

U.S. +1.212.449.6090

CameronTec Group CameronTec Group is the global standard in financial messaging infrastructure and tools for the Capital Markets industry that today powers the largest user base among financial institutions.

Uniquely positioned as a software and service provider for enterprise, hosted and managed platforms,

a dedicated professional services team ensures optimal integration and deployment performance.

CameronTec’s flagship offering Catalys is underpinned by market-leading connectivity technology and engineered on the widely acknowledged standard in FIX engines, CameronFIX.

The FIX integration, testing and management solutions, including VeriFIX, build out the offering to provide end-to-end global

connectivity solutions for any electronic trading environment using or migrating to FIX and proprietary protocols.

Catalys Market Access offers FIX-powered gateways to more than 60 equity, derivative and FX markets across the globe, as a locally deployed or managed / hosted service.

Contact details:

Web: www.camerontecgroup.com

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72 | RESOURCES

ConvergEx Group’s ConnExConnEx is ConvergEx Group’s fully-managed 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 broker-dealers and their network partners.

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.

Managing operations for customers, ConnEx helps firms save on capital

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.

Contact details:

For more information, contact George

Rosenberger at 212.468.7726 or via email

at [email protected]

FIX FlyerWith 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

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 multi-asset 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.

Contact Details:

www.fixflyer.com

GlobalTradingThought 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.

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

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:

[email protected]

www.fixglobal.com

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 [email protected].

Sophisticated Solutions for Broker-Dealers

GlobalTrading 2014 Quarter 3

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