December 03 - 05, 2019
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Highlights from Main Conference Day 1
Transparency is the Name of the Game
12.06.2018 | By John D'Antona
Give us transparency or give us death.
Not quite what Patrick Henry had in mind but if he were today’s buy-side trader it would be applicable. In a panel discussion here at the WBR Equities Leaders Summit in Miami, Florida that asked “Which initiatives should buy-side traders prioritize and how will the pending transaction fee pilot impact market transparency and best execution in NMS stocks?” the answer was clear – transparency. The buy-side definitely wants as much transparency as it can get and embraces as many initiatives as it can in order to get more comprehensive and exhaustive data that helps shine a light on how its orders are processed and filled.
Ryan Larson, Head of Equity Trading, U.S, RBC Global Asset Management kicked off the session by explaining that the more data he receives the better. And for him, it was the modifications to Rule 606, more commonly known as the Order Routing Rule. His firm trades small- and mid-cap sticks and anything that can help maximize the alpha on strategy and promotes greater liquidity is king.
“Rule 606 changes were at the forefront of our list,” Larson told conference attendees. “Any future pilots or rule changes we would hope would also have reportable milestones that can assist us as well.”
Michael Warlan, Head of Global Trading, Third Avenue Management agreed that market and order handling transparency and initiatives were tops on his radar.
“The aggregation and transparency of data helps our conversations internally and with clients,” Larson said. “Any pilot or programs designed to help explain how we get there (a more transparent market) are relevant here. But how we get there remains up in the air.”
Justin Schack, Partner, Head of Market Structure, Rosenblatt Securities who followed Larson and Warlan said the issues of transparency and disclosure and the data they can produce are paramount to a better functioning marketplace. And it can also alleviate some of the conflict within the equities market as to who is to blame for the oft-heated debate regarding access fees or rebates – the exchanges? The brokers?
“Of all the issues before the market, disclosure issues are the most important,” he began. “There are a lot of asset managers – not just the big ones but the smaller ones – who need Rule 606-related data. Everyone can benefit from this data in order to assess whether or not one is getting sub-optimal results with their brokers and how orders are routed.”
Panel moderator Ari Burstein, President, Capital Markets Strategies asked that given the increased provision of Rule 606-related data and the requests for even more, “what do we do with all this data?” and how does the buy-side digest it all?
Third Avenue Management’s Warlan said the vast data influx was OK despite some concerns over over-saturation and the result cost attached to the larger amount of data coming into the firm.
“While we’ve seen our compliance and technology costs rise as a result of more data, we’ve also begun to rely on our sell-side counterparts and vendors to help us,” he said.”
RBC Global Asset Management’s Larson agreed, adding that the cooperation between the buy- and sell-side in managing and interpreting data could only help make his traders better informed and in turn, help keep RBC’s clients more informed and trading.
“It is imperative that the buy- and sell-side coordinate on the data issue, especially on the cost issues,” Rosenblatt’s Schack said. “Market forces need to be taken into account and that is something not many are talking about.”
Bringing Crypto into the Mass Market
12.06.2018 | By John D'Antona
Crypto, crypto, crypto.
Wherever one goes – cocktail parties, CNBC or a family reunion- everyone seems to be talking about Bitcoin or its latest price movement or about someone who bought the currency and made a killing.
Everyone except the institutional buy-side – they have been gun shy about investing in the nascent asset. Institutions have refrained from jumping on the crypto bandwagon due to myriad reasons – ranging from liquidity, price transparency, custody, storage and cybersecurity. Only a handful of major players have dabbed in the sector, such as the Yale Endowment fund and Fidelity.
In the panel discussion here at the WBR Equities Leaders Summit in Miami, Florida, David Weisberger, founder of CoinRoutes.com told Traders Magazine he wanted to change the perception of cryptocurrencies. In a conversation that centered around his panel session here on Friday, “Bringing Cryptocurrency into the Mass Market,” he was going to focus on the aspects of crypto that both appeal to institutional investors and what are the issues that prevent their participation.
The goal – get the buy-side comfortable with crypto and eventualll get them trading it.
“Crypto has positive aspects include a lack of correlation, aspects of quantitative analysis which apply to crypto and the global, true multi-currency aspects of the asset class,
Topics that were to be discussed centered on issues that are the keys to institutional adoption of crypto as an asset class include clarity of pricing, availability of liquidity, regulatory certainty, custody/management of counter-party risk, etc, Weisberger said.
“I will likely do a short demonstration of CoinRoutes consolidated pricing to show how pricing clarity and knowledge of real time liquidity is available as part of the talk,” he said.
MiFID II Worries U.S. Buy Side
12.06.2018 | By Terry Flanagan
Markets in Financial Instruments Directive II will turn one on January 3, 2019. How has the sweeping European directive impacted the U.S. equities market and how has it affected brokers’ relationships with EU and US clients?
That was the topic of a Thursday afternoon panel discussion at WBR Equities Leaders Summit.
As a European ruleset, MiFID II isn’t binding for U.S. firms that don’t do business on the ‘Old Continent’ . But that only goes so far, because the new rules around provisioning research and best execution are increasingly seen as the higher standard that all firms should adhere to. And there is the specter that U.S. market regulators may move to a similar regime at some point.
One theme of the discussion was that the research side of MiFID II is decidedly not good news for smaller buy-side firms that don’t have the deep pockets of their larger rivals.
A sticking point is that MiFID II calls for an unbundling of research and trading, which mean investment firms need to pay for research cash on the barrel, instead of using so-called soft dollars and having the cost lumped in with trading commissions.
“The business models of some of these smaller firms were not designed to pay for research out of P&L,” said Jason Vedder, Director, Global Trading and Operations at Driehaus Capital Management, which manages $8.1 billion.
If the soft-dollar system goes away, smaller buy-sides in “bake-off” competitions with larger firms will be tripped up on the question of how they pay for research, and many will be forced to either be folded into a larger organization or close their doors. “You could see a part of the ecosystem wiped out,” he noted.
Vedder said MiFID II is having a “butterfly effect”, where a localized change in a complex system causes large effects elsewhere.
Lori Hoch is Chief Operating Officer of $3 billion manager Cortina Asset Management, which operates in the U.S. only. She said one of Cortina’s clients, a large institutional asset owner, has said Cortina must comply with the MiFID II standards that investment firms who operate in Europe are meeting, or risk being cut.
Pension funds and other institutional asset owners at the top of the food chain can sometimes indicate a willingness to chip in to pay for research, “but it doesn’t always come out that way,” said Healthy Markets Executive Director Tyler Gellasch, who moderated the panel. “The challenge is asking how much and what is their budget.”
Panelists noted that for now, MiFID II standards are being implemented at the client level. The U.S. Securities and Exchange Commission will ultimately hold sway on what happens from a top-down perspective; panelists said ideally the SEC will push back on some MiFID standards and work to develop a compromise framework that’s less onerous for smaller firms.
Buy-side Wants More Out of TCA
12.06.2018 | By John D'Antona
Like famed comedian Rodney Dangerfield, TCA gets no respect.
Trade Cost Analysis or TCA is the way buy-side traders attempt to evaluate their performance. But most buy-side traders know that most TCA offerings are either not complete or not high on their priority list as they struggle to meet best execution requirements. In a discussion here at the WBR Equities Leaders Summit in Miami, Florida, several traders and vendors sat down to discuss the evolution of TCA and its future.
Setting the stage for the discussion was the circa 1991 birth of the TCA and how it calculated trade performance.
“What started as simply a check box on our screens has increased in focus and importance these days,” said Michael Clements, Chief Trader, Employees Retirement System of Texas. “We now even use it as a measure towards a trader’s compensation package.”
Liquidmetrix’s Global Head of Sales, Henry Yegerman, explained that at its genesis TCA was simply used by the buy-side to evaluate its brokers. In turn, the sell-side then used TCA to evaluate how their algorithms worked and would fine-tune them based on the results.
Fast forward to now and TCA, while an older measure of performance, is ripe for adjustment and refinement, the panelists agreed. While back in the 1990s there were only a handful of straight line post-trade TCA providers, now there are myriad vendors peddling not just post-trade products but TCA that includes pre- and intra-trade information. And armed with newer products and information isn’t just about knowing how you are performing.
“Not knowing costs money,” said Michael Mollemans, Pavilion Global Markets’ Head of APAC Sales Trading, referring to the danger of not knowing the details of market microstructure and how it impacts routing decisions. “If you want the full picture of TCA and costs, you need to include some qualitative aspects into TCA that cover the entire trading process. You have to be able to anticipate changes in the marketplace.”
“Five years ago we had navigation systems that told you the best way to get you from point A to point B. Today we have Waze, which takes real-time traffic conditions into account when making that recommendation. We see TCA evolving in a very similar manner,” Stino Milito, Co-COO of Dash Financial Technologies added. “TCA doesn’t have to be limited to being inside of an OMS or EMS or those providers – keeping it there really limits your options.”
Liquidmetrix’s Yegerman added that TCA providers such as his firm need to remain flexible in the systems they create and the always evolving market structures. He sees TCA as becoming more thematic in terms of addressing broad themes in the market structure – such as the usage of RFQ exchanges in Europe or Canada’s move towards refining its trade analytics and algorithms.
“TCA is always number four on the buy-sides’ list of priorities, numbers one through three always change and shift,” Yegerman quipped. “But number four always stays the same.”
Employees Retirement System of Texas’s Clements said that he sees TCA usage falling into two groups – clients who use it as a compliance box-checking exercise, and those who use it to help improve decision making and drive performance. And he reiterated he uses it for the latter and not the former.
So, what about artificial intelligence and machine learning? Are they being incorporated into TCA systems of the future?
“The future of TCA is it being able to determine which brokers and algos are suitable at one moment in time and then recalibrating itself for future moments,” Dash’s Milito said. “TCA should recalibrate with every trade and order.”
And while that made sense to the session’s panelists, it has yet to be seen in current market offerings. Liquidmetrix’s Yegerman and Pavilion’s Mollemans said the inclusion of AI or ML remains more hype and marketing hyperbole than anything else.
“We really need now is TCA for blocks. We’re in the markets for that,” Mollemans said. “Now.”
A Holistic Approach to Trading
12.06.2018 | By Markets Media
By Brian Schaeffer, President and a Founder at Clearpool Group
Both real-time and historical trade performance analytics are important when it comes to taking an informed and holistic approach to trading in today’s market microstructure.
As the buy side establishes best execution practices, the way they evaluate their brokers and the adjustments they make to their trading strategies are largely reliant on the algorithmic and analytical systems their brokers make available to them.
The evolution of technology and the landscape of electronic trading is becoming more transparent, however the democratization of data within organizations and with partners is still limited. If analysts are the only ones leveraging the analytics tools and programmers are the only ones capable of making changes to an algorithm, then the transparency and value of real-time analytics will effectively remain unrealized.
“Our vision at Clearpool, has always been to place transparency at the forefront of all we do. But we knew early on that transparency alone was not enough, and the real power of transparency is unleashed when you can put real-time and historic trading tools in the hands of portfolio managers, sales traders, brokers, and analysts alike,” said Ray Ross, Clearpool Chief Technology Officer.
Real-time performance analytics provide traders with a deep level of transparency throughout a trade’s active lifecycle. It also gives brokers the ability to collaborate with their buy side partners in real-time and add color on the trade executions they are seeing. The complete democratization of this data allows for a renewed level of trust and transparency between brokers and their buy side clients.
“While transparency is paramount to bringing collaboration and trust back into the equation, transparency without the ability to take relevant and timely action is insufficient in our real-time world,” said Joe Wald, Clearpool CEO.
At a time when it appears the buy side is disenchanted with their sell side partners’ services as referenced in a recent Greenwich Report, US Institutional Investors Weigh in on Sell-Side Service, it imperative for the sell side to leverage technology that will empower them to collaborate and provide a level of expertise in “unpacking” electronic executions. This will ultimately improve the performance of their clients’ trades, help them effectively manage costs and elevate their best execution practices.
While real-time performance has its benefits, pairing it with historical performance of venues and order types and adding the expertise of a sell side execution consultant puts the buy side in the best position to effectively harness trading insights to enhance their overall performance.
ETFs Gain Traction
12.06.2018 | By Terry Flanagan
The exchange-traded funds ecosystem was the focus of the pre-lunch keynote Thursday at WBR Equities Leaders Summit in Miami.
Joe Mahoney, Institutional Sales & Trading at quantitative trading firm and liquidity provider Jane Street, discussed the latest products and regulations and addressed their wider impact on traditional asset management.
Mahoney cited a litany of statistics from a recent Jane Street survey of institutional investors, that show ETFs continue to gain traction.
“Investors are becoming increasingly comfortable with ETF liquidity,” Mahoney said. ETFs in turn are “experiencing more of a home in the core part of institutional portfolios, whereas traditionally they had been on periphery” where they were used tactically and/or for liquidity and risk management, he said.
In 2018, 35% of institutions polled by Jane Street said ETFs are a core part of their portfolio, up from 25% just last year.
The emergence and expansion of the ETF market has been a multi-year evolution. About 25% of equity trading in in 2018 has been via ETFs, up from high single digits in 2004. On a notional basis, more than $2 trillion in ETFs trade per month on average.
Mahoney noted the ETF market is top-heavy, as trading in the 50 biggest ETFs represent about 75% of total ETF dollar volume traded. The ultra-liquid ETFs at the very top of the rankings — SPY and QQQ for example, trade very similarly to equities.
ETF liquidity is as good or better than it was three years ago, according to the majority of institutions. In developed markets, 94% are positive about liquidity.
ETFs below the top tier need typically need some finesse to trade efficiently, and institutions are evolving in how they source liquidity. More firms are “looking beyond surface-level data” and incorporating a multi-faceted approach to pre-trade analytics, diving deeper into metrics such as the bid-offer spread, average daily volume, and the size of the ETF, Mahoney said.
Institutions are also decreasing reliance on manual trading processes, such as chat and phone, and trading more electronically. One notable trend is the emergence of Request for Quote (RFQ) protocol, which Mahoney said now makes up about 5% of ETF volumes traded off exchange, up from about 0% three years ago.
The Resurgence of the Block Trade
12.06.2018 | By John D'Antona
The more the merrier.
Orr as one buy-side trader said, “market fragmentation is a good thing.” He added that it has helped him find the Holy Grail of trading – natural block liquidity.
In a discussion here at the WBR Equities Leaders Summit in Miami, Florida that centered on venue proliferation and block liquidity, Enrico Cacciatore, Head of Market Structure and Trading Analytics, Voya Investment Management, the lone buy-side trader on the panel, told attendees that he’ll always opt for a block once his trading objective has been assessed.
“I use the data to decide,” he began. “As a buy-side trader I need to know my objective and what the balance is between tolerance to risk and market impact. But if I can trade 25,000 shares at the midpoint now I’ll always look to trade it.”
As some say in the market, the block is back. But as Tim Mahoney, CEO, BIDS Trading Investment Management chimed, it didn’t leave it just was quiet for a while. Mahoney liked the resurgence of block trading to the notion of it being easy to use. Back in 1995, he recounted how block trading was 53% of total volume at the New York Stock Exchange. But with fragmentation, the advent of FIX and more technology, the block faded somewhat. Yes, they were still getting done, more than ot in dark pools and other venues.
“Block trading is indeed picking up,” Mahoney said. “People are now more willing to purchase and sell blocks now.”
As proof, he told the audience that year-to-date (based on October data), block trading volume is up 12% while total consolidated trading volume is 9%.
Brian Williamson, Head of Sales at Luminex Trading and Analytics, concurred. According to his own data, block trading – using 10,000 shares as a standard – has grown and that block trading “is unique” and allows traders to source liquidity on their own terms.
“A block can allow you to trade them while you can, not when you have to,” Williamson said.
So, why is the block trade and venue enjoying a resurgence? First, as Voya’s Cacciatore explained, was the creation of and use of conditional orders. These allow him to send the order out and allow the technology to do the rest.
“Providers can now meet my need with the order in hand,” he said. “Before, I’d have to piece out my order.”
Session moderator Dave Weisberger, Head of Crypto, at ViableMKTS and co-founder of CoinRoutes, added that the development of smarter and block liquidity seeking algorithms were also a contributing factor to block trading growth. BIDs’ Mahoney agreed.
“Clearly the use of automated algorithms is on the rise and that includes those designed specifically for sourcing block liquidity,” Mahoney said. “These algos and block strategy are more widely adapted now than a few years back.”
And of course, the usage of auctions in the market – such as those from CODA Markets, BATS and Luminex have most certainly helped.
“For blocks, auctions open up the untapped universe of institutional liquidity that resides outside the Spread. The best provider of block liquidity to the buy side is the buy side,” said Jim Ross of CODA Markets. “Auctions are a unique, emerging tool for the buy side to explore and unleash the untapped latent liquidity that resides outside the spread.”
“Auctions can definitely help build a block and these vehicles need to be further examined,” Voya’s Cacciatore said. “You need to test and evaluate the auctions and take the opportunity to explore these new venues.”
Tech-Vendor Battle Heats Up
12.06.2018 | By Terry Flanagan
Consolidation has notched up in the technology-vendor space, as firms have been squeezed by the trends of lower revenue and higher costs.
Speaking Thursday at the WBR Equities Leaders Summit in Miami, Fidessa Director of Group Strategy Steve Grob said 2018 may not have been a record year, but it was a “standout” year for technology mergers and acquisitions.
He cited transactions such as IBM buying Red Hat and the Blackstone-Thomson Reuters deal that spawned Refinitiv. Earlier in the year and more directly applicable to equities trading desks were State Street-Charles River, SS&C-Eze, and Ion-Fidessa.
Grob explained that the millennial-driven trend toward passive investments have “sucked money out of the front end” of financial service firms, while tighter regulation has raised the bar for most all market participants.
For tech vendors, “there is less money in the pot, and the cost of participating has gone through the roof,” Grob said.
Sell-side brokers and buy-side investment firms have moved to boost efficiency in their operations, a pursuit for which scale and outsourcing can play important roles. But Grob noted that scale alone does not make a firm efficient, and with regard to bringing in a third party, “unless your outsourcing is committed to making your technology more efficient, you’ve just moved the problem,” which would manifest itself in high fees and poor service.
There is a “rebalancing” taking place in the buy-vs.-build debate, Grob said — larger market participants often built their own tech systems, but this is less the case nowadays amid tighter economics. Important factors firms need to consider here are systems integration, change control, and layering IP.
Regarding the future of the tech-vendor business, “it seems to me that the battleground will be in three areas: convergence, convenience, and data,” Grob said.
Convergence will align with regulators’ desire for all asset classes to be traded in the same way; convenience is about simplifying the user experience similarly to how an iPhone enables one-touch updating of multiple applications simultaneously; and data is about the industry making better use of its troves of data.
“The economics of our industry are completely different,” Grob said. “You need to operate at a lower cost, but you can’t do that without increasing business agility, because that’s how you differentiate.”
WBR ELS: T Rowe’s Williams Talks SEC and MiFID II
12.06.2018 | By John D'Antona
The buy-side has many things on its collective mind and one trading head at a major asset manager isn’t afraid to speak them.
In the Buyside Keynote address here at the WBR Equities Leaders Summit in Miami, Florida, Clive Williams, Head of Global Trading at T. Rowe Price kicked of Day Two of the summit in a one-on-one sit down with UBS’ Vlad Khandros, Global Head of Market Structure & Liquidity Strategy, to talk about some of the issues facing the institutional trader and desk.
First, Khandros inquired as to why the buy-side isn’t as pubic in terms of speaking out on market issues. Or, why is T.Rowe Price outspoken?
“Others (buy-side firms) don’t speak, we do,” Williams told Khandros and the audience. “While we don’t speak on every issue we do want to represent our clients and our own interests. And we’re not always going to agree with the sell-side on them.”
Khandros and Williams agreed that based on their own individual dealings with the Securities and Exchange Commission and requests for comment, the need for the buy-side to step up its game and get into the debates of the day is sorely needed. Even the SEC itself, Williams said, wants more institutional input and not the usual commentators and pundits submitting letters.
“I implore you to speak up and let them hear your voice,” Williams said directly to the buy-siders in the crowd.
Khandos then asked Williams on his views about MiFID II and its effects on T. Rowe’s business – as the firm operates globally, manages $1 trillion in assets and runs four trading desks round the world.
Williams began to explain that his firm had spent “a lot of time” preparing for MiFID II and to-date hasn’t seen a great deal of change in its broker list composition or research provision – especially in emerging and frontier brokers and markets. However, the composition could change as time and market conditions warrant, headed, if broker’s interests do not align with T.Rowe’s clients.
“We’ve got to be unbundled and still have to generate CSA’s (Commission Sharing Agreements) to pay for research,” Williams told the crowd. “The days of traders worrying about paying for research are gone. But we are still concerned with the unintended consequences of MiFID II.”
And what if the SEC goes the MiFID II route here in the U.S., Khandros asked.
“The SEC is caught in a tough spot by Europe on this one,” Williams began. “There is pressure from some clients and consultants – not the buy-side or us. The SEC will find that the sell-side thinks its ok to accept a check for research. Some are pushing back on this though and that speaks to their own interests and not ours.”
Continuing to address the sell-side, Williams told Khandros (who is on the sell-side himself) that new partnerships and acquisitions are forcing firms like T.Rowe Price to reconsider who it does business with.
“We’re going to continue to see market participants come into the space that haven’t been there before,” hence opening new opportunities to source liquidity, Williams said. “This has the bulge worried a bit as they now have to figure out how to get these volumes into their own dark pools before others.”
Khandros agreed on the point about doing business with new entrants.
“We are now considering doing business with firms that hadn’t been here five years ago,” he said.