Executable Bid Lists, eh

Is that MarketAxess “Inquiry lists for financial products’” anything like executable bid lists or something like the iois stuff here as previously posted?

What lies ahead for e-trading?

Well, I liked the sentiment of the headline from Icubic “talking their book” (and indeed mine too) via “Electronic Trading: Visibility and Agility in a Fragmented Market”, stating-

With liquidity continuing to decrease, as the financial crisis unfolds further in 2009, it is widely accepted that electronic trading will play a pivotal role in ensuring banks can stay abreast of market developments, capitalise on fleeting opportunities and ultimately retain an advantage in a highly competitive landscape.

…but the Aite group report“The Next Challenge in FX – Creating a New Post-Trade Paradigm in an Electronic Reality” struck a particular chord with me. Yes, this is partly because I’ve been blinkers-on in the end-to-end FX space for the past couple of months and realise how painfully manual everything still is, but it’s also because I’ve always felt the spotlight was always on the execution-related bells-and-whistles arms race, at the expense of the far more more mundane requirements of actually sorting out the operational side of the dramatically increasing levels of trading being done [because the front ends got so much better to use].

We’ve all done plenty to exploit those “fleeting” singledealer opportunities, but perhaps our opportunity now really is to build real STP; the collective, cooperative processing that will move us from the (all Aite quoted) FX ticket price for non-top-100-banks of $10-25, to something that compares far better to per-ticket costs of fixed income $12, futures $1.25, equity options $0.75, and equity $0.05 (… though a question on these; are you really only paying 5c per trade for equity processing? ..processing not including clearing?).

Electronic trading in FX has become the norm, and the emergence of high-frequency trading shops and the burgeoning retail market have driven trading volumes into uncharted territories. However, beyond the front office, where most of the innovations have taken place over the last decade, cracks are appearing that might derail the growth of the FX market in the long run. Growing trading volume has had a negative impact on the back-office, post-trade infrastructure of most active FX firms. Today, FX has one of the highest processing cost structures when compared to other popular financial instruments. Industry-wide efforts aimed at easing the post-trade challenge have been met with limited success due to the lack of both coordination and an overarching strategy.

Sure, old habits will die hard – banks still obviously seeking competitive edge will continue to focus on helping their customers trade with them rather than their competitors, full stop. But perhaps the bigger picture is to build those collaborative foundations that will help enable more of your customers to trade more, and do so more frequently, in turn gaining even more value from those wonderful tools you’re offering? .. So shouldn’t we all collectively create the wave first, then we can have the competitive surfing competition once buyside and sellside are at the beach and ready to enjoy it?

Reuters/Bloomberg IM

Finextra tells us that Reuters have launched cross platform Instant Messaging, linking their RM community with/into the big wide world. (I should have said finally in that sentence – we were talking to them in some detail about this sort of thing over 3 years ago).

Reuters Messaging (RM) Interchange is being billed as a global instant messaging hub, connecting Thomson Reuters RM with Cisco’s Jabber XCP, IBM Lotus’ Sametime and Microsoft’s LCS/OCS. Users connected to the hub will be listed on an inter-company community directory.

Does an inter-company community directory that (somewhat) validates each user @ their particular firm is who they claim now present a credible challenge Bloomberg messaging? … and given the more open nature of this offering, should we expect quicker development of conversational e-trading functionality?

Working from home?

Given the logistics problems the snow is bringing I thought I’d pose a question; how many of your traders are a) allowed to, and b) able to , work from home? Previously there have always been problems with the regulated roles doing their regulated work out of the [watchful eye of the] office, but I wondered if any firms were activly removing these hurdles in particular clever ways in order to support this. And does that give them an advantage on days like these?

Behavioural/Operational Data

As quoted here

UK credit card issuers have agreed a framework for sharing ‘behavioural data’ on their customers’ accounts as part of an initiative to meet political demands for responsible lending practices.

Is anyone yet extending this sort of analysis onto operational flows – to record and use the institutional behavioural data (STP rates, blame attributed fails, etc) in establishing a true(r) transactional cost of trading with the client in question for the product in question? …. then using that contextual info as one of the inputs to their pricing engine / SOR ?

Get Those Humans Back!

EFN tells us that humans are back in vogue…

Wild swings in global stock markets and unprecedented volatility are luring buyside and sellside traders back to the personal touch broking model, where they can find an experienced broker on the end of the phone. Electronic trading remains a high priority, but the human element may be the key to brokers gaining business.

Do you think this is indicative that e-trading technology still isn’t “good enough” to merit the trust of the customers wishing to trade? In which case what function is missing? Based on that article, it’s some sort of reassurance screen/popup; “yes that looks like a very sound trade, pretty much in-keeping with what were seeing, so please click OK to invest wisely”. Ok, that’s an exaggerated thought, but surely a colour/context check could be part of an automated negotiation/orderflow?

Clearing is the new black – but nobody cares

Finextra reports the latest exchange looking at the OTC markets – lch.clearnet eyeing up the FX market to work out how they can get clearing involvement.

This is just days after the news confirming fxmarketspace is being closed down (by CME and Reuters) because there was not enough activity on the platform.

Given everyone’s fear of counterparty risk at this point, you’d think the timing cannot get much better for offering centralised clearing for OTC products. So why is it so difficult to onboard clients to these offerings? I can’t believe its just a documentation hurdle – sure the lawyers are probably quite busy with one thing or another at this point, but surely any business/risk manager looking to be a hero would have legal review and signing way up their todo list.

So what’s missing from the pitch?

Human sales/trading in an increasingly electronic world

EFN tells us that TABB reckon e-trading use will grow rapidly in European fund managers and investment banks over the next two years – causing the number of sales traders to drop by 9% a year for the next two years, with human traders executing 50% of flow in 2010 (down from 82% in 2005).

The point that new opportunities for the sellside trader are arising thanks to increasing fragmentation – in providing clarity to the buyside on where to execute (“navigating the markets”) – appears underlined by Traders Magazine suggesting that buyside traders do not have a coherent and considered strategy regarding the use of dark pools (for example 18% of the buyside traders unsure what they think their potential usage would be of a dark pool that was able to send out indications based on order flow that resides in that pool).

Isnt the uncertainty just because the landscape is not particularly well charted because it is still changing (and perhaps dramatically so) – eg more execution venue launches later this year. So while sellside need to help buyside clients understand whats out there, surely once the dust settles and the landscape is charted, more buyside will want to execute based on the proprietary rules that they have, in their systems/processes, with regard to when where and why.

French Govvies on MTS

I see French govvy traders’ electronic market making obligations can now be fulfilled away from MTS – here – joining Holland and Belgium in doing this, we must be approaching the tipping point for the rest of the Eurozone Debt Management Offices to similarly open up obligations in terms of venue?? … and this is all happeing at the time the covered bonds guys are seeking their own platform?

Previous post with ICAPs article about the Eurozone restrictions is here

Tradeweb RFS

I see Tradeweb is in the news – with 4 new dealers (Citi, Deutsche, Goldmans, UBS) on Euro IRS, and also introducing a Request for Stream (RFS) trading model for Euro and Sterling IRS.

Time for CCP in FI Markets?

At the same time the exchange markets are moving into a much more OTC shaped model with fragmentation and dark liquidity .. Tabb is suggesting that the Fixed Income industry may need to migrate from a traditional OTC market without a central venue to a more traditional exchange model in which there are not only liquidity providers making two-sided markets but a vibrant agency model as well.   Full article here

With development resource more scarce given current market conditions I think all roads lead to Rome – with Rome being whatever the target client wants it to be. This definitely isnt a one-size-fits-all sort of Rome though. Instead we’ll see continued fragmentation of the existing etrading landscape leading to multiple venues happily co-existing, but each operating with a model specifically aiming at the type of customer they are targeting.  As each trading model brings a different proposition value for each different tiers on client and also on dealer side, it will be interesting to see how many of the existing venues have appetite for revolution to extend their footprint into dramatically new and unproven models (and new target clients), rather than reinforcing what they do by continuing on an enhancement-based evolutionary path – allowing new venues to enter the picture.

Institutional Buyside FI etrading

Another post from John Greenan…

What’s the future for Institutional buy-side Fixed Income trading?

Within the e-trading world a lot of the emphasis has been on the sell side with different firms and strategies (Liquidity Hub, project fusion and so on).  One aspect that does not seem to get as much attention is the buy-side.  Typically a big institutional buy-side will have an OMS like Charles River, LatentZero, MacGregor etc.  On top of that will sit one or more of MarketAxess, Tradeweb, BondVision and so on.  The model that these firms impose is one of FIX connectivity into the EMS but no option of end-to-end FIX connectivity from OMS to brokers.

As this market place matures it’s difficult to see what the future direction will be.

I’d like to propose one model.

Buy-side EMS connects via pure FIX 4.4 to a limited number of brokers.  A RFS process starts to request two way quotes in size for a list of instruments that the firm is interested in.  These quotes are combined into a synthetic order book – such that the buy-side can see ‘market-depth’ for instruments of interest.

The strength of this solution is that there is no longer a need to look at proprietary systems, the streamed quotes can be used for monitoring, it’s pure FIX, brokers can be plugged in or dropped without much fanfare.

The weakness is that the first buy-side to implement this may have to build the system.  Potentially it’s a very resource intensive system, depending on the number of quotes, brokers and instruments.

What are buy-sides doing in this space?

The MarketAxess CDS long-game

OTC derivatives spending to soar …says TABB, via Finextra, in which case is the MarketAxess long game actually a good bet?

Quote  Investment banks may be firmly focused on the reform of equity trading in Europe and the US but the fixed-income market is facing different issues, according to a bond trading specialist who argues the credit crisis six months ago may have set back the modernisation of credit default swap trading by a year or more.    

Are any eyes on e- CDS at this point or is everyone looking at rates?  … I wonder just how long that long game is

Bondvision and LatentZero

I see in Finextra that BondVision is partnering with Fidessa LatentZero (Minerva).   Clients will be able to ‘auction’ their business to the best bidder either outright, or by switching with up to five dealers online …. which i presume means singledealer orders and rfq?

I recall way back towards the tail end of 2005 (?) a Bondvision announcement about the FIX pipe being opened. 

LZ point to point etrading gets a step closer?

What Do You Want From A Hub?

Another post from John Greenan …. anyone want to volunteer something that fits the bill?

What do you want from a hub? Let’s clarify what we mean here.  In a classic equities buy-side connectivity world the institutional asset manager would generally choose between point-to-point connections using BTRadianz/TNS/similar or a hub such as Thomson Order Routing, Reuters Order Routing, FidessaExpress, UL Net, NYFIX etc.In the past the measure of value of a hub was seen in pure techie network terms – that the value increases as the square of the number of nodes.  That worked fine in a world where buy-sides were busy trying to add as many brokers as possible in the initial stages of the move to FIX based rather than telephone based trading.  But what are the dynamics in motion now?

Unbundling means that you do not need to deal with a broker in order to pay for their research.  So why bother with multiple brokers?  If you look at the execution capabilities of a firm such as Goldman Sachs or Morgan Stanley then it’s hard to see what else you need.  For simple risk management reasons it makes no sense to put all your eggs in one basket but the optimal number of brokers is perhaps now a great deal smaller than the consensus opinion.

Let’s put forward a new model of broker relationships – core and satellite.  Have a small number of core brokers with whom the buy-side maintains deep and broad trading relationships, multi-asset class, algos, programs and so on.  Have a number of satellite brokers that provide specialist execution capability – illiquid German mid caps, access to smaller markets where the tier one firms may not have a seat.  In this core satellite world how many brokers do you need for a global institutional asset manager?  Deal out of the US, EU and Asia Pacific.  Have say 6 core brokers and say 8 satellite brokers per region.  A total of thirty connections.

In this case it’s never mind the width, feel the quality.  Rather than a massive number of connections, lets go for the smallest number but have in depth trading relationships.  What can the hubs offer in this quality, rather than quantity, driven world?

What about a hub that offers 24×5 uptime based upon the hub having two connections to a broker and the buy-side having one connection to the hub?

What about a hub that offers crossing capabilities by default based upon being able to see all flow routed down the pipe?

Another issue, end of days.  In a global trading environment it’s hard to fit in end-of-days for sequence number resets.  Either you have a five minutes slot where a broker is unavailable or else you build two or more connections such that there are regional connections so an end-of-day can run after the business day has finished.

Intelligent management capabilities.  Monitor DKs and rejections and try and add value – notify people and let an investigation begin.

Management statistics.  What percentages of orders go where, which algos are used.  Can any patterns be determined?

Real time and post trade TCA.  How well is the firm performing in executing client orders?

I don’t think that a single hub exists at the moment with all these capabilities but it’d be nice to see it soon…

LinkedIn, Bloomberg, and your data

Data data data data data.

LinkedIn announcement are going to provide a new relationship mining tool through their network, therefore selling your relationship info as stored LinkedIn … the company is apparently going to be tapping into the “social graph” of its users, analyzing relationships between people, their companies and professions to figure out who knows a lot about what.

Is Bloomberg heading in the same direction?  I see they are now recording the number of hits each persons profile has… an indication of how ‘popular’ or ‘newsworthy’ someone is. Would that and the relationships as defined in that persons address book be worth $$$$$ to journo’s or headhunters?

A Single Platform

SIFMA Fixed Income eTrading Survey 2008 results show 85% of buy-side respondents expect to be using a single platform for all of their institution’s wholesale electronic trading activity within the next two years.

At SIFMA we heard that the future is not all multidealer venues. Indeed, singledealer platforms are still a serious consideration for the majority of attendees where there is a functional benefit.  We also heard that buyside do actively want competition in the ECN/vendor space – if only so the functional landscape does not stagnate.

So answering the question posed in Tales from a trading desk, buyside expectation and indeed their desire would appear that the single platform in question is not one of the vendor or dealer platforms, instead it is their own desktop (ie their single platform), and that this platform is able to aggregate their view of liquidity into a single view of the market, from where they trade. So OMS or EMS depending how you measure it.

My panel ( this one of the only snippets I heard ) concluded that 2008 is back to basics and so time for the foundational work to be done so we are ready to benefit from the new venues and landscape changes that the dealer consortia are driving.   In an environment where fixed income etrading budgets are broadly the same as last year (*), we need to be specific about where the right place to spend is. So in terms of back to basics, spend your 2008 money on the implementation of your OMS and then [...through 2009] plugging it into the liquidity pools.  

Which pools do you connect to though? Well, once buyside have got the hang of plugging their OMS into fixed income liquidity pools, we’d be mad not to expect a much stronger drive from buyside and sellside to hook up direct in order to handle bespoke orderflow/information flow, or perhaps a move towards something more cross-product.  Sure, this is a relationship enhancer so perhaps only really relevant for top tier clients, but how long will critical mass of connections into say one of the fi venues want electronic order flow constrained in some way just to match what is possible via the venue’s GUI ?  Will those venues constrain the types or order that they can process, or will they move towards a more generic orderflow routing instead?  … though perhaps that’s a question for 2010 and beyond.

(*) assuming survey of SIFMA attendees is indicative of the market as a whole. The other options were that budget was materially less or materially more than 2007.

Banking crisis averted? Virtually.

With this news that it is now prohibited to offer interest or any direct return on an investment (whether in L$ or other currency) from any object, such as an ATM, located in Second Life, without proof of an applicable government registration statement or financial institution charter - as per my original musing about Second Life, it seems that virtual regulation is absolutely on the cards… albeit not per-transaction rules at this point, although I wonder how long it will be until a regulator of the real-markets gets involved?

Bloomberg fixed income etrading

So, what is the impact to the future of Bloomberg fixed income etrading now Russel Levi has moved to Superderivatives ?

Reuters RTFI gets IRS

I was pondering what was going on with Reuters RTFI, in the light of Thomson/Reuters, and also Liquidity Hub, when I got an out of the blue notification saying they’d just introduced ‘click to trade’ capability (so not RFS?) on IRS via RTFI (with Deutsche Bank)  … though none of this appears to be mentioned on the RTFI information page at time of posting.

Next Generation Pricing Systems

I have commented in previous posts that the next generation of pricing systems will be one of the foundations for innovation in the etrading space, so heres a quick checkpoint; if your bond pricing system is still largely restricted to instrument on Y axis and its attributes in tabular form on X, then check out the demos at lab49 to start worrying about how soon you’re going to have to start again from scratch.   

Actionable IoIs

So following on from one thread in the tradeweb discussion, actionable IoIs are the subject of this traders magazine article. 

There seem many hurdles to getting this going in the equity space – so is getting this going for fixed income through the previously equity autex pipes (yes i know fixed income autex isnt new but who uses it? seriously) er where was i, yes..  is doing this for fixed income under the Tradeweb brand seen as “lower hanging fruit” as we already know and love the concept of autoexable axes?  .. so the hurdle is introducing the autex technology to the fixed income guys in order to join the autex dots…?

Indeed, I wonder if there is actually widespread ‘demand’ on buyside or (yes spot the irony) it is just an indication of interest coming from buyside?  It’s so easy to say yes that sounds great please let me know more … and this comment cast a different light, Some customers that execute electronically want actionable IOIs,” says BNY ConvergEx’s Cangemi. “But for long-only asset managers looking to buy into or sell a significant piece of liquidity, a follow-up conversation to an IOI is almost mandatory for a prudent execution decision.” One size doesn’t fit all.

Some stats in the article say AutEx sends out about 1 million IOI messages every day, 15 to 20 percent of which are naturals (ave size 75000 shares ..didnt mention ave consideration), according to Tradeweb’s Albert Lojko.  Article also places BlockDATA (owned by Tradeweb, being AutEx’s industry-standard counterpart used by buysiders to try to discern who has the axe in a name) at the receiving end of the flow; which should mean there is sufficient drive to at least reach some form of actionable IOIs in the foreseeable future.

Back office woes continue

Hedge funds and mutual funds will continue to have difficulty staffing their back offices in 2008. WSJ article includes a comment that “fund companies have to assume now that their workforce is highly mobile and they won’t stay long in a particular position”

It’s always been a fairly natural move from back office into etrading, but I wonder if the experiences and rumours associated with Jerome Kerviel and SocGen will going forwards cause any pause for thought in taking a back office joe into an etrading position with finger-on-the-trigger in front office?

OMS order routing on the up

WSJ says that leading asset managers — including AIG Global Investment Group, Deutsche Asset Management, Pioneer Investments, TIAA-CREF and State Street Global Advisors (SSgA) — have participated in an extensive trading survey to benchmark themselves against their peers;  and while the first survey conducted in 2006 examined risk, trade strategy, technology, organization, broker valuations, workflows, fixed income, speed and liquidity, for 2007 the hot topics were trading policy, trading strategy, broker valuation, technology and fixed income (“Everybody was pretty much in the same position with DMA [direct market access], speed to market and liquidity, so we minimized the effect of that and focused more on broker relations, where people wanted to spend their time”).

Results showed OMSs have improved is their ability to automatically route orders – with 80% of firms in 2007 saying they have the ability to automatically route orders from their OMSs to external counterparties, compared to less than 50% in 2006.

eTrading is dead?

The Trade News underlines that banks are getting rid of some of their electronic trading talent, just at the point that there is an argument for even further commoditisation of their sales and trading efforts into scalable electronic channels to save a bob or two.  So do you see all of this as indicating that etrading (inc DMA and algo) is still very much seen as a supporting role that can be scaled back to maintenance mode – or is all of this just scaling back etrading alongside an even bigger scaling back of the traditional roles as the capital markets sink into 2008?  Either way, with the consortia in abundance taking a fair slice of the development pie that remains, does this mean we should all expect less innovation this year through the singledealer sites/presence?