Mostly… fixed income and cross product eTrading

November 30, 2006

Bond market resists algorithmic trading

Filed under: etrading, OMS / EMS — holky @ 2:59 pm

efinancialnews and fixfortechies says that Participants expect growth of automated execution in equities and foreign exchange to tip over into other asset classes, and also points out that while the use of algorithms to automatically execute trades is thriving in equity and derivatives markets, fixed income trading has failed to follow suit.

It’s no surprise the article predicts that customers will utilise algorithms for government bonds before credit (my latest 2c on e- Credit in this waratah post),  and that the fixed income algos move will only occur as a “next step” after the buyside conquer using their algos for foreign exchange. 

But while the buyside use is clearly still some way off, the efn article quoted Apama to show that sellside are already using algos in their pricing and quoting .. “receiving requests for quotes, analysing all the streams of information and then calculating pricing on the fly is becoming more established within our customer base

The mention of RFQs leapt out at me. Sticking to the existing RFQ model (i.e. “whats your price for this size in this specific security?”) surely means buyside never get to fully utilise algorithms for fixed incomeIf the buyside algo machine has to make its stock selection before doing price inquiry then surely it’s going to spend a fair amount of time spinning its wheels reqeusting and re-requesting executable prices, based on the indicatives it has used in working out that it is interested enough to request a firm price.   It of course then also needs to send RFQ for every security that meets the criteria it is seeking (cpn, mty, drn, issuer, sector, …. and many more).  So are the platforms and dealers really going to be able to deal with the number of “open” RFQs increasing exponentially just because an algo box has been plugged in?

To really add full value the customer-facing algos actually need an executable stream of pricing of all of the inventory that is in scope for their trading decisions – as is commonly available for FX and also the markets where algos are already used –  so the machine can do its magic then request execution with a good degree of certainty of getting it.  The thing with the fixed income space is that given the breadth of inventory in FI space, multiplied by the number of dealers to contribute, I can’t help thinking this will only really work if customer indicates the attributes of the inventory they are interested in (ah, so something similar to that proposed in my post about executable bid lists then) rather than having to send hundreds of RFQs for specific securities just to get a truly executable price comparison…  Then the dealers can respond with anything in their inventory that matches the attributes and which they can price in a way that comes close to meeting customer expectations in terms of the aggressive bid/ask spread achievable today using RFQ.

So again I’ll conclude that new transaction types are required in order to take the market forward.  But this isnt one of those flags in the sand for two years time. Surely the existing platforms could offer sellside customers an attribute search for inventory that comes back with executable pricing (so “just click to select which trade you wish to do”) is really not a huge step?  They offer search functionality anyway, so it’s just down to sellside supporting the new order type behind the scenes – in order to [algorithmically] offer their true inventory out to customers.

Icap hits out at eurozone bond restrictions

Filed under: etrading — holky @ 7:32 am

Article in FT says that Icap on Wednesday threw down the gauntlet to MTS, the dominant eurozone government trading platform, after it sponsored a report that was deeply critical of the operations of the Italy-based exchange.

The report, which was commissioned by Icap and written by Professor Avinash Persaud, an economist and former director of debt research at UBS, claims the presence of rules that currently force traders to use the MTS platform in eight European Union member states have held back the development of the bond market in Europe.

November 28, 2006

Buyside/Sellside – I dunno – its so dark in this pool….

Filed under: 2015, etrading — holky @ 9:23 pm

Trading technology vendor Flextrade has started beta-testing its block FX trading platform MilanFX, it told FX Week. The vendor becomes the first to roll out a block trading venue for foreign exchange and employ a dark pool of liquidity. Spot broker EBS and electronic communications network (ECN) LavaFX are considering similar initiatives, as market participants search for ways to offset large positions with minimal market impact. Flextrade’s MilanFX enables users to trade large blocks anonymously under the names of their prime brokers, although self-clearing firms can also participate. The platform also introduces a dark pool of liquidity to FX, where only a non-tradable midpoint price, or reference price, for the fair market value of a currency pair is displayed.

Buyside and sellside have same access to this pool, which rang my “were going to see more blurring of the edges between buyside/sellside” bell.

Computers will replace hedge fund managers

Filed under: 2015 — holky @ 1:18 pm

from efn.. The hedge fund industry is set for a move away from active fund management according to a new report because automated trading systems can outperform real managers.  Professor Harry Kat and colleague Helder Palaro from Cass Business School claim to have designed systems that would have outperformed real managers 82% of the time over the past 15 years.   Kat said: “In the early days, the high fees came on the back of 15% to 20% returns. Things are very different now; hedge fund returns are routinely around 6% to 7%, basically the same as a glorified savings account. If fund managers are taken out of the picture, however, returns can be boosted by 2% or 3%.”

On the other hand .. the article notes that this is the third time Kat has made such a claim in almost 18 months, and that critics are still wondering why Kat has not invested his own money in the system.

November 24, 2006

FSA re MiFID best execution obligations

Filed under: Mifid — holky @ 12:24 pm

Hector Sants (Managing Director, Wholesale Markets Division, FSA) gave a useful speech 23/11/06 regarding FSAs implementation of MiFID best execution obligations, covering –

-Who is subject to best execution requirements
– If you are subject to MiFID’s best execution requirements, what does that mean for your business in practical terms?
– Portfolio managers and RTOs
– Review and monitoring

 speech transcript here

November 21, 2006

Credit Bonds and Executable Bid Lists

Filed under: etrading — holky @ 2:33 pm

Just a thought in relation to waratahs post question regarding credit bonds here

With a “client” hat on I’d be complaining that dealers credit inventory pages are not clearly showing what they are genuinely making market in.  If I look at Bloomberg (or other) I might see a whole bunch of dealers offering 000’s of bonds at 5×5, which appears great but I know that when I send an inquiry my certainty of execution is very limited – especially if Ive done my homework on stock selection and found something a bit whacky to pick up a bit of alpha.  Existing AXES offerings are better targeted, but still open to misuse -intentional or not.  Of course this isnt just fixed income – it’s the same story with equity IoIs; it all comes down to a dealer saying they are a buyer/seller when [to me] they are not.

So do we get someone to “police” IoIs and Axes (hey, did we all groan?) or turn this on its head; how about if buyside sent out executable bid/offer lists? So without having to work with baggage/history of dealers existing inventory offerings (pricing pages, axes, ioi), and being an initiative that is driven by buyside genuinely posting bid/offers for other market participants to aggress, do we reach a model that would work “better” for the credit bond market?

Conceptually is this really a million miles away from existing model? Aren’t these bid/offer lists just a bunch of RFQs specifying the attributes (cpn, mty, duration, issuer, sector, …) and a target trading level, rather than being an inquiry for a specific issue?  (Sure, loads of details to ensure you only get hit/lifted once per order if its multidealer, and how about partial fills from all the dealers you asked to add up to a total fill?, central order book?  attributed/name give up/ccp/prime bro?, and so on)

This isn’t pitched as a replacement of the existing e- markets. Just a question as to why we should not break out of the model of “just” replacing existing manual workflows with an electronic equivalent in order to offer processing gains and scalability.  So a question to the ECNs and platforms, if you want to capture market share in the electronic space, why not also explore new and different transaction types that are solely and specifically for the electronic markets

And if you’re still with me, with Mifid changing the potential execution venues for other asset classes, why would the above model need to be limited to just credit or indeed just bonds?  

November 20, 2006

Another fixed income etrading blog to visit

Filed under: etrading — holky @ 3:56 pm

Hooray – now you can scoot over to to get even more fixed income etrading blog action direct into your aggregator.

November 16, 2006

Stating the bleeding obvious?

Filed under: 2015, etrading, Mifid — holky @ 7:54 pm

Something I haven’t articulated specifically, but just wondered if I should ….

The regulatory changes upon us are forcing all market participants to look at their trade workflows and business practices. 

Hence this is actually a not a bad point in time to be pitching a new venue or new type or way of trading – especially if it [helps] tick the boxes in satisfying the regulators that you’ve traded with all the care and attention and due diligence that you should

Of course with the increased regulatory burden of proving you’ve done things right, the appeal of trading electronically is being seen more favourably by sellside, buyside, and all in-between, including for institutional size and shaped business Surely a very interesting backdrop for the strategic alliances and new offerings coming out of the woodwork at this point?

November 15, 2006

Challenges to existing landscape

Filed under: 2015 — holky @ 8:43 am

The world’s biggest investment banks are to create a new pan-European system for trading shares to rival Europe’s top stock exchanges
bbc news here, and efinancialnews here

The banks have been working on the project for at least the past several months and currently call it a Multilateral Trading Facility, the technicalities of being seen as creating an exchange.  The banks will trade stocks on it that are listed on other exchanges. Companies that list on the LSE also will be able to be traded on the bank-consortium platform under a passport-type system that will exist under MiFID. None of the participants was prepared to comment ahead of the formal launch today. But the new facility would be run as a utility and so not required to make a profit, which suggests that it would undercut fee levels on existing exchanges. Just how many shares could be traded would depend on customer demand, but those behind the scheme insist it is not the intention to limit this to solely the most liquid stocks.

Exchanges have been watching the talks between the seven with increasing nervousness over the past few months, although there were initially doubts over whether the seven companies would be able to reach agreement given the vicious competition they engage in on a day-to-day basis. The seven, along with HSBC and ABN Amro, are also collaborating in Project Boat, over data reporting, which could hit revenues the exchanges generate from this activity.

These “2015” strategic alliances are being announced more frequently now. I wonder how long it will be until we see a “joined-up” version challenging the existing landscape in more than one asset class?

November 13, 2006

Eu commission: Non-equities markets transparency

Filed under: Mifid — holky @ 1:08 pm

The European Commission has just published its feedback statement in response to its call for evidence on transparency in the bond markets and other non-equity markets. All interested stakeholders, including industry and individuals, were encouraged to reply to the call for evidence, and the responses given (inc. the FSA’s response, which follows on from my post in October) are available here

While the majority of market participants argued that there was no case for price transparency regulation, the Commission and other regulators in Europe are looking to the industry to come up with practical solutions that will improve the provision of price transparency to market participants, in particular to smaller and retail investors, thus avoiding the need for regulatory intervention

November 8, 2006

Practice what you preach – in client onboarding

Filed under: Client Onboarding, Nuts and Bolts, STP — holky @ 11:23 am

Funny that while all of the platforms and venues are keen to wave the flag about the massive workflow improvements they can deliver by replacing human steps in the trading and settlement workflows with electronic, scalable, systematically repeatable steps instead, they still all run client onboarding processes which are generally full of human intervention, and if not paper based then will often utilise spreadsheets or emails that tend to change format and content with each “good idea” that the sender has.

Surely with the amount of expertise that we as an industry collectively have in terms of protocols and feeds and integration of systems, it would not stretch the imagination to come up with an open standard for a client onboarding feed: eg a simple xml feed of client info from the vendors system to each dealers CRM system to present the requests and initiate their take on process, then give a status update back as the request is being processed.

November 7, 2006

FIX 5.0

Filed under: 2015, etrading, FIX, OMS / EMS, STP — holky @ 5:04 pm

With the release of FIX 5.0 I thought id reflect upon the part of my presentation at Tradetech Fixed Income 2004 where I asked whether FIX will become the defacto standard protocol throughout fixed income, while showing this picture  (when hell freezes over)


Back at that Tradetech I was waving the flag about a new service we’d launched that utilised FIX for fixed income, which made a significant process improvement to allocations on electronic trade flow.  We’d plumbed the Bloomberg allocation screens (which customers use to send allocation instructions for their AutoEx trades) into our allocation engine via a FIX pipe, so the customer could actually interface direct with our engine rather than just msging a sales contact who’d then need to do something to manually book the shape and confirm when done.  Two years on our service is still there, still used, but despite Bloomberg offering same functionality to all other dealers at no extra cost, I am told we are still the only dealer who is actually using this FIX connection rather than relying on their salesguys or middle office getting a msg and manually booking the allocations. This leads me to question whether FIX is as ubiquitous outside of OMGEO etc as is made out for fixed income allocations?

Since that 2004 Tradetech we have established FIX connections in which our customers conduct their fixed income price discovery and electronic order flow. Yes, customers trading Fixed Income with us via FIX. Many sellside have said for some time “were ready for fixed income FIX as soon as customers want to use it”, but I’m referring here to real customers, real fixed income FIX connections, with real fixed income flow via FIX each and every day.  But its generally just those customers using FIX to trade other products with us already and who have the organisational structure allowing them to leverage this existing connection – as the majority of FI customers remain more than happy to continue in the usual multidealer platforms at this point.  If you read my blog then you already know I expect FIX to become the de-facto standard for connectivity on the customer side in the cross-asset space, but as this is driven by uptake of OMS, and specifically for etrading within the OMS, this is still some way off in terms of reach critical mass.  

As the FPL “process” to agree requirements and establish releases means FIX is only ever deployed in OTC space to replace whatever the original connectivity solution was, would moving to an open source development model mean product initiators could “do it in FIX ” from the outset rather than building their proprietary connectivity which will at some point in the fullness of time be supported in FIX?   Surely once the guys at the coal face of developing electronic trading for totally new capital markets initiatives have the ability to deploy a full lifecycle FIX-based solution from day1, FIX would really work its way into the hearts and minds of the movers and shakers who sponsor these development projects? …at which point uptake would surely snowball.

The OTC FX and FI electronic markets .. and so the current generation of pricing/trading systems .. were built upon the premise of using proprietary APIs, and these APIs have each evolved in-line as each liquidity pool has evolved over the years.  So for existing market participants FIX will clearly need to do that connectivity better in order to be considered a candidate to replace any of this existing connectivity.  Of course one “better” might be in the aggregation of disparate feeds and venues; e.g. the pitch of Currenex’s “OpenSTP/FX” (FIX-based STP protocol for FX, MM and precious metals), though this clearly only works as a standard if more than one of the liquidity pools offers it  :-s  (and even then this particular Currenex example is only really of interest to those who don’t have an existing STP capture in place).

It’s not all doom and gloom. FPL has addressed some of its major issues in FIX though; with FAST aiming to shut up everyone who says FIX can’t cope with streaming data, and 5.0’s transport independence addressing the complaint that there are too many versions of FIX in use for it to really be a “standard” (- though is the irony that we still need everyone to update to 5.0 in order to actually use this??), the hurdle to using FIX appears now to be just a matter of “implementation”  – shifting the problem from being a technical issue into a “FIX implementation” resourcing issue instead.

It’s the new venues and market participants (and for examples of these see the “2015” category) that will drive the uptake of FIX in the OTC space.  So in terms of that slide I was talking about at the start of this… while it’s definitely not freezing over in Hell just yet, I think it has probably got colder there in the last couple of years.

November 6, 2006

U.K. Soft-Dollar Rule Would Ban OMS Payments

Filed under: etrading, Mifid, OMS / EMS — holky @ 3:13 pm

(from Securities industry news) … A proposal by the U.K. Financial Services Authority to ban soft-dollar compensation of asset managers for the use of order management systems (OMS) and execution management systems (EMS) is running into sharp criticism. 

The FSA by including these systems along with electronic networks, dedicated phone lines and word processing software among “non-permitted services” in proposed guidance that is open for public comment until Dec 6, is diverging from a Securities and Exchange Commission rule issued in July that put front-office OMS and EMS in the “safe harbor” for soft dollars. 

However, because OMS can be classified as mixed-use–for purposes other than helping to execute a trade, such as analytics and compliance–the SEC did say that only the costs related to trade execution are permitted.

It is unclear why the FSA did not take the same approach or differentiate between electronic systems that benefit broker-dealers versus those that benefit fund managers.  Last year, when the FSA first issued its guidance, it did not explicitly exclude OMS and EMS from soft-dollar eligibility.

So an EMS that acts as a pure aggregator for price discovery and execution +/- value-add algos — hence something specifically “helping to execute a trade” — but which did nothing else, would still be ok in the eyes of the regulators. 

Also found a ppt with expanded detail on the tests and checks here

November 5, 2006

Blogs on Bloomberg

Filed under: Nuts and Bolts — holky @ 9:17 am

Bloomberg have introduced “blogs” on their system (BLOG<go>) – though its actually more of a publically visible MSG rather than a blog really, as each post is not open to comments, there is no tagging or filtering, and there is no syndication.


Blog at