January 23, 2008
October 1, 2007
….so what are all the mifid consultants going to do from next month onwards?
July 29, 2007
The European Securities Markets Experts Group (ESME) has now published its report for the EU Commission on non-equity market transparency, concluding there is no evidence of market failure in the wholesale market in the provision of price transparency, but not a great deal of transparency is available/accessible to retail.
July 18, 2007
what is the industry consensus on how “execution venue” will be conveyed in mifid-ready FIX orderflow? there are many users of old FIX versions (seems mostly 4.2) who just want to know which field will contain what and when.
is FPL going to use mifid as a stick to beat the non-upgrading FIX users? giving all an ‘upgrade to 5.0 to get your mifid extensions and more OR ELSE!!!’ ….. or (rather less dramatically) have i just missed/not found a general consensus yet?
July 9, 2007
Reuters has moved to develop a trade reporting system for investment firms operating under the MiFID rulebook with “Reuters Trade Publication (RTP)” – providing “an independent and cost effective mechanism” to help both buy-side and sell-side firms to meet their obligation to publish data on any trading activity that does not take place on an exchange or a Multilateral Trading Facility (MTF) immediately after a trade is done.
June 29, 2007
EFN says that Clara Furse, chief executive of the London Stock Exchange, has publicly warned that Project Turquoise and MiFID could reduce liquidity and raise costs for investors.
She also dismissed the claims by Project Turquoise that stock exchange fees were a significant part of the overall cost of trading, and their claims that their mutually-owned structure was superior to that of the LSE; claiming exchange fees account for just 4p out of the average £6.50 average cost of trading £1,000 worth of shares on the LSE – or about 60 basis points – compared with 85p in commissions charged by brokers and 60p in market impact, adding “Even if we offered our services for free, we would only reduce the overall cost of trading on the LSE by 4p. That is a small price to pay for the efficiency and liquidity that we provide.”
June 28, 2007
Complinet survey reveals industry-wide concerns about MiFID best execution policy …. “Our customers are telling us that the guidance provided by the EU and by the UK Financial Services Authority is not yet clear enough for them to be sure what their obligations are. With less than five months to go, they are still having to compare different interpretations and take a view on what best execution means in practice for their firm. This level of uncertainty is clearly causing concern”
Thus each firm must wait for first test case through the courts to benchmark how good or not their MiFID-compliant best execution policy is?
June 20, 2007
The CESR site now contains the answers received to its May 2007 consultation paper on price transparency in bond and other non-equity markets.
May 24, 2007
Investment banks’ compliance staff are set for a busy summer after UK regulators this week urged companies to start submitting documents to show they comply with new European trading rules within the next two months (more here)
May 2, 2007
So (according to securities news) says outspoken Securities and Exchange Commission member Paul Atkins, who is extending his critique of recent reform initiatives to one of the industry’s most significant current compliance concerns: Regulation National Market System (NMS).
Atkins faults the commission on both procedural grounds and for going too far in micromanaging some aspects of market operations. Reg NMS “represents a massive regulatory intrusion into our security trading markets that was completely unwarranted, given the lack of evidence of market failure and the availability of substantially less intrusive means to achieve the regulatory goals,” Atkins said in a speech to the SIFMA annual operations conference.
Are the powers-that-be for mifid learning from the experiences of Reg NMS?
May 1, 2007
As in EFN…. The European Commission has started legal proceedings against the 24 EU countries (all except UK and Romania) that have not yet fully implemented new rules on securities trading into national law – warning that delays beyond the 1-Nov deadline could put European banks and companies at a “serious competitive disadvantage” .. and have a “significant effect on EU financial markets, as investment firms could have difficulties providing services in other member states and could be uncertain as to which legal regime is applicable” – potentially leaving countries open to legal action from private parties claiming damages for losses incurred because of late implementation of national legislation.
I wonder who is going to be first mini-me dr evil to execute something in one of the “rogue states” then sue them for not being mifid-compliant?
April 25, 2007
There are many reasons to expect an imminent increased uptake of electronic trading – its pretty much proven technology now so not so much of a perceived risk, etrading is part of most people’s daily life anyway (tesco shopping, cinema tickets, ebay, and so on..) so it really isnt such a scary concept now to ‘do’ etrading at work, the ‘nintendo kids’ who were the early adopters are growing up into management positions where they influence and define trading firms’ strategy …. and so on.
Additionally I’m sure we all expect a desire to satisfy mifid-induced requirements to cause an additional wave of business moving to electronic channels rather than voice – if only to gain an audit of what was done and why. That’s not a binary voice up to end Oct then electronic from 1-Nov, but once people have realised just how much easier getting a best execution ‘certificate’ from a platform will be compared to d-i-y, there seems little argument to continue to trade much of the basic flow in unexciting size by voice (er, except if you’re still getting a better price by voice)
Anecdotally I hear people claiming they’ve heard someone say that they’ve heard other people say they expect all flow products to be electronically executed within <cough – mumble – timeframe> – based on some or all of the above. The Liquidnet research showing that 2/3 of buyside traders expect an increase in the use of electronic trading because of mifid is not perhaps quite so exciting as that, but it does show a general acceptance of electronic trading, and an acceptance in the buyside that the wave of adoption is indeed coming.
Great news for those in or moving to etrading roles maybe. But are the stats/propoganda that the venues churn out to show how well they are doing actually going to be entirely meaningless from now? How are the venues going to clearly demonstrate the “alpha” increases they are seeing because of what they do well? over and above the “beta” increase in uptake just because it’s time – and they are surfing that wave?
February 1, 2007
Some axe grinding in response to Waratahpost geeing up his readers to challenge the status quo-
– Banks make prices and Funds take prices
– Algo trading isn’t for Fixed Income
There is no fundamental barrier between making prices and taking prices, but those making a living market making are by nature going to need to be good at sticking their prices out in whatever shop front and enticing customers to trade, whereas those on the customer side need to have honed their skills to know where to shop for the best opportunities to get the deal they want. My post a while ago suggested “executable bid lists” might give the ability for top tier customers to send their inventory requests in executable form to dealers – I expect we will enjoy an increase in this activity as direct customer to dealer connectivity increases, and this is offered by dealers as a value-add for their top customers.
The difficulties in a market maker doing this for all of their customers in processing unsolicited requests from many thousand customers at one time is purely “scale”. You can’t just present each request as a popup msg to the trader to manually decide (like many did in the early days of Tradeweb’s mybid/myoffer in the $ treasury market). The machine needs to be able to work out whether to accept or not – which gets us onto Algos.
The other point about this is why is the customer sending in their price. I can see a join between an OMS generating the orders needed to execute a particular move in a portfolio (adjusting overall duration or whatever), but would you want customers to have a gui on one of the platforms to just send you their own price … without your machine on the receiving end being able to instantly auto-reject all the crap?
So Algos in the fixed income space. You will find algos in fixed income, in pricing engines. The easiest place to start with this is responding to RFQ (because at that point you have a reasonably narrow set of data to crunch). So your algos look at all of the relevant data related to the inquiry in question and return the “right” price. Of course once you trust your algo to be able to do that, letting it loose market making on your order driven markets is just scaling this up – after all, it’s just a broader selection of inventory, still with a specific type of counterparty at the other end. If you need to handle executable bid-lists/IoIs where customers send in what they want and the price they’ll do it you’d need the RFQ processing and the ability to accept when the customers price is “close enough”, determined by how much you want/dont want the position.
Conventional wisdom suggests that the demand for customer-facing algos in the fixed income space will increase after they sort out their algos for FX. I also see the MiFID triggered changes in the exchange markets putting OTC closer on the algo radar too, as the re-engineering to make the existing (exchange focused) algos able to deal with fragmented liquidity does mean they are architecturally similar to what would be required in OTC markets. Why would a client not wish to utilise algorithms to systematically go-get their best execution? Of course the fundamental problem then will be whether the fixed income quotes the algos are relying on are truly executable or not – which is another item I’ve already added to waratah’s list.
January 24, 2007
Even with the exact detail of the regulatory best execution burden for each kind of OTC market participant still being defined and agreed , there are a growing number of news items about systems claiming to offer assistance regarding meeting your new mifid-led requirements – for example the first to help you demonstrate you’ve fulfilled your best execution obligations, and the second to catch you when you have not, and now some Microsoft tools helping you with client classification, best execution, market connectivity, reporting and systematic internalisation.
SIA launch a software tool for verifying and assessing ‘best execution’ requirements in securities transactions, in line with forthcoming compliance requirements under the MiFID. SIA says its ‘Execution Policy Monitoring for MiFID’ module, will be made available over the SIA-Eagle market abuse and exeuction surveillance platform .. where users will be able to automatically analyse all the transactions carried out across the European financial markets and provide a full audit for customer evidence. The system will also verify compliance with contractual terms agreed with buy-side clients ex-post, as to the implicit and explicit costs for achieving best price in consideration of market impact and opportunity costs – SIA site
FSA to build Mifid detection system – The Financial Services Authority, the UK markets watchdog, is to introduce a new system to ensure City firms are complying with the markets in financial instruments directive, the European trading rules that come into force in November – efinancialnews here
Microsoft launches MiFiD package – here
January 5, 2007
With many new trading venues coming thanks to MiFID – such as Project Turquoise (bank-led consortium), Chi-X (from instinet), Equiduct (was Easdaq), and many dark pools of liquidity that have been in the news through second half of 06, doesn’t this fragmentation of liquidity take an exchange market participant’s architecture closer to what we already see in OTC markets? — where the direct participants need access to as many liquidity pools as possible in order to get a chance of doing the trade they want to do?
With an argument of using electronic access to markets to more easily aggregate a view of fragmented liquidity within the decision-making process, and automated ability to route orders to the right place at the right time to get the best result, how many bright minds are working out cross-asset (or perhaps “asset-neutral”) etrading initiatives to capitalise on this?
P.S. interesting that at this point the exchanges (Eurex, OMX, NSX, Euronext, Direct Edge, BATS – not an exhaustive list just what came to mind) have been in the news regarding reduction of their fees, but the OTC platforms/venues aren’t [at least publicly] doing the same.
November 24, 2006
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
November 16, 2006
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 13, 2006
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 6, 2006
(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
October 30, 2006
Transcript of panel discussion (in NY Sep 06) on developments in advanced automated trading strategies; delving into the past, present and future of advanced trading strategies and the implications for technology requirements and the human intervention. As you might expect, many of the “2015” points at least touched upon.
- Moderator Chris Church of BT Radianz
- Andrew Brenner, managing director and head of ISE Stock Exchange
- Andy Brown, MD and CTO Credit Suisse
- Edward Brown, global head of new business development and prime services at Icap
- James Leman, managing director and head of execution trading for the Americas, HSBC.
October 12, 2006
Chief Exec of FSA John Tiner made a speech 11/10/06 clearly indicating that a one-size-fits-all benchmarking issue is no-more, and also that the customer-side of each trade holds ultimate responsibility for “shopping around” for best execution, rather than the dealers having a duty to provide it (unless asked to do so) –
“Overall, industry response to our benchmarking idea was quite negative although many conceded that benchmarks are already used to price instruments in some OTC markets. In any event, this feedback has convinced us that any guidance on benchmarks would be unhelpful so we will not be proposing any ….”,
and, “I am now satisfied that we have found an approach to implementing the best execution provisions of MiFID which will maintain the positive aspects of the UK’s trading markets. In particular, we are clear that dealers giving quotes will remain free to do so on the basis of their own books and internal models and that it will remain possible in dealer markets for fund managers to obtain best execution by shopping around themselves, if they wish and forming their own judgements about who to deal with, without that lucky dealer then being subject to a duty to provide best execution. It will of course be the case that fund managers will continue to be expected to obtain best execution for their funds and that if a fund manager wants a dealer to provide him with best execution, the dealer must do so or decline to trade. It is important to recognise that while these proposals will, we believe, enable current market practices to continue, it is possible that the Directive requirements for greater clarity around best execution may lead to the industry itself developing new business models.”
Full speech available here
August 8, 2006
Mifid is finally on the table for the fixed income markets. Even though the impractical one-size-fits-all-of-the-market best execution benchmarking proposal (from IBM for FSA) has been discussed and rejected as unworkable by the market participants (LIBA, BMA, ISDA), the likelihood is that the regulators will still choose to impose some additional regulation – they are regulators after all. The consultation period ends Aug 17th, and we wait until the FSA response detailing their proposals for best execution which is due in October. As yet I have still not heard of any specific example of market failure or operational issue with the fixed income market that the regulators are trying to address. But I do hope they see the potential for irony if they place onerous or unworkable regulatory constraints on the fixed income market that achieve nothing other than driving liquidity away and so making the market a much more scary place for the “uninformed investors” they are supposedly trying to protect. I also hope FSA has a social conscience and so recognises the hugely negative social impact that they could cause to all living in major european cities by regulating these markets to the extent that much of the liquidity moves ‘offshore’.
Alas etrading as it stands is not the full answer. Just looking at a plain vanilla bonds environment, sure there is certainly an angle for the existing multidealer etrading venues to help with best execution reporting – which should suffice the majority of institutional fixed income etrading flow. But this still leaves the rare breed of customers who have their own fi order management system hooked direct into dealers (who are also likely to be savvy enough to be able to document their own best execution policy), and it also leaves the (typically) smaller guys, or those customers where fixed income is not their primary product set, who have singledealer electronic trading functionality. And the big one of course is that there are still the 000000s of fi voice trades per day that will require some form of best execution record for audit… bet you cant wait ’till October for the punchline.