Fidessa vs Sungard…the endgame begins?

So, it’s now public information that Citi have signed up with Fidessa to deliver a global solution:

“Fidessa will provide Citi with an order management and distributed low-latency execution platform along with BlueBox, Fidessa’s integrated algorithmic trading engine. The Fidessa solution will also deliver risk management functionality, comprehensive market data and a global order routing service. ”

http://www.automatedtrader.net/headlines/91529/fidessa-to-deliver-global-derivatives-platform-for-citi

So, a big bank takes a chance on Fidessa to deliver a comprehensive futures platform.  Citi acquired a lot of people to build up this business and they are looking to deliver something impressive.

So – what  has that got to do with Sungard vs Fidessa?

Well, remember that Fidessa started by using GL Trade gateways to markets until they built up EMMA.  Fidessa built up an equities business and they never really hit the sweet spot in the futures space.

Now they have a top tier client that has publicised this decision.  So, what happens next?  The existing GLTrade client base now sit down and think “hmmm, if Citi can do it, so can I, get Steve Barrow on the phone”.

I really want to quote Sir Winston Churchill here, but I will resist the temptation.

Now, what do Sungard do?  I refer the honourable reader to my post of some moments ago – link here

https://mostly.wordpress.com/2011/08/15/sungard-gltradebrassfront-arena-what-now/

Sungard: GLTrade/Brass/Front Arena – what now?

Bid for Fidessa?  About £588 million market cap at £16/share. Throw on a premium – say 20% to take it to about £700 million.

Why?

A double or quits bet on the front office trading systems market.  The GL acquisition cannot be going well; why not scoop up the main competition?  Price earning of about 20.  For year ended 31st December 2010 Fidessa made a £40 million profit. That’s a decent return on equity in a downturn and beats the hell out of a bank account.

Massive synergies possible – basically you just shut down all of GL Trade and Brass and most of Front Arena.  Keep the Clearvision product offering. Integration costs will be high – closing down the Tunisia and Serbia development sites and pretty much all of the Paris based staff.

Do I expect Sungard to do it? 20% chance at best. But if you cannot beat ’em, buy ’em! At the moment Fidessa are eating their lunch on a drip-by-drip basis.  This would be a transformational acqusition in the true sense, since it would transform Sungard from a dying sclerotic business to being Fidessa+a few bits left from the Sungard Trading world.  Just have to make sure that the staff retention packages are enough to keep the Fidessa “magic/inner circle” onboard but not to much to let them get lazy.

Disclosure: I know people at both Fidessa and Sungard, I have not discussed this article with them and have no information other than market knowledge.

eTrading is king

No need to talk up your own book if you’re involved in eTrading, EFN summarises the recent Morgan Stanley and Oliver Wyman publication Outlook for Global Wholesale and Investment Banking as specifically very positive from the eTrading front:

Flow Monsters – As spreads narrow and margins tighten, MS and Oliver Wyman are predicting that so-called ‘flow monsters’ with electronic trading platforms, ‘scale, leading edge technology and outstanding risk management in key categories’ will prevail in equities and fixed income trading. In fixed income currencies and commodities (FICC) sales and trading think market leaders Goldman Sachs, Citigroup, JP Morgan, BofA Merrill Lynch, Deutsche and BarCap. In equities sales and trading think Goldman Sachs, Credit Suisse, SocGen, Deutsche, JPMorgan, and Bank of America Merrill Lynch.

also specifically in

Electronic Trading We noted yesterday that anything related to electronic trading is hot (here). MS and Oliver Wyman confirm that the push to cut costs and build volume will ensure that electronic trading remains key in flow businesses for the foreseeable future. As a corollary, they also predict ‘down-skilling’ in other areas, such as flow sales.

and just to touch on the STP/processing side,

Post trade servicing Few people get rich from working in post trade servicing, but it’s definitely a growth area. Banks are predicted to invest heavily in post trade clearing and asset servicing capabilities this year. This is largely to prepare for changes to the OTC derivatives market, where up to 85% of trades are expected to move to centralised clearing systems in the next few years.

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?

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 ?

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?

Back Office Woes

Heavy trading volumes on Aug 10th particularly in credit derivatives and credit default swaps have exposed weaknesses in the systems used by some investment banks for clearing these complex products, leading to backlogs of trades awaiting confirmation, and many working the weekend to start clearing the backlog.

One provider of derivatives technology said “Electronic confirmation rates are higher than they used to be but what the banks aren’t saying is how much manual work goes on behind the scenes getting the trades ready for matching”, and also “Electronic confirmation rates may be 80% to 90% but how long after trade execution is that happening? If it’s a week or more, the risk is great, whether the trade is being confirmed electronically or otherwise.”

Most CDS trades are executed over the phone between dealers and their brokers, meaning trade data is manually keyed into bank’s internal systems, leading to errors, one banker estimating that 20% of electronic confirmations fail because the trade data has not been entered correctly – the problem being compounded by the dealing room culture which regards data entry and operational efficiency as a back-office problem.

So to add these ingredients to waratahs recent muse on whether ‘e’ cds was coming; shouldn’t the platforms with CDS ‘etrading’ offerings now be positioning this offering entirely as a workflow solution (a-la swapswire). So this isn’t that scary electronic trading with click and trade real time pricing and credit checking requirements, its just a route to enable your customers to negotiate then capture the terms of the trade, then communicate this via whatever api links and pipes to all parties who need to know thereafter. If the problem is again that the platforms aren’t flexible or generic enough to support all the products and variations required, why not just offer the transaction building blocks to allow dealers to arrange these as required to service their clients? Spend your development ££ on this rather than bells and whistles in the gui that nobody will ever see because they cant use the platform.

Practice what you preach – in client onboarding

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.

FIX 5.0

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.

Customer tiering … on operational performance

The measurement of operational performance to rank your counterpart isnt a new concept for the buyside, as its an accepted and expected part of the dealer selection process. Consequently sellside expend a lot of effort to ensure their trading process overall stacks up well compared against their peers. At present this measurement is a one way street, but soon we will see buyside similarly incentivised to review their aged/mutated trading processes and even contractually agree maximum levels of human intervention in trade workflow, in order to secure the best price available on their trades.

Of course I don’t forsee a sellside stampede to dramatically worsen a “good” clients pricing just because they need a bit of hand-holding in their trade workflow, but a maturing electronic market and also current regulatory initiatives that are highlighting the importance and impact of transaction processing costs, and doing so without this appearing “just” a back-office issue, make it reasonable to expect the cost burden of “unnecessary” human intervention in customers workflow to shift back towards the buyside over time. After all, who can argue with those choosing to trade by voice rather than a cheaper electronic venue, or to manually amend 30% of their trades post-execution by paper rather than direct gui, paying more for the privilidge of doing so?

LatentZero Partners With MarketAxess to Offer Improved STP

Latest pr showing that even though MarketAxess had FIX offering back in Nov 04, ‘better’ STP is still newsworthy. So just need customers to really make use of this then :-s

“LatentZero has formed an alliance with MarketAxess, the leading electronic, multi-dealer to client platform for U.S. and European credit fixed income and emerging markets securities. The collaboration will see improved STP and enhanced electronic trading connectivity for users of LatentZero’s order management and trading solution, Capstone Minerva™.”

STP and Zero Touch Trade Flow

While the majority of trades from institutional customers are allocated/split, and the workflows offer a degree of STP, true zero touch trade workflow is still the exception rather than the norm.

Customers measuring their STP rates based on how much intervention was required to get the allocation instructions out the door really are missing the point.  Even if their machine can spit out a fax or telex or email automatically with their allocation instructions and they can count this as 100% STP’d, sellside still have to employ someone to receive and deal with the instruction – as well as placing a manual step in the process which slows everything down, this also increases transaction cost because these human stages do go wrong. Having people in the workflow increases transaction cost for both sellside and buyside, as “people time” is used both sides to deal with trade exceptions that result from the initial human error. So zero touch trade flow needs zero human touch – which means machine-to-machine instructions.

While there should be real interest from both sides in reaching true zero touch trade flow, the paper and people based scenarios above are still definitely the norm. This is not because the technology does not exist. The major fixed income venues (tradeweb, bloomberg, marketaxess, bondvision, and even reuters now) offer their own electronic routes for post trade allocations etc, which are plumbed direct into the dealers trading systems (on the assumption all dealers have chosen to hook them up). But these are not widely used – customers prefer a generic solution that spits out paper or an email.

So is FIX for fixed income the answer in the post-execution space? Not yet, as major accounts have omgeo or their own fax/telex thing setup so they need ‘a reason’ to change. Buyside firms merging then rationalizing their operational effort may trigger this, but if the message to buyside is that alls well and good in (say) euro govvies and lets apply the same to next product set, then surely we’re papering over the cracks, and we need to get the post trade stuff sorted out in order to really progress. So how do we do that?