Best Trading Systems in Europe

Awards for excellence in Trading and Technology Europe 2010 were annouced on 6th Oct 2010.

Some of the categories were I am interested in :

Best Sell Side Trading System - Fidessa
Best Buy Side Trading System - ITG Triton
Best Smart Order Router - Progress Apama SOR
Best Fixed-Income Trading Platform - MarketAxess
Best OTC Trading System - MarketAxess

Classic wall street cartoons - Wall Street Flight

Classic wall street cartoons - Market psychology

Smart order routing (SOR) in India

SEBI (Securities and Exchange Board of India ) has released a circular to permit Smart Order Routing (SOR) in the Indian Securities market. Two years back SEBI had allowed DMA, DMA Algo flows. Currently, these products are successfully used by many brokers.
Indian securities markets are becoming more and more competitive and close to the matured markets in the world.
NSE and BSE, two important markets in India, will be prime destinations where orders will be routed using SOR technology.

It will take 2-3 months of time before we can see first order traded using SOR. 

Let's wait and watch this space on following lines :

Exchanges
1.  Guidelines/Regulations for SOR product ?
2.  Preparedness from exchanges to launch the product ? i.e. unique id requirement.
3.  Who will be the first exchange to launch the product ?

Brokers
1. Global brokers will use SOR's from other markets ( US/EU ) to customise them for India ?
2. What kind of customizations will be needed for Indian markets ?
3. Can they leverage existing infrastructure to on board SOR ?
4. Who will be the first broker to launch SOR product ?

India talks in FIX protocol

National Stock Exchange and Bombay Stock exchange are FIX (Financial Information Exchange) protocol compliant. NSE is live with FIX 4.2 whereas BSE is live with FIX 5.0. FIX 4.2 is the widely used version of protocol. FIX 5.0 is the latest version.

It would be interesting to see
1. How long it will take for broker community to migrate from native protocol to FIX protocol ?
2. How it will benefit each exchange to attract liquidity ?
3. How FIIs will be able to take advantage of FIX for DMA and DMA Algo flows ?

Structured products : Warrants Vs Options

Structured Products are not new to the securities industry. Some of the popular structured products are
1.Warrants
2.CBBC
3.ELN
Warrents are often confused with Stock options. Please check out article from Hong Kong stock exchange detailing difference between them.

Post-trade transparency in Europe and fix protocol

Post Mifid, a European equity market continues to be fragmented. One of the challenges created by fragmentation is lack of “True” post trade transparency.
Post-Trade reporting happening as per Mifid via regulated market or reporting venue is mere accomplishment of the regulatory obligation. Post trade data generated from the regulated market, alternative trading systems and reporting venues creates sea of information. In the current state, even if simple consolidation is done from all of these venues, participants will not have accurate data or actionable data. This is because different methods ( i.e. size, type of trade, time) followed by each participant to report a trade.
Apart from regulatory intervention, there is a room for industry wide standard in this area. FIX protocol is best placed to address this need. FIX protocol can enhance standard so that post trade reporting happens in consistent manner. It should cover all the reporting requirements from regulated markets as well as OTC trades carried out by brokers.
Once industry starts talking in the same language then “Consolidated Tape” desired for “Actionable Data” will be on the horizon.

what are dark pools of liquidity ?

Dark pools are private exchanges. They are also known as crossing networks.

Why Dark?
-They do not display liquidity details to the public i.e. Order Size, Price, Counterparty
-May display liquidity only to selected participants
-May publish IOI's only to selected participants
-May publish best bids and offers if market volume is more than certain percentage of total traded volume

Who run them
-Broker/Dealers
-Consortia
-Independent firms.

Need for Dark Pools
-Better access for liquidity for block trades or illiquid Stock.
-Minimize risk of information leakage i.e. anonymity or do not disclose trading intentions
-Reduce impact Cost.
-Reduce trading Cost.

Others
-Earn revenue by publishing post-trade information.
-Execution price defined by reference price in main market
-Increase revenue by executing order on own dark pool (i.e.Broker's) than on market

Asian Capital Markets - Growth of Crossing Engines.

Broker crossing engines are not new in Japan. Citi has launched internal crossing engine called "Citi Match". This will increase access to Citi's internal liquidity pool and reduce trading cost.

Here is the list of other crossing engines in Japan

Credit Suisse's - Crossfinder.
Goldman Sachs's - Sigma X.
Bank of America/Merril Lynch's - MLXN.
Morgan Stanley's - MS Pool.
UBS - PIN.

How industry can measure success of crossing engines ?

1. Number of Trades ( Published at times )
2. Trading Cost. (No data around this)

Liquidity fragmentation in Europe and Consolidated tape

Thomson Reuters has published "White Paper" on the issue of liquidity fragmentation in Europe and need for consolidated tape.
They have talked about two types of tapes 1. Consolidated Quote and 2.Consolidated Trade Tape.
I think concept of consolidated tape is nothing but benchmarking to compare pre-trade and post-trade data for the purpose of regulatory compliance (i.e. MifiD) as well as for transaction cost analysis.
As we know, Best Execution is not a strict definition. It varies as per client needs and an agreement between Buy and Sell Side. In the absence of consolidated tape,  BUY Side will have to end up in getting Sell Side version of "best execution". "Best Execution" will also change per broker.
Buy side should be able to get the COMPARATIVE view of best execution for trades executed on any exchange/ATS/MTF via any broker/s.
Hence, there is need of two benchmarks for comparison.
Best Execution [Market]: This will be derived from consolidated tape.[Not Available]
Best Execution [Client]: This will be derived as per Client specific needs. [Currently Provided]
By taking all Best Execution parameters into account, Buy side will be able to validate size, price, venue and trading cost from consolidated tape with the executions received from broker. This will give Buy side an idea about degree to which they have actually received best execution, increasing transparency.

Smart-order routing Vs TSE’s new trading platform, Arrowhead

Fragmentation of liquidity and "Smart-order technology" are two sides of same coin. I see interesting situation in Japanese markets.
Emergence of proprietary trading systems (PTSs) in Japan causing fragmentation of liquidity. At the same time, recent launch of Arrowhead has been driving more liquidity on TSE.


But "Smart-order technology" is not common in JP like US or EU.
Few questions to ponder on
1. How Sell Side firms can decide to invest or not to invest in "Smart-order technology" ?
2. At what level of fragmentation SOR technology will start giving returns?

APAC Equities Trading Volume to grow by 20-30 % per Year.

Latest report from celent gives insight into how APAC markets will progress in next few years as well as how they will stand with respect toUS markets.

This is how they predict the future

1. APAC unlikely to follow same growth patch as US.
2. Buy side electronic trading levels of almost half the order flow.
3. Buy side DMA levels of 20-35%
4. Buy side Algo trading rates of 30-50% across the developed markets of Australia, Hong Kong, Japan , and Singapore
5. Japan and Australia will be more dynamic markets.

Sell side in APAC needs to gear-up for growth in Trading Volume and  more specifically in the areas of DMA, Algo on JP and AU.

Source : Celent.

POSIT Marketplace™ - New Dark Pool in Asia

ITG has launched new Dark Pool in Asia with objective of reducing Trading Cost. How ?

Trading costs are primarily affected by three factors. POSIT Marketplace helps to address them all:

1) Spreads – POSIT Marketplace aims to cross orders at the mid-point or better, saving half the bid/offer spread on each trade.
2) Market impact costs – by only executing in dark pools and therefore maintaining pre-trade anonymity, POSIT Marketplace reduces information leakage to the market, a significant factor in managing trading costs.
3) Delay costs – trade cost analysis shows that the largest factor in trading costs is delay, i.e. the amount of time taken to get the order done. By aggregating liquidity across a range of dark destinations, POSIT Marketplace increases the likelihood and frequency of orders being filled, minimizing delay.

The system is currently available for trading Hong Kong equities, with Australia and Japan to follow.

Source : ITG.

Smart Order Routing ( SOR )

Two year old but still relevant article "The smart way to deliver best execution" on Smart Order Routing. I plan to add much more and organized resources on Smart Order Routing.

Algorithmic Trading - US , Europe and Canada

All said and done, I see no end to the innovation in Algorthimic trading world. With the launch of new algo trading suite by Jefferies confirm the fact that even though markets are saturated with lot of Algorthmic offerings there much more that can be done.
Long way to go !!

Arrowhead - Tokyo Stock Exchange

The launch of next generation trading platform "Arrowhead" by Tokyo stock exchange marks milestone in the upgrade by exchange. It's complete upgrade in a sense that it assures high reliability, high speed(5 ms), high capacity for orders, execution and market data(3 ms) as well. In addition, introduction of "Sequential Trade Quote" is interesting feature to avoid sudden  price jumps over short period.

It will be interesting to see how "Arrowhead" is received by financial community.

If we just look at "Latency", I think of following questions
1. Has reduced "Latency"  helped financial community ? or it is to early to say anything ?
2. What kind of IT project triggered at BUY Side, SELL Side and other market participants ?
3. Will there be any impact on Algo's which runs on historical data ?
4. How "Sequential Trade Quote" will impact Algo trading engines ?
5. Will high speed market data mean quick response from Algorithmic trading engines ? more orders and order manipulations by Algorithmic trading engines ?
6. What will be typical changes in trading attributes i.e. trade size, average daily volume,liquidty fragmentation etc ?
Answer : http://www.thetradenews.com/asset-classes/equities/4335
Entire report from Investment Technology Group.
Imp Points :

• Reduction in Trading Cost by 36 % ( Large Cap : 46 %, MidCaps :27 % and Small Caps :14 % ) due to smaller tick size.
• Average Bid-Ask Spread - 20.7 bp from 24.4. Dec'09.
• Average Trade Size and Value - 400/US$6,896 from 600/US$11,112 Dec'09.

In general, interested to see, how exchange driven upgrades of this scale impacts financial community.

Just within a min of positing this blog, I came across the news
http://www.automatedtrader.net/news/ems-news/34589/aite-group-highlights-need-for-technology-focused-brokers-following-tse-arrowhead-launch

OTC Derivatives

ISDA -International SWAPS and Derivatives Association
Interesting resource on Credit Derivatives
Article on STP in OTC Derivatives by my friend Kishore.
Presentations from OTC Cash and Derivative Markets in 2010 conferences, Source : Markit

Know Fragmentation

http://fragmentation.fidessa.com/