Asia’s market structure creates demand for increasingly granular trading information – as Kent Rossiter, Head of Asia Pacific Trading Allianz Global Investors and Michael Corcoran, Managing Director ITG discuss, FIX can help.

Asia Pacific faces different liquidity challenges to other regions, particularly given that spreads are often much wider and are therefore an even more significant contributing factor to overall trading costs (See Chart). As the trading environment evolves in the region and the focus on managing costs grows, the requirements for transparency and feedback on trading increases. This is happening in parallel with the evolution of new trading venues in the region, particularly dark pools. Buy-side traders now want a greater level of detail on their dark pool fills to help them understand the behavior of their orders and manage their execution venues proactively to get the best trading result.

Kent Rossiter heads up the Asia Pacific trading desk of Allianz Global Investors, and is constantly looking for ways to improve the efficiency of their process and minimise the costs of trading. From his perspective, while post-trade TCA is now well-established, a particular growth area is the requirement for more detailed data on a shorter timeframe. He explains “We as buy-side traders are now trading an increasing amount of our orders ourselves using the electronic tools available, and when we do so we want more granularity and data fed back to us: which venues are our orders being executed in, at what price, and how aggressively. We want information that helps us adjust strategies on the fly for better trading outcomes, or quickly review the results so we can manage our future performance.”

One result of this is new demand in the region for analysis of maker/taker indicators on orders so that a trader can identify how often they are crossing the spread to find liquidity. Allianz Global Investors has been working with ITG and other brokers in the region to implement support of maker/taker analysis to help the trading desks improve their insight into market conditions and get more transparency into the behavior of their orders in dark venues.

Understanding Maker/Taker
Understanding whether an order is making or taking liquidity is important, particularly in wide-spread environments such as many of the Asian markets. Michael Corcoran, Managing Director of ITG, says “Traders want to know instantly whether they are providing liquidity or taking it, instead of retrospectively needing to compare fills and timestamps manually against what the market was trading at. This can be very useful information to help them adjust the trading strategy in real-time to the market conditions and the liquidity available. It can also help determine what kind of ‘throttle’ they should put on their strategy or their algo to find the right level of aggressiveness for the orders they are working. In addition to that it can also be a very valuable tool for sell-side firms, helping to refine the development and rules of algorithmic strategies and improve strategic ideas that will work for certain clients or order types.”

This is of growing relevance in a multi-venue environment, for example in Asia where over the past few years a lot more broker dark pools have been developed. Many buy-side firms now choose to use a dark aggregator to help improve their efficiency in accessing multiple venues, and here some kind of maker/taker liquidity analysis can be a helpful data point for assessing the type of outcome a trader is getting in those pools. Corcoran explains “Both ITG as a dark aggregator, and our buy-side clients themselves, want to understand whether orders are consistently making or taking liquidity in a specific dark venue so that the impact can be assessed – for example if our client’s orders always take liquidity in a certain venue we would review that to understand why. If we can pass that data directly back to the clients they can then make a decision about whether they want to be removed from that venue or change the distribution of their order flow across different pools. Likewise, if we see orders taking liquidity then see an unexpected change in the stock’s trading profile, this can be a useful warning indicator about the participants in a specific pool.”

FIX Tag 851 – a Potential Solution
A specific FIX Tag, 851, or Last Liquidity Indicator, has been developed by FIX Protocol Ltd (FPL) as an identifier of maker/taker behavior. The US appears to have the most established support of liquidity-indicating tags with exchanges able to pass the data back to brokers and most of those brokers able to pass that on to clients. In Europe, likewise the large exchanges and brokers can support this, although there is less among the mid and smaller brokers.

However, in Asia the tag is sparsely supported, if it all, by the exchanges, alternative lit trading venues and many of the broker dark pools. Firms therefore have to come up with interpretive solutions and workarounds to give their buy-side clients a higher level of detail and transparency on their trading, particularly in dark pool aggregation.

Rossiter would prefer an industry-wide approach to improving transparency and the availability of maker/taker data which includes vendors, brokers, and most importantly the exchanges “Typically the actual FIX tag for this information is supposed to be generated by the exchange or trading venue, and it is passed to the brokers who need to be able to identify and accept that tag and then pass it into the vendor EMS or OMS platform that the client is using. So there are a number of parties within the workflow who are affected and they need to collaborate to bring in changes. An industry-wide adoption of the relevant FIX tag would definitely be a good solution”.

Carlos Oliveira, Electronic Trading Solutions at Brandes Investment Partners examines the process of choosing a TCA provider, and the role of FPL.

We use Markit’s Execution Quality Manager (formerly known as QSG) for equity trading TCA. Our decision to switch providers was based on increased algorithm usage, a desire for more functionality, greater execution transparency and most importantly, the availability of more granular data for analysis via FIX.

We FTP our data daily and the results are available to us no later than US market open the next day. Trades are reviewed against traditional and custom benchmarks. We grant access to every trader and risk member, so that they can construct their own views as desired. Typically on a quarterly basis, we conduct our own and adapt broker studies to better understand the impact of our orders.

The implementation process
We evaluated four providers before making our final decision. We wanted a flexible platform that would accommodate maximum self-serving, custom reporting needs; minimal ongoing maintenance or upgrades requiring internal resources; and flexibility on custom solutions, such as the proper measurement of our ADR creation activity.

One vendor offered a very rich solution that was beyond our needs. For two others, we were not comfortable with the process for submitting data and how much work we would need to do internally. A key determinant was the overall level of commitment to the implementation, which we concluded Markit’s Managing Director Tim Sargent clearly demonstrated. It took us roughly two months to solidify the extract process and we went live on January 1, 2011.

TCA has become a key component of our trading process and we continue to realise value, primarily for post-trade at the moment. The value comes from the constant learning about our orders, what has worked well or not, and the adapting and improving of trading.

The large amount of data to analyse can be overwhelming at first and easily misinterpreted if not careful.

Frequent and honest dialog with the vendor, the traders, as well as tapping other sources of knowledge (i.e. broker TCA contacts and industry publications) is key to a successful implementation. Many reports went through several iterations, sometimes a quarter or two apart, before we got it to a meaningful and actionable state.

To avoid having too much of a one-side perspective, we compare broker-provided TCA reports with our vendor often. This helps the dialogue with both the brokers and the vendor – keeps both parties engaged and attentive.

The role of FPL
Our interaction with FPL began with the TCA implementation.

In late 2010, in conferences as well as in industry press, many parties were encouraging the buy-side to gain a better understanding of broker SOR practices and where the orders were getting executed, but with no actionable recommendations outside a specific platform. Being broker-neutral, the FIX execution venue reporting best practices proposed in early 2011 by the FPL Americas Buy-side Working Group helped us to move forward with this goal in the TCA platform. FPL Membership has enabled further contact with other buy-side firms and knowledge sharing not available otherwise to a smaller firm.

We started by asking for Tag 30, LastMarket. Broker responses to the data request varied greatly across brokers and regions. Correspondence spanned many months and contacts, particularly when we asked for MIC codes as opposed to proprietary values. We understand the queue priorities of brokers’ systems and demands of larger clients, and are very appreciative for what they have done thus far.

Some of our broker relationships have been exceptionally supportive in this effort, leading to enhanced dialogue on routing practices and more meaningful, targeted market structure content calls. Though not perfect, it is a significant improvement from just a year ago.

Ideally we would like to move forward and obtain data for Tag 851, but we are very much aware of the mapping challenges from exchanges to the brokers and to the OMS/EMS systems. We tabled this for 2012, but plan on revisiting it again in 2013.

As the regulatory juggernaut gathers pace, Alexander Neil, Head of Equity and Derivatives Trading at EFG Bank examines the issues behind the tape, and what the buy-side wants. 

Many of my buy-side peers have given up hope on a consolidated tape (CT), but the success of a CT is absolutely paramount now, even more so than it was a few years ago. Not just for industry insiders, but for politicians and the outside world to be shown that these can be transparent markets and that we are not penalised by misguided efforts to force volume onto lit markets, abolish dark pools or volume-enhancing factions such as certain HFT activities. In such a low-volume, low-commission environment I feel the stakes are especially high to get this right from the first day, and not let it drag on and into MiFID III . It shouldn’t be this hard to track trades in Europe and it’s funny to think that whilst we’ve seen a real race to zero in pre-trade latency, it feels like the post-trade space is being drawn out over years!

The Holy Grail is a ‘quality’ tape of record at ‘reasonable cost’. But what is a fair price for market data? Is it really something that can be left to market forces, or is it one of those things that should be regulated like electricity prices. After all, there are social responsibility aspects to market data, as ultimately higher costs for the buy-side are implicitly passed on to the broader (investing) public.

There were initially three routes that the European Commission (EC) wanted to take us down. The first route was to employ the same model as they did for execution and let the invisible hand of the market find the best solution and pricing through healthy competition. The second option was for a prescribed non-profit seeking entity to manage the CT, and the third option would be a public tender with just one winner. The EC seems to be leaning towards the fully commercial approach, and it has set the stage for a basic workflow where APAs (approved publication arrangements) collect and pass on the data to Consolidated Tape Provider(s) (CTP). But, if market forces alone could find a compromise between cost and implementation, we would have an affordable and reliable European Consolidated Tape (ECT) in place already, and MiFID II could instead concentrate on new problems.

So my first concern with the purely commercial approach is that so far, it hasn’t worked; incumbent exchanges are still charging pre-MiFID levels for their data (despite, or indeed because of, their diminished market share in execution), and the only real effort to break the stalemate (namely, the MTFs throwing down the gauntlet) will end up just penalising the buy-side more in the short-term. If the regulator doesn’t address data pricing head on, the buy-side may well end up suffering the effects of a scorched-earth move (wasn’t ESMA granted more powers than its predecessor CESR after all?).

Industry Initiatives
However, it’s not all bad. The COBA Project has recently announced a proposal which promises to address these commercial obstacles and has initial support from exchanges and other venues which contribute more than 50% of total turnover. Their solution establishes a new commercial model for Consolidated Tape data which lowers the cost and incorporates the best practices recommendations developed by FPL and other industry working groups. The best practices provide details on how trade condition flags should be normalised thereby enabling consolidation of trade data across exchanges, MTFs, OTC and even BOAT. FPL’s best practices recommendations also bring together wide representation from across the industry, and has been concentrating on data standardisation (including timestamp synchronisation and a clear distinction between execution times stamps and reporting time stamps).

The Coba Project is spearheaded by two former exchange and MTF people, and seems to be the most ambitious in terms of setting a deadline (Q2 ’13). For their sake I would like to see that good work recognised, but the EC has not officially endorsed them and I see this as one of the main failings so far. Without this endorsement or intervention, I worry that the whole effort will run out of steam. And if that happens (if the regulator doesn’t give the industry a nudge) I worry it will ironically signal the failure of the freemarket approach and the regulator will have to make an embarrassing U-turn and go for the prescribed, utility model. Remember the case of BOA T, which had the potential to become an ECT, but it perhaps wasn’t endorsed enough.

So we’re in a position where the exchanges and data vendors are rushing to try and come to a mutually beneficial solution BEFORE the regulator steps in and forces a US-style consolidated tape, and by doing so, potentially remove the commercial benefits for exchanges and vendors.

Being a CTP in itself will be a tough business though, and I wonder if there’s such a thing as a commercially-viable CTP proposition: Not only will they operate in a highly regulated business, but a few years down the line there’s the possibility that Europe goes the same way as the US and starts looking at moving away from a CT and instead getting direct fees from the exchanges (a sort of parallel industry, not quite direct competition). Not only that, but because under current proposals their product will be free after 15 minutes, I expect more investors might just accept a 15 minute lag and get the data for free.

Courtney McGuinn, FIX Protocol, Ignatius John, Sapient Global Markets, and Bill Hebert of the FPL Global Education & Marketing Committee discuss the role FIX has played in pre-trade and trading and look forward to its application in the post-trade space.

When the FIX Protocol was introduced to the financial services industry in the early 1990s the primary, though not exclusively intentional focus of its founders and early adopters was the electronic communication of equity related pre-trade indications, order and execution messages between buy- and sell-side firms. In itself this was revolutionary for an industry which saw itself as increasingly reliant on electronic trading solutions at the markets and exchange levels. Until that point it had never actually embraced a uniform standard which competitors at all levels: asset management, broker dealer, exchange and vendor could openly agree upon.

The rest of the story is a progressive history of collaborative cooperation or ‘coopetition’ as some would refer to the joint and often volunteer efforts of a competitive universe of industry participants. As time went on, non-equity asset class instruments (derivatives, fixed income, foreign exchange, commodities etc.) were provided for in newer versions of the FIX Protocol and supported workflows expanded to illustrate more comprehensive aspects of the trading systems lifecycle including post-trade processing.

Post-trade allocations have been supported in a fundamental message type as early as FIX 2.7. Certain buy-side firms and their sell-side trade execution partners worked together to support communication of FIX allocations, but widespread adoption was limited. This was due in part to then existing limitations in the FIX post-trade formats, more traditional third party product and network options, competing technical development priorities and budget constraints by all involved parties.

Traditionally, traders on both the buy- and sell-sides viewed trading responsibilities as completed once an order had been executed. From that point on all downstream processing and any reconciliation issues were handed off to the middle and back office operational staff and the respective internal and external systems including third party solutions that supported their activities.

Although allocations and other post-trade transaction types were added and enhanced in progressive versions of FIX, in 2004 FPL launched FIX 4.4 which opened new opportunities – not only to be able to send block level trade and allocation details, but also to confirm and affirm at the block trade and account level.

Initially the enhanced post-trade functionality in the FIX Protocol attained less visibility as firms both regionally and globally were satisfactorily using a major industry utility to confirm and affirm the trades with their counter-parties before sending the settlement details to the custodian banks.