Senior Executive Vice President Michael Lin of the Taiwan Stock Exchange goes through new developments and ongoing challenges for the TWSE.
What was your implementation procedure with your new connectivity platform, and what were you were looking to achieve? Basically, the implementation of FIX/FAST was for two reasons. One was that we see the following of international standards as a major part of our agenda for the development of our IT systems. Secondly, on the Taiwan capital market, the number of foreign institutional investors has been steadily increasing.
Foreign institutional investors already account for one-third of the market capitalisation, and they are very active in investment activity for their clients. Furthermore, many Taiwanese investors are also interested in investing in offshore products. So I think these two reasons are basically why we really wanted to implement FIX/FAST.
What is the current level of FIX Protocol implementation? We implemented the FIX Protocol three years ago. But, honestly speaking, at the current level of implementation, I don’t think we have many trading activities placed through the FIX Protocol. The reason is, for brokers, the problem is on our internal system, we still use our proprietary protocol TMP. It means that even though the brokers can place an order using the FIX Protocol, when the message enters into trading system, a conversion to TMP is needed. That means that for messages placed through the FIX Protocol, the performance is not good enough due to the need for convergence.
However, we are now gradually getting more brokers interested in placing their orders through the FIX Protocol. And, we are constructing a continuous trading mechanism, under the new system, the conversion from the FIX Protocol to TMP is no longer necessary.
Where is the Taiwan Stock Exchange amongst its global peers, as well as amongst its Asian counterparts? We have seen some clear trends in the development of connectivity, especially around the FIX Protocol and FIX/FAST.
Along with the rapid growth of globalised capital markets, we can find some exchanges that are eager to establish closer market connectivity. They are looking to build up close market connectivity for brokers, for example, the New York Stock Exchange proposed to establish connectivity between themselves and the Taiwan Stock Exchange.
The purpose of this connectivity is that it allows brokers in Taiwan or in New York to access the other market easily, just through the connectivity built by the two exchanges. Previously for any brokers in Taiwan, if they wanted to trade on the New York market, they had to find a broker in New York, and they needed to allocate resources to the connectivity solutions through service providers. That was a huge expense, and it was also very time-consuming.
However, once the connectivity between NYSE and TWSE is established, then we can make the connection for the brokers much easier and less costly.
Other exchanges are also looking at the same idea, for example, the London Stock Exchange and even in Asia we can see the Tokyo, the Korean and the Singapore Exchange are exploring connectivity solutions.
So, I think we should focus on this area. Internally, we also held discussions on helping the brokers in Taiwan to extend their global market. I think IT investment and IT management is not easy for many of the local brokers as they are quite small in scale. So we are now really focused on looking into this area.
What are you trying to achieve this year? This year there are several big projects for us. The first one is we are building our so-called “next generation trading system.” We finished the coding at the end of last year, and this year we are working on the testing. We hope by the end of this year, our new trading system can go live. This new trading system really matters because, first of all, we have changed the traditional proprietary platform to open architecture. We changed the language from COBOL to C++ and we also introduced a new middleware.
In terms of application structure, we have taken this opportunity to make the system more structural, separated into modules, and more flexible. We hope this change will make our business development easier.
Secondly, we are also building a new data centre. We thought about having a new data centre for many years and, fortunately, we are now building it. Construction is underway and we hope to finish the building next year, and to start operations in early 2015. The meaning of this data centre is that it is not only a data centre in a traditional sense, but we have constructed the new data centre around the “cloud concept”. This means we have prepared the building to very, very high specifications in terms of cooling, power consumption, etc.
Justin Llewellyn-Jones of Fidessa explains how connectivity is adapting to meet the concerns of brokers and traders.
The ability to integrate electronic trading and FIX connectivity into receiving platforms is a minimum requirement for trading. As such, it has become something of a commoditized service. The industry no longer refers to an OMS specific connection, for example, because it does not exist. Instead, brokers rely on consolidators that eliminate the need for individual connections, and provide both asset- and application-neutral connectivity from any client.
Interest in connectivity is being revived because of the growing complexities in marrying the need for fail-safe connectivity with the need to increase revenues and cut costs in the face of persistent downward pressure on margins.
Managing connectivity requires considerable effort: monitoring and capturing order failures and rejections, identifying the source of a problem, repairing it and going back to the client and convincing them to re-send the order is a constant challenge. The costs, time and resources required to maintain the communications infrastructure and relationships with telecommunications and application service providers can be significant.
What’s more, FIX expertise is a very specialized knowledge set that commands a correspondingly high price. FIX language is really more of a framework than a firm protocol. Many participants use the language to their own end to perform tasks such as interfacing with proprietary systems, which makes expert knowledge an absolute requirement.
As an expensive, commoditized service, connectivity appears to be a technology that should be outsourced in its entirety to specialist providers. Not surprisingly, a number of brokers have questioned the value they get from owning connectivity themselves. The infrastructure, the physical network connections, the relationships with telecommunication network providers do not add value, nor do they provide better quality of execution or improved relationships with clients.
But the wholesale outsourcing of connectivity management has not happened, which leaves brokers with ‘half and half’ solutions where, for example, a vendor’s consolidator and router might be used, but relationships with network service providers are maintained in-house. Brokers want to maintain a certain level of control, and do not trust vendors to deliver a cost effective solution, or time sensitive responses and customer service.
It is also considered that core services should not be outsourced at a time when it is becoming apparent that connectivity is a critical service, and one that is hard to separate from essential revenue-raising activity.
Brokers need to improve margins by attracting more flow from increasingly selective buy-sides. They need to do so by generating new investment returns, securing recognizable market differentiation or providing liquidity. Once more, we are seeing a definite trend where the buy-side is taking on the determination of the trading strategy. What buy-side traders need is the ability to confirm a particular broker’s trading strategy and then to customize it to a particular portfolio manager or investment fund. The implication is that buy-sides will increasingly demand instant access to new strategies.
Mizuho Securities’ Spyridon Mentzas discusses the status of the Japanese exchange merger and offers thoughts on how well the two systems will merge and the benefits investors can expect.
Compatibility The merger of Tokyo Stock Exchange (TSE) and Osaka Securities Exchange (OSE) is not yet finalized, but it appears they will merge in the beginning of 2013, with the details yet to be specified. The first impression is that they have nearly identical trading rules with some minor differences, such as the OSE trading until 3:10, while the TSE closes at 3:00. When TSE decided to shorten the lunch time in November, the OSE did the same. When one of the exchanges (usually, the TSE) changes the rules, then the other moves in tandem: for example, changing the tick sizes. If the merger does go ahead, it is likely that they are going to use the TSE’s cash system, arrowhead, and OSE’ J-GATE for derivatives. They will use the old systems in parallel, which will achieve a reduction in cost because they will not have to maintain two systems.
Further Industry Consolidation The ECN’s in the US enjoyed technological superiority versus the classic exchanges, where NYSE’s latency was significantly slower than Arca’s. This would have been reason enough for TSE to consider buying a PTS, but with arrowhead’s current latency of less than 2 milliseconds (and another upgrade in the next few months to target less than a millisecond), simply buying a PTS would not give them a noticeable advantage because the TSE and OSE are on par with the PTSs. The reason why PTSs are increasing their market share is that, unlike in the UK and US, where Reg NMS and MiFID have required trading on the exchange with the best price, in Japan the PTSs draw volume through decimal points and smaller tick sizes than the incumbents.
For example, Mizuho Financial Group might trade on the TSE at 105 yen bid, 106 yen offer. That one yen spread is close to 100 basis points or almost one percent, whereas the PTS trades at 0.1 yen. This is a major incentive for investors to buy and sell on the PTSs with their smaller increments to reduce market impact and trading costs. From the beginning, the regulators have not been overly concerned with the PTSs deciding to trade in decimal places and have 0.1 yen ticks. It was always up to the PTSs to decide and the TSE could do the same. If anything, I think the new exchange would rather reduce their tick sizes, than merge again.
However, not all participants would be happy to see new tick sizes, for example, some of the proprietary houses or small firms that trade with retail, as altering their downstream systems to handle decimal places would be costly.
This will also create a fragmentation of liquidity in tick sizes. The bids and offers on the TSE are often thick, with something like 50 billion shares sitting on the bid side, so with 0.1 yen ticks, the average order size might move to 3 million or 1 million shares. Traders who want to buy a large lot will have to scroll up and down to find out how much they have to go up to absorb the available liquidity. I think for the traditional long-only traders, this might mean an increased scattering of liquidity. There is sufficient liquidity in the market at present; even for stocks trading at a low price – there are market makers trying to make 1% during the day. If smaller tick sizes are introduced, that liquidity will likely be scattered or disappear.
FIXGlobal speaks with the buy-side in China about the prospects for China’s equity market, IPOs and how new technology and competition will improve domestic trading.
GDP and Trading Volumes The property market might continue to cool down in 2012, but it is not reasonable to expect the Chinese economy to shrink significantly this year because the Chinese government will allocate resources to other sectors of the economy. Because of the Lunar New Year effect, it looks as though Chinese Consumer Price Index (CPI) is heading upwards. Based on adjusted CPI, the property asset bubble is a political issue rather than an economic one. The Chinese government has pledged to continue monitoring property prices, and its strong fiscal position gives them various options in terms of how they address this situation. Trading volumes are expected to be much the same as 2011 and inflation should be heading downwards.
Major Driver: IPOs or Economics? There has been a rapid increase in the number of IPOs in China, but the regulators are questioning the quality of some of the IPO companies. Of those companies newly listed in 2011, valuation declined quite significantly. Investors used to think an IPO was like a lottery – buying new shares virtually guaranteed a profit. Many investors did not consider the actual valuation and quality of the company, and many are now realizing that not all investments are worth their list price.
The Chinese equity markets are in a transition stage; they are moving from being somewhat amateur to being much more economic and investor-driven. There were instances of listed companies in one industry that changed industries after the IPO (often moving into property development) and occasionally changing the name of the company, leaving investors uncertain about their strategy and focus.
Listed companies used to have considerable power, but the market is changing in a positive direction. However, we do not know how quickly the market will become transparent and trustworthy. The regulators, media and institutional investors are now more serious about issues of valuation, transparency, corporate governance, etc. The regulators should consider increasing Qualified Foreign Institutional Investor (QFII) and ways of improving the dissemination of information to investors in order to set a good example in the domestic market.
A primary focus of the Chinese Securities Regulatory Commission (CSRC) this year is insider trading. Addressing this matter will improve the quality of listed companies and give investors greater protection. The regulators are working on improving access to information for investors and institutional funds will benefit significantly from this transparency. Regulators are concerned with addressing both the difficulty of access to information and the quality of information about IPOs, and it is quite likely that they will be able to improve both aspects.
Applying New Technology The biggest technology upgrade implemented in the past six months has been algorithmic trading. Most Chinese buyside use their brokers’ algos, but in China, domestic mutual funds are not allowed to route orders to brokers. So what many dealing desks have done is to install the brokers’ algo engine on their side, so for every algo they choose, they go through their server and send the order to the exchange. In this way, dealers achieve efficiency in their algo usage because they do not use any brokerage; as a dealer, they are almost like their own broker. Algo trading also provides the buy-side with more precise post-trade analysis; specifically, the ability to analyze how much alpha has been captured and the transaction costs involved.
The primary benchmark used by most Chinese buy-side traders is Implementation Shortfall (IS), which is used to generate information to help the fund manager improve their investment strategies. For example, it might provide data about the delay cost created by an investment decision made an hour after the market opens, showing the fund manager that if the decision had been made earlier they could have saved a certain amount on the investment.
Guosen Securities’ Shen Tao reveals the latest trends in algo usage by Chinese asset managers, domestic mutual funds and Qualified Foreign Institutional Investors (QFIIs).
Who are the primary customers for algorithmic products in China? Algorithmic trading started in the Chinese A share market some time in 2007. In 2005, the first commercial FIX engine went live to accommodate the execution needs of the Chinese A share market of Qualified Foreign Institutional Investors, or QFIIs, as part of the plan by the Chinese government to allow regulated capital market investment by foreign investors. After an initial experimental phase of FIX connectivity with global trading networks, the local FIX trading platform became solid enough to interface with a real algo engine. In 2007, some leading global investment banks (predominantly, QFIIs from the sell-side) began to offer algorithmic trading facilities for their clients and their own proprietary trading desks. Most of these facilities were located offshore (e.g. Hong Kong) and connected to the Chinese brokers’ FIX gateway via a financial trading network such as Bloomberg.
The earliest providers and users of algo trading in the Chinese market were solely QFIIs and their clients. In 2008, although the global market was in turmoil and many infrastructure budgets were cut across the international financial community, there were still some firms seeking expansion opportunities for the future. Among them, some global banks with local brokerage joint venture subsidiaries began to build their onshore algo facilities. At about the same time, some leading purely local brokers also started their efforts in algo development, Guosen among them. We started in March 2008 and also targeted QFII investors for algorithmic trading, however, we understood the future of algorithmic trading in the Chinese market would rest on the domestic mutual fund industry. In late 2009, the Guosen algo platform was almost ready and the aforementioned onshore algo facilities run by the sell-side joint ventures of global banks also went live. The day of the algo had finally arrived for China.
In 2010, with support from a leading buy-side OMS vendor Hundsun; Guosen and UBS began their efforts by offering an algo solution for local mutual fund companies. In November 2010, UBS won its first success with two Beijing-based mutual fund companies, with Guosen securing a third six months later. Since that time, more than a dozen mutual fund companies have started using algorithms from UBS and Guosen. 2010 was the first year of the algo, from a local perspective. Currently, the momentum of mutual fund companies adopting algo platforms continues. We estimate that by the end of 2011, in terms of assets under management, over 40% of the local mutual fund industry could be covered by broker-provided algo services.
In retrospect, QFII investors were the founders of the market, but soon, the local mutual fund industry will become the primary user of algos. In addition, we foresee insurance companies adopting algo trading soon.
BNP Paribas Dealing Services Asia’s Francis So opens up about their new structure, how they use Transaction Cost Analysis (TCA) and their preferences regarding dark pools and High Frequency Trading (HFT) flow.
The Hong Kong dealing desk has been restructured as an externalised/outsourced dealing desk for the buy-side. As a result we are now independent of the asset management group and belong to BNP Paribas Securities Services. Our current name is BNP Paribas Fin’AMS Asia Ltd but this will soon change to BNP Paribas Dealing Services, better reflecting the services we provide. BNP Paribas Securities Services provides middle and back office outsourcing services for buyand sell- side, as well as corporate clients. This new dealing service allows us to provide a full suite of front to back office solutions to meet the needs of the clients. The trend has been for the outsourcing of back office activities and I think it is only a natural progression to consider front office activities. Given the market environment, cost reduction is a key element for asset managers/asset owners. Outsourcing the dealing activity can help reduce cost but more importantly allows the asset manager to focus on delivering greater value to their clients. Our Paris office has been very successful in attracting external clients and in Asia we plan to ramp up activity in 2012.
We treat BNP Paribas Investment Partners (the asset management company of the Group) as one of our most sophisticated clients and as such must ensure that the services provided to them are kept to the highest standard. This will be the same for new clients as one of the keys to attracting and maintaining new client relationships is our ability to provide tailor made solutions and services. Clients can range from new start-ups to existing asset managers that already have a dealing desk. We offer flexibility to asset managers such that they can choose the asset class and/or geographical region they want to outsource. For example, some asset managers that already have dealing capabilities in their home market may decide to invest in overseas markets or new asset classes. They need to ask themselves whether it makes sense from a cost perspective to create a new dealing desk where initial volume is expected to remain low.
We have the knowledge, the expertise and the global reach. We have locations in Europe and Asia to cover all asset classes globally. We also serve fund managers located in different geographical regions.
It is important to stress that we are in no way competing against the sell-side. Our clients keep their contractual and daily relationships with brokers. We act as an agency-only trading desk and we do not have any prop flow or take any positions.
We work together with the portfolio manager to determine what benchmarks best suit their needs. They are able to send orders to our global Order Management System (OMS) with a specific benchmark. By doing so, we can measure our execution performance using their specified benchmark, be it Implementation Shortfall (IS), VWAP or a specific measurable benchmark.
Direct Edge’s Kevin Carrai explains how they chose their new data center and what criteria were most important in making the decision.
Choosing the right data center is crucial to the success of any trading business. Gone are budgets supporting the practice of co-locating with every market center, which forces firms to take a closer look at how to optimize their connectivity and infrastructure without sacrificing performance or profits. In addition, firms now have more options than ever for where to host their IT infrastructure given the growth in the data center landscape driven by high frequency electronic trading, especially in northern New Jersey. There are several important things to consider when making this critical business decision - proximity to liquidity, cost savings, flexibility and scalability.
Proximity to Liquidity
Anyone familiar with the real estate market knows that the three most important factors are location, location and location. However, the factors that make one location better than another may change over the course of time. At one point in life, proximity to bars and restaurants may be a priority; after starting a family or getting a pet, proximity to good schools and parks may become more important. The same holds true when you are finding a home for your trading infrastructure. In the heyday of high volumes and deep pockets, firms colocated in multiple facilities regardless of cost in order to be as close as possible to liquidity destinations. In today’s trading environment, firms are reconsidering this need and are looking for a facility where they get the biggest ‘bang-for-their-buck’.
The New York/New Jersey/Connecticut tri-state area has become the location of choice for data centers that cater to the U.S. financial markets.Within this geographic area, if firms cannot be everywhere, where should they be? It is more advantageous for firms to be in a centralized location, where they can access many financial resources rather than duplicating their infrastructure at multiple data centers. Facilities that host companies who provide the same services foster healthy competition, thereby forcing vendors to improve functionality and curb costs.
Proximity to competitors, dark pools and other liquidity destinations was a key feature that attracted Direct Edge, a U.S. equity exchange that currently trades more than 9% of total consolidated volume, to NY4, an EQUINIX data center. Other market centers that have also chosen NY4 include International Securities Exchange (ISE), Hotspot FX, Boston Options Exchange (BOX) and CBOE’s new C2 Options Exchange. Having other liquidity destinations just a cross-connect away enables Direct Edge to have a robust, high performing, efficient connectivity infrastructure at a low cost.
Not only does NY4 provide proximity to a multitude of resources internally, it is well positioned physically in the NYC area. The latency between EQUINIX’s NY4 facility and Savvis, a third-party data center that hosts major exchanges and dark pools, is less than 100 microseconds.
Recent conventional wisdom has been that in order to ensure profitability, trading firms had to have a presence in every data center where there was accessible liquidity. As the number of market centers increased, so did the expense required to install and support trading and telecommunications infrastructure within each facility. Firms would gladly pay the increased expense while volatility and volumes were high, but they are now taking a hard look at this strategy.
In these uncertain market conditions, firms are more cost-conscious than ever. In order to remain profitable, firms have significantly reduced technology and telecommunication spending and can no longer support the trend of co-locating their trading infrastructure in every facility. With the increasing premiums imposed by many exchanges for co-location space, trading firms are trying to save money by reducing their footprints and minimizing hand-offs. Therefore, the selection of a few key facilities, or one facility, has become a realistic alternative to multi-facility co-location, especially with the advent of low latency connectivity between market centers.
Brown Brothers Harriman’s Garvin Young explains the decision to adopt a Software as a Service (SaaS) trading system in lieu of traditional on-site architecture.
In its capacity as a global custodian, Brown Brothers Harriman (BBH) takes a holistic view of its trade execution process. This view includes front-end connectivity and execution, all the way through to settlement. The firm continually assesses the current and future needs of its clients to ensure that its products and solutions fully meet their requirements.
Searching for a Cutting- Edge Solution
In late 2010, given the rapidly changing landscape of the brokerage industry related to connectivity, regulation, algorithms and back-office efficiencies, we initiated a RFP process to identify an order management system that could best position its clients for the future.
Specific details of the project included a buy versus build analysis, cost/resource considerations, client retention rates, etc. Given the timeframe that we had set for implementation, it became clear that a build-from-scratch solution would have been both costly and impractical. Such a solution would have required BBH to add staff, incur IT spend, expand occupancy space, and bear significant ongoing maintenance costs.
Through the RFP process, we looked for a provider with a reputation for stability. In an environment of microsecond execution, an OMS must be reliable, stable and flexible. The ability to customize the solution was also important. The solution had to include a robust front-end while also keeping with BBH’s requirements of high-quality middle- and back-office processing. Our integrated execution and settlement product required a solution provider with strong expertise around maintaining high straight-through processing levels and real-time client reporting.
As a privately held organization, BBH maintains a high focus on risk management, which meant that a strong track record of regulatory reporting and risk management tools was also critical. The firm’s global and sophisticated client base has complex connectivity requirements, such as Reuters, Bloomberg, ULLINK, SWIFT and virtual private networks (VPNs), to name a few. Further, its clients have specific FIX tag requirements and run multiple versions of the FIX Protocol. We required a solution that was able to meet all these demands.
Identifying the Right Provider
BBH narrowed the search to six top providers of equity execution platforms and went on to select Fidessa. BBH’s Investor Services clients recognize us as a leader in technology solutions, with the capability of offering them a sustainable, long-term and flexible solution that allows them to access new markets to grow their business. We determined that their platform aligned well with these needs, and offered an ideal complement to its existing proprietary solutions.
Itaú Asset Management’s Christian Zimmer and Hellinton Hatsuo Takada drill down into the usage of FIX in Brazil, isolating the areas where FIX is developing and where there is room to grow.
The BM&FBOVESPA (BVMF) initiative to provide market data using FIX is just the beginning of moving past the basic usage of FIX in Brazil. FIX is being implemented under the Unified Market Data Feed (UMDF) banner with the objective of integrating the traditional FIX market data and Multimedia Multiplexing Transport Protocol (MMTP) market data streams. The communication efficiency between these two needs to increase a lot, because in Brazil the trading community is starting to go beyond the simple use cases for FIX.
Besides the FIX implementations, one example of this development is the FPL initiative tasked with creating a version of the FIXimate in Portuguese, which the local FIX engineers are contributing to. In the last FPL meeting in Brazil, the local public seemed to be a little bit more aware of FIX, while the use of the FIXimate in Portuguese indicates a growing development of FIX solutions in Brazil.
Currently, some brokers are providing simple execution algos to be used in the Brazilian market. However, these are not delivered via FIXatdl, but via an algo-number indicated in a general purpose FIX-tag. Currently, the algos offered are very simple: mainly VWAP, TWAP, Iceberg, and POV. More sophisticated algos that try to gain some alpha are present too, but they are not originally created by Brazilian market participants. These kind of algos are normally developed from global brokerage firms at their headquarters in the US or Europe and then applied/adapted to the local market (what we call tropicalization).
Even if the algos were customized by the international firms to fit local market data, we have our doubts that on the actual trading floor there are many buy-side traders using these advanced methods. There are mainly two reasons for the nonusage of the advanced algos. First, there is a lack of confidence whether international teams understand well the local Brazilian market. Second, most of the time the big buy-side firms have mandates to achieve a 100% fill rate – something not guaranteed by the alpha-creating algos. This demand originates from the way the big asset management firms work in Brazil: they are more fundamental, and focused on allocation rather than trading.
The usage of FIXatdl could improve the usage of algos because of its standardization, but it is still hard to move forward on this issue.The sell-side seems not to be too enthusiastic, and thus, does not provide the buy-side with this efficient alternative. The buy-side is also not demanding it, which implies that there will be no advances.
In addition to FIXatdl, we expect the efforts of the FPL High Performance Interfaces Working Group to become applicable in the Brazilian market. The success depends on, obviously, if the exchange permits a separated access to their matching engine with this protocol dialect. But as there is always demand for lower latency, the outlook is positive for this initiative. The same might be true for the FPL Inter-Party Latency Working Group. Although there are hardware solutions to this problem and these hardware solutions may create less additional latency, it seems to be much easier for any mid-sized firm to use FIX-based latency analysis rather than buying an expensive system just for this purpose.