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.
Mike Caffi, VP and Manager of Global TCA Services, State Street Global Advisors, and Mike Napper, Director and Head of Global Client Analytics Technology, Credit Suisse and EMEA Client Connectivity Technology, Co-Chairs of the FPL TCA Working Group, examine the motivations for, and the progress of the TCA reference guide.
What is the history of the FPL TCA project? Mike Caffi: The industry has been lacking in any kind of standards for TCA, and that’s not a new problem. I have seen some really good TCA white papers over the last five to 10 years that have tried to address the subject, but eventually these fade on the shelf because there is no follow-up support or interest. What we’ve always needed was some independent group to be able to take ownership of this, but how does one get that started? It never really came about until about a year and a half ago, in September of 2011, with the formation of the OpenTCA group. The group was a collaboration of four sell-side firms in London and EMS and TCA vendor TradingScreen, which was the glue that put them all together.
When I read their white paper I got really excited because I saw a group of individuals who were trying to promote at least what appeared to be an essence of a global standard. They held a conference in London, and then they came to Boston and I contacted the person who was heading the public relations at TradingScreen. They invited me to be on a panel to talk about the benefits of standards, and that was in November of 2011. At this meeting TradingScreen had really tried to move this along, but I saw the need for a larger group to really take on this challenge as well. So that’s where I felt a group like FPL would be perfect.
As a matter of fact, when I was at the conference, I related this back to the early beginnings of the FIX Protocol when I was involved 15 years ago. We needed the collaboration of industry participants within a neutral body such as FPL, to take ownership of TCA standards. I even posed that question to the audience: “who would be willing to form a group, putting up a small amount of money just to get the essence of a working group together?”, but there really wasn’t much reaction at that particular time. Given that the holidays were approaching I decided to let it simmer down until after the New Year.
By early March I contacted John Goeller, FPL Americas Regional Co-Chair, and ran the idea by him to see if FPL would be interested in hosting a TCA Working Group. John liked the idea and soon after he ran it by the organisation’s Global Steering Committee, who also thought it would deliver strong industry benefit and liked the idea. From there, FPL leaders opened discussions with TradingScreen and due to strong FPL member firm interest in addressing some of the key business issues impacting the TCA environment, it was agreed that FPL would create a TCA working group. Representatives from Trading Screen joined this parallel activity.
So it was agreed to put out a call for participation, and on the first pass we had about 70 people sign up. We had our first meeting in June of last year, and that is when we got traction; at that point it was really pretty much driven by consensus, which evolved into a survey that allowed us to prioritise our objectives. That gave us greater focus and direction on what to do and, from that survey, we could see that with 70 or 80 people, we needed to break out into smaller groups.
The number one issue highlighted in the survey was terminology and methodology, and as such it was decided that our first working group should focus on coming up with standardised definitions for TCA in the equity space. This has taken some time as we wanted to take a slightly different approach, not writing a white paper, but more of a working reference guide. That project has been our focus for the last four or five months and right now we’re at a point where individuals are actually finalising the more difficult aspects of that document.
Last September, I said it’d be great if we can have this all done by the end of the year, and that was just a bit presumptuous on my part. Now I realise this is going to take quite a while to produce as there is a lot of work involved, and this is just the equity space. We’re going to look at multi-asset class perspectives of TCA after that.
Mike Napper, would you like to give a brief overview of the reasons behind your involvement? Mike Napper: I’m interested and involved in this initiative from two perspectives. Firstly, I head Credit Suisse’s Global Transaction Cost Analysis Technology, both pre-trade and post-trade. Secondly, I also head FIX Client Connectivity for Credit Suisse in EMEA, for Equities, FX and Listed Derivatives, and thus have exposure to the FIX Protocol and FPL.
In 2Q2012, I was invited to help lead this initiative as the sell-side co-chair and I was very happy to contribute. The standardisation will help everyone in the market. It will help clients by providing more clarity on the reports they’re reading. It will help brokers and third party vendors by providing a consolidated reference guide explaining the principles and methodologies to all stakeholders. Firms are doing a lot of creative and original technical analysis, but there isn’t consensus in all cases on some of the basic stuff, and that’s an opportunity.
An area of particular interest, with both my TCA and FIX hats, is the convergence of asset classes onto electronic trading over time, providing greater automation and transparency. We can agree some foundational definitions for what TCA means in a multi-asset-class sense. We have started with a set of Equities definitions, to clarify and standardise what’s already out there and in most cases mature. Then, we’ll expand and mature the definitions across asset classes, where in some cases there is less existing consensus.
David Morgan, Marketing director, trading and client connectivity, SunGard’s capital markets business, Q&A on FPL’s recommended risk guidelines and SunGard position paper “Implementing effective electronic trading risk controls”.
What is your general opinion on the FPL Guidelines?
We were very pleased to see them, as clearly any initiative coming from an organisation with a lot of credibility looking to promote best practices in the market place must be a good thing, and of course also from a selfish point of view as a software vendor: those best practices need some good software in order to support them
This particular area of pre-trade risk management is one where we’ve been active for a long time; we feel we have some particular advantages with our well developed products. We were very keen when the first issue of the FPL guidelines was published in 2011 to use them as a benchmark to check whether we were covering the major items that were being brought to light by FPL as best practice recommendations.
So we went through that as an exercise and we have done the same thing again on the updated 2012, guidelines, which provide more detail on derivatives-specific requirements.
So the value is that it gives you a benchmark for comparison?
Yes, it gives a basis for discussions with individual clients when looking at how the product line should be moved forward, because different points will have different importance to different clients based on the nature of their business. There are some guidelines that 99% of people were already following, at the level of fat finger checks etc. At the other extreme you’ve got some points in the guidelines which I would say very few people are doing and even fewer are doing them on a pre-trade basis, as it might be impractical to do so. Others are of a more specialist nature where it would depend on the nature of the business as to whether they are relevant or a priority. So there is quite a variety in there from the absolute vanilla to the quite exotic.
Is there anything you think the FPL guidelines missed or could have done better as the organisation always welcomes industry feedback, or is there a deliberate intent to leave gaps for others to fill?
They appear to be pretty comprehensive. They are fairly prescriptive; in the second edition of the guidelines you can almost take it as your outline product specification and start writing the code; they don’t leave much to the imagination, which is a good thing. This isn’t an area where one should mess around with vague discussions.
There are a couple of minor areas that our products cover that the FPL guidelines do not. One is in strategy trading, as strategies are not easy to pre-validate. Normally buy and sell legs cover each other, so validation of the whole strategy has to be done: if you validate each leg independently you will be too restrictive. We cover this, but FPL doesn’t mention it. It’s important in many derivatives trading contexts, and for equity pairs trading.
Second is the area of alerts, where FPL doesn’t talk about their use. Before getting to the point where you have to block an order, it is often useful to alert the trader that he has reached a certain percentage of a limit: we provide this option.
Carl Weir of HSBC and Gregg Drumma of Gamma Three Trading discuss how the newly formed Global Cross Asset Committee (GCAC) is helping to support existing FPL asset class focused committees in their best-practice, educational and promotional efforts.
In early 2012, the FPL Global Steering Committee (GSC) discussed the need for a new committee to oversee multi-asset class activities and strategic considerations given many of the common issues and overlapping initiatives of FPL’s Derivatives, Fixed Income and Foreign Exchange committees. The GSC proposed the creation of the Global Cross Asset Committee (GCAC) to oversee the Global Fixed Income, Global Foreign Exchange, and Global Derivatives committees and report directly to the GSC.
While equity markets have matured and been electronic for some time, there has been rapid movement towards a more electronic workflow in other asset classes. Historically, each asset class was segregated, but times have changed and are continuing to do so quickly. Exchange and marketplace consolidations have expanded global liquidity to offer multiple assets. Buy-side firms are increasingly diversifying their portfolios to add a wide range of assets to manage risk and improve returns. Sell-side counterparties are offering increased access and merging desks. A subsequent need for order/execution management systems to handle combined asset coverage has driven vendors to provide solutions to support wide asset coverage. This also includes an everexpanding range of over-the-counter (OTC) products and instruments. Once the GSC recognized the need for a committee, a call for nominations for the newly formed GCAC was sent to FPL members in March 2012, with an election held soon after. Gregg Drumma, Founder and President, Gamma Three Trading, LL C and Carl Weir, EMEA Head of Cross Asset FIX Connectivity, HSBC Global Banking and Markets were elected as co-chairs for a two-year term. Both co-chairs have years of experience in the electronic trading markets of multi-asset trading.
At the time of writing, over 50 representatives from almost 40 different FPL member firms had joined the committee. The members represent a global presence and cover a complete cross section of single and multi-asset exchanges, products, sell-side, buy-side and vendor firms. The committee’s success is driven by its members and the voices from all markets and participants over the entire trade lifecycle.
The GCAC will provide oversight, guidance and help coordinate the efforts of the Derivatives, Fixed Income and Foreign Exchange committees, and provide its findings to the GSC for consideration in specifications, best-practices, and educational and promotional efforts. As a first step towards this goal, an initial survey was distributed to the GCAC members on a range of topics relating to FIX and multi-asset trading, education and forward-thinking technology crossover integration. The results are being collated to help direct the committee to the immediate needs of its members and will be published shortly for group review. The survey questions included topics relating to specific asset classes and technical concerns, regulatory issues, instruments, the discussions around professional certification and training, in addition to certification of the FIX Protocol, and also offered additional room for comment on topics not covered.
Edouard Vieillefond of Autorité des Marches Financiers looks at the factors that contribute to financial stability and how investor choice needs to be balanced with investor protection, market fairness and efficiency concerns.
FIXGlobal: How can the Commission and the European Securities and Markets Authority (ESMA) ‘encourage’ institutions to trade via multilateral facilities?
Edouard Vieillefond, Autorité des Marches Financiers (AMF): Market transparency, efficiency and integrity are essential to financial stability and to ensure that financial markets continue to play their core role of financing the real economy.
In the context of the financial crisis, in 2009 the G20 leaders declared that “all standardized over-the-counter (OTC) derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest”. In order to implement these objectives, in 2012 the International Organization of Securities Commissions (IOSCO) identified some key characteristics that electronic trading platforms should fulfil in this context, amongst which were pre- and post-trade transparency and “the opportunity for platform participants to seek liquidity and trade with multiple liquidity providers within a centralised system”. We believe that this multilateral criteria, which is not consensual amongst regulators, is absolutely essential in defining what a trading venue is and ensuring the real efficiency of the price formation process on financial markets.
As regards the perspective of the MiFID review, in Europe the Commission proposes an obligation for derivatives to be traded on multilateral trading venues, which shows progress in the right direction. On cash securities, unregulated trading has developed over recent years, including in the fully OTC bilateral space. The Commission’s aim of catching all these new trading spaces within a new EU regulatory framework is a positive one. However, without clearly defining the boundaries of the European trading environment, it leaves aside the possibility for new trading concepts to be developed, including bilateral ones. It also leaves aside more structural issues – such as the role that we want financial markets to play in the near future with regards to the real economy. An essential first step for legislators and regulators in Europe would therefore be to define in greater detail what the EU trading space shall consist of; and then to incentivize trading of standardized and sufficiently liquid financial instruments on genuine trading venues such as exchanges and multilateral trading facilities (MTF).
FG: Where is the balancing point between investor choice and encouragement towards certain venues?
EV: Investor choice is of course to be kept fully flexible but also, on the regulatory side, to be balanced with investor protection, market fairness and efficiency concerns.
In Europe, MiFID has led to excessive market fragmentation, despite the legitimate intention of the directive to enhance competition between exchanges and multilateral trading facilities. This approach has produced very mixed results, including no real overall cost reduction for final investors, an increase in dark trading and a decrease in the quality of pre- and post-trade transparency to the detriment of the market as a whole.
If financial markets are to remain a reference and to serve investors and the real economy, an essential step in reviewing MiFID is to ensure that orders be primarily executed on genuine trading venues. So, a clear distinction must be made between trading venues where prices are formed according to transparent, non-discretionary and publicly known principles that reflect real supply and demand (exchanges and MTFs), and the other trading spaces. To that extent, it is not possible to consider broker crossing networks (BCNs) and therefore organised trading facilities (OTFs) as equivalent to regulated markets (RMs) and MTFs as they do not offer the same degree of transparency (and hence efficiency) of the price formation process. Crossing networks should at best be considered as an intermediate way to execute transactions, for residual transactions that do not constitute addressable liquidity or with a very strict ceiling above which those BCNs should be transformed into truly multilateral MTFs.
Neal Goldstein, J.P. Morgan, Timothy Furey, Goldman Sachs and Greg Wood elaborate on the forthcoming FPL Risk Subcommittee’s Risk Management Guidelines including their extension to cover DMA, symbology and futures.
While margin checks do not fit into the typical pre-trade risk check, how can traders assimilate the risk limit functionality of FIX with their margin-level risk monitoring?
Neal Goldstein, J.P. Morgan:
Pre-trade risk checks are a key element of the comprehensive risk management strategy applied for business lines like prime brokerage. For electronic trading relationships where a client is offered leverage based on some level of collateral, real time positions for each client are usually calculated based on start of day, and intra-day drop copies of execution reports. A typical risk control is to link the post-trade position checks with the pre-trade checks applied at the gateway. If a client’s intra-day position approaches a level that exceeds the pre-arranged leverage or margin agreements, the post-trade system can send a cut off signal to the pre-trade gateway. The client would then be allowed to liquidate the position to reduce the long/short positions, but not go any further long or short.
The basic definition of DMA trading is that brokers provide access to a venue in the most efficient and effective way possible. What can brokers do to ensure they do not miss client risk limits, internal counterparty checks, rule 15c3-5 requirements, etc while maintaining speed of access?
Timothy Furey, Goldman Sachs:
Whether using algorithms, smart order routing and/or DMA to access the market, it is important to make sure that the rules are optimized and that automated testing and checkout processes are in place to verify that they are working. Appropriate risk controls are a key part of execution and are baked into the process. With all the advances in technology, development teams have the ability not only to better optimize the execution path for speed and efficiency, but also to provide benefits like automated testing to check that controls are functioning properly.
How important is symbology validation to equity risk controls? Can better technology remove fat finger errors from trading?
Greg Wood: Symbology validation is very important to any type of electronic order flow since the broker must clearly identify the instrument being traded by the client. An erroneous validation of a symbol could have serious repercussions in how the order is executed in the market, including inadvertent disruption to the market. One of the key rules of engagement when a broker certifies a FIX connection with a client or vendor is for both parties to agree what symbology is being used on the session and then not to deviate from that without a subsequent recertification.
Risk management technology is definitely evolving alongside trading technology to provide better controls for the way people are trading now. A simple fat finger check can prevent an inadvertently large order being sent direct to the market. However clients are increasingly using algos to trade large orders over a longer duration or using different types of interaction with the market. In this situation the fat finger check is deliberately large to allow the order to be submitted to the algo. The algo then needs to assess whether the parameters of the order - instrument, aggression, duration, time of day, etc - are suitable for the size of the order. If a large order has parameters that are too aggressive in comparison to the average daily volume of the instrument and the desired timeframe for execution then the algo should either reject or pause the order to avoid impact to the market. If this happens then the broker and client should discuss how to adjust the parameters of the order to avoid impact.
At the FIXGlobal Face2Face Forum in Seoul, Korean firms announced the formation of a FIX working group and the Korean Exchange’s intention to build an ultra low latency trading platform.
The opening speaker at the FIXGlobal Face2Face Forum Korea was keenly anticipated by the 200+ delegates, (a quarter of whom were made up of the buy-side and a third the sellside), as he was raising many of the issues that surround the HFT arena, but that are rarely touched on at industry events in Korea. By placing HFT in context , Edgar Perez, author of the recently published “The Speed Traders”, highlighted many of the opportunities and challenges that markets around the world face, in the low latency trading strategies environment. Not least, he pointed out the colossal task facing regulators and associated technology costs, just to monitor high-frequency trading, post trade, let alone real-time.
A recurring theme throughout the day, latency was covered by most of the presentations, especially in the context of FIX. Deutsche Borse’s Hanno Klein, and NYSE Technologies Asia Pacific CEO, Daniel Burgin, stressed that FIX standards are quite at home in the low latency environment, with exchanges around the world already using FIX for their low latency systems. As Mr. Burgin pointed out, “FIX is not slow, but through poor implementation, it can be made slow – and this has happened in various markets”. These comments rang true with the attendees, especially as Mr. Kyung Yoon, Division Head of Financial Investment IT Division of KOSCOM, outlined their plans not only to implement the latest version of FIX at the Korean Exchange, but also that when the new exchange system is rolled out in 2013, that speeds as low as 70 microseconds will be their benchmark. To the ‘icing on the cake’ Mr. Yoon then expressed KOSCOM’s commitment to helping establish a FIX liaison group in Korea that will ensure a highly ‘standard’ implementation of the FIX Protocol.
MC for the day, FIXGlobal’s Edward Mangles, (also FPL Asia PacificRegional Director), welcomed the announcement, stating that he and the FPL Asia Pacific group, looked forward to working more closely with KOSCOM, KRX and the Korean trading community as a whole. With delegates staying put to hear the bi-lingual presentations/discussions throughout the day, (with a few afternoon speakers actually commenting that the crowd in the room was unusually large for the final sessions), the updates on algorithmic trading (Josephine Kim, BAML) and TCA (Ofir Geffin, ITG) provoked a number of follow-up questions and discussions, indicating the delegates’ appetite surrounding these issues.