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.
J.P. Morgan ‘s Frank Troise sat down with FIXGlobal to chart the expansion of electronic trading tools available to the buy-side and point out which new tools will make the difference in the months to come.
In what way has the trader’s desktop improved?
Over the last few years, the biggest improvements have been the inclusion of more multi-asset class execution capabilities and the inclusion of additional analytics. Desktop trading platforms that support equities options, futures and FX trading, with the ability to track all of those orders in the market and give aggregated profit and loss are much more prevalent. More trader desktops incorporate pre-trade analytics measures, such as market impact estimates as well as post-trade execution information.
What do your clients say they want most from their analytics?
Clients want a combination of real-time and post-trade analytics. Prior to starting the trade, clients want tools that help their investment decision process. Once an investment decision is made, pre-trade market impact and trade scheduling tools can help traders develop an implementation game plan. Through the course of the trade, clients like to see real-time analytics that can help them improve the performance of their trade; for example, abnormalities around volatilities and volumes. Post-trade, clients want performanc reports measuring actual execution costs against various benchmarks on a daily, monthly, and quarterly basis.
How does putting so much technology in the hands of the trader change the role of the broker? How does the broker add value in addition to the electronic tools?
In the electronic broker business, our value added comes in our role as execution consultant and our ability to educate clients on the use of pre- and post-trade analytics and execution tools. I look at the roles and responsibilities of the people on our electronic client trading desk as helping clients implement their investment ideas. When a client has a trade to execute, it is up to our team to educate that client on the tools they can use to put together a plan, present them with the tools to execute the trade and while they are executing the trade, provide information that can be used to improve their plan throughout the execution period.
After the trade is executed, we work with clients to evaluate how well they did against their plan and help them improve their trading process in the future. We focus on creating and enhancing client products continuously. Our goal is to make it easy for them to use analytics and execution tools to achieve best execution. The better we understand a client’s goals and objectives the more we can collaborate with the client on custom solutions and training. Electronic trading products are very different from traditional equities execution capabilities. A key differentiating characteristic is that the products reside and are used by the client at the client site. In the traditional model virtually no broker technology oriented product existed at the client site.
The communication mechanism for order delivery was the telephone and execution occurred in the broker/ dealer environment. Electronic brokering is a very intrusive business. Our products exist in the client’s technology infrastructure. This has led to changing core competencies of brokerage firms. We now have to be experts at delivering products into the client site. This has implications on training and technology integration.
How does the electronic broker assist clients in locating liquidity, either through tools or the consulting process?
Liquidity has and continues to be a top priority for clients. They have always come to brokers to find liquidity in as ‘quiet’ a way as possible. In today’s landscape, much of that liquidity exists in electronic form and is fragmented. The result has been a proliferation of tools (e.g., algos, routers) that help clients navigate liquidity pools to logically consolidate the fragmented liquidity. To assist in that process we have created a pool to concentrate order flow across various trading desks, retail segments of the broader J.P. Morgan Chase organization, transition management flow, and third party broker dealer flow. I refer to it as a centralized electronic merchandise hub.
Dmitry Koltunov of Highbridge Capital Management opens up to FIXGlobal about the buy-side expectations for FIXatdlSM algos and how vendors and sell-side firms can improve their offerings.
How do you evaluate a broker’s FIXatdlSM offerings? Are you requiring or looking for them to hold to a standard?
Our preference is towards FIXatdlSM 1.1 or 1.0, since the recent iterations are able to capture more details of the algorithm. However working with any version of FIXatdlSM is already a significant improvement over a static document. Since our proprietary EMS/OMS is built around a customized implementation of FIXatdlSM, the broker FIXatdlSM can never be taken “as-is”. We also do some minimum tweaking to the layout, rules and default settings based on our trader’s preferences. This allows us to have the same look and feel for similar algos from multiple providers.
The standard has been evolving significantly, and in our view, it would be beneficial for the industry to come to more of a convergence point. Having every FIXatdlSM consumer require a different version may be detrimental to overall adoption, because it raises the maintenance cost for the vendors to keep backwards compatibility for each client. The FPL Algorithmic Trading Working Group (which developed FIXatdlSM) has now drawn a line in the sand with the latest version and is making a widespread industry push for it. FIXatdlSM 1.1 is quite comprehensive, so we would be pleased to see the community shift gears from evolving content to aiding adoption of this version. However there are constantly new types of Algorithms coming to the market and this will keep pushing the standard to grow and change. The challenge remains for the industry to work collaboratively to evolve at a measured pace while fostering widespread adoption.
How responsive are your brokers to your requests for new algorithmic products?
We have seen varied response times, which range from a few weeks to over a year, depending on the broker, algo type and level of customization. Most bulge bracket firms are responsive, but the smaller boutiques can vary from poor to great, with those that explicitly focus on execution at the forefront. Some brokers have also put together custom solutions for our traders, and those timelines vary from weeks to months.
It has been a challenge to integrate with brokers that tie their algos to a particular EMS. In one particular situation, a vendor indicated that it would take over a year to make its algo accessible through FIX. Waiting was not an option, so we ultimately worked with another vendor with similar functionality that did not require a particular EMS and could integrate through FIX and FIXatdlSM. Vendors that realize that their real product is execution logic, as opposed to a particular display or EMS, wind up being more successful. In general, we have recently seen more brokers respond to us with FIXatdlSM. This is a positive development, because a year ago, only a handful of brokers were even aware of it. In many cases, we were the first firm to ask our brokers for FIXatdlSM files, so we find it encouraging that more than half are now able to serve up the files. When we do request FIXatdlSM, the timelines vary from weeks to months, and we have seen some firms hire consultants to complete it more quickly.
Timing is a differentiator and FIXatdlSM is critical to this. In general, traders become accustomed to how certain algos behave, and the first algos to get ’test-driven’ have an advantage. As the space becomes increasingly crowded, I can see the laggards start to struggle to keep a presence.
Jay Hurley, FPL Global Foreign Exchange Committee Co-Chair and Vice President, Morgan Stanley Fixed Income, unravels FIX’s role in FX and argues for FX to be integrated into equities algo trading.
Adoption of FIX in FX
Adoption of FIX in FX for the core functions, such as streaming prices, orders and executions, has done well. Evolving from a situation where few ECN’s and banks used FIX for FX to one where the last ECN not using FIX will be FIX compatible in January of 2011. While adoption at the ECN level is almost 100%, for banks it is probably around 70%, up from 15% 5 years ago.
I would say FIX sold itself. It just naturally happens that when you get enough critical mass, after that tipping point, outliers start to look unusual. From there, it becomes more important for FIX to address more than just core functions. For instance, nondeliverable forwards (NDFs), which include most of the Asian currencies that cannot be freely traded, have some of their own specific features that need to be incorporated into the protocol.
New Developments in FIX for FX
The FIX Protocol for FX has provided an opportunity for rapid product development and deployment, and in doing so has increased competition in the market space. FIX provides the flexibility necessary for a platform provider to work with potential users to provide product enhancements. If a product doesn’t meet the needs of the market participants, it will fail quickly; but other times a new product will fill a gap and become the new force in FX trading. This process does not need regulatory oversight for it to happen - it happens by innovation.
Currently, the GFXC is working on OTC options as well. FX specific issues for options revolve around the fact that often at the end of the day, traders receive deliverable cash, so questions like ‘What is the currency of your option?’ are not as obvious. In a currency option, you have several currencies: the currency of the option, the currency that it is against and the currency of the payment, which can be a third currency.
The FPL Global Foreign Exchange Committee (GFXC) has also worked on FIX for allocations, which has some quirks for FX that are not present in equities. For example, if a fund manager has 50 sub-funds, often they will do a single FX trade, representing the net exposure of all of the funds. Rather than buying and selling some all day, they aggregate it. As a result, a single trade of ‘buy 1 million Euros, sell US Dollars,’ turns into an allocation of sell 50 million Euros, buy 150, sell 100, etc. Also, the net trade cannot be zero; otherwise, you cannot settle the trade. This issue caused a lot of consternation, but because there is still a need for a way to do the allocations in a trade where the net is very small, it was decided to have a one cent minimum.
Other factors FIX has to address include delivery and settlement dates, and NDFs cannot actually be delivered, so they are cash settled - normally in US Dollars. There are also questions regarding what fixing rate to use, because FX is an OTC market and there can be several semi-official prices to choose from.