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.
Lisa Taikitsadaporn, of Brook Path Partners and Chair of the FPL Global Fixed Income Technical Subcommittee and Sassan Danesh of Etrading Software chart the evolution of the FPL-FICWG Initiative.
Background and Objectives In the nearly 20 years of the FIX Protocol standard, the protocol has been synonymous with equities electronic trading and has become the de facto standard used by equities trading systems globally. FIX has evolved over those years to continually support the needs of the global user community across different user groups and has expanded into additional asset classes. In 2001, FIX Protocol Ltd (FPL) signed a memorandum of understanding with the Bond Market Association (which merged with the Securities Industry Association to form SIFMA) to collaborate on enhancing the FIX Protocol to support the trading life cycle of cash fixed income products.
This initiative resulted in FIX Protocol enhancements in version 4.4 of FIX to support additional fixed income asset types, as well as supporting workflows such as quote/negotiation, post-trade allocation and confirmation/affirmation workflows. The fixed income asset types covered in the 2003 release of FIX 4.4 included: US Treasuries, Agencies, Municipals, TBA Mortgages, Corporates, Commercial Paper, Repurchase Agreements and Security Lending transactions as well as their European counterparts.
The release of version 4.4 increased the penetration of FIX into the fixed income space, primarily for buyside connectivity with electronic platforms or directly between buy-side customers and the brokerdealers. However, many of the Electronic Communication Networks (ECNs) active in the fixed income markets did not implement these specifications for connectivity by the broker-dealer community, who provide the liquidity to the markets.
In June 2011, the global investment banking community, with the support of Etrading Software and Expand Research, launched the Fixed Income Connectivity Working Group (FICWG) initiative, aiming to standardize connectivity between major sellside banks and execution venues for fixed income trading through the use of the FIX Protocol and other open industry standards. This initiative was supported by FIX Protocol Ltd. in the same month, and the result was the creation of a working group under the FPL Global Fixed Income Technical Subcommittee to produce the required recommendations to achieve the standardised connectivity.
The initial focus for FICWG in 2011 was standardisation of OTC swaps trading, which was under increasing regulatory scrutiny following the collapse of Lehman Brothers in 2008, and the resulting realisation that regulators required better and more timely information on OTC derivatives trading in order to be able to monitor systemic risk across the market. This realisation led to the mandating of the trading of standardised OTC swaps contracts onto newly established and regulated execution venues known as Swap Execution Facilities (SEFs) in the United States and Organised Trading Facilities (OTFs) in Europe.
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.
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.
Rudolf Siebel, Managing Director of BVI Bundesverband Investment und Asset Management, shares the perspectives of German asset managers and their needs and goals for the coming year.
Technology and Trading Costs BVI represents German investment fund and asset managment industry which manages ¤1.7 trillion in assets such as bonds, equities and derivatives. Trading is an issue dear to our hearts. In particular, we welcome the improvements in electronic trading over the past decade especially those based on standards, such as the FIX Protocol, which enable automation based on standardization. That is one of the reasons why we became part of the FIX community in September 2011. Costs of trading have certainly fallen over the past few years, particularly with regard to the costs charged by brokers and venues. Also, trading costs have been implicitly lowered through a reduced market impact. Our members sense that with electronic trading they can be much closer to the market and limit the loss of market value because of the latency in trading. Our members, however, have seen that the cost of support and analytics has not fallen. Some also believe that the buy-side trading volume side had declined and that the sellside volume is on the increase.
Value through Innovation Having discussed issues of electronic trading within our industry, I think the increased ability to analyze market impact and trading costs has provided value. Over the past few years, our membership has seen value shift very quickly to better market access, especially through smarter routing technology. Based on mutual studies, only about 65% of the turnover of the DA X is now on the Deutsche Boerse, and for the FTSE 100, only 50% is now on the LSE. It is absolutely vital for our members to be able to access different liquidity pools, whether lit or dark. Smart algorithms have become a main issue, but not necessarily in view of improving low latency. Our members are asset managers who base their decisions on the selection of securities and asset classes, not necessarily on squeezing out each latent nanosecond. As a result, low latency trading is a secondary priority for BVI’s members, but smart order routing is obviously important given the large number of venues in the European market. At my latest count, there are about 70+ different types of trading venues, be they exchanges or other trading platforms.
Volatility and Connectivity We are now in a market where there are no longer any safe havens among asset classes, and in times of high market volatility it is absolutely necessary to link your internal systems to outside trading platforms in order to be flexible and quick to market. German asset managers have yet to establish connections across asset classes, and the FIX Protocol is very important as a basis for discussing the connectivity issue. Going forward with Dodd-Frank and new regulation on the European side, the the connectivity with Central Counter Parties (CCPs), will also be a big issue for 2013 and 2014. As far as it is possible, connecting to all markets and asset classes in an electronic way, and connecting to more CCPs will be the challenge for next few years.
Daniel Ciment of J.P. Morgan details the development of Brazilian algos and outlines the most effective strategies for trading in Brazil.
Using Algos in Brazil Already accustomed to trading with algorithms or using algorithms to trade strategies in different markets around the world, as international buy-side traders look to Brazil, they want to trade there in the same way they have traded elsewhere. Even though having just one exchange makes the data feed more streamlined, because of the low liquidity profile of certain stocks in Brazil, you cannot use algorithms to trade all stocks electronically. For the more liquid names, many traders are using benchmark algorithmic strategies, like VWAP, percentage of volume, or arrival price. Most algorithmic strategies are based on benchmarks for now, as buy-side traders seek to replicate the methods they use elsewhere, while obviously taking into account the intricacies of the market structure. In the end, if they trade with algorithms in the US, Europe and Asia, they want to trade with algorithms in Brazil as well.
Infrastructure and Volume Spikes This is one of the challenges that we face as an industry. As you are building electronic infrastructures, you have to build for growth and not just for where we are today. When we look at a market, whether it is Brazil or more developed markets like the US, Europe or Asia, we know what we are trading today, but we have to build to accommodate what we will trade in a year, two years and what we think the peak might be. Just because a market trades a couple of hundred million in a day, or in the US, 8 billion shares a day, it does not mean you build your plan to support 8 billion shares a day because a year from now, that figure might be 20% higher.
More so, if a major event happens next week, then that figure might double, so you need to build sufficient headroom. Right now, we can handle a lot more than what we manage on a daily basis, but that is on purpose to make sure that at times of stress we are there for our clients and that they can trade through us with full confidence.
DMA or Boots-on-the-Ground? To be successful in a market like Brazil, brokers need to have people on-site who know the local investor community and know the local financial community. J.P. Morgan has a major trading presence in Sao Paulo, and that is just one piece of the offering in Brazil. For small firms who want access, outsourcing is a realistic option, but if you are going to be big in a market, especially in a market like Brazil, an in-country trading team is required.
Technical Challenges Reliable trading requires market data and telecommunications systems, which are present in Brazil, along with data center space and algorithms that are tuned to the local market and market structures. This tuning includes the liquidity profiles of the stocks as well as the rules and regulations of the exchange; you cannot apply the same algorithms from one region to another and expect them to work. We spend a lot of time and effort, fine tuning our algorithms, testing them on our desk and then rolling them out to clients. It is not just copy-and-paste.
Annie Walsh of CameronTec spoke to FX users to better understand the topical issues and challenges facing the OTC Foreign Exchange market and the central role FIX can play in addressing these challenges.
Undoubtedly the capital markets in 2011 will be remembered for many history-making moments including some of the largest currency moves the market can remember. We have witnessed the global foreign exchange market — the most liquid financial market in the world with an average daily turnover in the vicinity of USD4 trillion — bear the brunt of one political crisis after another, causing widespread volatility and difficult to pick currency moves.
Currency friction in Europe and between the US Administration and China will no doubt remain a prominent feature of the global economy for at least the next 1 – 2 years. On top of this remains uncertainty of government, particularly in Europe, and the implications for continuity of fiscal and monetary policy.
Many investment banks too in their search for alpha have been left wondering ”where did the black box get it wrong?” following lack lustre P&L performance, almost industry-wide over recent months.
Without a formal open or close, the FX market presents a true ‘follow the sun’ global market, with inherent levels of opportunity and risk.
Against this uncertain backdrop, the FIX Protocol has great potential to centrally feature in what is undoubtedly the single greatest threat (opportunity, if you prefer) facing the global OTC FX market. That is of structural uncertainty compounded by impending regulatory change to be ushered in, courtesy of Dodd Frank, and MIFID II and III.
With no unified or centrally cleared market for the majority of trades, and little cross-border regulation, due to the over-thecounter (OTC) nature of currency markets, these are rather a number of interconnected marketplaces, where different currencies’ instruments are traded. Inevitably OTC FX will move, however grudgingly, away from its long-standing (self-serving) model of self-regulation, toward greater levels of transparency, regulatory oversight (either directly or indirectly) and centralised clearing.
A Two Speed FX Market
As currently drafted, spot, outrightsand swaps are to be exempt from Dodd Frank’s requirement to be traded via Swap Execution Facilities (SEFs) and be centrally cleared; FX options, Cross Currency (CCY) swaps and Non-deliverable Forwards (ND Fs), however, are not. A perhaps unintended consequence of this two speed approach is the potential for jurisdictional arbitrage, product/financial re-engineering and further fragmentation of execution venues and liquidity.
In the short term, it also means that the sell-side needs to fundamentally reconsider strategies for design, development and deployment of Single Dealer Platforms (SDPs). Multi asset class SDPs will now necessarily evolve to become simultaneously both an execution venue as a destination and a gateway to a SEF, depending on the instrument traded.
CME Group’s Fred Malabre and Don Mendelson chart the history of electronic commodities trading and discuss the recent improvements in FIX for commodities, including fractional pricing, trading listed strategies and faster market data.
Adoption of FIX for Commodity Trading
Products traded on CME Group exchanges have many underlying asset classes, including commodities, interest rate instruments, foreign exchange and equity indexes. Although the largest share of products traded today on our platforms are financial futures, the history of our markets began with agricultural and livestock commodities. The underlying physical commodities include the petroleum complex, agricultural products such as soybeans, wheat and corn, and metals such as gold and copper.
Listed contracts in all of our markets include futures and options on futures. The futures contracts can be physically settled, meaning that a seller has an obligation to physically deliver the commodity to the buyer when the contract expires at a delivery point specified by the contract, or cash settled, which are products that could not be settled to an index.
Back in 2001, we were at a crossroads. At this time, futures contracts were primarily traded via open outcry – brokers shouting and waving arms in trading pits. At that time, CME launched its first FIX compliant interface to electronically match orders for a wide range of asset classes ultimately including equity indexes, FX, interest rates, real estate, weather, economic events, energy, metals and agriculture. The question arose: how do we represent orders and execution reports and transmit them between firms and the exchange? We had earlier put out its own order routing API, but it had some drawbacks, including the high level of software developer support required. Firms were running several different computing platforms, for example.
At that time, the FIX Protocol had begun well in the equities world. It was attractive because it was not an API, but rather a standard for message exchange. From the exchange’s perspective, this was an attractive proposition: we would develop our side of the conversation, and firms would develop theirs. From the firms’ perspective, their software developers could achieve high performance, only limited by their own imagination and skills.
It seemed that with a few adjustments, FIX could be adapted for futures and options trading. In version 4.2, fields were added to support derivatives, including expiration and strike price. We participated in working groups to standardize those changes, and later helped spawn FIX-based solutions for market data and FIXML for clearing.
An example of a problem with adapting an equities standard to commodities is fractional pricing. Traditionally, agricultural prices were stated in fractions. To this day, soybean futures are quoted in increments of ¼ of one cent per bushel. US equities made a leap from fractional to decimal pricing in 2001. Although trade pricing stuck with tradition, we decided to follow FIX conventions with decimal pricing in messages.
We added some custom indicators within our FIX interface to facilitate conversion to a fractional display. One indicator represents the main fraction and another represents the sub-fraction. For example, for a product ticking in ½ 64th, we would send the main fraction as 1/64 and the sub-fraction as ½. These indicators could then be used to convert a decimal price used over our FIX interface as 105.0390625 which would then be converted to a screen display as 105 2.5/64th. We found that the FIX Protocol is easy to extend to add custom features and can easily be extended for legacy needs with negligible impact to customers not using new tags such as the custom indicators talked about previously.