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A Renewed Focus On Innovation


By Rupert Walker, Managing Editor, GlobalTrading

Technology and regulation are re-shaping the trading industry in a shifting geopolitical environment, according to speakers at the 15th Asia Pacific Trading Summit, 2017.

The trading industry is facing many challenges as it prepares for the implementation of important regulatory changes and adapts to rapid advances in technology. In normal circumstances, the tasks confronting all industry participants would be substantial, but recent shifts in the structure of markets and investor behaviour as well as political uncertainties compound the difficulties.

Yet, the mood was upbeat at the 15th Asia Pacific Trading Summit (2017) organized by the FIX Trading Community in Hong Kong on 18 May, with speakers and delegates at the region’s largest one-day electronic trading event invigorated by the opportunities offered by regulatory change and inspired by a future shaped with innovative technologies, including artificial intelligence (AI) and machine learning.

“While start-up disruption in many ways is over-hyped, this technology, over time, will revolutionize not only investment banking and trading, but how the economy operates. The [financial] industry is at an inflexion point,” said Larry Tabb, founder and research chairman of TABB Group, in an opening keynote speech.

Tabb also examined how several factors including the state of the markets, regulation and uncertainty about President Trump are affecting and, in some ways, hindering a clear development of the trading environment.

In recent years, markets in leading economies have been distorted by post-financial crisis asset purchases by central banks and a host of reactive proscriptions rigorously enforced. Yet, in the US at least, the trajectory of regulatory reform is uncertain since the election of President Trump, with market participants receiving mixed-messages: on the one hand anticipating a roll-back of major parts of the 2010 Dodd-Frank legislation, and on the other, bemused by the lack of clear direction and tangible action by the new administration.

Of course, the economic and geopolitical shape of the world is in flux too. New fulcrums and centres of power – in particular the continued rise of China – are determining where financial industries concentrate their resources and adjust to new challenges.

The post-lunch keynote speech was delivered by MSCI-veteran Chris Ryan, now chairman and CEO of First Capital Partners and co-founder of Digital Finance Media, who was able to avoid having to find ways to deflect the usual queries about the MSCI’s plans to include China A-shares in its benchmark indices (which finally took place a few days later anyway), and instead concentrate on how China’s markets will drive Asia’s investment agenda.

“China’s markets have just begun to flex their muscles: better financial infrastructure, better access and international diplomacy and trade will bring us all many more opportunities,” said Ryan.

Regulatory imperatives
Meanwhile, the financial industry throughout the world is focussed on the implementation of the Markets in Financial Instruments Directive (MiFID) II in January 2018, which will likely lead to the growth of multi-lateral trading systems and banks’ systematic internalisers at the expense of traditional exchanges as both buy- and sell-side firms try to meet their obligations to achieve best trade execution through access to all sources of potential liquidity as well as cutting costs.

Transparency, liquidity and tight dealing spreads are indispensable for all asset classes, from ETFs to foreign exchange, noted Wai Kin Cahn, at XTX Markets Arjen Gaasbeek at Flow Traders Asia.

In fact, a “progression of liquidity provider to buy-side trading shops is sensible given the risk tolerance and regulatory environment facing the traditional banks and brokerages,” argued Matthew Hassan, head of platform sales at Nomura Securities.

The European legislation will also have other far-reaching effects on the industry too, especially a reduction in research budgets as the buy-side unbundles its research consumption from trade commissions.

According to Benjamin Quinlan, CEO and managing partner at Quinlan & Associates, MiFID II’s unbundling regulations are set to fundamentally disrupt the global investment research industry as we know it. Yet, it is also “an opportunity to re-invent research models and continue to increase focus on trading services,” said Stephane Loiseau, managing director, head of cash equities and global execution services at Société Générale.

In addition, active fund management strategies have been constrained by an increase in stock de-listings, a significant shift to passive funds among investors and a substantial decline in stock market volatility. These trends have been caused by combination of the burdens imposed from regulation, sustained bull markets fuelled by central bank liquidity and the rising impact of new financial technology.

Humans or machines
A consequence has been the reappearance of a question that often recurs during periods of instability, and which was explicitly posed at the Hong Kong event, namely: Is innovation back in fashion again? Few speakers disagreed with Edward Mangles, regional director, Asia Pacific, FIX Trading Community and director of GlobalTrading who observed that today “innovation is changing people’s minds”. In particular, advances in artificial intelligence and machine learning are gaining traction in the financial industry.

“Finance, just like any IT intensive industry, bears the greatest risk of being disrupted by AI,” argued Gerardo Salandra, CEO and founder and Rocketbots, while Eugene Kanevsky, global head of electronic trading at CLSA pointed out that AI is at the core of a new generation of agency algorithms.

However, it is important to identify exactly how these new technologies will have the greatest impact and value. As Kris Longmore, co-founder and head of quantitative research at Quantify noted in a presentation, if machine learning is the engine, then data is the fuel that drives it.

“Machine learning is a great way to extract new structured data sets from unstructured content…New financial data is arising from text mining, transactions and analysis, and the internet of things,” agreed Stephen Malinak, global head of persistent analytics and data science, financial & risk division at Thomson Reuters.

Whether or not the adoption of more sophisticated technologies in the financial industry will eventually cause the redundancy of human agency in the trading process is debatable – and, naturally, a sensitive issue for market players.

Samir Rath, CEO and founder of Blue Pool reckoned that “machine intelligence will turbocharge humans not replace them”, but Francis So, co-chair of the Asia Pacific Steering Committee, FIX Trading Community and head of trading Asia, BNP Paribas Dealing Services went further.

“The trading desk will be run by technologists and engineers in 15 years’ time,” he said. However, there were also more circumspect, if not sceptical voices too amid the prophets of radical change.

Marcus Consolini, managing director of corporate acquisitions at Odyssey Capital Group spoke for several delegates, especially those with long experience in the industry.

“The death of the sales-trader never happened despite predictions to the contrary. We will either adopt disruptive technology into the trading environment or we will continue to be driven by regulation and the same slow change of the past 15 years,” he said.

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