FIX Trading Community’s 12th Annual APAC Trading Summit

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“Picking Up The Pieces”


Key themes

  • Burden on the buy-side
    • Regulatory shift continues to move towards the buy-side, as does the burden for technological understanding and in some cases, development
    • The buy-side trader’s required skillset continues to change, not only to continue to sourcing blocks, but to understand shifting market structure and technology
  • Sell-side “doing more with less”
    • Changes to how sell-sides are paid – increase in CSAs; increasing demand for high-touch service from low-touch desks; “blended” desks fit some, but not all, and also introduce commission/payment complications
    • Regional desks on the sell-side: shifting tech teams and traders to cover more markets from centralized locations. Not necessarily headcount reduction anymore, but being smarter with the headcount placement.
  • Exchanges and alternatives continue to innovate, and often create many questions (and opportunities) while doing so:
    • Hong Kong-Shanghai Connect program has generated a vast amount of interest across the region; many questions remain about the precise workings of the program, and much remains to be done for many firms to be confident of being ready in time.
    • IEX and “the book” generating interest, and creating many questions around the precise nature of market structure that is desirable. While the book itself was not much of a revelation to the industry, it has spurred a much wider conversation which will continue especially in the US and Europe. Common view that there’s a bit of sensationalism at work, and education is key.
  • Collaboration between industry participants a key message in virtually every session. New innovations, regulation, and market microstructure changes are too much for any one participant to handle and optimize. Constructive – and often data-backed – dialogue and consultations are increasingly important for the industry.
  • “Flash Boys” mention count: 13

Session Notes

  • Shanghai-Hong Kong Stock Connect
    • Part of the trend of opening up China and cementing Hong Kong as the best place to access China
    • Calculation of quotas will be done on a real-time basis, but questions remain over how often that data will be released – the exchanges want to avoid rushes to grab the last of the quotas
    • Clarification was given that QFII funds and those bought through the quota will be held in separate accounts, and as such are not fungible. Further clarification given that while technically covered short sells are allowed on both markets, there are still difficulties being worked out regarding how to actually borrow shares in the Mainland.
    • Questions remain around settlement, capital gains tax, voting rights, and latency arbitrage opportunities, among others.
  • The Dark, the Lit, and the Alternatives
    • Video interview with Brad Katsuyama, President and CEO of IEX Group.
    • IEX is new, but growing. Looking to address major questions regarding US market structure through their 350 microsecond delay and other innovations and measures.
    • Buy-side owned, as opposed to sell-side owned, which gives them a new perspective on market operation and value to the buy-side
    • Broker priority on order types is one way of encouraging more crossing on IEX; this can serve as a free facility vs. a broker’s building and maintaining its own dark pools.
    • “Good vs. bad HFT” – different types of arbitrage, some to take advantage of market inefficiencies, others technology inefficiencies – which are good and which are bad?
    • Examples of negative reversion have sprung up – rather than creating market impact, after the trade, the security reverts in your favor
  • Value Propositions and Exchange Models
    • The wider market structure debate’s relevance to Asia needs examination. Only two really fragmented markets in Asia, namely Australia and Japan.
    • The markets in the region are also relatively slow – latency arbitrage opportunities and other “negative” HFT behavior less likely to occur given fewer “playing grounds”.
    • Using the dark – major problem over branding. Whoever first called it “dark liquidity” did nobody any favors. However, the buy-side has plenty of legitimate uses for the venues to trade anonymously and in size.
  • Exchange test environment: Best Practices
    • Key questions around testing environment design remain – different types of environments and simulations for different purposes. What do firms already have in-house vs. what they need the exchange to provide – how are the two different and what values do they both have?
    • Should exchanges provide artificial noise on these environments? Should they just let test algos “bounce off each other”, or should they be full sandboxes? What capabilities are there for market events / shocks to be tested? Privacy of strategy testing? Repeatability of events like closing auctions? Many different ways to skin the cat.
    • Resources are fundamentally limited for development
    • No point testing just for the sake of testing – the environments need to be “stressful” enough to ensure that systems and products are ready to go live
    • Industry-wide, standardized test cases could potentially be used for satisfying regulatory requirements, but “one size doesn’t fit all”. But standardized situations could be used for profiling and collecting meaningful metrics, e.g. order/trade ratios, cancellation rates, etc.
    • Consensus from brokers and industry participants are key, and an action point for the industry
  • Ch-Ch-Ch-Ch-Changes: Exchanges and regulation in Asia
    • Updates from Greg Yanco, ASIC included their new surveillance system, and how it is changing how regulators are conducting themselves – an increasing blend of industry conversation and hard data to back up the proposals. Potential tick size competition in Australia an open question
    • Balance of competition and free markets, with too much fragmentation. Clarity is needed around dark pools and who can see what inside them.
    • How to pay for regulators Message fees – potential impact on order/trade ratios? Not disruptive on the whole, but market makers have raised concerns.
    • Japan update – tick sizes and pilot scheme to shrink tick sizes further, curiously at a time when the US is looking at a pilot to increase tick sizes. Increasing accessibility to retail is an underlying goal. Significant bid/ask spread reduction mentioned as a result in the pilot program.
    • Alternatives, e.g. Chi-X, can inspire innovation and changes (e.g. tick sizes) in certain markets; both institutions and retail can potentially benefit from price improvement. But systems must also be upgraded to handle innovation across the spectrum of market participants.
    • Singapore update – market structure changes are incoming, but it is similarly a balance between analytics and consultation with the market. Conversations are ongoing around collateral, derivatives trading, and a broad market structure study. Point made that when volumes are low in a market, fragmentation may do more harm than good.

  • OTC Trading Reforms are Coming, and Fast. Is Asia ready?
    • Pre-trade clearing certainty has paved the way for “impartial access”, or trading in a many-to-many environment.
    • Definitions of a “US person” affecting regulatory obligations, but difficulties remain over how firms delineate between their accounts, their fund sources, their trading arms, and which fall under what regulatory regimes
    • New structures are driving massive changes in compliance and legal departments
    • Too many SEFs (at least 24) that are arguably too niche-focused. Those that had liquidity previously continue to have it now. Will the 24 shrink as some go out of business and the SEF landscape “optimizes”? Time will tell.
    • Mandatory clearing can lead to a 2-tiered market, those “on SEF” and “off SEF”; will this drive further fragmentation?
    • Signing up for trading with an SEF is onerous; a buy-side is likely to only sign with a few at most.
    • There will be reconciliation between global regulations, and between Asia and the US, but debate remains over who’s “setting the standard” – Dodd-Frank, MiFID II, EMIR are all coming, and all may have unintended consequences. Will regulation become more diverse before it gets better?
  • Industry Collaboration
    • Much uncertainty remains around implementation of regulation, and all the while the costs of compliance are rising. Asia is particularly difficult given the fragmented markets and regulatory regimes.
    • Regional and global cooperation between regulators needs to be increased
    • As an industry we can standardize compliance solutions and processes as much as possible, and become more creative with solutions to drive development
    • Need to engage locally, regionally and globally to ensure standardization and cooperation at all levels of regulation and implementation. The e-trading industry should collaborate more to re-harness its creativity in financial innovation.
  • Debunking the Bitcoin Myths
    • The technology of crypto-currencies is proven and they are increasingly an alternative to payment systems
    • Education needed on the topic to dispel myths
    • New forms of currency will end up existing side by side with traditional currencies – the technology needs to be better understood and regulated
    • Many views from the audience are that BTC will be banned, primarily due to the security concerns and volatility of the asset class. But bitcoin may just be one instrument in a payment technology that could have significant staying power.
  • Trends and Evolving Best Practices at the Buy-Side
    • Regulation – SFC algo regulations were the biggest challenge of the last year. There have been many effects, among them better leverage of technology across the buy-side, and shrunken broker lists in some cases. There is a risk of over-regulation, and questions remain over implementation. Lastly, there is concern on whether other markets in Asia will follow suit, and if so, similarly, or with something greatly different?
    • Abroad, Europe continues with MiFID II, dark trading, volume caps/waivers, and the search for a practical solution to the consolidated tape. North America’s hot topic is transparency.
    • Commissions – the FCA is making a big push in Europe on CSAs and unbundling; it’s one area thought to have a global impact. Can impact smaller buy-sides disproportionately. Part of the wider trend of putting dollar values on sell-side services.
    • Extraterritoriality – a fund can be domiciled, managed, and traded out of 3 different regions. Breaking down into individual portfolios can create even further complexity. Which jurisdiction is each entity / activity regulated by?
    • Liquidity – Changing skillsets across the buy-side and sell-side. Different types of trading – just executing no longer enough. Conversations between the PMs and traders, more so on fixed income desks, and compliance is a key concern, but the conversations are evolving.
  • The Buy-Side Represents
    • Asia Trader Forum continues to grow in both members and AUM.
    • Great amount of collaboration on the e-trading consultation paper, and now shifting focus toward the dark pool consultation.
    • ATF is increasingly traveling and meeting with local regulators and exchanges to open dialogues on behalf of the buy-side and industry.
  • Risk: A New Perspective
    • Risk management is a process, and can be managed in many ways. It should be monitored enterprise-wide, and stress testing is critical.
    • Focus should be risk-adjusted return – not risk.
    • Risk needs more integration between the PMs and traders – decisions need to both be top-down and bottom-up to ensure market risk, trading risk and operational risk all align and are managed. PMs should be directly involved in stress testing.
  • Putting FIX to Work in Trading and Post-Trade
    • Update to FIX 6.0 now announced in US, EMEA and Asia – technical committees continue to develop the protocol. Will result in closer alignment to ISO20022. Will also result in higher performance for FIX.
    • FIX for allocations and confirmations is being driven forward, but more education and readiness across the Street is needed.
  • The Big Shift
    • Differences between high touch and low touch are blurring, “algos are commoditized”, sell-side firms can’t be all things to all people, especially without being paid for it.
    • Blocks are increasingly going electronic, but the roles of the salestrader is still very important. The buy-side are prepared to pay for good service though, especially with regards to block trading.
    • Operational risk is evolving – the whole organization needs to work together to minimize systemic risk.
    • CSAs can be expensive and difficult – may need regulatory push to drive adoption

    Quote from the conference’s expert panel of ‘Commentators’;
    “The various panelists had many themes in common, that block trading and liquidity is important to their business, and that despite the alarm brought up in “Flash Boys”, about dark pools, they should still have a place in the stable of tools used by institutional traders. Many feel regulations are making it more difficult to conduct business.”

To download the presentations please follow the link: http://www.fix-events.com/HongKong/agenda.aspx and enter the passcode: GLOBALTRADING