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On Good Authority: How Electronic Trading is Changing

By Tony Whalley, Chris Jackson
Tony Whalley, Head of Dealing and Derivatives for Scottish Widows Investment Partnership and Chris Jackson, Head of Execution Sales, EMEA, Citi highlight to FIXGlobal the changing role of the broker, implementing technical solutions and the chances for a consolidated tape in Europe.

FIXGlobal: How have electronic trading technologies changed the way you go about your job – for example, a trader’s investment styles or attributes?
Tony Whalley: Previously, brokers just had to find the liquidity; however, nowadays the difference is what brokers need to do in order to find that liquidity. I think if you compare and contrast market conditions today with those 18 months ago, they are dramatically different, and the trader who is unable to adapt to those changing conditions, is not going to do particularly well.
Chris Jackson: The growth of client-driven electronic trading has meant that low touch portions of a clients trading blotter are executed more efficiently and with lower risk. In turn this has allowed the sales trader to operate more efficiently and focus on more valueadded interaction with clients.
FG: Is sell-side execution performance continuing to improve? What can be done to make that relationship more efficient? How can a broker stand out?
TW: I think it works pretty well. What we have with the vast majority of our counterparties is a symbiotic relationship. I believe that at the end of the day, they need to do business with us in order to have a degree of credibility within the market, and we need to do business with them because, if they’re the other side of our trades, we chose them for best execution purposes. So from that point of view, it works very well.
Occasionally there are spats, misunderstandings, or whatever you want to call it, but I don’t really feel that this is down to developments in the electronic trading market space. I think we’re in a situation where as soon as one broker comes up with a smart-order router, someone else comes up with another, and then another one and another. Once one broker moves into a certain technological space, everyone needs to get there as well; otherwise, one firm is going to find they’ve got an edge over another and, from our point of view, clearly, if that house has a distinct edge, then they’re going to get more business than others. What we’re tending to find, however, is that if a broker does have a competitive advantage, it won’t last particularly long.
FG: Is there a right or wrong answer as to whether firms should outsource technology implementations or develop them in-house?
TW: I think from our point of view, given the size of our operation, it has to be done in-house. I think when you look at some of the smaller niche players, then there is a very good reason why technology could be done outside the firm, but certainly from our point of view, it has to be done internally.
CJ: From a sell-side perspective, the majority of client-facing systems are in-house. Our algorithmic trading platform or our internal order management systems, for instance, have to be designed internally. We’ve found that we need to maintain a level of focus and ‘bespokeness’ to the platform and the product. It needs to be able to adapt quickly to a changing market environment, which you can’t get from out-sourcing. We cannot ask a client to work to a third party’s deadline. That kind of quick turnaround requires that we have control over the resources in-house.

FG: Over the coming 12-18 months, where will your firms be devoting resources in terms of developing tech infrastructure?
TW: On the buy-side, we rely very heavily on our brokers to provide the technology that we need in order to get our best execution. For example, we rely almost entirely on them to provide smart-order routing. We evidence that by looking at destination reports, and so on and so forth, but at the same time, we believe it is down to them to be able to route to all the various venues as and when they feel it is correct. So from that point of view, the choice in terms of what we do and how we do it is taken out of our hands. We do not want to use our own capital in developing these capabilities because they would be of use to us alone, whereas for the brokers, they are of use to all their clients. What the broker is trying to do in the execution space is create an advantage over the competition which is discernible, and they do that by creating all these different suites of products, which we can choose from. So we are the beneficiaries of the investments that they make.
CJ: At Citi, we look forward over the next 12 to 18 months, the core requirements for electronic trading products are smart-order routing, our Citi Match internationalisation engine, and our algorithmic trading suite. These are all things that will continue to be revised and finessed over time, but they’re very much there and in place. The next challenge is to integrate the electronic trading product into the liquidity ‘engine’ that is the equity trading floor at Citi. We’re already seeing some huge steps forward in that integration process.
FG: Will trading technology (and standards like FIX) take a greater role in other asset classes or will it be limited to its existing applications?
TW: It makes total sense, when, for example, Chi-X are looking at derivatives platforms, to broaden their activities. Various other people will look at this. The technology is there and it’s just a question of broadening it out to the different asset classes. The investment has been made in the technology, and therefore, it makes sense to use that technology, not just for one asset class, but across the board.
CJ: Absolutely. We are seeing that the assets may differ on the face of it, but in many ways, if you look at FX, and indeed, some of the derivative markets – certainly futures – a lot of the technology is almost plug and play from equities.
TW: The problem is, when you look at the evolution that’s going on here – or revolution, depending on which way you look at it- the market is moving so quickly that one broker will have the best system today, and then in a week’s time, someone else has unveiled their new system. It’s like asking what is the fastest car? The fastest car today is not going to be the fastest car in three months’ time, and it is not going to be the fastest three months after that, because people are constantly striving to innovate.
I think to a certain extent, it would be bad for the industry if the same firms continue to be the best at everything, because if they were, they’d naturally get all the business and no one else would get a look in. Therefore, our business would suffer due to lack of competition.
CJ: Yes. I think we’ve gone through a process of change over the last five years, which parallels the early days of the Internet. You had this huge explosion in the Internet, which was really all about offering a new form of accessing information. And then very quickly, people realised that the important thing isn’t the browser, it’s the content. Similarly, the first phase in electronic trading has been about widespread adoption of algorithmic trading tools into the buy-side workflow. The next phase is characterised not by tools but by the underlying liquidity they give clients access to.

FG: On a different note, what are the biggest risks in European trading?
TW: Lack of pre and post -trade transparency.
FG: So that would be a consolidated tape or something similar?
TW: Absolutely. The problem here is all the brokers agree, but none of them are really prepared to do anything about it, because the less transparency we have, the more profit they make. Therefore, they all diligently pay lip service to a consolidated tape and do everything in their power to avoid giving it to us.
FG: What do you say about that, Chris?
CJ: I think the sell-side have a responsibility to work towards an industry solution and to contribute a significant amount towards that industry solution. There’s consensus across the market that MTF’s, data vendors, exchanges and buy-side participants should share that responsibility.
TW: Absolutely. The vast majority of people are providing all their data free. You have Turquoise, Chi-X, BATS etc, providing their data for nothing. On the other hand, you have the London Stock Exchange continuing to charge the same rate as they were three years ago, when they had 100% of the data, for what effectively is now 50% of the data, and therefore, not worth a jot on its own.
FG: So where do you see this going in the next few years?
TW: Well, hopefully we’ll get legislation, which means that that data has to be provided at a reasonable cost in a consolidated form and someone will be charged with consolidating that data.
FG: Does this come through the European Parliament?
TW: I would hope so. I think it needs to; otherwise you’re going to get differences in the way we do things in the UK, France, Germany, Spain and Italy, which clearly would not be ideal. To be perfectly honest, you’ve got a far better situation in places like Germany than you had previously, but in the UK it is far worse, and the reason for that is we have sunk to the lowest common denominator.
CJ: Take any industry, which has been brought under a European regulatory umbrella, and you will find there is exactly the same move over time from the general to the particular. The initial legislation is kept deliberately broad to allow the varied industry groups the latitude to re-align businesses to new rules. MiFID 2 will logically start to close the gaps and better define the rules of play.
TW: It’s the commonsense approach that’s needed.


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