The Transparency Evolution
By Michael Beth, Vice President, Equity & Derivative Trading, WallachBeth Capital
Regulatory changes have created the need for increased execution transparency.
Execution transparency has been a common preoccupation for most trading desks in recent years. Whether it is in order handling, exchange fees or transaction cost analysis (TCA) there is always information perceived to be missing or unclear.
Technology is one answer to the lack of transparency between the sell-side and the buy-side and their clients. With the advent of the FIX protocol, exchanges have been able to send specific information on where and how an order is was executed, while order audit trail system (OATS) reporting sends detailed information on how orders are handled once received. The sell-side, in particular, has spent a lot of resources and time working on this.
However, although proven useful, these methods are “old” technology and new ways to disseminate data are being developed. The major drivers of these advancements have come from both regulation and commercial necessity. Of course, the most recent regulatory initiative to improve transparency is the markets in financial instruments directive (MiFID) II, devised by the European Securities and Markets Authority. MiFID II introduces guidelines on how firms receive pricing, report transactions, quantify best execution, and pay for research. Estimates for the overall cost of this initiative reach well into the billions of dollars. This initiative has forced vendors to create new systems, as well as enhance existing platforms to enhance trade transparency.
In the United States, a similar trend is emerging with Consolidated Audit Trail (CAT) reporting, and the first group of exchange members are expected to start sending data from November 2018. The amount of investment in technology required for compliance with CAT is also likely to be similar to the level of resources allocated to meeting the requirements of MiFID II. For the first time, both Financial Industry Regulatory Authority members and other market participants will be obliged to report audit trail information across multiple asset classes.
Both MiFID II and CAT have generated a dire need for smarter technology and more trade transparency. Old T+1 TCA metrics and execution data are no longer as relevant to traders who are increasingly concerned about how they are performing, rather than how they performed. The market has moved to the idea of “T+Now”.
True innovators will be able to supply required data in real-time, and consumers of this data will be able to adjust their trading immediately to meet their best execution requirements. Moreover, those who are most successful at creating new technologies will incorporate both artificial intelligence and machine learning. Deploying these techniques allows an application the capability of enhancing itself over time. At WallachBeth, we have created a T+Now portal that not only giving users access to TCA in real-time, but also incorporates machine learning techniques into a proprietary pre-trade model.
Older systems will have trouble adjusting. Monolithic architecture and physical servers are not easy to maintain. That is why more technologists are offering cloud computing and micro services frameworks. Both of these allow creators of applications to be agile and better able to adjust their capacity, as well as build and update individual pieces of code.
The future is bright for firms who take this evolution in their stride. The demand is here, and all that is needed is for the first few innovators to take a leap of faith.
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