According BMLL Technologies data, bilateral trading accounted for 35% of overall notional traded as of November 2024, including request for quote (RFQ), off-book on-exchange, over the counter (OTC) and SI volumes both above and below the large in scale (LiS) threshold. This marks a 12% increase since January 2021.

Defining what falls into the bilateral sphere is important. Regulators in the last few months have been attempting to clean up reporting flags in a bid to offer greater transparency to participants looking to better understand the landscape.

One of the most notable bilateral growth stories, however, is that of the off-book on-exchange segment. This umbrella term again accounts for a whole host of things including retail flow and high touch agency crosses. Cboe and Aquis’ new VWAP offerings will also print their flow as off-book on-exchange for example.

Central to the growth of the off-book segment and perhaps responsible for ruffling the most feathers is a relatively new workflow whereby non-bank liquidity providers quote directly to the buy-side via their execution management systems (EMS) leveraging actionable indications of interest (IOIs). It’s this new growth among other areas that has attracted notable attention from the industry and sparked new offerings from the more traditional players looking to preserve their market share.

The benefits of streamlined buy-side workflows are clear: offering better price improvement, reduced market impact and time to market and greater flexibility around liquidity access. What’s more, with volumes on the lit market continuing to decline, one can hardly blame traders for exploring alternatives to traditional workflows.

That being said, the bilateral segment is becoming increasingly meaningful with both alternative and now traditional players exploring new workflows, and some participants are now beginning to question whether such a level of bilateral trading exists that could be detrimental to the market’s long term health. Some participants have even begun suggesting that the European equities market could find itself on track to adopting an almost completely off-exchange foreign exchange model in the next few years if it continues on its current path. However, this eventuality is highly unlikely. Said bilateral workflows rely heavily on a reference price from the lit markets. Ironically, the thing that stands to be damaged if too many volumes move off-exchange.

For buy-side traders, the appeal of executing without going out to market is – understandably – hard to resist, but the question as to whose job it is to now moderate the level of bilateral liquidity in the market is now somewhat continuously being asked.

“I can understand the appeal to a buy-side trader thinking ‘I can clear my entire blotter with one click of a button so why don’t I do that and not have to worry about direct market impact?’,” explains T. Rowe Price’s equity trader and market structure analyst, Evan Canwell.

“There’s definitely a place for bilateral liquidity, but it’s incumbent on us as the buy-side to understand what we’re interacting with and think about the balance. It’s like fast food, it might feel good in the short term but there could be unintended consequences for the longer term health of the trading ecosystem.”

Non-bank providers

One of the most spoken about names in this context is, of course, Optiver. While the firm is not solely responsible for the growth of off-book on-exchange, the market maker’s model of connecting directly to the buy-side via EMS has taken the market by a storm. The firm’s model is risk filling but without acting as a systematic internaliser (SI).

“It [bilateral trading for blocks] never really took off as a product whereas the way I look at the more recent developments in bilateral liquidity, it’s for a lower liquidity demand which does feel more sustainable,” says Legal & General Investment Management’s global head of trading, Ed Wicks.

While historical bilateral connections with other alternative providers – namely XTX Markets – have historically been more focused on smaller flow, Optiver’s model offers the opportunity to trade blocks of 5-20% of average daily volume (ADV), The TRADE understands. And it’s this element that has piqued buy-side interest. It’s easy ‘fill or kill’ model means traders don’t have to go out to market in order to execute, simplifying workflows and reducing market impact.

“The liquidity provision workflow can be a useful tool, especially given the recent record lows of lit liquidity. If you can get done and risk filled, there’s an efficiency to that,” says Hayley McDowell, EU equity electronic sales trader and EU market structure Consultant at RBC Capital Markets.

It’s this efficiency that has seen the buy-side continue to use this model of trading to execute flow. According to BMLL Technologies data, as of November 2024, off-book on-exchange constituted 58% of all bilateral trading activity – around €376bn – evidencing how attractive this model is to firms in comparison with multilateral venues and platforms in the lit markets.

“If I see a workflow solution that is potentially saving costs for funds and ultimately delivering good outcomes for clients then we have to evaluate it,” adds Wicks.

“For us, it’s [bilateral] more of an efficiency workflow tool for the lower liquidity demand orders or baskets we have. We consume the feed into our EMS so when an order hits our desk we can see straight away whether the whole order can be fulfilled by the bilateral liquidity. Not having to declare anything is an asymmetric benefit to us because we can see whether that liquidity can be fully filled on a fill or kill basis.

“If we were to go into the secondary markets utilising a liquidity seeking algorithm that would have a cost relative to trading at midpoint on the bilateral feed. For a subset of our flow from a cost perspective and an efficiency perspective it makes a lot of sense to us to utilise that bilateral liquidity.”

In light of the growing bilateral sphere, agency brokers such as BTIG and Redburn Atlantic have also been busy launching services that aggregate and streamline liquidity from alternative and electronic liquidity providers (ELPs) and connect the buy-side with them via an EMS or via a custom algorithmic strategy, all with the aim of easing the strain on the buy-side by channelling liquidity to them via one location.

“Traditional liquidity aggregation is not an option when trading bilaterally, but connecting clients to multiple competing quotes – on a fill-or-kill basis – via a single access point saves them time, limits selection bias and increases overall hit rates,” head of trading and algorithmic solutions at Redburn Atlantic, Phil Risley, tells The TRADE.

“The challenge in optimising the approach to principal liquidity, is to balance the ELP’s need to understand the profile of the flow with which they interact and the requirement to minimise information leakage.

“Ultimately, the goal is to create a virtuous cycle, with high quality flow incentivising larger and more consistent quotes – aligning interests and ensuring everyone wins.”

Redburn’s offering claims to tackle issues around market impact by operating under a fill or kill basis. Each client order is matched immediately in its entirety with a single ELP or not at all. It is directly available to the buy-side with qualifying flow via their EMS as a custom algo strategy. A spokesperson confirmed that the firm is speaking with all of the major non-bank SIs regarding onboarding. The ELP liquidity is not aggregated but available from a single point of access.

BTIG’s offering currently takes in live streams from three ELPs. Based on client preferences, it streams the best quote into the buy-side client’s EMS. A source has confirmed that the number of provider partners used by BTIG is growing.

Said quote can be anything from mid to far point liquidity in different shapes. If the client wants to interact they click to instantly execute or use OMS automation. The client then faces BTIG for settlement so there is no additional onboarding required.

The client has the choice whether to remain anonymous or allow ELP to profile them which may result in tighter pricing. This offering is also available via BTIG algos which for some buy-side clients may fit workflow better with wheels.

Traditional banks strike back

Given the growth of market share seen by these alternatives, the market has also seen a wave of new interest in this area by the traditional banks as they look to maintain their market share and retain commissions.

Major sell-side have offered systematic bilateral liquidity for years now but the practice hasn’t seen mainstream adoption for several reasons. Historically connecting bilaterally to a CRB for example has always been seen as a bit of a blind play as you don’t necessarily know what else is in there. The services for blocks have typically also only been on an ad hoc basis for banks’ larger clients.

“The evolution of IOIs being sent directly to client EMS’ is a net positive and opens up further trading opportunities and importantly enhances workflows, particularly when offered alongside a robust TCA process to help manage the challenges of longer term parent level impact,” explains Goldman Sachs’ managing director and head EMEA electronic and program trading, Alex Harman.

“This year we have been working with the major EMS’ to utilise actionables to deliver liquidity in several products; blocks, IS and close benchmarks. Expect to see a lot more from us here in the future.

“Our systematic GMOC product was the first of its kind and remains a heavily used product as part of our close benchmark offering. More recently we launched our DTC Stealth product, which is a tactic within our SOR that leverages dedicated liquidity from our systemic internaliser, plus other non-displayed liquidity with the aim to fully fill parent orders.”

With alternative players now targeting larger flow, major sell-side are looking to create their own direct connections via EMS providers in order to compete in a second wave of the bilateral evolution.

“I know several [big banks] are building aggregators and liquidity workflows that try and mimic some of the bilateral features. Whether we see a pure bilateral product from the investment bank similar to what we see from the alternatives I still don’t know if that will be the case,” adds Wicks.

“More traditional liquidity providers like the investment banks are now looking at it with some degree of urgency to try and insert themselves into that workflow. I don’t know how many more [bilateral offerings] we would need frankly but we will look at them when they come.”

Fast food?

With both electronic and alternative players cementing their workflows and major sell-side looking to follow suit, the bilateral segment is becoming extremely meaningful for both the buy-side and the wider market. And this meaningfulness is what’s raising some eyebrows. With the proposition now irresistibly attractive to the buy-side, the longer term impacts are now being assessed.

“The issue comes if too much of your flow goes that way,” says McDowell. “It can also impact on-venue liquidity. If has a trader has a large order on the pad, they might go to an ELP first, then maybe an SI, before going to the order book last.”

Given the existing decline of lit, this natural evolution – and it is a natural evolution – has the potential to become a bit of a self-fulling prophecy as spreads and toxicity increase in the lit market.

“Most buy-side firms and a lot of market participants would recognise that it’s in most people’s interests to make sure that lit markets remain a functioning viable part of the market,” concurs Wicks.

Traditional sell-side bring with them whole swathes of other auxiliary services that are bundled with their services across settlement, payments and research to name a few. Electronic and alternative liquidity providers do not provide these extensively and their services are usually limited to the execution side of things.

“Longer term, if we end up with a large part of the market trading bilaterally then we may start seeing impacts elsewhere – for example, will traditional brokers start reducing resources in other areas to focus more on liquidity provision?” Asks Canwell. “Will we see reduced price formation and greater toxicity on-exchange if smaller orders end up in bilateral mechanisms?”

The role of the regulator

The question now being asked by many is: what is the role of the regulator? Some participants are asking whether it is fair that some market makers should be able to risk fill clients without operating as an SI and the associated pre-trade transparency.

Ultimately, given this is the natural evolution of where the market is heading, it’s hard to see an eventuality where regulators would step in to prevent it. Famously, regulators tried to tackle decreasing exchange traded volumes with caps on dark trading in Europe during the Mifid II Review and the multi-year tug-of-war esque saga that achieved an arbitrary result of deleting the 4% and 8% double volume caps (DVCs) in favour of a single cap of 7% has largely been criticised as a waste of time.

“If they [regulators] think too much is being done off-exchange and there’s not enough price formation on-exchange, potentially I could see them stepping in,” says Canwell. “One area where there might be more regulatory scrutiny is around the closing auction because there’s a lot more being done off the primary closing auction in recent years.”

One area regulators should and are looking to change is around transparency. Reporting flags were one such area that was focused on by both UK and European regulators in April in order to simplify the regime and try to understand a bit better where volumes are being executed within the market. The concept of what is addressable and what is not is something now being explored by participants and regulators and could result in further probing from watchdogs.

“Reporting changes had a profound impact on the liquidity landscape. It was confusing before and a lot of the flags didn’t necessarily make sense. There was a lot of repetition and noise,” says McDowell. “Traders are looking for more transparency in the off-book space. Some participants are using “off-book” as a means of printing activity, but peers and clients are unclear about exactly what off-book on-exchange is.”

All roads lead back to the consolidated tape. And there is, of course, the likelihood that we will have a consolidated data source in the next decade (fingers crossed). This will also bring with it extensive transparency that will help both participants and regulators alike to better understand and interpret the market picture around percentages of liquidity accounted for by different segments. Given how participants and regulators alike are turning their attention to the addressability of flow, it may even be a worthwhile venture to do an independent analysis of how stable pricing is in Europe.  

“The market structure needs to respond to this change in dynamics and central to this is the delivery of a consolidated tape in both the UK and EU so all market participants can understand what liquidity is available where,” said Eleanor Beasley, EMEA equities COO and head of market structure at Goldman Sachs. “Understanding the different mechanisms leveraged to deploy bilateral liquidity is important as is understanding where this volume is printing.”

The growth of various different trading workflows that fall under the bilateral umbrella is undeniable and certainly something that participants and regulators alike should be keeping tabs on. Whether or not it’s something watchdogs should intervene with is another matter. Bilateral liquidity only works to a certain size. There will always be a portion of the market that requires public markets and going out to find the other side.

The market’s natural evolution is what it is. If these providers are offering buy-side traders an attractive service, who’s to say it is wrong or right? Perhaps as Canwell noted earlier the onus is on the buy-side to steer the market in the “right” direction.

However, when an order hits the pad, it’s rare for a trader to sit back and think about the wider long term market implications instead of whether a workflow will achieve the desired best outcome for their trades and subsequently their clients. On the current trajectory, our markets are likely set to look fairly different in the next five years. Whether that’s wrong is one for the philosophers that walk among us.

The post Liquidity, it’s a two-way street appeared first on The TRADE.

For trading desks, the new rules will result in a range of operational and regulatory shifts. Clearing obligations will become stricter, with enhanced oversight of margin requirements and risk management processes. 

Despite these new potentially arduous compliance pressures, trading desks are also likely to benefit from reduced counterparty risk and improved market confidence thanks to the changes. Day-to-day trading activities, liquidity, and risk management on fixed income desks are all things that could be impacted by these new rule changes. As with any regulatory change or evolution, industry participants will need to adapt their strategies and systems to navigate the shifting fixed income landscape.

“As numerous policymakers, academics, and market participants have recognised, greater central clearing of US Treasury transactions would improve the safety, soundness, and efficiency of the US Treasury market, promote competition, enhance transparency, and facilitate all-to-all trading,” notes Laura Klimpel, managing director, head of fixed income and financing solutions at The Depository Trust and Clearing Corporation (DTCC).  

“Increased central clearing can also reduce clearing costs and credit risk by incentivising direct participants to submit more balanced portfolios that have a lower risk profile and thus carry lower clearing fund and liquidity facility requirements.”

In addition, with the introduction of balance sheet netting and favourable regulatory capital treatment, central clearing could result in an increase of dealers’ capacity to transact and potentially improve some market liquidity constraints.

The SEC’s new rule changes are primarily aimed at improving market stability and minimising systemic risks. They aim to strengthen the security of the US Treasury market by requiring central clearing for eligible instruments such as repos, reverse repos, inter-dealer broker transactions, and other cash transactions. The objective of these rules is to reduce counterparty risk, curb contagion, and enhance market transparency.

“The lessons learnt from past financial stress conditions and crises, particularly those involving non-bank market participants, have driven these changes. One counterparty defaulting could pass risk on to another party, this in turn could have a cascading effect on liquidity across the market,” highlights Edoardo Pacenti, head of trading tools for fixed income at ION. 

“In addition, currently, the Fixed Income Clearing Corporation (FICC) is indirectly exposed if one of its members makes a trade with a non-member and subsequently defaults on the transaction. With these changes, there will be a dramatic increase in the amount of daily US Treasury clearing activity processed through the FICC.”

As it currently stands, two compliance dates exist which firms should be most conscious of. If no extensions are actioned, 31 December 2025 marks the beginning of the mandate for cash transactions, while on 30 June 2026 the repo transaction mandate will commence. 

Institutions should also note that the SEC has implemented a regulatory change to redefine the term ‘dealer,’ aimed at increasing oversight of proprietary trading firms (PTFs), which are key liquidity providers in the US Treasury market. 

PTFs, which trade using their own capital rather than on behalf of clients, will now be required to register as dealers with both the SEC and FINRA. Alternatively, if PTFs prefer not to register as dealers, they must set up a sponsored member arrangement.

“While this is a significant change for PTFs, they already have experience delivering similar large-scale projects following the change to the T+1 settlement in May 2024 which can be applied to the upcoming dealer redefinition and central clearing changes,” adds Pacenti. 

Another key consideration for institutions is the increase in clearing volume that will occur as a result of these rule changes. 

“Our understanding is that seven trillion or so is the daily average volume that is traded in these markets. Based on our engagement with market participants, we’re expecting that it’s going to be an increase in demand for capital – maybe a 20-30% increase,” notes Kevin Khokhar, head of investment funding at T. Rowe Price. “Firms will have to look at the infrastructure, systems and processes, to see if they can absorb this large market structure regulatory change.”

Khokhar continues to highlight that margin and portfolio funding impact should be another key focus for institutions as they adapt to these rules. When considering bilateral transactions, which typically occur in the treasury trading space, when shifting into a cleared model, there will be increased rules and regulations around the type of assets you can pose for margining, to optimise and normalise FI trading books.

“Being able to understand the impact of your liquidity profile in your trading portfolios will be one of the key factors, something that the market needs to consider as you get into clearing market structures,” he adds. 

Competition

The new fixed income clearing rules could potentially have a significant impact on competition in the bond markets, particularly for new entrants. By mandating central clearing for a wider range of transactions and increasing oversight on market participants, the new rules could raise the operational and compliance costs for smaller firms and new market entrants. Despite this potentially leading to barriers to entry, it could also enable a more level playing field by reducing counterparty risk and increasing transparency. 

“Transparency is always good for competition, right? It narrows bid ask spreads. It makes things easier to trade and encourages more to be involved because there’s more information,” notes Brian Rubin, head of US fixed income trading at T. Rowe Price. 

“The new rules should make markets more liquid. We’re always looking for greater transparency.”

Established firms, which have more robust infrastructure and regulatory expertise, may find it easier to adapt to these changes, while newer players will need to navigate increased regulatory expectations to compete effectively.

The new rules also have the potential to shift the ways in which transparency exists within the fixed income landscape. Particularly, with a shift from transparency solely being held by broker dealers, to the buy-side. 

“As you move from more of a bilateral transaction-based market to more of a cleared based model, market participants including buy-side participants will potentially see more transparency into what the transactions levels look like, what overall trading volume trends are, and also some of the post-trade aspects that impact FI Treasury and repo markets,” emphasises Khokhar. “That gives market end users more transparency on the buy-side to see what potentially may be happening from the dealer/broker community.”

Impacts on trading

Central clearing is expected to alleviate counterparty credit limits through improved risk management and transparency offered by central counterparties (CCPs) and shift previously uncollateralised bilateral agreements to CCPs. This transition should notably reduce the risks of counterparty defaults and fire sales.

“This could improve market liquidity by removing existing trading restrictions and mitigating counterparty and bilateral trading risk. This will be particularly beneficial in times of stress, as these factors will ensure that dealers don’t withdraw liquidity,” notes Pacenti.

“At the same time, the cost of central clearing and risk management activities will likely increase the overall costs of transactions for participants who don’t currently centrally clear transactions. These costs will be passed on from FICC members to non-FICC members.”

Likewise, highly leveraged or low-margin trading strategies, such as basis and relative value trades, may become less viable due to these proposals. As a result, fewer PTFs may engage in these trades, causing a decline in liquidity for the underlying asset classes, like US Treasury actives. This could offset some of the anticipated benefits of the new rules.

Anticipating the changes 

DTCC’s Klimpel tells The TRADE that as a covered clearing agency, FICC has been taking the necessary steps under the SEC rule requirements to prepare for this significant market structure initiative. 

“FICC offers a variety of both direct and indirect membership models for buy- and sell-side market participants. As we prepare for the upcoming mandate, FICC continues to work with the industry to educate firms, assess offerings, and ensure readiness,” she states.  

“Our guidance to market participants is to begin preparations now by evaluating direct and indirect access models to determine the best approach for their organisations and clients to achieve successful implementation by the SEC compliance dates.”

Another strategy being developed in response to these changes is increased investment in technology, primarily to offset the costs of central clearing. This involves investing in scalable transaction reporting systems, which reduce reliance on manual processes, lower the risk of errors, and decrease the marginal cost of each transaction.

“Overall, investing in technology will make it more economical for firms to comply with the new rule changes,” adds Pacenti. 

With rule changes such as these, the impacts will be felt across institutions, spanning across different areas of their operational structure. Having open and more transparent communication among the different strands of a business will have a positive impact on efforts to make compliance successful.

“We have to understand the impact from a fixed income trading perspective, but also post-trade services and capabilities. We need to assess the impact to operations, risk, and other business units as well as our external providers for sourcing portfolio liquidity,” argues Khokhar. 

“Another aspect is having operational strategies, where market participants should implement a governance structure across all potential impacted business units to fully understand the impact to your front-to-back trading platform.” 

Despite some hopes that the implementation of these fixed income clearing rules will be delayed, institutions should act as though the set dates are expected to go ahead as planned to ensure adequate adjustments are made to ensure successful compliance. Clearing obligations will undoubtedly become more prominent, requiring an increase in viewpoints of margin requirements and risk management processes. As with any key regulatory change, the sooner institutions can prepare, the better the outcome will be for the industry at large. 

The post A look into the centrally cleared future appeared first on The TRADE.

Andy Mahoney

Specifically, T.Rowe Price is live on Propellant’s Digital’s fixed income transparency data offering via FlexTrade’s fixed income EMS, FlexFI. 

Speaking to The TRADE,  Andy Mahoney, managing director, EMEA, FlexTrade, asserted that the firm has seen the adoption of EMS solutions on fixed income trading desks continue to grow this year, with expectations for this to accelerate further into 2025.

He adds: “The drive for this deployment is twofold. Firstly, the continued electronification in fixed income and the need to handle increasingly sophisticated data sets have seen desks needing technology to handle their bond trading activities efficiently.

“Outside of this, we also see broader-scale transformation initiatives to rationalise and streamline multiple asset class-specific EMS solutions to a single, scalable platform to provide a common set of cross-asset tools, processes, and automation logic across equities, fixed-income, FX, and derivatives trading.” 

Propellant Digital’s solution is used by both global and regional banks, as well as asset managers, quant hedge funds, trading venues, regulators, and industry associations.

Through the availability of Propellant’s insights alongside other internal and external data sources within a single interface, FlexFI users benefit from enhanced processes “without leaving the context of their fixed-income trading blotter,” said the firms.

Specifically, T. Rowe Price’s fixed income trading teams can now view a comprehensive dataset within the FlexFI Order Blotter, which includes real-time market activity, historical trade prices, and aggregated trade volumes.  

Vincent Grandjean, chief executive of Propellant Digital, tells The TRADE: “Integrating our pre-trade analytics into FlexFI EMS allows their team to access a full market view without leaving the order blotter. In addition, our technology can support them in both TCA and research efforts. Our solution is well-placed to help firms like T. Rowe Price stay ahead in their data journey.”

The post T.Rowe Price live on Propellant’s Digital’s fixed income transparency data offering via FlexTrade appeared first on The TRADE.

When thinking about best execution in the derivative space it is critical to consider all the inputs that go into measuring the outcome for the portfolio. Unlike cash instruments, there are significantly more variables beyond the prevailing market price and in the OTC world there may not even be a readily available transparent market price to base execution off.

This means that having pre-trade transparency on funding costs, clearing fees, collateral schedules and initial margin becomes an important part in deciding what your implementation looks like as well as potentially impacting counterparty selection. When dealing with clearing and margin this data can vary significantly from one portfolio to another which can also add an additional layer of complexity for block trades.

Even where futures can appear simple, given you are dealing with a mostly lit single venue instrument, once you dig into market structure you come up against elastic supply that can transfer liquidity from the underlying market through arbitrage and a monthly or quarterly roll process that can significantly distort liquidity data.

How can TCA be best leveraged when trading equity derivatives?

I think you have to re-imagine what TCA actually means when trading equity derivatives. Before the point of trade, it has to include implementation analysis where the trading desk works with the investment team to determine the most efficient method of achieving the desired investment outcome. This can include analysis of option break-evens to help decide whether to trade options or use a delta1 instrument.

In the delta1 space, you are looking across a number of different possible expressions from fully funded cash positions, futures and total return swaps all of which have different implications for the portfolio across leverage, collateral, funding and liquidity. This analysis is a constantly moving target that requires visibility across a much wider range of data and analytics than would be used in traditional TCA.

It is entirely possible that the best price on the screen may not reflect the best holistic outcome for the portfolio and this requires a shift in mindset for traders who are used to the price on the screen driving the whole execution decision making process. There is also a post-trade piece where you continue to optimise for margin potential meaning that you make decisions to move/close or roll exposures again not necessarily fully driven by market prices. This requires an informed and empowered trading desk equipped with the best data available as close to real time as possible.

What is the outlook for equity derivatives for 2024, what are the key industry talking points?

Systematic selling of volatility at the index level continues to grow as a strategy, particularly for income enhancing ETF’s, and shows every sign of being more sustainable than short volatility strategies have been in the past. There is every sign of this systematically impacting levels of implied volatility more broadly and this could even have knock on effects as some strategies base leverage on risk models that use VIX as an input.

We also expect to see hedging strategies to get more tactical and focused than they have been historically as broad index hedges have simply not worked over a sustained time period now. This could also see some additional pick up in the utilisation of custom baskets referencing themes and/or getting much more bespoke in nature.

The phenomenon of zero-day-to-expiry (0DTE) options, which has cemented its presence in the market, is another area to watch. Its potential expansion beyond the US market underscores that growing trend towards more agile and short-term trading strategies. As these trends unfold, key industry discussions will likely revolve around adapting risk management frameworks, enhancing tactical hedging strategies, and exploring the implications of these evolving practices on market volatility and portfolio performance.

The post Fireside Friday with… T. Rowe Price’s Matt Howell appeared first on The TRADE.

The whole debacle was sparked by CLS’s reveal last month that it would not be moving its cut-off due to feedback from its members – a decision which surprised and disappointed some – while pointing out that custodians would still be able to tweak their own internal deadlines. The onus is now on these providers to alleviate any workflow issues that may arise for buy-side firms looking to trade around the time of the cut offs – of which there are many.

The result? The buy-side feels its voice hasn’t been heard when looking for support, custodians feel the attention was shifted to their internal cut-offs at the eleventh hour, and CLS is likely feeling stuck in the middle with its hands tied by its sell-side members.

While fingers of blame are being pointed in each direction, the bottom line is asset managers are now facing operational challenges, the notion of pre-funding trades and balancing settlement security with best execution obligations. The idea that more trades might be settled bilaterally also increases the counterparty risk that regulators have been looking to avoid across the industry.

Central to all of this, CLS, the operator of the market’s largest multi-currency settlement system, also probably harbours an element of frustration itself given that an equities problem sprung on this industry by regulators has spilled over into its FX world. And, that it can’t simply make adjustments without due consideration of its membership and the impact on them.

However, it’s difficult not to appreciate the predicament for the buy-side, who now face a last-minute scramble to adjust their operations and trading to avoid prefunding, bilateral settlement and moving team members to the US.

“[We’re] not surprised but disappointed at the way the buy-side concerns appear to have been trivialised,” Adam Conn, head of trading at Baillie Gifford, tells The TRADE.

“The core concern is that if a spot FX trade cannot be cleared through CLS it will need to be settled bilaterally with the FX bank we trade with thus increasing counterparty and operational risk. At this stage of the cycle, it’s more the operational risk but in times of stress that counterparty risk could be just as important. Settling trades gross operationally carries a higher degree of risk than a payment versus payment netting platform which, in my opinion, is really the whole purpose of CLS.”

Baillie Gifford is one of a handful of firms that have opted to open a new trading desk in New York on the back of the US’ move to T+1.

Background of the decision

When the US Securities and Exchange Commission (SEC) announced that the US would move to T+1 settlement for equities in February 2023, a 15-month countdown for preparation began. However, what the regulator probably failed to account for was the knock-on effect outside of the US, and on adjacent processes – securities lending, corporate actions and FX to name a few.

What CLS made clear from the outset was that it would not change its cut-off ahead of the T+1 implementation on 28 May, however, it had reportedly been open with the industry that it would explore a change in its 00.00 CET (6pm ET) deadline – considering 30-, 60- and 90-minute extensions – and promised an update around the end of Q1 2024.

When that update came – with a refusal to budge – the US shift to T+1 was just seven weeks away. CLS concluded that the development to accommodate a move in CLS’s initial pay-in schedule – with a deadline of 00.00 CET – would take “considerable time to implement”. 

Global Custodian and The TRADE understand that for some of the larger members, those system developments, and related approvals, could theoretically take between nine and 12 months to roll out. 

Either way, in its internal survey, over 40% of CLS settlement members – representing around 50% of CLS Settlement’s $6.5 trillion average daily value (ADV) – declared that system development may be needed, the infrastructure provider said. 

For reference, CLS has 76 settlement members, as of December 2023, with 60 of those based outside of the US, Canada or Mexico. 

Why it took 14 months to conclude the survey and come to the decision has become a bugbear for custodians and the buy-side. Of the handful of large US asset servicers we spoke to, many of them stopped short of saying CLS threw them under the bus, however they did feel “the ball was put in our court” – as one source put it.

“CLS essentially implied that custodians could absorb the credit risk of confirming settlement through CLS without being able to appropriately check source of funding,” said another.

Baillie Gifford’s Conn added: “If they set about doing this when T+1 was first announced they would have had time, but they chose not to. The SEC chair has publicly spoken about how T+1 will push infrastructure providers to enhance their service. I’m not seeing it yet. One of the big benefits of T+1 was the argument that it will reduce risk but what we feel is happening is a transfer of risk from proprietary trading strategies and retail brokers to asset managers and their clients. That cannot be seen to be a positive outcome.”

Attention turns to the custodians

Following the reveal of the CLS member survey results, attention has turned to custodian deadlines which fall before the CLS cut-off. It appears a portion of asset managers were unaware these were two different things, given their interaction was with the broker-dealers who were the members of CLS, as opposed to them being direct members themselves.

Not all custodians felt frustration with CLS however, as one source said “what were CLS supposed to do? There are times you could move to which could be totally redundant because there isn’t any liquidity in the market. If liquidity starts to emerge you could move it, but you can’t put the cart before the horse.”

Global Custodian understands from multiple sources that a handful of custodians are moving their deadlines, with those close to the matter referencing ‘positive moves’ on that front. BNY Mellon, for example, has confirmed publicly that it is adding an extra hour for clients to get their CLS-eligible trade instructions to the bank to increase the chances of those trades making the CLS deadline.

In addition, it is also allowing extra time for FX trade instructions it is executing on behalf of clients to come in for same-day settlement, on trades denominated in the Australian dollar, New Zealand dollar, Hong Kong dollar, Singapore dollar and Japanese yen.

Ryan Cuthbertson, global head of custody services, BNY Mellon, told Global Custodian: “BNY Mellon has been advocating for clients to assess their operating models from execution, through to settlement, this includes FX and funding, since the announcement of T+1.

“We are not surprised by the timing of these issues coming to light, instead we see this as the market reacting to final considerations relative to T+1 that participants of financial markets may have to date believed would be ‘swept up’ in custodians processing. We are actually seeing a spike in interest with regards to FX and funding solutions from clients as they come to the realisation that usage of custodians’ balance sheet in the form of end of day credit is not free and is not guaranteed.”

Many other custodians are tweaking their own deadlines as well but have been less public. Global Custodian knows of one custodian moving its cut-off to 5.45pm ET and one to 5.30pm ET. This is also a confusing process however, with some clients allegedly receiving preferential treatment. Long term this could become a contributing factor to further consolidation of smaller buy-side players across the street, emboldening a trend already seen in recent years.

“Custodians are very good at is picking clients off one by one,” says one source speaking on the condition of anonymity. “At the end of the day, it’s a massive spectrum. So, you can already ensure that if BlackRock reaches out to their custodian they would say ‘right, okay, you want it 30 seconds before the settlement cut off – yeah, we’ll live with that’. It’s not been a unilateral broadcast – they will speak to clients one-by-one-by-one and see how they can divide and conquer.”

In truth, it’s probably easier for the asset management clients of custodians to direct their frustration towards CLS – an infrastructure they don’t deal directly with – but CLS has invested in reaching out on an educational front where possible throughout the past 15 months. Its processes, functions and benefits are arguably clearer to the market than ever, while some custodians feel they are closer to the organisation following the lengthy stretch of change.

When asked why not all custodians had moved, one source put it down to “complex funding constraints, high levels of non-standard instructions, or a combination of both”. However, in the past few weeks, the phrase being thrown around plenty is that there are “positive movements” being made by a number of providers. Ultimately, the move could end up reshaping the competitive landscape, as buy-side firms look to interact more with those that have accommodated them during the shift and less with those that haven’t.

Conn explains: “Our goal is to get everything in CLS before that cut-off. Some of the custodian banks that our clients contract with have been very obliging and some others less so in terms of moving their own cut offs before the CLS deadline. I’m certain that a banks’ ability to be operationally sound will definitely have an impact on where we choose to trade going forward. 

“What we and others will be speaking to custodian banks about is their ability to move their own cut off as close to – the CLS cut-off at 6:00 PM ET. The best practise we’ve seen from custodian banks has been to move their cut off time to 5:45 PM ET. It might be too simplistic but if some custodians can do it, I struggle to understand why others cannot.” 

Ultimately, this keeps coming back to increased costs, risk and operational complexities for the buy-side. One of the biggest talking points for asset managers and their custodians is liquidity.

Moving the deadlines is one thing, but they have to coincide with where the liquidity is, otherwise moving the cut-off is a moot point. Moving to 4pm ET isn’t going to make much difference, but every minute counts the nearer you move to 6pm ET.

Buy-side pressure

Many desks are now left with a decision – rush to get everything done within the CLS window or execute outside of it and chance taking on undue risk. If trades head into the US close, asset managers could be left with a tiny window to get an FX trade generated and executed. With additional demand caused by time pressure, there is also the potential for traders to face wider spreads on larger size FX risk at the end of the day.

Once such solution to said problem could be simultaneous execution of equity and currency trades – which are usually done after the fact – to alleviate time pressure.

“We used to trade FX a little bit later and wait until equity trades were confirmed but now we’re speeding it up to do our FX trading at the time of execution which is going to be very helpful for us so we can get those trades funded ahead of the cut off,” Blair Connelly, director, cash and FX management at T. Rowe Price, tells The TRADE. “That’s really what we’ve been focused on, just being proactive and trying to create our own solution internally instead of relying on third parties.”

However, this could leave trading desks subject to increased risk of executing FX trades against unconfirmed or unmatched equity trades.

Among the most central challenges for the foreign exchange market caused by the shift to T+1 is its impact on liquidity and the potential for a shortened settlement window to make the market less attractive to source FX.

Thanks to the UK/EU and US time difference, the shortened settlement timeframe has been flagged by traders as likely to create a “golden hour” of liquidity at 5 pm Eastern Time – otherwise known as midnight in the UK. The result of this, if no other solution emerges, means that for many the prospect of moving FX desks to the US will become a reality.

The prospect of divergence is also still very much on everyone’s minds. While the US shift is imminent, the UK and Europe have opted for a more “wait and see what happens” methodology, leaving trading desks to juggle differing regimes.

With the European market as complex as it currently is, it’s likely the road to implementing T+1 will be a long one. If the EU and the UK don’t follow suit, markets could see a variety of nuances to navigate including in some areas such as ETFs and paper share certificates staying on T+2.

A not insignificant 1%

Pressure ramped up even further on CLS last month when the European Fund and Asset Management Association (EFAMA) released a report estimating that roughly 40% of daily FX flows – representing between $50-70 billion – will no longer be able to settle through the CLS platform, resulting in increased risks.

While this headline stat caught a lot of attention, digging deeper into the report showed that it was actually the inability to meet internal custodian deadlines – based on their trading patterns and relationships – that will mean that 40% of daily FX flows will no longer be able to settle through the CLS platform. 

CLS has said its own research aligned with that of EFAMA’s but stressed that the 40% figure only related to the 1% of CLSSettlement ADV which it believes could be impacted by the move to T+1 and could settle outside of CLS.

So taking holistic view, the impact seems minimal, but if you’re caught up in that not-insignificant percentage which still accounts for tens of billions of dollars, the whole saga has been a point of frustration.

“If they’d [CLS] have put the figure in dollar value it might have been slightly more headline worthy,” says Conn. “In the EFAMA report, US$65 billion upwards a day could potentially settle outside of CLS. That’s a lot of money sitting outside of a payment versus payment network.”

“One percent might not sound like a lot but in notional value it’s probably pretty significant,” adds Connelly. “Depending on somebody’s flow there could be some very big and impactful days, but I think from a market level they’re probably right it’s probably not that impactful. It’s going to have an impact on certain people on certain days.   

“I don’t feel a backlash from our perspective. We understand that the members are the ones that drive the agenda for CLS. They’re the ones that are going to have to make the technology change and the ones who are going to have to spend. They’re valued trading partners of ours so I can certainly understand that there probably is a backlash but from our perspective, I don’t feel that backlash. We’re understanding of it.  

“In 6-12 months, there will be a lot of telling to see who’s right who’s wrong. In terms of the people that think CLS are wrong, when the data comes through that’ll be interesting and I think it’ll be rehashed.”

While the deadline remains firm, CLS has said it will monitor the impact of the shift to T+1 and make assessments on the impact in both June and September, in what it calls more of a “wait and see” approach through “temperature checks”, Lisa Danino-Lewis, chief growth officer at CLS told Global Custodian at the time of the member survey announcement.

“It’s difficult to ascertain exactly what might be related to T+1, because we don’t have that level of detail, but we can look around certain parameters. If we found that  volumes and values stay exactly the same, then we can safely assume that the impact has been negligible. Obviously, if impacted volumes are much higher than expected we’ll reassess it sooner.”

The path forward

In lieu of a change at this point, CLS is reminding members that they can still submit their trades to CLSSettlement up until 06:30 CET for settlement that day. It’s a message they will be reminding the market of for a long time.

“We can’t move if our members can’t move, but there’s nothing that precludes them entering those trades. Within CLSSettlement, members can submit trade instructions up to 6.30am CET on the day of value. It’s really down to each individual member to agree with their clients.”

In addition, CLS highlights that “for same-day instructions that cannot settle within CLS due to custodian cut-off times CLSNet, CLS’s automated and standardised bilateral netting calculation service, can help to reduce funding obligations and the number of payments required by calculating net payment obligations that facilitate payment netting”.

Regardless of who is to blame an equities problem has spilt over into the FX world. Somehow custodians and CLS have ended up between a rock and a hard place, which is fine – unless you’re a matter of days away from one of the largest structural changes in the history of the financial markets.

The post Inside the FX cut-off conundrum sparking animosity between the buy-side, CLS and custodians as T+1 looms appeared first on The TRADE.

How is the skillset of what’s required of a trader changing?

Traders are becoming more versatile – they need to adapt to a very rapidly changing industry on multiple fronts. Whether it comes to market structure, risk management, sourcing liquidity or keeping up to speed with current regulatory and technological changes, traders are required to evolve. As such, the skillset that we see on the street and at T. Rowe Price is broadening. While the core qualities of a good trader – effective communication, relationship building, and sharp market insight – remain crucial, there is a growing emphasis on acquiring data-centric skills. Traders are now enhancing their skillsets with coding abilities to automate tasks and improve efficiencies, allowing them to devote more time to value-adding activities.

How are data and technology developments shaping the type of person you see on the trading desk?

Data and technology advancements haven’t necessarily altered the type of individuals we have on our trading desk, but they have led us to adopt a more “quantamental” approach to trading. As discussed above, the skillset required to trade efficiently has now broadened but the basics haven’t changed. Traders still need to be adaptable, strong communicators, pay attention to details and risk manage. However, the challenge is now about how we leverage data to better inform our decision-making process and how to put new technologies to the service of our trading desk to improve efficiency. We need to continuously educate ourselves and keep up to speed with recent developments to use this at our advantage. On our desk, some of the team have coding skills and we are developing new tools to help better manipulate, consume, and visualise data. One of the trends we are observing, is also increased collaboration with our tech and TCA [transaction cost analysis] teams as we leverage more data and technological advances to make swift and informed decisions.

In what way has the hiring/talent acquisition process changed to accommodate this?

We are looking for people that have multifaceted skillsets, with a growth mindset, that are highly adaptable and keen to learn. They need to be very good communicators, detail oriented, interested in markets but also have some quantitative edge, or at least have a willingness to learn new technological and data-oriented skills, to drive innovation and increase efficiency on the desk. At T. Rowe Price, we focus on the people and their mindsets rather than functional skillsets as we believe that skills can be taught. Coding skills are definitely a plus, but it’s also about having a keen interest in data and data driven processes. When it comes to talent acquisition, we are looking for people that have a fundamental understanding of markets but that are also able to think outside the box to drive innovation.

The post Oriane Cochard: The future is versatile appeared first on The TRADE.

Double volume caps (DVCs) were deleted as of 28 March in the original Mifir text published in January. However, the previous text only authorised the enforcement of the SVC [single volume cap] in 18 months’ time – leaving an unintentional window with no caps thanks to the clerical error. Brussels subsequently began exploring possible ways to close the loophole in the new share trading rules. In the last days of March, the European Commission subsequently rushed through a last-minute draft revision to its Mifir text to plug the loophole, keeping the DVCs in place until the implementation of the new single volume cap.

The regulator’s mistake and subsequent decision to fix it has re-sparked an existing discussion around why watchdogs are focusing their attentions on micro changes to regimes and not on the wider issue around low volumes in Europe – especially when the result has little to no impact on the markets. 

Dark trading became the poster child of post-Brexit regulatory discussion in the UK and Europe, with the Bloc championing lit transparent trading throughout. The DVCs regime included in the January Mifir text had followed more than six years of deliberation over the desired cap on dark trading in the Bloc, with the European Commission and Parliament finally settling on the deletion of the 4% and 8% caps in favour of a single cap of 7%. 

“In my opinion, the last-minute decision [in March] wasn’t a surprise as it’s been clear from the beginning of Mifid II that politicians and regulators across Europe are committed to the DVC mechanism,” Evan Canwell, equity trader and market structure analyst at T. Rowe Price, tells The TRADE.

An unintended experiment 

Without the clarification, ESMA had the opportunity to stop enforcing DVCs until Q4 of next year. Had the last-minute changes to the text not come through, Europe would have found itself taking part in an unintended experiment to test how far dark trading could go if left uncapped. 

“While I think it’s unlikely that ESMA had ever planned to stop enforcing the DVC mechanism during this period, it would have been a fascinating opportunity to observe the shift in market dynamics without any artificial constraints on dark trading,” adds Canwell. “This would also have allowed market participants and regulators to engage in discussions on both the optimal thresholds and the appropriateness of any future dark caps, in a fully data-driven manner.”

Following reports of the loophole in early March, participants and venues in some cases had begun to put in place contingency plans should dark trading be left uncapped. Those most vocal against the use of dark caps during the European regulatory discussions came from the buy- and sell-side, with many suggesting the new single cap of 7% was arbitrary and querying how the watchdog had reached this conclusion. Many were therefore keeping close tabs on the saga in March, watching the events unfold in the hope that what they considered an unnecessarily complex detail might not come to fruition.

“There was a genuine hope that there could be an opportunity for those caps to be repealed. I suppose intuitively you would expect a certain level of disappointment on a number of levels,” says James Baugh, head of European market structure at TD Cowen. “One is that we found ourselves in this position, but also perhaps that there wasn’t a willingness to use it as an opportunity, to provide that chance to see what would happen without the caps in place.

“If this was a mistake in the drafting, it would clearly take some courage to roll the dice to see what would happen if the caps were lifted for that interim period.”

The reality is that other regions where dark trading has been left uncapped have not seen the segment grow out of control. In fact, the US, which doesn’t enforce caps, and the UK, which ditched caps post-Brexit, have both seen dark trading reach a certain level and then plateau. In the UK, dark trading has peaked at around 13% of monthly traded volumes on exchange since removing its caps. Meanwhile in Europe, stocks are rarely close to the DVC thresholds. 

“When we look at the double volume cap regime, it’s not like we’re seeing those European markets buffer at those levels,” adds Baugh. “It’s not like dark trading has got to those levels and therefore, it’s constrained at those levels. That’s not the case at all. If anything, the data would show you that it’s trading a couple of percentage points below those current levels.”

The market has evolved towards other forms of execution in light of the caps on dark trading, meaning a significant shift to dark venues is more than unlikely. 

“There are a large number of well-established alternative venues (such as periodic auctions) which allow for trading in a ‘dark-like’ manner and have been firmly embedded in routing logic across Europe,” adds Canwell.

Why is it then that we have seen two major primary exchanges move to launch dark books in the last few months when it was those exchanges that were most against removing caps on dark trading during Mifid discussions? Both Euronext and Deutsche Börse have set their sights on dark trading in the last year. Euronext confirmed in May 2023 that it was set to launch a dark trading service. The service went live trading in March but has seen slow uptake as of yet.

This news was followed by rival exchange Deutsche Börse announcing own its plans to develop a midpoint trading functionality in March earlier this year. The new functionality has an envisaged launch of November. Known as ‘Xetra Midpoint’, the functionality is a customer-driven project according to Deutsche Börse and will be integrated into the Xetra market.

The events around the DVC correction when laid alongside the recent launches paint an interesting picture and begs the question: what is Europe trying to achieve? Europe as a region is one of the most fragmented markets to trade with three times the number of exchanges as the US, 10 times the number of listing venues and 20 times as many post-trade providers.

Central to many panels at recent events is the level of fragmentation Europe has reached alongside its comparatively low volumes to the rest of the world. While fragmentation is essential to competition, it can go the other way and harm markets by causing investors to widen the prices they show and reduce their size.

Speaking at a recent Bloomberg Intelligence event which explored ‘liquiditiy in transition,’ Eleanor Beaslety, COO, equity execution, Goldman Sachs, said: “Innovation is great and if something has a USP that brings more volumes into Europe, that’s great. What we don’t need is more of the same. There are a number of dark books. The interesting thing with primary markets is potentially they have unique liquidity in regions that are very national so that could lead to more liquidity coming to the fore. Where it’s just another venue, it’s expensive and it’s another overhead.”

Moving from a micro focus to a macro one

With volumes in Europe on a continuous decline – seen most drastically on the lit continuous order books – it forces participants to question whether or not regulators are focusing on the right areas, with many participants suggesting we should zoom out from these time-consuming micro debates and assess the wider macro landscape to support growth in Europe. 

“We’re rarely in a steady state with regulation. We implement something and then months down the line we’re looking to change it,” said Anish Puaar, head of European equity market Structure at Optiver, also speaking at Bloomberg’s event.

“It’s every time something is introduced – e.g. DVC or SI thresholds – and this tinkering with micro aspects takes up a lot of time and doesn’t have any meaningful change in the market. Europe’s problems are much bigger than that.” 

Volumes have indeed become increasingly segmented and internalised in light of the challenging volume environment in Europe. Alongside volumes executed by systematic internalisers, the bilateral and negotiated trade segments have also grown exponentially. This is where many suggest regulators should be focusing their attentions. 

“That’s the bigger macro picture, not squabbling over the double volume caps,” says Baugh.

The UK is now bringing in new requirements in May that will transform the way firms tag trades and subsequently report them, shedding more light on volumes and liquidity taking place off exchange. However, a slight hinderance to this is that the UK and Europe have once again opted for ever so slightly different regimes. 

“If we could flag OTC trades and get consistency across the UK an EU it would go a long way to solving a lot of what the consolidated tape is supposed to be doing,” added Rupert Fennelly, head of electronic trading sales and coverage, Barclays Investment Bank, also speaking at Bloomberg’s event.

The events of the last few months have exacerbated a desire from participants to see their appointed regulators re-focus their attentions on core structural issues surrounding Europe’s trading landscape. As a region, Europe must turn its attention away from the small and arguably arbitrary fixes in favour of a resolution to the larger issues at hand.

“We need to have some tougher conversations that might be politically difficult such as simplifying post-trade. That would be a much more meaningful debate than some of the tinkering we’ve done over the last 10-15 years,” concluded Puaar. 

The post The dark trading debacle – does anyone even care? appeared first on The TRADE.

What are your key requirements when selecting an OEMS?

For those on the buy-side thinking about changing their order and/or execution management system(s), I would encourage them to explore the modern landscape. It is possible your setup is optimised, but regardless, you’ll accrue benefits and increase your knowledge of the current offerings on the market.

As you begin, resources, complexities and goals should be top of mind. At T. Rowe Price, we’ve taken a more tailored approach for different workflows, but there could be a provider who meets most or all your requirements.

When thinking about requirements, you need to lead, looking at your activity, workflows, and gaps to capture and articulate those. That said, integration with existing systems is paramount. Bells and whistles mean nothing without straight-through-processing.

Speaking from personal experience, we went through a large-scale project to onboard a new EMS three years ago. The project included different phases, including requirement gathering, execution of RFIs, analyses of capabilities and costs, and proofs-of-concept. The requirements we considered included netting, trading protocols (RFQs, ESPs, algos, high-touch), LP availability, automated trading, and FX product availability, among many others. The extensive effort paid off, with the platform now handling over 80% of our ticket volume while hosting our automated trading system.

How efficient is the communication between liquidity providers and platforms and how can this be improved to better manage FX positions and hedging?

Efficiency in communication between liquidity providers and platforms varies greatly, with some examples of true partnership and other times, not so much. This dynamic can be a challenge given the diverse set of objectives across sell-side, vendor, and buy-side. To make improvements and reduce costs for all, everyone could do more to seek increased standardisation in trading and messaging protocols to increase trading efficiency across the industry, including ourselves. Under every custom adaptor lies a hidden opportunity cost whereby the completed work is not portable, requiring duplicate efforts elsewhere. FIX protocols are great, generally speaking, but there are still a number of workflows for which there does not seem to be a standardised solution.

On top of this, I think the buy-side (again, ourselves included) can do a better job of making sure that our needs are being communicated effectively to both sell-side and vendor. Like any relationship, the onus is on the one whose needs are not being met to rectify the situation. Looking ahead, we strive to help bridge the gap between sell-side and vendor to help come up with scalable solutions for all.

How can pre-trade data and capabilities be best integrated into platforms to improve execution performance?

Along with the push for interconnected, interoperable workflows, I genuinely view this as the next frontier for trading on the buy-side. While significant progress has been made in transaction cost analysis (TCA) over the last five years, we have still yet to apply data and analytics in the most valuable way. Being able to truly augment trader expertise and decision-making with real-time recommendations is the goal, and for this effort to be successful, the recommendations need to be integrated within trader workflows as close as possible to the point of execution.

While at T. Rowe Price we are opting to build our own recommendation systems, with a RFQ panel selector going live in Q1 and an algo recommender system currently under development, solutions are emerging in the industry for those looking to “buy” rather than “build” these capabilities, which I highly encourage people to explore.

To reiterate the point, however, integration with workflows is paramount, and this is going to be a challenge that must be overcome to truly unlock these capabilities. Looking ahead, we are pushing for more open architectures, including scalable frameworks for plugging in APIs and interoperability, in the hopes of improving “go-to-market” efficiencies on these types of initiatives.

How comprehensive is the current offering of vendors providing holistic market views pre-trade? How do you use these on the desk?

On the whole, our market data vendors do a good job of providing our traders with price discovery and a sense for market conditions before and while engaging particular trades. While there are some areas of weakness, like illiquid NDF markets, these are largely market-structure-driven. For example, levels on screens in markets like PEN, CLP, and COP may not give the best indication of what is truly attainable in the market, but with significantly less liquidity overall, our traders know to take these data points with a grain of salt.

Having said that, our usage of these platforms is largely disconnected from our OEMS workflows, presenting a sizable opportunity for efficiency gains in the future. Our hope is that interoperability vendors provide a solution here, bridging the gap across systems and providing a more seamless experience across workflows. Further, there is significant potential to increase the consumption of market data within predictive, pre-trade analytics across much of the buy-side. Both of these enhancements would no doubt lead to better trading experiences for not only our traders, but also, our end investors and clients.

The post Building a successful execution setup appeared first on The TRADE.

The move is the next step in Glimpse’s growing list of buy-side participants,

Glimpse went live last June, and immediately received a high degree of interest from the buy-side thanks to its data-driven data model.

Read more – Data Sharing Network Glimpse Markets’ no fee data sharing platform continues to attract buy-side interest

The network gained significant traction with the buy-side in the lead up to its launch, with firms including NN Investment Partners, Invesco, Columbia Threadneedle, Carmignac and Quoniam signing up initially.

PGGM, Allianz Global Investors, Bluebay Asset Maagement, Cowe, Exoé, Federated Hermes and Natixis TradEx Solutions have also previously shown support.

Last year, Glimpse Markets formed a strategic alliance with Wavelabs to provide Glimpse’s clients with access to a free web-based dashboard, allowing clients to view and analyse the live and historical buy-side trade data previously shared over the Glimpse network.

The post T.Rowe Price joins data sharing network Glimpse Markets appeared first on The TRADE.

What is driving the push for multi-asset trading capabilities?

There are a number of macro trends driving multi-asset trading. Markets are increasingly interlinked and signals in one asset class often have implications across assets. It is mission critical that trading has line of sight on these correlations and how they change over time. It is harder to do this with siloed trading teams. 

Our institutional clients continue to seek solutions over individual products. This trend also requires portfolios with broader access across different instruments, especially with derivatives.  

Finally, liquidity is becoming more constrained. Whilst volumes can appear elevated, what is important is the size that can be executed on at a point in time. The top of the order book across asset classes is shrinking and the depth of the market is becoming shallower. This directly impacts the cost of trading. When implementing an investment thesis, there may not be sufficient liquidity to implement directly at the right cost in the instrument of choice. This may require thinking about implementation more creatively and looking across asset classes and derivatives for the most efficient expression of an idea. We have formed multi-discipline teams not only to highlight opportunities, but also to identify risks and build tools to optimise outcomes.

What are the benefits of operating an agile multi-asset business?

I like how you framed the question as “agile multi-asset”. Agility is important to ensure ideas and opportunities are flowing correctly across the platform, enabling our investment team to capture alpha for clients. With “agile athletes”, we can redeploy resources to supplement talent in asset classes that are in focus. Some skills and experiences are transferable; however, it is important to understand the nuances and risks of each instrument. This means that leveraging the subject matter expertise of the core team is essential. Another benefit comes from the insight that different perspectives can bring. These ideas and insight come together to help us make better decisions and provide a more informed understanding of what is driving pricing across markets.

What are the necessary capabilities required to successfully meet growing multi-asset demands?

An integrated approach which combines investment excellence, trading/market structure acumen, robust/reliable data, technology, quantitative insight, legal, interoperability, and ability to adjust to meet the needs of the opportunity. Relying on “the way we’ve always done it” will, over time, lead to suboptimal outcomes, missed opportunities, and leave alpha on the table. 

Leaning into the relationships we have built with our sell-side partners, as well as current and emerging liquidity platforms, is essential. We need to share our collective pain points and work to develop solutions which reduce friction and increase access to liquidity.

A change mindset is a prerequisite. I firmly believe that ideas can come from anywhere on our team. Innovation is a team sport. Continuous improvement means we always need to be looking for new ways to operate more efficiently. Stealing from one of my favorite poets – “Changes aren’t permanent, but change is”.  

What sort of challenges come with building the desk of the future?

Building the desk of the future means not being afraid to break traditions, and it is essential to supplement seasoned talent with new skillsets. However, introducing change while keeping the culture that has been critical to our success presents an interesting challenge. 

When we think about that it highlights how important attracting the right talent is. We have had success bringing in new traders with different backgrounds. Evan Canwell on our London desk has a master’s degree in physics and Kelsie Palumbo on our Baltimore fixed income desk has degrees in computer science and mathematics. With a fresh perspective, these individuals – among many others – are driving innovation and leading new initiatives for our desks.

What do you think will be the biggest themes in trading and execution for 2023?

Data, data, liquidity, regulatory changes, interoperability and more data.

The post Marc Wyatt: How to meet growing multi-asset demands appeared first on The TRADE.