Automation and electronification has brought a number of changes, one of which has been the large increase in volumes. There are various reasons for that – the obvious one being that you can do more with less when you apply computers to a problem like this. Trading desks have got smaller over the years, while volumes have gone up.

Another manifestation is that trading has become more widespread geographically. At one point, if you wanted to trade a German stock, you had to be in Germany and if you wanted to trade a Thai stock, you had to be in Thailand. Today, you can pretty much trade anything, anywhere. The electronification of the market has brought about that change as well, which has allowed money to flow around more broadly. 

The third evolution has been around different trading models. If you go way back, 30 years plus, trading – even on exchanges – was broadly manual. You basically phoned an order through onto the floor of the exchange and people negotiated prices and so on. Since then, central limit order books have come in, around 30 or so years ago. Electronic access to those came with it and we’ve seen evolution of market models ever since, because it’s relatively easy to program in software changes to these types of systems to give you periodic auctions and all these different ways of trading that simply wouldn’t have been possible by hand. 

What are some of the good things that we’ve lost and/or gained in the past three decades?

Starting with the gain, the obvious one is cost. This evolution has certainly helped facilitate dropping commission rates pretty much across the board, particularly in the more agency-style business because again, you could do more with less and new entrants coming in and competitive pressures and the rest of it. Ultimately, trading has become a lot cheaper.

There’s certainly been concerns raised over the years with certain types of trading. I think it’s safe to say that some of the high frequency markets had a bit of a bad reputation, perhaps in the press, for good reasons or bad. It’s certainly caused a lot of changes and people have had to adapt to that. The days when you could simply just put a large order directly on the market and the market would just deal with it, things have changed. You need to be a bit more careful and a bit more considerate about how you interact with the markets.

Of course, the flip side of that is that doing so is much easier because the technology around, and indeed the experience around to interact with the markets, in this new world, is there and is available for a large number of participants at good prices. So I think those things have changed and it’s also safe to say that the electronification of markets and indeed trading in general works best for liquid instruments.

Liquid listed derivatives, liquid shares and so on, they have really ridden the wave of this very effectively. When you get into other asset classes, it’s less obvious that electronification makes a material difference because there’s so much manual processing anyway. There are still advantages, not least of which being that you take away rekeying risk and things like the error rates of trading can come down, and indeed have come down. That’s a big boon as well. But whether you see the same sort of change in volumes and trading styles in some of these instruments or not, that’s yet to be seen. We haven’t seen an awful lot of change in a number of asset classes over the last few years. 

Alternatively, what are some of the bad things we’ve lost and/or gained over the same period?

I don’t know if there’s anything particularly that we’ve lost, however one thing which comes up in conversations every now and again is this slight worry about whether we are losing any skills in the industry. This is a general theme which crops up not just with the electrification of trading, but also with the younger generations coming to the markets in a much more technologically driven environment. Also, with artificial intelligence coming in and being able to take on some of the heavy lifting.

In a way we’re exposing ourselves to a potential risk that we have less experience and knowledge, particularly for dealing with tricky situations on the trading desks. That’s something which I think we as an industry need to make sure we’re very mindful of and act against. Not incidentally by not adopting these technologies or indeed hiring younger people, but by making sure that we have training and we keep the handing down of knowledge going. 

Looking forward, how do you expect the trading landscape to shift in the next 30 years?

We will see in some ways more of the same. There will continue to be evolution and innovation in the markets and people will try new things. AI of course is something everyone needs to keep an eye on as to what various types of AI will allow you to do or enable you to do in the world of trading. Even if it’s just supporting the process in terms of workflow management and pre-trade idea generation, or even if it doesn’t actually make it the trade process itself. We will see more of that coming through as well. It’s also safe to say that newer technology such as blockchain, distributed ledger technology and so on has yet to make a real impact in financial services. We’re probably going to see that becoming more mainstream in the near future, because of the possibilities that provides to simplify a lot of processes.

Beyond that, very hard to tell. I think it’d be very hard to tell 30 years ago where we would have ended up now. People probably predicted fewer traders – with some people even predicting no traders – and that turned out to be completely wrong and a good thing too. I wouldn’t want to say in 30 years’ time we’ll have no traders. We’ll probably see a continuation of what we’ve got today, wherein skill set and the role of traders changes over time – with this probably becoming more technology-based. But we’ll still have traders. We’ll still have trading. There are the larger scale changes that technology will help bring, not least of which being perhaps bringing more cross asset trading together, as the barriers between these asset classes breaks down and technology helps that. Also, with people becoming more adept at managing different types of asset classes as part of their day job. I can see that trend continuing.  

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Anthony Woolley

“This initiative aims to upgrade existing financial infrastructure to seamlessly interact with distributed ledger technology by facilitating interoperability across traditional financial systems and blockchain-based platforms,” according to both organisations.

Specifically, the two entities coming together will enable the FIX-FINP2P Protocol Interoperability Alliance. This will allow firms to use their existing FIX gateways to connect to the tokenisation space and avoid expenses and complexity.

The initiative is set to allow for seamless messaging between traditional finance and digital securities, specifically with regards to: bonds, loans, securities lending, alternative investments, repo, and money market funds. 

Jim Kaye, executive director of FIX Trading Community, said: “This Alliance is a natural partnership – both FIX and FinP2P were conceived as open peer-to-peer protocols and the potential for our community to use their FIX gateways to instruct the orchestration and settlement of tokenisation transactions over FinP2P will be a testament to the power and flexibility of the FIX messaging language.”

The working group first met on 20 June and is set to operate over a four month period. Following this, a whitepaper will be published summarising testing findings and key insights and recommendations for enhancing FIX as it seeks to accommodate digital assets. 

Read more: FIX Trading Community London AI Workshop finds that the upsides of AI are there despite some existing fears.

Speaking to the importance of this move, Anthony Woolley, co-chair of the GDF tokenisation forum and head of business development and marketing at Ownera – an integration partner – explained that the biggest challenge needing to be addressed by tokenisation initiatives currently is to “connect market supply and demand at scale and make it easy for buy-side institutions to access the pipelines of high-quality assets now being tokenised by the sell-side.” 

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Speaking in a roundup of the findings, executive director of FIX Trading Community, Jim Kaye, explained that “the room didn’t feel that the industry was quite ready yet for full AI in autonomous pre-trade and execution solutions, but did say that it was only a matter of time.”

The insights, gleaned from a set of industry experts across three roundtable sessions, broadly address the use cases for AI in trading and implications for data as well as touching on risk and mitigation considerations.

The discussion groups were largely made up of traders and data experts, specifically: 17 buy-siders, eight sell-siders, 19 vendors and eight other parties including regulators.

Kaye highlighted that due to the broad mixture of people in the room, there were a fairly broad set of answers to each topic.

AI, a veneer for progress

One key finding from the room was the assertion that for AI, an effective way to encompass its potential would be to view the technology as an overlay to existing processes, rather than as a replacement.

“An interesting point made about legacy systems was that the industry is not necessarily trying to fix them as such or replace them, but simply understand them better,” said Kaye.

“The idea of having some auto–documentation of what legacy systems do and how they work allows for better support, it’s about putting layers of technology on top of these systems to make them easier to deal with rather than having to potentially throw them out.”

Read more: Fireside Friday with… FIX Trading Community’s Jim Kaye

Overall, the strong sentiment from the workshop was that for the meantime looking at the short-term future, it remains all about improving what humans can do rather than replacing them. Helping make human touch more proficient. 

Speaking to this, Rebecca Healey, co-chair EMEA regional committee at  FIX Trading Community asserted that groups agreed that AI is truly adding to traders’ effectiveness, working to enhance performance: “It’s really changing just how much a trader can add to the investment process. Not just through execution, but also the selection aspect of what goes into a portfolio.”

She further added that, when it comes to TCA, it is becoming clear that what has been able to be done in equity, the market can now begin to do in other asset classes.

“It really creates some interesting opportunities, particularly around liquidity profiling and instrument selection.”

Data then AI, AI then data?

When it came to what the workshop thought about the relationship between AI and data a large part of the discussion centred on how structured data is or should be. 

Matthew Coupe, co-chair EMEA regional committee at the FIX Trading Community, shared that when it came to unstructured data and structured data there was an element of disconnect within the discussion group: “A disagreement if you like. There’s a general sense that you need both of these and can do different things with the different types.”

Coupe highlighted that while the importance of structured data in order for artificial intelligence to be effective in trading applications is true, AI is getting better and better at handling unstructured data.

“There’s a general sense in the room that you do need the data completely structured and to some extent, normalised to be able to use AI really and let it loose on trading type applications.

“You need to find what standards are obviously and then you need to do some work to clean the data up, and this is an expensive and time-consuming thing. But if you don’t do it, then you basically can’t trust the results, that was generally the sense.”

Interestingly, one discussion point raised was the notion of AI as a cleanser and producer of data, as opposed to simply a user. Something which could be done up front, and potentially take priority.

“This is an interesting area for the industry to really look at, how can we use AI to help improve what we do to then use the AI tools in a better way going forward,” asserted Kaye.

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As one of the speakers on the fixing equities panel – held under Chatham House – put it, “it’s time to make Europe great again”.

Addressing the underperformance of European equities, one panellist highlighted the positive correlation between the surge of regulatory burdens and decreased innovation.

“I think regulation fatigue is real and it stifles the innovation […] when you look at things that are firm level, there’s a bit of a disconnect between the sheer volume of regulations that people have to deal with.

“There’s less conversation internally between different departments about how we actually implement those regulations and maybe try and do something slightly different or exciting. Everything’s just about the budgets and cost.”

Another panellist added that the amount of regulation is also affecting Europe’s competitiveness, a word that is coming up more and more amongst policymakers.

“For the first time we are really seeing signs that so much regulation is threatening Europe and in a weird way, maybe that’s one area in which Brexit might help because I think the UK is trying to be lighter touch and that makes European policymakers a little bit more thoughtful and I think that will benefit them.” 

This point was backed by the room during a live vote as the audience highlighted regulatory load and divergence as a key driver, closely followed by political scenarios and lack of involvement of the retail market.

Key takeaways from the lively discussion on how to ‘fix’ equities included: innovation, encouraging the growth of small cap businesses, reducing complexity, address rising costs, and of course easing the burden of regulation.

Overall, the experts were in agreement that overall processes need to be easier and in concluding how this may be done empirically, one suggested that working groups could be key.

Another expert added that “we need to extend the successes of other areas in equities, including areas like equity derivatives, ETF listing and trading, and corporate listing […] I think we’ve done very well in the infrastructure there and we need to bring some of those same merits.

“Continue to embrace technology and innovation and use it wisely, and not just because it’s there, but actually find a way that it will help to inspire us to invest in in good quality companies.”

Building upon this idea, one panellist highlighted that the way European regulation is actually created and drafted holds “very little vision,” adding that “it gets diluted” through numerous revisions which neutralise progress, and that more centralisation and different drafting processes could be beneficial.

Finally, concluding the overall recommendations, one panellist highlighted that in the current climate the entire market should, as a whole, be focused on making it easier to trade across European borders.

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With markets just months away from North America moving to T+1 settlement, panellists discussed market readiness and whether the rest of the world should follow suit.

One panellist noted that with this transition, a consideration of an early close to US markets would allow trades to carry on afterwards as they are now, but in the next day’s business. “That will allow the time pressure to be released, allowing us to match with brokers, generate FX, execute FX and still clear it centrally through CLS, rather than bilaterally, which increases risk.”

Although the panellist highlighted that this would be unlikely, they added that it would be a logical next step to ensure post-trade processes to work efficiently.

A key issue that has been discussed widely linked to the transition to T+1, is the likelihood for increased settlement fails.

“The problem with trade fails – particularly an increase in trade fails – is it will increase the need for borrowing which on a normal day-to-day basis would not be a problem. However, if there is a credit crunch, holidays, etc, and there isn’t funding available, it will either cost a lot of money or not be available at all, resulting in more fails,” noted one panellist. 

Another panellist echoed this sentiment, highlighting that risk has been an “underused” word in this transition, emphasising that risk should be the main protocol and focus area.

A key issue with North America’s transition to T+1 is the impact this would have on smaller firms, panellists stressed.

Unlike big players, which have various geographical locations, smaller names may have to set up US shift to align with this new transition – which could have negative social impacts and, in some cases, increased costs.

The end investor should be a key consideration, stressed panellists. “More systems will equal more costs which the end investor will ultimately face. This can also affect competitiveness for new entrants due to these increased costs.”

Largely agreed upon at the event so far is that whether the UK and the EU will follow suit is simply a matter of when and not if. As a result, various jurisdictions should start making preparations.

“The market needs to move together,” emphasised one panellist. “It’s not about one firm in isolation, varies parties will be impacted by any shifts and they need to be aligned.”

Another panellist echoed this, highlighting that financial markets are all about interconnectivity, harmonisation and standardisation.

“The US has rightly or wrongly kicked off this process and we as international markets do not have any other choice but to follow that process in order to maintain that harmonisation.”

Panellist said that UK, EU and Swiss alignment would be essential to any potential moves to a shortened settlement cycle in the region. However, whether or not a ‘one-size-fits-all’ approach would work is yet to be seen.

“In a perfect world, the UK and EU would move together, making life simpler. The question is time frames and whether they can actually move at the same time,” concluded one panellist.

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A key discussion point was around the balancing act of global conformity in the face of regional disparity, and the idea of regulators playing a key role in whether regions will continue to be more or less fragmented.

One speaker suggested: “You want to give jurisdictions the ability to make their own decisions […] try to coordinate and provide mutual recognition where possible, but I think it’s sometimes not going to be the case that we’re on the same page and we have to be able to work through those issues too.” 

When asked where regulators should prioritise their time, 58% of experts in the room responded that reducing existing requirements to focus more on guidelines should be the main priority for regulators across the board.

Coming in second with 23% was the recommendation to level the playing field by extending existing rules to new market participants. 

Speaking to these results, one panellist agreed that the best course of action is to keep things simple in the quest for progress.

“What is detrimental is when the industry is asking for more and more precise answers, and in that you end up with thousands of pages of Q&A’s and different levels […] and questions like ‘what if that situation that will never happen was to happen in the foreseeable future?’ at some point, you have to keep it simple.”

Another speaker asserted that there is potential for the industry to self-regulate to an extent and in that situation regulators can “come in over the top, when and if necessary”.

Elsewhere, the speakers were also all in agreement about the importance of data and specifically data accuracy. Panellists agreed that it is a thread woven into almost every financial markets issue, from the consolidated tape tenders to market structure adjustments.

Linked to this, the panellists gave their distinct approaches to the consolidated tape developments, with the consensus being that if market participants want moves to be made soon, they must play their part in terms of providing the key necessary data.

While T+1 was of course a key area of discussion in the room, it appeared that across the panel, it was agreed that at present – despite huge market attention – it is in actuality not a key area of focus for the regulators themselves, with few concrete moves having been made.

However, the panellists stated that the imminent shift only further served to highlight the key idea of interconnectedness across the financial industry.

“It goes back to the interesting point that actually a markets are incredibly interconnected [and] it talks to the whole trade life cycle. Initial discussions were that it’s a back office issue and you don’t need to worry about, but actually it starts creeping into [other] aspects,” said one panellist.

Another highlighted the inevitability and irrevocability of the shift, concluding: “[T+1] will make things evolve, so it doesn’t matter what your opinion on it is. It’s happening.” 

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Vince Turcotte

“We are entering a new era, marked by the emergence of new asset classes enriching traditional ones. We see a bright future ahead of us, with new and improved efficiencies and greater transparency across the financial services sector, benefiting all participants,” said Vince Turcotte, co-chair of FIX’s digital assets and technology committee. 

One of the specific actions of FIX’s digital assets and technology committee will be to analyse the interoperability between competing digital asset-focused technologies, as well as unpacking the intricacies of the interplay between these technologies and the traditional financial space.

Another area of focus for FIX is the development of a common workflow design to make DLT and smart contracts more efficient.

Speaking to the specifics of this protocol, Turcotte explained: “Smart contracts, enhanced with the FIX protocol, will facilitate the settlement of both digital and traditional assets in a distributed ledger ecosystem. This is due to their programmable and interoperable nature as well as their ability to automate processes.

In addition, regulatory guidance will be offered to industry participants, with the standards aimed at easing any implementation burden.

Read more: Fireside Friday with… FIX Trading Community’s Jim Kaye

Goncalo Lima, co-chair of FIX’s digital assets and technology committee and capital markets strategy lead at DLT provider, R3, highlighted the important role of integration and interoperability in the scaling up of asset tokenisation, adding: “Establishing a set of standards, such as the ones developed by FIX, will play a vital role in lowering barriers to adoption, facilitating innovation and ensuring the secure exchange of data and value across the ever-evolving capital markets landscape.

“We invite community members to join us as we look to determine how best to harness the power of these new technologies for the greater good of the industry.”

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This latest inclusion in the FIX Trading Community follows recent additions over the last few months including China Post Global, which provides investment solutions across various asset classes, as well as OSTTRA, the joint venture between S&P Global and CME Group.

EuroCTP aims to foster transparency, fairness and access to market data for all investors by providing a fully consolidated view of the European equity and ETFs markets, according to its participants which include BME, Deutsche Boerse Group, Euronext, and Nasdaq.

Its goals include establishing a consolidated tape that provides a comprehensive, standardised and consistent representation of the European trading landscape.

Over the last few months, The FIX Trading Community unveiled new business standards covering definitions of addressable liquidity in a bid to clarify the markets’ understanding and consolidate conflicting perceptions.

Read more: FIX Trading Community tackles the market’s conflicting perceptions around addressable liquidity

Elsewhere, the Community launched a new real-time messaging type aimed at supporting the industry in its shift to accelerated settlement cycles.

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How is the FIX Trading Community addressing the outages topic?

One of the things we’ve been doing is workshopping specific outage scenarios. We’ve had a look at some recent outages and analysed what information is needed, how it will be used, and what is missing. Asking those questions is important because you start to build more of a process workflow and ultimately, this isn’t just about the communication content, it is about an entire process of effectively managing an outage.  

What we’re working towards is the standardisation of communication protocols.  The industry as a whole has come together to work on this. The main point is to make sure that the information that is shared following an outage is relevant to the audience it is being sent to, which requires a bit of thought and is something that firms should be focusing on as they start to grapple with these kinds of problems. It’s going to require a little bit of thought, but I do think it’s ultimately doable.  

What are the main hurdles when looking at building a standardised communication system for outages?

One factor is that each firm does things differently, which makes it quite hard to understand what’s going on if something’s not working properly. With communication currently, you effectively end up with a bespoke process for every single firm, which obviously is hard to deal with.

I think the other thing is that, as we’ve gone through the work of asking the question ‘what should go in an electronic communication about a market outage’, we’ve learned about the process and realised that it isn’t just a question of issuing a communication which is then disseminated on various other electronic channels – there is more to it. You have to look at it from the perspective of whether the industry is even getting the information it needs the most.

When is communication most important?

I think what we’re talking about here is more the ‘heat of battle’ type messaging, as opposed to postmortems. The idea being that these messages in theory could be fed directly into trading infrastructures, which in turn could react directly. We should be conceptualising the idea that, if you get a message from a venue about an outage, there is a plan b.  

When something goes obviously wrong, in many ways this is the easiest type of problem to solve. Trickier problems are when it’s not obvious what’s going on and you must wait for events to unfold. Within the trading ecosystem, this usually happens because of complex infrastructures, even at individual firms. This is why standardised communication is important, you’re not just communicating what is wrong, but also the reassurance that it’s being investigated. It works like a yellow alert. These are useful because you can at least keep an eye on things, and be ready for it to go green or red. As firms will have had a chance to prepare, the potential impact should in theory not be as severe, which in turn contributes to market stability.  

In terms of more detailed explanations following the resolution of an outage, there is currently no standardised postmortem communication protocol. As the disruption is no longer being felt, firms have more time to deal with and digest the information, rendering the standardisation of postmortem communication protocols arguably less important.

Who should these announcements be going to?  

 This is a great question because it’s something that the FIX group has been asking. If you wind it back to what the regulators are particularly interested in, I think they basically see it as communication from trading venues to their participants. But, when you look at it more broadly, and based on industry feedback we’ve received, you start to realise that , understandably, everybody wants to know everything. So even in a particular case where a venue is trying to tell their participants, the participants themselves might want to communicate this to their own clients and of course the message they will be sending their clients can be different. They’re not simply going to just forward the communication from the trading venues because the implications to a broker’s clients might not be the same as the implications to the broker.

On the trading desk, if you have a problem with the system, often everyone starts phoning up all the clients simultaneously but being able to do that electronically would speed things up very, very quickly. Sometimes the message is all you need to help continue to trade and the quicker you can get that done, the better.

How long will it take to put this [the standardisation] in motion?

We’ve got something which is pretty close to an agreed model and we’re now about to start the process of drafting up FIX messages. We’re looking to have that done sometime this quarter and at that stage come out with the standard, the documentation, and overall, our view of how we think this should be addressed.

In terms of timeframes for implementation, this is still TBC. What we usually do is go to the major players, both those who are involved in this process already and then perhaps those who aren’t yet and walk through what we’ve done. That takes time. Also, there’s a regulatory driver and their timeframes are for now still unclear. But even the fact that the regulators are looking at this means that firms will be somewhat incentivised to look into this as well.

For now, the best approach is to approach the major exchanges, all the big banks, perhaps some of the technology providers in the middle and simply explain why and how having standardised communication for outages really helps – it just makes it a lot easier for everybody. It makes it much more likely that people will build something if they know that they’re building something which is the same as everyone else’s.

The post Fireside Friday with… FIX Trading Community’s Jim Kaye appeared first on The TRADE.

FIX members found in their discussions that the term ‘addressable liquidity’ is empirically construed differently between market participants depending on the scenario under consideration.

In answer to this, FIX split the types of addressable liquidity into four subcategories in its European equities addressable liquidity document: Interactable liquidity, multilateral liquidity, multilateral “lit” liquidity, and multilateral “lit” liquidity excluding frequent batch auctions.

Read more: FIX Trading Community launches new messaging capabilities for real-time settlement

The definitions – agreed by the FIX equities consolidated tape working group – includes details “both in terms of a brief description and by way of trade category scenario analysis. It also provides details of how each of these definitions may be ‘constructed’ using data available on post-trade feeds, e.g., trade flags, venue identifiers and similar.”

The first category, ‘Interactable Liquidity’ relates to all executions undertaken on trading venues, as well as trades brought onto a venue that are considered to be ‘price forming’, and SI/OTC activity excluding ‘technical’ trades.

The ‘Multilateral Liquidity’ refers to multilateral executions undertaken on trading venues and excludes negotiated trades and bilateral services.

‘Multilateral Lit Liquidity’ encompasses those multilateral executions which are undertaken on trading venues “where at least an aggregated indication of volume and price is made available on public data feeds”.

Lastly, the ‘Multilateral “Lit” Liquidity’ is the subset of multilateral ‘lit’ liquidity which excludes activity resulting from frequent batch auctions.

Aside from outlining these types of addressable liquidity, the document highlights different use cases and maps these to different trading styles.

Specifically, the several liquidity scenarios address activities pertaining to those ‘traded on venue’, ‘brought on venue’, and ‘off-venue’. 

Elsewhere, The FIX Trading Community made clear that when it came to duplicate trade handling – trades that are considered to be cross-border duplicates, should not be included in these definitions of addressable liquidity, which avoids any double-counting of liquidity.

Speaking in an announcement, FIX said: “The lack of such standards has been a problem for the industry for many years, and improvements to post-trade transparency driven both by UK/EU regulators and FIX’s own recommendations make it possible to create these.”

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