TradeTech Day One – Wednesday 25th April 2018 – Highlights

Panel Summaries

Machine learning has the potential to revolutionise financial markets, although tangible uses artificial intelligence (AI) are yet to be seen.
European markets are far more complex than US markets under the new MiFID II regime. US markets are fragmented, but easier to navigate than in Europe where new venues like periodic auctions and systematic internalisers are on the rise.
Regulators must speak with the buy-side more about the implementation of MiFID II. The notion of lit liquidity is the best liquidity is misguided.

Periodic auctions, LIS venues and SIs continue to grow in the early days of MiFID II. Statistics from venues suggest pre-matched activity is not as significant as has been suggested by regulators or in the media.

RTS 27 best execution reports will be largely ineffective. Data that could be useful is not required for those reports so it is considered by some a waste of time and resources.

The high touch sales trader will remain important in markets. When orders are resting in large pools or periodic auctions, sales traders offer the ability to provide liquidity that isn't seen in the market.

Artificial intelligence (AI) is an umbrella term that includes elements including machine learning, robotic process automation, natural language processing, deep learning, and further sub-components such as neural networks, which are essentially “small thinking” nodes.
While there are a huge number of applications for AI across the investment and trading lifecycle, getting the underlying data architecture right is absolutely crucial to success in this field.
With the emergence of AI, middle and front office operations are becoming more tightly integrated, creating new opportunities for the application of machine learning.
One of the biggest challenges to the adoption of AI is trust; elements such as deep learning can result in a loss of transparency and more fundamental research into the AI space is required in order to build comfort with the technology.
Acquisition of AI talent is also a large stumbling block for some and there is a risk of over-investment in the technology.
While large organisations will have the resources to throw at AI development, smaller and new firms have far greater agility when it comes to getting the data architecture right before building out AI capabilities.

Historically access to information was a proximity issue, limited to those in large cities or with wealth. Technology has changed this through the introduction of the Internet and mobile devices, particularly in areas such as Africa which now have some of the fastest-growing economies in the world.
But this is not the case in the capital markets. Access to capital is still fragmented and regionalised, particularly in the wake of the 2008 global credit crisis. Cross border capital flow has decreased 65% and banks are increasing retrenched.
Investment in FinTech start-ups has totalled $100 billion over the last five years, but institutional investment start-ups are few and far between. Payments, lending, crowd-funding and banking apps for retail are changing the face of capital for consumers, and capital markets must use this model to introduce the Age of Capital. Asset managers have a vast amount of capital that can be used to invest in new technologies.
The Age of Capital is beneficiary to all market participants: Companies gain access to investors; Investors gain access to opportunities; Banks gain access to more capital and diversified risk.

The buy-side are becoming increasingly comfortable with interacting with external SIs due to the transparency they offer.
There will likely be more SIs come to market which could see further fragmentation, and brokers must be able to deal with this moving forward in terms of routing client orders.
MiFID II has not helped to clean the data for SI volumes. It’s difficult to judge what SI volume reported is truly on risk or how much double counting there really is.

The introduction of MiFID II has seen a spike in large in scale trading, particularly following the delayed implementation of the dark pool double volume caps in March, however this is a trend that has been occurring for the past few years, not just in 2018.
Market complexity has also significantly increased but buy-side traders have embraced the new market landscape, with some saying that it is now the “optimal trading environment” and that these trends are clearly in favour of asset managers.
Regulators, such as the FCA, will continue to monitor the progress of large in scale trading and the overall market, but must take a more holistic approach than they have previously to ensure MiFID II is having its anticipated effect.
Europe is still behind the US for large in scale platforms but market participants agree that more will come to market in the near future

Four months into the implementation of MiFID II, certain derivatives and commodities markets have shifted away from Europe but that is not the case for European equities. Clearly market structure has changed but this is difficult to measure.
Periodic auctions are considered to be lit trades, but the levels of transparency are very limited. They provide practically no pre-trade transparency and no means to fully understand the order book.
Extension of tick size regime to systematic internalisers (SIs) is welcomed. Regulators will continue to keep an eye on SIs and how they operate.
Industry is far from having achieved a satisfactory outcome in terms of reporting and transparency requirements. MiFID II is demanding but market participants must strive to do better to improve the quality of reporting.

Firms can utilise machine learning technology to clean and process vast amounts of data for increased efficiencies and cost savings.
Starting that journey doesn’t have to cost millions of dollars, but it can be expensive filling the technology and applying the right people to those tasks.
Blockchain is a great technology that will allow transference of ownership of assets in unique and incredible ways as we look forward.

Audience poll on pitches given by three FinTech startups based on which firm has the the most potential impact on the trading community. WINNER: PrimaryBid