21 - 23 April, 2020
Palais des Congrès de Paris
KEYNOTE BUY SIDE ADDRESS: Leading the way through change – how has Blackrock created a dynamic team structure and trading strategy that encourages constant innovation and adaptability to growth on a global scale?
• BlackRock has placed a firm emphasis on developing flexible, technology-driven trading personnel in order to stay ahead of evolving market conditions, building a culture that ensures trading desk staff are armed with a diverse set of skills that can be utilised across its execution channels and technology resources.
• An iterative, proactive approach to new technology, improving workflow processes throughout the trading order lifecycle and consistent dialogue with other market participants is absolutely essential to achieving this.
• Regulatory change is creating regional liquidity pools that require a new approach to trading workflows, which is where technology developments around automation and data can be utilised.
MARKET STRUCTURE LEADERS PANEL: The paradigm shift - how are changes in market structure, liquidity and new products altering the way you interact with your counterparts across the value chain?
• The biggest impact of MiFID II has been seen in systematic internalisers and unbundling, according to the audience poll. Though panellists believe it’s not one big standout impact, it’s lots of little things.
• “The biggest impact isn’t particularly around market structure, it’s getting to grips around lack of liquidity in the markets. It doesn’t feel like market structure has changed significantly and that’s because the market has done a good job of innovating and maintaining the attributes they like,“ said James Hilton - Head of Sales, EMEA, for Advanced Execution Services (AES), Credit Suisse.
• A lot of time/resource spent on liquidity sourcing, connecting to Sis, looking at periodic auctions and how to navigate the liquidity that they provide. Unfortunately the outcome is the channel shift has been fairly muted if we look at percentage of business that has migrated, it has been relatively small.
• There is a sig alpha shortage, so ways of improving those outcomes for everybody in a fast changing world is key and unbundling is at the heart of it, even though regulators outside Europe don’t have a focus on it and don’t want anything to do with it really.
• A lot more systematic routing of orders based on performance. Not encumbered by research, it’s pure numbers now. You are starting to see differentiation in service models - can you connect to Sis and can you do all these different things? Not everyone can do that, so there’s less broker commoditisation and polarisation of skills. You have buy-side with bigger focus on best execution, sell-side with polarising capabilities, and you are starting to see concentration of business on the execution side with small number of providers in the electronic space. Data to suggest that concentration of flow with bigger providers.
• Poll showed biggest change in trading strategy since MiFID II has been more focus on TCA.
• A lot of banks/brokers spend time/effort/resource on TCA, seeing converse in action, demand of TCA from our clients is becoming less. Clearly the buy-side need a more independent source of TCA, a multi-broker type solution, according to James Baugh - Head, EMEA Market Structure, Citigroup. Moderator, Lynn Challenger of UBS, added that there is a shift internally to figure out how to “use this tool we’ve had on our desktop for the last ten years”.
• Audience said they want their brokers to focus on both improved algorithms and enhanced transparency of transaction costs and slippage with their resources to improve execution outcomes.
• Looking forward – big issue around share trading obligation “we shouldn’t underplay the technology that will need to support that. Mark Pumfrey of Liquidnet added that as MiFID II gives the buy-side trader more control, that also makes you think about the tools you can create to make that happen.
ALL STAR PANEL- BUY SIDE & SELL SIDE INSIGHT: Evaluating the difference between key liquidity providers– how to build an effective plan to determine who is best to use, when and why?
• Electronic liquidity provider systematic internalisers (ELP SIs) are becoming a more important part of the market structure now that MiFID II has had time to bed in and the industry has adapted to these new participants.
• Brokers will play a key role in the growth of ELP SIs going forward, although they too are getting used to their place in the market.
• Although there is lingering confusion around how ELP SIs operate and differentiate from each other, the growing amount of data coming through from these venues is beginning to create greater transparency and dialogue as to the mechanics of ELP SIs.
• However, audience polls found that this sentiment may not be too widespread: 56% of audience members said they are unsure of how ELP SIs differ from each other, 51% said the biggest challenge they faced was understanding who they were interacting with, while 82% of audience members said they did not receive sufficient information on the mechanics of how SIs work.
All star panel: A brave new world for capital markets - what does it take to thrive in the ever evolving global trading environment where innovation, transformation and renewal wins?
• For the sell-side, the long-term differentiator will be the ability to adapt in the new environment. Institutions need to be prepared to make bold moves, but that can be more difficult for the larger sell-side firms which need to build the right infrastructure to govern new data sources born from regulation and technology.
• The barriers to entry for firms on the sell-side is a huge challenge, in part due to the regulatory burden. We know that MiFID II has seen buy-side firms re-evaluate their broker lists, so the challenge is getting on the broker list, and staying there. Balance sheet and risk also play a massive role in this as demand from the buy-side for access to large balance sheets for credit risk or prime brokerage purposes remains very high.
• Predictions on future disruptive factors in the industry include the democratisation and universal access to data, the way in which that data is utilised, outsourced dealing, and potentially new products and services from existing institutions such as Virtu Financial and Aquis Exchange.
ALL STAR PANEL: How have market makers, SIs and alternative liquidity sources advanced in light of more robust pre-trade transparency, improved price efficiency, rigorous best execution demands and are the buy-side asking their brokers the right questions to remain compliant?
• Increased use of systematic internalisers (SIs) is consequence of regulatory intervention. One of the attractions is the transparency element, allowing buy-side and sell-side market participants to see and assess transaction cost analysis (TCA) on fill rates achieved if a broker routes to SIs.
• Some market participants are sceptical of SIs due to the complexity introduced to the market and the cost to the end investor of dealing with that complexity.
• MiFID II has brought about more fragmentation, but the fragmentation means that competition is thriving with no single dominant primary exchange, may secondary trading platforms and other trading protocols competing for business.
DISCUSSION PANEL: Smart venue analysis – how can you discover a deeper understanding of order routing and rationale to improve access to liquidity?
• No longer a one-size fits all. Not one particular strategy that can find liquidity across every venue. Need to look at how you are connecting and why you are connecting. Pre- and post-trade analysis is crucial, and can give an indication of liquidity.
• The buy-side are keen to collect a lot of data themselves and run the analysis themselves. Approaching a collaborative/consulting approach.
• Smart venue analysis brings out deeper discussions with the buy-side to understand better what their strategies are, performance goals are under different scenarios.
• The more knowledge providers can get from discussions with the buy-side – the better they are able to trade for them.
• Venue analysis - when you break it down at the venue level – it makes it more clear to the sell-side to how you should react to different situations. Then it allows you to predict. You can be more agile and make better decisions venue to venue.
• Innovation potential on pre-, post- and in-trade analysis. Data and technology together to make better routing.
DISCUSSION PANEL: How can leveraging alternative data sources help you make more profitable business decisions and who are the companies offering true innovation?
• Alternative data – social media, blogs, reports from websites, dark web, IOT devices, anything that’s not in that traditional set. Most of it is unstructured. Another speaker described it as essentially being big data that can be used by asset managers to maintain informational edge.
• When searching for alpha post-financal crisis and looking at how you create alpha, alternative data can a differentiator. The information is out there where you can create an edge from others.
• Alternative and traditional data is really a partnership, where you need to marry the two together.
• Firms need a corporate strategy which involves ownership, in-house vs using a vendor, workflow integration.
• Most firms have tonnes of data they are not accessing or leveraging, so some of the greatest enhancements are allowing you to gain insights from that data. Every day interactions with customers can be valuable.
• Regulation and standardisation needs to overcome challenges, with some of the actions around ESG being used as a benchmark for where alternative data should look for inspiration.
Leveraging AI and Automation:
Ai – Who Is Actually Using It And Where Is The Real Value Seen For The Trading Desk?
• The application of artificial intelligence tools in financial markets holds significant potential but firms must be cognisant of the areas this kind of technology most benefits. Risk management, tactical allocation, pricing and execution are all high-value processes that benefit from the use of AI.
• Building a team of AI specialists is a crucial element to the successful use of AI and diversity is a key element to this; programming specialists, technology engineers and data scientists can all be utilised, but other scientists (such as biologists, chemists and physicists) can also bring something to the table.
• AI will not take over the industry any time soon, despite the prevalent fears that human traders will be replaced by machines. AI can provide incremental improvements in targeted areas, but firms must do their homework and identify specific problems they want to address in order to realise tangible benefits.
Ai And Automation In Trading – How To Approach It In A Sensible And Cost Effective Way?
• The combination of human hypothesis and ideas with the power of machines to store, process and analyse data is the most successful approach to adopting artificial intelligence and machine learning systems.
• Automation will lead to more automation; while there are many manual processes that have been automated for a number of years already, there are further areas where automation can benefit capital markets participants, such as communications and compliance functions.
• However, compliance does present a difficult issue for AI-based activities and firms should be careful to document all steps they undertake and all data processes.
• The transcription and recording of voice communications is one specific area where AI technology can bring tangible benefits. Although significant advances have been made in this space, the technology is not perfect and there is still much work to do before it can be adopted on a more widespread basis.
How Can You Make Future Proofed Technology Investments To Achieve Scalability And Enhance Trade Performance?
• The availability of resources for technology investments can be a difficult issue to navigate and business cases must be airtight to ensure allocation.
• Recruiting talent has become a far harder prospect for buy-side firms, particularly technology talent, due to a change in culture and the emergence of large tech firms such as Google and Amazon.
• Technology is a necessity and demands investment, but should not be an end goal in and of itself. Many firms are not correctly structured to leverage significant value from these investments.
• Agile development is not always beneficial for capital markets firms and, in some cases, longer-term strategies for large-scale projects are far more suitable.
Applying Smart Trade Analytics
FIRESIDE CHAT - Establishing a systematic trading approach in 2019.
• There’s a focus on lowering trade costs, integrating process with the portfolio managers, and creating more operational efficiency to the benefit of the end investor. At JP Morgan Asset Management, good quality data is key for evidencing the value of undertaking new technology projects.
• JP Morgan as an organisation now spends in excess of $10 billion annually on technology. It’s no longer considered to be a back-office function but a major part of the wider business. The technology team is closely intertwined with the trading desk and understand what would benefit the traders. It is a challenge to find talent to expand the technology team, but building and innovating new platforms in partnership with the traders is a key focus for JP Morgan Asset Management.
• Transaction cost analysis (TCA) has moved from being ‘nice to have’ to a ‘need to have’ product for the buy-side. TCA has historically been used to benchmark traders and as well as brokers, which hasn’t changed and is unlikely to change in the near future. MiFID II helped to create more competition in the space with more focus on broker evaluation and trade performance.
• Mining data for TCA is maturing, meaning it can provide more granular insights on various venues such as periodic auction pools, systematic internalisers, and block trades. But the next phase moving forward is making it useful for traders.
OMS and EMS
• The notion of an OEMS has been debated in the industry for years, with attempts to merge various systems into a single platform. The constant need to switch between systems and a lack of interoperability between OMS and EMS is driving consolidation among providers, but providers note that both systems are different and provide different functionality.
• The need for an EMS is specific to each asset manager, it’s not a one size fits all type of process. Value add such as transaction cost analysis when seeking to implement an EMS is a key focus for the buy-side, but it comes down to selecting the product that will fill the biggest gaps in each firms processes.
• When deciding whether to outsource, the decision to move forward with a partnership is only valid at that point in time due to the dynamics of the industry and the continuously evolving nature of the landscape. There is a reputation risk when outsourcing as firms put certain functions and processes beyond their control. On the other hand, outsourcing with an independent third-party provider can also provide strategic vetting for processes such as TCA or benchmarks.
• In terms of regulatory compliance, regulators tend not to get upset if a mistake has been made but more so if you are not applying the appropriate level of rigour and time to ensuring regulatory compliance. There are lots of outsourced providers who are entirely focused on fulfilling regulatory requirements to the point that they are considered to be best in practice. On the other hand, working with an outsourced provider that does not focus on regulatory compliance is a big risk.
• Dealing with the legacy aspect is a challenge when processes have been done a certain way for a long time. Implementing new technologies requires a political shift within the business in order to get that type of project on track. It is easier for firms starting with a blank slate, but for institutions with an existing process or system it can be difficult.
OXFORD STYLE DEBATE: Outsourcing your execution services is the most time and cost effective way to ensure best execution and compliance in today’s trading landscape- For and Against
• Some asset managers have turned to outsourcing for cost and risk reduction following new regulations, access to markets, leverage of technology and platforms. But outsourcing decisions depend largely on size and situation.
• One speaker described outsourcing as an ‘emotional topic’, saying if you remove the emotion you can look at how you can measure the value chain. People comfortable with outsourcing, back, middle office, custody.
• Relationship and communication between fund managers, internal teams and outsourcing provider crucial.
• Invesco trading head says for the sort of business they are, outsourcing equities trading not something that is on their radar. “I don’t think anybody can do it better than we could,” said David Miller, head trader, EMEA equities, Invesco.