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.

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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.

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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.

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External challenges such as a lack of liquidity, increased regulation and rising fees have left trading desks in a position where they have to do more with less to maintain profitability. Internal challenges such as the optimisation of data was also identified as being key for firms, while also dealing with legacy technologies and diversifying talent pools.

“Data is key. New types of data are increasingly becoming relevant to the desk and diversifying tech platforms – not just the skills and people, but also diversifying platforms – can help with existing challenges,” said James Munro, CTO at Man AHL.

“Liquidity challenges and economic change means you need to make sure you have enough providers for everything and you need to know exactly where that liquidity is, which connects back to that need for rich data.”

With growing talent pools, it is important to ensure firms are making the most of the skillsets and market expertise they have, alongside ensuring talent is being used in the most efficient ways, noted panellists.

“We have more humans than ever, but they do not do the stuff they were doing several years ago – machines are able to do that today,” said Rafa Lopez-Espinosa, COO of international business at Point 72.

“The big effort of our investment in data, technology and automation is to free up high value human time to do the most alpha manipulation activities.”

Looking at how to build a high performing and agile multi-asset business, one panellist noted the importance of sharing information across the desk.

“In terms of being tactical when addressing the market, it’s important that we share information across the desk. Historically, if you had a terminal and you were watching the markets, you would say ‘this is the asset class I am focused on’. This is, however, a view of the world and we benefit if you are sharing that across our platform,” said Marc Wyatt, global head of trading at T. Rowe Price.

“With liquidity being constrained, we might not always be able to express the trade in the exact instrument that we would like to for lack of liquidity in it, so therefore, we might have to come up with a new way of expressing that trade and that requires a cross-asset discipline but also knowledge on how you can express that trade in other parts of the market.”

The role of traders is also shifting with growing multi-asset demands, however, panellists noted that the evolution is more so about equipping traders with new skills as opposed to replacing them entirely.

“The desk is not going anywhere, but what people are doing will continue to change as it always has. Richer data is definitely an aspect of that, with multidisciplinary teams needed to ensure everything is measurable and understandable,” added Munro.

“Technology such as Chat GPT are just awesome suggesters, but there is a limit to their ability to rationalise what’s going on and understand connection across data sets. Technology will impact desks, and impact tech teams making them faster. You need a team that will be able to respond to that which brings us back to the need for a multidisciplinary team, which will be the most agile team in these circumstances.”

Wyatt concluded that advancements in technology and automation will add scale, essential acting as a supplement as opposed to a complete replacement of human talent.

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What is the structure of your team, and how is your desk made up?

We are a global trading team with team members in Baltimore, London, and Hong Kong. We trade the entire spectrum of FI and FX asset classes across cash and derivative instruments. We have market structure and data analytics members that enhance the value proposition of our trading desk. We are building off a simple concept that an idea can emanate from anywhere. We spend a lot of time trying to democratise communication channels to increase diversity of thought and explore different approaches to arrive at the best outcome for client portfolios.   

What makes T. Rowe Price’s trading desk unique, and how has it evolved over the years? 

While I have only been at T. Rowe Price just under three years, I have been impressed with the homegrown ‘Trader 2.0’ talent that has been cultivated at the firm. Robust interaction between portfolio managers, research analysts, and traders is essential for a fixed income platform to deliver better outcomes for clients. The FI traders here are active contributors in our investment meetings, bringing insights into the markets. The China property volatility that occurred over the last 12 months is an example of how our Hong Kong trading team was vocal and provided detailed commentary across the investment platform.   We are building a culture within FI trading that emphasies a growth mindset and we promote the concept of psychological safety, so the team feels that ideas flow freely.  The best meetings take place when I’m not doing the talking. 

How do you see the role of the trader evolving? 

Pre-global financial crisis you almost had a combined PM/trader role. Traders were heavily involved in the investment process, it was viewed as a career path. Post-crisis, given all the challenges the broader industry was facing, a lot of tasks that weren’t directly trading-related got pushed down to the desk. If you think of it as a three-legged stool between trader, research analyst and PM, traders in my opinion became a distant third within that grouping. With all the central bank money that came into the financial markets, there really wasn’t enough volatility for traders to be part of that alpha engine. A lot of it was related to the research side, the growth of go-anywhere portfolios and so on. 

What Covid brought back in was that level of sustained volatility, and so the firms that had centralised trading desks that were integrated within the investment process were much better able to navigate those pockets of volatility. Then in 2022, we saw volatility right out of the gates as more macro, geopolitical and risk influences came into the market, and the trading desk became front and centre in investment meetings again, bringing liquidity back into the conversation. People wanted to hear the opinions of the desk again, they wanted to hear from our EM traders, our rates traders in terms of risk pricing. 

Today, we are seeing an industry-wide shift in the table stakes requirements of entry-level fixed income trading roles. Quality FI traders today are more skilled and must understand portfolio construction and research, and they must become adept at price decision-making, often without complete information. Volatility is the friend of the trading desk, and the value proposition of having integrated trading within the investment process has been evident this year.  

We’ve evolved into Trader 2.0 and we’re moving towards Trader 3.0 in terms of the needed skillsets. Fixed income has always been a quantitative-oriented asset class. There’s obviously been a big push for coding skills, and more diversity of thought versus the traditional finance majors coming into the industry. I believe data literacy in terms of the ability to see trends in datasets and make value added decisions from that kind of analysis is an even more important skillset. But diversity to me is not just about gender and race, though those are important, but diversity of thought, different perspectives, different backgrounds are equally important. You make better decisions when you are more inclusive within the team. We need people with outside interests – I think you’re better at your job if you’re able to take a step back and recharge – that brings focus and clarity to your work, and you are able to solve problems better, compared to a cluttered mind concentrating on six screens at once. That’s why interoperability is so important. If you can declutter a trader’s workspace, and only push to them the relevant information for a particular risk trade, they are going to make much better decisions. 

Our desk is evolving with the framework having an in-depth understanding of the objectives for client portfolios and tying that back to trade execution and collaboration skills. We need to have a dual mindset, one with an emphasis on growth and learning, the other with an emphasis on being pro-technology. 

What were the top investment trends you saw in 2022 – what decisions were you most proud of, in terms of your own trading strategy and execution? 

We have seen a return of sustained volatility across the broader FI asset classes, a Fed hiking cycle, and macro factors influencing the risk transfer as opposed to single-name asymmetric risk factors. Since I joined in 2019, the team has embraced new trading protocols and expanded relationships across dealers and trading platforms. We encourage information sharing and breaking down silos so that ideas flow freely across the platform. 

Two trends that have accelerated in 2022 are portfolio trading and the use of macro portfolio products to buy and sell risk. Portfolio trading was a trading protocol that, after some thought and evaluation, we embraced in fixed income because we believe in certain situations it affords us the opportunity to achieve the best client outcome. The use of macro portfolio products has grown steadily at T. Rowe Price. We have expanded our use cases from CDS indices to options on those indices, and options on the credit beta ETFs to thematic decompression trades in credit markets. We have expanded our tool kit in the IRS space as well. Flexibility has been beneficial for the FI platform. 

When I think about the value proposition of the desk, there are both quantitative and qualitative measures. The qualitative were – are the traders picking the opportune times to move a block of risk. The quantitative is more in terms of dealer wallet share – which dealers are performing best? With the price inputs that are coming into the platform, which of our traders are making the best price decisions? Are we moving risk at the most opportune time and getting the best client outcome in those situations? 

One change we made recently was creating a head of FX trading. Given the Russia/Ukraine situation, having a person who led that effort was important. I think we were ahead of managing FX in that situation, and we wouldn’t have been as successful if we hadn’t already put that in place. 

What do you see as your key challenges going into 2023, and what plans have you put in place to address these? 

Data and technology stack modernisation are the major focus areas here for our platform. On the data side, we are bringing more options for the different asset classes we trade and looking to share that across our platform. We have partnered with some innovative companies that have a more tech-oriented approach to the asset class than some of the incumbents. We recently adopted FlexTrade as our EMS for the platform. For us, the EMS is much more than the point of execution in FI markets. We believe the tech engineering prowess of FlexTrade, its open architecture approach and the connectivity options the EMS will bring to our FI investment platform will be beneficial for our clients. 

We have a derivatives solutions team within global trading; the result of their hard work and partnership with the FI trading team has been beneficial for clients given the growth of synthetic credit products as risk transfer vehicles, which have had massive growth year over year. In addition, we work closely with our FI quantitative research team as some of our trading may become more portfolio- attribute based.   

As FI traders, we must focus on improvement in the entire order-to-trade lifecycle. We work hard to bring liquidity to the front of the conversation. If the desk can provide pre-trade analytics and a menu of liquidity options for a given market context, then we are going to have a more effective order- generation process. Bringing liquidity to the front also benefits research analysts, allowing them to focus their efforts on ideas where risk or, in turn, the impact of exiting a position, can be sourced. The post-trade feedback loop is important, as well. 

How are you handling the current scarcity of liquidity in the fixed income space, and what changes are you seeing in terms of market structure and relationships in response to this?  

I would characterise liquidity as more challenging and different than the on-demand liquidity that the dealers provided prior to the global financial crisis. The way dealers manage risk and balance sheet is evolving, and I believe there is a structural change in the liquidity risk transfer mechanism in FI markets. Dealer management of their directional market risk and gross balance sheet has migrated to a liquidity ecosystem composed of ETFs, portfolio trading and macro portfolio products, CDS indices, and TRS, as examples. Across FI, price discovery can be challenging in the illiquid buckets. The growth in size of FI markets over the last decade has overwhelmed the traditional dealer inventory capacity. Therefore, the mindset must change for how today’s liquidity is viewed today, in my opinion. Today, there is a greater willingness for partnership across the buy-side, sell-side, and vendor communities to tackle the liquidity challenges we all face in FI markets. As a trading team, we keep our focus on approaches that will help us get faster, more streamlined, and incorporate more automated/digitised tools to match up with the human, soft skills of the trading team.  

What do you see as the most important trading technology trends within your space right now, and how are you handling these with regards to future-proofing the trading desk? 

In our assessment of new trends our first question is, which ones will help us deliver the best client outcome?  Desktop or workflow interoperability, from my perspective, is the most important initiative because it can be applied to the entire organisation and is applicable to our focus on streamlining the order-to-trade lifecycle. The simple explanation of interoperability is how your iPhone applications work within the operating system.  The next key trend we are emphasising for our FI trading platform is direct dealer connectivity to maximise the engagement with key relationships. Data literacy is the trader skillset of choice over coding, in my view, and we want to deploy scalable, consumer-grade applications to enhance this skillset on our trading desk.  The last trend I’ll reference that I believe may be structurally transformative is how we as a firm shape our methodology around the buy-versus-build construct. I believe a balanced approach works, building in partnership when we have unique intellectual property that enhances value for our clients and buying more commoditised applications that help us scale.  

How is electronification changing the fixed income trading space?

In FI markets, we have graduated from a decade-old, simplistic view of the equitisation of fixed income markets to electronification being much more than the point of execution.  I believe it is a process that allows FI desks to scale and meet the challenges of the vast amount of data pinging the platform. Through a protocol such as all-to-all trading, our traders can aggress against risk using a market context they have framed via the data flow we have on the platform. We are also trying to get smarter about how we use a traditional trading protocol like RFQ by using smart order-routing, data-driven tools to select the best dealers for a given RFQ. 

FI traders who visualise their value-add within the investment process as being a part of the idea- generation phase, bringing in market intelligence and who value their own time, have embraced the FI market structure advances that are evolving.  In that regard, FI desks that have adopted electronification, automation, and digitisation will have an advantage of attracting the next generation of trading talent that has only grown up with technology. 

What are the challenges regarding data in the fixed income space, and how would you like to see these overcome? 

FI markets by nature are fragmented, and that brings the need for innovative thinking in a firm’s approach to their tech stack and how data is handled. Data quality has improved in FI markets from a combination of Silicon Valley approaches, the automated market making capabilities of dealers, the influence of ETFs in the liquidity ecosystem, the advent of non-traditional liquidity providers, and the connective tissue approach of some vendor platforms. Data cost is a major challenge faced by the buy-side, so we have a high bar for data sourcing.  And the data we do source brings scale efficiencies to the platform. To mitigate the fragmentation and maximise our data aggregation efforts, we are pursuing projects with our OMS, EMS, and technology partners in the areas of aggregation and workflow interoperability. 

What are the differences between fixed income trading in Europe and the US?

I would not say there are any differences between the two in skill sets needed for success. Of course, there are regulatory and regional differences.  I’m less interested in the differences and more focused on the commonalities to improve consistency in process between regions.  

Price discovery and, in turn, liquidity, is more challenging in Europe at present but with the push for a consolidated tape, that should be beneficial for market transparency as TRACE has been in the States. Our London and Hong Kong traders have been instrumental this year as the FI market risk factors have had more macro influences. Their FI trading activity is multi-asset in nature and the associated benefit of that is an understanding of macro and micro influences on the transfer of risk.  That is the benefit of having a global perspective on our FI desk. Take emerging market credit liquidity, which is one of the more difficult markets for price discovery.  Insights from our EM credit trading team can be shared with traders in less liquid domestic FI like securitised credit or segments of high yield.

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