Michael Rosen, global co-head of prime brokerage and outsourced trading at Marex

The acquisition has benefited us in several significant ways. Marex’s end customer base is distinctly different from what we previously had; they have a strong focus on futures and commodities on a global scale. Their customers are also very interested in trading and receiving support in other asset classes, beyond those they were accustomed to with Marex. By combining our strengths in equities and fixed income trading with Marex’s expertise in futures and commodities, we’ve created a more diversified and comprehensive offering.

Now, with a global footprint that includes outsourced trading for securities, futures, and commodities, we have become a highly attractive partner to a variety of entities. Many of these entities were previously unaware that outsourced trading could meet their needs, especially in the futures and commodities space. While outsourced trading is well-established in equities, it’s less common in futures and commodities, with fixed income falling somewhere in between. This expanded capability positions us to better serve our clients across all these asset classes.

It’s been quite a year for the outsourced trading landscape, what are some of the biggest themes you are seeing?

The themes in outsourced trading have remained fairly consistent over the past few years, but they are becoming more pronounced. Outsourced trading is undoubtedly becoming more global and extending beyond equities into additional asset classes. This globalisation is driven by increasing client demand for services that can support trading across multiple regions and asset classes.

In addition to this, there is a growing acceptance of outsourced trading among a broader range of entities, beyond just hedge funds. We are seeing more interest from institutional investors and corporates, who are recognising the value of outsourcing their trading operations. This shift is contributing to a significant increase in demand, and we are responding by expanding our offerings and geographical reach.

How are you catering for those trends within Marex?

We are continuing to build on our existing strengths while expanding into regions where Marex has established office bases and personnel. This expansion has provided us with access to new relationships and markets, particularly in the Middle East and Asia, where outsourced trading is gaining traction.

We’ve had a presence in Hong Kong for some time, but Marex’s additional offices in Singapore, Australia, and other key locations are now enabling us to develop business in these areas. We’ve been visiting clients and building on the strong relationships that the Marex team has cultivated over the years. This collaboration has been essential in helping us engage more deeply with local clients and offer services tailored to their specific needs.

Singapore, which serves as Marex’s Asian headquarters, will be a major focus going forward. As one of the most evolved financial services and business centres globally, Singapore is key to our efforts, complementing what has already been achieved in Hong Kong. The integration of our expertise in equities with Marex’s established presence in these regions strengthens our ability to deliver comprehensive, global trading solutions.

Just how big can this market get and how do you think the winners on the service provision side will be determined?

There’s no question that the market can become substantially larger, with expectations for continued, steady growth. While it’s difficult to pin down specific global figures, it’s clear that the share of outsourced trading within the overall commission wallet has grown significantly. A few years ago, outsourced trading might have accounted for around 5% of the market, but it’s now industry surveys point to it being at least twice that size.

Looking ahead, it’s not unrealistic to expect outsourced trading to comprise a quarter or even a third of the entire market. This growth will likely be driven by the expansion of services and the ability to cater to an increasingly diverse range of client needs.

Are there any other key attributes of an outsourced trading provider you think are crucial over the next 12 months?

Global coverage is essential. Many of the outsourced mandates we’re receiving involve a hybrid approach—trading the US markets for Asian and European clients, or vice versa. Therefore, a global footprint is crucial for any provider hoping to be a meaningful player in this space.

Additionally, the ability to trade across multiple asset classes is increasingly important. 

At Marex, our approach has always been to ensure that a client has all the information needed to say ‘yes’! It’s about making sure that the market fully understands the scope of our offering and where exactly we can add value. If you’re not clearly communicating your capabilities, you risk losing out on potential opportunities. 

The goal is to maximise our chances of winning every piece of business we’re competing for, and with the combined strengths of Marex, we’re in a stronger position than ever to do just that.

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Benjamin Arnold, founder and managing partner at Meraki Global Advisors

With our current and prospective clients, we’ve discussed cost and operational efficiency, access to live traders with expertise in new asset classes and all global markets, technology enhancements, and overall trading desk optimisation as driving factors behind outsourcing their trading. The bottom line is, if an investment manager can increase fund performance by eliminating implicit and explicit deadweight loss resulting from an inefficient trading desk architecture, they should – at a minimum – explore the concept further.

How did you decide the structure of your offering and how does it differ to competitors? 

Outsourced trading already existed but the firms and their traders providing these services were functionally no different than that of an introducing broker or sell-side sales trader. There were a limited number of outsourced trading services offering a use case that we felt was genuinely accretive to the investment manager. I was determined to build a structure that allowed us to be the exact mirror image of a sophisticated buy-side trading desk, with just one structural difference: our traders would not be employees of the investment manager. 

Meraki Global Advisors’ unbundled offering embraces the ethos of what outsourced trading is: operating as an unconflicted true extension of the investment manager – a quality that represents the model’s core value proposition. A true outsourced trade management solution, like the service we provide, strictly communicates orders to the client’s execution counterparties as an authorised trader of the fund. Our firm has stood by our promise to provide clients the highest level of service in the industry by meticulously managing the number of client mandates we take on, maintaining a 3:1 client to trader ratio, and only providing a full or supplemental trade management solution. These aspects allow our traders to be familiar with the inner workings of each client they support. We also do not offer backup trading services unless we are a supplemental solution and the client’s internal trader needs backup periodically. A trader that is not continuously involved in the implementation leg of the investment thesis and seldomly trades as a back-up trader, can be hazardous in our opinion.  

What are the differentiated remits or functions that your traders provide that sets them apart from your competitors? 

When I look at the current landscape, I don’t think anyone prioritises requisite buy-side experience quite like we do at Meraki. The portfolio manager/trader relationship is paramount and revolves around more than just trade execution. A seasoned buy-side trader understands the portfolio manager, as well as portfolio, execution, and counterparty risks and when welcomed, a deep understanding of the investment thesis to sift through information for the portfolio manager, and to anticipate and be prepared for follow up questions. There is a very tangible understanding of the comprehensive set of factors that comes with managing risk, and you can’t teach that experience unless you’ve sat on a buy-side trading desk. That shared experience removes an immediate hurdle that an outsourced trading provider will encounter if they do not have the requisite in-house talent. Meraki’s traders offer an initial level of comfort that vastly expedites the learning curve of how we can best service a portfolio or fund manager. This allows the client to focus on their core strategy without the disruption of market volatility, setting both parties up for long-term success. 

How do you see traditional asset managers’ decision to outsource trading impacting the industry as a whole? 

Financial services are a perpetually evolving efficiency machine. Therefore, the migration to outsourced trading will continue to increase as traditional asset managers seek to realise the benefits of localised market access, asset-specific hedging structured by their traders, and cost savings. The outsourced solution is fundamental in democratising the buy-side landscape by lowering not only the barrier to entry, but also, optimising operating costs across the spectrum of managers. The successful platforms that will grow in market share will have to diligently scale with a focus on their client’s longevity over simply accumulating additional revenue streams. That prioritisation has always been part of our ethos.

What have been the key developments for outsourced trading over the last year?

Geographic diversification has been key. To offer additional value beyond direct market access – something highlighted by the pandemic – Meraki has always covered the global trading day with physical seats in relevant geographic locations. Our trading skillset not only encompasses the multi-asset spectrum, but our traders have also traded live markets globally, with few local market nuances that they’ve not encountered. In addition, the increasing complexity of local market structure and regulatory changes will continue to be a valuable ‘solve’ for the best outsourced platforms to offer clients, alongside the march of technological advancements and the trader’s proficiency in the ever-evolving tools utilised to enhance fund performance, all of which have been areas of focus this past year.

What are Meraki’s priorities moving forward?

Continuing to grow by scaling and fine tuning the scope of services and tools we provide our clients is a key priority. The injection of large language models and AI tools is dynamically changing the way trading desks operate, and we remain committed to offering top tier and cutting-edge technological service and efficiencies to our clients. Given the nascent nature of our business, high level decision makers are sometimes reticent to make the decision to outsource their trade management. However, Meraki’s structure and talent provides a truly bespoke solution that is best-of-breed, evidenced by our successful growth servicing investment managers that range in size, complexity, and trading remits. I could not be more excited about our continued growth.

The post Seasoned traders and aligned interests are essential for outsourced trading appeared first on The TRADE.

The front-office is experiencing the knock-on impacts of the shortened settlement cycle and central securities depositories regulations, among other regulatory changes, exacerbating the need for truly integrated solutions.

Trading desks, usually happy to get their job done while typically ignoring post-trade processes, are more cognisant than ever of the importance of front-to-back solutions – it is (literally) not worth overlooking.

Investing in integration

Allesandro Cavallari

Client demand for streamlined solutions is continually picking up pace as firms increasingly seek to reduce costs, eliminate dated legacy systems and ultimately seek a reliable one-stop-shop, single provider approach.

As fees are demonstrably being passed back along the value chain, threatening to eat into profits and loss on the desks, the front-office has firmly turned its head in the direction of what’s going on in the back.

Historically, the front-office may have empowered operational teams and network managers to appoint a settlement agent. Therefore, through continued innovation, settlement agents are in a prime position to effectively provide highly operationally resilient solutions.

These industry-wide investments show that back office is at the forefront of value creation, and no longer considered only as expenses to manage.

With this in mind, SGSS has honed its approach over the last 12 months in the pursuit of definitive efficiency. Earlier this year, Societe Generale combined its Clearing and Custody into a single service, as it restructured to deliver clearing, settlement and custody through an integrated model for financial intermediaries.

Bringing together nearly 30 years of clearing experience onto a robust and industry leading custody platform, has allowed for streamlined end-to-end processes including instruction processing and reporting. In turn this one-stop shop allows clients to maximise settlement efficiency and focus on their core activities. 

This move is a key strategic pillar for the SGSS global transformation, spurred by the key market structure changes affecting trading processes, CSDR, Mifir and Mifid  II, and most particularly T+1.

SGSS plays a vital role in enhancing T+1 operational and settlement cycle efficiencies, which helps to reduce trading impacts, risk, and liquidity constraints. By providing cutting edge technology and sophisticated integrated post-trade platform solutions, notably straight-through processing (STP), SGSS ensures faster and more accurate trade matching and settlement processes. This reduces the operational risk associated with delayed settlements and minimises the potential for settlement failures.

This client-centric approach is one which is being embraced across the market, wherein the benefits of an integrated approach are demonstrably speaking for themselves.

Proximity with trading desks

Steve Gutowski

Indisputably, the absolute dream when it comes to the best set up for these processes is real-time visibility on everything. However, back in reality, we’re not quite there yet. Even so, trading desks’ expectations are climbing.

As technology continues to improve, providers steadily up their game, and risk assessment tools are increasingly enhanced, there is real capacity to have the more granular approach as firms expect their middle- and back-office providers to be very much an extension of their own teams.

Through close contact with clients in order to deeply understand business’ thoughts and priorities and their ways of working, providers are investing more time than ever in understanding the impact of changes at any stage of the workflow.

SSGS’ fully integrated end-to-end streamlined solution has numerous key tangible benefits. However, alongside effectiveness, desks’ main focus when it comes to any relationship is trust – which is where expertise and client service support can make all the difference.

When it comes to any industry-leading technology solutions, especially those which have been heavily invested in, the value of human touch should not be underestimated.

It is vitally important not just to have technology in place, but to back this up with a strong team who are knowledgeable and proactive. This is of course particularly true when things are running less smoothly. With market volatility more unpredictable than ever clients not only need this support, they expect it.

In addition, with every aspect of the workflow under scrutiny, having flexibility and different tools to allow clients to optimise and use various risk mechanisms – and thus compute associated risk profiles – is paramount.

Providers must recognise the bottom line – that their clients are looking to do business in the most efficient way possible. Whether that be streamlined communication flows to make sure they know if the trade status is feeding back in an automated fashion, giving clients stats and real time data, or even just making sure that accessing the information is efficient and user friendly.

The optimum set-up today is for strong technology in the front, backed by an integrated back-office platform, allowing firms to focus on their investment activities and client satisfaction.

In that light, SGSS’s expertise in real-time data management and reporting facilitates transparency and informed decision-making, helping clients optimise their investment decision duties and manage risk effectively. Specifically, a more efficient settlement cycle is enabled through streamlined workflows and automated systems, along with the support of SGSS’ expert teams, thus supporting market participants in meeting their T+1 obligations with reduced risk exposure and enhanced liquidity management.

In short, it’s about promoting the development of industry standards and interoperable systems to create a more seamless and cost-effective post-trade environment.

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Natan Tiefenbrun

Cboe BIDS VWAP-X will be a first-of-its-kind, exchange-operated trajectory crossing service for European equities, allowing participants to source and match scheduled volume which is executed at a forward benchmark price.  We will offer this new crossing service through the very successful Cboe BIDS Europe platform, and trades will be executed based on a standard, exchange-regulated volume weighted average price (VWAP) methodology. This will help investors to meet their participation-based algorithm volume schedules and price objectives, based on an industry-approved VWAP pricing methodology. 

The growth in systematic and passive investing has led to more institutional order flow being transacted through participative trading strategies, which typically seek to achieve an average price over a defined time period. This service is our response to that trend and is highly complementary to our existing range of order books. Given that venue-based trajectory crosses solutions have started to gain traction in US equities, global banks and brokers now have improved capability and experience to access such liquidity. The strong group of firms that we recently announced as supporting our service from launch demonstrates that European brokers are now ready to execute their institutional order flow in this way on exchange.

Stephen, what are the benefits of offering this service through Cboe BIDS Europe?

Stephen Berte

Offering the service through Cboe BIDS Europe, the region’s largest block trading platform, is important for a few reasons.

The first is utilisation of its proven conditional workflow. This helps to minimise the opportunity cost of using the service and allows participants to continue to work orders elsewhere whilst seeking matches in VWAP-X. Participants can submit VWAP-X indications of interest (V-IOIs) to the system to identify potential matches. Once a match is found, the firms are invited to ‘firm-up’ their IOI within a specified time period as part of a bilateral trade negotiation and a matching cycle then begins to determine the interval-VWAP execution price (see box-out for more information).

The second is ease of accessibility. As Europe’s largest block trading platform, Cboe BIDS Europe already has well-established connectivity among Europe’s leading banks, brokers and its buy-side community. At launch, sell-side participants of Cboe Europe will be able to submit V-IOIs using their existing Cboe BIDS Europe connectivity. 

The service will also utilise the unique BIDS Scorecards to promote positive interactions on the platform and provide protection against potential information leakage. Additional features will be added to monitor for activity during and after the VWAP matching cycle. In line with all other exchange activity, Cboe Europe’s market supervision team will also be responsible for surveillance of participants’ use of the service.

Natan, what are the benefits and why now?

Customers understand the benefits of achieving the VWAP price without incurring any spread cost or slippage. In Europe, many brokers pursue this through algorithms which follow a volume-based trading schedule, meaning they participate in proportion to anticipated market volume, with child orders fed into the market progressively; but with this approach the risk of price slippage remains.

The benefit VWAP-X brings is being able to achieve a more consistent execution outcome, allowing participants to perfectly match agreed volume at the VWAP without either incurring spread costs. The service is designed to encourage interactions between natural buyers and sellers with a common execution objective and benchmark.

The exchange-regulated nature of the service also confers many benefits. Orders will be executed at a standardised VWAP price methodology, utilising price data from Cboe, other pan-European markets and the listings exchange. All trades are also executed as ‘off-book, on-exchange’ transactions through either Cboe’s UK or Dutch exchange, published on our market data feeds and then sent to clearing under Cboe Europe’s interoperable clearing model.

Stephen, how might the model evolve in the future?

It’s important to say that we’re launching initially with a relatively straightforward VWAP model in Europe, but we’re already excited about how this might evolve given the long list of additional features participants are already asking for. Whilst we’re starting with Europe our plans are to introduce this functionality to the global BIDS platforms, both the BIDS platform in the US, and the Cboe BIDS platforms in Canada, Australia and Japan. 

At launch, Cboe BIDS VWAP-X in Europe will be accessible only by sell-side participants, which can use their existing Cboe BIDS Europe connectivity to submit VWAP indications of interest. As with our current point-in-time block crossing platforms, we do hope to be able to allow direct order entry by the buy-side through the BIDS Trader GUI. In time, we may be able to use this service to contest for other types of flow which remains strongly tied to the listings exchanges. 

How will matching happen in Cboe BIDS VWAP-X?

• VWAP-IOIs are submitted to the Cboe BIDS Europe system to identify potential matches.
• Once a match is found, the firms are invited to ‘firm-up’ their IOI within a specified time period as part of a bilateral trade negotiation.
• Once all firm-ups are received, eligible orders are matched with an agreed quantity, and a matching cycle then begins to determine the interval-VWAP execution price.
• The trade is executed on-exchange through the applicable Cboe exchange.
• The trade is sent to clearing under Cboe Europe’s interoperable clearing model.
• The trade is reported through the Cboe CXE or Cboe DXE market data feed as an off-book, on-exchange, trade in real time and uniquely identified with the new sub-MIC codes of XWAP (CXE) and VWAP (DXE).

The post Cboe BIDS VWAP-X: Introducing venue-based trajectory crossing to Europe appeared first on The TRADE.

Charlie Walker, deputy chief executive officer at the London Stock Exchange

The UK capital markets reform agenda has been ongoing for several years now. Market participants, the regulators and authorities across the UK should be given a lot of credit for the ambition they have shown to evolve our capital markets to be more effective for the companies and investors of today and of the future. There is sometimes the temptation to look at the UK capital markets through a narrow lens, for example, of just a set of listing rules or just secondary market trading dynamics. However, the reform agenda is a more holistic assessment of all the components that make up the UK capital markets with the objective of being able to support the growth of UK companies and maintain London’s position as a global financial center – on which the UK economy also relies.

What has been encouraging to see is that the whole ecosystem – companies, investors, advisors – have really come together with a shared objective of having world leading capital markets. It does not mean that everyone agrees on everything, but I do think that the majority have fed into the consultations and discussions over an extensive period. It has been heartening to see that level of collaboration.

What are the key components of the reform process?

The first one is making sure that we have internationally competitive primary markets rules. Essentially, making sure that companies can join the UK markets and that there are no unnecessary barriers in place to stop them from doing so; making sure that the UK capital markets are attractive to founder-led businesses, and that companies listed in the UK can compete with those listed overseas on a level playing field. That is vital in helping companies start, scale and stay in the UK.

The second aspect is research coverage. The UK has seen a decline in the quantity and availability of research coverage post-Mifid II implementation, particularly in small- and mid-caps. The FCA has just announced a policy on providing greater optionality for the payment of research which we support and hope will lead to more coverage.

The third area is the availability of risk capital. The UK has not had active policies over the last 20 years which recognise the importance of domestic investment to the UK and therefore actively incentivise it. There has been a significant disinvestment from pension schemes in the UK partially as a result. In some instances, we’ve also seen policies, such as stamp duty where you are charged if you buy a UK share but not as an overseas share, work as a disincentive for domestic investment. To bring that to life, a UK investor pays stamp duty if they buy shares in Aston Martin but not if they buy Tesla. It is important that the UK population has a stake in their own economy and shares in the growth of the country –the capital markets should be an enabler of that.

It is worth noting this disinvestment from the UK is not a choice that most people have made. 97% of the public is in a default defined contribution scheme or a defined benefit pension scheme, and therefore are not actively choosing where their money is invested. However, progress has been made here, including plans for a British ISA, the Mansion House compact and the Pensions Review recently announced in the Kings Speech. We hope all of these initiatives result in the UK investing in itself again.

The fourth component focuses on corporate governance and stewardship. Markets have changed tremendously over the last 10 to 20 years, for example the continued rise of passive fund management or the focus on ESG among other things. We think now is the time to consider how those changes have impacted the relationship between company boards and investors. What does good corporate governance and stewardship look like in modern markets and how can the UK provide frameworks to support both companies and investors? Sometimes these have been setup to be oppositional, we believe the presumption should be that investors and companies are on the same side. The Financial Reporting Council have announced that they will be reviewing the Stewardship Code, which is a key document that many asset managers and proxy agencies in the UK are signatories of. That review is ongoing and we believe is an opportunity for the UK to take a leading role in this debate which is relevant in capital markets globally.

The fifth component is creating a scaling environment in the UK. We need to support companies across their journey from startup to global champions. The question is how do we create that funding continuum? In this regard, the UK government has announced the world’s first regulated crossover market, called PISCES, which will allow private companies to apply to a regulated exchange for the first time to have their shares traded periodically using all of the existing infrastructure.

And finally, we need to recognise the importance of culture. How do we as a country celebrate entrepreneurship, success and the benefits this brings to the country? At the London Stock Exchange, we do as much as we can in that regard, whether it’s a Market Opens to celebrate the UK’s private and public companies, our ‘Be Inspired’ interviews with private and public market CEOs, or events that we host at the Exchange and globally to convene market participants. But we can collectively do more. 

How are these changes as well as the LSE’s wider strategy across the funding continuum expected to make it easier for companies to access capital and liquidity in the UK?

On PISCES, between the liquidity windows, the private companies who choose to join will remain fully private. This market will provide early-stage investors, employees, angels, VC’s, and other shareholders with the option to exit companies or realise investments earlier than they ordinarily would have had the opportunity to do so. It will also enable new investors to get exposure to private companies earlier than they ordinarily could do, to join the company’s register and to create that cycle of funding being recycled through companies. This crossover market is certainly very ambitious, and something that the London Stock Exchange is actively working on.

What trends are we seeing in the UK equities trading market and the type of trading that is taking place?

Retail inclusion is a big theme you can see across the reform agenda – whether it is asking how retail investors can access equity capital raising events more easily or ongoing discussions around whether retail investors should have access to mainstream listed bonds as well as equities.

We are also seeing an evolution in the way that retail investors are choosing to trade. There are an increasing number of neobrokers providing products and services. More broadly, retail investors now have access to a wide range of investments including through ETFs among other products. We believe this increase in retail participation will continue, which is a good thing for individuals and the market. We have long believed that the safest place for retail investors is investing alongside institutional investors on the same terms, and we would like to see a broadening of access to regulated asset classes in the UK.

In the longer-term, we continue to see a decline in the share of total trading that is taking place across lit exchanges, which is a growing cause for concern. Is this going to lead to challenges in price formation and is the current trend sustainable in the long run? That is a question we and participants across the market are increasingly focusing on.

Discover more about the new Main Market here. 

The post A deep dive into the ongoing UK capital markets reform agenda appeared first on The TRADE.

For example, a long position in EURO STOXX 50® futures could be combined with long put positions on individual stocks, reducing margin. The example in Table 1 demonstrates approximately a 70% reduction in initial margin when portfolio margining is applied instead of margining each position.

Table 1: Single vs. Portfolio Margin – Long Index Futures / Long Individual Stock Puts

This first example of portfolio margining benefits combines long equity futures with a long put option position in blue-chip securities. The initial margin for all four positions is over €206,000 without portfolio margining. When portfolio margining is considered, this figure drops by about €144,000 or 70%, as noted above. All three put positions are on blue-chip stocks that are expected to move in sync with the EURO STOXX 50®, allowing for a dramatic reduction in initial margin.

Table 2 is a second example of combining positions to achieve capital efficiency through portfolio margining. This will greatly benefit traders who like selling calls against long positions. However, calls are sold on individual stocks against broad-based index futures in this case.

Table 2: Single vs. Portfolio Margin – Long Index Futures / Short Individual Stock Calls

This second example could be seen as a covered call with the long futures position replacing the individual stocks. The net result is a reduction of about €176,000 or 59% of the original single margin amount.

Astute traders may realise there are secondary benefits to this second example. First, by selecting short calls on individual stocks, a portfolio manager could select stocks they expect to underperform the EURO STOXX 50® over the trade’s lifespan. Typically, a call will be sold against the underlying security. However, with portfolio margining, a manager can be more strategic when choosing individual calls to sell. Finally, this creates more choices when selling calls, as the manager is not limited to the stocks they own.

Another benefit is that the implied volatility of individual stock options is typically higher than index options. For example, the 30-day at-the-money implied volatility average for the EURO STOXX 50® was about 12.00% over the first five months of 2024. That same figure is 19.58% for TOTB and 24.64% for MOH. ASM tops those stocks with an average of over 37%.¹

A final example of the benefits of portfolio margining combining futures and options appears in Table 3. In this case, EURO STOXX 50® Banks futures were sold short, and this position is combined with long call positions on five individual bank stocks.

Table 3: Single vs. Portfolio Margin – Short Sector Futures / Long Individual Stock Calls

The margin reduction in the final futures-related case totals over €293,000 and a margin savings of 86%. This figure exceeds the regulatory cap of 80%, resulting in an initial margin of about €68,131. The risk for the short futures position is higher bank stock prices, a scenario that would likely result in a value increase of the long calls on individual bank stocks. In addition to a more favorable margin, this is another case of a manager having the ability to choose specific components of an index versus using index options in combination with futures. Here, the difference is that the long calls act as a pseudo-hedge against an index increase. A manager could choose calls on stocks where they expect an index outperformance when the market moves up.

Finally, portfolio margining can be used when taking offsetting positions in stocks in the same industry. Table 4 shows this example by combining a bullish and bearish calendar spread on two automobile manufacturers.

Table 4: Single vs. Portfolio Margin – Bullish / Bearish Calendar Spread

In this calendar spread example, a trader owns longer dated calls and puts than their short positions; specifically, the December options will expire before March. The initial margin for individual option positions totals €178,752.04. This drops to €24,950.85 when portfolio margining is applied. Note that this case involves two stocks in the same industry, which offers efficient use of capital in cases where a portfolio manager is pair trading stocks with the goal of one outperforming the other.

The previous examples demonstrate how Eurex’s portfolio margining benefits firms taking positions in instruments that share common risk characteristics. Eurex worked closely with all interested market participants – buy-side, sell-side, and liquidity providers – in developing and updating their approach to portfolio margin.

1 – Implied volatility data downloaded from Bloomberg using 30-Day IVOL at 100.0% Moneyness function

Further information:

Equity Options (eurex.com)

The post Maximise capital efficiency with Eurex’s portfolio margin solutions appeared first on The TRADE.

To address trading execution issues such as slippage and alpha erosion through periods of volatility that could upend the best historical models, RBC and its Borealis AI research institute developed Aiden – an electronic trading platform that uses AI and deep reinforcement learning to adjust to market conditions in real-time. Making its debut in North America in 2020, Aiden proved its mettle by swiftly adapting to volatile market changes while preserving performance, without the need for frequent manual re-coding. Now launched in UK and European markets, the platform continues to adeptly navigate the complexities of dynamic market conditions, with the goal of delivering improved trading execution quality and insights for clients.  

Solving for VWAP with advanced AI

One key area of focus is optimising execution performance while minimising slippage against the volume-weighted average price (VWAP) benchmark, a critical reference point for traders.  Aiden VWAP is the first algorithm on the Aiden platform in Europe – a volume-weighted average price strategy that uses the power of AI and deep reinforcement learning to reward optimal outcomes, aiming to minimise the slippage against the benchmark.  Unlike traditional VWAP algorithms, Aiden VWAP considers a variety of different market data with more than 200 inputs that it processes through a deep neural network. Within guardrails, it is given discretion to optimise its behaviour, learning from its performance both during and after the trade. 

RBC has also developed Aiden Insights, an initial version of an explanation system for the Aiden algorithms. The RBC coverage team utilises Aiden Insights to provide real-time trading insights and explain to our clients how Aiden is adapting and making decisions to optimise its execution benchmark.

Beyond pre-set trading algorithms

By analysing both historical data and real-time shifts in market dynamics and liquidity patterns, Aiden learns autonomously, seeking to minimise slippage and execute orders at optimal prices. Unlike traditional pre-set algorithms, Aiden proactively explores new trading patterns within defined parameters. It has the freedom to discover and act upon new patterns that aim to deliver better execution outcomes. This adaptability ensures Aiden’s execution strategies remain effective across various scenarios, including periods of market volatility. 

When executing trades more efficiently, traders can avoid unnecessary price deviations. This efficiency allows greater focus on higher-value activities, such as customising strategies to meet specific individual needs, risk tolerance, and investment horizons.

Staying ahead of the curve

The Aiden VWAP algorithm marked the first foundational step of Aiden’s evolution. In 2022, RBC Capital Markets introduced Aiden Arrival Price in North America – the second AI-based execution algorithm that offers a comprehensive solution to the arrival price challenge. With an expanded set of trading actions, Aiden Arrival Price offers greater flexibility over the execution trajectory. It is designed to reduce slippage against the arrival price benchmark by utilising an enhanced reward system and leveraging over 300 data inputs. This allows for continuous performance optimisation.

We are actively engaged towards offering Aiden Arrival to our clients in the UK and Europe and we continue to work closely with clients to push the boundaries of trading technology. In the world of algorithmic trading, AI is not merely a tool, but a catalyst for change setting new standards and expectations. Amidst this transformation, the need to stay agile is paramount. With its adaptability and precision, the Aiden platform is a powerful choice for optimising trade execution, offering a competitive edge in the complexities of today’s fast-moving markets.

Find out more

Aiden VWAP is now live for UK and European clients via RBC Capital Markets sales and trading desk. 

To learn more about how Aiden delivers powerful trading intelligence at RBC Capital Markets, please visit rbccm.com/aiden. To discover more about the research behind Aiden from the Borealis AI team, head to www. borealisai.com or contact ElectronicSalesandTrading@rbccm.com.

Key points: 

• Advanced AI has transformed algorithmic trading in Europe, as market dynamics drive demand for improved execution, adaptability and efficiency.
• RBC’s Aiden trading platform uses deep reinforcement learning, a technique of machine learning, to adapt to different market or order characteristics and respond to changes in market conditions in real-time. 
• A key area of focus is optimising execution performance while minimising slippage against the volume-weighted average price (VWAP) benchmark. 
• Unlike traditional pre-set algorithms, Aiden proactively explores real time trading patterns seeking to reduce discrepancies between expected and executed trade prices. 

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Guy Melamed, co-founder and chief executive officer at Exberry

In today’s capital markets, we’re witnessing a period marked by an extraordinary cadence of changes. The confluence of technological innovation, evolving regulatory frameworks, and shifting investor behaviour is unlike any other time in history. This era is juxtaposed with significant infrastructure changes: the rise of cloud computing, AI and SaaS operations. These advancements are enabling a level of flexibility, agility and innovation that traditional solutions cannot match.

Meanwhile, regulatory pressures and the demand for compliance are driving markets to adapt rapidly, even as they navigate complex risk environments. Investor behaviour is also transforming, with growing engagement and diversification into new asset classes. This unique combination of factors creates an unprecedented landscape, presenting both challenges and vast opportunities for growth.

What are the primary challenges facing exchanges and market operators today?

Exchanges and market operators are grappling with several primary challenges today. The changing velocity of technology and human resources demands that we attract the right talent to keep pace with new trends and manage technological infrastructure that can endure for the next 10-20 years. Regulatory requirements are becoming increasingly complex, creating the need for agile compliance processes. Cybersecurity risks are escalating, necessitating robust measures to ensure the resilience and trust of market infrastructure. Ethical AI considerations are also paramount, as we must leverage emerging technologies responsibly. These challenges require a balanced approach to innovation, regulation, and security to maintain competitive and secure markets.

We address these challenges head-on by providing sophisticated technology solutions that streamline compliance processes, enable modernisation without disruption, enhance cybersecurity measures, and differentiate exchanges with innovative offerings and personalised service.

What trends do you see shaping the future of capital markets?

The future of capital markets will be shaped by several transformative trends. From an infrastructure standpoint, the move to cloud computing is inevitable, offering efficiency gains and freeing up resources for more strategic initiatives. The integration of AI will revolutionise how new markets and assets are tested and launched, altering regulatory dynamics and operational models. We see the rise of new asset types such as digital assets, ESG investments and DLT-based settlements.

The market will also support more sophisticated new entrants, such as the new Texas Stock Exchange (TXSE) and Abaxx Commodities Futures Exchange, who are driving the creation of advanced markets. Additionally, the emergence of new investor types demanding 24/7 trading capabilities will necessitate specialised solutions, often hybrid in nature, blending built and bought technologies. These trends will drive the evolution of capital markets, making them more dynamic, inclusive and resilient.

Can you share some examples of successful collaborations or partnerships that Exberry has formed within our ecosystem?

We have established several impactful collaborations within our ecosystem, demonstrating our commitment to innovation and market excellence. Our partnerships with leading cloud providers (such as Amazon Web Services (AWS), Google Cloud Platform (GCP) and Microsoft Azure) stand out, as we work together at the cutting edge of latency reduction, AI integration and market operations. These collaborations are pivotal in enabling cloud-based trading solutions that enhance efficiency and agility. We still need to see much more work done in this area, however, so watch this space.

We’ve also teamed up with a central counterparty clearing system to support evolving market needs. This includes pioneering advanced settlement methodologies like DLT-based solutions and tokenisation, which can aid with the seamless integration of new asset classes. In addition, we have established partnerships with prominent industry associations to help promote best practices in regulatory compliance.

These partnerships not only enhance our technological capabilities but also ensure we remain at the forefront of market developments, delivering state-of-the-art solutions that drive growth and resilience in the financial trading industry.

What is your vision for the future of capital markets technology?

Our vision for the future of capital markets technology is one of diversification and agility. We see a landscape where both on-premises and cloud solutions coexist, leveraging SaaS delivery to significantly reduce operational costs and enable faster deployments and market testing. This approach eliminates the long waits traditionally associated with incumbent providers, allowing for rapid feature implementation, which also satisfies regulatory compliance demands.

AI will play a crucial role in operations, surveillance and risk management, driving efficiencies and enhancing market integrity. We envision T+0 settlement becoming the norm, revolutionising transaction speeds and reliability. Additionally, sustainable financial models for ESG 2.0 markets and the integration of new asset types will be key focuses.

Our commitment to continuous innovation and leveraging emerging technologies like AI, machine learning and blockchain will ensure that capital markets are more efficient, transparent and trustworthy, empowering exchanges and market operators to thrive in a rapidly evolving landscape.

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Broadly, there are of course a lot of IT systems that clearing houses and clearing members use, but generally we can think about these as four distinct areas: a risk system or risk management system; some kind of collateral management system; an offering which deals with trades – commonly a matching and confirmation system; and finally, a system that deals with settlement, including payments.

Integration is key

If we think about this at a high level, alongside these four areas, what is of upmost importance is to have an effective market data integration system. All of those processes, whether it be risk or collateral management etc., needs access to live market data, especially when market players are increasingly seeking to do things in real time.

For effective live risk management, market participants must be able to see what’s happening in the market at any given time, so a system that will efficiently bring in market data and feed it in to all these other systems is paramount. Similarly, this is also the case when it comes to reporting and sending communications – such as trade notifications or margin calls.

The more you can improve the integration, the better value you can have, the less risk you’re exposed to, and the more transparency the processes have.

Of course, from a CCP’s point of view, you’re increasing the chances of creating new revenue streams if you’re able to provide new types of services to clearing members; so at a very high-level view, IT systems hold more potential the more they work together.

The significance of innovation to combat market structure evolution

As the market gears up for the imminent shift to T+1 in North America, there is a wealth of challenges facing players across the CCP space. Two big pillars of this are the need to reinforce systems to handle these faster settlement cycles and having the appropriate staffing and operational requirements in place to support this.

From the technology angle, there will be a lot of operational adjustments that will need to be done. Going from T+1 as compared to T+2 may on paper appear as though you’re going from 48 hours to 24 hours, but in actuality, it’s a lot less than that.

If your trade happened at 4pm on the Monday, it needs to settle by 4pm on Tuesday but in that space of time, counting the hours people are actually awake and working, you’ve got a lot less than 24 hours.

Add to that the fact that if something goes wrong – unless you’ve got the right kind of coverage such as night shifts – dealing with these problems will also take up a significant amount of your window, which makes it even more important than you’ve got strong and resilient processing systems. 

Using cloud to deliver resilience and new services

Elsewhere, the ever-evolving cloud debate is continuing to be front of mind for actors in the space. There are significant and widely-accepted advantages to the cloud in the space which theoretically make it an important tool going forward.

In practice, we can expect better scalability, more cost efficiency, and better resilience, benefits which are especially true for global or pan-regional CCPs – for example, it can allow for different market centres, different infrastructures, and better failovers.

Aside from this resilience aspect however, it also has the potential to help with improved innovation, presenting an avenue through which to more seamlessly deliver new services to markets. With the cloud making it possible to try out new things faster, we can expect a quicker introduction of new systems – opening up new commercial opportunities for both CCPs and their members.

Empirically, the technology provides a potentially easier way to start up new cloud-based services, including those related to margin calculations, collateral transformations, and market valuations, or a new kind of a member portal for instance, and reduces the internal IT overhead if you’re able to put it out onto well-developed cloud architecture.

Cloud adoption has clear benefits, including being able to run better stress testing scenarios which is undoubtedly incredibly important, as well as being able to do more things in real time, including more timely risk management and market monitoring. It’s worth remembering, though, that cloud is no ‘silver bullet’, and requires skills and investment to deliver its undoubted benefits.

Cybersecurity

In the financial markets, a successful attack on a major clearinghouse could cause massive disruption. Given some of the cyber-attack incidents that we’ve had in recent times, the market – and especially CCPs are becoming more acutely aware of the importance of staying ahead of the curve when it comes to innovations.

Overall, it’s about increasing resiliency – and while it’s a mixed picture currently – it is clear to the market that there is ultimately one direction of travel.

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Kaltrina Hamza

However, these advantages alone do not guarantee success. To continue attracting and building liquidity, exchanges such as Eurex constantly implement unification processes and reduce cost barriers.

Today, Eurex hosts Europe’s most liquid venue for single stock options, with about 70 million contracts of open interest — equivalent to €250 billion. Traders can gain exposure to more than 500 shares from 13 countries using American and European-style options with weekly and monthly expiration cycles of up to five years.

This has moved the European market away from its initial structure of home exchanges, where single stock derivatives would trade on the domestic exchange of origin. Over time, market structure increasingly moved towards a hub model, where traders execute their business at one venue and can leverage efficiencies such as cross-margining.

Eurex offers margin efficiencies across its single stock product range and index products. Other unification measures include a single rulebook for corporate actions, which, in addition to its membership of the European Corporate Actions Committee, ensures consistent corporate action treatment and minimal market disruption.  

Together, these features reduce friction and inefficiencies in the trading lifecycle, smoothing out the market and ultimately encouraging greater liquidity.

Home market settlement

The latest step in this constant effort of efficiency-seeking is the home market settlement service, a measure that significantly reduces the operational costs of the single stock market.

The current settlement infrastructure requires that firms can only settle physically delivered equity options and futures at Clearstream Banking Frankfurt. This set-up obliges clients to re-align their assets, i.e. moving assets from their domestic central securities depository to CBF for settlement.

With home market settlement, clients can settle their physical deliveries directly at the Euroclear ESES CSDs (France, Belgium and the Netherlands). For liquidity reasons, this aligns with the market’s preference to hold domestic equities in their local home market.

“With the implementation of Eurex’s Home Market Settlement project and connectivity to the ESES CSDs, allowing clients to settle directly at the respective Home Market,” says Kaltrina Hamza, securities and collateral clearing design at Eurex. “As such, re-alignment of assets can be avoided, significantly reducing the number of delivery instructions required for settlement, bringing down the risk of settlement delays and failures. Ultimately, it results in lower settlement costs across the market.”

For now, home market settlement only applies to ESES CSDs. However, as a next step, Eurex intends to expand the offering to other European markets, including Italy and Spain. The long-term goal is to enable home market settlement for all components of the EURO STOXX 50®. Meanwhile, Clearstream remains a fundamental part of Eurex’s infrastructure, with its own set of innovative utilization such as the Investor-CSD solution for market participants.  

Cross-CSD settlement at Eurex will use the European harmonised settlement infrastructure of the Target2-Securities platform.

“The main driver of the overall project is to help our clients to improve their operational processes,” adds Hamza. “Our goal as CCP and market infrastructure provider is to ensure and further improve settlement efficiency on the market.”

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