Despite worries in the lead up to the monumental shift, many have managed to adapt their workflows to evade issues across the ETF market, securities lending and FX alike, while adapting to affirmation and central trade matching platforms to achieve straight through processing.

However, while many buy-side have hailed the migration as considerably smooth, there are some unexpected patterns emerging in how expensive it is to trade on certain days thanks to misalignment with other regions that have not shortened their settlement cycles, and this is leading to a lack of liquidity.

Presenting the Thursday conundrum.

Given that the settlement cycle is now shorter in the US trading volumes on a Thursday have dropped off significantly thanks to funding requirements that require brokers to fund a position for an additional three days on Friday, Saturday and Sunday given the slightly longer settlement cycle in Europe, the UK, and most of Asia Pacific.

The issue has been flagged by participants in various arenas, most recently on stage at the inaugural CMX conference held by the Finance Hive last week. When quizzed on their views of how the market was handling the transition to T+1, the issue around trading on a Thursday was raised several times by buy-side speakers.

Thursday volumes were noted as “muted” thanks to what some were claiming was an extra five basis point charge on trading for orders made on that day thanks to broker funding requirements over the weekend.

Jim Goldie

“The impact on a Thursday is that brokers need to fund for another three days. Additional funding over the weekend will manifest itself through wider spreads. A few bps matter,” said Jim Goldie, EMEA head of capital markets, ETFs and indexed strategies, Invesco.

“Brokers are pricing two different levels, one for T+1 settlement and one more expensive option for T+2 settlement. We’re in a suboptimal place with global misalignment. Depending on the day of the week or the settlement cycle used it’ll be more expensive to trade.”

“It’s not just Thursdays but the day prior too thanks to the funding issue. From a basket perspective, banks have been willing to do extended settlements but they charge for that. Somewhere in the system someone is picking up the tab. These are the complexities that go away with alignment.”

Highlighted by many is the fact that the industry is yet to go through a public holiday falling a Monday or impacting the end of a week in a post-T+1 environment and this will likely exacerbate many of the patterns we are seeing emerge.

“We’re in a wait and see phase. There is the Friday the 5 [July] issue but we’ll have to wait until September for a three-day weekend. There’s a hyperfocus now but what does business as usual look like? Will the SEC [US Securities and Exchange Commission] start to implement fines?” said Callum McPherson, dealing manager at Evenlode Investment, also speaking at CMX.

Elsewhere, several banks have reportedly sent notes to clients letting them know that they intend to pull liquidity currently being provided between five and six pm on a Friday NY time given that they have seen zero executions in this window since the shift to T+1 and given that everyone is now pre-funded.

Europe and the UK must move together

With the UK and Europe on a misaligned settlement cycle to the US, some have urged the UK to move on with its own shortened settlement cycle plans now that it is no longer part of the EU.

Callum McPherson

However, as noted by buy-side speakers at CMX, this would leave UK traders at the mercy of the same misalignment-related issues as seen currently between the pan-European markets and the US.

“The UK should move in step with the EU,” said Huw Gronow, head of dealing and implementation, Newton Investment Management.

This was corroborated by Goldie: “If the UK followed strict timelines it could be there by 2026. UK market structure isn’t that complicated. But the UK Government and regulator listened to the industry. We would see the same pain points in Europe. The UK and Europe need to move together otherwise it’s just more misalignment.”

The UK put together a taskforce in 2022, releasing its first report in March of this year that confirmed that the UK should move to T+1 no later than December 2027. Its final report will be published at the end of this year.

Meanwhile in Europe, the European Securities and Markets Authority (ESMA) is set to publish its own report at the end of this year, latest in January 2025, Nina Suhaib-Wolf, director market practice and regulatory policy at ICMA confirmed.

She added that there would be a public hearing on the subject on 10 July and that it had become a question of “how not if” in Europe.

Real time settlement

When asked about the benefits of real time settlement, speakers on stage at CMX were unanimous that both the UK and European markets should focus on the move to T+1 before beginning to tackle a move to T0.

Nina Suhaib-Wolf

“It isn’t something we have time to talk about. We’ve been preparing for T+1. T0 would remove a lot of legacy systems and the custodian function. The regulatory environment would need to change. We’ll get there after alignment on T+1,” said Goldie.

“If building the system from scratch now it would be like the digital asset system with instantaneous settlement. The final step will need to be blockchain related,” added McPherson. “The advantage of real time settlement would be that the investor gets their investment back the same day.”

So long as Europe and the UK maintain a misaligned settlement structure to the US, snags in the workflows of the industry will continue to show themselves. Many institutions have done well to accommodate the change – it’s smooth but it’s not optimal. The industry is also yet to experience a major liquidity event under the new regime and this will surely put it to the test and reveal any major cracks left unidentified.

The post The Thursday T+1 trading conundrum appeared first on The TRADE.

What new developments are you seeing in the algo space?

Algos have evolved immensely since program desk’s developed them to handle large volumes of orders and now they are even accessible to retail clients. In the institutional client space, the vanilla strategies have largely become commoditised and the algo suite providers seem to be focussed on improving their smart order routers and tweaking the non-vanilla algos that seek to mimic trader behaviours for the more complex orders – for example, scaling at the close or switching strategy when certain criteria are met. I am also seeing more work being done to avoid adverse selection, indicating that maybe not all block liquidity is good liquidity. Lastly, I think more algo providers are starting to use RFQ systems where they feel it can improve fill rate, while minimising price impact.

Where can algo wheels be used to better tap into alpha generating opportunities?

Algo wheels were originally developed for strategy selection, but uptake soon changed (possibly driven by regulatory concerns) to using them as a tool to absolve traders of broker selection, avoiding broker preferencing/trader bias. I am glad to see the trend is moving back towards strategy selection. They are a useful tool to handle the high volume/low ADV% orders allowing traders to focus on the orders where they can add more value. In order to generate alpha, maybe some portfolio manager profiling would be necessary but a large enough data set to analyse would be required.

What lessons can other asset classes take from equity algo wheels?

Other asset classes are embracing algos, but their market structures are so different from equities that I don’t think they will be using algo wheels to the same extent as in the equity world. 

Has algo usage reached its maximum capacity or do you expect it to account for more volumes in the years to come?

Algos allow traders to handle vastly higher volumes than without and as such, I think they will continue to grow. I see traders using them more frequently for complex trades that would traditionally have gone to a high touch desk. For example, you no longer need a sales trader to access central risk book liquidity. They are constantly evolving and improving, which is a factor that you need to bear in mind when going down the customisation route – will your customised algo get upgraded at the same time as the non-customised algos? Also, all users, current and future, really need to know and understand what customisations have been made. I am seeing algo provider lists shrinking and stronger partnerships between users and providers being built.

What are some of the hurdles that algos face?

We are seeing growing retail participation in the markets, and it is very different from institutional flow with regards to the fact that it leads to higher volatility and price impact, together with relatively fast reversion and it is also largely inaccessible flow. It would be great if algo engines could factor this in and act accordingly, but it would be very useful to be alerted when retail participation is particularly high.

Recently we had a bank crisis, and trading styles often change during such events, often toward more risk averse strategies like VWAP. When this happens, liquidity seeking strategies may be less likely to find blocks, so the strategies need to be able to adapt to a fast changing liquidity landscape.

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Sources familiar with the matter informed The TRADE that Newton Investment Management has appointed buy-side veteran, Jason Reeve, in an unconfirmed title. Reeve joins Newton Investment Management from Sloane Robinson, where he spent 21 and a half years as a partner and head of trading. The appointment marks the second major buy-side move in the last weeks, following Millennium’s appointment of Staskus.

In an effort to aid the expansion of its ecosystem, FactSet has appointed Joel Kornblum to work with its partnerships and alliances team. Joining FactSet from BNY Mellon, Kornblum brings a wealth of experience across the end-to-end investment operational process to the role: including experience in investment data management, performance measurement and investment accounting.

Bank of America has appointed Robert Mackenzie Smith as vice president of electronic trading and market structure for its fixed income, currency and commodities (FICC) business. Smith joins Bank of America from Bloomberg, where he spent the last 10 months as a senior research analyst for financial market structure, based in New York.

Adding to the ongoing trend which has seen numerous senior figures entering the crypto space from the conventional markets, crypto financial services provider Babel Finance has appointed Yang Song as head of treasury. Song joins from Commerzbank, where he spent 12 years, most recently as vice president of treasury. The newly created treasury role is designed to help the company expand the scope of its services to more diverse client groups.

Following a successful $110 million Series D funding round, foreign exchange novation platform provider, Capitolis, confirmed that it has expanded its employee base by 50% compared to the same period last year. Capitolis has welcomed a number of major strategic recruits and notable promotions across its New York and Tel Aviv offices as part of its expansion. Among the additions, Lindsey Baptise was promoted to chief financial officer. Meanwhile, Leon Leviner joined the company as head of FX engineering, responsible for the delivery of the FX compression products. Elsewhere, Ben Townson joined the product team as vice president, head of product management for compression; Milos Marinkovic joins as vice president, engineering; Sofiane Nait-Saidi joined the Capitolis capital labs team as vice president, quantitative strategy; and finally, Stephen Fanale joined as algorithm team lead.

The post People Moves Monday – A busy week for the buy-side appeared first on The TRADE.

Buy-side veteran Jason Reeve joins Newton in an unconfirmed title after previously spending 21 and a half years as a partner and head of trading at Sloane Robinson.

The hedge fund shuttering at the end of 2020 after seeing a rapid decline in assets under management exacerbated by the pandemic and a subsequent dramatic slowdown in emerging market economies.

Newton Investment Management had not responded to a request for comment at the time of publishing.

Under Reeve’s stewardship, the hedge fund’s desk was shortlisted for The TRADE’s Leaders in Trading emerging markets trading desk of the year award in 2018.

Prior to joining Sloane Robinson, Reeve also spent over a decade at Nomura Asset Management as a trader.

It’s the second major buy-side move in the last few weeks after it was confirmed that BlackRock’s director of EMEA equity trading at left in February to join hedge fund Millennium in an index rebalancing role.

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