Steven Sanders

Through this new alliance, HSBC clients will have access to WorldTrader – powered by Interactive Brokers – a new digital investment platform allowing customers in the UAE to trade equities, ETFs, and bonds in 25 markets across 77 exchanges.

Clients can trade via both a mobile app or online platform, with additional markets expected to be added. 

Read more: Interactive Brokers enhances APAC reach with extended Korean derivatives trading hours

Steven Sanders, EVP of marketing and product development at Interactive Brokers, said: “We are pleased that HSBC has chosen Interactive Brokers, a premier provider of white branded solutions for introducing brokers and banks. 

“Our suite of services includes powerful technology and trading tools, competitive pricing, and access to global markets. Institutions worldwide continue to select our platform to streamline their businesses and meet the needs of their clients efficiently.”

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Specifically, the offering enhances and aligns trading opportunities for users across the Korean, US, and European time zones, making Korean derivatives available during US and European trading hours.

Milan Galik, chief executive of Interactive Brokers highlighted exactly what time means for users: “Clients can now take advantage of extended hours to trade in one of the world’s most liquid derivatives markets. Our global client base, including APAC, European and American clients, benefit by having access to KOSPI derivatives during normal and extended trading hours, regardless of location.”

Through the expanded trading hours, products include: KOSPI 200 Options, Mini-KOSPI 200 Futures, KOSPI 200 Futures, and USD/KRW currency futures.

Speaking in an announcement, the firm confirmed that recent regulatory changes have made processes easier for foreign investments in South Korean equities.

“These changes are expected to elevate South Korea’s status from an emerging to a developed market, making it more appealing to global institutional investors,” said the company.

Read more: Interactive Brokers expands European trading through Cboe Europe Derivatives

Interactive Brokers’ clients can trade Korean derivatives along with the rest of the business’ offering from a single unified platform across various currencies, including the Korean Won.

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Malin Galik

The move will offer Interactive Brokers’ clients another means to trade European equity derivatives alongside a wide range of global financial instruments, including stocks, options, futures, etc., from a single unified platform.

Access to CEDX coincides with Interactive Brokers’ existing European equity derivatives offering through Eurex and Euronext, providing clients with an added route to manage European investments.

“The introduction of Cboe Europe Derivatives underscores our commitment to providing clients with an extensive range of products to enhance their trading strategies at low cost,” said Milan Galik, chief executive of Interactive Brokers.

“As investors increasingly use derivatives to diversify and fine-tune market exposure, CEDX broadens the investment options available for our clients.”

Interactive Brokers’ clients will have access to more than 300 stock options, through CEDX, based on European cominies from 14 countries and European equity index derivatives.

Futures and options contracts based on Cboe Europe single country and pan-European indices are also available via benchmarks including Cboe Eurozone 50, Cboe Germany 40 and Cboe UK 100.

“We’re thrilled that clients of Interactive Brokers can now access Cboe Europe Derivatives’ suite of pan-European equity derivatives contracts,” said Iouri Saroukhanov, head of European derivatives at Cboe Europe.

“This is a significant milestone in CEDX’s journey to improve the ability of retail investors to gain access to and benefit from European derivatives, particularly options.”

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Milan Galik

Interactive Brokers has become a direct trading participant on CEDX and a direct clearing participant for equity derivatives on Cboe’s pan-European clearing house and CEDX’s clearing provider, Cboe Clear Europe.

“We are thrilled to welcome Interactive Brokers to CEDX, which represents a significant milestone in the exchange’s journey to improve the ability of retail investors to gain access to and benefit from European derivatives, particularly options,” said Iouri Saroukhanov, head of European derivatives at Cboe Europe.

“Interactive Brokers has been a strong collaborator to our successful US options markets for many years, and we look forward to strengthening this collaboration with them in Europe to help improve and grow derivatives markets in the region.”

Launched in September 2021, CEDX initially offered trading in futures and options based on key Cboe Europe single country and pan-European indices, with clearing provided by Cboe Clear Europe.

In November last year, CEDX expanded into equity options, with future expansion of these products in Q1 2024. The derivatives exchange now offers contracts on over 300 European companies.

“We are pleased to introduce access to CEDX and give our clients an additional way to trade European derivatives alongside our existing global stocks, options, futures, currencies, bonds, funds and more from a single unified platform,” said Milan Galik, chief executive at Interactive Brokers.  

“With the addition of CEDX’s extensive European equity options and index derivatives, our clients now enjoy enhanced choice and flexibility, enabling them to manage their European investments more effectively.”

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Eligible clients of Interactive Brokers Hong Kong trading cryptocurrencies will now be able to transact and manage their portfolio through a single platform with a unified view.

The development will also allow clients to benefit from centralised cash management with the ability to trade cryptocurrencies such as Bitcoin and Ethereum alongside stocks, options, futures, currencies, bonds, mutual funds, ETFs, event contracts, cryptocurrency futures and futures options – all from a single account and interface.

“As demand for cryptocurrency exposure as a means of diversification continues to rise, we are pleased to offer investors in Hong Kong a straightforward and cost-effective way to allocate a portion of their portfolio to digital assets,” said David Friedland, head of APAC at Interactive Brokers.

“Our single unified platform lets clients worldwide easily invest across a broad range of global products, and the retail investor community in Hong Kong will benefit from the ability to access digital currency markets without opening and maintaining different accounts at multiple brokers and exchanges.”

Interactive Brokers launched cryptocurrency trading in Hong Kong with the first SFC-licensed digital asset trading platform in Hong Kong, OSL Digital Securities.

Cryptocurrency trading for eligible professional investor clients of Interactive Brokers Hong Kong was introduced on 14 February.

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Through the partnership with Paxos, clients will be able to trade and custody cryptocurrencies including Bitcoin, Ethereum, Litecoin and Bitcoin Cash alongside existing asset classes including stocks, options, futures, bonds, mutual funds and ETFs through a unified platform at the global brokerage firm.

The new cryptocurrency trading capabilities will initially be available to US residents with individual or joint accounts with plans to roll-out to additional client types in other parts of the world in the future.

“As financial markets evolve, sophisticated individual and institutional investors are increasingly seeking out allocations to digital currencies as a means of achieving their financial objectives,” said Milan Galik, chief executive officer of Interactive Brokers.

“In giving our clients access to cryptocurrency trading, we recognise the need to meet the growing investor demand to trade cryptocurrency alongside other asset classes in a convenient and low-cost way.”

Interactive Brokers is the third firm to confirm the launch of a cryptocurrency focused offering in the last week after Brevan Howard and Jump Trading Group also confirmed they would be launching crypto focused divisions to meet increased client demand.

“Consumer interest in accessing digital assets through trusted intermediaries is driving a shift in the financial industry. Paxos provides the regulated blockchain infrastructure to ensure enterprises can enable crypto safely and with reduced risk,” said Charles Cascarilla, chief executive and co-founder of Paxos.

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The capital markets technology firm has provided Interactive Brokers with its Capmatix Doc and Data Cockpit tools for documentation in stocks, bonds, options and futures in more than 135 markets via a 24/7 automation process.

LPA Group said the implementation will offer necessary financial product documentation on a daily basis to ensure regulatory compliance and increased transparency for Interactive Brokers’ clients.

“With this awareness of document availability, we can actively control our product offering for each of our distribution countries in Europe. This gives us the opportunity to expand our product range and ensure compliance at all times within the framework of product governance,” added Yochai Korn, managing director of global financial information services and global head of market data and research at Interactive Brokers.

Providing correct documentation to clients and for regulatory purposes for firms can be challenging, with millions of documents in different languages and variations proving burdensome for many institutions.

LPA’s technology, which uses deep learning and pattern recognition, is tailored to clients’ range of products to flag requirements for product portfolios.

“Our goal is to always help our customers achieve full compliance and increased efficiency,” added Eran Elad, product manager at LPA Group. “We hope that our collaboration helps the company meet its high-quality standards for customers and regulatory compliance through a modern and forward-thinking approach to technology usage.”

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He shifted out of risk assets, shorted Italian government bonds and bought the yen as a flight to safety. In this case, human judgement was the key, and the shift was made “long before the rocket science told us to,” he says.

These days, Kramarczik is a consultant in trading algorithms, working from home in Frankfurt. He had a sense of déjà vu as the COVID-19 pandemic prompted market collapse. While algorithms did not cause the mess, they were “not very helpful in March,” he explains. There was the same sense of panic that he witnessed in 2007. “People think that if they use algorithms they are not emotionally involved,” he says. “But that’s not true.”

Kramarczik now uses simple algorithms to identify the best days of the month on which to buy securities, or the best hour within a day. He sees gold as a “safety net” against the massive amounts of liquidity that have been injected into the financial system. Even having reached record levels, gold can still provide “insurance for the future,” he believes.

Still, he treats algorithms as a tool rather than a guide. “If there are moves that are not in your database, it becomes difficult,” he says. “Sometimes the correlation disappears.”

Flash Crash

The benefits of algorithms are obvious: much more efficient investment research and faster trading execution. Algorithms are also used to reduce the market impact of big trades as they make it easier to subdivide orders, so the size of the trades will not be apparent.

The behavioural biases of traders, at least in theory, are eliminated. This doesn’t come for free: market exchanges still experience software glitches, the effect of which can be magnified and spread by algorithms.

“There is no argument” that algorithmic trading adds more liquidity to the markets, says Ashu Swami, chief technology officer at Apifiny, a global trading and financial value transfer network in New York. But, given their high volumes and automatic nature, “if they go wrong and are not contained, they can cause sharp swings in the market”. Swami previously led the high frequency market-making business at Morgan Stanley.

Algorithms are often used to instantly exploit even minor price discrepancies in the same security trading in different markets. The International Organisation of Securities Commissions (IOSCO) Technical Committee in 2011 found that algorithms can quickly transmit shocks rapidly from one market to the next, so amplifying systemic risk.

A classic example is the ‘Flash Crash’ of 6 May 2010 when more than a trillion dollars was temporarily wiped off US equity prices. Computer programs exacerbated the damage by selling large volumes of stocks in response to the volatility. Greater use of market-wide circuit breakers was a result.

COVID-19

Rather than a financial or market-led crisis, COVID-19 is a crisis of health and the economy. Some argue that algorithmic trading allowed a prompt, if partial, recovery from the COVID-19 lows seen early this year. The danger now, Swami says, is one of contagion.

When an algorithm goes wrong, “the other algos either see it as an anomaly and pull their quotes, or they make unreasonable trading decisions based on the outlier prices”. Swami is confident that the problem will tend to be reduced over time: “More people using algos will lead to their democratisation and lessen deleterious contagion.”

The volatility seen in March was a function of the pandemic rather than being caused by algorithms, says Ray Ross, co-head of electronic trading at BMO Capital Markets in New York. BMO, he claims, performed well for its clients while using algorithms.

BMO uses algorithms to manage execution and market impact, rather than to generate trading ideas. Given the fact that they can be used for any kind of strategy, Ross sees little danger that they will all give off the same signal. Neither does Ross see algorithms as being responsible for increased numbers of failed trades in March. He sees settlement and clearing as the more likely candidates: “my guess is that it’s at that end.”

BMO Capital Markets has been functioning pretty much as usual with people working from home, Ross says. They will keep doing so for the foreseeable future and he expects the change in working culture to outlast the pandemic. Working from home is “a real improvement” due to technological improvements in the years before the pandemic.

Still, the ability to meet face-to- face with clients is missing, he says. That is what will drive decision-making about getting people back into the office. “There’s no way to make up for personal contact.” The most likely result is a “hybrid comeback”.

High-frequency trading

For Dejan Ilijevski, president at Sabela Capital Markets in Chicago, the pandemic has expanded the opportunities to use algorithms for high-frequency trading (HFT).

“When markets are slow and flat, there are no triggers, no edges, no opportunities for profits,” he explains. “Uncertainty is the main source for volatility, and the con- text around COVID-19 is all about uncertainty.”

Since market efficiency depends on price discovery, an increase in trading volumes and market participation leads to fairer asset prices, Ilijevski argues. HFT has also led to lower transactional costs for investors, he adds.

BMO’s Ross takes a more nuanced view. He does not expect there to be a decline in high-frequency strategies. Under normal conditions, he counters, high-frequency traders reduce volatility, but at times of stress, they can serve to create a “phantom” illusion of liquidity. The order books look full, but no-one is really willing to step in and take the risk. “People think there’s more liquidity in the market than there really is.”

Liquidity auctions

Ross also points to US volatility auctions as showing a weak point in algorithms. The US had a level 1 cross-market trading halt on 9 March for the first time in 20 years, and this was followed by three more such halts.

Market-wide circuit breakers force a pause to let markets reset from extraordinary spikes in volatility. The halts led to volatility auctions designed to allow price discovery.

“That’s not really what we saw,” Ross says.

Since auctions are a key form of price discovery, lack of participation is likely to have an impact on the market once the auction is over, Ross contends. He points to post-volatility auction trading volumes and price moves which were significantly higher compared with the first minute of trading after a typical opening auction: stabilisation has still not been achieved. Some brokers were completely unable to support participation in the auctions.

The most likely explanation, he believes, is that algorithms were not coded to handle such events. The algorithm “only really knows what it has seen before,” and so chose to sit the auctions out, leaving the markets to fend for themselves.

Managing an automated options market making model for about 20 years taught Steve Sosnick that successful algorithms “need to be tweaked constantly”. A shock that is beyond the normal scope of a model “doesn’t invalidate the algorithms inside it, but it does force a larger re-evaluation of its underlying premises,” says Sosnick, now chief strategist at Interactive Brokers in Connecticut.

“Profitability should never take a back seat to risk management,” he says. “We learned the hard way who focused on reward without sufficient focus on risk.”

There’s no way that algorithms and HFT are going to go away, Sosnick adds. The key is managing control. Practitioners must “maintain risk controls that work even in extraordinary circumstances”.

Artificial intelligence

Algorithms can be divided between those that simply follow the rules laid down in the programme, and those that are linked to machine learning and artificial intelligence (AI). In the latter case, the aim is for these “self-learning” algorithms to be updated automatically in a changing situation, without human intervention.

The danger is that the speed at which these algorithms learn will outpace human capacity to manage and regulate them. According to a report in June from the International Organisation of Securities Commissions (IOSC), AI and machine learning (ML) can “create or amplify” risks for financial markets.

Regulators should consider requiring firms to have designated senior management responsible for monitoring and controlling AI and ML, the report says. Regulators should also require firms to continuously test algorithms to validate the results of the techniques used, the IOSC said. Further, compliance and risk

management functions need to be able to understand and challenge the algorithms that are produced, and conduct due diligence on third-party providers.

Ross says the danger of market manipulation is “a regulatory concern”. “The machine does not know the regulations. It could certainly come up with something that does not meet market norms.”

Still, he believes the same kind of dangers exist with human traders as with algorithms and “it’s easier to shut down the machine than the human”. Of course, rogue human traders are easier to prosecute once you find them. But who gets prosecuted when the algorithms go wrong?

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Increased volatility always encourages market participation from individuals, says Steve Sanders, executive vice president of product development at retail broker Interactive Brokers. 

“I have seen in my 20 years over and over again, when there is an increase in volatility in the markets there is absolutely more trading activity and that is because people like to hop into the market and make short-term profits. When the market is stagnant and moving sideways there is just not as much interest.”

Interactive Brokers reported it saw almost 40,000 new accounts open in March alone, well above a 50% increase on the previous month’s 15,000. By July, the brokerage’s total number of new accounts had grown to 912,000, up by more than 200,000 since January. 

Robinhood, the online brokerage platform offering 0% commission to its users, is now valued at $11 billion. The platform that promotes itself as a tool for ‘democratising finance’ by reducing market access costs boasted three million new users in the first quarter of this year alone, taking its total customer base to 13 million.

Chief executive officer of investment bank Peel Hunt, Steven Fine, says speculative stocks in the market are acting as a supplement for the lack of book making activities that are available day-to-day during the pandemic.

“People of a speculative nature have turned to the markets to fulfil their book making needs during lockdown,” says Fine. “You have this bizarre situation where for retail if you are of a speculative nature, there is no horse racing, no football, no casinos, no ability to effectively do any book making at all on any other product whatsoever. But you’ve got this thing called the stock market.

“Retail flows have grown enormously. You’ve only got to look at the Hargreaves Lansdown numbers which show the number of accounts opened by individuals under the age of 35 was a new record,” adds Fine.

In the US alone, retail sales jumped 17.7% in May from the previous month, more than a 50% increase on the forecasted 8%. In July, it was speculated that retail investors represented 25% of the market, up a significant 150% compared to figures from 2019.

Icy relations 

This army of retail investors has impacted their institutional counterparts. One senior buy-side trader speaking to The TRADE on condition of anonymity explains that pools of retail liquidity were often out of reach for the institutions, leading to “icy” relations between retail investors and institutional ones.

“We can only access [retail trading flows] via a few select brokers,” the trader says. “That’s the only way we can get into those sorts of flows. So, when you do see something in Lloyds where on certain days 40-50% of trades is through retail networks, the only way we get to interact with that is either when the market maker is making those prices unwind into the market or if we have certain access into those brokers. 

“What you can end up with if you don’t have that access is a lot of volume going on that we on the institutional side just can’t interact with. That brings a different element to trading. You have to be very aware of those types of stocks and manage that accordingly.”

Retail volumes tend to have a greater turnover in the morning, meaning that institutions are forced to adapt their trading patterns to keep up with the market and this trend. The trader adds his trading desk were not as active in the morning due to the volatility in prices earlier on in the day. As retail orders usually hit the market a round 9am, buy-side traders have to change how they trade, and at which time.

“We have to be more careful because there is wider spreads and more volatility. It’s important to be more aware of the prices you are trading at, as opposed to later in the day when there is a lot more turnover in the stocks and prices are more stable. If you’re trading against that then that’s fine, but if you’re trading the same way then that causes problems obviously if the stocks being ramped up in your face.”

The buy-side trader believes that retail investors give a false view of the market, particularly in the US. “Although the markets were slightly up that was a result of five big stocks and the rest of the market was actually quite weak.” 

This, they add, has “forced institutional investors to get into those stocks when they wouldn’t necessarily have been involved in them. I think some of them feel they have to be involved in it to not lose performance.”

Shifting landscape 

Peel Hunt’s CEO, Steven Fine, counters that retail investors are a vital part of the market’s ecosystem and the price formation process. “It is a good impact. Without question.

Retail flow is helpful for institutional investors. It enables them to transact within the spread more easily. It is an additional pool of capital that they otherwise wouldn’t be able to tap into. 

“We’ve developed proprietary tools to allow institutions to tap into retail flow quite easily at the middle of the spread, which seems to work very nicely with limited slippage and low transaction costs,” adds Fine.

Interactive Brokers’ Sanders continues that the surge in involvement from retail investors shows an ongoing evolution in the market that might not favour institutions.

“The institutions are going to have to be careful as the landscape is shifting. Market makers who are after short-term profits from fluctuations are certainly going to have to be a lot more careful.”

Often labelled ‘dumb money’, retail investors with an untrained eye can slip into a pattern of viewing the market as one-way, driving up the price of certain stocks and causing unexpected fluctuations. 

Evidence of this became apparent when shares in car hire company Hertz surged 800% despite the company filing for bankruptcy in May. The company is in $18 billion of debt, but despite this, interest in shares in the company has skyrocketed.

The surge in retail investment has prompted warnings from both the European Securities and Markets Authority and the UK’s Financial Conduct Authority to firms with retail clients. They warned retail brokers that they have a greater responsibility to protect less sophisticated investors during intense market volatility.

“The impact is if individuals take their money away from institutions and manage it themselves,” Fine concludes. “If you have your money with an asset manager but decide actually you don’t want it there anymore and you want to put it in your own pension fund, which you administer yourself, that is a change. If everybody does the same thing, that’s where the institutional changes come. 

“However, whilst there is an interest in markets when stocks are volatile, I still think there is an element of ‘I’m not sure what I’m doing here I’d rather let a professional money manager deal with it’.”

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In a statement, the SEC said Interactive Brokers had failed to file more than 150 SARs relating to cases where manipulation of microcap securities was taking place over a one-year period.

The SEC added that Interactive Brokers failed to recognise the red flags for the transactions and investigate the suspicious activity as required, and did not file the SARs in a suitable time frame, despite the suspicious transactions being flagged by compliance staff. 

“SAR filings are an essential tool in assisting regulators and law enforcement to detect potential violations of the securities laws, particularly in the microcap space,” director of the SEC New York regional office, Marc Berger, commented. “Today’s multi-agency settlement reflects the seriousness we place on broker-dealers complying with their SAR reporting obligations and maintaining appropriate anti-money laundering controls.”

Interactive Brokers has agreed to pay $11.5 million without admitting or denying the findings made by the SEC.

In the same statement, the SEC also confirmed that Interactive Brokers also agreed to pay a settlement to the Financial Industry Regulatory Authority (FINRA) and the US Commodity Futures Trading Commission (CFTC) for anti-money laundering failures.

Interactive Brokers will pay $15 million to FINRA and $11.5 million to the CFTC for the anti-money laundering breaches, taking its total settlement with all three authorities, including the SARs fine, to $38 million.

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