Tokyo’s Kabuto-cho bristles with securities houses, both old and new. Headquartered in a corner of this district, Kurokawa Kitoku Securities Co. Ltd. (CEO: Mr. Ken Izawa) is a time-honored company that has been in operation for 130 years, earning it the title of Japan’s oldest securities house.

Entering the Futures & Options market

Kurokawa Kitoku Securities has expanded into a field that has potential for growth even in the current market environment: electronic futures and options trading.

With many wealthy clients, Kurokawa Kitoku Securities’ core business is in retail equity trading. Recognizing the increasingly difficult market conditions, the firm considered strategies to generate new revenue streams, and decided to establish a Corporate Sales Division to offer electronic futures and options trading to professional clients. Mr. Ihara was invited to take the post of division chief.

Mr. Ihara focused the operation of the new Division on DMA (Direct Market Access) trading, and introduced SunGard’s Valdi Market Access ASP-based service as the market connectivity infrastructure. In April 2009 the Division launched a service for asset management companies in Japan and overseas, executing orders for futures and options on stock indices and bonds.

Mr. Ihara explains why Kurokawa Kitoku Securities adopted Valdi Market Access: “We needed to start operations quickly and at low cost, but we had no resources for new system development or operations. SunGard was the only vendor that could provide us with a solution for getting our service started fast enough.”

The Corporate Division’s deputy chief, Mr. Koichi Takada, adds that “Aside from the SunGard solution’s capacity and speed of order execution, clients value highly the usability of the Valdi Trader order screen, which allows them to place and cancel orders easily, with just a mouse-click. The user-customizable order book is very clear.”

The futures and options market is experiencing brisk trading conditions, in contrast to cash equities. This has helped Kurokawa Kitoku Securities’ new business to meet its planned revenue targets, and according to Mr. Ihara the company “was able to recoup almost the entire cost of the initial investment in one year. We focus on our operation and leave the system management to SunGard.”

Managing risk

One of the issues attracting great attention in the securities trading world today is the operational risk associated with erroneous orders being sent to market. These can of course cause serious financial and reputational damage, and Japan’s Financial Services Agency also keeps a watchful eye on such errors, making them an area of close scrutiny in inspections.

In this context, Mr. Takada praises SunGard’s Valdi Selector pre-trade risk management architecture. “We can set precise filters across a variety of factors including instrument, position, number of orders, prices and open interest, which enables us to minimize our risks.”

About 270 people work for Kurokawa Kitoku Securities, of which the Corporate Sales Division headed by Mr. Ihara has a staff of just four. This lean and efficient team has leveraged SunGard’s services so as to avoid placing any demands on the company’s own system management personnel. ”Employing new staff to build and operate the new systems would have raised the break-even revenue point significantly,” says Mr. Ihara. ”In addition, since we use the SunGard solution as a managed service, we do not have to worry about responding to changes in the exchanges’ systems. Whether we have to deal with a new release of the Osaka Securities Exchange’s OMX platform, or of TSE’s Tdex+, it doesn’t cost us a thing.”

Automating clearing

Kurokawa Kitoku Securities has succeeded well with its corporate futures and options trading initiative, and has established a revenue structure that is not easily affected by market conditions. The company now plans to expand its product line, improve service quality, and reduce costs in tandem with SunGard.

As a next step, Mr. Ihara intends to introduce SunGard’s Stream Clearvision middle-office system. “If we can do this,” he says, “We can expect to reduce operational mistakes and costs because there will no longer be any manual tasks in our trade processing cycle, from order execution to settlement.”

The challenges Kurokawa Kitoku Securities is taking on are considerable. The firm’s partnership with SunGard is one of the key factors enabling it to meet its ambitious business objectives.

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Currently, OCBC Securities has three core platforms supported by SunGard solutions – retail investment, institutional investment and Internet retail.

For OCBC Securities’ retail investment arm, SunGard provides solutions for the firm’s 350 trading representatives (TRs) – working for a portfolio of retail clients who are mostly present in Singapore. SunGard also supports the firm’s institutional investment arm, which includes business with Tier-one brokerage firms and hedge funds. In addition, as part of Internet retail, SunGard also facilitates OCBC Securities’ clients in sending their orders through the web.

Since November 2007, OCBC Securities has been providing its trading representatives with SunGard’s GL Win trading workstations and direct market access gateways so that they can trade on the Singapore Stock Exchange (SGX), the Bursa Malaysia and the Hong Kong Stock Exchange (HKEx) . These solutions have allowed OCBC Securities trading representatives to bring the benefits of electronic trading, such as order executions in low latency and real-time reports to their retail customers. OCBC Securities trading representatives were the first in Singapore to offer these services for retail investment.

This push for technology was spurred by developments in the Asian markets which Mr Hui had observed. “In the last 10 years or so, there has been an increasing demand for multi-asset and multi-market solutions. While people were happy in the old days with cash deposits and, perhaps, simple mutual trusts, they have now become more savvy and sophisticated in their investments, wanting to trade in more exotic instruments and to go beyond their shores into the global markets. And this applies, not only to institutional investors, but also to retail investors.’’

Thanks to its experience with OCBC Securities, SunGard signed an industry-wide deal to replace exchange solution for all trading representatives in Singapore, thereby replacing about 3,000 screens for 13 brokerage firms to access the SGX platform.

Increasing sophistication in Asian exchanges
Mr Hui also points to the recent liberalization of formerly insular markets, like Japan and Korea, as an example of how Asian exchanges are evolving quickly. Together with the implementation of better infrastructure, there has also been a demand for new asset classes.

In September 2009, OCBC Securities cemented its new business model by announcing that it was ready to offer a global trading platform to retail, as well as institutional, investors. “What we have actually done is give the power of institutional trading to everyone. That is our value proposition. While others are still debating whether they should spend so much to satisfy this segment of the market, we have already gone ahead. And it’s only with a technology provider like SunGard and their network that we are able to execute solutions like this.”

Evolving solutions

To provide even more sophisticated execution services to its institutional clients, OCBC Securities regularly searched for new order management and trading capacities. At first, SunGard provided the GL Stream Order Management System and client connectivity so that OCBC Securities could manage order flows from its global institutional clients and execute on SGX. Updates have been applied regularly so that OCBC Securities could offer new advanced services such as algorithmic trading and lower latency for order management and execution.

Today, OCBC Securities has built an extensive connectivity, order management and trading platform with SunGard’s suite of advanced trading solutions such as GL Stream, GL Selector and the SunGard Global Network (SGN) order routing services.

First, the platform allows OCBC Securities to receive and manage orders flows from global institutional clients coming from SGN and other order routing networks. Secondly, it can handle the execution of orders on multiple local and global marketplaces such as AMEX, NYSE, NASDAQ, LSE, ASX, IDX, HKEx, SGX – with a re-routing of the order via SGN or other network to brokers across Asia, and also in the US and Europe.

Finally, the SunGard platform allows OCBC Securities to monitor its clients’ positions with a centralized risk management module (GL Selector), aggregating real-time positions across multiple markets. With this platform, OCBC Securities is able to provide its clients with cross-border investment opportunities and real-time reporting on the executed orders.

Because of this trusted and synergistic relationship, OCBC Securities eventually became the first broker in Singapore to convert its whole trading platform, using SunGard (and previously GL Trade) trading solutions. “We were ahead of the rest of the brokers in implementing one platform, provided by SunGard, to satisfy both our institutional and retail customers.’’

This is how we, as a business owner, see the value of a solution provider. There are many solutions out there. What’s important is how we mix and match and customize them to meet our clients’ needs.‘’

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The SunGard Mumbai City Day, it tuned out, was also the day of some happy auguries on the markets. The Bombay Stock Exchange Sensitive Index, or Sensex, jumped 485 points that day, an increase of 2.4%, giving a new edge to the bull run in Indian equities. The rise mirrors India’s robust growth story, which has attracted foreign institutional investors and brought a boom in the equities market. Foreign funds have poured some US$23bn into Indian equities up to mid-October this year, the highest ever on record for any calendar year. “The sun is clearly shining brightly on SunGard’s Mumbai City Day,” joked Mr.M Damodaran, the key note speaker who is the former Chairman of India’s key regulatory body, the Securities and Exchange Board of India, or SEBI.

The rising tide of global investors means there are new pressures on the Indian markets for changing legacy systems and adopting global best practices in terms of trading systems and platforms. The Indian market is only now catching up in Direct Market Access (DMA) or algorithmic trading capabilities. Speakers at the SunGard Mumbai City Day session on “Key Trends in Global and Indian Electronic Trading” said the time was right for change; brokerages have little option but to move to the next level of efficiency and transparency if they have to grow and build on the opportunities now at hand.

Anshuman Jaswal said, Senior Analyst for Celent, “Investment in technology has not been a priority in the Indian context. The way our market is, we do not have very large players who can invest and lead the market but this is changing. There was a time when French and German brokerages were late to react to technologies like DMA and business went to London and Switzerland. So if I were to predict, there is a pretty good chance that brokers who do not adopt technology will perish. It is now a question of survival, not just about making some more profits.”

Jaswal made the remarks in reply to a question on whether the Indian market was ready for large investments in technology that will be required if the market is to catch up with its Asian peers and look to global standards of operation.

India is a large, diverse country and the markets work within an ecosystem nourished by some 3,000 brokerages, many of them delivering small volumes. This is different from, say Singapore, which has just over 100 brokerages. So while the disparate, myriad Indian firms cater to a disparate audience with needs that vary from voice orders to personalised attention, there is the view that consolidation is the next logical step in a market that is changing and increasing in complexity.

In an interview ahead of Mumbai City Day, Samir Jayaswal, Sales Director for SunGard in India explained, “There is a tendency among domestic brokerages to prefer functionality over performance. There is not much of a premium on performance so a few milliseconds here or there may not always matter. There is on the other hand a huge emphasis on costs, so a solution that comes cheap may be preferred.”

An increasing demand for performance

But with booming markets, rising tide of foreign funds pouring in and the consequent demand for performance, the scenario is fast changing.

“As global investors flock to India, they look for doing business with brokerages which are mature and are sensitive to their needs. Brokerages in turn look at technology partners that bring reliability, scalability and global experience. A lot is expected from Indian brokerages while India transforms itself from a silo investment destination to a well integrated investment marketplace. Foreign investors demand the scale and quality of execution which don’t exist with domestic brokerages. Domestic brokerages are not very sensitive to performance and lay a lot of emphasis on functionality and speedy implementation. They don’t really pay a premium to performance, an aspect which will change in future,” Jayaswal of SunGard India explained.

Jayaswal said the overall market will grow as India continues on a growth path with high GDP growth rates but there will be consolidation amongst the number of brokers. “Only those with superior execution capabilities and capital will survive. Indian vendors are in learning mode and don’t have global experience. They experience along with their clients which can at times prove very expensive for the client. To provide quality execution, brokers will need vendors like SunGard which can lead the market by experience,” he added.

As it is, the growing complexities in the market demand the use of technology solutions, ranging from pricing plans for clients to complex risk decisions.

Chetan Pandya, Head for Information Technology at Kotak Institutional Equities, explained it rather well with an analogy that would be immediately understood in India, which is a mass mobile market with more than 650 million mobile phones. There was a time, Pandya explained, when some people sat behind a desk and devised a new pricing plan for mobiles every other day, which was then offered to customers some days down the line. As competition grew, as number of users rose and as demands from the market came to be felt as pressure on companies, pricing became a complex process. Now, no single person can devise a plan and companies have invested huge amounts in data mining, prospect finding and trend finding to devise pans in a market as competitive and hot as India is in mobile services.

Similarly, it has been pretty easy in India to devise brokerage plans but as the market here grows in complexity, size and competitive intensity, technology will come into play not just in systems and trading platforms but also in building and servicing the customer base with plans and services that are optimal.

The run for low latency in India

In many senses, speakers agreed that the Indian market was indeed ripe for change.

Said Pramod Bothra, Director of a brokerage called Evermore, “The three prerequisites for Algo trading and DMA in the Indian markets are already in place. The Indian authorities allowed DMA in 2008 (albeit only for institutional clients), co location in 2009 and Smart Order Routing in 2010. DMA and algorithmic trading are a fact and happening in the Indian markets, and it is only a matter of time before this takes off.”

However, comfort levels are still not high and so just about 10 percent to 15 per cent of volumes are through DMA. “Change is underway but it still takes time to change the attitude of people,” said Jaswal of Celent. “Within a year or two, the Indian market should be at a par with its Asian peers,” he added.

Already, all manner and forms of solutions are available in India and are being used in various pockets.

“Name what you want…all the abbreviations that are heard all around and you have it in India – DMA, SOR, algo, co-location, proximity hosting, high speed market data, time stamped market data and post trade analysis. From milliseconds to micro seconds, the drive is on. It is a very competitive world in India and in some cases it is a ‘take-all-or-none’ game in the market for executions. The latency will continue to drop and we have ever improving infrastructure providers and vendors,” Pandya of Kotak Institutional Equities said.

Take for an example a view of latency across Asian order books. According to Celent, ASX (Australia) and SGX (Singapore) lead with latency of under 1 millisecond whereas NSE in India comes next with 2.5 milliseconds and TSE (Japan) has a 2 to 5 millisecond range.

Pandya pointed out, “You will see a one millisecond and a sub millisecond time also coming to the market but this is a gradual progression. Latency will continue to drop and throughput from both the exchanges (Bombay Stock Exchange-BSE and National Stock Exchange-NSE) will continue to go up. The best thing is that our exchanges understand the significance of providing infrastructure that scales up, is fast and on par with the world. Both the exchanges have done an enormous amount of work and we are reaping the benefits of this today.”

The Indian capital market specificities

BSE and NSE are the dominant exchanges in India, and equities volume is concentrated in these two exchanges. This situation mirrors the rest of Asia, where an overwhelming 98.9 per cent of equities volume is conducted on exchanges and is concentrated usually on one flagship exchange. In contrast, 42 per cent of US volume is executed off exchange, whereas a slightly lower proportion of 30 per cent is executed on European MTFs like Turquoise and Chi-X, according to Celent.

Jaswal of Celent pointed out that the leading Asian markets for electronic trading, namely ASX, TSE and SGX have the lowest trading costs among equity markets in Asia-Pacific. Trade sizes are falling as well; the higher use of algorithmic trading is visibly impacting the trade sizes in leading Asian markets.

From the Asian buy side, the leading reasons for algorithmic trading usage are costs and anonymity (leading reasons, 28 per cent each) followed by trader productivity (23 per cent), speed (13 per cent) and price improvement (8 per cent). VWAP, or Volume Weighted Average Price, is still the main algorithm type but usage of other algorithms like Implementation Shortfall (IS) and Participation algos has also risen.

Jaswal said he expects a gradual but steady evolution in Asian market structure and fragmentation where new entrants will gain market share but incumbent exchanges will also benefit from the overall rise in trading volumes as the pie gets bigger. Volumes are expected to grow by some 15 per cent a year, primarily driven by economic fundamentals and high velocity traders and proprietary arms of investment banks.

Looking to the evolution of the US equities market as a precursor to the evolution of other markets and a milestone for measuring maturity, European equities markets are modelling themselves on the US pattern and moving closer to maturity. Asian equity markets are where Europe was pre-MiFID, and can be regarded as the ‘Now’ marketplace whereas Latin America is behind Asia, and will be the ‘Next’ marketplace to watch for evolution.

“So a lot of growth and activity will happen in Asia at this point in time,” Jaswal of Celent pointed out.

Where does India stand in this evolution?

In a pyramid of evolution where HFT stands at the pinnacle, the base is built by connectivity, which comes through SOR, multiple venues and co location. This is followed by the next stage in the pyramid, which comprises execution algorithms like VWAP, TWAP (Time Weighted Average Price) or IS. Both of these foundational blocks are already present or are beginning to evolve in e-trading markets of Australia, Singapore, Japan, Hong Kong and India. So at this level, India joins its more advanced Asian counterparts.

DMA and DSA have been slower to take off in India but are expected to be realised to the full potential in India sooner. According to Celent, over 200 brokerages have taken permission for DMA and some 80 to 90 brokerages are already putting their algo strategies to use.

The introduction of DMA spurs FIX adoption, something not talked of in India earlier. Now, a lot of brokerages and buy-side are talking of adopting the FIX protocol in India. Over time, there will be a steady increase in the implementation of FIX in India, driven by an increase in volumes, the need to move up the value-chain, ease in processing, executing and monitoring orders electronically, demands of international clients, compliance requirements and Straight-Through-Processing (STP) requirements for post-trade activities.

Control, speed and cost remain the key drivers for DMA. Foreign Institutional Investors, FIIs, are driving change in India. There is also a greater acceptance among Domestic Institutional Investors, DIIs, especially the top mutual funds. However, there are tight restrictions on DMA and what the Indian market is seeing is mainly “low touch” DMA as players take time to adjust to the system. Foreign and Tier-one domestic brokerages are well geared up; tier-two brokerages are in the process of adopting technology.

Of course, Alternative Trading Systems (ATS) and Darkpools are innovations that India has consciously avoided and it will be sometime before these are considered here. So it will be sometime before the potential of HFT can be fully realised.

Yet, all of these measures are being built into the system in a compressed timeframe of two to three years against a decade or so it took a leading market like the United States to adopt these steps and embrace change.

Trading volume has grown at over 30% CAGR during last four year period in India. With the adoption of advanced trading tools, volumes are likely to grow even further. Managing the flow of orders for such high number of trades will require advanced technologies from an operational point of view as well, Jaswal noted.

A strong retail investment business

Comparing the various legs of India’s financial markets, it is clear that the retail securities market segment has the highest level of internet penetration, so this remains the best market in terms of adopting new technology and providing newer services. In that sense, the securities market is ahead of mutual funds, insurance and pension schemes. The retail segment in capital markets currently constitutes some 21% of overall turnover. The number of retail Indian equity investors is expected to cross 25 million by 2012. Clearly, retail participation in capital market is booming and mobile trading will only add to the momentum.

Mobile trading is expected to receive good support from the establishment as well because it will help achieve goals of financial inclusion given that mobile handset penetration in India is deep and services have been enthusiastically adopted by common Indians at large, in urban as well as rural areas.

Said Pandya of Kotak Institutional Equities, “Wireless will be the key … Today, the government and the regulator understand that if financial inclusion goals have to be achieved whether through participation in banking, capital markets or any other form, mobile ecosystems are going to be important and you will see proactive approaches from government and the industry to help build and support a very robust, reliable and cheap mobile ecosystem for people to use and do transactions.” Pandya called this “a very crucial work-in-progress,” saying that if it is successful, it will help in meeting the entire range of goals for financial inclusion.

Financial inclusion remains an elusive goal but a key achievement parameter for the Indian government, which must strike a balance between economic reforms to achieve high GDP growth and at the same time ensure that the weaker sections and the poor in this country of 1.1 billion people are not marginalised or ignored in the process. Financial inclusion is an oft-stated goal of various senior leaders in the government of Indian Prime Minister Dr.Manmohan Singh.

In the end, India may present some sense of a paradox.

On the one hand, there is a deep interest in the latest technologies and putting them to work in the Indian context. India excels in Information Technology solutions and IT Services are an important export of India. Market participants like Bothra of Evermore are proud of this fact and say electronic trading is therefore a natural solution for a country like India. And as Pandya pointed out, there are people here also working on a “neural trading system” – silently and with dedication, building for the future.

On the other hand, the Indian markets can be slow to change and the process for adoption of technology is gradual as the regulator remains cautious and infrastructure takes time to match up.

As Pandya said, “The message from industry is to make very simple and functional things to begin with and if that works to build something further rather than build a Taj Mahal straightaway, which would take an enormous amount of time and money and which may not come to the market or be used or by the time you build the best, the market could be lost.” The message: smart execution is the key.

And Jaswal pointed out that technology is not only to meet the immediate or growing needs of the market. It remains a crucial ingredient to the dream that Mumbai be developed into an international financial centre of repute. “If you look at the bigger picture, then without technology, this is not going to happen,” he said.

There could be no better realisation of this and the bigger picture than the large number of people who thronged the SunGard Mumbai City Day, an attendance that would not have been seen on earlier such occasions.

Panelists:

• Simon Haque, global head of electronic trading sales, BBVA
• Kojo Asakura, general manager, KBC Securities N.V. Polish Branch
• Roman Lokhov, managing director, head of global markets and investment banking. Otkritie

Latin-America

Haque said that while BBVA was indisputably Spanish the bank had a presence in 32 countries around the world and is one of the largest retail operations throughout Latin-America.

Emerging markets were big news. A Goldman Sachs emerging market report had listed its expectation of the five most economically powerful nations in 2050: China USA, India, Brazil and Mexico – two Latin-American countries in the top-five. Not a day goes by that economic growth in emerging markets is not featured in the financial press.

Haque demonstrated BBVA’s commitment to Latin-America by revealing that, of a total worldwide staff of 110,000, half of those were employed in the region. With a total population of 600 million people Latin America has often in the past been seen as ripe for growth “but something seems to go wrong, one of those aspects could well be inflation – in the 80s and 90s it was well out of control but since the turn of the century that has not been the case.” Generally, with exceptions – notably Argentina and Venezuela – Latin-American economies had been well managed both in terms of external balances and debt.

There was some evidence that Latin-America had decoupled from the US and the more developed world – investor interest in the region was gaining traction. Haque talked about the growing interest in equity trading. Obviously most interest had been seen in Brazil, the region’s largest economy – Bovespa and Bolsa Mexicana combined represented 93% of the volume in the Latin-American market – but Peru, Columbia and Chile were seeing increased focus. Those markets are very small but Columbia, for example, has risen 1000% over the last 10 years.

Haque said that investors are asking for, and it is BBVA’s plan to build, a single platform to access all equity markets across Latin-America. DMA (Direct Market Access) is readily available to Brazil and Mexico and, although access to other markets is currently more cumbersome, this is expected to change in the near future.

Poland

Asakura focused on Polish economic success. He said that the story was different to that of Western Europe: Poland was the only European country to have a positive GDP in 2009. For this year and next analysts have recently upgraded their estimates – GDP for 2010 and 2011 is now predicted to be 3½% in each year.

The main driver of the economic growth is private consumption. While Poland was not untouched by the global downturn real salaries remained stable and although unemployment increased the rise was moderate. Generally, aggregate wages and, as a result, consumption were maintained at healthy levels. A factor in Poland being relatively unscathed by the crisis was that Poland is under-banked and was therefore spared the necessity of bank bailouts. And, while foreign currency mortgages do exist in Poland, generally denominated in Swiss Francs, they have had far less a negative impact there than they have in Hungary.

Growth will continue in Poland over coming years fuelled by European Union funds, there is €10 billion scheduled in 2010 and 2011, which will largely be spent on infrastructure. The European funds add approximately 1% to Poland’s GDP.

As regards the Polish stock market, short-selling is possible (in fact Poland decided to permit short-selling around the same time that other jurisdictions were banning it) as is lending and borrowing securities under GMSLA (Global Master Securities Lending Agreement), there is no stamp duty, give-up agreements are now allowed and omnibus accounts are expected in 2011.

Among other changes, in 2012 the Warsaw stock exchange will launch a new trading system, NYSE Technologies’ UTP (Universal Trading Platform) and, from next year, trading sessions on the exchange will be increased by one hour. There is also the forthcoming IPO of the Warsaw stock Exchange itself.

The capitalisation of the Polish market is in the top-10 worldwide and equity turnover and liquidity is also impressive. Further, it is not merely a simple market – the Warsaw stock exchange is the fourth largest in Europe for derivatives.

KBC Securities is the largest stockbroker in Central Europe and has a local presence in all its markets. KBC is part of the SunGard Global Network (SGN) and via SGN Securities can offer direct access to the exchanges or route orders through its own platforms. It is one of the few brokers offering real DMA to the Polish futures market.

Russia

Lokhov said that the Russian economy was back to growth. Russian GDP is estimated at 4 to 5% per year over the next two or three years and the budget deficit is expected to decrease rapidly due to the growth in reserves. External balances are positive and, although inflation is still a concern, it is expected that this will be answered by the appreciation of the Rouble.

Lokhov stated that “Growth drivers are about to be changed” – the stock market sold off by more than 70% at the start of the crisis but has recovered well. The recovery has been driven by the manufacturing, transport and mining sectors. Otkritie expected the RTS index to increase by a further 10% by the end of the year to 1650.

The crisis might even be seen as a positive shock for Russia after eight years of growth; companies responded by cutting expenses and capital expenditure and optimising operations.

Valuations in Russia are attractive in comparison with other emerging markets at prices around seven times earnings – other markets trade at a multiple of around 12.

Regarding the Russian financial system, there was a considerable governmental support for creating a financial centre in Russia, situated as it is between Hong Kong and London, but there were considerable barriers to be overcome: the legal framework and technology among others.

Lokhov believed that “Russia will be fully emerged within three years” but one could easily access the Russian market now. To solve legislative problems Otkritie has “basically outsourced [its] brokerage business and DMA to the UK” so that trading is with an FSA-regulated company and country-risk is reduced. Trading technology is an easier problem to solve and readily available. To aid transparency DMA is offered but execution alone is not sufficient: over the next four years Otkritie intends to position itself as a full service prime broker for emerging markets offering custody, stock lending and borrowing, and money markets services.

Moderator: Will Rhode, research analyst, TABB Group

Panelists:

• Cressida Hamilton, head of securities operations, HSBC
• Trevor Gatfield, head of securities operations, Investec
• Andrew Gibbons, global head of equity settlements, Royal Bank of Scotland

In his opening remarks Rhode contrasted the “US equity market – a horizontal market with a single central counterparty (CCP)” with the European market, “a vertical market, where the exchange owns the CCP and the depository”. Without widespread inter-operability in Europe firms are “faced with a plethora of venues with which to connect.” The resultant frictional costs have now given impetus to improving efficiency in the middle- and back- office. Rhode also highlighted the resurgence of a push for T+1 settlement.

The benefits of system integration

Hamilton detailed the key benefits of unifying a back-office. Improved risk management was a prime benefit: “if you are operating under one back-office system and that back-office is globally consistent it is much easier to manage your risk – you have one picture, one set of data, you don’t need to reconcile between systems.” And, of course, once that unified system was paid for there would be cost savings: “one system, while to get there will demand an outlay, will ultimately give you a return on investment because the reality is that you have one set of deployments within one system – you don’t have to deploy across multiple systems across the globe. It makes it easier, it makes it cheaper and it certainly makes it quicker. Along the same lines, from an I.T. perspective, if I’m paying for one I.T. team to manage one system that’s a lot cheaper than paying for multiple I.T. teams.”

Hamilton also saw that clients, particularly those with global interests would receive a better service from a bank or broker with one system: “If I have a system that is globally consistent then clearly I have an advantage.” She added that “At HSBC of course we don’t have one system, we have a number of systems and they are quite fragmented [but] we are gradually going through a process to re-engineer those systems and unifying them.”

Gibbons also saw unified systems as important: “Integration – unification of systems – gives me cost reduction, price transparency, consistency of client service in every location that we operate and it also gives me scalability – there is always work to be done in this space. Frictional trade costs in Europe are still far too high and integrating middle- and back-office systems helps reduce those costs. It gives me the ability to see where we are spending money – where I can take cost out of the equation and become more efficient.”

Gibbons felt that latency was no longer the prime differentiator for clients and that firms were starting to realise that “Quality and speed of execution is not a differentiator any more. Anyone with a PhD and a big enough box can build an algo-trading system. What differentiates is post-trading service, and if the business realises that they sponsor it, they fund it and it makes everyone’s life down-stream an awful lot easier. I can’t improve front-to-back processes, I can’t improve operational efficiency without the business understanding and sponsoring.”

The consequences of MiFID I

There was some discussion of MiFID and its shortcomings. Hamilton did not think that the trumpeted implementation of ‘best execution’ together with the administrative and data-collection burdens to support it was a great advance in practice: “I don’t think that best execution, a result of MiFID in itself has actually provided a huge amount. And conversations with our clients support this view.” Gatfield said that the resultant fragmentation had increased unit costs in comparison to the US. Both Gibbons and Gatfield saw some consolidation in clearing. As Gibbons put it: “On a net basis fragmentation has become cost-additive, that was not what was intended to achieve. There has been consolidation in the MTF space and I’m sure we’ll also see it in the clearing space.”

The possibility of T+1 settlement

Given the regulatory drive to mitigate systemic risk the panellists were asked their views on the merits and difficulties of moving to a settlement cycle of one day, known in the industry as T+1.

Gatfield was unequivocal is support of the idea: “Bring it on!” In answer to any who might baulk at the difficulty of T+1 implementation he pointed out that there were those who had thought that T+10 then T+5 and later T+3 would not be managed. He admitted that there would be situations where T+1 was impossible: “We know those clients, we know those markets – which ones are going to cause us difficulties – but the vast majority [of trades]…will go through ‘on the nod’ – you will have a very high percentage settling T+1, most of the rest at T+2 and a small percentage T+3 or later but you are ahead of the game, you are removing risk and removing cost.”

Gibbons was supportive of the T+1 concept but more wary of the difficulties. He saw cross-border client activity and the lack of universal automation as the main stumbling blocks: “You can have a client in Asia, for example, trading into Europe – effectively T+1 is T+0 for that client. [And] a lot of the markets in Europe settle on overnight batches, again that creates an effective T+0 settlement cycle.” He felt that same day trade affirmation was a pre-requisite on the path to T+1 but that some clients still insisted on fax rather than electronic confirmations.

Hamilton picked up on Gibbons’ point: “There are good reasons why the Securities Industry Association looked at this in 2004 and dropped it. It is a nice idea and if you are trading in the UK or Europe perhaps it’s slightly easier but Andrew’s point is a good one – if you are trading across multiple balance sheets with clients that have very differing requirements it’s more tricky”. She said that T+1 would not just be “a requirement of brokers or investment banks, we do have to get our clients on board and our clients have to be prepared to accept electronic post-trade solutions.” Further, she asked whether a “move to T+1 when the client base in some of the larger organisations is not ready – wouldn’t that increase your operating risk?”

Gibbons made clear his support of a shorter settlement cycle: “The arguments are valid – T+1 or even T+0 is the right place to be but how do we get there and how is it funded in a budget-constrained environment?” He picked up on Hamilton’s point that both buy- and sell-side support was required to make it a reality but that the cost savings of a reduction of margin and collateralization were not sufficient to outweigh the costs for some of the implementation. But if the industry did not act he foresaw that a two-tier market might arise: “It could evolve into a situation where the large institutions, investment banks and brokers – where everything is electronic – becomes one market, where costs and process will be reduced…and there would also be a second tier market where the costs are a lot higher I can see that evolving, certainly.”

Hamilton made the interesting point that “There is a difference between T+1 and what T+1 might give us. Basically the important point is about becoming more STP…it’s not about T+1 but getting full automation” or, as she also put it: “same day affirmation is a priority – once that is established then we can talk about shortening settlement cycles.”

Gatfield said he thought that all the panellists were in broad agreement on the merits of T+1 and that he also agreed what the problems are but that he had “a different way to get to the end-game.” He said that “legally the moment you trade the stock changes hands – why do we need a settlement period? Unless you adopt that thought process we will be here next year talking about same-day affirmation.”

Moderator: Will Rhode, research analyst, TABB Group

Panelists:

• Philippe Ruault, head of clearing settlement and custody products, BNP Paribas
• Frederic Colette, head of operations, Newedge Group

Will Rhode of TABB introduced the SunGard’s London City Day session by pointing out that “investment in risk management technology and process is growing at a healthy rate in fact the growth in this area is far greater than for most other business areas”. This investment was both to comply with impending regulatory mandates and for competitive differentiation.

Rhode said that “in a multi-asset trading world risk considerations become more complex. Risk management is going to be increasingly integrated into a real-time trading and review process. With the increase in velocity of trading, ‘end-of-day’ simply does not cut it any longer.”

Frederic Colette of Newedge detailed what he saw as his real-time risk management needs: “our clients are using more and more leverage and to be able to provide this as well as cross-margining we need to know, as close to real-time as possible, what is the position we have with our client, what is the market exposure they are taking and also, depending on the product, what is the exposure to counterparts.” Colette saw the need for real-time position information across all asset classes and the ability to aggregate this information at the client portfolio level.

BNP Paribas’ Philippe Ruault agreed for the need to be able to measure client exposure intraday but also saw real-time calculations as a means “to develop our business” in developing a more accurate credit process and “in order to do what we need to assess the exposure and the collateral.”

The ideal is to not only achieve a holistic real-time view of an enterprise and also a view of the exposure to each client across asset classes. But there is still some way to achieve this. Ruault said that BNP Paribas “developing new products to be able to combine open positions in cash equities and derivatives and calculate cross-margining [to determine] what is the true exposure should the client go bankrupt”. At Newedge, Colette said there was already a suite of systems that showed a “holistic view…cross asset on FX, equities, fixed income and their derivatives” but this was generally post-processing and that the aim now was to “have real-time data, more accurate, much more normalized.” He added that one of the main challenges is to evolve to combine the exposure from all asset classes and all clients and have an overview by client as well as by counterpart for all the products. If you achieve that you still need a different type of calculation, intraday versus overnight as you can’t expect to do the same level of calculation. It takes quite a lot of time to do a Monte Carlo VaR (Value at Risk) calculation for example.”

Colette was concerned that, in the competition to provide clients with optimal direct access to markets, pre-trade monitoring was less rigorous than it could be: “To be honest, if you really want that in place you are affecting the velocity and the clients are not interested in that solution so it’s really a trade-off between your appetite for risk and the velocity you will lower your client to trade on. It is one of the key challenges at the moment.” The accuracy of a pre-trade process could in fact act as an impediment to the business: “the more your pre-trade risk-monitoring is efficient the more time it takes to make the calculation and therefore the more time it takes the order to reach the market. So it is a constant arbitration between what you are willing to accept in terms of risk and the way you are going to cover the risk basically by monitoring the orders properly before they reach the market.” Colette hoped that the new regulation would address this problem.

Increase transparency on position and liquidity situation

Of course, the new capital requirements were themselves increasing the push towards better liquidity management and real-time risk assessment. The panellists agreed that there was a risk that regulators could just apply a blunt method of capital calculation and risk management if firms could not demonstrate adequate risk management capability in an increasingly automated market. Ruault said that investment now, across the settlement cycle was essential. Colette expanded: “It is clear that the more that you can demonstrate that you are in control of your business the more you will be able to have a better relationship with the regulator – it will have an impact basically on your capital, on your need for capital. The less you are able to show that you control your business and know exactly what your liquidity situation is the more capital they are going to ask you to put aside, this will increase your costs. It is very important to be properly organized.” Ruault agreed but made the point that in a tighter regulatory environment “the item on which we can act is client selection – obviously if we are too selective we will have fewer clients so that is an issue.”

Clients’ expectations were of course changing in terms of the information that was supplied to them and the timeliness of that information. Ruault said that: “clients are demanding more transparency particularly with regard to how we calculate their exposure. More and more we set up meetings with clients to explain how we calculate their exposure, why we need a certain level of guarantees or collateral, that’s a big change of behaviour from our side and its welcomed by the clients” BNP Paribas’ technology is mostly internal said Ruault: “we have tools to monitor and calculate the VaR exposure we are in the process of adding derivatives to this so that we can deliver cross-margining.”

Colette agreed that “Clients are expressing the wish to see much more transparency on the methodology you are using for the calculations – they no longer just accept the figure they want to know exactly what are the parameters – they want to challenge you on the volatility you are using, the curves they are closing prices and so on and, that brings a completely new set of challenges to be able to justify this information.”

The panellists saw another challenge as the sheer weight of data. Colette said that “one of the challenges is capacity – you have such an amount of data to deal with now so aside from the velocity and the messaging capability, it’s really the capacity to absorb such a large volume of data and use it real-time – you need a completely new set of technology to be able to do that”

Ruault said that BNP Paribas solution was now to look further afield for software: “It is the same for us regarding capacity and velocity. What we are trying to do as a securities services provider is to partner as much as we can with our investment bank and leverage their tools for pricing, for VaR calculation etc.” But for workflow technology the bank had looked externally: “on the derivatives side we are using SunGard’s Stream Instant Control to monitor give-up/take-up process and calculate the exposure. A massive investment in technology is key for us.”

Colette summed up well the value of technological investment: “The better your technology in terms of information and transparency the less cost it will be to adapt to the new regulation whatever the regulation is…it is clear that the investment we are making today will save us a lot of money in the future.”

Against this background, a panel of market data experts at SunGard’s London City Day discussed both the challenges and potential solutions facing the data industry in the developing regulatory and economic environment. While exploring the evolution of market data, topics such as the “data tsunami”, technological advances and shrinking budgets were discussed but the enduring theme was that when assessing value, relationships matter: whatever the pressures, the fabric of each vendor relationship has the ability to contribute significantly to the price-value equation.

Moderator: David Anderson, director, Atradia

Panelists:

• Ken Richmond, global head of commercial market data, Royal Bank of Scotland
• Janet Simpson, principal, JS Market Data
• Steve Allen, director, EMEA head of market data strategy, Citi
• Robert Jeanbart, director, market data, SunGard

Setting the scene before directing the panel discussion, Anderson wryly noted that business has moved on a long way since the days of the old Telerate and Reuters “green screens”. Now we see virtually full automation with data being transmitted at the speed of light. Indeed, these days there is so much information that there is a danger of being overwhelmed by a “data tsunami”, with the logistical complexity of administering all the ensuing data now being massive.

Anderson highlighted what he saw as the main current themes in the sector: significant cost cutting and control; dealing with new regulations and compliance with all the accompanying red-tape; the potential fragmentation of the suppliers and possible tensions between the established big vendors and smaller niche market data players like SunGard’s MarketMap.

Changes to the data industry in a highly cost-conscious environment

Anderson asked the panel what had significantly changed recently for them, and how much choice buyers have in selecting their vendors.

Citi’s Allen thought data buyers were more interested now in developing partnerships with vendors that deliver solutions rather than silo products. “Those vendors who deliver a straight vanilla product take a smaller portion of the pie today”, he claimed.

Simpson noted an “explosion of interest” in niche vendors such as Markit, especially amongst the smaller buyers such as hedge funds who see them as more innovative.

RBS’s Richmond thought that since the data industry is now globalised, we could see a sizeable ‘number 3’ emerge to challenge the Bloomberg/Thomson Reuters duopoly in the real time data segment. He also noted that big banks are significant users of Markit products too: unsurprisingly as these banks are major shareholders.

Jeanbart said that when Infotec – acquired by GL Trade, and then by SunGard – started supplying data 10 years ago, they were told it was foolish to even take on the duopoly in a commoditized field. But there has been a shift in attitude from buyers over that time – with speed of transmission and developments in customer partnerships being key.

Anderson continued by asking the panel how the economic crisis of 2008/09 had affected market data. Richmond said things weren’t really getting any easier, citing significant layoffs in the wider financial industry announced on the day of the discussion. He was concerned at vendors trying to sell unnecessary add-ons that traders did not need, and one response at RBS was trying to avoid long-term tie-ins so that they could stay nimble with their vendor relationships.

Citi were still looking for beneficial longer-term relationships, responded Allen, but they had learnt from the downturn to be more flexible: “we remember the guys who work with us and also those who don’t work with us” when picking relationships these days.

Simpson thought that even though “DEFCON 2” measures were still in place and getting sign-off on expenses was often a tough task, customers were buying and there are signs of expansionary actions again.

Anderson then asked Jeanbart how the crisis had affected SunGard as a data vendor. Jeanbart said it was mostly business as usual, offering “fair business at a fair price, with fair content”. No policy changes had been required, and this gave him comfort that they’d get through these tough times and be well positioned for when things pick up.

Regulations

Anderson moved the discussion onto the impact of regulatory changes, such as MiFID II. Simpson cautioned that ideas such as splitting banks into clearly designated data silos could create more work and cost, but Allen was not so concerned by this. He thought smart firms usually found a way to adapt and innovate around new regulations and make money regardless.

Richmond saw some new regulations, citing the US consolidated tape rules as an example, as simply creating inefficiencies where the monopoly vendors could simply make more money supplying mandatory data which would prove to be of questionable benefit to anybody. Jeanbart said new regulations create a mountain of work for suppliers as they factor them into their products, which though sometimes progressive and useful, rarely seem to help avert any new crises from happening.

Value and Innovation

Anderson was keen to explore the concept of how you measure value in market data.

Jeanbart immediately responded that at SunGard they don’t lead with selling value to customers, and that vendors can only measure their own value to buyers by the level of sustainable relationships, including low attrition rates and decent growth. Instead, Jeanbart thought that buyers put a price on what they want, and the ‘price times utilization of vendor service’ equation was different for every customer.

Richmond said RBS never think of market data as an expense, but instead “buy it to make more money” and drive revenue, and only then can it be said to add value to a business: “if a product was free but didn’t help us make money that isn’t good value”. Allen concurred by saying it is often better for Citi to buy the more expensive product; like many things in life, the cheapest offering isn’t always the best option.

Allen also noted a worrying lack of innovation with some vendors as costs were cut over the last couple of years. In response to a floor question about innovation being sapped by the downturn, panellists went on to say that in some areas this was clearly true, stating the lack of automation for vendor invoices and key performance indicators as examples. But Jeanbart thought suppliers like SunGard did not spend less on innovation in a crisis. Instead vendors “just spend better”, focusing the mind more on what is really important to driving improved relations with customers.

Asian markets are evolving quickly as many electronic trading initiatives unfold. Asia is now the new frontier for developments in technology and innovations, building on (and learning from) the successes and mistakes of mature financial markets in the United States and Europe. With the launches of Chi-East, Arrowhead and SGX Reach, markets in Singapore, Japan and the rest of Asia are anticipating revolutionary changes in high frequency cross-border trading, together with the increasing popularity and prevalence of dark pools and algorithmic trading. Technology will play a vital role in this evolution, but regulation also has an important part to play, to ensure transparency, uniformity and propriety. However, finding a balance between a firm hand and efficient free markets will be difficult, as will the unifying of the disparate and unevenly developed financial domains in Asia.

Anshuman Jaswal, Senior Analyst, Celent, noted that various factors need to be in place first before high frequency trading (HFT) can be effective, including a comfort level of usage when it comes to direct market access (DMA). There must also be greater post-trade transparency, especially with co-location, which has become increasingly important in Asian markets of late.

He said: “It’s not just sufficient to have technology in place. Regulation is also very important. We need to see major regulatory change, like MiFID in Europe, to change the way the market works and reduce the issues and problems we have, with regard to cross-border trading, for example.’’

Dark pools
The popularity of dark pools is a key contributing factor to the push towards new e-trading initiatives. One of the main success factors of dark pools has come from the fragmentation of liquidity that has diminished the average trade size executed on the exchanges.

Ned Philips, CEO of Chi-East, said: “The main point of dark pools is that they lessen market impact. So if you are going to trade loads of stock, you can use a dark pool to minimise impact and bring liquidity to the market. This is especially important in Asian markets where liquidity can be a major issue.’’

Dark pools came about because of a general dissatisfaction with lit-book exchange markets, where the operating model has benefited hedge funds and high frequency traders, at the expense of traditional institutional investors. The fear of numerous traditional buy-side firms, that they were likely to be victims of predatory trading from the algorithmic trading engine of hedge funds when trading large orders on the exchange, was reinforced by the launch of hosting services by exchanges, which could favour latency arbitrage.

Said Anshuman: “Numerous buy-side firms in Europe relied on the algos provided by their brokers with little customization, and were confronted with counterparts that had a much more sophisticated approach to program trading enabling them to take advantage of the predictability of the trading strategies used by traditional buy-side firms.’’

Ned Philips pointed out that, while not everybody may understand how a dark pool, a lit pool or an algo works, they all aim to reduce cost across the markets, increase efficiency and lower latency.

He added: “So these new developments, such as Reach and Chi-East, are very much driven by straightforward and simple concepts we can all appreciate. Exchanges themselves have seen competition and, obviously, have to react in their own ways, whether by upgrading their infrastructure or partnering with technology firms.’’

Regulatory issues
In order to support an HFT environment, a unified regulatory framework is needed. Anshuman drew the example of the US Securities Exchange Commission’s recommendations for the HFT market as a likely model for Asia.

The SEC’s recommendations included mandating that market centres place additional responsibilities on certain market makers, such as mandatory quote activities or restrictions on the number of cancelled orders. It also called for more transparent post-trade reporting of activity on dark pools and more stringent risk controls for the provisioning of sponsored access, as well as requiring co-location services to be offered more transparently to the marketplace.

“We expect a refinement of the current system to increase transparency, with some additional responsibilities placed on market participants, but not truly a wholesale restructuring of the market,’’ said Anshuman, adding that not all Asian markets will have these factors taken into account. “Different markets will be at different stages of development. There is no one solution in terms of HFT. We have to understand the markets themselves.’’

Philips agreed: “It is slightly more difficult in Asia. Europe and America is one market, with one currency and one settlement cycle. It is quite a homogenous market. Asia has a range of different markets, in terms of clearing and settlement. What we will see in Asia is a market-by-market acceptance in different ways, for example, Japan with Arrowhead, Singapore with Reach. But it all boils down to the same basics, really, of bringing more liquidity.’’

With regard to Singapore, Ng Kin Yee, SVP of the Operations and Technology Group at SGX, noted that regulators are working closely with the exchanges to foster a positive relationship, despite their differing views. He stressed the importance of a regulator that is enlightened because the market is very rapidly evolving on compressed timescales, with new products and technologies.

“Regulators must be aware that market forces and innovations need to be supported, allowing changes to happen while guarding against significant negative effects. Someone mentioned that a regulator’s role is that of the person at a party who takes away the punch bowl before things get out of hand. I guess there’s an element of that, but we also must have some innovation and freedom for the market to develop,’’ he added.

Technology matters
Technology is evolving so quickly that peripheral support systems sometimes cannot keep up. TK Yap, Executive Director at OCBC Securities, said the different levels of infrastructure development in various Asian countries can pose problems, particularly for network issues.

“One has to consider whether local telcos can provide a reliable network with the right amount of uptime. One may talk of latency, but one should also look at whether that latency is stable. There are a lot of markets where latency is not stable. Sometimes it works and sometimes it doesn’t.’’

He added that these are huge obstacles to HFT, which need to be resolved quickly. “With some of the connections in some of these markets, we are seeing telco systems at a level where Singapore was six or seven years ago.’’

Ng said that exchanges are already bracing themselves for the “wave of changes’’ happening in Europe and shifting swiftly to Asia. “All exchanges and traders will have to operate very differently by looking at latencies shifting from seconds all the way to microseconds. This requires totally different infrastructure, different capabilities, different software and networks. We have to look at servers that can perform and fine-tune them to levels of bare-metal efficiencies.’’

He noted that Singapore has already decided to move from the middle to the head of the pack by launching a microsecond latency engine, which would help attract HFT liquidity providers to the Singapore securities and derivatives markets.

“Whether it’s efficiency of code, network infrastructure or how you trade in terms of your algorithms coming into play, the slightest variation can make a difference. We are talking about latencies in which a difference in milliseconds can change your revenue profile from one trader to another trader. All this is game-changing.’’

Yap also noted, however, that changes also can be made in more mundane ways. “We have one client with an arbitrage desk who took about three months to fine-tune his latency across the whole chain – from his keyboard to his exchange. There are lots of things you can tweak, like different hubs and applications, the way lines are connected, by changing versions you have already installed. And each time there can be a measurable improvement in latency.

“We also have situations where we tell people if they want to hit the close of a market, to send orders at least two seconds before the close. Otherwise they risk not having a print. We tell them this is the twilight zone: if they send an order later than this, they’re on their own, and there’s no guarantee they can make the trade. But if they follow our advice on timing, they can get in before the gate closes. So sometimes there are these other aspects that are not very technical, but it all boils down to finding out what works and what doesn’t, and then sharing it with other people.’’

Ultimately, though, all agreed that ensuring stable latency was of crucial importance. Said Philips: “The key drivers in Asia are not so different, even if we don’t necessarily want to increase speed – some institutions prefer long-term value of buying something and holding it for a year. But there is a large and growing part of the market that sees low latency and the addition of liquidity as important.’’

Implications and challenges
With greater computing power and databases, low-cost storage, high-efficiency servers, low-latency technologies, messaging protocols, and the rise of open source, what are the implications going forward?
Once HFT strategies are enabled, more US and European firms will locate their hardware and software applications closer to the exchange matching engines in Tokyo and Singapore, said Anshuman. Similarly, these firms may move to be physically closer to other exchanges in Asia, which will make co-location more important, even though he does not see the growth trajectory in Asia accelerating to the levels seen in the US and Western Europe.

Ng noted that co-location could solve the problem of unreliable telco lines, but a lot of other considerations also need to be met to attract high frequency traders. And these will have cost implications. “You must have monitoring capabilities before moving into new infrastructure and technology like fabric networks. Provide incentive schemes to attract HFT players., but then you need the ability to supervise a higher flow of traffic and have a better surveillance of the market in terms of pre-execution checks. A lot of investment needs to be put in, in order to line all the ducks in a row. And you must be able to launch all these activities before you can attract the high frequency traders.’’

“And you have to give them high predictability and a very reliable infrastructure so they can do what they do best, which is execute algorithms in a predictable way, to enjoy the liquidity that is brought to the market.’’
Yap also cautioned that a lot can go wrong when there are market makers, citing the example of prop shops doing European ETS trades. So, trading can be done in Singapore but priced elsewhere. He also noted that a lot of prop shops are not financial institutions these days, adding to counterparty risk. “These people need to trade huge volumes at very small spreads, so they need to book huge trades through you. Now, how do you take that large trade of $100m a day when the client doesn’t have an S&P rating because he is not a financial institution? You go through certain clearing houses, which then come with limitations as they have to work through brokers, and it all becomes very expensive”.

“We can address these issues slowly, bit by bit, but I feel we are far from resolving them.’’

In the US, there have been downside risks as a result of HFT, which Asia would do well to bear in mind. These include short-term volatility and price fluctuations, over-aggressive algorithm selection due to potential raised volatility, and increased implementation shortfall costs.

In Europe, Philips noted, MiFID2 is now being discussed. “When MiFID came out, the results were not exactly what they were supposed to be. As with any regulation, there are always ways to improve and enhance it. It will be interesting to see how things develop.’’

Moderator:
Steve Edge, Principal, Asia Etrading.com

Panelists:
Todd Keenan, UBS, Director, Regional Head of ETD Operations
Emma Larkham, Morgan Stanley, Executive Director, Asia Regional Head of Listed Derivatives Operations
Thomas McMahon, Singapore Mercantile Exchange, Chief Executive Officer
Philip Joslin, Eurex Group, Head of Representative Office in Singapore

There are three key challenges in the post-trade derivatives and processing environment: regulations, transparency and efficiency. All three are crucial in the face of a fast-evolving trading landscape, especially in Asia, which saw 6.8 billion contracts traded in 2009, not including over-the-counter trades (OTCs). What were small markets 10 years ago are now global leaders. Also, with an increasing number of new contract types and product innovations on derivatives exchanges, there is perhaps a need for OTC standardization. Infrastructure upgrade is also vital so that all parties can keep up with the rapid changes.

Regulations
Asia has always been a highly regulated protectionist environment, but it is slowly opening up, said Edge. For example, the Singapore Exchange and Chi-X Global have joined forces to create ChiEast, the first multi-regional dark venue in Asia, and the Singapore Mercantile Exchange has been given a licence to operate directly against the Singapore Commodity Exchange. Australia and Japan have also mandated exchange competition. In terms of evolving a trial regulatory framework, Asia has the added advantage of observing and learning from the problems and successes of the West – for example, the European Union’s Markets in Financial Instruments Directive (MiFID). MiFID, Edge added, would be the “Holy Grail’’ for Asia, even though he acknowledged that it is still a long way away from happening.

Said Thomas McMahon, Chief Executive Officer of the Singapore Mercantile Exchange: “Singapore enjoys a very good regulatory environment. The Monetary Authority of Singapore is very forward- thinking in its ability to change. The greater question is the impact of Washington and coordination with the United States. But ultimately, the regulations will be beneficial as long as there is a concept of building a universal front across Asia, and not silos.’’

He also struck a note of caution against the standardization of products: “It’s easy to say you can stuff all the OTCs in one bag. But OTCs are unique and that’s why they’ve never been in one bag. While customization has inherent risks, trying to make them all standardized is not easy. You can do that maybe with energy products. But it’s difficult with financial products. So this needs a step-by-step approach and not a reactionary process.’’

Emma Larkham, Morgan Stanley’s Executive Director, Asia Regional Head of Listed Derivatives Operations, said that her firm was already seeing more interest from clients in OTCs, and it is working with other exchanges to observe disparate solutions. “So even while regulations are still being deliberated and a decision probably would not be made till end of 2011 or in 2012, we anticipate a rapid uptake once it does happen, so we need to be give our clients a heads-up and be prepared to support it.’’

Transparency
Risk management and visibility of risk dominate priorities in the post-trade environment, said Edge, citing how Lehman Brothers traded on a Friday and went bankrupt over the weekend, leaving clearing houses on the hook. “No one wants this to happen again. So there is a need to deliver transparency in real time or, at the very least, intra-day.’’

Risk implications needs to be understood at any given moment in time. One also needs to manage sheer volumes effectively to allow them to work more nimbly. Liquidity has to be found when needed, in order to mitigate risk, he added.

Philip Joslin, Eurex Group, Head of Representative Office in Singapore, said his company has come up with an Enhanced Risk Solution which provides margin statements to clients every 10 minutes. “This is so they can drill down more effectively into positions, which is vital to business and clients. The more data they have, the more control they have over their internal systems.’’

As for the impact of a CCP for OTCs, Larkham felt this would be a positive thing, from a risk perspective. “As a clearing broker, we are keen to see clients manage their risks. In terms of members of the CCP, however, we would recommend that they should be people who have a deep understanding of OTCs and capital derivatives in terms of actual clearing numbers. They need to be able to manage and handle default situations.’’
She also expressed a hope that OTCs will use existing trade tools available in the market to get trade information, so as to minimise risks intra-day.

However, McMahon cautioned that a concentration of risk was something to be wary of. “A clearing house can be too large. There is nothing wrong with having separate clearing venues. Asia has a 1000-year legacy in commodities trading, but for the most part, they have existed as silos. Japanese exchanges dealt in Japanese products, for example. In recent years, China and India have re-emerged rapidly but they too are largely closed markets. The issue here is to benchmark the trades, to shift risk, pricing and clearing – not to fragment centres – to Asia. There are a lot of business models that can be extended to Asia.’’

Todd Keenan, UBS, Director, Regional Head of ETD Operations, said however, that he saw commodities and OTCs as more of a growth area of the future. “Our bread and butter are still index futures and we see that market increasing there.’’

Efficiency
Edge said that straight-through processing (STP) is the goal when it comes to achieving efficiency, which, in a post trade environment, is a challenge. Some 2/3 of trade risk is borne by the back office, he noted. However, one of the hurdles to achieving true STP is that there is no messaging standard implemented across markets. “The businesses using STP are using different messaging standards. The issue of intraoperability between service providers has not been effectively explored.’’

Larkham said: “We are all very batch-driven, looking at batch processing overnight. It is currently quite difficult to see and capture which clients are making their positions intra-day.’’ She added that her company is trying to function more in real time, by giving real time statements and real time calculations around margins. “That’s going to be fundamental platform change from where we are today. Risk managers need to have tools to see what’s going on day to day. It’s still a manual process at the moment so that’s definitely a challenge.’’

The benefits of STP are many, according to Edge. These include a short settlement cycle and turnaround time; increased transparency; reduction in operational risks and errors; and faster data capturing, processing and report generation.’

However, initial challenges exist. Larkham pointed out that some work still needs to be done, particularly around margins and methodology around standards.

Keenan agreed: “We have tools in place but we have clients in Asia that have very specific demands. They expect perfection but they may not be willing to use the tools they have so we need to get them onto the tools that are already in place.’’

Le résumé du débat animé par :

• Axel Pierron, Senior Vice president, Managing director of Celent’s Europe, Celent

Avec :

• Matthieu Chardot, Directeur des Ventes, BNP Paribas Corporate & Investment Banking
• Steeve Charvet, Global Head of Fixed Income, Newedge
• Matthieu Denis, Risk Manager, Kepler
• Stéphane Giordano, Responsable des Services d’Exécution, Société Générale Corporate & Investment Banking
• Anna Pesman, Business Development, Kyte Group

Comment a évolué le modèle économique des brokers depuis MiIFD ?

Anna Pesman : Avant MiFID, Kyte travaillait quasi exclusivement sur les dérivés listés… Après MiFID, les coûts de transaction ont beaucoup baissés, et cela a ouvert de nouvelles opportunités à nos clients, des acteurs du proprietary trading et des market makers, des acteurs souvent de petite taille qui n’avaient pas accès au marché cash du fait des coûts de transaction. Ils traitent désormais sur les marchés equities européens. Kyte est devenu membre des MTF et des marchés cash.

Stéphane Giordano : MiFID a entraîné un changement dans la nature des marchés actions. Un premier changement avec les investisseurs traditionnels qui ont eu tendance à réduire le nombre de brokers. Second changement d’importance, l’arrivée des traders haute fréquence (HTF). Enfin, on a assisté à une gradation des brokers : ceux présents sur tous les marchés, ceux présents sur certains marchés et devenant clients des premiers, et les très spécialisés, dans l’intensif pour servir les HTF.

Steeve Charvet : MiFID a opéré une sorte de professionnalisation et spécialisation : soit vous offrez de la technologie, des services d’exécution intelligente, de la compensation, de la conservation, soit vous êtes un broker de niche avec une spécificité qui fait votre valeur ajoutée.

Quelle est l’évolution du marché du Fixed Income ?

Matthieu Denis : Il y a différentes façon d’aborder l’exécution. Pour les papiers d’Etats, la notion de rapidité est très importante et les volumes traités très élevés, l’unité de base est de plusieurs dizaines de millions d’euros. Pour les obligations d’entreprises, il y a une très grande variété de titres, de taille et d’échéance différentes. Le Broker doit donc proposer quasiment du sur mesure à ses clients. Je suis assez sceptique concernant les récentes volontés de vouloir traiter le papier d’entreprise sur des plates-formes. Avec plus de 90% des transactions en OTC, le rafraichissement des prix de façon satisfaisante pour les clients me paraît problématique. Le marché reste OTC et risque de le rester longtemps, notamment sur les titres qui sont peu cotés.

Y-a-t’il une réelle demande pour une offre de trading multi asset ?

Anna Pesman : Les clients qui traitent de façon intensive et simultanée sur deux classes d’actifs différentes, je n’en connais pas.

Steeve Charvet : Si l’on se place du côté investisseurs, le trading multi asset fait sens, les clients ont besoin d’être accompagnés dans leurs choix en tant qu’allocateurs. Côté exécution, il y a nécessairement des spécialisations qui apparaissent et le multi asset n’a pas vraiment de sens. Il en faut pour tous les goûts, certains clients vont voir des gros brokers multi métiers comme nous qui veulent être accompagnés et puis il y a des clients qui ont besoin de brokers très spécialisés.

Matthieu Denis : le multi asset a du sens dans les métiers où on est efficace pour exécuter. Faire du multi asset n’est pas une fin en soi. Et c’est une qualité pour un broker de pouvoir dire à un client, ce produit, je ne sais pas le traiter.

Matthieu Chardot : nous faisons tous du multi asset, maintenant, ce n’est pas la même façon d’exécuter, pas la même structure de marché… difficile d’avoir une offre homogène, mais c’est quelque chose que l’on développe activement.

L’industrie du courtage est-elle en surcapacité en Europe ?

Anna Pesman : Il n’y a pas de surcapacité de courtage car il y a besoin de beaucoup d’acteurs pour traiter des demandes très différentes. Personne ne fait tout de façon parfaite, de nouveaux acteurs très spécialisés continueront de se créer.

Matthieu Chardot : Au niveau exécution, il y a clairement des surcapacités. Vu la baisse des volumes, il y aura des restructurations.

Steeve Charvet : Nous sommes dans une phase d’assainissement du secteur de la finance qui va générer moins de revenus. Le courtage ne fera pas exception. Le secteur des inter-dealer-brokers, par exemple, va continuer à se concentrer. Les cinq acteurs qui réalisent 90% des transactions ne seront plus cinq d’ici cinq ans. Quant aux petits brokers qui se sont créés par opportunités, 140 rien qu’à Londres en 2009, beaucoup vont disparaître. Leurs fondateurs réintégreront les banques d’investissement qu’ils avaient quittées.

Stéphane Giordano : je ne crois pas vraiment à l’apparition de nouveaux acteurs se positionnant sur de nouvelles niches, de nouvelles opportunités. Il y a une prime à la consolidation : si des niches se créent, elles seront adressées par les acteurs les plus importants.

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