Successful drive into futures and options trading exploits SunGard solutions

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.

For more information, click here to download all the case study.

Mr Hui Yew Ping, OCBC Securities’ managing director, says it is ready to take advantage of all these opportunities, thanks to its investment in technology and, especially, its partnership with SunGard.

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.‘’

For more information, click here to download all the case study.

The rising tide of global investors means there are new pressures on the Indian markets for adopting global best practices in terms of trading systems and platforms. The Indian market is only now catching up in DMA or algorithmic trading capabilities. Speakers at the SunGard Mumbai City Day said the time was right for change; brokerages have to move to the next level of efficiency and transparency if they have to grow and build on the opportunities now at hand.

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.

The mature economies of the United States, the Eurozone and Japan are responsible for scarcely more than 50% of global GDP. It is the emerging economies which will deliver the world from a double-dip recession. There is much investment focus on China but many other nations also offer opportunities. The three panellists each gave a presentation of the opportunities in the respective emerging markets in which they specialised.

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.

With the profound changes taking place in Europe’s securities markets, trading firms are now more focused on the middle and back offices than in the past. Whereas the middle office was once regarded as a control step in the trading chain, regional and specialist brokers now realise they can exploit the middle office to deliver superior service to their clients. Additionally, the middle office is playing a role in unifying back-office systems for prime brokers, bringing together the data residing in disparate silos.

MiFID unleashed competition through the introduction of multilateral trading facilities (MTFs), which entered the market with lower cost offerings than those of the incumbent stock exchanges. Along with the MTFs came new central counterparties (CCPs).

This fragmentation in trading and clearing venues was accompanied by a surge in market volumes driven by smart order routing, direct market access and algorithmic trading technologies. MiFID also enabled a move to systematic internalisation, with large broking firms breaking trades up and executing them against their own books.

The financial crisis has also had an impact. All financial institutions are facing greater regulatory scrutiny, risk challenges and competition. Trading firms will have some important decisions to make about their business models and operations during the coming year.

CHALLENGES

This evolving securities landscape in Europe presents a number of challenges to trading firms as they seek to achieve the MiFID requirements of ‘best execution’ for their clients. These challenges include:

1. Market access & more complex instruments

The trend for investment firms to trade ‘anywhere at any time’ has put pressure on trading firms to provide access to a burgeoning number of trading venues.

Post-trade, firms must have access to multiple CCPs, but without widespread interoperability between CCPs they are faced with a plethora of clearing venues with which to connect.

The growth in structured products, exotic derivatives and hybrid instruments is likely to continue. In many cases, trading firms have managed such instruments manually on external spreadsheets or in-house systems at considerable operational risk.

2. High frequency trading

HFT puts significant pressure on trading firms’ operations – being able to handle the throughput of trades in the middle and back offices has become an issue. Moreover, as their clients increase their appetite for more complex instruments, trading firms must also rapidly calculate the complex charging rules associated with those instruments. The ability to provide real-time information has become a competitive differentiator for broking firms.

3. Risk management

Since the collapse of Lehman Brothers counterparty risk has risen to the top of the agenda, a consideration that generates an almost insatiable requirement for data. An automatic assumption that trades will settle is no longer made, and trading firms want to know their exposures to counterparties before they accept an order.

4. Cost pressures

Downward pressure on fees has been exerted all along the value chain. The introduction of competition led to reduced costs in trading, which highlighted the costs of clearing and settlement. In the competitive European landscape, efficiency is being sought all along the trading chain to drive out further costs.

5. Prime brokers’ challenges

In addition to all of the above, the largest broking firms also face a challenge in tracking multiple systems in their global operations and consolidating the information they receive into a single place from which they will have a consolidated view of their position.

SOLUTIONS

There are a number of solutions that will help trading firms to control middle and back office costs while meeting increasingly sophisticated client demands.

1. Netting

The Stream RIMS Netting module can deliver significant cost savings – for example, a user can net down 10,000 or so messages a day to 100-125 per day. Stream RIMS Netting is a stand alone ‘service based’ solution that automatically captures trades from third party front-office systems, identifies them as requiring netting and then automatically creates the net trades from user defined criteria such as counterparty, market, currency and value date etc.

2. ASP Services

In order to deliver flexibility at lower cost, SunGard can deliver hosted services for middle- and back-office processes via Stream RIMS. This ASP-based service helps brokers to outsource the maintenance of securities processing systems, thus freeing up resources to focus on core business and value added post-trade tasks.

3. Real-time information

SunGard’s Stream RIMS Middle and Back Office brings timely information to the front office and to clients without interfering with core processes.

At the middle-office level, brokers use the real-time capabilities to confirm allocations and to calculate charges. A real-time dashboard gives a global view of exceptions across all post-trade operations. For the largest firms, transparency of information is also crucial. The middle-office layer in these firms must be able to take information from disparate silos and feed it into a range of back-office systems, a capability Stream RIMS delivers.

4. Flexibility

Stream RIMS provides access to multiple venues and its Smart Settlement Routing capabilities ensure settlement instructions are formatted and routed to the correct destination according to business rules.

5. Scalability

The HFT and the multi-venue environment in Europe have increased trading volumes, and as a consequence the number of post-trade operations that must be carried out. Via the new EON module, Stream RIMS can support very high trading and messaging volumes as well as managing peak loads according to clients’ business priorities.

CONCLUSION

The impact of fragmentation in the European securities markets on the middle- and back-office operations of trading firms has been significant. To offer access to multiple pools of activity while controlling costs requires a thorough examination of how technology is deployed not only in the front office, but also in the middle and back offices. Automation, in the form of netting, ASP Services and real-time information will deliver the efficiency, transparency and flexibility that trading firms, and their clients, require to compete in Europe’s evolving securities markets.

For more information, click here to download the white paper

How can automated workflow and STP  improve transparency and efficiency in the post-trade operations processing of options?

The global listed derivatives markets have experienced rapid growth during the past five years and in the first half of 2010 overall volume of trades increased by 23% compared to the same period in 2009. Month on month, derivatives markets in Europe recorded the strongest growth from April to May, climbing 32%.

According to the Futures Industry Association around 18 billion futures and options contracts were traded during 2009 (2009 Derivatives Exchange Volume Webinar, March 18, 2010).

The listed derivatives markets have, to a certain extent, risen at the expense of the OTC derivatives markets where the collapse of leading brokerage houses in 2008 highlighted the levels of counterparty risk in the OTC market. Firms have turned to listed derivatives, which they see as more secure and transparent.

However, this growth has exposed the manual nature of listed derivatives processing. While many advances have been made during the past decade to improve straight-through-processing (STP) rates in financial institutions’ back offices, some pockets of manual processing have remained. None more so than in the listed derivatives arena, where certain aspects of the option life cycle are characterised by labour-intensive, key-punching processes.

This can change with a unique solution from SunGard that automates the most challenging aspects of options processing, enabling firms to gain better control and monitoring of the option lifecycle.

Read the positioning paper for more information

Contact: guillaume.bunouf@sungard.com

SunGard is accelerating the integration of GL Trade solutions. All SunGard software product lines for trading on global listed markets are now branded under a single name: Valdi. GL Win, for instance, is now called Valdi Trader.

In January 2009 GL Trade became the Global Trading business of SunGard. Since then, the team has been working to integrate our product lines with other SunGard offerings: during 2010, for example, GL Net became part of the expanded SunGard Global Network, which now links a community of over 2000 buy-side firms to more than 500 brokers.

In 2011 SunGard is taking a further important step, and we have brought together all SunGard software product lines for trading on global listed markets under a single brand: Valdi. This means that all GL Stream products will change their names: The Reference Card linked here gives details.

This branding change will have no immediate impact on the products or service organization, but will open up new opportunities as SunGard furthers its development work. An important new Valdi product has already been introduced. The Valdi Execution Management System is derived directly from the GL Stream architecture and, extends the functionality offered by the GL Winway workstation for buy-side trading desks. It enables integration of the trading station into the workflow of the asset manager or brokerage firm that uses it, facilitating the management of care order and DMA flows across multiple markets and trading desks.

Your SunGard account manager will of course be pleased to help if you have questions about our move to Valdi. The Valdi pages on SunGard’s website also provide further information.