By Philippe Carré, Global Head of Connectivity, SunGard’s Global Trading business
One of the major themes of this year’s London City Day was ‘Capitalizing on Change’ and there is nowhere that has seen more change in 2011 than the Middle East and Africa. So it was not surprising that the session ‘New investment opportunities: trading emerging markets in Egypt and the Pan Africa region’ attracted so much interest. Read more»
Mohamed Amer from Beltone Financial, a leading investment bank in the Middle East and North Africa, gives insight into electronic trading in Egypt and the Middle East, and explains how SunGard helps Beltone Financial deliver superior trading services to both regional and international investors and traders.
Jordan Kai, Member of the Board at Steubing AG, talks about the challenges faced by continental Europe brokers and how SunGard’s trading and connectivity solutions help Steubing deliver better trading services to its clients.
Complex event processing (CEP) has been labelled as the next revolution in trading technology and is already a prominent fixture in many investment banks, hedge funds, broker/dealers and exchanges. But how justified is its revolutionary status? Is it suitable for everyone? And what exactly are the benefits that CEP provides? These were the questions that were answered in a recent presentation at SunGard’s City Day in Beijing.
CEP is ideally suited to the trading world because it is technology that allows you to deal with information that is in motion rather than at rest. One of the biggest problems facing capital markets firms is the sheer volume of data and the speed at which it is moving. And for firms operating in the high frequency trading space, the speed of execution is a constant imperative.
In such high volume, low-latency environments CEP technology comes into its own. Trading decisions are not binary choices but complex events where a number of concurrent factors have to be acted on at the same time. A CEP engine uses real-time datastreams rather than traditional static databases enabling it to process millions of events per second and for traders to make decisions on all these events in microseconds.
In the Asian capital markets the speed of trading may not yet be up to the level of microseconds but there is every possibility that this will soon be the case. The Singapore exchange is investing in a new advanced trading platform that will make it the quickest in the world and other exchanges in the region are likely to follow suit.
System set-up
A typical CEP system will have inbound and outbound adaptors to get information into the system (such as market data) and out of the system (execution decisions). The CEP engine itself will process millions of events per second and makes decisions based on the logic designed by users in the application. Some systems will also employ visualisation to help with the application development process. For example, CEP vendor Streambase has a graphical development studio to enable users to design their own applications.
The rapid development of applications and for algorithmic traders this is especially important. The shelf life of a high frequency trading algorithm is constantly reducing (some firms will modify their algorithms on a daily basis) so the quicker these algorithms can be developed and brought to market, the greater the competitive advantage for trading firms.
When you change your algos every day this makes risk management much more important on both a pre and post-trade basis. The key to pre-trade risk management in a high frequency trading world is that it has to happen in microseconds and be able to be modified according to changes in regulation and compliance requirements.
Post-trade risk management is also increasingly vital for any firm engaged in algorithmic trading and this is one area where future development of CEP technology is likely to focus. Previous end-of-day P&L reporting, trade monitoring and market surveillance is no longer acceptable in this trading environment, it must be in real-time in order to spot erroneous trades or changes in market behaviour that warrant a change in the algorithm.
The next area of focus for CEP technology is making it applicable for adoption by a wide group of users across the enterprise. For algorithmic trading firms this wide group will include not just prop traders, quantitative analysts, brokers and business analysts but also risk and compliance managers. As CEP becomes more widely deployed across the organisation, firms will also want to consider how cloud computing can be used rather than existing IT infrastructure.
June 14 (Bloomberg) — Raj Mahajan, president of SunGard’s global trading business, talks about the difference between trading in Asian financial markets compared to the U.S. SunGard provides infrastructure for financial institution trading systems. Mahajan speaks with Carol Massar and Matt Miller on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)
By Philippe Carré, global head of connectivity, SunGard’s Global Trading Business
A couple of years ago you wouldn’t have been far wrong in thinking “Brazil” every time you read ‘Latin America’ or ‘LatAm’. But today there are vibrant, expanding markets throughout Central and South America: LatAm is now much more than Brazil.
Obviously Brazil, the 4th largest emerging market according to a recent study by The Economist, is still the biggest story: you can’t ignore a market that experienced 67% growth in market volumes in 2010. And of course Mexico’s Bolsa de Valores is also booming but the most dramatic growth over the next couple of years, in my opinion, will come from Argentina and the different markets that comprise ‘MILA’: Chile, Colombia and Peru.
The MILA initiative is very interesting: the acronym stands for ‘Integrated Latin America Market’ and marks an initiative started last November to consolidate the three local stock markets. The consolidation will standardize trading procedures and clearing and settlement rules, broaden liquidity, the increase the diversity of companies in which to invest.
This will also, of course, attract more international investment, not that there needs to be much more further incentive than the fact that all three markets gave a return of around 40% last year according to the MSCI dollar index.
Of the three markets my attention is currently drawn to the opportunities in Chile. At an event in Santiago last month co-hosted by SunGard and the Santiago Stock Exchange I couldn’t help noticing the energy and enthusiasm of all those present.
Perhaps this vibrancy pervades the whole of Chile and stems from the miraculous rescue of the San Jose gold and copper miners. Perhaps it has something to do with the charisma of the new President Sebastian Pinera who took office last year. But I think the good feeling is just as much to do with the forward-looking approach of the Santiago Stock Exchange itself. The exchange has supported FIX connectivity since 2006, and has embraced electronic trading (more than 10% of order flow to the exchange is now DMA) and actively sought high-frequency and algorithmic order flow. No wonder equity trading on the exchange increased by more that 30% last year.
In addition to the MILA tie-up the Santiago Stock Exchange has also allied itself with Brazil’s BM&FBOVESPA, late last year agreement was reached to enable connectivity between the exchanges and will lead to further joint initiatives.
Initiatives like this, increasing connectivity, standardizing the investor experience, facilitating market development at every opportunity bodes very well for the Chilean market and in fact for investment in the whole of Latin America.
The panel at SunGard’s City Day in Hong Kong late last week looked at the issue of dark pool and how they can impact the wider market. Were they good for all investors? And how has the picture in Asia changed in recent years?
There has been great change over the past five years in this area. Ned Phillips, CEO of Chi-East, noted that five years ago people were talking vaguely about dark pools and alternative markets, but were generally skeptical that it would happen, or at least that it would take a long time. “Two years ago, people were saying I think this might happen and were generally more accepting. What we’ve found in the last 12 months, across all alternative venues, is that people are no longer wondering would alternatives happen, but when and how. And that’s the big change we’ve seen,” said Philips.
Indeed, recent developments bear that out. Chi-X Japan and Chi-East were both launched last year, and also the news in recent weeks that Chi-X Australia has finally been granted license.
When discussing whether High Frequency Trading is additional quality liquidity for an institutional investor, panelists agreed that HFT is important for market making on lit pools, “but it does not make sense to have HF Traders in a dark pool because it defeats a lot of the objects of a dark pool”, commented Chris Jenkins, regional head of Tora Trading. “The vast majority of what dark pools and HFT do is increase liquidity, and improve execution. But HFT and clearing go hand in hand, continued Phillips. The cost of clearing is so high in certain markets that you would not see HFT liquidity there; you have to look at the whole cost of a trade. In Europe, clearing costs have fallen dramatically, which is better for the broker, the retail and the institutional investors”.
Another factor that is brought in when alternative venues exist is smart order routing. More markets, or venues, mean brokers have options, and their portfolio managers will want them to get the best price. This change will come in the form of best execution policies. Smart order routing is the result of these policies. In Europe, with 20 dark pools, this is already in place, but in Asia the picture is more mixed. When there is a single market, as in many markets, such as Hong Kong and in Singapore, there is no need. However, in Japan and Australia there is. To add the list of markets with multiple venues, Thailand has recently announced it will allow alternative venues. We have yet to see any of the providers enter that market though.
“There is obviously a much bigger push in the US around best execution, and not just by the brokers, but also in the investment houses themselves, be it their own internal mandated policies, they have to prove to their management and their PMs that they are seeking the best price and best liquidity that they possibly can,” noted Phillips.
On dark pools benefiting the market in general the panel pointed out a report by ITG done some nine months ago, that studied millions of trades in Europe over the time before dark pools were introduced and the time after. The report said that after dark pools arrived only three things can happen, the execution gets better, it stays the same or it gets worse. All that report did, through data, was prove it did not get worse. They are now working to show if it got better or not. So the benefit of dark pools, or at least that they do no harm, has been shown in markets.
Competition was a recurrent theme during the panel, with all members agreeing that it was a good thing, for all investors, both institutional and retail. And a clear benefit of competition is lower costs for all market participants. This was particularly highlighted given the location of the CityDay, Hong Kong, which was pointed out as not the cheapest place to trade in the world. “I think there would be a benefit if it broke potential monopolies and if it allowed, specifically on the clearing side, for the cost of clearing to be lowered. An execution only business is a low margin business and high clearing costs can destroy that. So if mergers brought in a new regime of competition, that would be a great thing for everyone,” said Chris Jenkins, regional head of Tora Trading.
A great analogy was used by Philips to highlight how strange equity markets are in their treatment of institutional investors. He pointed out that you do not expect MacDonald’s to buy hamburgers in the supermarket. The price would be wrong and the supply would be insufficient. So they go to wholesale sellers. “The equity market is one of the only major markets out there where you are forcing wholesale investors to interact with retail investors. It’s the wrong economy of scale. Venues like ours allow the institutional guy to meet up with the institutional guy and trade at the price that’s right,” he noted.
By Nasser Khodri, APAC Managing Director for SunGard’s global trading business
This issue was addressed by a panel at SunGard’s CityDay in Hong Kong late last week. The discussion came at a time when news was circulating about ASEAN markets moving closer towards establishing a link that has long been discussed.
The panel looked at what was driving the market and the challenges faced by cross-border investors, as well as the different situations in various countries when it came to foreign participation.
Three main drivers for cross border trading were identified. First is the trend towards global investing. Partly driven by the fact that you have country A shares, traded in country B, and partly by the move towards greater diversification and the search for more trading opportunities outside domestic markets. Second is market access. There are more Pipes and a greater choice of algos today than you had a couple of years ago. Third is that people need products to trade. Nowadays there is a lot if interplay between products, for instance ETFs versus cash versus the futures on an underlying index.
On the ASEAN link, Gary Tan, head of market development and iOCBC at OCBC Securities, highlighted that the growth in foreign involvement in these markets was the main driver. “If you look at the World Exchange Federation statistics, in particular for Indonesia, basically you are seeing an average 60% year-on-year increase in foreign trades into the exchange versus the total turnover of the market. So that forms the basis and why the ASEAN link is being set up.”
ASEAN is an initiative from regional exchanges, and there are still issues around counterparty risk, operations and settlement. As a competitor almost to any such link, the panel discussed the use of Pipes and algos by global brokers to access the various markets. “This is an initiative that is coming up against another model already in place, which is that regional brokers have existing connectivity, and existing custody relationships in place,” said TK Yap, executive director at OCBC Securities. “A client once said to me: anyone can put a pipe in place, the difference is whether the sell side broker understands what’s needed to drive flows into that pipe, such as the software and intangibles ,” he added.
Panel members came from different countries within Asia and gave perspectives on cross border trading in those countries. Julia Kim, strategist/ manager, Prime Strategy Development and Management at KR Futures, talked about the international moves by Kospi, with listings in America and Europe, “In Korea, especially after the inception of Kospi on CME and on Eurex, there have been huge inflows and outflows looking for opportunities in cross-border trading. Locally in Korea, there is a trend for local hedge funds to find arbitrage opportunities, using cross border trading.” This was not without problems, facing issues such as much of the volume in the Eurex Future being driven by Eurex members and market makers, not Korean investors. The CME linked options have faced liquidity issues.
Local regulations were also given as possible hindrances to cross-border trade. Indonesia requires all FX conversion to be done onshore. “So you are always faced with the issue where you choose to settle in your preferred currency, but the FX exchange rate you are offered could be exorbitant and could wipe out all your capital gain,” said Tan.
On Taiwan the panel was positive, with Steven Chou, Director & RO, Futures Division, Taiwan Concord Capital Securities, saying, “The trading volume of TaiEx futures has contributed to the greater volumes on TaiEx. And the trading hours of the MSCI TaiEx is even longer than the TaiEx itself, so arbitrage opportunities are there for investors in this region.”
So while cross-border undoubtedly faces challenges around regulation, liquidity and custody aspects in the Asian market, , there are positive signs, and considerable flows occurring. With moves like the ASEAN Link and the general push by the industry towards greater cross-border trading, the market is surely set to grow.
The SunGard panel session at this week’s TradeTech conference addressed the thorny issue of how regional brokers can compete with their global counterparts in today’s securities market. Is it possible for an agile, domestically-focused broker to outmaneuver a global player? Or in an increasingly IT-dominated market, is it unrealistic to expect a small, local firm to keep up?
All panelists agreed that any broker, large or small, has to be able to add value, particularly when most investment managers are looking to consolidate their broker lists. According to Michael Sits, regional manager for capital markets consulting services at SunGard, regional brokers are best served by focusing on their domestic markets – demonstrating a knowledge of the local market for outside investors and engendering loyalty from local investors by offering them a full and preferential service.
Partnerships with global brokers may actually be one of the best ways for regional brokers to compete in today’s market, but how should such alliances work? First and foremost there have to be suitable synergies, as partnerships between two brokers with the same business model rarely work. And there may be mutual benefits from exploiting each other’s liquidity. “Partnerships change over time” said Bradley Duke, managing director at US-based broker Knight Capital Group: markets and businesses evolve, and requirements change.
A major attraction for regional brokers is often the potential access to a much larger technology resource. “Most clients want a full suite of services from all of their brokers, regional and global,” said Matthew Cousens, head of AES sales at Credit Suisse. ìA regional broker may not have a full set of algorithmic trading tools so we often see requests to access our technology but to keep their clients.î
“We feel comfortable with the partnerships we have with brokers that provide us with technology,” said Asa Palm, head of electronic trading at Sweden-based SEB Enskilda. “For example, they give us the ability to cross our flow and to create a pool within a pool without having to create our own dark pool and deal with all of the accompanying regulation.”
Regulation is one factor that could prove influential in the future fortunes of local brokers and the cost of compliance is yet another investment that has to be considered when a local broker looks to expand. “It is another instance of asking if you add value,” said Palm. “In our local markets we definitely feel we add value and we know the local regulators well. But having recently opened a Hong Kong office to trade Asian stocks, we will not be taking direct membership of all exchanges in that region.”
The 2007 MiFID Directive, which was meant to increase competition between brokers, has actually had the opposite effect in some respects. The IT costs involved with adapting to the new post-MiFID market structure have played into the hands of the brokers with the deepest pockets. According to Cousens it is another reason why regional brokers should pursue more technology outsourcing arrangements with global brokers. “It may not make them more competitive but it will keep a lot of them in business.”
What is important is that the regulatory burden does not become too much for local brokers and prevent them from expanding and innovating, said Bradley Duke. “All global brokers started out as regional brokers, so regulators have to ensure that any new rules do not crush the developing regional players.”
In closing, Michael Sits commented that technology can help firms cope with the changes in regulation and market structure, for example through the increasing availability of managed service options to assist in addressing these challenges cost-effectively.
By Nasser Khodri, APAC Managing Director for SunGard’s global trading business
Back from India where SunGard attended two events – TradeTech and FIA -, we would like to share a few takeaways on the key trends that keep the Indian exchanges and brokers awake at night.
First of all, while the two main exchanges in India – National Stock Exchange & Bombay Stock Exchange – continue their respective growth as well as their competition, new exchanges are popping up -MCX, NCDEX, USE, etc. These exchanges will be focussing in five main areas in 2011:
1. Technology: Speed is now of the essence, as in other markets, and exchanges are investing in technology to offer best of breed trading for their members in particular those that need HFT capabilities. So the exchanges are now offering co-location facilities.
2. Products: Exchanges have been launching new products – currency futures, new interest rates and indexes, etc. and commodities exchanges are seeing dramatic growth in trading volumes.
3. Volumes: The volumes on Indian exchanges are still increasing steadily. NSE leads the pack, taking 80% of the notional value traded, but has a smaller lead in terms of number of trades (NSE 65%; BSE 35%).
4. Global Alliances: the exchanges are participating in the global alliance wave. For example, NSE is working closely with SGX to list Indian products and, Eurex now trades Indian products.
5. Market safety: On the derivatives side, the focus is on having as many products as possible go through CCPs. In equities regulators are maintaining a tight grip.
Among the brokers, several concerns are widely expressed. Transaction costs remain too high for many Indian brokers. Obstacles also exist in the algo trading field, in which the entrance barrier remains high due to stringent authorization procedures. Also some brokers, while though they welcome new product introductions by the exchanges, complain that they do not receive good information or training around these products.
Today SunGard can help Indian brokers access NSE and BSE in DMA, and to implement order management and/or algo trading solutions to support their local and international business. Soon SunGard will be empanelled by the NSE market, which will help further with development of our business in India.
