Solutions: Trading

global head of connectivity, SunGard’s global trading business

Back to the Future

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This blog post was originally published on DerivSource.

The news that NASDAQ OMX is investing into Dutch alternative venue TOM MTF proves once again how much the European trading landscape has changed recently, with the focus increasingly shifting from equities to derivatives, given the paucity of trading volumes in equities and unsustainability of a lot of the venues that appeared on the scene after MiFID.

TOM MTF, short for The Order Machine, counts the largest Dutch institutions as shareholders (Optiver, Binck Bank, ABN, IMC) and has been working largely under the radar for a little while, first launching an equities MTF with a lit order book specialized on Dutch stock. Then followed, after a long and protracted battle; the launch of the relatively novel idea of a competing MTF listing and trading single stock equity options on Dutch stocks, which put in direct competition with NYSE Liffe Europe’s Amsterdam business.

With strong backing in the Dutch financial community and a market quite used to trading derivatives, TOM MTF is one of the very few trading venues to have chosen derivatives as their main focus, introducing competition in an area typically considered a duopoly in Europe between NYSE Liffe Europe and EUREX. With a market share around 15% in equities options for a trading platform launched little more than a year ago and with the usual difficulties with regards to clearing and settlement that have affected other alternative venues in Europe, such as Turquoise Derivatives, they are today one of the few credible derivatives alternative market – albeit operating on a small niche.

NASDAQ seems determined to get back into the thick of it in Europe, after the unfortunate experience of NASDAQ OMX Europe (remember them?), one of the first pan-European MTFs which failed to garner enough traction against Chi-X, Turquoise and BATS, and ultimately closed a few years’ back. The combined launch of NASDAQ NLX, competing in the rates business with the exchanges mentioned above, and now with the possibility to spread the battle to the listed equity options world through the TOM MTF “franchise” is definitely an interesting combination, showing the strength of the trading platform operator.

Interestingly, NASDAQ OMX through the TOM MTF investment has also acquired the opportunity to go back to equities trading competition, as the Nordics equities landscape increasingly fragments, no longer being a “chasse gardée.” We may be closer to seeing Europe finally turning into a single market, no longer a series of individual markets linked through technology. It may also be that we will see new life breathed into some of the market consolidation brutally curtailed by the successive failures of the LSE/TMX and Deutsche Boerse/NYSE Liffe Europe tie-ups.

Many of the current alternative venues are not viable, and the larger operators need to prove to their shareholders they have a strategy, and one that works: diversifying, buying market share or integrating new ideas could very well be the way forward.

While you’re here…

vice president, SunGard’s capital markets business

Finally, a Trading Advantage from the Dodd-Frank Act

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This blog post was originally published on FOW.

The Dodd-Frank Wall Street Reform Act (the DFA) requires agencies to promulgate hundreds of new rules.  With the promulgation of these new rules, which generally require additional or different automation processes, come marketplace opportunities, including trading advantages that are often overlooked by those participants scrambling exclusively for DFA compliance.  This obscure rule change could lead to opportunities concerning the lifeblood of trading – data.

A primary goal of the DFA was to increase transparency in the formerly opaque swaps market.  The Commodities Futures Trading Commission (CFTC) issued a final rule imposing real-time reporting of transaction and pricing data and public dissemination requirements on registrants and registered entities for all publicly reportable swaps. Therefore, any arm’s-length transaction between two parties that results in a corresponding change in the market risk qualifies as a publicly reportable swap.

A publicly reportable swap transaction that is executed on or pursuant to the rules of a registered swap execution facility or designated contract market relieves the counterparties of an initial reporting obligation. Conversely, off-facility swaps are reported by a counterparty by means of a defined hierarchy, or alternatively by agreement.

In both instances transactional information must be reported to a swap data repository (SDR).  Significantly, in either instance the real-time public reporting rule drastically expands the content and amount of disseminated transactional information. Which also means that the potential visibility of transactional information, also know as tick data, provides new and potentially significant opportunistic advantages for those market participants that have direct data access and an active cross-structural position management system.

The final rule requires dissemination of publicly reportable swap transaction, pricing and volume data through electronic means in a non-discriminatory manner. However, the rule provides a significant exception, known as the embargo rule.

The embargo rule, enumerated under Title VII §43.3(b)(3) expressly allows a designated reporting party to, in addition to reporting to a swap data repository, directly disclose transaction and pricing data relating to a publicly reportable swap transaction if: (i) disclosure is limited to market participants, customers or counterparties; (ii) disclosure is made at least concurrently with the transmittal of such data to a registered swap data repository; (iii) market participants are provided advance notice of such disclosure; and (iv) disclosure is non-discriminatory.

Taken together, the exception allows access to potentially pre-publicly disseminated transaction data to virtually any party affiliated with a swap dealer or major swap participant; or a member of a swap execution facility or designated contract market.

The pre-disseminated data is valuable because swap transaction data reported to a SDR may be significantly slowed. This is true because in some instances a SDR may require additional or comparative information from the counterparties or facility prior to public dissemination, which slows the process and concurrently gives market participants a distinct data possession time advantage. Also, a SDR must, according to the rules, parse and withhold identifying information. This anonymity processing requirement, when applicable, likely gives market participants a distinct data possession time advantage.

The pre-dissemination advantage can be seamlessly leveraged by monitoring and managing real-time data with a configured trading management infrastructure capable of cross-asset inputs and a compilation of both exchange-traded and intricate over-the-counter (OTC) swap data into a single comprehensive platform.

While the agencies promulgate new rules, traders and market analysts will generally require additional, different or enhanced automation processes to leverage the new opportunities that result.

While you’re here…

global head of connectivity, SunGard’s global trading business

2 + 2 = 5: The Value of Exchange Alliances

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A version of this article originally appeared in The National.

Last month, the Stock Exchange of Thailand joined the ASEAN Trading Link, an alliance comprising three exchanges from across southeast Asia. Russian exchanges Micex and RTS completed their tie-up in December 2011 to form the Moscow Exchange. More recently, the Tokyo Stock Exchange and Osaka Securities Exchange announced their imminent merger, expected to complete on 1 January 2013. These events have brought the debate regarding consolidating the Middle East’s own exchanges into sharper focus. Trading across multiple markets is commonplace across the globe, but this practice is yet to become a reality here. Why?

Although there have been major steps forward in terms of the technology used by Middle Eastern exchanges and the participant financial institutions, a perception of complexity remains around cross-border trading, deterring many people from even trying . The exchanges themselves remain relatively small, difficult to access, and subject to regulation at the national level. As a result, capital markets in the Middle East still remain largely underdeveloped relative to other regions.

Over the last few years we have seen multiple alliances in other parts of the world come to fruition. As well as ASEAN, there is Euronext in western Europe, CEESEG in central and eastern Europe, and MILA in Latin America. Furthermore, we’ve also witnessed various new MOUs and partnerships between exchanges worldwide.

The advantages of interconnectivity are clear: as well as creating more competition and greater foreign participation in these markets, consolidation offers a deeper pool of liquidity and greater appeal for companies looking at exchange listings as an alternative source of funding to bank credit lines or bond financing. In the case of MILA, it became obvious very quickly that 1 + 1 + 1 = 4. Linking the Chilean, Colombian and Peruvian exchanges created a large amount of goodwill because the sum of the constituents is greater than its parts. Investors, who previously might have shied away from spending the resources required to look at investing in one small market, will now make that investment if they can access multiple markets at once and with greater ease. That reality and ease of access also brings new sources of funds as well as growth opportunities to businesses and institutions within each member country.

Four conditions need to be met to get an exchange alliance to work effectively. The first is a political superstructure, which can develop in different ways. In the case of MILA and ASEAN, there was an existing structure created to facilitate and promote the interaction of the different countries. The ASEAN Stock Exchange linkage initiative, for example, leverages the ASEAN political alliance superstructure, whilst the Euronext and CEESEG alliances operate under the Single Market promoted by the European Union.

The Middle East already has such a superstructure with the Gulf Cooperation Council (GCC), connecting the United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait. This structure could bring exchanges closer together and promote the formal link-up of the different regional capital markets.

Even with a political structure, the second required element is a strong and persistent political will. In Europe, the European Union provided the structure and initial momentum, so when the Amsterdam, Brussels and Paris exchanges announced their plans to create Euronext, the idea resonated with both the political will and desire at that time. In any alliance, a larger player often takes the helm and may have to cajole the others past the finishing line, which works as long as these other participants can clearly see the benefits. As with a political alliance such as the GCC, each country may be in a different stage of development but must realize the combined interests in working together.

The next hurdle – and probably the biggest – is the different regulatory environments amongst Middle Eastern markets. This point was highlighted as one of the biggest concerns at SunGard’s Dubai City Day event earlier this year. But if you don’t start somewhere, the issues will never be addressed. A regional exchange alliance can create the momentum needed to kickstart that process, as was proved in the MILA and Euronext countries.

The final condition is use of the right technology. Although the Middle East region is large and therefore not without its infrastructure challenges, ASEAN provides some clues for overcoming them. It shows how to link these markets, demonstrating that you can build a network among exchanges without losing each player’s national identity, trading platform or connection to their individual investor communities, whilst at the same time leveraging each participant’s own strengths and creating a new, regional synergy.

Each country in the Middle East is trying to develop national industries and national psyches beyond oil extraction or mineral exploitation. A properly functioning capital market is a key piece of that development. I am certain we will see initiatives that will eventually create links between these markets. It is primarily a matter of developing the political will and then creating the momentum – the rest may just fall into place.

While you’re here…

director, business development, Asia-Pacific, SunGard’s capital markets business

Why DMA Makes Sense for Southeast Asia

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Direct Market Access (DMA) trading has become increasingly prevalent worldwide as more buy-side traders take advantage of available technology to execute their own orders. As many markets in Asia-Pacific are currently outpacing developed markets in terms of volumes, investment and overall growth, they are primed to take advantage of this new mode of international trading.

DMA is gaining ground because it offers a superhighway for algorithmic trading and facilitates transactions that are executed in milliseconds. DMA also brings down error rates and offers greater transparency in how orders are handled. This transparency allows better control of the final execution and the ability to exploit liquidity and price opportunities quickly.

DMA is well established in mature markets such as the U.S.; in its 2011 report “US Hedge Fund Equity Trading 2011: The Challenge is The Opportunity” market research firm Tabb Group found that 53 percent of participants route their DMA order flow to broker-dealers for algorithmic trading and potential use of crossing networks. European firms are also increasing their usage of DMA and algorithmic strategies.

While the adoption of DMA trading strategies grows, investors in U.S. and European markets are looking for opportunities in other parts of the world, with the Asia-Pacific region high on their list. In fact, Tabb Group found that one-third of U.S. hedge funds are looking to Asia-Pacific and 24 percent of European hedge funds see promise in the region.

DMA is paving the way for U.S. and European firms to access Asian trading venues cost-effectively, and all indications are that investors and firms in the Asia-Pacific region are following suit. The strong investment returns seen from Thailand, Indonesia and Malaysia over the last few years reflect the evolution of the Asian market structure. These three countries have outperformed major U.S. and European markets in recent years, and this continues to attract new attention.

In response, trading venues in Thailand, Indonesia and Malaysia have taken steps to build on their success via DMA.

  • In 2006, the Stock Exchange of Thailand (SET) gave the green light to DMA, and has followed it up with a succession of derivative contract launches. In 2011, SET officials reported a significant rise in electronic trading flow and that algorithmic trading had more than doubled over 2010.
  • Bursa Malaysia introduced DMA for derivatives in April 2008 and for equities in 2009. In 2011, there were more new local brokers offering DMA access in a variety of forms—a trend that has continued in 2012.
  • Indonesia took a major step forward in 2007 when the Surabaya Stock Exchange was merged into the Jakarta Stock Exchange, which then changed its name to the Indonesia Stock Exchange (IDX). By 2010, according to the World Federation of Exchanges, IDX was the fifth best performing stock exchange in the world, and by 2011 60 percent of all tradable shares via IDX were owned by international investors. In 2008, Credit Suisse became the first firm to offer DMA trading in Indonesia, and this year the Indonesian investment bank Mandiri Sekuritas has endorsed DMA.

Despite these strides, the Asian markets do have some hurdles ahead of them. Today, the region still suffers from a concentration on national exchanges; high frequency trading is limited by inadequate matching and latency; crossing systems are highly manual; algorithmic trading is still in its infancy and often hamstrung by market structure; and market entry is often hampered by incumbent brokerage members.

These conditions are expected to improve as more local brokers use DMA and other trading technologies to attract international clients. Over the next five years, some of the steps that will likely pave the way for greater use of DMA in the region are:

  • Exchanges with faster and greater capacity trading engines
  • Longer trading hours without lunch breaks
  • Faster execution times
  • Alternative execution platforms and smart order routing

Many broker-dealers in the region already think that DMA makes sense and that it’s likely to be a major contributor to their revenue streams. They see cross-border trading growing and more buy-side constituencies showing interest in international markets. The leading players are already developing strategies and taking action, so DMA access and flow is increasing at ever-faster rates. With so much growth in the Asia-Pacific region in the past few years, this is certainly an interesting area to watch.

While you’re here…

head of product management, Front Arena, SunGard's capital markets business

Success in Middle East Trading: Keeping it Simple

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At the recent SunGard Dubai City Day, panelists at the session entitled “Leading from the Front: the Ever-changing Capital Markets Arena” had a very interesting discussion about how institutions, particularly those in the Middle East, can compete in times of rapid global regulatory and technological change.

New regulations, such as Dodd-Frank in the U.S. and MiFID II Europe, are focused on systemic risk and transparency. However, in the Middle East, systemic risks are typically well-contained and transparency almost entirely refers to OTC instruments which are not prevalent in the region. Consequently, the new regulations in other regions will have minimal impact in the Middle East.

It was noted that there are differences between regional consumption models: the U.S. has largely financed consumption with debt, European consumption has been mostly savings-financed and China appears to be growth-financed.

In contrast, the Middle East, rich in both natural resources and cash, has financed little of its consumption with debt. There has been discussion of the idea that the region should combine different consumption models, financing with a mixture of debt, savings and growth. There was a belief that the choice of the correct model will ensure a lower level of regulation compared to other countries.

There is a broad, ongoing discussion about regulation in the Middle East markets. The panelists emphasized the importance of balance and pointed to a concern over “regulatory inconsistency across the region.” But there are also more upbeat perspectives on the regulatory landscape: unlike more developed regions where participants from all sectors are seeing increased regulation as a potential business impediment, the Middle East is seeing its markets opening up.

In the last two years alone, Qatar, for example, has received approval for a DvP (delivery vs. payment) mechanism, stock lending, market-making, DMA (direct market access), ETFs (exchange-traded funds), bills, new indices, new order types, and closing auctions.

That said, technology must keep pace with so much rapid change, and it seems clear today that dedicated systems for market-making and securities lending are imperative. Further, the increasing breadth of products, models and regulations requires consolidation of systems and data sources to provide clear insight into risks.

Indeed, with an expectation of a take-off in DMA, some foresee a time when a minority of flow will go through broker order management systems: technology vendors must “supply tools to calculate and assess the risk that comes along with these new trades.”

The core message we heard in Dubai was the importance of “going back to basics.” Simplified and standardized regulation and processes coupled with “accurate, reliable and comparable data” is fundamental to the path forward for trading in the Middle East.

global head of connectivity, SunGard’s global trading business

Trading in the Middle East: Turning a Corner?

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At SunGard’s Dubai City Day, a panel looked at trading opportunities and challenges in the Middle East. Panel members started with the bad news first: due to regulatory constraints, the region’s exchanges remain largely domestic monopolies, with very little competition for listings, no high-frequency trading and no CCP. Add to this the constraint of settlement caps, the large retail focus of most exchanges, different working weeks and settlement models – all deterrents to the generation of regional liquidity abound, probably explaining the minimal foreign participation in the markets until very recently.

Trading in the region will eventually become more attractive and accessible to overseas investors, but the panelists in Dubai implied that regulators were understandably quite cautious at present. Of more concern was the diversity of regulatory regimes throughout the region.

It was suggested that the lack of drive to unify some of the basic rules could in part be due to a desire to preserve each exchange’s local dominance, but a lack of competition for flow and listings constrains liquidity movement and foreign participation throughout the region. As case in point, Saudi Arabia for example simply bars foreign ownership; currently, foreigners can only trade Saudi stocks through funds or swap structures.

Panelists indicated that in Saudi Arabia, the market has experienced a doubling of volumes over the first half of 2012, driven by local investors with a strong domestic focus in an economy growing at more than 5 percent per year.* The domesticity and retail-oriented focus of the Saudi market – an amazing 93 percent of trading volumes are said to be retail-generated – gives it a different character from international markets, where retail volumes can be more erratic. Conversely, the Egyptian market was said to be dominated by institutional volumes. In Qatar, the focus is on attracting both domestic flows – particularly from the expat client base that may not have been aware that participation was possible – and increased participation from GCC institutions rather than directly reaching international investors.

The difference in settlement structures and models is also naturally becoming a point of concern, especially for investors looking across different regional exchanges. For example, while Saudi is at T+0, other GCC countries operate in a T+2 environment.

Turning to connectivity, the panel looked at the GCC exchanges’ capacity to absorb a sudden influx of high-frequency external order flow. The panel’s answer was a qualified yes for the future, but not anytime soon. The implementation of new trading engines and the adoption of industry-standard trading protocols probably explain that enthusiasm. Attention was also given to the technical connectivity methods themselves: with more fiber-optic cables being laid and a greater belief in Internet security, panelists proposed that direct market access over VPN (virtual private network) could become a viable method in the region.

On the panel, there was a clear view that the Middle East needs new products to drive liquidity to its capital markets, besides the requirement to improve infrastructure and the need to provide market participants an experience similar to “Western” standards, through changes to the markets’ structure, such as market-making, full delivery vs. payment, etc.

There is no doubt that the region’s regulators and market operators are, in a carefully considered way, adopting policies conducive to market expansion, the narrowing of spreads, and the provision of liquidity. We may be getting closer to the day when Middle East equity markets become venues for international investment.

*Sources AMF & WFE

global head of connectivity, SunGard’s global trading business

ASEAN Today, Africa Tomorrow?

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This blog post originally appeared on TabbFORUM.

The ASEAN link went live this week, linking Singapore Exchange and Bursa Malaysia members and traders, completing a project started five years ago. Perhaps it was only natural that Asia should pick up on one of the latest developments in capital markets: interconnectedness.

While full-blown mergers and acquisitions between stock exchanges, especially cross-border, are probably off the table for now – the last year has seen quite a few memorable failed attempts, NYSE Euronext/Deutsche Boerse, LSE/TMX, ASX Group/Singapore Exchange – there are repeated examples of ambitious capital market linkages across the globe since the turn of the century. Euronext, before “merging” with NYSE, unified the stock exchanges of Amsterdam, Brussels, Lisbon and Paris; CEESEG, the Central and Eastern Europe Stock Exchange Group, today brings together under Vienna’s leadership the Austrian, Czech, Hungarian and Slovenian financial markets, with an eye for further expansion in South East Europe; NASDAQ OMX, bringing Nordic and Baltic stocks trading under a common uniform. The movement is not confined to Europe, as the recent launch of MILA – Mercado Integrado Latino-Americano showed, which links the financial marketplaces of Bogotá, Lima and Santiago.

So is the ASEAN Trading Link, the symbol of deepening economic and political integration in South East Asia, realizing the aspirations of millions of people to live in a more peaceful, integrated bloc? Or is it simply that each of the underlying venues was reaching its local potential and needed to find new avenues to attract new sources of capital and new investors? Most probably both, with the added interest that it is hard to exist when living in the shadow of the Chinese cloak.

The advantages of capital markets linkages are clear, and relatively well known: linking trading venues without any losing their identity, opens new opportunities for business, the possibility for ambitious local players to access new sources of wealth creation and the means to fight off larger financial powerhouses – or at least compete with them. Such links also give stock exchanges the occasion to take a short breath before the next step, which could either involve departing sensationally from that first route (cue the acquisition of Euronext by NYSE) or instead facilitating further integration.

It will be intriguing to see what the next steps for the ASEAN Trading Link turn to be, beyond the integration of Thailand and the probable acquisition of new participants (Indonesia, Philippines, etc.) already members of the ASEAN political grouping. An initial success could lead its members to become bolder and target other services, thereby further reducing inefficiencies in the trading chain in Asia: common rule book, foreign ownership, remote membership, clearing and settlement, single trading system, pooling of IT resources and spend, etc. Conversely, this could also give the possibility for the ASEAN Trading Link participants to engage in (more or less) collaborative approaches to other regional participants – the new Japan Exchange Group could be an early target for cooperation, as it seeks to revive the economic fortunes of Japan and the competitiveness of the Nippon financial markets, but Australia or even India could also be brought into the fabric of the trading link.

What the ASEAN Trading Link ultimately does, is heap further pressure on those regions where the lack of any such successful collaboration is becoming glaringly obvious. The very different cases of Africa and the Middle East come to mind – regions where the current status quo state of affairs with regard to trading and cross-border initiatives might attract the grade “can do better.” ASEAN success could well trigger changes well beyond its original borders and immediate surroundings.

While you’re here…

product manager, Valdi, SunGard's capital markets business

Consolidated Audit Trail: More than One Way to Skin this CAT

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This  blog post originally appeared on Advanced Trading.

The Securities Exchange Commission voted in July 2012 to require exchanges and broker oversight groups to have a single system to monitor and analyze trading activity across U.S. equity and options trading venues. This Consolidated Audit Trail (CAT) will be designed to help enhance the surveillance of the equities markets by establishing a centralized database that can track and store order information throughout its entire lifecycle, including every trade order, execution and cancellation.

Why is CAT necessary?

Regulators are currently on a different playing field than market participants. They’re not able to keep up with the technology and data improvements in the marketplace. Regulators currently oversee trading activity by observing data collected in various formats from various systems. CAT would provide a centralized data store, capturing all relevant information throughout the lifecycle of a transaction. The CAT system would begin the process of “calling up” the regulators to the major leagues.

CAT has spurred various opinions on the impact and effectiveness of the rule. Proponents of the rule argue that CAT will increase the ability of regulators to monitor the overall market structure, ensuring better understanding of rules and the effect on trading. They believe data will provide better insight into patterns, helping to assess the quality and fairness in the markets. Critics of CAT say the SEC has not considered the cost benefit analysis of the rule, in that it will be too costly to implement and won’t provide any significant benefit to regulators and the marketplace as a whole.

Implementing CAT

A system and data warehouse of the size and scope of CAT is a complex and timely effort. A system will have to provide firms with the data warehouse framework and reporting capabilities to be able to respond to CAT. Ideally, this should include cloud-based surveillance, supervision, and management reporting to provide a complete view of an order’s lifecycle. A best-practice CAT system must allow regulators, exchanges and broker-dealers to implement a cost-effective solution in a timely fashion.

For instance, if a broker-dealer seeks to establish a system to capture the elements of CAT in order to display the routing information associated with a specific trade order exception, the firm would need:

A proactive approach

The passage of CAT by the SEC shows once again that firms need to stay diligent and proactive in today’s regulatory environment.  Firms can no longer be reactive to changes.  In fact, SEC Chairman Mary Schapiro said, “A consolidated audit trail will reduce the regulatory data production burdens on SROs and broker-dealers by reducing the number and types of ad hoc requests that regulators submit today.” This is just a first step in a broader change that will affect all market participants.  There may be more than one way to skin a CAT, but behooves these various firms to be prepared to tackle these new requirements now and in the future.

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head of Valdi Options US, SunGard's capital markets business

The Time Has Come for Options Dark Pools

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This blog post originally appeared on Advanced Trading.

Many people think dark pools are a complicated concept. But there are three points about dark pools and the U.S. equity trading market that even a casual observer in the financial services industry will recognize:

1. Dark pools primarily serve the needs of institutional investors and traders who need to execute very large amounts of stock with limited price movements

2. Dark pool participants appear to place a premium on remaining anonymous – so much so that they’re willing to put an above-average amount of faith in the dark pool operator to protect the inner-workings of such a marketplace

3. Dark pools pose a tangible threat to the growth prospects of listed equity exchanges, based on recent assertions about how dark pools and other trading operations now make up 40 percent of equity trading volumes

Now perhaps you’re thinking, “Thanks for the summary, Russ. Gotta go.” But I’m not finished yet; my interest isn’t in equities. Equities are so 2008. In my world, equities are nothing more than a hedging instrument and an input to a pricing model. Options will be the playground for the trading community in 2013 and beyond.

And you know what’s going to grow options trading for the masses? Options dark pools. Yes, you heard me correctly.

I’ll give credit here to firms like Ballista and Pipeline as they initially put together the first iteration of what an options dark pool could look like. The only downside to these business models was the fact that after they matched buyers and sellers, the final options trades still needed to be executed on an exchange (as was and still is required).

In order to make options dark pools a reality, the industry needs structural change and regulatory approval whereby options dark pools could exist in a similar structure to how equity dark pools operate today. Crazy? Maybe. Controversial? Likely. A way to grow interest and increase participation in options trading? Definitely.

I have no major problems with the existing options exchange structure. We’ve heard the basic justification for exchanges on many occasions: clear and transparent markets, known entities, decent safeguard, etc. All reasonable points. However, isn’t it useful to shake things up a bit from time to time? Can’t the status quo be challenged every so often to keep an industry on its toes? Exploring a different yet viable way of doing things has a number of positive outcomes.

Dark pools for options would certainly change the options trading landscape, but it would not lead to trading Armageddon as some might suggest. Although options by their very nature are quite different from equities, that hasn’t stopped the options industry from incorporating aspects of equity trading into its own business practices. Decimalization, penny prices, maker-taker fees and other practices all got their initial traction in the equity space and eventually made their way into the options space. The options industry was legitimately wary as each type of equity construct made its way into options trading, but options traders eventually adapted.

Market participants will adapt to options dark pools, too.

What overall utility could options dark pools actually bring to the industry? Actually, a lot of the value in options dark pools would look surprisingly similar to those found in equity dark pools.

One of the biggest options industry gripes is that large traders can’t do trades in big enough size in listed markets. If set up intelligently, specialized options dark pools could be geared towards providing larger size to its participants with less price displacement. Also, if given a choice, many options traders would likely gladly take greater amounts of anonymity in their trades, especially since many trades (like spreads) have multiple legs involved. Next, true options dark pools would be the conduit for more high-frequency firms to join the options trading arena in greater numbers, as their trading models would likely be more easily accommodated. Lastly, options dark pools provide intriguing competition for the existing options exchanges and force all parties to hone their business strategies and serve their targeted customer niches with much more acumen.

Realistically, options dark pools will not be approved any time soon. In this Dodd-Frank era of regulation and compliance, the clear trend is toward more exchange-type trading, not less. If the options industry wants to continue to expand its volume and its visibility, however, it would be wise to once again follow their equity brethren’s lead and jump into the pool.

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trading and client connectivity, SunGard’s global trading business

WHY SHOULD BROKERS FOCUS ON TOTAL COST OF OWNERSHIP?

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For smaller European broking firms, particularly those engaged in regional business, the implementation and management of technology and connectivity across multiple trading venues post-MiFID is proving increasingly costly and time-consuming. Adding to this pressure, client and regulatory demands to deliver best execution have to be met in a context of declining volumes and intense competition. The overall pressure on margins means that brokers have to consider carefully how to undertake any business development initiatives in the most efficient and cost-effective ways.

Meanwhile, the overall importance of technology in the delivery of brokerage services continues to grow; and as its use extends across all business processes, its cost also becomes more important. Making the right technology choices is therefore vital, and it is equally important to manage resources efficiently.

There is today an increasingly sharp realization that optimizing the management of technology can make a huge difference to its total cost of ownership (TCO).

It has become clear that regional brokerage firms cannot support the ongoing rise in technology costs that results from a business-as-usual approach, and one consequence of this is rapid growth in the use of managed or hosted services. Brokers can essentially go one or more of three ways (indeed we see increasing numbers now using all of these options):

  1. Outsource execution as a whole.
  2. Use managed, mutualized services for market data and trading.
  3. Apply the same approach for connectivity to clients.

Outsourcing of execution is widely used for global trading – in North America, Asia-Pacific and worldwide emerging markets. The European broker can offer its clients a full service for these regions, while behind the scenes the order flows are sent to local brokers via FIX links and order routing networks. Some firms have gone further and also outsourced expensive multi-venue European execution, including smart routing, but it might be argued that this is akin to “outsourcing your soul” and is a step too far for most. Fortunately, many options exist at the level of having technologies, as distinct from entire business functions, managed by service providers.

The outsourcing of market data management to vendor firms is of course long established, and trading connectivity is an obvious follow-up. In the U.S., order management and connection to markets have been handled almost exclusively via managed services, or software as a service (SaaS), for many years, and European firms are increasingly conscious that trading servers, order management systems and smart routers do not have to be run in-house.

Just as connecting to multiple exchanges is complex, so too is connecting to a large number of clients. A broker is typically required by its clients to deal with a range of connection types over many different networks, both FIX-based and proprietary. A managed services approach can render the technology transparent to both broker and clients, and also can help to deliver the flexibility and speed of response that is typically required by buy-side firms.

The decision to follow the SaaS managed services route is normally a straightforward financial one. Where a technical and operational business process is sufficiently standardized, a brokerage firm gains no competitive advantage by running that process itself. Engaging an experienced managed services provider will almost certainly result in lower TCO, and potentially in some real functional advantages, such as lower latency via co- or near-location of servers for a given trading venue.

For brokerage firms, the use of SaaS and associated simplification of business processes can enable them to achieve a significant reduction in their TCO and to place management emphasis where it should be: on looking after client relationships and growing revenues.

While you’re here…