The Blotter (formerly known as Insights) cuts through the noise to explain the issues that impair your trading desk, undermine your investment process, and cloud your business strategies. Subscribe to The Blotter's RSS feed. Find our latest thinking on market structures, technology, and policy to take control of the information you need to set a course in the right direction.
A little over a week ago, the French Autorite des Marches Financiers (“AMF”) published guidance on certain notification requirements relating to the use of algorithmic strategies for trading in certain French securities. The notification requirement comes into force on 1st January, 2015.
Based on conversations we held with the AMF late last week, we understand that they consider this new rule to be a precursor to the algorithmic trading strategy notification requirements included in the overhaul of the European Union’s Markets in Financial Instruments Directive (“MiFID II”). Whilst we do not doubt the AMF’s resolve to impose an algorithmic trading strategy notification requirement on market participants as part of the MiFID II package, we query if other national regulators such as the U.K.’s Financial Conduct Authority will use their powers under MiFID II to follow a similar approach to the AMF’s.
Having demonstrated an initial, and understandable, wariness of cloud services, trading firms and other players such as hosting providers in the institutional trading environment are slowly coming to embrace the technology. With storage demands for mid-size firms growing at approximately 90 terabytes a year, perhaps this is not surprising. Building proprietary infrastructure that can keep up with this level of growth is comparable to painting the Golden Gate Bridge: a never-ending task.
ITG Financial Engineering has recently completed its R&D work on international stock specific intraday volume profiles, extending its robust estimation methodology to common stocks and several other security types to cover more than 50 markets around the world.1 The intraday volume profiles, which include the estimated percentages of the daily volume to be traded in each 15-minute interval of the continuous trading session and at the and closing call auctions, are estimated for individual securities traded on each market and can be used for efficient execution of large orders.
“The most valuable commodity I know of is information” – to quote Gordon Gekko from the 1987 movie classic Wall Street. This line has never been more significant than in today’s data-fuelled financial markets, where detailed analysis of information can provide that all important competitive edge – both now and in the future. To achieve this, firms are looking towards Transaction Cost Analysis (TCA), which enables them to reduce costs and hone trading strategies.
The term ‘TCA’ has now become so common across the industry, and some would argue commoditized, that its value is in danger of becoming misunderstood. While most buyside firms use some form of broker post-trade analysis to measure how they’ve performed against their benchmark, the firms who are out-performing versus their peers are using a broader approach of pre-trade, real time and post-trade analytics to answer questions about how and why trading costs are incurred, and what actions can be taken to reduce them.
Please find this article referenced in the Wall Street Journal.
Responding to many client requests, the FX team at ITG Analytics reviewed trade data surrounding the WM/Reuters London Closing Spot Rate Service (“the fix”). By observing the factors that influence trading costs using ITG TCA® for FX’s rich quote data we found trade patterns that were unique. Consistent with academic literature,we show that volume and volatility around the fix spikes and the spread costs tighten temporarily. In addition, we see mean reversion of the FX rates on days when there is substantial price pressure shortly prior to the fix. Our analysis does not prove the allegations of manipulation brought about by some market participants.
I recently received my copy of the Winter 2014 Journal of Trading. Quickly scanning the journal’s cover, I began flipping through to an article on real-time TCA visualization. I stopped, when I came across the title which I reuse for this comment. The Journal piece is an edited manuscript of a panel session of the same title held during a conference, organized by Robert Schwartz of Baruch College in New York. The participants, led by Andy Brooks of T. Rowe Price Associates, are well-known in the industry, and I recommend a read by anyone who did not see that crew in action.
Market participants do not need to be told that they are working in an era of Big Data. They experience it every day. However, developing an appropriate response is going to change the daily experience in a number of important ways. The relationship with technology will inevitably change. Internal relationships will be altered. And analytics will dominate any list of required capabilities.
On January 14th, Michel Barnier, the European Commissioner in charge of financial services in the European Union (EU) welcomed the agreement in principle reached on rule changes to the Markets in Financial Instruments Directive (MiFID II/ MiFIR). Barnier declared that although the speed of implementation was not ambitious enough, the agreement still represented “a key step towards establishing a safer, more open and more responsible financial system and restoring investor confidence in the wake of the financial crisis” (see: http://europa.eu/rapid/press-release_MEMO-14-15_en.htm?locale=en).
The unbundling of research and trading has been a discussion topic for many years both globally and in Asia. While in theory there are many good reasons to unbundle, the practical implications have often made it difficult for asset managers to do so. However now several important business factors are pushing Asia-based fund managers to review their processes and consider how they value research and trading, while using more sophisticated tools to manage and report on who and what they pay.