“Picking Up The Pieces”
Key themes
- Burden on the buy-side
- Regulatory shift continues to move towards the buy-side, as does the burden for technological understanding and in some cases, development
- The buy-side trader’s required skillset continues to change, not only to continue to sourcing blocks, but to understand shifting market structure and technology
- Sell-side “doing more with less”
- Changes to how sell-sides are paid – increase in CSAs; increasing demand for high-touch service from low-touch desks; “blended” desks fit some, but not all, and also introduce commission/payment complications
- Regional desks on the sell-side: shifting tech teams and traders to cover more markets from centralized locations. Not necessarily headcount reduction anymore, but being smarter with the headcount placement.
- Exchanges and alternatives continue to innovate, and often create many questions (and opportunities) while doing so:
- Hong Kong-Shanghai Connect program has generated a vast amount of interest across the region; many questions remain about the precise workings of the program, and much remains to be done for many firms to be confident of being ready in time.
- IEX and “the book” generating interest, and creating many questions around the precise nature of market structure that is desirable. While the book itself was not much of a revelation to the industry, it has spurred a much wider conversation which will continue especially in the US and Europe. Common view that there’s a bit of sensationalism at work, and education is key.
- Collaboration between industry participants a key message in virtually every session. New innovations, regulation, and market microstructure changes are too much for any one participant to handle and optimize. Constructive – and often data-backed – dialogue and consultations are increasingly important for the industry.
- “Flash Boys” mention count: 13
Session Notes
- Shanghai-Hong Kong Stock Connect
- Part of the trend of opening up China and cementing Hong Kong as the best place to access China
- Calculation of quotas will be done on a real-time basis, but questions remain over how often that data will be released – the exchanges want to avoid rushes to grab the last of the quotas
- Clarification was given that QFII funds and those bought through the quota will be held in separate accounts, and as such are not fungible. Further clarification given that while technically covered short sells are allowed on both markets, there are still difficulties being worked out regarding how to actually borrow shares in the Mainland.
- Questions remain around settlement, capital gains tax, voting rights, and latency arbitrage opportunities, among others.
- The Dark, the Lit, and the Alternatives
- Video interview with Brad Katsuyama, President and CEO of IEX Group.
- IEX is new, but growing. Looking to address major questions regarding US market structure through their 350 microsecond delay and other innovations and measures.
- Buy-side owned, as opposed to sell-side owned, which gives them a new perspective on market operation and value to the buy-side
- Broker priority on order types is one way of encouraging more crossing on IEX; this can serve as a free facility vs. a broker’s building and maintaining its own dark pools.
- “Good vs. bad HFT” – different types of arbitrage, some to take advantage of market inefficiencies, others technology inefficiencies – which are good and which are bad?
- Examples of negative reversion have sprung up – rather than creating market impact, after the trade, the security reverts in your favor
- Value Propositions and Exchange Models
- The wider market structure debate’s relevance to Asia needs examination. Only two really fragmented markets in Asia, namely Australia and Japan.
- The markets in the region are also relatively slow – latency arbitrage opportunities and other “negative” HFT behavior less likely to occur given fewer “playing grounds”.
- Using the dark – major problem over branding. Whoever first called it “dark liquidity” did nobody any favors. However, the buy-side has plenty of legitimate uses for the venues to trade anonymously and in size.
- Exchange test environment: Best Practices
- Key questions around testing environment design remain – different types of environments and simulations for different purposes. What do firms already have in-house vs. what they need the exchange to provide – how are the two different and what values do they both have?
- Should exchanges provide artificial noise on these environments? Should they just let test algos “bounce off each other”, or should they be full sandboxes? What capabilities are there for market events / shocks to be tested? Privacy of strategy testing? Repeatability of events like closing auctions? Many different ways to skin the cat.
- Resources are fundamentally limited for development
- No point testing just for the sake of testing – the environments need to be “stressful” enough to ensure that systems and products are ready to go live
- Industry-wide, standardized test cases could potentially be used for satisfying regulatory requirements, but “one size doesn’t fit all”. But standardized situations could be used for profiling and collecting meaningful metrics, e.g. order/trade ratios, cancellation rates, etc.
- Consensus from brokers and industry participants are key, and an action point for the industry
- Ch-Ch-Ch-Ch-Changes: Exchanges and regulation in Asia
- Updates from Greg Yanco, ASIC included their new surveillance system, and how it is changing how regulators are conducting themselves – an increasing blend of industry conversation and hard data to back up the proposals. Potential tick size competition in Australia an open question
- Balance of competition and free markets, with too much fragmentation. Clarity is needed around dark pools and who can see what inside them.
- How to pay for regulators Message fees – potential impact on order/trade ratios? Not disruptive on the whole, but market makers have raised concerns.
- Japan update – tick sizes and pilot scheme to shrink tick sizes further, curiously at a time when the US is looking at a pilot to increase tick sizes. Increasing accessibility to retail is an underlying goal. Significant bid/ask spread reduction mentioned as a result in the pilot program.
- Alternatives, e.g. Chi-X, can inspire innovation and changes (e.g. tick sizes) in certain markets; both institutions and retail can potentially benefit from price improvement. But systems must also be upgraded to handle innovation across the spectrum of market participants.
- Singapore update – market structure changes are incoming, but it is similarly a balance between analytics and consultation with the market. Conversations are ongoing around collateral, derivatives trading, and a broad market structure study. Point made that when volumes are low in a market, fragmentation may do more harm than good.
