Oliver Sung, Managing Director and Head of Electronic Execution, Convergex looks at the process for adapting to changing regulatory environments, and how this impacts the buy-side and sell-side desks.
In terms of regulatory developments, among the biggest changes expected is the SEC’s Tick Pilot Program that is scheduled to begin next May in the U.S. It is interesting to study this kind of event for its impact on our firm; even though it is relatively far off, it is something that we still have to plan for now. We have to start spending money to ensure we are well prepared prior to the date this program goes live.
We are constantly reviewing our development priorities, and any time there are regulatory changes in the marketplace, there is potential impact on our workflow. Whether it is happening in the US, Asia, or Europe, these are factors that all industry participants must deal with, and we are acutely focused on being up-to-date with regards to our algos in any sort of market. For example, the LSE is coming out with an intraday trading auction , and this is an area that we are looking into – including around how we read the data, how we participate and how our algos work with and around it. Any time there is something new, the marketplace requires us to spend significant time and effort to make sure our solution works seamlessly.
This process starts when we first hear that a change to an existing rule is being proposed. Once we have a broad outline of what is going to change in the market place, we bring in our tech guys and our developers to discuss the upcoming change at a very high level, including the potential impact on our technology. We then use that high-level analysis to start doing rough sketches of possible scenarios (i.e. if the rule says X, we can do Y; if it says A, we should do B, etc). We start by analyzing and planning for how we can tackle the various elements being changed; but, no development is done at this initial stage. In doing this exercise, we identify potential concerns; posed by the initial rule proposal, which gives us an awareness of possible issues when the final rule is released and becomes effective. This means that we can go into that situation with some form of prior awareness, as opposed to just starting to find a solution when the final rules are implemented.
Global impact
We have a global algo development team tasked with developing innovative tools for the 35 markets for which we offer algos. That team monitors all the new and potential upcoming changes for those market places. We closely follow ongoing regulatory trends and developments, and watch to see what other global regulators might do in response. While we may address a regulatory change in one local market, we are careful not to directly begin development on a global solution just because one regulator has implemented a new policy.
What our process often allows for is the realisation that, if we have dealt with a similar requirement and solution in one market, we can leverage our knowledge and experience towards the efficient and timely development of solutions for other markets. And so, having a global development team allows for some comfort, because there is a good chance that, if something changes in one regulatory zone, it is likely that regulators elsewhere will follow suit.
Our goal is to provide the best electronic tools for customers wherever they trade. Thus, we are always
trying to find ways to further improve the customer experience, whether that is by continuing to enhance our VWAP algorithm, by improving child order implementation, or by developing new algos. If a customer has a particularly specialised request, we will do our best to try and satisfy it. If it is a good idea that can be more broadly applied, we will definitely add it to our platform globally, to the extent it provides value across our client base.
The high touch trader
Customer electronic trading has historically been on an agency basis. In contrast, a decision to commit capital has traditionally been handled on the desk by the trader. The real value-add that a high-touch trader brings is giving color, and using their skill set to facilitate a block trade between two counterparties.
We continue to use our electronic tools to drive efficiencies and facilitate block trades where we can. However, it takes a lot of skill from the high-touch traders to put the large situations together. There’s still a need for human on the sell-side.
As the buy-side continues to develop, we have to foresee what we are going to do next. We have to build automated systems for what we anticipate happening in the future and, therefore, try to take more permutations into account. However, there will always be instances where human intervention is necessary to handle particular situations. The reality is that computers can’t react to situations until they are properly programmed. However, the technology is continuing to improve, and the buy-side is increasingly confident using those tools.
Buy-side changes
Our buy-side clients are increasingly using more variations of algos, and as a result, algos are becoming much more sophisticated every year. Clients are also becoming increasingly more comfortable with technology. Buy-side traders have moved past asking basic questions about how to use algos. They are now more sophisticated and are focusing more on understanding how the algos should work and how best to integrate them into their detailed workflow. The responsibility for technology is definitely moving from the sell-side to the buy-side. The sell-side is increasingly asking the buy-side about their workflow needs. It is using that information to develop solutions aimed at and addressing those buy-side needs, from the very basic to the very complicated, such as customising algos that the buy-side might require.
By asking more complicated questions, the buy-side is driving us on the sell-side to continue to improve our platforms, invest in the resources, and provide solutions for the trades that they would like us to do. The increasing sophistication of the buy-side is a good thing for everybody involved. It pushes us on the sell-side to continue to innovate, and allows the buy-side to use the tools set in a more informed, efficient and productive way.
The buy-sides’ increased sophistication allows them to better understand and anticipate their own needs and to narrow down the tools that they know are going to work for them. Even if everybody has a VWAP algo there is a continued drive for sophistication on the buy-side to understand the details of how the algo is actually working. This allows the buy-side to compare and choose the VWAP engine that best suits their needs.
The buy-side is still relying on its brokers for the information, but it is also going to exchanges to obtain it. As they learn and become more sophisticated, the buy-side is going up and down the chain to obtain needed information.
Conclusion
There is much to value in the intuition and instincts of a skilled and experienced trader on a desk who handles special situations. We will continue to see equity desks and algos that become increasingly sophisticated. As other asset class algos start rolling out (depending on how much collaboration they have with their equity brethren), that level of sophistication will accelerate more than it did on the equity side.
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How Technology Reacts
