Scott Bradley, Head of Securities Trading Sales and Platform Distribution at LSEG talks to Dan Barnes about how LSEG is more than a diversified global financial markets infrastructure and data business.
Which big themes were brought to the fore at TradeTech 2022?
The first big theme is the next iteration in further automating the trading workflow. A vision we are seeing, and sharing, is that smart automation could continue to bring together the full trading ecosystem including buy side, brokers, venues and vendors
That represents a shift in view, where historically we have seen concerns on the sell side particularly, that automation could lead to disintermediation of some trading firms. Front-to-back ecosystem automation is not about disintermediation, everybody has a potential part to play, although some traditional roles may be changing.
A second theme is the drive to release value throughout the ecosystem, as the industry tries to overcome constrained resources. One part of that has been interest in the role bilateral liquidity provision could play. At TradeTech we heard a number of the liquidity providers discuss creating customised liquidity opportunities.
While innovation is welcome where it overcomes industry challenges, we should also be aware of the impact that decentralisation of liquidity can have. The multilateral market delivered by central limit order books is critical and key in the price formation process. Where alternative liquidity in the form of bilateral liquidity is genuinely able to add value and not just replicate what is already taking place on those central limit order books, it can offer further efficiencies to investors. Systematic Internalisers certainly have their place, as do the multilateral venues and primary market exchanges, where visible price formation and access to all participants both large and small is afforded.
However, when markets are stressed there has always been a flight to trading on lit order books. They offer price transparency and therefore reduce volatility risk. Also, the nature of any multilateral trading facility is its openness to participants, large and small, creating a diverse depth of liquidity, which in turn creates a robust price formation process that we know the market feels comfortable with.
We need to ensure the quality of the system, to ensure it remains strong. There’s a place for bilateral or principal activity where it can really demonstrate it is adding value in areas that wouldn’t otherwise be possible.
Finally, a lot of discussion at TradeTech had been around trader empowerment, working with vendors to get notifications and actionable insights directly onto the traders blotter. It’s a theme that constantly gets revisited, buy-side traders being empowered, but the adoption of new workflows is actually taking place today. The sell-side community is having to work ever more closely with the buy-side community, in partnership with vendors to achieve that. We are keen to continue facilitating this information transfer.
There is a shift in where we see that drive to evolve. We’re getting a lot of inbound from the buy side, from direct investors, who have ideas they want to explore and share with us, and include with the broker community.
Have you as an organisation had to become more open, in order to absorb inbound innovation?
Turquoise Plato™ is a great example of how we work symbiotically with the wider market. Using this partnership dynamic to have a conversation with the buy and sell-side communities in one room is very powerful. Going back to my second theme, where resources are stretched and scarce, we can work together to develop products and new initiatives that people actually want. That way we are solving existing problems for market participants.
We are very proud of the success of the partnership with Plato in the formation of Turquoise Plato™. As well as continuing to help drive improved market structure change through innovation, Turquoise has contributed significantly to not-for-profit Plato Partnership, enabling reinvestment into the community and the market. One example of that is the academic market structure research it has conducted, to drive improvement for the industry, by the industry. That gives a sense of why it’s an important partnership.
Where does data fit into these discussions?
I’ve recently had conversations with buy side firms who are employing new analytical skill sets onto the desk, to work with data. Some are internal analysts, others are more externally focused client-facing market analysts that work with brokers, i.e. in-house expertise to help come up with new ways to refine the search for liquidity, in order to drive change. Developing workflow ideas has come about as a result of this re-tooling of desk skill sets.
Where there are new developments to increase efficiency such as bilateral trading, can you see an opportunity for Turquoise?
We’re cognisant of that drive for efficiency. We’re looking to see how we can help our members reduce costs. One of those initiatives is to work with a third-party partner in the creation of a high-fidelity equity market test environment as an extension of our current customer development service. The time, energy, cost, and potential P&L risk, is significant for a sell-side firm when it goes to market with new strategies. Notwithstanding regulatory requirements (RTS6), internal conformance testing allied with a new opportunity to truly performance test in an unrivalled simulation environment is exciting. Our new enhanced testing service can be tailored to this high-fidelity market environment, in which a series of agent-based models and virtual trading actors in the marketplace, that act as if in a real life situation, allows the sell-side firm to performance test new ideas and new strategies in a way which doesn’t have P&L risks and creates a virtual ‘test exchange’ in-a-box.
It can be used by the sell-side community in performance testing and refinement, but could potentially also become a resource to take on board projects, such as testing different combinations of service providers in a uniform environment (think algo wheel selection) to identify best execution criteria and metric performance measures. That is currently in a trial phase.
Do you think your ability to respond to markets become more iterative?
We both develop and iterate existing innovations. In the more developed areas of the market landscape, an iterative process is best. Having a community in the room and using partnership to evolve ideas remains key. But we also need to look outside of the traditional core business and continue to drive new opportunities through innovation.
That dovetails closely with Turquoise’s global expansion plans. For example. we’re looking into new investor bases, including the engaged retail investors in Asia, who are significantly increasing their non-domestic and international trading activity.
Our timezone in London, sitting at the heart of the global market between east and west, enables us to provide a platform whereby during London trading hours, six and a half hours before the US opens, investors can trade US securities through Turquoise in the UK. That is an FCA regulated venue offering centralised liquidity based on fully fungible post trade workflows. This is something which is new and innovative. So while there’s refinement and customisation, and trying to do more to drive efficiency, equally there are entirely new opportunities to pursue.
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