PUBLISHED: FTSE Global Markets, Issue 39 - January/February 2010
The quest for Best Prices, Liquidity & Consolidated Data
FTSE GLOBAL MARKETS TRADING VENUES ROUNDTABLE:
Attendees First row: left to right
MARTIN EKERS – European head of trading at Northern Trust Global Investments
PETER JOHANSSON – global head of equities at Neonet
MICHAEL KROGMANN – executive director, Deutsche Börse
Second row: left to right
LARRY TABB – founder and chief executive officer of the TABB GROUP
TIM WILDENBERG – head of direct execution, EMEA, at UBS
TONY WHALLEY – investment director at Scottish Widows
MARKET STRUCTURES & THE SPEED OF CHANGE
TONY WHALLEY – investment director, Scottish Widows: Most notable is the speed of change, both to market structures and liquidity, so much so that we need to adapt and modify our trading strategy on a far more regular basis than ever before. Post-Lehman Brothers’ collapse there’s been a significant impact on the liquidity that’s made available to us. Moreover, the rise of MTFs has had quite a dramatic influence on what we’re doing. The next trend is volume business transacted within dark pools. Whether that is to the good or bad, we are yet to find out. There are obvious benefits. Even so, it is imperative that we secure access to those dark pools in a way that is beneficial to us. Additionally, there are issues surrounding market transparency. As market fragmentation continues, there are concerns about the effect that has on the way the whole market is seen. A key requirement now, to mitigate some of the detrimental effects of market fragmentation, is to have consolidated market data; on both a pre- and post-trade basis. Without it our job is increasingly difficult.
LARRY TABB – founder and ceo of Tabb Group: MiFID has changed the ground rules of how the European markets work. We are in a process of fragmentation and increased competition within the marketplace, which is changing how the buyside and the sellside interact. New liquidity providers are moving into the market, increasing liquidity within certain MTFs. Meanwhile, the buyside needs a wider range of tools to be able to trade against a fragmented infrastructure as well as protect trading flow from possibly predatory liquidity providers and high frequency traders. Moreover, US and European regulators are looking at the new players, technologies and market centres, trying to determine the right market structure and how we should be operating, and that will then change the landscape again.
Michael Krogmann – executive director, Deutsche Börse: An important observation is that the algorithms implemented on our central platform worked well, even with a decrease in volumes and increasing volatility during the crisis. It is vital for us to confirm this fact. When the algorithms were first implemented (and we can actually track them back on our platform to 2002) we recognised that they provided significant liquidity to the market. However, that was in the good times, when volumes and turnover were on an upward trajectory. Over the last year, we saw that our major market participants and liquidity providers kept on providing liquidity and the market share of algo flow on the central platform remained constant. Elsewhere, customers who are very active today in the US markets have set up subsidiaries and entities within the European Union and have started trading and implementing their algorithms over here and now provide additional liquidity into the market. We think the game is now a European one. Moreover, cross-border trading, clearing and settlement continue to be very important. Finally, consolidation has to occur. We need it, because there are too many platforms out there.
PETER JOHANSSON – global head of equities, Neonet: From the brokerage viewpoint, the market provides ample opportunities. As fragmentation continues we interact in a different way with our clients and the dynamics of buyside/sellside client interaction nowadays focuses more on service solutions. Overall, the biggest change is the level of innovation and roll out of technology. However, the big challenge this year has been finding liquidity; and it has been hard, for both the buyside and sellside. I’m not as bearish perhaps on the fragmentation issue. Yes, consolidation is needed, but we need to find the right solutions to a market which in the near term looks to be continuing to fragment. MiFID has been good. It has brought competition, it has brought more liquidity into the marketplace. We could argue is it good liquidity for the buyside, for end clients? Nevertheless, it has encouraged technology innovation in terms of market interaction, which by the end of the day will affect transactions costs in a positive way.
MARTIN EKERS – European head of trading, Northern Trust Global Investments: Just to get a bit controversial, I slightly disagree with Larry. I don’t think the buyside is going to have this huge IT challenge that you kind of imply and that’s really because, as Peter intimated, of the service solutions that are being provided by the brokerage side. I share his view about fragmentation too. Everyone says the US is always big: big numbers, big Macs, and there are so many different venues. Actually, there aren’t. Even at a recent presentation at the White House the claim that there were 42 separate trading venues in the US was knocked back to 32!. So, there’s a bit of puff here. It can be very scary when you’re faced with supposedly all these venues, supposedly new entrants and supposedly new liquidity. Really, how meaningful is that to the buyside? It’s probably noise to Tony [Whalley] and I. It’s the white noise that you want to somehow exploit and the sellside has been pretty good so far at clearing our TV screens for us. The two big issues that will help us significantly are market data and inter-operable clearing systems. You’ve got to have that open up and once that’s opened up, the issues aren’t as scary as they seem today.
TIM WILDENBERG – head of direct execution, Emea, Ubs:
I think there are three things: the first is competition, which seems to get harder every year. You think you’re getting better at what you do but, sadly, your competitor seems to be doing the same, which is always a slight frustration. The second is fragmentation; MiFID is a work in progress, if you like. Definitely some good things have come out of it. However, there has also been some unintended consequences that people may not have anticipated. Tony Whalley’s point about transparency and market data is pertinent in this regard. Third: the “dark pool” debate is raging in the regulatory world and it’s an important one. The thing we can ask from regulators is to help us get clean and accurate data. Also, we need to put this so-called problem in perspective, for the market and for regulators, as there is a danger that it is being inflated out of proportion. There are a number of post-MiFID issues and they all need to be addressed. While the dark pool issue is one of them, it is not the biggest.
TRADING PLACES: THE NEW BUYSIDE/SELL SIDE RAPPORT
TIM WILDENBERG: There’s an extra dimension now to stockbroking. In reality it’s become a kind of technology and service provision role that, 15 years ago, wasn’t the case. Then, it was about being able to find liquidity; advising clients with regard to the market; and making recommendations on stocks. There’s a wider range of things that brokers do nowadays, driven by an evolution of the stock market itself as it has moved from the floor to an electronic model. In consequence, brokers have had to compete more as technologists. The question now is: when does that stop? Actually, I’m not sure it stops any time soon. It will continue to get busier and tougher and harder. As long as there are competitors in the marketplace, there will always be somebody trying to invent a better mousetrap or a faster service. Competition drives that and will continue to, but we must face that it is a new dimension to brokerage that wasn’t there before.
TONY WHALLEY: Brokers are constantly coming up and saying: “We’ve got a new this and that, which does this quicker than everyone else’s.” By the time we’ve tested it, checked connectivity issues and installed it, someone else comes along and says they’ve got something faster and better. From a buyside perspective, long-term relationships are paramount. You go with people you know can deliver. Brokers are now putting in front of us a lot more products that we can use, and it is down to us to choose which products we think are most suitable. There is a fairly substantial technology cost to the buyside of all this, as we have to test them and ensure they are compatible with our legacy systems and that can be time and cost consuming. Those brokers that are able to innovate and connect will over the long-term do better. The buyside meanwhile is asking, on a monthly/quarterly basis, for destination reports, to check that making good use of all the different forms of liquidity out there. However, as Martin will testify, 20 years ago if we were looking for, let’s say, 50m Tescos, you’d ring up a trusted broker and you’d tell him: “I’m looking for 50m Tescos. Don’t take them, but if you see anything, make sure we don’t get overlooked.” The broker would sit there and say nothing. Two, even four days later someone in the trading room shouts: “I’m a seller of 20m Tescos!” The broker says, “I’ll buy those, thank you very much”. That was your original dark pool. Now that happens electronically.
PETER JOHANSSON: Tony, do you feel more secure about the old dark pool or the new dark pool? What’s the overall buyside feeling?
TONY WHALLEY: The buyside has become immensely more professional and more diligent than it was 20 years ago and cognisant of what is going on in the market in terms of structure, pricing, volumes. Today’s good buyside trader is much better equipped than the buyside trader of 20/30 years ago.
PETER JOHANSSON: I do believe we’ve seen that transformation on the sellside too, i.e. in the way in which our traders interact with clients and their overall approach to trading. Now we’re just moving into hybrid areas, in between, low touch and high touch service. I believe you have to utilise all of the technology and innovation and market access together with the old school personal approach to trading, because it is still a relationship business.
TONY WHALLEY: Yes. It’s about prioritising your order flow, isn’t it? As you say, high touch, low touch. You now have systems whereby any order which is worth less than, let’s say, £5,000 is automatically routed somewhere and executed and comes back and you don’t even need to see it. It is not only low touch, it’s no touch.
LARRY TABB: It isn’t that the buy side’s going to develop an entire suite of algos and build their infrastructures. However, they will need more order management technology. Eventually, you will wind up with a whole suite of really good algorithms provided by brokers. To some degree, we’re seeing this in the States, where even those buyside firms that you would think wouldn’t have independent execution management tools are implementing them to take a little bit more control of the execution process, and not necessarily putting everything through a broker — whether to hide strategy or take more control of it. Now, you’re not going to be building those platforms from the ground up, instead implementing vendor-based platforms and some canned outside-algorithms, but it’s more than you had in the past.
CROSSING & DARK LIQUIDITY
TIM WILDENBERG: No question, MiFID has enabled new trading venues. Now we have the arrival of dark MTFs, which are publicly accessible non-displayed pools. We’ve always had crossing services that brokers were operating solely because we were trading for our clients. We know that we’ve got a buyer of Alcatel and we’ve got a seller of Alcatel, so we’re going to try, if it makes sense from a best execution standpoint, to cross them. That is exactly what we’ve always done as stockbrokers. We are obliged to look after our clients’ interests. To whom we might – or might not — show bits of their order rests on our understanding of our clients’ requirements.
One thing that brokers, with hindsight, have perhaps done badly is that we’ve allowed the perception to develop over time that crossing services offered by brokers are the equivalent of dark pools that are public MTFs. Actually, they are quite different. It goes to the point mentioned earlier: about the importance of knowing whom you trust.
MICHAEL KROGMANN: Being progressive and considering that there is crossing and liquidity, it is vital in an efficient market that we strengthen the elements of transparency and price formation. Nevertheless, big investment firms must be able to cross large-in-scale orders on the basis of public information and price. We should consider in order to account for economic necessities and existing trading practices, MiFID originally allowed few exemptions from the strict transparency regime. Again: the basis for the waivers was to avoid “excessive transparency” for large-in-scale orders, and this is the very area waivers should be restricted to, besides the other waivers that are already in place. If they are, they might indeed support a transparent and efficient market structure.
LARRY TABB: The problem is, when you’re looking at blocks that are large in scale, a lot of the blocks that wind up getting executed in the broker dark pools look a lot like small little pieces. The issue then becomes that sometimes there is only one side of the order that’s block and what winds up crossing against it is lots of small orders or an algorithm, and if you start banning dark pools or putting too many restrictions on dark pools, investment managers aren’t going to put a million shares into a pool. They’re just going to leave it on their desk or put it into an algorithm or give it to a broker over a period of time. You wind up moving that liquidity out of the market completely and it makes it just more difficult for the buy side.
TIM WILDENBERG: There needs to be more granularity and transparency. To Larry’s point: in reality the crossing executions that are happening are not always traditional “blocks.” There are many reasons for that. The nature of the instructions we get from a client varies. He may want to trade discretely throughout the day, so executions are done in micro-portions. We need to be transparent about where we’re printing those executions. Do we print them today instantly? Yes, and we print them at the midpoint. While improved transparency has a positive impact, there also need to be protections in place when crossing with non-displayed flow to ensure that people are not trading outside of the spread or at bad prices. One of the points that Tony raised about seeing more free trade could actually be a problem. The trader is our client, but some fund managers are looking at their dealing desk, saying: “Well, I know that the crossing pools might be trading at a different price, but I’m measuring you on the primary.” Therefore, though an algorithm can manage multiple curves across multiple markets in order to achieve price improvement, brokers may be compelled to “dumb them down”, providing our clients with a benchmark primary because that’s what they themselves are being benchmarked against. This tells us that if there was actually one consolidated tape, they wouldn’t be having that conversation because everyone would be looking in the right place for the market data.
TONY WHALLEY: The big worry with dark pools is if, for example, and I’m using Tesco again, I’m looking to buy 5m Tesco through UBS’s dark pool and Martin is looking to sell 5m Tesco through Merrill Lynch’s dark pool, they’ll sit there all day and nothing happens.
TIM WILDENBERG: That would have also happened before in your old floor based system. You would have talked to only one broker.
TONY WHALLEY: Yes, but wouldn’t it be so much better and so much more advantageous to our side of the fence not necessarily your side of the fence because there’s a vested interest here―if dark pools were consolidated and everything came together?
TIM WILDENBERG: Then they would all be public open pools. In the same way you’ve talked us through your Tesco example, there are going to be certain times where you’re not going to want anybody else to know about your order. So, the problem is that this is a bit like the indications of interest (IOI) debate.
TONY WHALLEY: Absolutely. It’s protectionism.
MARTIN EKERS: Do buyside desks prefer the old dark pools or the new dark pools? My reply to that is that you can walk into a very nasty pool in both the old or the new style pools or, equally, you can decide to swim very badly with your eyes shut. Either way, you will end up damaged. Dark pools have always been there and our biggest risk as an industry is that the regulators don’t understand that dark pools have always been there. This isn’t some nasty new plague that’s suddenly coming across the industry for which they prescribe some prohibitive regulation. They often use a sledgehammer to crack a nut, and it’s a hell of a way back once they’ve done that. It is our duty as industry professionals to ask everyone else who’s involved to guide regulators towards a sensible solution. As we’ve discussed, technology has only enhanced what was already there.
TIM WILDENBERG: In non-displayed liquidity, everyone wants to see your IOIs, and not show their own. The problem rests in certain types of orders. When you give us an order, we will put it in some of the public dark pools. We will also allow some of our other clients’ orders to match against it because we know it’s usually good for them and you. The problem with a dark pool is implicit. If it’s a public dark pool, then in reality it’s not that dark, because you just don’t know who’s going into it or what they are doing with the information they are getting from their interactions. You don’t know that Martin Ekers has been sitting there thinking: “There’s a buyer on Tesco, I’ll just wait.” What’s the fine line between someone being a great trader and someone gaming a dark pool? It’s a very subtle difference.
MARTIN EKERS: I was reading this morning about a major US company that’s launching in London very soon and their average trade size in the States is 415 shares. I’m not sure that that’s of any benefit to my order book or Tony’s order book and yet this is a major headline and there’s a big fanfare.
TIM WILDENBERG: To be fair, though, there is an intellectual debate that says if new people come to the market with volume each day, but leave the market at the end of every night flat, have they brought liquidity or have they not? In aggregate, you’re right, 415 shares isn’t going to make a difference. However, if every time you trade you manage to trade that 415 shares with half a basis point price improvement, that over time is going to make a pretty major difference to you. If, as you say, all this frequency trader does is take money out of the business, then that will stimulate a debate around: have you brought a new buyer to the market? I don’t know the answer, but I can see that there actually is more turnover, there is some more liquidity been brought into play. Is liquidity all about institutional long only clients buying stocks, keeping them and selling them to another long only guy? I don’t know, but the accumulation of good 415 share executions adds up.
LARRY TABB: In the US, TABB Group counts all the dark pools through our LiquidityMatrix. We gather the information that providers give us and if you look at the dark pools that have large-in-size trades — such as Liquidnet — the amount of their liquidity is much more limited than if you look at the ones that are trading 100, 200 and 400 shares. Therefore, if you’ve got your 5m Tescos, you’re going to put that in a Liquidnet. If somebody else is in Liquidnet and you can match that off, that’s great, no leakage. The question then becomes, if everybody’s buying Tesco, who is going to take the other side? That’s when you start getting into the broker dark pools that bring in different types of liquidity. I’ve been on desks where they’re starting to get fills and, yes, they’re getting 100 and 200 share fills but they’re getting a huge number of them, really filling quickly. The question then is: is that, for example, Martin or is that Tony on the other side with an algorithm feeding into the other side of that? Or is it Mr. Get Go taking the other side and laying it off heaven knows where? Unfortunately, it’s hard to tell. If you look at the numbers of Credit Suisse, Sigma-X or UBS, even though they don’t tell us their numbers, they’re actually doing far more volume than the big block dark pools.
TIM WILDENBERG: Ultimately, dark liquidity is one part of a larger function. It’s a tool. There are times where you need a visible and public market, and often most of the time, you need to advertise you’re a buyer or you’re a seller. You want to be sitting on the best bid and you want to be visible, because you need to find the other side of the order. There are many times, however, where you don’t want this visibility. There is also sometimes an unhealthy blur between what is over the counter (OTC), or off exchange, and what is dark. There is a misplaced perception that all OTC is dark or non displayed liquidity, which is not the case. The percentage of orders that are truly dark is probably 5% in Europe, compared to the 40% that is OTC. As an industry we need to be more transparent around that OTC number, because an OTC trade report might for example just be relating to some swap or give-up going on behind the scenes, or a risk trade, or all sorts of other things that (chances are) have actually been through the public lit market first, anyway.
MICHAEL KROGMANN: If you want to get fills in small sizes, you can just send a certain proportion of your big order to the order book and get executed against 260 market participants to execute against you fully and anonymously. If it comes to execution of small proportions of a big order, it should be distributed in the price discovery process that is publicly available. We have a big conflict here, because no individual is interested in sending his order to the public order book. However, everybody is interested, of course, in high quality price discovery that he can read as an indication for all kinds of executions.
LARRY TABB: In the US, the public markets have been very open to the high frequency set and to a lesser extent, the dark books, or at least certain dark books. When we talk with institutional traders, there’s a much greater desire to keep things, even if they’re getting 100 to 200 share fills and they’re dark. That’s because they feel that when they get to the lit markets they’re absolutely playing with the Mr GetGos. Sometimes, when you need to get filled, you need that, but they want a little bit more shelter.
PETER JOHANSSON: There will always be different types of vendors, there will always be different types of brokers. There will always be different types of algos, dark pools, marketplaces. I just think that we need to take one step back and understand, specifically from the buy side’s perspective: what is the investment decision behind this trade? Where shall I go? Who shall I interact with? You should keep close interaction and notes and make sure that you get all of the information you require. Where did I trade it? How did I trade it? Where was the EBBO? It is also vital to measure your execution quality, because there’s always going to be different venues to choose from.
BUYSIDE APPROACHES TO TRADING
TONY WHALLEY: Our fund managers are supposed to be taking a three-year view. The high frequency traders are taking a three nanosecond view. Now, as far as I’m concerned, there has always been a fear in the market as to who you’re trading against. It used to be: am I trading against natural on the other side or am I trading against the market maker? Then it became: am I trading against a hedge fund? Now it’s become: am I trading against a high frequency trader? Well, actually, provided I’m fulfilling my objective, which is buying or selling the shares that the fund manager wants to buy and sell on a three, four, five-year view, I’m doing my job. In any case, this fear about who we’re trading against actually shouldn’t matter. These guys are providing liquidity and our job, as much as anything else, is to find that liquidity.
MARTIN EKERS: I’m glad Peter has posed the questions, it’s better coming from the sell side. At what point does the buyside and the whole variety of buyside desks that there are become accountable? I fully acknowledge that you and Tim and all the other brokers have got orders but I do not know any other transaction that you would make that you’d be prepared to complete based on a future price. For example, Larry, have you flown over here only to find out how much your flight will cost you when you get home? Of course you haven’t. None of us would do that and the justifications given for those sorts of instructions concern me. We’ve got a huge core business and if the benchmark is the closing auction, I fully understand why we’re going into the close, even though we could have traded at four o’clock. We’re going to trade at the auction at 4:35 and that is absolutely crystal clear and fully defendable. For example, if my equity manager has made a decision to buy 50m Tescos based on the price at 25 past one, then it’s my job to get that done as quickly as possible with as little impact as possible with whoever else is out there.
PETER JOHANSSON: The buyside trading desk is now also asking for help with alpha from the sellside. Therefore, I do believe there’s an interaction between them, however, with the options available today, you should feel fully secure that giving out the trades that Martin is talking about, that you are sure about the added value in just giving out straight benchmark. I cannot agree more with you.
MICHAEL KROGMANN: There has always been a demand for crossing of big orders outside the order book, as we’ve discussed. Xetra MidPoint allows trading members to trade stocks without disclosing the volume and the limit of their order. The functionality thereby enables market participants to execute market neutral orders of greater volume. The orders are entered into a closed order book and executed at midpoint between the best bid and ask price of the open Xetra order book. Therefore the Xetra MidPoint, is not a dark pool, it is a reference price-matching. However due to the execution at midpoint between the best bid and ask price, implicit transaction costs for investors are reduced. Xetra MidPoint thereby not only ensures full transparency concerning price determination but also enables trading members to minimise their trading costs.
Additionally, as Larry mentioned before, all the public dark pools are not as successful as the broker-owned dark pools. As far as I know, there has not been a single public or exchange-owned dark pool in Europe that has been successful.
GROWING TRANSPARENCY
LARRY TABB: What Tony and Martin were saying earlier about pre-and post-trade market transparency, that tends to be the biggest challenge we hear from European buyside traders; that it’s very difficult to get a complete view of what’s happening in the market. Hand in hand with that is clearing and settlement. Pre- and post-trade transparency will be a challenge but it’s more easily solved than the post-trade clearing issue with five or six CCPs and a significant number of depositories to take into account.
MARTIN EKERS: Condition codes are fairly boring, yet crucial. There is a whole swathe of data out there that we’re all trying to decipher and if we can get a very clear common set of condition codes across Europe, then it just becomes so much easier for everyone. Any agency transaction, any OTC cross should be printed, reported and published immediately and marked as such. For example, if I decide to buy 5m Tescos from Tim on writ, that should not print. That should be privileged information for Tim and me to know. When he unwinds it in the marketplace or from the high frequency trade or from Tony, then that should print, and I don’t think there’d be anyone on the sellside or the buyside who would argue against a very commonsense solution.
PETER JOHANSSON: We spoke about the old days previously. Wasn’t there some kind of gentleman’s agreement in between buyside and sellside of unwinding the position?
TIM WILDENBERG: MiFID has actually, though many don’t wish to admit it, made the world more transparent. However, if you were a London stock market operator, either on the buyside or the sellside, the new, more transparent rules of MiFID are actually a step backwards from what was visible in London before. In aggregate there is more visibility, there is more trade reporting and there’s more detail because actually anything that traded in Germany could have been traded OTC almost anywhere on the planet and was just getting booked and not shown. Now we’re in a scenario where all of these OTC executions are actually visible. People don’t yet have the tools, although they’re starting to build them and understand how to drive them, to do that. However, to Martin’s point, there is a debate in the market about the value of MiFID. Some of Michael’s colleagues, I’m sure, in the legacy exchange world are facing intense competition and may find some of the developments in the OTC space rather threatening. In reality, though, at a granular level, we discover that the dark liquidity that everybody’s so very worried about is only 5% or 6% of all the aggregate, tradable volume. What is displayed remains a massive proportion. For example, if you look on the Fidessa website today, they’ve got a thing called “The Fragulator,” where you can see how much is trading dark, how much is lit, and on which venues. There is a big chunk that is OTC and that needs to be flagged in a way that explains that this is a client to client cross, this is a client to book cross or whatever.
MICHAEL KROGMANN: If I look at the whole proportion of OTC trading, in some months it is near 45%. Even so, there is no formal and publicly available information that says how much is going on in broker internal dark pools. Therefore, all the figures, even the figures that Larry is providing, are just a good guess about what’s going on in these dark pools. So, we need some more transparency there.
TONY WHALLEY: On a European basis we are far more transparent than we were pre-MiFID and the issue that we have is very much one that we have on all European legislation, not just in the financial sector, where you’re trying to get lots of different shaped things all to fit in the same hole and, actually, it doesn’t always work for me. Ironically, the transparency we enjoyed in the UK market pre-MiFID was actually far greater than the level of transparency we now have. People are pushing back to a certain extent and slightly concerned that what they used to be able to see and what used to enable them to do their job is now no longer available and that is a big concern. I also think that if you look at what is going to happen in MiFID Stage 2, if such a thing does go ahead, which I believe it will, then you’re going to find that unless the transparency/consolidated tape argument is mandated by the regulators, it simply will not happen. That is because there is a certain amount of vested interest in the mix, where transparency is not a big thing. You ask anyone and they will say: “I want everyone’s business to be 100% transparent except mine.” However, it doesn’t work that way. Even so, if you have a greater degree of transparency in markets, it encourages liquidity, which is what we all want.
LARRY TABB: I had a discussion recently here in London with a market operator who was also very sceptical of getting complete pre-and post-trade transparency. He felt that if there was complete pre-and post-trade transparency, a lot of the liquidity from Europe would wind up in London, mostly because more of the trading venues are there and that it would disadvantage a lot of the smaller countries trying to build up their own bourses. Now, that might not necessarily affect Xetra because that’s a big market centre, but it might affect some of the smaller countries, and they would never go for it. That’s only one market operator’s viewpoint but...
TIM WILDENBERG: We’ve seen recently in the US the SEC discussing the “Fair Access” point, saying basically that they’re considering changing the threshold at which the dark pools that publish IOIs will need to display prices more visibly. Moreover, the SEC is also talking about a tape where people would have to immediately declare where a non-displayed trade happens. So, rather than just take an execution report that says IBM just traded at ten, it will say IBM traded at ten in Sigma-X or in UBS PIN or New York Stock Exchange or Xetra, for instance. Xetra, for instance. In Europe if we cross something today, for instance, we put it in BOAT in real time, so it is already being published in real time and we are happy to do it. The interesting feedback I’m getting from my US colleagues is that the US client base does not want that level of granularity to go on a public tape, as the SEC are proposing. That is, information that shows a block go through and who traded it.
TONY WHALLEY: You’ve got to give it a bit of time where people actually see the benefit of having full transparency. As long as the client name isn’t shown, I don’t have a problem. In the old days in the market where a broker just crossed up stock, if you had business to do in that stock, you gave that particular broker a call, knowing where the business was going on, meaning that they get more business and we end up getting our business executed with less market impact.
TIM WILDENBERG: Except there is a general trend throughout Europe and around the world to “anonymise” the public markets (i.e. hide the broker codes) , because the information leakage is viewed as detrimental to the players in the market.
PETER JOHANSSON: I’ve been involved in those discussions regarding anonymity on the exchanges. There has been, and I do believe there still is, a strong resistance among Scandinavians, both buyside and sellside, to go completely anonymous on the post-trade scenario. So, how does that affect the market? I’m a strong believer that we should become totally anonymous because I’ve seen some patterns within the markets where orders get shuffled around and you have some front-running. I’m not saying that I could point it out precisely, but you can have a good guess at it. The execution performance in anonymous markets versus non-anonymous markets tells us that all markets should embrace total anonymity. However, the debate is still raging.
MICHAEL KROGMANN: The market needs to be fully anonymous because otherwise all the market participants might have a problem with the counterparty risk when they see small broker names in the book. All trades should be fully anonymous and fully secured by CCP afterwards.
TIM WILDENBERG: Well, that’s contrary to what is being asked for in the dark pool debate by the SEC. In that debate we are being asked to print in real time and put our name on it. So, to some extent there’s a conflict. Maybe a solution is we publish it in real time and later on we tell you this was our total number and we mark it in someway or something. I absolutely agree with you. Transparency, in my view, takes the debate away because the dark pool debate, in my view, has become too big unnecessarily.
MICHAEL KROGMANN: However, your internal dark pool is obviously not a public marketplace and not everybody can have access. On an exchange, actually, everybody can have access. That is for me a totally different discussion.
TIM WILDENBERG: Nevertheless, the risks around anonymity remain.
MARTIN EKERS: There was question a little while ago about whether we feel there’s a reluctance to publicise the venue, where the things trade. If there is, its very misguided. I would fully, fully support it and I don’t really get Michael’s difference here because we’re in a public market and a Sigma-X or UBS PIN. If the trade’s going on in the public market, then all market participants are going to get there. They’re going to know very quickly. If all the volume of Siemens is on Xetra, they’re going to trade it on Xetra, there’s no doubt about that. If Tim is putting up crosses after crosses after crosses and you can see it going though real time on the tape and it’s all got his little flag on it, then it’s quite right that I get hold of Tim and he rings up Tony and he does a huge great cross and we’re both happy.
MICHAEL KROGMANN: I’m not.
MARTIN EKERS: That’s competition, right? One of the biggest threats to us as an industry is lack of trust in the price formation process, lack of reliability about the tape, which is why it’s so important to consolidate it, misunderstanding about what is real volume and what isn’t real volume and how much is going on where and what and it’s within our grasp as practitioners to help solve that problem. We should be publishing. You’ll all have your different ways of advertising it. People will have it on the tape Neonet just crossed this and I’ve got an interest in the name and I’m going to be calling you up. That’s the way it should be.
LARRY TABB: Some of the debate in the United States is not necessarily about larger mid-cap and large cap names but some of the smaller cap names. These smaller cap names are easier to game and traders are worried that real-time printing of smaller cap names, especially in the dark, may help facilitate the gaming of these names. Now, I don’t know whether that’s right or not.
MARTIN EKERS: Because it’s a trade and it’s complete, the gaming risk, and this is to Larry’s point, really, about the small cap, is no greater or less than any other scenario. It’s no different in 25,000 little shares with a small company and a 50m Tesco. The chance of that being gained after the trade has hit the tape is exactly the same.
LARRY TABB: That’s the issue: when you wind up with one after another print of 200 share prints in a dark pool of a smaller cap stock that trades over a period of time. It’s not when you’re done all at once.
TONY WHALLEY: There’s no doubt at all that the fund management industry is becoming more and more global and will continue to do so. However, I do think, like all things, it is very, very important that we get what’s going on our own doorstep correct before we start trying to branch out. If we try and branch out before we’ve got the stuff close to home working properly, all that’s going to happen is that a lot of the problems we have close to home we will export to the other markets and make them worse than they are right now. So, we’ve got to be very, very careful about that. The trend itself is to move to a global basis in terms of fund management, in terms of analysis and probably in terms of trading from a fund management perspective as well. You see more and more desks starting to split their order flow, not so much on a geographical basis but on a sectoral basis and that is probably going to continue as time goes on. However, please, please can we concentrate on getting what’s at home right before we try and move overseas?
LARRY TABB: Also, the issue is that Europe through the EU process and Brussels is coming together while at the same time Asia is really fragmented and not coming together. You have the Asian markets with some linkages but those markets are really very different.
THE VERDICT ON MiFID
MARTIN EKERS: I’d give MiFID six or seven out of ten. It hasn’t quite achieved what they wanted it to but it has been a wake-up call for the industry. The first words in this roundtable were about change being continuous and ongoing. That sounds good and that continues to be the case. I don’t think you ever get to a point in this industry where everything is sorted and we stop developing or stop innovating and changing. I’m reasonably optimistic that the market fragmentation will, in the short term, worsen but in the medium term improve. I share Tony’s reflection that the quality of buyside has improved and continues to do so.
FRANCESCA CARNEVALE: Do you think the buyside of the sellside has benefited most from a post-MiFID world?
TIM WILDENBERG: At first glance, the perception will be that the sell side has benefited more, especially if your business is selling technology that aggregates fragmented markets. However when somebody does some qualitative work around the liquidity of the market, I believe we’ll actually discover that the buyside and some of their clients have also benefited. I’m not sure that’s clear yet because there is scant research in the marketplace that demonstrates how spreads are tighter, liquidity has become easier, and the cost of trading has dramatically changed. I think trading costs have come down; but we need empirical proof.
MARTIN EKERS: Just a PS on that. The problem, as we already mentioned, is about the quality of the data but also you have to accept from any position that 2008 was an extraordinary year and you’ve almost got to lift it out of the equation. You’ve got to go back to 2007 and you’ve got to compare 2009 and 2007 and just say, right, 2008 was a real aberration, an outlier that’s going to make a mess of any stats.
TIM WILDENBERG: Have you thought of doing some of that work, Larry?
LARRY TABB: Yes, we’re actually in the process of looking at the last four years, the two pre-MiFID and two years post-MiFID, analysing effective spreads not across the whole market but a tier of, say, 30 stocks. That includes top tier as well as mid tier and small tier, across the FTSE, the CAC and the DAX.
MICHAEL KROGMANN: Of course, there have been a lot of changes in the last two years but at Deutsche Börse and Xetra we were always in the position where we had to compete with the markets. Compared to other European markets we did not have a concentration rule in Germany, so it was always possible for retail as well as institutional investors to trade OTC off the markets. Then we have the peculiarity in Germany that we still have seven regional exchanges that are, of course, not a competitor on an institutional scale, but which are certainly competitive on the retail scale and we have had to innovate all the time. We have implemented around two releases of Xetra every year even before the implementation of MiFID. So, we have listened to the market, have been innovative and so on, but, of course, the dynamics increased as regulatory changes have been implemented but at the same time technology implementation on the customer side also increased, so we have really had to adapt our business model to new market conditions. That is why we are launching Xetra International Market, a dedicated segment for trading of European Blue Chip equities with an efficient home market settlement process. In terms of a market share comparison of what was traded in German instruments and in the transparent order books, it looks like we don’t have the same proportion that we had probably two years ago, but I’m not so sure whether that would have been routed to our platform even before MiFID.
PETER JOHANSSON: There’s been great opportunities and there’s been some great issues as well. We’ve seen fragmentation. It is here to stay. One could debate whether it will continue. There will be consolidation on the trading venue side, but also in the asset management space. You might see it also on the brokerage side. We might see some more consolidation on the sellside because, with this fragmentation, there’s a lot of brokers out there that do not have the capability or the infrastructure or the money to actually invest in what’s needed to actually reach all the different liquidity pools. Moreover, on the other side of consolidation, which we haven’t spoken about, I’m actually in a market where suddenly exchanges are starting to compete with me on out-routing, forward-routing. I’m just starting to see the whole map, defining a new but still exciting market. The buyside has benefited from MiFID in the changing way that it now needs to utilise the sellside more as a consultancy for solutions, and to actually reach the market in a more technological way. The old relationship will still stand however, and I do believe that’s one of the core things within our business. Going forward there’s still opportunities out there and we just have to embrace them and finally, liquidity will continue to move into market.
TONY WHALLEY: I wouldn’t say it’s much improved, I would say it’s different. MiFID was there primarily as a driver for change and to ask questions and there is no doubt whatsoever we have seen some change and there’s still a certain amount of change to come and it will possibly be in areas where we don’t expect to see that change. The discussions we’ve had over the previous hour and a half show that there’s still some questions which definitely need to be answered. So, from that point of view MiFID has done a very good job. In terms of exchanges, in terms of ECNs, in terms of MTFs, the question is whether we’ve actually reached the stage where fragmentation is going to continue or start to consolidate. If we look at the example of the LSE with Baikal, and potential take-over of Turquoise, we’re starting to see the consolidation starting to take place. What the marketplace will look like longer term, I’m not sure, but I do believe that it’s given us and it’s also given the sellside a huge amount more choice as to how we execute that business and choice is good. Choice in itself allows you to use a little bit more discretion, to add a little value to the way trades are executed and that in itself has led to a higher quality of people on both sides of the fence.
