2016: Year of the Trading Tech Boom?

By Madhvi Mavadiya | 21 March 2016

Even though we are only in the third month of the year, trading tech has exploded and developments in innovation are set to flourish in 2016. After the flash crash in 2010 which resulted in the Dow Jones index losing 9% of its value in 20 minutes, US regulators introduced circuit breakers that would stop trading in situations like these in order to maintain market resilience. This year, many traders in the EU have MiFID II on their minds as it will require all trading venues in the region to have circuit breakers.

Regulating Volatility

The obstacle of volatility still remains as Edwin Schooling-Latter, head of markets infrastructure and policy at the Financial Conduct Authority explained at the FIX Trading EMEA conference, according to Markets Media. “There is an arms race to be the fastest and a debate is needed over whether the risks outweigh the benefits. We believe high-frequency traders are less likely to withdraw in volatile markets, as volatility offers opportunities for profit, but careful study is warranted.”

Electronification of trading has become a concern for policymakers as high frequency trading is more established in sectors like foreign exchange now. A review published by the Bank for International Settlements, that questioned over 30 fixed income electronic trading platforms revealed that the increased use of this form of trading is shaping price formation and how liquidity is provided.

The report also drew attention to the US Treasury market flash rally in 2014 where an algorithm is said to have been the reason for extreme price swings. “One concern is that abrupt but short-lived price swings may become more frequent in highly automated fixed income markets,” the report read. Despite this, many companies have recently decided to upgrade their technology in order to meet the requirements for millennials.

Trading for Millennials

It was announced last week that BlackRock, a business that manages $4.6 trillion in assets, have a team of young traders that are coming up with innovative ideas of how to apply electronic trading to markets that have not implemented the tech as of yet, according to Business Insider. BlackRock’s deputy head of trading, Supurna VedBrat believes that this is a great idea. “Your 25-year-old may come up with a brilliant idea that somebody with 20 years’ experience may not come up with just because they’ve been so attuned to the status quo.”

Business Insider also explores how electronic trading is a challenge for the corporate bonds sector, because the bond market is more fragmented and Iseult Conlin, corporate bond trader at BlackRock explained why this is. “The way that corporate bonds trade historically has been very relationship driven – very over-the-counter, pick-up-the-phone, and dealer-quote oriented, where the informational advantage and inventory of bonds was very much with the broker-dealers.”

However, Goldman Sachs is working hard to remediate this problem in a similar way with the rehire of Raj Mahajan, which will help the institution move forward into the future. “When we look at how Goldman wants to be positioned for the future, simply put, we want to deliver the best execution quality to our clients, which is tantamount to saying we need the best technology,” Mahajan said in an interview according to Reuters.

Goldman Sachs clients will soon have access to a system that will allow them to use the bank’s algorithms to tap into quantitative trading strategies, which should help to alleviate accusations from other Wall Street firms that they are not syncing up to algorithmic trading strategies. “At a time when people are pulling back or potentially retrenching, we are stepping on the gas,” Mahajan said.

New Problems for New Systems…

Lee Maschler, founder of Trillium, explains how “one of the biggest trends that continue to be top of everyone’s mind is speed. While you don’t necessarily need to be the fastest, you certainly can’t be the slowest.” Maschler continued to say that with the emergence of dark pools, banks will be able to tackle problems that arise from private share trading venues.

There are banks that offer their own dark pools, while others are large clients to dark pools. While there are benefits to both approaches, as with any business, there are going to be challenges. As dark pools continue to evolve, banks will continue to evaluate dark pools as a business as well as a destination to send their clients order flow. As long as the stated objectives of dark pools are being achieved by the banks, such as making markets more efficient, less expensive and easier to manage, banks will continue to work to address the regulatory and other changes necessary to have them mature into a full service offering.”

Recent news found that Deutsche Borse and the London Stock Exchange had agreed to complete the merger for £21 billion. This “merger of equals” is expected to cut costs and expand services to a wider market, according to The Telegraph. Acquisitions like these raise shares and can transform the market in minutes and it is important for traders to keep on top of new trading developments.

…Like Blockchain?

Maschler said that thinking that blockchain is the solution to everything is a little naïve. “As Wall Street decides how it wants to move from a T+3 to a T+1 or near-real time processing environment, it needs to examine all options either through a competitive or collaborative process. Blockchain should definitely be in the conversation, but it’s definitely not the only option.

This month, CNBC reported that 40 major banks are working with fintech firm R3 CEV to test a new way to trade fixed income assets, which operates on the blockchain. This presented how serious these banks are about blockchain technology and would simplify processes, like settling trades, which currently take days now.

R3 CEV CEO David Rutter said in a statement that “these technologies represent a new frontier of innovation and will dramatically improve the way the financial services industry operates, in much the same way as the advent of electronic trading decades ago delivered huge advancements in efficiency, transparency, scalability and security,” Rutter said according to CNBC.

In other news, it was reported that broker ICAP are the first to use blockchain for trading data, according to Reuters. This form of technology is becoming popular as banks could save money in middle and back office solutions as they will be relying on “golden sourcing” data, rather than having to revalidate trades.

We believe we are the first to do this using distributed ledger and blockchain technology. What’s really transformational is that the banks no longer have to do so much themselves,” Jenny Knott, chief executive of ICAP’s Post Trade Risk and Information Unit.

Maschler highlights how in any industry, new entrants will always come into play. “Those businesses are going to be nimble and work hard. There are some that are going to be incorporated into the market and there are players that have robust ideas that won’t find a market. Both are happening across the pre-trade, real time, post trade and infrastructure space.”

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