Tag Archives: electronic trading


SEC Chair Jay Clayton Axe: Greater Corporate Bond Market Transparency

Corporate Bond Market Transparency 4.0 MarketsMuse fixed income fintech curators, who have been on the beat for better than 8 years, were keen to cover this week’s inaugrual meeting of FIMSAC.  e-Bond trading system founders, fixed income fund managers and fintech aficionados who have long lamented the limited degree of US corporate bond market transparency and less-than-likeable liquidity when trading corporate bonds in the secondary market and who ‘get the joke’ insofar as the benefits of embracing electronic trading platforms for corporate bonds might have a new advocate: SEC Chair Jay Clayton. At least that’s the way it appears based on comments Clayton made on Thursday while speaking to members of the Fixed Income Market Structure Advisory Committee (FIMSAC) during the group’s first meeting in Washington DC.

Whether Clayton does a typical White House walk-back after financial industry lobbyists turn up the heat in effort to preserve their legacy role controlling order flow and pricing remains to be seen. Because Clayton’s axe is less focused on institutional participants versus retail investors when stating “Main Street investors want liquidity; it is a sign of stability and resiliency..” he may not understand how the corporate bond works or the process by which individual investors become holders of corporate debt within their portfolios. If that’s the case, he’s perhaps perfectly suited to be a member of the present White House administration.

The importance of fixed income markets is “difficult to overstate,” Clayton said, noting the value of outstanding corporate bonds rose 76 percent between 2006 and 2016, compared to equity market cap growth of 40 percent.

“Individual investors are key participants in these markets, both directly and indirectly through pension funds and other pooled vehicles,” Clayton said, adding that he intends for the commission to continue focusing on these investors.

Courtesy of Law360 coverage: “Concerns regarding liquidity, or the ease with which buyers and sellers can match up in a given market, have been raised by bond market investors in recent years as big banks that serve as bond dealers and market makers, acting on new regulations imposed in the wake of the 2009 financial crisis, have reduced their balance sheets to cut costs and rein in risk.

The banks have shrunk their balance sheets by scaling back on the large bond positions they once held and used for creating markets for bond investors.

Some bond market participants have said the smaller balance sheets have led to reduced liquidity because it’s now harder to match buyers and sellers. That’s raised concerns that investors could lose lots of money should they need to quickly sell a large block of bonds into a market with few buyers.

Companies seeking to raise capital via private placement of debt instruments and in need of offering prospectus document preparation services turn to investor document specialists at global consultancy Prospectus.com

The wider concern is that if liquidity is already fragile it could essentially freeze during a time of financial stress when lots of investors choose to sell their bonds. When that happens, as it did in 2007, a domino effect kicks in which, given the size and reach of global bond markets, poses a threat to the world’s economy.

Committee member Gilbert Garcia, managing partner of Houston-based bond manager Garcia Hamilton & Associates, said he trades daily and has firsthand knowledge of a lack of liquidity during normal trading conditions, especially for large blocks of bonds.

“What we need to do is be ready for the next crisis,” Garcia told other members of the committee.

Scott Krohn, Verizon Communications Inc.’s treasurer and also a committee member, raised a concern that yields on Verizon’s highly liquid bonds could be vulnerable to extreme volatility during periods of financial stress as investors flee riskier securities in favor of safer ones, such as Verizon’s corporate debt.

To read the full article from Law360, click here

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Citadel and KCG Targets of DOJ

NEW YORK (Reuters) – Federal authorities investigating the market-making arms of the $25bil hedge fund Citadel LLC and broker KCG Holdings Inc, are looking into the possibility that the two giants of electronic trading are giving small investors a poor deal when executing stock transactions on their behalf.

The Justice Department has subpoenaed information from Citadel and KCG (formerly known as Knight Capital Group) related to the firms’ execution of stock trades on behalf of clients, according to people familiar with the investigation. FBI Director Jim Comey, the top cop for the US DOJ will ultimately oversee the investigation, as he does for all other DOJ matters. Prior to his current role as FBI Director,  Comey worked as the General Counsel to Westport, CT-based Bridgewater Associates,  the world’s largest hedge fund with $150bil (RAUM) and owned mostly by the firm’s Founder Ray Dalio, a trading guru who is known to have a particularly intense personality. But, that comes with the territory if you’ve built a personal fortune estimated at $15bil.  Chicago-based Citadel is steered by billionaire hedge fund manager Ken Griffin, whose estimated net worth of  $7bil is half of what Dalio purportedly has, but does include multiple luxury residences, whose total value is nearly $500 mil, and includes a $200mil NYC penthouse that he purchased in Q3 2015.

Intermission from news flash: For followers of Showtime’s drama-parody of the world where hedge funds cross paths with regulators aka Billions, you’ll get the joke. Meaning, the notion that a guy who first appeared as a rising federal prosecutor, working all the way up to White House level roles, then, by virtue of administration revolving doors, he finds his way down the yellow brick road into the private sector, where he manages to land a sweet job at a defense contractor and takes in $6mil after 5 years and then,  he finds Jesus [in Westport CT],  who is located at the peak of Hedge Fund Mountain. This is where  he makes nearly $10mil –pretty good pay for a former Elliot Ness–in less than three years as top lawyer to of all folks, the world’s biggest and most secretive hedge running $150bil (RAUM) for institutions and sovereign governments.  Wait! Now flash forward two seasons; that same guy is now the FBI Head who, in Season 2, Episode 1 goes after Apple Inc and threatens to waterboard Tim Cook unless he pries open the back of an iPhone belonging to a self-acclaimed follower of Daesh .  And now, Season 2, Episode 2,  our top cop is now going after a billionaire hedge fund manager who happens to swim in the same “billionated” pool of HF sharks as his former partner!  Memo To: Andrew Ross Sorkin–Are you writing this sh*t down?? P.S. New phrase above ie. ‘billionated’,  also pronounced billion-ated. Means: to be full of billions, to be inflated with material possessions that cost billions, to have your brain inflated with thoughts of self aggrandizement   because you are full of billions. Not to be confused with “Billionator”, which is the finance industry equivalent to “Terminator”…but we digress… back to the main story…citadel-fbi-marketsmuse

Authorities are examining internal data concerning the firms’ routing of customer stock orders through exchanges and other trading systems, to see whether they are giving customers unfavorable prices on trades in order to capture more profit on the transact

marketsmuse mr algo

Credit Suisse Bids Adieu to Mr. Algo in Wake of Dark Pool Fine

(Bloomberg LP reporting via TradersMagazine) — Dan Mathisson, aka “Mr. Algo”, the executive who helped build Credit Suisse Group AG into an electronic-trading powerhouse over the past decade, plans to leave the bank at the end of next month, according to people familiar with the matter.

Mathisson, who most recently served as head of U.S. equity trading for the brokerdealer, made the decision to go, according to the people, who asked not to be identified discussing personnel matters. The bank plans to separate electronic trading from block trading, said one of the people, after those businesses had been pushed together during his ascent. The separation is part of broader changes within the Zurich-based company’s markets business.

The 45-year-old is leaving at the same time the private stock-trading platform that he oversaw is under investigation. Bloomberg News reported in September that the bank will pay more than $80 million to settle federal and New York authorities’ allegations that it didn’t adequately inform customers of how the Crossfinder dark pool operated.

Mathisson plans to open his own asset-management business next year, according to a person familiar with the matter. A company spokeswoman said he wasn’t available to comment. The Wall Street Journal reported earlier Tuesday that Mathisson is leaving.

dan mathisson
Dan “Mr.Algo” Mathisson

Mr. Algo

Once dubbed “Mr. Algo,” Mathisson was one of the most prominent faces in modern, electronic markets. He help build Crossfinder into one of the largest U.S. dark pools. When lawmakers started to ask whether Wall Street’s private trading clubs had made stock markets less transparent and less fair, Mathisson trekked to Washington to defend them in a way that was unparalleled by his peers at other banks. He testified several times before Congress in recent years, vowing that dark pools weren’t as mysterious as their cryptic-sounding name implied.

He joined Credit Suisse in 2000 after eight years at quantitative hedge fund D.E. Shaw & Co., where he was the firm’s head stock trader and built his own trading models. Credit Suisse executive Bob Jain, who ran the bank’s quantitative trading desk, introduced Mathisson to colleagues as “Mr. Algo,” a reference to his status as an innovator in a field that was just starting to sweep through Wall Street: Using computer algorithms to automate big transactions.

Mathisson is known for being as much a translator as a trader. A fixture at industry conferences, he’s well regarded for his skills at explaining the complex architecture of the modern stock market in ways that a layman can understand, according to peers.

Under his leadership, Credit Suisse grabbed market share by selling algorithms directly to money managers. The programs resulted in better executions for institutional investors, who want to have their large orders filled without stock prices moving against them.

Before dark pools ran afoul of regulators, one of their biggest threats in Washington was lobbying by stock exchanges. New York Stock Exchange and Nasdaq Inc. executives were aggressively complaining to lawmakers that too much volume had moved off public venues, which had made trading less transparent and could affect the prices all investors pay to buy and sell shares. When the Senate and House held hearings, Mathisson became the go-to witness for banks that operated dark pools.

“Much of the debate over dark pools is misguided and is fueled by a desire by exchanges to avoid healthy competition,” he told a subpanel of the Senate Banking Committee in 2009.

For the full story, please click here


Electronifying The Corporate Bond Market Chapter 15: Liquidnet Tosses Hat Into the Ring

MarketsMuse editors are almost starting to lose count when it comes to the number of electronic trading initiatives from FinTech aficionados who purportedly intend to make the institutional corporate bond market more transparent, and hence more liquid..

Thanks to Liquidnet, the latest player to plug into the corporate bond market movement and throw their hat into the ring, there are now 15 (give or take) initiatives. We can only opine that those who believe that fragmenting marketplaces [particularly products that were never even centralized to start with] as a means to creating a competitive, transparent and hence liquid trading marketplace for institutional investors is at very best, counterintuitive. Some market structure experts might even go so far as to say this electronic bond free-for-all for market share is “completely assbackwards.”

Per coverage by Pensions & Investments Magazine, institutional trading network Liquidnet is set to launch an institutional dark pool for corporate bonds, in the third quarter this year. Best known as a dark pool provider for institutional equities trading, Liquidnet is integrating seven order management systems, which execute securities orders, to provide the connectivity and access to trading opportunities that are not currently available in the corporate bonds market. Liquidnet said in a news release Thursday the development will centralize “a critical mass” of corporate bond liquidity to market participants.

liquidnet“By connecting to (clients’) existing order management systems, asset managers will have direct access to a protected venue that allows them to exchange natural liquidity with minimum effort and minimum information leakage,” said Constantinos Antoniades, head of Liquidnet fixed income, in the news release. “The functionality, protocols and connectivity of our dark pool will create significant new liquidity in the broader corporate bond universe — not just in the most liquid segment of the market.”

Upon reading the press release via Pensions & Investments Magazine, one electronic market veteran had this to say, “The long-held thesis that a centralized marketplace, where all orders are routed and displayed in centralized limit order books (CLOBS) is the best foundation to attracting liquidity and by definition, also provides true best execution for legacy OTC products is a notion that seems to have gone with the wind.” Added that Opinionator (who chooses to remain anonymous given his current Industry role), “It’s only mildly surprising that the regulators (i.e. SEC) have no clue as to the impact of their enabling an industry-wide gambit that will turn the corporate bond market into an electronic rats nest. Despite a 5-fold increase in outstanding issuance during the past several years,  Dodd-Frank regulation has caused banks to step away from traditional market-making and risk taking, and consequently, the corporate bond market is only becoming increasingly more illiquid. More electronic platforms approved by regulators will simply make the corporate bond market even more fragmented and even less competitive.”

Breaking News: Yet Another Corporate Bond Trading System: Bondcube

Just when you thought the world of electronic bond trading had become saturated, MarketsMuse.com Fixed Income and Trading Tech departments continues coverage of the increasingly popular fixation on the part of entrepreneurs and technology firms, who have set up nearly two dozen new markets to trade corporate debt. In the rhetorical question posed by Bloomberg LP reporter John Detrixhe in his 15 April coverage of yet the latest entrant “BondCube”, the question is whether any of them will succeed.

In advance of the below extract from Bloomberg LP, MarketsMuse editors pose the following question: “Now that there are close on two dozen competing initiatives, which innovator from the world of FinTech will launch a platform that aggregates the APIs of the these disparate systems so as to provide a means by which bond traders can enter an order that will be seamlessly routed to the best destination for best execution? OK, So the likely answer is : Not until there are at least 4-5 systems that have demonstrated they have captured enough liquidity to make it worth the effort to build a fire hose for fixed income order routing. Here’s the extract from Bloomberg LP:

Paul Reynolds, CE0 Bondcube
Paul Reynolds, CE0 Bondcube

Bondcube, a London-based startup 30 percent owned by Deutsche Boerse AG, has gone live in the U.S. and Europe, according to a statement on Tuesday. The fixed-income market hosts securities denominated in 10 currencies, and averages about $300 million of orders a day.

“To simply start in this space as a new platform, never mind survive, you need a good idea, you need institutional financial support — in our case that is Deutsche Boerse,” said Paul Reynolds, Bondcube’s chief executive officer. “You need to be properly regulated. Unless you achieve those milestones, you’re not even going to start.” Continue reading

Mr Robot: Tom Dorsey’s ETF Uses Computers To Outperform Humans

MarketMuse update is courtesy of BloombergBusiness’s Anthony Effinger and Eric Balchunas’s 15 March article, “Funds Run by Robots Now Account for $400 Billion” profiles self proclaimed money manager, Tom Dorsey’s key to  a successful portfolio just takes pressing a button. 

Few people have profited more from the so-called smart-beta craze than Tom Dorsey. A new exchange-traded fund that he runs using a century-old charting methods took in $1.2 billion last year. Then, in January, he sold his 22-person investment firm, Dorsey, Wright & Associates, to Nasdaq OMX Group for $225 million.

Dorsey calls himself a money manager, Bloomberg Markets will report in its April issue, but his methods are more robot designer. He says so himself, proudly. If Dorsey and his team got abducted from their Richmond, Virginia, office by aliens, their algorithms could keep picking investments for the firm’s new money magnet, the First Trust Dorsey Wright Focus 5 ETF, forever.

“Once a quarter, we press a button,’’ Dorsey says. The Focus 5 algorithm then generates a list of investments, and First Trust Portfolios, his partner company, executes them. Otherwise, they don’t meddle with the robot. “We just need someone to press the button.’’

That, for Dorsey, is the essence of smart beta, or strategic beta, or scientific beta, or factor-based investing, or fundamental indexing, depending on which Ph.D. is talking. (Many smart-beta funds are designed by finance geeks.) It’s index investing with key twists, all of them rules-based, with no active management required. Most smart-beta funds track custom indexes. Some are simple variants of the Standard & Poor’s 500 Index and do what they say on the box. Others are hand-crafted and small batch, made by people with little more than a stock-filtering system and a dream.

For the entire article from BloombergBusiness, click here.

Trading Titan Point72 Gets to the Point: Big Data

MarketMuse update courtesy of Bloomberg Business profiles investment firm, Point72 Asset Management, expands its jobs to hire more employees in order to collect and analyze data. 

Steven Cohen’s investment firm is looking for an edge in public data.

Point72 Asset Management, the successor to Cohen’s hedge fund SAC Capital Advisors, has hired about 30 employees since the start of last year to build computer models that collect publicly available data and analyze it for patterns, according to two people with knowledge of the matter.

The hires are part of a project to expand quantitative investing, dubbed Aperio, that’s spearheaded by President Doug Haynes, said Mark Herr, a spokesman for the Stamford, Connecticut-based firm. Point72 is in the process of hiring a manager to oversee the strategy, he said, declining to comment on the number of professionals the firm has brought in so far.

Cohen, whose SAC Capital shut down last year and paid a record fine to settle charges of insider trading, joins Ray Dalio’s Bridgewater Associates in pushing into computer-driven investing, an area dominated by a handful of big firms such as the $25 billion Renaissance Technologies and the $24 billion Two Sigma. The money managers are seeking to take advantage of advances in computing power and data availability to analyze large amounts of information.

“Data used to come to you in a trickle and today it comes in torrents,” Herr said. “The amount of publicly accessible data can now be compared to a fire hose of information. People who can read the signals most accurately and analyze them are the ones who will generate returns.”

For the entire article, click here.

Electronic Trading of Corporate Bonds: Buy-Side Says: Don’t Fix What Ain’t Broken

Marketsmuse.com continues coverage of corporate bond electronic trading initiatives with outtake courtesy of coverage by Traders Magazine and column authored by Wall Street & Technology’s Ivy Schmerken. MM editor note: Since it was our chief honcho who coined the phrase “electronification of markets” 20 years ago, we’re also the first to say “If anyone has their pulse on fixed income electronic trading schemes, Ivy does.”

While new electronic venues are pushing to solve a liquidity shortage, buyside traders say the market is working fine, and they value dealer relationships.

Ivy Schmerken
Ivy Schmerken

Buyside traders say they are still finding liquidity from traditional voice dealers in the corporate bond market, though they will increase their usage of electronic venues for small trades to boost efficiency.

Despite concerns about a looming liquidity crisis and sellside balance sheets constraints, head traders speaking at an industry conference sponsored by Tabb Group said they mainly rely on voice traders to meet their liquidity needs.

Though the panel discussion was focused on the liquidity conundrum and the development of electronic bond trading networks, buyside traders said the market is working fine and they are not in a panic over a potential liquidity crisis.

“There are people confused as to where we are now and where they think we will be if we don’t see some automation or electronification of the market,” said Michael Nappi, VP Investment Grade Trader, Investment Grade FI at Eaton Vance. He said liquidity weaknesses do not affect all issues and sectors. Continue reading

Here We Go Again: OpenBondX Proposes Launch of Another Electronic Bond Trading Platform

While contemplating today’s news release profiling the proposed launch of the latest corporate bond electronic trading platform “OpenBondX,” MarketsMuse senior editors respectfully borrow Yogi Berra’s best line  “It’s like déjà vu all over again.” But for those too young to remember that most famous Yankee, we’ll toss you a softball: “Here we go, yet one more hat thrown in to the ring of electronifying the corporate bond market. We’ve almost lost count as to the number of initiatives that aspire to change the dynamics of buying and selling corporate bonds within the institutional marketplace, but the good news is this group is apparently not deterred by the number that have tried and failed to crack the cultural egg typical to those focused on fixed income trading.”

OpenBondX (OBX), an Alternative Trading System (ATS) upstart, unveiled plans to revamp its electronic bond trading in Q1 2015 with its new systems launch for both non-traditional and traditional providers.

The platform offers liquidity access via bond markets in the company’s first multi-tiered system. OBX’s ATS system targets both buy and sell-side participants, given the acute need for a platform that bridges institutional bond traders and natural liquidity suppliers in tandem.

At present, the landscape of corporate bond traders has changed due to shifting regulatory requirements and capital rules that has led to the mitigation of inventories by approximately 70% since 2008, according to GreySpark Partners’ estimates. The firm estimates that in 2014, buy-side firms held 96% to 99% of the U.S. corporate bond inventory in 2014.

According to OBX cofounder and CEO Alistair Brown in a recent statement on the platform, “every facet of OpenBondX and its technology have been built from the ground up to encourage providers to contribute liquidity and safely expose orders to the most aggressive pricing available, all under absolute anonymity.”

“By automating the bond markets as such and attracting liquidity from non-traditional providers, we believe our ATS will drive true two-way markets and significantly reduce trading costs,” he added.

Liquidity Fragmentation

The primary draw of OBX’s platform is its ambition to unlock fragmented liquidity, which aims to stymie information leakage and negative pricing issues that has become endemic in fixed income markets.

Helping to that end is a robust array of internal risk controls to aid market participants. As such, real-time utilities such as value-at-risk (VAR) validation on executed trades and open orders, aggregate value traded, duplicate order check and user access controls are afforded.

OBX has revealed a launch date for Q1 2015, with fully compatible trading for all US corporate bonds.


Dark Pool Tales Part 3: Fidelity Leads Buy Side-Only Initiative For Block Equities

In what has become an ongoing “trilogy-type” story straight out of Hollywood, the WSJ reports today that Fidelity Investments is set to launch yet the latest “dark pool” initiative via a consortium of and exclusively for buy-side investment managers. The announcement comes on the heels of a recently-profiled NYSE initiative [with a strategy to partner with leading investment banks that operate their own dark pools and otherwise bring back the block trade volume taking place away from the NYSE in consideration for lower fees] and a competing NASDAQ initiative that comes with a completely different pricing scheme in effort to capture market share.

MarketsMuse Senior Editor quips: “We’ve seen ‘buy-side only’ schemes before for both equities and fixed income. Bottom line: they’ve all wound up on the cutting room floor.”

Here’s the extract from WSJ reporting, courtesy of Kirsten Grind: Continue reading

NASDAQ Challenges the NYSE to Run Dark Pools

MarketMuse update courtesy of Reuters in CNBC

The NYSE has recently come close to completing a deal with some big banks to take over running the banks’ dark pools. Now, NASDAQ is proposing an alternative solution as they eye running dark pools for banks as well.

Nasdaq OMX Group has approached several big banks with a proposal to take over the operation of their so-called “dark pools,” and plans to seek regulatory permission to do so, The Wall Street Journal reported, citing Nasdaq Chief Executive Robert Greifeld.

The new initiative was a response to the needs of the company’s customers and not a strategic change, the Journal quoted Greifeld as saying.

Exchanges have been losing market share to broker-run alternative trading systems, including “dark pools,” partly as brokers seek to avoid high exchange fees.

Dark pools are broker-run electronic trading venues, and several big banks have one. They allow investors to trade anonymously and only make trading data available after a trade, reducing the chance that others in the market will know about the buyer’s or seller’s intentions and move the price against them.

Dark pool venues have come under scrutiny amid concerns their unlit markets may drive too much volume away from traditional exchanges and make it hard for investors to see demand and potentially distorting prices.

Last month, Citigroup said it would shut down its alternative stock trading venue LavaFlow, at a time when regulatory scrutiny has increased around broker-run trading platforms, forcing banks to rethink the costs. Wells Fargo shut its dark pool in October, citing a lack of customer demand.

Banks’ “costs are skyrocketing and our job is figuring out how we can help them solve that problem,” Greifeld told the Journal.

Using its technology, surveillance software and regulatory expertise, Nasdaq can manage dark pools on behalf of banks, still allowing them to trade at lower prices than they do on exchanges and letting bank customers trade anonymously, the newspaper reported.

A final business product hasn’t been completed and plans may change, the Journal said.

Representatives at the Nasdaq were not immediately available for comment outside regular U.S. business hours.

The U.S. Securities and Exchange Commission Chair Mary Jo White announced last year that she planned to propose new rules that would require alternative trading platform operators to disclose more details to the public about the way they operate.

For the original article, click here.

Dark Trading Pools: Deconstructing Market Structure?

MarketMuse update courtesy of Anna Bernasek 9 January article in The New York Times.

JUDGING solely by the name, stock trading in so-called dark pools may conjure up images of mysterious deals cut beyond public view. Also called simply “dark trading,” it happens when computers serve as matchmakers and bid-and-ask quotations aren’t displayed to all participants. What’s surprising is just how big the dark-trading market has become.

trading in dark 1In the third quarter of 2014, the average daily volume of dark shares was 2.56 billion, accounting for 45 percent of the total average daily share volume in the United States, according to a report from the TABB Group, a financial research and advisory firm. That is up from 42 percent during the same period in 2013, according to the report.

What’s behind the growth? “The proliferation of dark volume is partly because of technological advancement and the creation of multiple trading venues,” said Sayena Mostowfi, senior analyst for equities at the TABB Group and author of the report. “The thinking is if you have the match internally, why would you go to the exchange?”

Assessing the overall impact of dark trading isn’t simple. Connecting computers with other computers might simply seem to be the height of efficiency, and no doubt it has some advantages. But while dark trading can benefit some insiders, it may cost the market as a whole.

For one thing, dark trading has led to greater fragmentation of the domestic stock market, which is now made up of around 300 venues. Only 13 of these are registered exchanges, while the rest are alternative trading systems or broker-dealer platforms, according to a recent paper by Frank Hatheway, chief economist for Nasdaq; Amy Kwan, now a lecturer in finance at the University of Sydney Business School in Australia; and Hui Zheng, a senior lecturer at the same school. This fragmentation has made it more difficult for many traders to find the best prices.

The paper concluded that, on balance, dark trading turns out to raise aggregate transaction costs and reduce the accuracy of prices displayed in traditional trading venues. The paper’s findings would seem to suggest that the more dark trading grows, the less meaningful public stock quotes are. And that possibility is something that all investors should be concerned about.

For the original article from The New York Times, click here


ETF Execution and Algo’s: Bloomberg Says

As electronic trading markets become more fragmented, the majority of large orders are executed via broker-provided execution algorithms.

Typically, implementation shortfall trading algorithms are used to slice the parent order into many small ones and spread them out over the time horizon to minimize the slippage between average fill price and midquote of order entry, through striking the optimal balance between market impact and volatility risk.

Bloomberg Tradebook’s recent study, entitled “Seeking Optimal ETF Execution in Electronic Markets,” shows that trade costs of ETF orders are quite different from those of common stocks.

seeking optimal executionThe team has measured trade costs of ETF orders and common stock orders for various order size groups and compared them side by side within each group. The dataset of the study includes more than 100,000 orders trading US common stocks and ETFs from clients of Bloomberg Tradebook throughout the whole of 2013.

Results show that the median trade cost of orders becomes higher with increased order size for both common stocks and ETFs. However, given the same order size group, median costs of ETF orders are significantly lower than those of common stocks with 95% confidence.

Also, the study shows that ETFs have tighter cost distribution (i.e., lower variance of trade cost) compared with common stocks. This data implies that ETFs have lower median market impact than common stock of the same order size due to the liquidity of the underlying basket in addition to ETF liquidity displayed in the limit order book of the exchange.

As a result, those trading ETFs directly in exchanges can afford to be more aggressive in taking out liquidity without causing as much market impact as trading common stocks would.

– See more at: http://www.ftseglobalmarkets.com/blog/blomberg-tradebook/etfs-determining-final-trade-costs.html#sthash.Fu93JKAB.dpuf

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Buy-Side Trading Desks: Eye On Electronic Capabilities

tradersmag   Extract courtesy of TradersMagazine / Phil Albinus

Although the buyside has been known for its cautious and conservative approach to change and adapting to new market conditions, those days may be over. According to a new study by market research firm Tabb Group, the rate of change within the US buy-side equity trading desk is accelerating even though commissions have declined 19 percent since 2010.

In the first of three new reports entitled US Institutional Equity Trading 2014: Bellwethers of the Buy Side, partner and director of research Adam Sussman, senior analyst Sayena Mostowfi, and research analyst Valerie Bogard interviewed 108 asset managers in the U.S. Along with identifying firms that are on the IT leading edge, they found “a middle majority of firms who recognize the threats of being behind and are actively engaged in bringing similar capabilities to their firm.”

Last year saw the biggest increase in electronic trading, up to 41 percent of shares traded with bellwether firms auto-routing program trades and parent orders with share sizes of less than 5 percent of average daily volume (ADV). But as more of these firms sought to automate pieces of their order flow, the asset managers told TABB a quantitative overlay was critical. “This issue came up repeatedly in different forms, from portfolio manager alpha modeling, to venue analysis and internal routing optimization,” said Sussman.  

Among some of Tabb Group’s findings are: KEEP READING VIA TRADERS MAGAZINE

Algorithms & Altruism 101: Big Buy-Side Player Want Better, Going Back Upstairs

wsjlogoTake-away from (2) news articles today profiling proliferation of algorithmic trading strategies: The buyside “gets it”, but they don’t want it..

 Excerpt from WSJ’s Bradley Hope article “Buyside Traders Move Upstairs”: Some of the world’s biggest investors are changing the way they trade in U.S. markets in response to what they say are rising risks for institutions of their size.

The strategies include conducting more “upstairs trades,” in which deals are executed among big institutions, bypassing the broader market, as well as other sophisticated order-routing techniques designed to avoid pitfalls that have become increasingly apparent to investment managers.

Investors say such measures are increasingly necessary because the proliferation of algorithmic trading and other structural issues, including the fragmentation of the market, are hurting their ability to get the best prices and execute large trades quickly.

marketsmedia logo Excerpt from MarketsMedia “Buyside Traders Seek More..”

With algorithmic trading firmly entrenched in the electronic equity landscape, buy-side traders on an eternal quest for alpha preservation are moving beyond algo selection to algo optimization, which entails monitoring and calibrating as the trade is going down.

“The real objective is to get best execution, which often requires not only picking an algorithm but managing the parameters of that algorithm subject to market conditions,” said Michael Earlywine, head trader, North America at $1.2 billion asset manager Ecofin.

One of the more compelling critiques re: above noted topic is courtesy of industry veteran and electronic trading guru Thomas Quigley, Managing Director/Electronic Trading Group for agency boutique WallachBeth Capital,  “The take-away from both articles is a message that we caveat whenever institutional firms reach out to us for guidance; however commoditized electronic trading approaches have become, and however easy it may seem to choose and implement algo-based strategies, the need for consultative and agnostic guidance has never been more relevant.”

Both above-noted news articles can be accessed by clicking on the logo links adjacent to the excerpt.

ETF and Options Execution Firm Expands Global Footprint: More Hiring In Store

wall-street-letter-logo  Courtesy of Wall Street Letter reporter Sean Creamer

Institutional brokerage WallachBeth Capital LLC will expand its staff to bolster electronic trading across exchange-traded funds and options over the next two years, according to Michael Wallach, CEO.

The agency broker-dealer aims to bring on 15-20 people, some of whom may be college interns who transition to permanent employment with the company, according to Wallach.  He added “this strategy ensures the staff has a rounded experience in the firm before taking up a permanent role.”

WB CEO Michael Wallach (r), Pres/COO David Beth (l)
WB CEO Michael Wallach (r), Pres/COO David Beth (l)

Beyond staff expansion, the brokerage, whose headquarters is based in the heart of Wall Street and maintains a footprint in the UK, is aiming to expand its ETF execution presence to South America to serve pension fund managers in these regions, Wallach noted. “ Many money managers throughout the world now trade US ETFs. We want to introduce our model to any region whose managers want and need real best execution services.”   To view the full article from WSL, please click here.

“Navesis-ETF” Launches Today: 1st Euro-based Alternative Trading System for ETFs

A joint partnership between Normua Holdings and inter-dealer broker Tradition PLC formalized the launch of the ETF industry’s first electronic exchange platform.  Based in London and designed for the European theatre, where ETF transparency is often problematic, “Navesis-ETF” is  intended to provide “qualified customers” the ability to trade ETFs in real-time, and enable investors to create and redeem ETF units based on the fund’s net asset value (NAV). The initial launch of the platform will facilitate trade in upwards of 100 different Euro-centric ETF issues.

According to Rupert Hodges, managing director of  TFS Derivatives, the brokering division of Compagnie Financiere Tradition that has partnered with Nomura, ” Up until now, institutional investors in ETFs on the primary market could only buy and sell units via market makers and other ‘authorised participants, accepting an indicative price determined by the supply and demand for the ETF offered. By offering the ability to trade based on NAV, Navesis-ETF is a game changer.”

Lee Burrows, Head of Delta One, EMEA for Nomura added, “Listing on a MTF will allow us to provide more liquidity and maximise efficiency in pricing.” Navesis-ETF has been in development for almost a year and according to the joint venture press release, the platform has been beta-tested for the past two months by clients that include Credit Suisse, HSBC and UBS.  Burrows stated there will be a minimum order size for units of 25,000-100,000 ETF shares and will operate in two phases. From 0900-1200 GMT it will operate a continuous call phase, accepting bids and offers. Then, from 1200-1215 GMT, there will be a “dark option” phase similar to dark pool trading. It will also provide an auction process once a day.