May 2010

TRADING: speed is of the essence

In this buy-side trading report, we look at the technology developments and regulatory changes affecting the sector. Nicholas Pratt talks to a number of experts in the industry

Just as there is an 80/20 rule in the trading world, so there is a similar yardstick in the media – that is, the majority of the stories involve the minority of the market. Nowhere is this clearer than in the trading world where articles on high frequency trading, ultra-low latency and algorithmic-driven black boxes appear regularly, even though many buy-side dealing desks have very little engagement with this intensely tech-driven segment of the marketplace.

Nevertheless, it is a growing segment of the market and one that has captured the attention of regulators, particularly in the US where the SEC has sought to impose some safety measures on electronic, algorithmic and high-frequency trades. At the beginning of the year it banned naked or direct market access (which accounts for 44% of US equity trades). The latest SEC proposal is to introduce electronic tags for high-frequency trades, presumably not the same ones worn on the ankles of anti-social behaviour offenders.

And where the US leads, Europe is sure to follow. Mifid and its deregulating implications has created a market that demands traders be equipped with the technology needed to navigate a dispersed market – smart-order routers, transaction-cost-analysis tools and execution management systems – although it is yet to order electronic tags.

The regulatory body most closely associated with Europe’s buy-side traders, the Committee for European Stock Exchanges (Cesr), has recently consulted with buy-side trading heads over a range of Mifid-related issues – from dark pools, to high-frequency trading to trade reporting. When it finally gets through reading all the responses, Cesr will realise the variety of fund managers trading in Europe’s securities market and the different agendas in play. For some firms with very specific strategies, high-frequency trading is everything, while for others it is a mere supplement to a well-rounded trading desk that still places great importance on the need for traders to pick up the phone and talk to their brokers.

The implications of this variety have been seen in the various discussions around consolidated tape – a provision that pulls together all the trading data of Europe’s fragmented execution venues. As Europe fragments even more, the need for an accessible source of aggregated post-trade data becomes all the more necessary but harder and more expensive to produce, not least because different market participants have different thresholds in what they are prepared to pay for in terms of post-trade data.

The article on page 52 addresses the consolidated tape question, outlining the challenges ahead and the two possible paths that can be taken – a vendor-led series of (hopefully) compatible and interoperable offerings, or a public utility open to all. It is a subject that was no doubt covered at the recent Trade Tech event in London, except that a meltdown in Iceland once again created havoc across Europe’s financial markets and put paid to any hope of my attendance.

Trade Tech
It was the first time this event had been held in London and moved away from its traditional Paris base. The move was controversial, depriving London-based attendees of two or three days out in France, but also giving them the opportunity to return to work if an afternoon presentation on best execution failed to catch the imagination. Perhaps the switch from Paris to London was merely a reflection of the changes we are seeing in terms of Europe’s execution venues, following the news that NYSE Euronext, that champion of continental Europe, is moving its matching engine from Paris to Basildon in Essex.

The move is designed to place NYSE Euronext’s servers closer to the high-frequency traders that depend on low-latency connections to their execution venues and have congregated in London because that is where the majority of multilateral trading facilities such as Chi-X have set up shop. For the majority of buy-side traders such a move is of more interest in terms of national posturing and the testosterone-fuelled battle between London, Frankfurt and Paris to be the financial centre of Europe than it is in terms of operational impact, but it is yet another example of how the interests of a minority (the high-speed traders) affect and influence the behaviour of a service provider, such as NYSE Euronext, that caters for the majority of the market.

©2010 funds europe