Top stories

Hugo Jenkins and John Barker join Ancoa Advisory Board

Aug 24, 2016
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Ancoa, provider of contextual surveillance and insightful analytics for exchanges, regulators and buy- & sell-side firms, today announced the appointments of Hugo Jenkins and John Barker to its Advisory Board. The addition of Hugo and John will strengthen Ancoa’s existing Management team.

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TeleWare and Linx Networks announce strategic partnership

Aug 24, 2016
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Communications technology business TeleWare has announced a new partnership with Linx Networks, a City of London based banking and financial IT specialist.

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Equinix opens fifth Aussie datacentre to promote NSW growth

Aug 24, 2016
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Equinix has opened its latest International Business Exchange (IBX) datacentre in Sydney, known as SY4.

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Latest Blog Posts

Applying Blockchain to Payments

Chris Skinner

Aug 23, 2016
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I’ve blogged for over a week about blockchain based developments in Clearing & Settlement and Trade Finance, and will continue for another week talking about the developments in Payments and Digital Identity.  However, at this point, I should clarify that I use the term blockchain as an overall term to describe what is happening.  I often get critiqued for this, quite rightly, as blockchain is just a part of building a distributed ledger and what I’m really talking about here is Distributed Ledger Technology (DLT).  My problem* is that most people find that terminology can also get confusing as we talk about permission and permissionless ledgers, shared and federated ledgers, public and private ledgers and so no.  So apologies if using the broad brush term blockchain to refer to DLT, but I just find it easier. The reason why I say I get critiqued for this, quite rightly, is that if I were talking about DLT, blockchain is just one of four key parts to a distributed ledger2: Blockchain—a secure record of historical transactions, collected into blocks, chained in chronological order and distributed across a number of different servers to create reliable provenance Digital signatures—unique digital keys used to authorize and check transactions and positively identify the initiator A consensus mechanism—rules and techniques to ensure that participants recording and processing transactions agree on which transactions are valid A digital currency—in some implementations, a cryptographic token that represents actual value. Bitcoins are one example, but ultimately central banks could create digital fiat currencies as well. So I apologise to the pedants out there (Dave Birch) but hopefully that that helps to clarify what I mean when discussing blockchain in Clearing & Settlement, Trade Finance, Payments and Digital Identity, and overcomes some of that criticism. Anyways, continuing the use case discussions of blockchain in banking and finance, I’ll move onto the third major use case today, payments.  Of course, payments is really the #1 use case for the blockchain, as this started with bitcoin as a currency.  It’s morphed from there into all sorts of other currencies: litecoins, Ripples, dogecoins and more. Now I could write a lot more about that, but instead I’m going to defer this blog column to Credit Suisse as just two weeks ago, they produced a fantastic report about the implications of bitcoin and blockchain on the world’s payments markets. The conclusion is that Visa, MasterCard, WorldPay and others in the payments sector can relax: bitcoin will remain a niche player and blockchain technology poses little risk. The report has been produced in response to questions from investors about blockchain and its potential to disintermediate the payments processors.  The 135-page report draws an analysis on the impact the technology will have on 14 different companies in various sectors from payments to capital markets.  The authors conclude that bitcoin faces an uphill struggle to become a major force, highlighting 13 barriers to mainstream adoption. In contrast, shared ledgers are seen as a more potent force with three key properties – disintermediation of trust, immutable record and smart contracts – endowing the technology with real advantages to legacy systems. On payments, the report acknowledges that a permissioned public ledger could remove the need for a central clearing house in the form of Visa and MasterCard. However, the bank’s analysts still see limited risk to these card schemes, arguing that the decision by the likes of Apple to tap into their rails, making the networks the guardians of the tokenization process, puts them in a strong position. Concerns about firms such as WorldPay are misplaced, which rates the company’s stock as ‘outperform’, while DH Corporation also scores ‘outperform’ in part because it is facing up to the blockchain threat and partnering with Ripple. Fintech giant Fiserv faces a greater threat, rated ‘neutral’ because “we believe that as blockchain-based applications develop around core financial services, FISV could face competition in the bank technology space”. Fiserv has, in fact, hedged against the threat, taking a stake in blockchain start-up Chain, alongside Nasdaq, Visa, Citi and Capital One. Another payments player that could be in trouble is SWIFT, which is slow and costly and has systems that are decades old, have limited flexibility and face a growing security threat, as evidenced by the recent Bangladesh Bank attack. Warns the report: “Enter blockchain – a low-cost, instant, virtually unhackable, fully automated, end-to-end transaction system built on a private permission-based network. Such a system would not only enable banks to eliminate costly overheads, but would provide a lower-cost money transfer product attractive to large multi-national organizations with high frequent cross-border funding and trade finance demands.” A similar report was produced by Citibank in July with the same conclusions. Given the disruptive impact the internet has had on other industries, one key concern for investors is whether Bitcoin could disrupt the status quo in payments. The Bitcoin Blockchain has a market cap of ~$10 billion, so the market is clearly ascribing value to this payment network. The key question we address is whether a decentralized payments system like Bitcoin overcomes security, throughput, and other potential hurdles and presents a meaningful challenge to the incumbents? The key conclusion is that cryptocurrencies are not a disruptive threat to the banks or card networks (Visa/MasterCard), or the MTO model (e.g. Western Union) for cross border remittances, but that the impact will be more from its ability to open up new markets and reach new customers. Another report from Bain & Company delves deeper into what is happening in payments: Changes to the complex pipelines that make payments possible rarely occur, but when they do happen, the consequences can be profound. Distributed ledger technology, first showcased by the Bitcoin digital currency network, has the potential for such dramatic change—yet most banks have not adequately prepared for the ensuing battles to retain control of customers and of merchant payment interfaces. By removing central intermediaries, simplifying connections between counterparties and recording data on a tamper-proof block chain, distributed ledger technology has the potential to improve the speed, transparency and efficiency with which payments are made. Bitcoin, for all its flaws, provides a compelling example of the possibilities, and has catalysed a surge of investment and innovation. Since 2012, roughly $1 billion in capital has poured into hundreds of distributed-ledger investments. Official recognition has followed: For example, Ripple Labs, a prominent distributed ledger start-up, has secured a seat on the Federal Reserve’s Faster Payments Task Force, the US regulator’s flagship payments modernization effort. What are the implications for banks? To address that question, Bain & Company interviewed more than 50 senior bankers, venture capitalists, technologists, international payment association executives and start-up CEOs. What became clear from these conversations: While in theory banks are well positioned to confront the changes triggered by the rise of distributed ledgers, in practice the situation is more complicated. Regulatory and other hurdles may have forced most start-ups to partner with, rather than compete against, incumbent banks, but distributed ledgers will create winners and losers within the banking industry. It’s interesting that they reference Ripple in that dialogue, along with Credit Suisse questioning SWIFT’s future, as Ripple are really targeting the decimation of cost in the international payments arena incurred by counterparty structures like SWIFT.  They recently announced, for example, that seven banks (Santander, CIBC, UniCredit, UBS, ReiseBank, National Bank of Abu Dhabi and ATB Financial of Edmonton) had made a breakthrough by being among the first financial institutions in the world to move real money across borders using blockchain-based technology.  The banks announced they had taken part in projects to make international payments using digital assets on the platform of Ripple, who were also elected to the Federal Reserve’s Faster Payments Task Force Steering Committee last year.  Ripple are a key player in the payments space, and I’ll come back to them tomorrow. Other key recent announcements include Danish blockchain payment service provider Coinify raising $4 million in their Series A investment round from SEB Venture Capital, an entity within the SEB Group and SEED Capital Denmark.  Coinify says it presently supports 15 blockchain currencies (including Bitcoin, Ether and Ripple). Ether is the currency of Ethereum, and Ethereum are probably the other big contender for the payments crown alongside Ripple.  I say that as, even with the DAO hack, Ethereum and their ability to transact programmed transactions, better known as smart contracts, are a key player in the internet of trust. As you can see there is lots happening here, and payments is one of the key spaces to watch.   * my real problem is that DLT has always been Dave Lee Travis to me, and I don’t really want to refer to this exciting technology as a besmirched DJ
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Dark Trading and MiFID II: What You Need to Know

Duncan Higgins, ITG

Aug 23, 2016
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MiFID II implementation may significantly affect investors’ ability to source dark liquidity effectively. Broker crossing networks will disappear, and certain types of dark trading will be mostly restricted to midpoint. If triggered, the introduction of double volume caps will limit certain dark trading volumes per stock to 4% in a single dark pool and 8% across all dark pools. The double volume caps are likely to result in six-month dark trading suspensions for many stocks, increasing market complexity around trading suspended stocks and tracking the status of each stock. But that doesn’t mean that dark trading will disappear. Industry participants have launched initiatives to help investors find liquidity in the new regulatory environment.
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Putting the Ex in IEX

Philip Pearson, ITG

Aug 19, 2016
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IEX begins its exchange launch today, Aug. 19, taking the next step toward gaining meaningful market share from the likes of NYSE and NASDAQ. The transition from an ATS to an exchange takes place in phases over two weeks, concluding Sept. 2. This culminates a long application process that brought out both ardent critics and supporters. IEX has actually had a working lit order book for about 1.5 years, slowly growing its market share. Currently, its lit and dark books combine to be slightly below 2% of U.S. equity volumes, although this is dominated by the dark volume. To continue to grow, it has long been IEX’s strategy to become a full-blown exchange without sacrificing much of its unique market structure. After several delays, the SEC approved IEX’s exchange status in June and now we welcome the 13th U.S. national stock exchange. As the legacy exchange competitors rush to release new features to combat the upstart, IEX hopes its differentiation allows it to become the next electronic platform to become a major player in third-market exchange operation, following the lead of BATS, ARCA and Direct Edge a generation before. Source: FINRA ATS Data Much has been written, both positively and negatively, about allowing the famed magic shoebox to delay protected orders, so instead we would like to focus on updating ITG clients on how IEX’s conversion to an exchange will affect trading in the new regime. ITG has used IEX since its launch, ITG has used its displayed orders since they were offered beginning in January 2015, and ITG will be accessing IEX as an exchange on day one of the first phase of its launch. ITG clients have been asking how we will change our interaction with IEX, and we would like to clarify this a bit. How does ITG access IEX and what will change given IEX’s new exchange status? Lit trading—This is the biggest change, as displayed orders on IEX become Reg NMS-protected quotes. Previously, ITG SMRT (our smart order router) accessed IEX to take advantage of available displayed liquidity. On the passive side, SLimit, ITG’s passive order routing strategy that sits beneath our algorithms, also sent displayed orders to rest on the IEX book. Both SLimit and SMRT will continue to access IEX in the same fashion as they had previously. We assume that fill rates will increase in the future as IEX’s market share grows (especially the market share of NBBO quotes). As such, when taking liquidity, SMRT will target the exchange increasingly when it has the best price available. SLimit uses a proprietary mix of historical fill rates and real-time NBBO data to decide where to place passive orders to maximize fill rate. As IEX is already accounted for in this capacity, the primary focus for ITG—as it should be for other brokers—will be the launch’s effect on market share (and thus our fill rates). We will monitor and analyze, but SLimit will account for changes automatically by design. Given the shift from being an unprotected to a protected quote, it is quite likely that there will be a material increase in our passive fill rates. Dark trading—IEX is one of our largest counterparties in dark trading through our dark algo, Posit Marketplace. According to FINRA’s ATS data, it has been a Top 3 dark pool by volume for more than a year. Our research on the quality of the pool has consistently ranked IEX above average. As such, it is valued highly in our optimization process. When accessing IEX for dark liquidity, we use discretionary peg orders for all resting interaction. We do this primarily to gain the extra price improvement when trading against aggressive orders, but additionally benefit from its crumbling quote logic. In the near future, we will continue to use IEX for dark trading in fundamentally the same manner that we do currently. We will continue to use D-peg orders, which have additional benefits. We also use IOC orders at midpoint to ping for latent liquidity. We believe that as IEX transitions from ATS to exchange, anyone using it as a venue for midpoint liquidity must use discretionary peg orders to maintain quality. In addition to price improvement, other features of D-peg orders will help minimize stock support. Comparing IEX to other exchanges, we had largely stopped using resting orders on other exchanges’ hidden midpoint books. We found that often these orders stepped in front of market-bound orders and acted as support levels for stocks. By not allowing incoming aggressive orders to remove an inside bid/offer, hidden orders stand in the way of natural price movement and are thus adverse for institutional order performance. We do have some concerns about the ongoing quality of IEX as a block trading venue and protected market—no other exchange provides quality block trades outside the auctions, in our opinion. However, IEX’s D-peg mitigates some of this effect by trading passively against aggressive counterparties. Furthermore, D-peg orders are prioritized after the passive lit orders. This means that the displayed quote would be taken out before the D-peg orders trade, thus reducing the aforementioned support effect. Nonetheless, this will be closely scrutinized in the current months, and a change in behavior may be warranted. Market data—We currently consume IEX TOPS feed directly. IEX’s quote was previously not part of the SIP, so TOPS was required in order to route. For our routers, we will continue to use the direct feed. How will the IEX launch affect market quality? It’s impossible to say how IEX will change in the coming months and years, but we expect an uptick in its lit volumes. Downstream effects of this are harder to forecast. Will IEX’s dark pool, previously thought to be clean institutional liquidity, see performance deteriorate? Will overall market quality improve as other exchanges rush to copy some of IEX’s more novel ideas? It will be interesting to observe whether these developments to the exchange landscape are zero sum or a change in overall equity market quality. On the pricing side, IEX has shown some flexibility, currently offering free trading (0/0) for both sides on the lit book. This is likely to be a short-term enticement, but generally its pricing seems fluid as IEX finds its sweet spot. Generally, we do believe IEX remains institutional-friendly. For one example, its free market data feed shows only prices and sizes rather than individual orders. Additionally, on the passive side, by not offering day ISO orders, there is less of a perceived advantage for the HFT community. What research does ITG have coming on IEX? In addition to future work analyzing the effect of IEX’s becoming a protected exchange, ITG will soon be releasing research using the existing data since its lit order book went live. Due to the fact that ITX’s quote was not protected, there was concern that perhaps other venues were trading at prices worse than those available on IEX. To see if this is actually occurring, ITG conducted a study comparing all trade data versus IEX’s TOPS feed and direct exchange quote feeds. In summary, a small amount of trade-throughs seem to be occurring, but it is small enough that we feel the brokerage community has done a fairly good job of integrating the venue’s quoting system. More on this soon. We’d like to wish the folks over at 4 WTC good luck over the course of the launch. The equity world is watching.
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Interview

MiFID II – the good, the bad and the regulatory

Jun 27, 2016
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ATMonitor talks with Christer Wennerberg, Head of Market Structure at Itiviti. Wennerberg discusses the main differences between equities and derivatives markets in regards to regulation, fragmentation and the implementation of MiFID II.

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MAR – What you need to know

Jun 22, 2016
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ATMonitor talks with Johannes Frey-Skött, Principle Software Engineer at Itiviti. Frey-Skött discusses the implementation and components of a complete MAR solution.

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Talking Trading with Itiviti

Jun 21, 2016
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ATMonitor talks with Chris Anderson, Senior Product Manager at Itiviti. Anderson discusses what sets Tbricks apart from other trading solutions, as well as current trends within the market and the challenges faced by clients.

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Survey

Execution Management Systems Survey

Trading Survey Now in its fourth year running, The TRADE magazine in conjunction with ATMonitor, is once again running its industry leading survey of Execution Management Systems for 2016. If you are trading electronically, we invite you to comment on your use of execution management systems, which features you consider important and how you rate their current capabilities. All submissions are reported in aggregated and anonymous format. Please rate your EMS vendors by completing the online questionnaire available here

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Research

The 2016 Algorithmic Trading Survey: Hedge Funds

The TRADE

Jul 18, 2016
The 2016 Algorithmic Trading Survey: Hedge Funds

2016 is the third year in which the Algorithmic Trading Survey results have been separated with different results reported on for hedge funds and long only firms. One of the most interesting conclusions from the current results is the contrast in momentum in scoring of one group against the other. As we noted in our last issue, scores for long only firms were generally on an upward trend, with twelve of fourteen categorie posting higher scores and the highest scores ever being recorded for Customer Support. The position with hedge fund respondents could not be more stark.

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Video showcase

Corvil working with RSJ

Corvil Watch Michal Sanak, CIO, RSJ Algorithmic Trading discuss working with Corvil. read more

Corvil working with Tradition

Corvil Watch Yann L'Huillier, CIO, Tradition and Alex Krovina, CTO, Tradition discuss working with Corvil. read more

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